S. HRG. 112–498 

CONCURRENT RESOLUTION ON THE 

BUDGET FISCAL YEAR 2012 

HEARINGS 

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED TWELTH CONGRESS 

FIRST SESSION 

January 7, 2011–THE U.S. ECONOMIC OUTLOOK: CHALLENGES FOR 

MONETARY AND FISCAL POLICY 

January 27, 2011–THE BUDGET AND ECONOMIC OUTLOOK: FISCAL 

YEARS 2011–2021 

February 1, 2011–THE U.S. ECONOMIC OUTLOOK 

February 2, 2011–TAX REFORM: A NECESSARY COMPONENT FOR 

RESTORING FISCAL RESPONSIBILITY 

February 3, 2011–CHALLENGES FOR THE U.S. ECONOMIC RECOVERY 

February 15, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

PROPOSAL 

February 17, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET AND 

REVENUE PROPOSALS 

March 1, 2011 09THE PRESIDENT’S FISCAL YEAR 2012 EDUCATION 

BUDGET 

March 2, 2011 09THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

REQUEST FOR THE DEPARTMENT OF ENERGY 

March 3, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

REQUEST FOR THE U.S. DEPARMENT OF TRANSPORTATION 

March 8, 2011–THE REPORT OF THE NATIONAL COMMISSION ON 

FISCAL RESPONSIBILTY AND REFORM 

March 9, 2011–DISTRIBUTION AND EFFICIENCY OF SPENDING IN 

THE TAX CODE 

March 10, 2011–THE PRESIDENT’S FISCAL YEAR 2012 DEFENSE AND 

INTERNATIONAL AFFAIRS BUDGET 
CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2012 
U.S. GOVERNMENT PRINTING OFFICE

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68–184pdf 2011

S. HRG. 112–498 

CONCURRENT RESOLUTION ON THE 

BUDGET FISCAL YEAR 2012 

HEARINGS 

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED TWELTH CONGRESS 

FIRST SESSION 

January 7, 2011–THE U.S. ECONOMIC OUTLOOK: CHALLENGES FOR 

MONETARY AND FISCAL POLICY 

January 27, 2011–THE BUDGET AND ECONOMIC OUTLOOK: FISCAL 

YEARS 2011–2021 

February 1, 2011–THE U.S. ECONOMIC OUTLOOK 

February 2, 2011–TAX REFORM: A NECESSARY COMPONENT FOR 

RESTORING FISCAL RESPONSIBILITY 

February 3, 2011–CHALLENGES FOR THE U.S. ECONOMIC RECOVERY 

February 15, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

PROPOSAL 

February 17, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET AND 

REVENUE PROPOSALS 

March 1, 2011–THE PRESIDENT’S FISCAL YEAR 2012 EDUCATION 

BUDGET 

March 2, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

REQUEST FOR THE DEPARTMENT OF ENERGY 

March 3, 2011–THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

REQUEST FOR THE U.S. DEPARMENT OF TRANSPORTATION 

March 8, 2011–THE REPORT OF THE NATIONAL COMMISSION ON 

FISCAL RESPONSIBILTY AND REFORM 

March 9, 2011–DISTRIBUTION AND EFFICIENCY OF SPENDING IN 

THE TAX CODE 

March 10, 2011–THE PRESIDENT’S FISCAL YEAR 2012 DEFENSE AND 

INTERNATIONAL AFFAIRS BUDGET 

Printed for the use of the Committee on the Budget 
COMMITTEE ON THE BUDGET 

KENT CONRAD, NORTH DAKOTA, CHAIRMAN 

PATTY MURRAY, WASHINGTON 

RON WYDEN, OREGON 

BILL NELSON, FLORIDA 

DEBBIE STABENOW, MICHIGAN 

BENJAMIN CARDIN, MARYLAND 

BERNARD SANDERS, VERMONT 

SHELDON WHITEHOUSE, RHODE ISLAND 

MARK R. WARNER, VIRGINIA 

JEFF MERKLEY, OREGON 

MARK BEGICH, ALASKA 

CHISTOPHER A. COONS, DELAWARE 

JEFF SESSIONS, ALABAMA 

CHARLES E. GRASSLEY, IOWA 

MICHAEL ENZI, WYOMING 

MIKE CRAPO, IDAHO 

JOHN CORNYN, TEXAS 

LINDSEY O. GRAHAM, SOUTH CAROLINA 

JOHN THUNE, SOUTH DAKOTA 

ROB PORTMAN, OHIO 

PAT TOOMEY, PENNSYLVANIA 

RON JOHNSON, WISCONSIN 

KELLY AYOTTE, NEW HAMPSHIRE 

MARY ANN NAYLOR, Majority Staff Director 

MARCUS PEACOCK, Minority Staff Director 

(II) 
iii 

C O N T E N T S 

HEARINGS 

Page 

January 7, 2011–The U.S. Economic Outlook: Challenges for Monetary and 

Fiscal Policy .......................................................................................................... 1 

January 27, 2011–The Budget and Economic Outlook: Fiscal Years 2011– 

2021 ....................................................................................................................... 83 

February 1, 2011–The U.S. Economic Outlook ..................................................... 157 

February 2, 2011–Tax Reform: A Necessary Component for Restoring Fiscal 

Responsibility ....................................................................................................... 265 

February 3, 2011–Challenges for the U.S. Economic Recovery ........................... 363 

February 15, 2011–The President’s Fiscal Year 2012 Budget Proposal ............. 461 

February 17, 2011–The President’s Fiscal Year 2012 Budget and Revenue 

Proposals ............................................................................................................... 639 

March 1, 2011–The President’s Fiscal Year 2012 Education Budget .................. 719 

March 2, 2011–The President’s Fiscal Year 2012 Budget Request for the 

Department of Energy ......................................................................................... 831 

March 3, 2011–The President’s Fiscal Year 2012 Budget Request for the 

U.S. Department of Transportation .................................................................... 949 

March 8, 2011–The Report of the National Commission on Fiscal Responsibility and Reform ................................................................................................. 1005 

March 9, 2011–Distribution and Efficiency of Spending in the Tax Code .......... 1075 

March 10, 2011–The President’s Fiscal Year 2012 Defense and International 

Affairs Budget ...................................................................................................... 1173 

STATEMENTS BY COMMITTEE MEMBERS 

Chairman Conrad....... 1, 83, 157, 265, 363, 461, 639, 719, 831, 949, 1005, 1075, 1173 

Ranking Member Sessions.......... 11, 117, 169, 274, 398, 468, 648, 696, 728, 838, 895, 

958, 993, 1013, 1084, 1183 

Senator Crapo .......................................................................................................... 91 

Senator Thune...................................................................................................... 353, 995 

Senator Wyden ......................................................................................................... 998 

WITNESSES 

Roseanne Altshuler, PhD., Professor, Rutgers University ............................... 303, 306 

Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal 

Reserve System..................................................................................................... 14, 20 

Richard Berner, PhD., Managing Director, Co-Head of Global Economics, 

and Chief U.S. Economist, Morgan Stanley ................................................... 171, 175 

Honorable Erskine Bowles, Co-Chair, National Commission on Fiscal Responsibility and Reform ............................................................................................... 1037 

Honorable Steven Chu, PhD., Secretary, U.S. Department of Energy............ 841, 844 

Honorable Arne Duncan, Secretary, U.S. Department of Education: Accompanied by Thomas Skelly, Acting Chief Financial Officer, U.S. Department 

of Education .............................................................................................. 733, 738, 766 

Chris Edwards, Director of Tax Policy Studies, CATO Institute..................... 430, 433 

Douglas W. Elmendorf, Director, Congressional Budget Office ........................... 93, 97 

Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury...................................................................................................................... 650, 653 

Robert Greenstein, Executive Director, Center on Budget and Policy Priorities ................................................................................................................ 1087, 1090

Scott Hodge, President, Tax Foundation........................................................ 1110, 1113 
Page

iv 

Simon Johnson, Senior Fellow, Peterson Institute for Internation Econoics 

and Roanld A. Kurtz Proffesor of Entrepreneurship, Sloan School of 

Manangement, Massachusetts Institute of Technology ................................ 183, 186 

Honorable Ray LaHood, Secretary, U.S. Department of Transportation ........ 959, 961 

Honorable Jacob J. Lew, Director, U.S. Office of Management and Budget ........................................................................................................................ 470, 474 

Lawrence B. Lindsey, PhD., Professor, Rutgers University ............................. 315, 318 

Honorable William J. Lynn, III, Deputy Secretary of Deense, U.S. Department of Defense ............................................................................................ 1193, 1196 

David Malpass, President, Encima Global......................................................... 194, 201 

Donald B. Marron, PhD., Director, Urban-Brookings Tax Policy Center, and 

Visiting Professor, Georgetown Public Policy Institute................................. 290, 292 

Robert S. McIntyre, Director, Citizens for Tax Justice................................. 1100, 1102 

Honorable Thomas R. Nides, Deputy Secretary of State for Management 

and Resources, U.S. Department of State .................................................. 1185, 1188 

Raymond C. Scheppah, Executive Director, National Governors Association..................................................................................................................... 416, 420 

Honorable Alan Simpson, Co-Chair, National Commission on Fiscal Responsibility and Reform.......................................................................................... 1015, 1019 

C. Eugene Steuerle, PhD., Institute Fellow and Richard B. Fisher Chair, 

The Urban Institute ......................................................................................... 276, 278 

Till Von Wachter, Phd., Associate Professor of Economics, Columbia University ..................................................................................................................... 398, 402 

Mark Zandi, PhD., Chief Economist, Moody’s Analytics .................................. 372, 378 

QUESTIONS AND ANSWERS 

Questions and Answers......... 63, 148, 259, 357, 528, 696, 813, 895, 1001, 1069, 1162, 

1226 
(1) 

THE U.S. ECONOMIC OUTLOOK: CHALLENGES 

FOR MONETARY AND FISCAL POLICY 

FRIDAY, JANUARY 7, 2011 

UNITED STATES SENATE, COMMITTEE ON THE BUDGET, Washington, D.C. 

The Committee met, pursuant to notice, at 9:31 a.m., in Room 

SH–216, Hart Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Wyden, Stabenow, Warner, Merkley, 

Manchin, Sessions, Enzi, and Cornyn. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The Committee will come to order. 

I want to welcome everyone to the Budget Committee this morning. I especially want to welcome Senator Sessions. 

Senator Sessions has not formally been recognized as Ranking 

Member of the Budget Committee, but that is just a formality. He 

will be as soon as the organizing resolution is adopted, and so I intend to treat Senator Sessions as the Ranking Member here today, 

and I think that is the appropriate thing to do. 

I very much welcome Senator Sessions as my partner on this 

Committee. He has considerable knowledge of the budget and the 

budget process, and I very much look forward to working with him 

as we confront the significant challenges facing the country. 

I also want to welcome Federal Reserve Chairman Ben Bernanke 

back to the Budget Committee. This is Chairman Bernanke’s third 

appearance here, and we have always benefitted by his wise counsel. I believe that when the history of this period is written, you 

will be one of the heroes of the piece in averting what could have 

been a financial collapse. 

I was in the meetings with the former Secretary of the Treasury 

and with you when you warned us of how serious the financial circumstances were in late 2008. Those moments will be forever riveted in my memory, I am sure in yours as well. I personally believe 

you and then Secretary of the Treasury Hank Paulson, followed by 

this administration, have taken steps that were critically important 

to averting a financial collapse, not only here but globally as well. 

Still, our Nation faces very serious challenges. We know we are 

on an unsustainable course with the budget, borrowing about 40 

cents of every dollar that we spend. Clearly, that cannot continue 

for very long. 
2 

On the other hand, we also face a fragile economy. With one in 

every six workers in this country either unemployed or underemployed, that requires our immediate attention as well. My own 

belief is that we need to put in place a plan this year to get our 

fiscal house back in order, and that plan needs to be phased in over 

a period of time along the lines of what the Fiscal Commission proposed. 

I think we also understand where we have come. This has been 

an extraordinary period in the country’s economic history. I would 

like to just go over a brief history of what we have experienced. 

I personally believe the Federal response did avert what could 

have been a financial collapse. I believe it was that serious. In the 

meetings that I was in with then Secretary of the Treasury Hank 

Paulson and you, Mr. Chairman, the risks were very clear. We 

have seen some progress made—in fact, important progress made. 

Private sector job growth has returned, although not as much as 

we would have liked. We heard the numbers this morning, something over 100,000 jobs created in the private sector, a dramatic 

improvement of where we were back in January of 2009 when we 

were losing 800,000 private sector jobs a month. Now we have had 

12 consecutive months of private sector job growth. 

Now, in economic growth the pattern is the same, although actually somewhat better. In the fourth quarter of 2008, the economy 

actually contracted, actually shrunk by 6.8 percent. More recently, 

in the third quarter of 2010, we saw a positive growth of 2.6 percent—again, a dramatic improvement, while not as strong as we 

would hope. We have now had five consecutive quarters of growth. 
3 

We have also seen a dramatic rebound in the stock market. After 

falling to a low of just about 6,500 in March of 2009, the Dow is 

now over 11,500. And two of the most respected economists in the 

country—Mark Zandi, who was a consultant to the McCain Campaign, and Alan Blinder, the former Deputy Chairman of the Federal Reserve—did an analysis that measured the impact of Federal 

actions—the TARP and stimulus—and also included the Fed’s monetary policy actions, and they concluded as follows: ‘‘We find that 

its effects on real GDP, jobs, and inflation are huge and probably 

averted what could have been called ‘Great Depression 2.0.’ When 

all is said and done, the financial and fiscal policies will have cost 
4 

taxpayers a substantial sum, but not nearly as much as most had 

feared and not nearly as much as if policymakers had not acted at 

all. If the comprehensive policy responses saved the economy from 

another depression, as we estimate, they were well worth the cost.’’ 
5 

This next chart shows Dr. Blinder and Dr. Zandi’s estimate of 

the number of jobs we would have without the Federal response. 

It shows we would have had 8 million fewer jobs in the second 

quarter of 2010 if we had not had the Federal response—the TARP 

and the stimulus. 
6 

We see a similar picture with the unemployment rate. The unemployment rate averaged 9.7 percent in the second quarter. According to Dr. Blinder and Dr. Zandi, if we had not had the Federal 

response, the unemployment rate would have been 15 percent in 

the second quarter and would have continued rising to over 16 percent in the fourth quarter of 2010. So, clearly, the Federal response 

to the economic crisis has had and continues to have a significant 

positive impact on the economy, but we are not out of the woods. 
7 

We cannot forget that, as I mentioned before, one in every six of 

our fellow citizens are either unemployed or underemployed. The 

unemployment rate in December, which was also announced this 

morning, was 9.4 percent. This is still far too high. And Federal Reserve projections show the rate is likely to come down only slowly, 

averaging still in the high 8-percentage-point range by the fourth 

quarter of 2012. 
8 

But as I noted, we must now also pivot to addressing the longterm fiscal imbalances that the country confronts. I believe we are 

at a critical juncture. We have been borrowing, as I mentioned earlier, 40 cents of every dollar that we spend. That cannot continue 

much longer. Spending is at the highest level as a share of our national income in 60 years; revenue is at its lowest level as a share 

of our national income in 60 years. I believe that indicates you 

have to work both sides of that equation if we are to make 

progress. 
9 

Gross Federal debt is already expected to reach 100 percent of 

GDP this year, well above the 90-percent threshold that many 

economists see as the danger zone. A leading economist came before our Commission and has come before this Committee, Dr. Carmen Reinhart, who has studied 200 years of fiscal crises around 

the world. She concluded that when government debt as a share of 

the economy exceeds 90 percent—and she is referring here to gross 

Federal debt—that economic growth tends to be about one percentage point lower than it would be if debt levels were not so high. 

If that association were applied to the United States today, it 

would translate into a potential economic loss of hundreds of billions of dollars and substantially fewer jobs for Americans. 
10 

So I believe the deficit and debt reduction plan assembled by the 

Fiscal Commission could provide a blueprint and a way forward. 

The plan would stabilize the publicly held debt by 2014 and then 

lower it to 60 percent of GDP by 2023 and roughly 30 percent by 

2040. I emphasize that is the publicly held debt, not the gross debt. 
11 

The bipartisan Commission voted for the plan; 60 percent of us 

supported it—interestingly enough, five Republicans and five 

Democrats and one Independent. I think that demonstrates that we 

can reach across the aisle to do things that are critically important 

for the country. Facing up to the debt threat is something we must 

do, and we must do it together. 

With that, we will turn to Senator Sessions for his opening remarks, and, again, I want to welcome him as Ranking Member of 

the Budget Committee. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Chairman Conrad. It is an honor 

to be here, to be with you. I respect you very much and value our 

friendship and enjoy being ribbed by you—effectively, I must add— 

and look forward to working with you to help make our country 

better. We have some real serious challenges ahead of us. 

I also want to note how much I have admired our former Ranking Member, Judd Gregg. I know you and he had a great relationship. I think his leadership was particularly valuable. People listened to him, they trusted his judgment, and I hope that I can just 

come close to being as effective as he has been in this position. 

I would like to share some thoughts and concerns. I know that 

when the mortgage crisis hit and the economy was whacked, a lot 

of people got together and tried to make some decisions. Mr. Chairman, it would have been better, I think, had we seen the mortgage 

crisis 2 years in advance and taken action to make the crisis less 

real. And I say that because we ought to be humble about where 

we are today. 

I do not think anyone fully understands this magnificent world 

economy we are a part of. I do not think any one person, whether 
12 

it is the Federal Reserve, the Secretary of Treasury, or even Congress, can have a little meeting and be sure that the actions we 

take are going to have certain impacts on this massive economy of 

which we are a part. When you are confused, in the end you need 

to return to the fundamentals of blocking and tackling, to the fundamentals of paying your bills on time, and create some confidence 

in the economy. 

So today is our Committee’s first hearing of the 112th Congress. 

We meet on the heels of a historic election. It is important, that 

election. The American people rebelled against wasteful Washington spending and a Government that has grown too large and 

too intrusive. The American people also rebelled against a political 

establishment that has placed our country on a path to fiscal decline. Solving our Nation’s economic and debt crisis is about more 

than economics. It is about protecting our way of life at home and 

our standing abroad as a great Nation, and it is about honest and 

moral policy. 

Our goal is not an era of austerity but an era of prosperity. Restoring fiscal discipline and strengthening the private sector is the 

only way to create growth and opportunity for every hard-working 

American, and it is the only way to protect our country’s greatness 

and its vital role in the world. 

To solve our problems, we must speak about them candidly. Our 

Nation’s debt will soon be equal to the size of our entire economy. 

Forty percent of our budget relies on borrowed funds. In 2009, the 

interest on our debt alone cost $187 billion. And the Congressional 

Budget Office projects that under the President’s budget these interest payments will climb to $916 billion in 2020. That exceeds 

any other part of our budget and is growing faster than any other 

part of our budget—vastly superior to the defense budget. 

We are on a path that is unsustainable. The only real question 

is how much road is left between us and the edge of the cliff. The 

American people understand the situation. They understand that 

years of unchecked Federal spending has squandered our Nation’s 

wealth and threatened our children’s future. The American people 

understand what elites in Washington seem to forget, and that is, 

you can only live beyond your means for so long. Eventually the 

bill comes due. Fundamentally it is immoral to take from our children their wealth so we can spend unearned wealth today. 

There are other problems, too. Considering the housing bubble, 

for years Congress delayed action to address the unfolding catastrophe at Freddie and Fannie. The Federal Reserve was asleep at 

the switch and failed to sound the alarm. And then one day the 

bubble burst, and the whole world changed. No one knows exactly 

what will happen if we continue our spending on the current 

course, but we must not find out. 

James Baker wrote a recent piece in the Washington Times describing some of the worse potential consequences, saying we need 

to be more specific about what the consequences will be. He said, 

‘‘One day the Treasury will hold an auction and there will not be 

buyers. The Federal Reserve will step in as a buyer of last resort, 

conjuring money from the ether to buy bonds. The injection of massive liquidity into the financial system will trigger fears of hyperinflation, causing the dollar to plunge and interest rates to rise. If 
13 

the resources of the European Union and the International Monetary Fund are stretched to rescue the finances of tiny Greece and 

Ireland, the United States will not only be too big to fail but too 

big to bail out. Absent emergency action by the Government, the 

economy will plunge into a depression roughly 3 times more acute 

than the recession we just experienced.’’ 

I do not know if it would happen like that, but Barron’s also had 

an editorial by an experienced Wall Streeter of 45 years warning 

of a hyperinflationary spiral. The writer explained that while the 

Federal Reserve can monetize the debt, historically a ‘‘break point 

occurs when a government borrows an amount equal to 40 percent 

of its expenditures for an extended period of time.’’ 

In a recent interview, Chairman Bernanke, you said you were 

100 percent confident the Fed could prevent such inflation, but I 

am not sure the masters of the universe—you being maybe the 

master master how confident you can be about that. You have been 

wrong before. And while we can debate just how great and imminent the risk is, there is no debating what the American people 

have declared in poll after poll. We are on the wrong track. 

But where is the leadership from our administration? Just last 

December, the President would only agree to maintain current tax 

rates if Congress agreed to new spending, all borrowed, that would 

add another $250 billion to the debt. Instead of slowing down, 

President Obama hit the accelerator. But simply easing off the 

pedal will not solve the problem. When you are driving toward a 

cliff at 90 miles an hour, you cannot just slow down to 60. You 

need to hit the brakes and steer on to the right road. For too long, 

Washington compromise has changed only the pace and not the direction that we are going. 

Last November, the American people said, ‘‘Enough.’’ That is precisely what they said, I believe. They sent Congress a new freshman class with a clear set of instructions. Those instructions include a budget that changes our trajectory and genuinely reduces 

the size, cost, and burden of Government. We can learn from those 

who are setting a strong example. 

In New Jersey, Governor Chris Christie has a plan to close his 

State’s funding gap without raising taxes. 

In Britain, the new conservative government has taken strong 

action and has a plan to reduce their deficit from 10 to 4 percent 

of GDP in just 4 years. As Britain’s Chancellor of the Exchequer 

George Osborne said, ‘‘It is a hard road, but it leads to a better future.’’ 

Yet some would argue that reducing Government spending even 

a small amount will reduce the quality of our life, but the surest 

way to lower the quality of life in America is to continue on our 

current course, spending without restraint, crushing private enterprise, and mortgaging the inheritance of our children. 

The challenges ahead may be difficult, but the choices we face 

are not. We need to limit Government, control spending, and create 

an environment where the free market can thrive and flourish. It 

is a road map our Founders laid out more than two centuries ago. 

There is no doubt it will work again. America’s progress is not a 

thing of the past. We can do this. But to achieve this progress, we 

can no longer compromise our Nation’s founding principles. Instead 
14 

we must fight for them and in so doing hope to find common 

ground in doing so. 

Chairman Bernanke, I look forward to discussing these and other 

issues with you today, and I look forward to getting your thoughts 

on how you and the administration are working together with a 

plan for strengthening our future. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you so much, Senator Sessions, and I 

just want to say I welcome your analysis. We may not agree on 

every solution. I think the one thing we are agreed on is we are 

on an unsustainable course, and we have an obligation, we have a 

very serious and somber obligation to come up with a plan and to 

do it sooner rather than later, and I look very much forward to 

working with you on that. 

Senator SESSIONS. Thank you. I value those comments. 

Chairman CONRAD. Mr. Chairman, thank you so much for coming. I want to tell the Committee that Chairman Bernanke has also 

offered to come up here in a closed session with Committee members to discuss what he sees with respect to the economy, but we 

very much welcome your being here as our first witness as we embark on the challenge of putting together a budget for this year and 

succeeding years. Welcome. 

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. BERNANKE. Thank you. Thank you, Chairman Conrad, Senator Sessions, and other members of the Committee. I want to 

thank you for this opportunity to offer my views on current economic conditions, recent monetary policy actions, and issues related 

to the Federal budget. 

The economic recovery that began a year and a half ago is continuing, although to date at a pace that has been insufficient to reduce the rate of unemployment significantly. The initial stages of 

the recovery in the second half of 2009 and in early 2010 were 

largely attributable to the stabilization of the financial system, the 

expansion of monetary and fiscal policies, and a powerful inventory 

cycle. 

Growth slowed somewhat this past spring as the impetus from 

fiscal policy and inventory building waned and as European sovereign debt problems led to increased volatility in financial markets. More recently, however, we have seen increased evidence that 

a self-sustaining recovery in consumer and business spending may 

be taking hold. In particular, real consumer spending rose at an 

annual rate of 2.5 percent in the third quarter of 2010, and the 

available indicators suggest that it likely expanded at a somewhat 

faster pace in the fourth quarter. 

Business investment in new equipment and software has grown 

robustly in recent quarters, albeit from a fairly low level, as firms 

replaced aging equipment and made investments that had been delayed during the downturn. However, the housing sector remains 

depressed as the overhand of vacant house continues to weigh 

heavily on both home prices and construction, and non-residential 

construction is also quite weak. Overall, the pace of economic recov-
15 

ery seems likely to be moderately stronger in 2011 than it was in 

2010. 

Although recent indicators of spending and production have generally been encouraging, conditions in the labor market have improved only modestly at best. After the loss of nearly 8.5 million 

jobs in 2008 and 2009, private payrolls expanded at an average of 

only about 100,000 per month in 2010—a pace barely enough to accommodate the normal increase in the labor force and, therefore, 

insufficient to materially reduce the unemployment rate. 

On a more positive note, a number of indicators of job openings 

and hiring plans have looked stronger in recent months, and initial 

claims for unemployment insurance declined through November 

and December. Notwithstanding these hopeful signs, with output 

growth likely to be moderate in the next few quarters and employers reportedly still reluctant to add to payrolls, considerable time 

likely will be required before the unemployment rate has returned 

to a more normal level. 

Persistently high unemployment by dampening household income 

and confidence could threaten the strength and sustainability of 

the recovery. Moreover, roughly 40 percent of the unemployed have 

been out of work for 6 months or more. Long-term unemployment 

not only imposes exceptional hardships on the jobless and their 

families, but it also erodes the skills of those workers and may inflict lasting damage on their employment and earnings prospects. 

Recent data show consumer price inflation continuing to trend 

downward. For the 12 months ending in November, prices for personal consumption expenditures rose 1.0 percent, and inflation, excluding the relatively volatile food and energy components, which 

tends to be a better gauge of underlying inflation trends, was only 

0.8 percent, down from 1.7 percent a year earlier and from about 

2.5 percent in 2007, the year before the recession began. 

The downward trend in inflation over the past few years is no 

surprise given the low rates of resource utilization that have prevailed over that time. Indeed, as a result of the weak job market, 

wage growth has slowed along with inflation. Over the 12 months 

ending in November, average hourly earnings have risen only 1.6 

percent. 

Despite the decline in inflation, long-run inflation expectations 

have remained stable. For example, the rate of inflation that 

households expect over the next 5 to 10 years, as measured by the 

Thompson Reuters/University of Michigan Surveys of Consumers, 

has remained in a narrow range over the past few years. With inflation expectations stable and with levels of resource utilization 

expected to remain low, inflation is likely to be subdued for some 

time. 

Although it is likely that economic growth will pick up this year 

and that the unemployment rate will decline somewhat, progress 

toward the Federal Reserve statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by the Federal Open Market Committee, or FOMC, 

showed that, notwithstanding forecasts of increased growth in 2011 

and 2012, most participants expected the unemployment rate to be 

close to 8 percent 2 years from now. At this rate of improvement, 
16 

it could take 4 to 5 more years for the job market to normalize 

fully. 

FOMC participants also predicted inflation to be at historically 

low levels for some time. Very low rates of inflation raise several 

concerns. 

First, very low inflation increases the risk that new adverse 

shocks could push the economy into deflation; that is, a situation 

involving ongoing declines in prices. Experience shows that deflation induced by economic slack can lead to extended periods of poor 

economic performance. Indeed, even a significant perceived risk of 

deflation may lead firms to be more cautious about investment and 

hiring. 

Second, with short-term nominal interest rates already close to 

zero, declines in actual and expected inflation increase, respectively, both the real cost of servicing existing debt and the expected 

real cost of new borrowing. By raising effective debt burdens and 

by inhibiting new household spending and business investment, 

higher real borrowing costs create a further drag on growth. 

Finally, it is important to recognize that periods of very low inflation generally involve very slow growth in nominal wages and 

incomes as well as prices. I have already alluded to the recent deceleration in average hourly earnings. Thus, in circumstances like 

those we face now, very low inflation, or deflation, does not necessarily imply any increase in household purchasing power. Rather, 

because of the associated deterioration in economic performance, 

very low inflation, or deflation, arising from economic slack is generally linked with reductions rather than gains in living standards. 

In a situation in which unemployment is high and expected to remain so and inflation is unusually low, the FOMC would normally 

respond by reducing its target for the Federal funds rate. However, 

the Federal Reserve’s target for the Federal funds rate has been 

close to zero since December 2008, leaving essentially no scope for 

further reductions. Consequently for the past 2 years, the FOMC 

has been using alternative tools to provide additional monetary accommodation. Notably, between December 2008 and March 2010, 

the FOMC purchased about $1.7 trillion in longer-term Treasury 

and agency-backed securities in the open market. The proceeds of 

these purchases ultimately find their way into the banking system, 

with the result that depository institutions now hold a high level 

of reserve balances with the Federal Reserve. 

Although longer-term securities purchases are a different tool for 

conducting monetary policy than the more familiar approach of 

managing the overnight interest rate, the goals and transmission 

mechanisms of the two approaches are similar. Conventional monetary policy works by changing market expectations for the future 

path of short-term interest rates, which in turn influences the current level of longer-term interest rates and other financial conditions. These changes in financial conditions then affect household 

and business spending. By contrast, securities purchases by the 

Federal Reserve put downward pressure directly on longer-term interest rates by reducing the stock of longer-term securities held by 

private investors. These actions affect private sector spending 

through the same channels as conventional monetary policy. 
17 

In particular, the Federal Reserve’s earlier program of asset purchases appeared to be successful in influencing longer-term interest 

rates, raising the prices of equities and other assets, and improving 

credit conditions more broadly, thereby helping stabilize the economy and support the recovery. 

In light of this experience and with the economic outlook still unsatisfactory, late last summer the FOMC began to signal to financial markets that it was considering providing additional monetary 

policy accommodation by conducting further asset purchases. At its 

meeting in early November, the FOMC formally announced its intention to purchase an additional $600 billion in Treasury securities by the end of the second quarter of 2011, or about one-third 

the value of securities purchased in earlier programs. The FOMC 

also maintained its policy, adopted at its August meeting, of reinvesting principal received on the Federal Reserve’s holdings of securities. The FOMC stated that it will review its asset purchase 

program regularly in light of incoming information and will adjust 

the program as needed to meet its objectives. 

Importantly, the committee remains unwaveringly committed to 

price stability and in particular to maintaining inflation at a level 

consistent with the Federal Reserve’s mandate from the Congress. 

In that regards, it bears emphasizing that the Federal Reserve has 

all the tools it needs to ensure that it will be able to smoothly and 

effectively exit from this program at the appropriate time. 

Importantly, the Federal Reserve’s ability to pay interest on reserve balances held at Federal Reserve banks will allow it to put 

upward pressure on short-term market interest rates and thus to 

tighten monetary policy when needed, even if bank reserves remain 

high. Moreover, the Fed has invested considerable effort in developing methods to drain or immobilize bank reserves as needed to 

facilitate the smooth withdrawal of policy accommodation when 

conditions warrant. If necessary, the committee could also tighten 

policy by redeeming or selling securities on the open market. 

As I am appearing before the Budget Committee, it is worth emphasizing that the Fed’s purchases of longer-term securities are not 

comparable to ordinary Government spending. In executing these 

transactions, the Federal Reserve requires financial assets, not 

goods and services. Ultimately, at the appropriate time, the Federal Reserve will normalize its balance sheet by selling these assets 

back into the market or by allowing them to mature. In the interim, the interest that the Federal Reserve earns from its securities holdings adds to the Fed’s remittances to the Treasury. In 

2009 and 2010, those remittances totaled about $120 billion. 

Fiscal policymakers also face a challenging environment. Our 

Nation’s fiscal position has deteriorated appreciably since the onset 

of the financial crisis and the recession. To a significant extent, 

this deterioration is the result of the effects of the weak economy 

on revenues and outlays along with the actions that we are taking 

to ease the recession and steady financial markets. In their planning for the near term, fiscal policymakers will need to continue to 

take into account the low level of economic activity and the still 

fragile nature of the economic recovery. 

However, an important part of the Federal budget deficit appears 

to be structural rather than cyclical; that is, the deficit is expected 
18 

to remain unsustainably elevated even after economic conditions 

have returned to normal. For example, under the CBO’s so-called 

alternative fiscal scenario, which assumes that most of the tax cuts 

enacted in 2001 and 2003 are made permanent and that discretionary spending rises at the same rate as the GDP, the deficit is 

projected to fall from its current level of about 9 percent of GDP 

to 5 percent of GDP by 2015, but then to rise to about 6.5 percent 

of GDP by the end of the decade. 

In subsequent years, the budget outlook is projected to deteriorate even more rapidly as the aging of the population and continued growth in health spending boost Federal outlays on entitlement programs. Under this scenario, Federal debt held by the public is projected to reach 185 percent of the GDP by 2035, up from 

about 60 percent at the end of fiscal year 2010. 

The CBO projections by design ignore the adverse effects that 

such high debt and deficits would likely have on our economy. But 

if Government debt and deficits were actually to grow at the pace 

envisioned in the scenario, the economic and financial effects would 

be severe. Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on Government debt and potentially to broader 

financial turmoil. Moreover, high rates of Government borrowing 

would drain funds away from private capital formation and increase our foreign indebtedness with adverse long-run effects on 

U.S. output, incomes, and standards of living. 

It is widely understood that the Federal Government is on an 

unsustainable fiscal path, yet as a Nation we have done little to address this critical threat to our economy. Doing nothing will not be 

an option indefinitely. The longer we wait to act, the greater the 

risks and the more wrenching the inevitable changes to the budget 

will be. By contrast, the prompt adoption of a credible program to 

reduce future deficits would not only enhance economic growth and 

stability in the long run, but could also yield substantial near-term 

benefits in terms of lower long-term interest rates and increased 

consumer and business confidence. 

Plans recently put forward by the President’s National Commission on Fiscal Responsibility and Reform and other prominent 

groups provide useful starting points for a much needed national 

conversation about our medium- and long-term fiscal situation. Although these various proposals differ on many details, each gives 

a sobering perspective on the size of the problem and offers some 

potential solutions. 

Of course, economic growth is affected not only by the levels of 

taxes and spending but also by their composition and structure. I 

hope that in addressing our long-term fiscal challenges the Congress will seek reforms to the Government’s tax policies and spending priorities that serve not only to reduce the deficit but also to 

enhance the long-term growth potential of our economy, for example, by encouraging investment in physical and human capital, by 

promoting research and development, by providing necessary public 

infrastructure, and by reducing disincentives to work and to save. 

We cannot grow out of our fiscal imbalances, but a more productive 

economy would ease the trade-offs that we face. 
19 

Thank you, Mr. Chairman, Senator Sessions. I would be pleased 

to take your questions. 

[The prepared statement of Mr. Bernanke follows:] 
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24 
25 
26 
27 
28 
29 

Chairman CONRAD. Thank you for your excellent testimony. 

I want to go to your final point. This is the Budget Committee. 

We have a special responsibility to our colleagues and the country 

to propose a fiscal policy going forward. What I hear you saying is 

that it is critically important that we adopt a credible plan, longerterm plan, to deal with our deficits and debt. Is that an accurate 

understanding of what you are saying to us? 

Mr. BERNANKE. That is correct, Mr. Chairman. Our fiscal issues 

are very long-term in nature. They increase— the difficulties increase over time. Merely addressing this year’s spending is not 

going to solve the problem. We need to develop a plan, and a credible plan, one that markets will accept as plausible, to address the 

longer-term structural budget deficits that we face. 

Chairman CONRAD. The Fiscal Commission proposed a plan that 

would reduce the debt over time by $4 trillion, which would stabilize the debt in the short term, but importantly, bring the debt 

down as a share of the economy to roughly, publicly-held debt, to 

30 percent of GDP. That is over an extended period of time. Is that 

about the magnitude of the size of the plan that is necessary? 

Mr. BERNANKE. Senator, no one knows exactly what the desirable 

debt-to-GDP ratio is in the long run. You mentioned the 90 percent 

number as an upper level of comfort. In the near term, I think we 

need to focus on stabilizing the debt-to-GDP ratio. Under the alternative scenario of the CBO, it just rises indefinitely and that is certainly not sustainable. 

If we could achieve, say, in the next decade a two or three percentage point of GDP reduction in the deficit, that would be sufficient to bring the primary deficit close to zero and would stabilize 

the debt-to-GDP ratio over the next decade. We would need additional steps after that. So I think stability is the first step. Bringing it down is a bonus, if we can do that. 

Chairman CONRAD. You know, that was really the conclusion of 

the Commission. The conclusion of the Commission was, first job, 

job one is to stabilize the debt. You know, we talk about these different measures of debt. Publicly-held debt is currently roughly 60 

percent. The gross debt is currently about 90 percent. And most of 

the advice to the Commission was, you have to stabilize publiclyheld debt at 60 percent, gross debt at 90 percent. But over time, 

you really need to bring it down. You should not stabilize it and 

consider that you have finished the job because you need to have 

a margin to deal with future shocks. Is that your judgment, as 

well? 

Mr. BERNANKE. Yes, Mr. Chairman, but stabilizing it would be 

a very important first step. 

Chairman CONRAD. Yes. Job one, stabilize. 

Mr. BERNANKE. Right. 

Chairman CONRAD. My second question is the timing of imposing 

the tough choices that need to be made here on both the spending 

side of the equation, and the Commission proposed roughly $2.2 

trillion of spending cuts, proposed nearly a trillion dollars of new 

revenue. The rest of the savings was savings of interest. In terms 

of when you pivot, that is a critical question. The Commission’s 

conclusion was you ought not to take the really tough steps that 

need to be taken for the next several years. You need to begin. You 
30 

need to adopt the plan. But the real tough medicine needs to wait 

until the economy is on stronger ground. What would your recommendation be to us? 

Mr. BERNANKE. Mr. Chairman, I think the issue is credibility. If 

we can—it is not really sufficient to say, well, we are not doing 

anything now because of the recession but we will do something 

later, but we are not specifying what that is. I think if we could 

adopt a credible plan that is specific enough and credible enough 

to address the long-run situation, that would be the most positive 

thing that we could do, and in doing so, we could get really all the 

benefits without having to take actions that would endanger the 

very near-term recovery, which is still somewhat fragile. 

Chairman CONRAD. Yes, that was very much the conclusion of 

the Commission. It is not enough to say, yes, we are going to do 

something in the sweet bye-and-bye. You have actually got to adopt 

a plan. You have to put it in place. You have to put it in place legislatively so people know, yes, we are going to cut spending. We are 

going to improve the revenue base. We are going to have savings 

of interest costs. And it has to be credibly scored. It has to be real. 

But you should not have the bite occur too soon or you endanger 

this fragile recovery. 

You made another set of comments that I thought was very important and that was the composition of the spending reductions, 

the composition of the revenue is also critically important to future 

economy growth. You are saying, look, you have to pay attention 

to human capital, education. You have to pay attention to infrastructure because that improves the economic competitive position 

of the United States. But when you are imposing these spending 

cuts, you have to go after things that are superfluous, and goodness 

knows as we look across Federal spending there are places we are 

not doing things that enhance economic growth. There are things 

that constitute waste, although the idea that just cutting waste, 

fraud, and abuse is going to solve this problem is—I wish it were 

the case, but it is necessary but not sufficient. 

On the revenue side, the Commission concluded one of the best 

things we could do is broaden the tax base, eliminating some of the 

tax expenditures, but simultaneously reducing rates to make America more competitive. Is that what you had in mind when you 

talked about paying attention to the composition of the changes 

that are made? 

Mr. BERNANKE. Yes, Mr. Chairman. On the first point, the National Income Accounts do not really distinguish between government consumption and investment very sharply. I mean, there is 

a technical distinction. But we need to think about making investments for the future as opposed to simply spending on current 

needs, and so thinking about government programs, we should ask 

the question, will this provide benefits in the future, provide a 

more productive, competitive economy in the future. 

On the tax side, I do not think it is really very controversial 

among economists that rising rates combined with a multiplication 

of exemptions, deductions, credits, and so on leads to a tax code 

which is very complex and can distort economic decisions, and I 

think all of the major deficit reduction commissions have taken the 

opportunity to talk about the need to lower rates but to avoid—but 
31 

to close loopholes so as not to lose revenue. So I think that is something, I hope, that the Congress will talk about. It is not at all inconsistent to both address the long-term deficit issues but also to 

think about making our tax code and our spending priorities more 

growth friendly. 

Chairman CONRAD. I tell you, there is nobody that could have 

participated in this process that did not conclude this tax system 

that we have is just completely out of date. You know, it does not 

take account of the world that we live in today. 

The other conclusion of the Commission was that you have to 

have everything on the table. Spending, revenue, and every part of 

Federal spending has to be dealt with, and, you know, even defense. One of the most startling, I would say to my colleague, one 

of the most startling pieces of information that came to the Commission was 51 percent of the Federal workforce is at the Department of Defense. That does not count the contractors. When we 

asked the defense analysts who came before the Commission, how 

many contractors does the Department of Defense have, they told 

us they could not tell us, not because it was secret but because 

they did not know. And when we asked them, what was the range, 

they said between one and nine million. That is a pretty broad 

range. 

So we have issues throughout the Federal Government and we 

are going to have to address them. I very much appreciate the good 

advice that you have given us. 

Mr. BERNANKE. Thank you. 

Chairman CONRAD. Senator Sessions? By the way, we are going 

with eight-minute rounds, a little bit longer than usual because of 

the numbers who are here, and I have tried to respect that in my 

time and hope others will. 

Senator SESSIONS. Thank you, Mr. Chairman. 

First, Mr. Bernanke, let me pursue the question that revolves 

around your confidence about being able to prevent inflation. You 

note that you remain unwaveringly committed to price stability in 

your statement, and in particular, maintaining inflation at a level 

consistent with the Federal Reserve’s mandate. In that regard, it 

bears emphasizing that the Federal Reserve has all the tools it 

needs to ensure that it will be smoothly and effectively exit from 

this program at the appropriate time. 

Well, forgive me if I am less confident you can know precisely 

when and how to exit and that you can do so smoothly. And I notice that the bond market and the common seems almost consensus 

view now around Wall Street and investors is that bonds are a bad 

investment, presumably because they expect a realistic reality of 

an increase in interest rates in the future as a result of quantitative easing deficits and the like. Can you assure us? It looks to 

me like, would you not agree, that investors are getting nervous already? 

Mr. BERNANKE. Well, Senator, first, on your earlier comment 

about the 100 percent certainty, what I was talking about there 

was not that we would know exactly with certainty the right moment. What I was trying to convey was I thought I was certain that 

we have the tools we need. Now, it is always the case that when 

you are reversing monetary policy in a period of growth, that as a 
32 

matter of judgment, you can be too early, too late, but that is true 

for normal monetary policy as well as for unusual monetary policy. 

So I am not trying to claim omniscience, and, of course, it is always 

possible that we will be either a little too slow or a little too quick, 

and we will do our very, very best to move at the right time. 

As far as inflation is concerned, though, I mean, again, the actual 

inflation rate is at essentially a post- war low and inflation expectations look very stable— 

Senator SESSIONS. What about—is there a difference between interest rates on the Federal debt and inflation? 

Mr. BERNANKE. The interest rates on the Federal also are quite 

low, of course, and in the indexed bond market, the break-even inflation rates are about where you think they want to be if people 

expect that over the next five to ten years the Fed will keep inflation at about two percent, which is about where we think we ought 

to be aiming. We are going to pay very close attention to the inflation situation and we take that very, very seriously. 

Senator SESSIONS. But tell me, just trying to bring a little common sense and an honest question to you, it does seem that the 

bond market is nervous. It does seem to me that the quantitative 

easing plans continue and may continue again and that the deficits 

continue at an unsustainable rate. Why should people not be worried that eventually there could be a tipping point reached and a 

rather dramatic surge in our interest rates could occur? 

Mr. BERNANKE. Well, on the monetary policy side, as I said, we 

are in a situation similar to where we always are, which is we need 

to find the right moment to begin tightening. You mentioned that 

the bond market is expecting short-term rates to rise in the future. 

That would, of course, be corresponding to the Fed tightening and 

reversing the easy money policies. 

In terms of the fiscal side, there, I absolutely agree with you. I 

think that if the Congress and the administration do not find a 

credible plan for controlling the long-term structural deficits, there 

could be very serious problems in financial markets and in inflation. That is the history of many, many situations in the past. 

So I do very much urge this committee to look for strong and 

credible actions to control the Federal debt. If that is done, then 

I do not think that inflation will be a long-term problem. What we 

are trying to do, I think, in the short term, is to create an appropriate balance between the risks of inflation and the risks of deflation, which are not yet gone. 

Senator SESSIONS. With regard to unemployment, I think you 

made clear in your statement, but it is important for us to understand, even though the rate dropped three-tenths, four-tenths of a 

point to 9.4, the 103,000 jobs added is really sort of treading water 

about what you have to just maintain the current employment rate, 

is that not right, and that is not really a number that we can celebrate today? 

Mr. BERNANKE. It is about what we expected, but as you say, it 

is not a number that is going to—if we continue at this pace, we 

are not going to see sustained declines in the unemployment rate. 

Senator SESSIONS. But the predictions were as much as 275,000 

jobs are being added. 
33 

Mr. BERNANKE. That was not—certainly not our prediction, and 

not most Wall Street predictions. There was a number that came 

out of—the so-called ADP number, which was very high— 

Senator SESSIONS. Yes. 

Mr. BERNANKE. —but that is only loosely connected with the actual number. 

Senator SESSIONS. I think the American people are deeply concerned about where we are heading economically. Their jobs are at 

stake. I believe that that is a legitimate concern. To what extent 

do you have a plan and to what extent does the administration, the 

President have a plan that sees into the future and it says, we are 

going to do A, B, C, and D and those things will bring us out of 

this, and is it written? Can we see it? 

Mr. BERNANKE. Senator, well, first of all, it was concern about 

the failure of unemployment to decline that motivated us back in 

August and September to adopt more monetary accommodation, 

and my view is that we have already had some benefits from that. 

We have seen some improvements in the outlook. We have seen 

some improvements in financial markets. So that is certainly part 

of what we are trying to do, is trying to keep this recovery going. 

In addition, of course, we are working very hard in our role as 

a regulator to try to improve the availability of credit to small businesses and to other borrowers. Senator Warner, I know, has been 

very interested in that issue. So we are working very hard and that 

is our top priority. 

Senator SESSIONS. Well, we have a change-over in the White 

House. Mr. Summers is gone. Ms. Romer is gone. Peter Orszag has 

left. Mr. Lew is there at OMB. We have a new Chief of Staff, I 

hear, today. But I do not sense anywhere in our government that 

we have the kind of clarity of leadership we had under Mr. Volcker 

when we had the crisis in the late 1970s and early 1980s. One of 

the Fed members said we knew we were doing the right thing. 

They were protesting Mr. Volcker. Some called for his resignation. 

But we had a plan and we were staying with it. 

Can the American people have confidence that you and the administration are on the same page and we have a plan other than 

reacting every month or two to some new change in conditions? 

Mr. BERNANKE. Well, Senator, the Federal Reserve is independent of the administration. I mean, we try to coordinate with 

the administration. We try to coordinate with Congress. But the 

Federal Reserve is independent. We make independent decisions. 

Senator SESSIONS. I know you are independent. 

Mr. BERNANKE. So the administration’s plan, Congress’s plan, I 

mean, those are not our province. That is for the administration 

and Congress to decide. 

In our case, we do have a plan, and like—I have tremendous respect for Chairman Volcker, and one of the things that he did, as 

you say, was he did what he thought was right even though there 

was a lot of criticism, and I think that is what the importance of 

independent monetary policy is. At the Federal Reserve, we recognize that there are different views, but we are trying to do the best 

thing that we can for the American economy and that is the beauty 

of having an independent central bank. 
34 

Senator SESSIONS. Thank you very much. Mr. Volcker, history 

records, I think, was correct in his plan. I hope history will record 

the same for your leadership. 

Chairman CONRAD. Thanks, Senator Sessions. 

Let me just indicate that on our side, it is Senator Wyden, Senator Warner, Senator Manchin, Senator Stabenow, Senator 

Merkley. On the Republican side, it is Senator Enzi and Senator 

Cornyn. 

Senator Wyden. 

Senator WYDEN. Thank you very much, Mr. Chairman. 

I, too, want to welcome Senator Sessions as our Ranking Minority Member. He is somebody I greatly enjoy working with and respect very much. I do want to note for the record that I do not believe the Auburn Tigers have a realistic chance of keeping up with 

the University of Oregon’s fast-moving, innovative offense in the 

championship game, but we will save that for another discussion. 

I just want to welcome my good friend. 

Senator SESSIONS. Well, if you are correct in that, I will be 

pleased to wear that tie you have on for a few days perhaps. 

Senator WYDEN. We have an agreement, and I will reciprocate. 

[Laughter.] 

Senator WYDEN. Senator Conrad, thank you very much, and Mr. 

Chairman, we are so glad to have you here, and I especially because you and I share a similar view that the big idea for economic 

growth in our country is fundamental tax reform, where you go in 

there and clean out this job-killing, thoroughly discredited mess, 

and you addressed that, I thought, very well in the ‘‘60 Minutes’’ 

discussion that you had back in December. 

Here is my first question. It was clear at the end of the year that 

you had to take some steps with respect to the tax code in the short 

term so that people would not be clobbered at the beginning of the 

year, the middle-class folks and small businesses and others. But 

what I am concerned about is when you look at the overall structure of what was done in December, it has contributed once again 

to tax uncertainty, all of the two-year provisions, the one-year provisions, the phase-ins, the phase-outs. As you know, the tax code 

has tripled in just the number of words in the last decade and that 

has been fueled once again by what was done in December. 

I want to make sure, for the record, it is clear that when you are 

talking about long-term economic growth, you want a different tax 

model than what the Congress passed in December. You do not 

want to see more provisions added and more exemptions and deductions. You think, by and large, we ought to be draining the 

swamp, cleaning out a lot of the clutter to hold down some rates, 

keep progressivity and provide some certainty. You want a different model than what was passed in December for the long term, 

is that correct? 

Mr. BERNANKE. Yes, Senator. What was passed in December was 

understandable, given the exigencies of time and so on. But I hope 

that the Congress will think hard about what long-run tax structure will be most beneficial, and lowering rates and closing loopholes is, I think, the best approach. 

Senator WYDEN. The second question, there has been considerable discussion in the last few days, really the last week or so, 
35 

about the idea of instead of the kind of tax reform you and I want, 

comprehensive reform, just going out and changing the corporate 

tax rate. I think that would be a big mistake, and the reason why 

is that most businesses in America, probably in the vicinity of 80 

percent, pay taxes essentially as individuals, some Chapter S, sole 

proprietors, partnerships, the whole host of firms that are not, in 

effect, C Corporations. 

Is there not a real danger if you go in and just make changes 

on the corporate side to have further distortions, further complications, and end up with yet more uncertainty than you would have 

if you went in and made a comprehensive overhaul, recognizing the 

connections between the individual provisions in the code and the 

business provisions? 

Mr. BERNANKE. Well, Senator, as you know better than me or 

anyone, there are many interactions between the two codes, including, for example, the double taxation of dividends and many other 

issues. So, yes, ideally, I hope that you would look at the tax system as a holistic single part of policy. I do not know what is feasible for politically and so on. That is really your call. But ideally, 

yes, of course, you would like to make sure that the entire Federal 

code is consistent and is supportive of efficient growth. 

Senator WYDEN. I will keep you out of the politics, but colleagues, and we have several on the Finance Committee and Senator Sessions is very interested in it, the Chairman is making a 

very important point. There is today such a connection between the 

individual portions of the code and the corporate portions of the 

code, to just split one out as some have been discussing, I think, 

could once again create a whole set of additional distortions in the 

American economy and I appreciate what you are saying, Mr. 

Chairman. 

One other point with respect to tax reform that I think you have 

touched on in the past but would be important to have on the 

record. Today, it is very clear that people loathe the Internal Revenue System. I mean, it is just up there at the top of all of the Federal agencies and functions of the Federal Government people are 

furious about. 

It seems to me if you got to the point where you had a one-page 

1040 Form—Senator Gregg and I have that in our bill, as you 

know, Chairman Volcker has all but proposed that, it was in the 

Bush proposal, for Pete’s sakes, years and years ago—would not 

having a one-page 1040 Form, where most people could complete 

taxes themselves rather than spending their whole spring on 

TurboTax and the like, would that not in and of itself be a public 

good in terms of simplicity and understanding and making people 

feel more confident that the American economy and the 

underpinnings of the American economy were sound? 

Mr. BERNANKE. Well, as a general matter, simplicity, besides 

being less likely to be distortionary, has benefits of lower compliance costs, which are quite significant, and less need for the IRS 

or for accountants to adjudicate complex provisions in the code. So 

certainly simplicity is to be desired and I think it would make people more comfortable with the tax code because it would be less of 

a burden and because they would feel more comfortable that there 
36 

were not all kinds of loopholes they did not understand that people 

were taking advantage of. 

Senator WYDEN. One last question, again, not from a political 

standpoint, from an economic standpoint. One judgment I have 

made, looking back over the last quarter century on this, is that 

a mistake in 1986 was to not have some provisions to make it 

tougher to unravel fundamental tax reform when you got it. In 

other words, over the last 25 years after it was enacted, pretty 

much a few weeks later, the ink on the bill was dry and everybody 

just went back to business as usual. From an economic standpoint, 

how useful would it be when the tax code is overhauled this time, 

so there is more fairness for the middle class and take these steps 

to be globally competitive, how important from an economic standpoint is it to make it tougher to unravel it as soon as you get the 

reform? 

Mr. BERNANKE. Well, Senator, as you say, there are political and 

probably constitutional issues involved in all that, but everything 

else being equal, greater clarity and certainty is obviously beneficial, and to the extent that you can create more certainty about 

where the tax code is going to be over a number of years, that 

would be helpful. 

Senator WYDEN. Mr. Chairman, thank you, and I look forward to 

following up with you on these matters, and the fact that you have 

been outspoken on this has really given a boost to reformers and 

we are very appreciative. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. 

To follow up on what the Senator from Oregon said, our Nation’s 

fiscal policy is in tatters. Our projected level of Federal spending 

growth is unsustainable. Our Tax Code is a mess. The only constant is that the Federal budget deficit is large and likely to remain that way. 

To what extent does the uncertainty that comes with these problems undermine economic growth? 

Mr. BERNANKE. It is hard to make a quantitative judgment, Senator, but I am sure it is a negative. I do think that addressing our 

long-term structural budget deficits would not only reduce the risks 

we face in the future, but would probably have near-term benefits 

in terms of possibly of lower interest rates but also in terms of 

greater confidence and certainty. As you say, as it stands the one 

thing we know about our long-term tax and spending commitments 

is that they are not feasible, they cannot happen, they are not sustainable. So we do not know how things are going to change. So, 

yes, the more clarity we can achieve, the better we will be, the better off we will be. 

Senator ENZI. Thank you. I was a cosponsor of the Conrad-Gregg 

deficit commission bill and was pleased that we got one, one way 

or another, and I think that that sheds some real light on what 

needs to be done by Congress. I am really concerned about the rapidly rising debt-to-GDP ratios and watching what is happening 

over in Europe. They have enacted some programs to rein in government spending. Some of them did not act quickly enough and 

had to be bailed out by their neighbors. 
37 

During a hearing before the House Budget Committee in June, 

Representative Hensarling asked you whether the United States 

was nearing a similar point given our comparable debt-to-GDP 

ratio, and you responded that you do not know exactly how much 

breathing space we have. Rather than enact austerity cuts as the 

Europeans did, we have seen our gross national debt increase by 

$1 trillion since June. Can you give us any kind of an indication 

of how much breathing room we do have if we continue on this 

course before we reach that tipping point? Anything more exact 

since June? 

Mr. BERNANKE. You know, I just think it is inherently impossible 

to pinpoint the exact date or the exact level of debt that would create a crisis or a sharp increase in interest rates. 

That being said, it would be the better part of valor to take action now to make sure that we do not get too close to that point. 

I do not know what the number is, but what I do know—and the 

CBO’s projections show this very clearly— is that absent any action, the debt-to-GDP ratio is going to be not only rising but rising 

at an increasing pace. It is going to be heading straight to heaven, 

basically, and that is certainly not going to happen—that certainly 

cannot occur. 

So I do not know at what point exactly, but that point will come 

if we do not take appropriate action. 

Senator ENZI. I also appreciate your meeting with some other 

groups. Senators Warner and Chambliss started a group to review 

these things, and I appreciated your comments about the difference 

between our debt-to-GDP ratio and the Japanese one where they 

have a lot of savings and we do not. There are just so many things 

that need to be taken into consideration with all of these things. 

I know that the Fed undertook quantitative easing because of a 

fear of deflation, yet other than housing prices, Americans are experiencing inflation in virtually every other major household outlay, particularly when it comes to groceries and gasoline. America’s 

economy runs to a large degree on motor fuel. If as some analysts 

predict gasoline prices reach $4 a gallon this summer, will not this 

risk choking off the economic recovery? 

Mr. BERNANKE. Well, first, just the facts are that inflation is 1 

percent including food and fuel, so inflation overall, taking into account everything that people buy, is quite low. 

Now, it is true that people are very sensitive to the price of gasoline, and we are watching that very carefully. I do not think that 

quantitative easing of monetary policy is the main reason that oil 

prices are up in the past few months. The dollar, after all, has been 

quite stable, and oil prices are up in essentially all currencies. I 

think the main reason oil prices are up is the strength of emerging 

markets, the demand for energy from China and other fast-growing 

emerging-market economies. 

That being said, we are watching it very carefully because, as 

you point out, higher gas prices are like a tax on families; and if 

they get too high, then that will, in fact, be a negative for growth 

as well as for inflation. So we will pay very close attention to both 

energy prices and other commodity prices as well. 

Senator ENZI. There is discussion among policymakers about removing the Federal Reserve’s dual mandate of a stable monetary 
38 

policy and full employment. Some have suggested that it would 

make sense to remove your mandate for full employment so that 

you can focus only on monetary policy. Do you have an opinion 

about this matter? 

Mr. BERNANKE. Senator, we are not seeking any change. We 

think the current mandate is workable. That being said, I think it 

is entirely appropriate for the Senate and for the Congress to consider what mandate they want to set. There are, after all, central 

banks around the world that do focus primarily on price stability, 

and whatever decision the Congress makes, of course, we will 

honor that decision and pursue that mandate. 

Senator ENZI. Thank you. I do not have any further questions. 

Chairman CONRAD. Thank you so much, Senator Enzi. 

Senator WARNER. 

Senator WARNER. Thank you, Mr. Chairman, and thank you for 

holding this hearing this morning. 

Chairman Bernanke, let me first of all acknowledge what my colleague Senator Enzi has already said and thank you for being willing to meet with a growing bipartisan group of Senators. Senator 

Chambliss and I have been working, along with Senator Wyden 

and others, on saying we need to move forward on a real plan. And 

compliments to Senator Conrad and Senator Gregg and others. And 

while imperfect—and I particularly appreciate your comments in 

your testimony about the President’s National Commission on Fiscal Responsibility and Reform that we ought to go ahead and take 

that work product of the last year and use that as a starting point, 

because I think as both you and Senator Sessions have said in your 

testimonies, simply talking about deficit reduction does not get us 

anyplace. We have to have a real plan to work against. And it is 

the intention of Senator Chambliss and me to take that work and 

put it into legislative language and introduce it. I think, again, a 

point that both Senator Conrad and Senator Wyden have made, is 

that if we are going to take on this issue, it is going to require dramatic cuts in Government spending, but it is also going to require 

meaningful tax reform. And I think, again, a lot of the early attention to the Commission’s work focused on the deficit reduction 

piece. It did not focus as much on the tax reform piece, which both 

lower corporate rates and individual rates, and actually I would 

add on the individual side, lent more progressivity to the Tax Code. 

So I think it is a good working document, and I look forward to 

working with colleagues on both sides of the aisle to see if we can 

get as many cosponsors as possible to at least move forward on this 

discussion. And it is my hope that we could actually see a plan put 

forward this year, working off of the President’s Commission, as I 

am sure it would be amended, and actually get it voted on. Because 

the way I hear you saying—now, you would never be as impolite 

as to use these terms, so let me use these terms. But you are basically saying to us, the Congress and the policymakers, we have to 

walk and chew gum at the same time, so that we have to continue 

to do short-term stimulus—you at the Fed have done that through 

your quantitative easing policies, and we in certain tax policies 

that were taken in December, both in terms of short-term stimulus, 

but that short-term stimulus then has to be morphed into longterm deficit reduction. 
39 

Going back to some of Chairman Conrad’s earlier questions, you 

know, what should we look at as the metrics or other indicators of 

when we should kind of ease off on the stimulus and ramp up the 

deficit reduction piece? Should that be based on a timeline? I think 

the President’s Commission, Chairman Conrad, you had a lot of 

your actions starting to click in about 2012, 2013, 2014. Should it 

be on a kind of date line process? Should it be based on when 

growth hits at a certain level, unemployment falls to a certain 

level? What should be the indicators, even if we get a plan in place, 

that would trigger the kind of hard choices around deficit reduction 

that we are looking at? 

Mr. BERNANKE. Senator, first let me say that I enjoyed meeting 

with your group, you and Senator Chambliss, and I commend you 

for the extra work you are doing on this issue. 

I think there is an important trade-off. We need to—we, the 

American people, the Congress needs to demonstrate a credible 

commitment to solving the long-term fiscal problems. The stronger 

and more credible the plan that is put forward, the less need there 

will be to take sharp short-term cuts in order to show your seriousness. So a strong long-term plan that kicks in over a period of time 

will make it less necessary to take actions in the short term that 

would be counterproductive from the point of view of the recovery. 

So that is why it is so important to develop a strong plan. 

So that is the trade-off: The stronger the plan, the less near-term 

downpayment you have to make. 

Senator WARNER. And, Mr. Chairman, could I just interrupt for 

one second? Based upon your testimony today by referencing the 

National Commission on Fiscal Responsibility and Reform, by referencing that effort, is that an endorsement that that would be 

viewed in your mind as a strong plan? 

Mr. BERNANKE. Yes. For example, it has the feature that I believe that by 2015 there is a stabilization of the debt-to-GDP ratio 

which requires, I think, about a two- to three-percentage-point-ofGDP cut in the deficit starting in a couple of years through the rest 

of the decade. 

In terms of criteria, I think there is no magic number, but what 

we need to see is a sense of momentum, a sense that there is 

enough forward movement and strength in the recovery that we 

can feel confident that it will continue and will not be knocked off 

course by too precipitate fiscal retrenchment. 

Senator WARNER. I know you do not want to give me a set indicator, but should those indicators be time, growth rate, unemployment rates, a combination of all of those? What should be our 

markers if we pass this plan—whether the Commission’s plan or 

a like kind serious plan, there has to be some markers when we 

shift course from stimulative activities to serious deficit reduction 

and cost— 

Mr. BERNANKE. Well, all of those factors matter, but I think a 

sustained growth rate above sort of the long-term average would be 

an indication that the recovery is proceeding and has some momentum. But, again, the stronger, more credible the forward-looking 

plan, the less need there will be to make sharp short-term adjustments that might risk the recovery. 
40 

Senator WARNER. Let me in my last moment follow up on Senator Enzi’s comments, and I think he was looking for a percentage 

on when the markets will say ‘‘no mas’’ in terms of our debt-toGDP ratio. I guess my feeling is it is not a question of if we are 

going to do deficit reduction. It is going to happen. It is really only 

a question of when, and whether we are going to do this on our 

timetable in a way that is not disruptive to the economy or whether it is going to be dictated by the markets in terms of their lack 

of faith in our ability to service our debt over the long term. 

And so what I guess I would ask you—and I know my time has 

expired, Mr. Chairman, and this will be my last question. You 

know, we cannot predict that to a specific percentage or date certain. But what would be or what could be some of the warning 

signs that we are getting close to that precipice? Could it not be 

some external international, God forbid, terrorist incident that 

might put a shock wave across the economy? Could it not be another economy in Europe getting close to a failing point, an economy that would be larger than, say, Ireland or Greece? What are 

some of those warning signals? And would you also say that if we 

start going down this precipice it could happen very quickly once 

we get to that unforeseen point? 

Mr. BERNANKE. So in terms of market signals, I think I would 

look at things like Government financing, interest rates, long-term 

bond yields, the dollar, indicators of confidence in the United 

States. 

I think it is important to understand, if I may, that nobody 

doubts that the United States has the economic capacity to pay its 

bills. It is really a question of do we have the political will to do 

that, and demonstration of the political will, that is what the markets are watching. Are the Congress and the public and the administration able to demonstrate that they are serious and that they 

have enough willingness to work together to make progress? At the 

point where confidence is lost in that, you could see a relatively 

quick deterioration in financial positions, as we saw in some cases 

in Europe, where things change very quickly based on just the 

change in sentiment about the prospects for those economies. 

Senator WARNER. Thank you, Mr. Chairman. I look forward to 

working with you and Senator Sessions and all our colleagues on 

making sure we do not get to that point. 

Chairman CONRAD. Yes, we appreciate the effort that you have 

mounted, along with Senator Chambliss, our colleague. 

I just for the record want to point out that the Commission proposal stabilized the debt by 2014 and then starts bringing it down 

on a sure path after that. 

Senator MANCHIN. 

Senator MANCHIN. Thank you, Mr. Chairman. 

Chairman Bernanke, first of all, from the perspective of my home 

State of West Virginia, I am concerned about the finances of our 

State and all the States, being a former member of the NGA. What 

I would like to know is from your opinion as based on the future 

pension liabilities of both corporate and State governments, the recent reports of the financial crisis that many of our States are facing in the very near term future, have you all looked carefully at 

the possibility of a default on general obligation and municipal 
41 

bonds by State and local governments and the budget strains that 

would present to the overall U.S. economy? We are concerned about 

that the stimulus runs out June of this year. What happens if 

there is no more stimulus to come or Federal bailout, if you will, 

and they have to work on a balanced budget amendment and they 

cannot meet these long-term obligations? Have you all looked into 

that or been spending any time on it? 

Mr. BERNANKE. To some extent, Senator, yes. No question State 

and local governments are under a lot of pressure. They have been 

cutting spending and employment over the last couple years. The 

Federal assistance will continue in 2011, but after 2011, it is going 

to be pretty much zeroed out, I think. And so, on the one hand, the 

States are seeing some improvement in tax revenues as there has 

been some growth; but on the other hand, they could be losing 

some of the Federal assistance. So the pressures on State budgets 

and local municipal budgets are going to continue for a while, and 

that is going to be a head wind for the overall economy as well as 

for the individual States. 

It is also true—this is more a long-run issue—that like the Federal Government, the State and local governments have some longterm fiscal issues relating primarily both to pensions of State employees but also to health care promises, which in most cases are 

almost entirely unfunded. So those are long-term obligations that 

could be collectively as much as $2 trillion for all the States together in the long run. Now, those, of course, are long-run obligations and do not come in the near term. So there are some very 

serious long-term fiscal pressures. 

Now, in terms of the municipal bond market, it currently seems 

to be functioning reasonably well. Liquidity is fine. Issuance has 

actually been very high, including issuance for capital projects, so 

we are not seeing extraordinary stress in the municipal markets, 

which suggests that investors still are reasonably confident that 

there will not be any defaults among major borrowers. And one 

reason they might believe that is because most States have rules 

which put debt repayment and interest payments at a very high 

priority, above many other obligations of the State and localities. 

So, bottom line, the municipal markets, bond markets, seem to 

be doing okay, but clearly there is a lot of both near-term and 

longer-term pressure on these governments, and it is going to be 

something that is not going to be going away in the near term. 

Senator MANCHIN. Another question I have is that, you know, in 

West Virginia, when families have problems, whether they be families or single parents, they cannot really respond and kind of understand what we do here in Washington or what Government 

does. They do not sit down and think how much more money can 

they spend or how much can they borrow to get themselves out of 

trouble. They start looking at cutting expenses. 

What expenses could the Federal Government cut that would 

have the longest—or have the most effect on long-term stability in 

your recommendation? What should we be cutting? 

Mr. BERNANKE. Well, Senator, I should just say first, very 

strongly that these tough decisions about taxes versus spending 

and the mix of spending and so on are your decisions and not mine, 

and I do not want to inject myself too much. But I will say one 
42 

thing which is just obvious from the arithmetic, which is that going 

forward the costs of health-related programs—Medicare and Medicaid—are rising prospectively very quickly, and on current trends, 

you know, would be at some point, between Medicare and Medicaid 

and Social Security, would essentially be what is now the entire 

budget of the United States. 

So I do think that an important priority for us as a country and 

for the Congress from a fiscal point of view is to think about what 

we can do to achieve better cost efficiency in the health care area 

at the same time that we do what we can to maintain quality and 

access. So that is clearly an area we need to look at. 

That being said, of course, we have military spending, other discretionary spending. We have the Tax Code. There are many other 

things that you will certainly want to look at. 

Senator MANCHIN. And I know that there have been some Members of Congress who have long advocated for a Federal audit on 

the Federal Reserve System. Would you oppose an independent 

audit of the Federal Reserve System? 

Mr. BERNANKE. The Dodd-Frank Act included an amendment, 

sponsored by Senator Sanders and others, that includes an exhaustive audit of all the financial aspects of the Federal Reserve. In 

fact, on December 1st, we released all the information about our— 

all the lending programs, financial programs, credit programs that 

we undertook during the crisis. So as far as our finances are concerned, we are an open book, and if there is any area where you 

or your colleagues are dissatisfied with the information, I would be 

happy to work with you to make sure you get what you need. So 

in terms of all aspects of our finances and operations, I think it is 

reasonable for Congress to want to have that information. 

The one area where I have been concerned—and this goes back 

to my earlier comment to Senator Sessions—is that monetary policy independence is very important for the stability of our economy 

and our financial markets, and where ‘‘Fed audit’’ is really a code 

for congressional intervention in monetary policy decisions, that is 

where I would be much less comfortable. 

Senator MANCHIN. And, finally, is the Federal Reserve considering any policy changes that would negatively impact the financial 

viability of local community banks around the country? 

Mr. BERNANKE. To the contrary, we have a strong commitment 

to community banks, and we have, in fact, recently increased our 

schedule of direct meetings with the Board with representatives of 

community banks. There is obviously a lot of work to be done to 

implement Dodd-Frank and Basel III and other changes in financial regulation. It is our objective—I think the intent of both Basel 

III and the Dodd-Frank Act is to focus on the largest so-called toobig-to-fail banks and to make them not too big to fail. That is 

where our focus is as well, and we want to make sure that we do 

what we can not to increase the regulatory burden that small 

banks face. And small banks have been playing just an incredibly 

important role. Particularly as large banks have cut back on their 

lending to small businesses in other contexts, they have in many 

cases stepped up and proven their worth to the U.S. economy. 

Senator MANCHIN. Thank you, sir. 

Chairman CONRAD. Thank you, Senator. 
43 

Senator STABENOW. 

Senator STABENOW. Well, thank you, Mr. Chairman, and welcome, Mr. Chairman. 

Mr. Chairman, thank you for your thoughtfulness, and I think 

what you laid out to us both in terms of where we have come from, 

what we have done, and where we need to go I think is very, very 

important. 

I feel as a member of this Committee now for many, many years, 

though, that I have a need to make sure that we do not have revisionist history whenever we are talking about how we got here. I 

think it is really important if we are not going to repeat mistakes 

that have been made before that got us here. I think it is important to just say once again for the record that when I had the opportunity to come in and serve with you, Mr. Chairman, Committee 

members in 2001, we had the biggest surpluses in the history of 

the country. And so we have not always been in this situation, and 

there were a number of decisions made on spending, frankly, without accountability that haveten us where we are. And I would 

argue that, unfortunately, the spending in the 8 years in the previous administration was not focused on those things that create 

innovation to create jobs, to compete in a global economy or focus 

on opportunity or security for middle-class families. Instead it was 

very much focused on the benefit to a privileged few. And at the 

time, in the last administration, we were told deficits did not matter when we were focusing on things that would benefit the privileged few. Now, after two very, very tough years—very tough years, 

very slow years—we are turning it around. We have not gotten 

things back on track. People in Michigan are still hurting, although 

it is better, but we have a long way to go. 

My concern is that we are now hearing with the new majority 

in the House that, again, deficits only matter when it is things that 

affect middle-class families in terms of opportunity, education, innovation; but that when it comes to the policies that got us in this 

mess, focusing on tax cuts for the privileged few, supply-side economics, hoping it will trickle down, that that does not count. And 

so we saw this week over $1 trillion exempted from the budget 

rules that will add over $1 trillion in debt if we go forward with 

that, based on a way of looking at the economy that frankly did not 

work and then it got us in the last decade, in my judgment, into 

the hole that we are in. 

So, Mr. Chairman, I want to ask you about how we get out of 

this hole, both short term and long term, and I agree we need a 

credible plan, and I very strongly share your view that we have to 

be very careful in the short run. It is a very fragile situation. And 

I do not, frankly, see how we get out of this with over 15 million 

people out of work. I do not know how—how do we get out of deficit 

if we do not first focus on jobs? 

One of the things that I am proudest of is the fact that we did 

not give up on American manufacturing 2 years ago. We did not 

give up on the American automobile industry, and this year, for the 

first time since 1999 all three companies are making a profit. They 

are actually bringing jobs back to this country. And because of our 

investments in innovation, we are going to go from 2 percent of the 
44 

world’s battery manufacturing, advanced batteries, to 40 percent in 

the next 4 years. 

But my question, Mr. Chairman, relates to the immediate situation for families that are not yet feeling this recovery and the fact 

that we have tens of millions of people who are out of work. And, 

frankly, when we talk about 2008 budget numbers, I would like to 

go back to 2008 jobs numbers and focus on that to get us out of 

deficit. But how would you focus on job creation in the short run, 

knowing that we have serious long-term issues that have to be addressed on the deficit? But at the same time, I guess I would like 

your reaction to the notion that we will not get out of debt if we 

have over 15 million Americans out of work. 

Mr. BERNANKE. Senator, you are absolutely right that a large 

part of the deficit we currently have is what economists call a ‘‘cyclical deficit.’’ It arises because unemployment is well above a normal level, and what we need to address is the structural component, the part that remains once the economy is back to a more 

normal level. 

Again, I think that we need to think of fiscal policy as a piece; 

that is, we cannot think about short run and long run separately. 

You have to think about them together. And the more credible and 

effective our plans are for addressing the long-term structural 

issues, structural deficits, the more scope we will have and more 

flexibility we will have to allow continued support for the recovery 

now that we continue to need as the economy remains in a very 

still weak and fragile condition. 

So my advice, for what it is worth, is, again, not to focus only 

on the short term but think also about the long term, that you need 

to combine those two things. You mentioned things like innovation. 

Again, as I talked about in my testimony, the composition and 

structure of Government spending and the Tax Code and so on is 

also very important. Are we doing enough for innovation? We 

spend quite a bit of money on that, but is it well directed? Is it sufficient to keep our leadership position going forward? 

So those would be the themes I would note. Long-term structural 

deficits need to be addressed, and in doing so it would help the 

short term, would give us more flexibility in the short term. And 

we need to think hard about what we are doing to promote longerterm growth, longer-term innovation, longer-term human capital, 

training, education, and so on that makes people able to get better 

jobs and sustain higher incomes. 

So it is a tough set of problems, and they are very much interconnected. 

Senator STABENOW. Well, I very much appreciate your comments 

and share your feeling that it is about balance; it is putting in 

place the long-term plan; but also understanding that in a global 

economy—we are in transition now as a country—that it is very, 

very important that we be investing in those things, opportunity, 

education, innovation, that allow us to move forward in terms of 

growing the economy quickly. 

Before my time runs out, just one quick question to follow up on 

small businesses. We passed the small business jobs bill. We talked 

about the importance of supporting community banks. I would just 

ask you—on the one hand, we are saying to banks, ‘‘Lend more.’’ 
45 

Regulators are saying, ‘‘Don’t lend,’’ essentially, or ‘‘Tighten up 

things.’’ It is critical, I think, that the Fed and other regulators 

help banks, community banks, take full advantage of the lending 

initiatives that we placed in the small business jobs bill. And I am 

wondering what actions the Federal Reserve is doing or can do to 

help small business. 

Mr. BERNANKE. Senator, as it happens, I am going to be on a 

panel sponsored by the FDIC, I think it is next week, with Sheila 

Bair and with Senator Warner. We will be talking about small 

business credit and talking about all the initiatives and things that 

the Congress has done, the Federal Reserve has done, and the 

other banking agencies have done. 

But just very briefly, we are very attuned to the need to have an 

appropriate balance. On the one hand, we do not want banks making bad loans. That is how we got in trouble in the first place. But 

on the other hand, creditworthy borrowers need to have access to 

credit so that they can hire and they can expand and help the economy recover. And so we have been working very hard with the 

banks and with our examiners to try to get a balanced approach 

and I think it is beginning to pay off. There is some improvement, 

in my view, in the availability of credit and I expect to see more 

lending this year. So there is—the terms and standards have begun 

to ease a bit. So I think there is some progress on that side. 

We have also, and I will not take too much of your time, but we 

have also undertaken a series of meetings around the country, 

more than 40 meetings, where we have met with small businesses, 

lenders, examiners, local officials, trade associations, and the like, 

and tried to identify technical problems and other issues that have 

blocked access to credit and we have found some very useful things 

and we are working—we are moving forward on the things we 

learned. 

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

Chairman CONRAD. Thank you very much, Senator Stabenow. 

Senator Cornyn is recognized for 30 seconds. No, that is not— 

Senator CORNYN. Mr. Chairman, I cannot clear my throat in 30 

seconds. 

[Laughter.] 

Chairman CONRAD. Seriously, we are doing eight-minute rounds. 

Senator CORNYN. Mr. Chairman, thank you very much for your 

service in what is, by all accounts, a very challenging job. But, of 

course, we are all volunteers here and no one is holding a gun to 

our head and making us do these jobs. We volunteer to do them 

because we think we can contribute to doing things that are in the 

best interest of the country and appreciate very much your service 

in admittedly a very challenging job. 

It strikes me that there are three events coming up which will 

really provide an opportunity for Congress and the administration 

to demonstrate its seriousness at dealing with the runaway spending and the unsustainable debt problem that we have. One is the 

President’s budget is going to be due the first Monday in February. 

That will be, I think, one of the first indications, perhaps, of the 

President’s response to the report of the Fiscal Commission, and I 

want to congratulate all of our colleagues who participated in that 

on a bipartisan basis who I think demonstrated great courage in 
46 

voting for a plan, albeit one that we all can find some differences 

with. But again, the time for talk is running out and now it is time 

for action. 

So it strikes me as the first event that will provide the President 

an opportunity to respond to that in a meaningful way, to set out 

his budget for the next fiscal year, will be the first Monday in February, or I hear it may slip by a week or so. 

The second, it strikes me, is the debt ceiling vote that is going 

to be coming up, and there has been a lot of talk and speculation 

about what might happen, whether there will be some additional 

conditions that would be imposed on voting to extend the debt ceiling, which is obviously a very sensitive and important issue. 

And then it strikes me that the third sort of watershed that is 

coming up here that will demonstrate our collective seriousness of 

dealing with this, particularly from a fiscal policy standpoint, will 

be the expiration of the Continuing Resolution. 

But I want to ask you specifically about something that Senator 

Manchin alluded to briefly in terms of not just the Federal Government’s problems dealing with its debt, but the States and municipalities. Meredith Whitney, an analyst who correctly foresaw the 

mortgage crisis in 2008, now predicts that 50 to 100 sizeable U.S. 

cities could default in 2011. She said this could cause hundreds of 

billions of dollars of municipal bond defaults and warns that, next 

to housing, this is the single most important issue in the United 

States and certainly the biggest threat to the U.S. economy. And 

I would note, obviously, many States are in deep fiscal trouble, 

also, and there is the potential—at least the potential, maybe not 

the probability at least imminently, but at least the potential—that 

we could see some defaults at the State level. 

I heard what you said about the municipal bond market not 

showing any imminent signs of crisis, but do you agree that this 

is a very serious issue that needs to be confronted? 

Mr. BERNANKE. Well, I do not have a—I am sorry, Senator. I do 

not have a forecast about default risk. I think that sounds like a 

somewhat pessimistic view, but something we need to pay close attention to. Clearly, a lot of cities are under—certainly, no one can 

question they are under a lot of financial stress and it is something 

we need to pay attention to because it would have some spillover 

effects into other markets. But we do not at this point see anything 

of that magnitude happening. 

That being said, I think cities and localities will need to take 

strong measures to avoid default. Default is only, at best, a shortterm solution for local governments because what they find is that 

it will be very difficult to get back into the market, or if they do, 

they will have to pay a higher interest rate, so it would obviously 

be very much in their interest to take the difficult measures to 

avoid default. 

So I, again, as I said earlier, while there is no question that 

there is a lot of stress at State and local governments, at this point, 

the municipal market seems to be operating fairly normally, but we 

will watch that very carefully. 

Senator CORNYN. That is fair enough. Let me sort of drill down 

a little bit, because this is a point I want to get to, in particular. 

In 2002, you gave a speech before the National Economists Club in 
47 

Washington and you said, quote, and I think this is a fair quote, 

tell me if it is not, quote, ‘‘The Fed has the authority to buy foreign 

government debt as well as domestic government debt.’’ And we 

know that under the QE2 plan that you are implementing at the 

Fed, you are buying U.S. Government bonds, but would that extend 

to State and local debt, that authority? 

Mr. BERNANKE. Only in a very, very limited way. So first of all, 

we have no intention to buy foreign debt. That is really a provision 

to allow us to hold foreign exchange reserves, and we are not planning any policy in that direction. 

Senator CORNYN. My interest, obviously, is really on the State— 

Mr. BERNANKE. On the State and local, we have very limited authority there. We do have the authority to buy very short-term municipal debt that is within certain categories. So we have very limited ability to buy State, local, municipal debt. And moreover, the 

Dodd-Frank legislation restricts our ability additionally not to lend 

to any insolvent borrower and not to lend to an individual borrower, but only in terms of a broad program. So we have no expectation or intention to get involved in State and local finance. I 

think to the extent that there is anyone to look at that, it would 

have to be Congress to look at that. 

Senator CORNYN. Well, I do not have to tell you how a request 

for a bailout or for a State or municipality would be received here 

in Washington. So let me ask you, under Chapter 9 of the Bankruptcy Code, a municipality could go through a bankruptcy proceeding. But right now, there is no provision in the Bankruptcy 

Code, as I understand, for a State to go through a bankruptcy-like 

proceeding, a Chapter 11 where, of course, the secured creditors, 

the bondholders and others would maintain the highest priority, 

but there would be a procedure by which the State could ultimately 

wind its way out of this crisis situation and get back onto a more 

sound fiscal basis. 

There has been some suggestion among commentators and others 

that Congress ought to look at a procedure that would allow that 

to happen as one alternative. Would you think that that would be 

a wise or a good thing for Congress to do? 

Mr. BERNANKE. I think it would be useful for Congress to look 

at the situation broadly and try to identify what potential problems 

that might be there and what lacunae there might be in the bankruptcy law, et cetera. I think it would be extraordinarily unusual 

for a State to default. It has not really happened seriously for 160 

years or so and I think we ought to focus on States meeting their 

obligations, which they do have the tools to do. And again, as I 

mentioned before, in most States, the debt and interest payments 

are the top priority and they would come in front of provision of 

services and so on. So I think we should understand the situation, 

but I am very, very hopeful and expect that we will be able to avoid 

defaults at that level. 

Senator CORNYN. And I share that hope, but if I may conclude 

on this question, what would be the consequence of a large State 

like California or Illinois defaulting on its debt? 

Mr. BERNANKE. It is— 

Senator CORNYN. In terms of the national economy. 
48 

Mr. BERNANKE. Well, it is difficult to know, frankly, because it 

has not happened for a long time. It would certainly be a—it would 

certainly create a lot of stress and volatility in the markets. There 

is no question about that. It also would mean that the State, when 

it came back into the market, would probably have to pay a much 

higher interest rate for a considerable period and therefore it would 

be, I think, very much a last resort for any State to do that. 

Senator CORNYN. Thank you very much. Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Senator. I thank the Senator for 

asking the question, because I think this is something we need to 

be paying close attention to. The Senator has raised the question 

of a series of municipalities that may be under significant stress. 

We have also been told that there are a number of States, I have 

been told as many as 20. Governor Manchin, maybe you have more 

recent information— 

Senator MANCHIN. I just cycled out of being Chair of the NGA 

and we were very much concerned about this, watching the fiscal 

viability of every one of the States, and everything is back to 2008 

levels, is what we were based off, and that is what you all based 

off in Congress when you set up the help that was given as far as 

the aid to the States. That all goes away by June 30. Most of our 

fiscal budgets are done June 30, 2011. 

Chairman CONRAD. And do you have a rough idea of how many 

States are— 

Senator MANCHIN. I think upwards more of in the high 20s, low 

30s, that could be in serious problems. We are concerned. We are 

very much concerned. 

Chairman CONRAD. We have an analysis, by the way, underway 

on this question. This may be one of the things we would like to 

talk to you about if you have an opportunity to come up and meet 

with us in a session with all Senators. We do have an effort underway based on the conversation I had with Governor Manchin earlier. 

Senator MANCHIN. If I could ask one question, Mr. Chairman, 

and to Mr. Bernanke, is I think what we were asking, and the Senator from Texas was asking the same, is there any plan—I know 

it has not happened for many, many years and maybe—but we are 

seeing indications and concerns that we have right now, and States 

have done everything humanly possible because they have to meet 

a balanced budget every year and they have cut to the bone, if you 

will, and if the cash flow is just not there to suffice with the 

amount of services they have to give, is there any bailout or any 

other proposal that you all have or have been looking at? I think 

that is what we are saying. Is there any plan available that could 

help a State, that would prevent this from happening, from falling 

into default, or could you do that? 

Mr. BERNANKE. I do not think the Federal Reserve has the authority and I do not think it would be appropriate for us to do that. 

This is something that would take place over a period of time. It 

would not happen in a day or two and there would be plenty of 

time, I think, for Congress and for the State legislature to look at 

alternative solutions. So I think this is really a political fiscal issue. 

We will watch it very carefully because it has implications for the 
49 

economy and for financial markets, but I do not think the Fed really has much that we can do about it. 

Senator MANCHIN. Mr. Chairman, I would recommend that 

maybe as a committee what we should do is check with the NGA. 

They will give you a complete status of what they see in real crisis. 

Chairman CONRAD. I think we had better think about how we 

get input on this. The more we look, and Senator Cornyn has 

brought to our attention here what we had heard earlier as a result 

of the information you shared with us, this is something that is out 

there on the horizon that we need to pay very close attention to. 

Senator Merkley, we apologize to you because we interceded on 

your time. We will give you an additional minute and you are recognized. 

Senator MERKLEY. Thank you very much, Mr. Chair, and I will 

use a few seconds of that to say that, Senator Sessions, I am happy 

to hear that you are willing to wear Senator Wyden’s tie if Oregon 

wins. I have a pin right here that maybe you would be willing to 

wear this pin after Oregon wins for a couple of days. 

Senator SESSIONS. I would be glad to, although I am not going 

to lose any sleep over that prospect. 

[Laughter.] 

Senator MERKLEY. Will you be out there on Saturday? 

Senator SESSIONS. Having an Auburn team going to Tuscaloosa 

and come out victorious, I am a little confident. But actually, it is 

exciting. It is so much fun and people are so excited. I am sure they 

are in Oregon. It is just one of the great things about America, that 

people can pick out something other than politics— 

Senator MERKLEY. Absolutely. 

Senator SESSIONS. —and have some fun with. 

Senator MERKLEY. A little bit of an antidote. 

Well, let me turn to the business at hand, and thank you very 

much for your testimony, Mr. Chairman. I wanted to start by asking a little bit around the QE2 policy. As I understand it, you could 

summarize it by saying that in buying these bonds, you are injecting more money into the economy. Doing so reduces the interest 

that would be borne on those bonds, which encourages people to 

maybe hold less of those bonds and invest more in either corporate 

bonds or perhaps stocks, if there was a substitution effect, to invest 

in American business. So that is kind of one category. 

Another category would be that in doing this, one also creates 

more pressure in terms of those economies such as China’s which 

are using a pegged exchange rate with the United States to try to 

reduce the impact of China’s currency manipulation on our ability 

to sell our products abroad. 

Do you see both of those as key components of this policy, or is 

one more important than the other, or could you just help us get 

our hands around those two pieces? 

Mr. BERNANKE. Senator, first, I want to say the Federal Reserve 

is neutral on the Auburn-Oregon issue. 

[Laughter.] 

Senator MERKLEY. I am disappointed to hear that, because there 

are two Senators from Oregon here and only one from Alabama, 

so— 

[Laughter.] 
50 

Mr. BERNANKE. Senator, your first part of your description, I 

think, was very accurate. I mean, we are trying to ease financial 

conditions to stimulate more economic activity. You know, de facto, 

this policy has been in effect really since August, because we, in 

August, we began to reinvest our securities and I began to talk 

about this in public and the markets began to anticipate these actions. And we have seen since August significant improvements in 

stock prices, in spreads and volatility, in a variety of areas, and I 

think we are having some positive benefits on financial conditions 

and are contributing to a better outlook for the economy. 

It is not our intention to do anything in particular on the international front. Our objectives are focused entirely on the U.S. economy, which is what our mandate tells us to do. It is true that to 

the extent that China or other countries undervalue their exchange 

rate or maintain a fixed exchange rate, that they import U.S. monetary policy. U.S. monetary policy, in my view, which is quite accommodative, is appropriate for the United States. It is not particularly appropriate for China, given how quickly they are growing. In 

fact, they are dealing with some inflation issues now. So, in fact, 

it is forcing them to take some actions. Letting their exchange rate 

appreciate somewhat would be helpful for them in this context because it would reduce the inflation pressures that they are otherwise going to experience. But that is not the key objective of the 

policy. The policy’s objective is to try to meet our price stability and 

employment goals. 

Senator MERKLEY. No, I understand that, but the employment 

goals also are impacted by the ability of us to sell our products 

overseas, so there is kind of a complete picture that comes to play 

in that. 

And in that regard, let me turn then to manufacturing, because 

one of the challenges certainly for American products, making them 

here and selling them abroad, is the difference in labor rates. But 

there has also been the argument that in our trade agreements, we 

sometimes end up in a situation where foreign producers seem to 

have full access to the American economy while, both through currency manipulation and through non-tariff barriers, American 

products do not seem to be able to get into the foreign markets as 

easily, and that that differential has undermined manufacturing in 

America. 

There has also been a related conversation that I just wanted to 

lay it out because I see it starting to appear here and there, and 

that is that one of the reasons we seem to be coming out on the 

short end of these trade agreements is because we also go into 

these negotiations with other goals that are not necessarily economic goals, that is, goals related to access, military access, finding 

a key ally to say, as we did within the markets in China when we 

were involved in the wrestling with the Soviet Union, that we take 

non-economic goals into these agreements. 

So I thought I would just see if you would like to comment a little bit on these challenges in terms of our ability to maintain a 

manufacturing base and some of the interrelated issues regarding 

trade negotiations. 

Mr. BERNANKE. Senator, of course, we remain an important manufacturing power. I think we still have the largest manufacturing 
51 

sector in the world. Employment has been declining very sharply 

because of productivity gains. But you are also correct, I think, that 

trade and currency issues are an important factor. 

On the currency side, I have been very clear that I believe that 

the policy of China and other emerging markets to undervalue 

their currencies is counterproductive both for those countries and 

also for international imbalances and for global trade flows and I 

hope that we can continue to work with China and those other 

countries to create a more flexible exchange rate regime. I think 

that is very important. 

I am not deeply conversant with the details of trade negotiations. 

I think every country has multiple objectives when they engage in 

these negotiations, but I hope that we will be aggressive in pursuing WTO remedies, et cetera, as needed to eliminate trade barriers, both tariff and non- tariff barriers, and I am very supportive, 

like most economists, of free trade agreements which work both 

ways, that allow both exports as well as imports to flow freely. 

Senator MERKLEY. Thank you. Let me turn to another issue, 

which is the ongoing impact of the high level of foreclosures on 

housing prices in America. We have had an ongoing rate, and I 

think it is projected through the balance of this year, of about 

300,000 foreclosure filings a month. Not all of those will result in 

foreclosures, but many will. We still seem to be driving down the 

value of homes, which results in more families underwater, more 

families that are in a situation they certainly cannot borrow 

against the value of their house since the house is worth less than 

they owe. 

How does this—and I will just note that our effort to intervene, 

which was highly debated two years ago when I first came here to 

the Senate, a decision to invest $50 to $100 billion to assist Oregon—not Oregon, but Oregon and the United States homeowners—as a result of an expenditure over these two years of less 

than a billion dollars—I think last I checked it was about $500 million. So our intervention has been modest, at most. This remains 

both a huge factor affecting the quality of life for families and their 

ability to look positively on the future. How does this play into our 

monetary policy or interrelate in ways that we should understand 

better? 

Mr. BERNANKE. Well, you said it very well. Foreclosures continue 

to be very high. There have been sincere government efforts to try 

to address the problem, but they run into lots of bureaucratic and 

other difficulties, as well as the fact that in a weak economy with 

lots of unemployment, there are a lot of folks for whom there really 

is no solution or good alternative, given that income has been lost 

through job loss. 

This is an important consequence—has important consequences 

for the macro situation, as I alluded to in my testimony. The high 

levels of vacancies, homes that are not only empty but are, in fact, 

reducing the value of the neighboring homes around them are driving down prices, which is affecting household wealth, which is affecting consumer spending and confidence. It is affecting the whole 

residential industry. Construction is very, very weak because with 

prices so low, new construction cannot recover its costs. It has some 

implications for the quality of mortgage assets and therefore for 
52 

our financial system. In our reviews of bank capital positions, we 

are doing stress test scenarios and one of the main stressors is 

what happens if house prices were to fall five or ten or 15 percent 

more and how would that affect their mortgage portfolios and their 

capital. 

So in a number of different directions over and above how it is 

affecting the individual families, at the community level and at the 

broad economic level, it is a very serious problem and it is one of 

the reasons that the recovery, along with the problems in credit 

markets, one of the reasons that the recovery is not as robust as 

it normally would be, given how deep the recession was. 

Senator MERKLEY. My time has expired. I do have another question, if it is appropriate. 

Chairman CONRAD. Given the fact we intruded on your time, go 

ahead. 

Senator MERKLEY. Thank you. Well, one of the interesting developments is that families started saving a substantial amount, recognizing that they needed to prepare for the possibility of the loss 

of a job or the drop in value of their home and so on and so forth, 

which, of course, on the spending side that throws a wrench into 

the economy. But one thing that I have heard reference to, but I 

am not sure if it is right, is that the amount of consumer debt has 

decreased by more than the amount the national debt has increased. That is, if you take the family debt and the national debt 

together, our total indebtedness has dropped. Is that accurate, and 

how does that play into the macroeconomic picture in terms of the 

impact of our national debt? 

Mr. BERNANKE. That is correct, and one way to see that is that 

our current account deficit, which is our foreign borrowing, has 

gone down, meaning that our total need for borrowing, public and 

private, is lower than it was before the crisis. That is the opposite 

side of saying that the aggregate demand, that total spending is insufficient to bring the economy to full employment. So what you 

say is exactly right and it, again, is consistent with the need for 

continued, at least speaking from the Federal Reserve’s perspective, continued accommodative monetary policy to help support the 

economy’s recovery. 

Senator MERKLEY. Thank you. 

Chairman CONRAD. I thank the Senator. 

We will go to a second round, and I think maybe what we will 

do is reduce this to four minutes so we do not impose too much on 

the Chairman’s time. 

Let me just say, I haveten an initial report now on the States’ 

situation and I have asked Senator Manchin, as former head of the 

National Governors Association, to get us the latest information 

that is available from that source. Here is what I have in an initial 

review since our conversation on the floor, I think it was last week, 

Governor Manchin, maybe a week ago or so. 

In looking at what has happened since enacting their 2011 budgets, 15 States had new budget gaps open by late November totaling 

$27 billion. Nearly the entire gap is accounted for by five States: 

Illinois, half of it, roughly half; Arizona, about ten percent; Washington, seven percent; California, roughly seven percent; Texas, five 

percent. Those are the new gaps that opened up in 2011 after they 
53 

collectively had closed $84 billion of gaps in working on their 2011 

budgets. 

What is, I think, a serious matter is looking at the 

2012 budget gaps. NCSL’s survey, the National Committee on State Legislatures, projected a gap of roughly $97 billion 

in 2012. The Committee on Budget and Policy Priorities reports that gap currently stands at $113 billion and is expected to grow 

to $140 billion once all the States have updated forecasts. So we 

are talking about a significant problem here with some 35 States 

projecting gaps in 2012. Only 11 States reporting no budget gaps 

for 2012. I must say, proudly, my State has no budget gap. I think 

Governor Manchin left his State in very good shape. I do not think 

they face a budget gap. But that—now, looking back in 2011, they closed $84 billion of 

budget gaps, so clearly there is capacity there to do significant 

budget gap closing looking at 2012. But, I mean, $140 billion is a 

big number, certainly for those individual States, and I think it 

is—you know, you look at Illinois, for example. They are talking 

about a 2012 budget gap of $15 billion, which represents 50 percent 

of their budget. That is a whopper. 

And I do think we need to be prepared with a plan in case we 

are approached by one or more States, because clearly, the problem 

is concentrated in a handful of States. As I indicated, five States 

were the significant majority of the 2011 gaps—Illinois, Arizona, 

Washington, California, and Texas. We have to be ready with a 

plan if we are approached with respect to requests from any or all 

of those States, and I understand fully that is not in your domain, 

but I think we can reasonably anticipate that we may have requests made to us. I can tell you, I do not think Congress, the 

House or the Senate, are going to be very interested in bailouts to 

States. 

Senator MANCHIN. Mr. Chairman? 

Chairman CONRAD. Senator Manchin? 

Senator MANCHIN. If I may, just in open discussion here, the 

States are going to be in a situation where they are going to have 

to have the flexibility to refinance to put their financial houses in 

order. Everybody bet on the come, if we will. They worked off of 

2008 levels, the amount of stimulus that helped them get through 

a difficult time, and we thought the economy would pick up and it 

has not. They are still left short, if you will, and they are making 

some really draconian cuts and they are all making that effort. 

But with that, our know, our ability—our bond ceilings that we 

have that we as States were able to go out to the market with, 

there might be some creative financing that is needed to be done 

here and we are going to need all the help we can get. Can they 

raise those ceilings to see if there is a market so they can refinance 

zero percent bonds, to go out and find out if they can create value 

within their States. I do not think the appetite is here in Congress 

to just say, okay, here is more money to help you. Can we help you 

help yourself? Can we give you some flexibility? Are there some restrictions and regulations that we can ease up on? 

I think that is what would be most appreciative, and I think we 

should be looking at it now because it is not if it is going to happen, it is when they are going to need our assistance and help. 
54 

Chairman CONRAD. Well, I think you make a very good point, 

and I think since our previous conversation, I immediately asked 

people to go out and do this survey and I think it is something this 

committee is going to have to be prepared with an answer. And 

what you are saying, I think, makes eminent good sense. That is, 

maybe there are ways to help with creative financing. I do not 

think there is going to be much appetite here to send truckloads 

of money to States. 

I have about used my time on this four-minute round. Others? 

Senator Sessions, would you like an additional round? 

Senator SESSIONS. I would, Mr. Chairman, and there is so much 

to ask, Chairman Bernanke, I will submit written questions to you. 

With regard to the State situation, the States are sovereign. 

They have issued their own debt, and the people who loan money 

to States need to know their likelihood of being repaid is based on 

the financial condition of that State. And there is a moral erosion 

of a significant nature when we undertake to start bailing out 

more. I just think this whole bailout mentality has far more ramifications than a lot of us think and a lot of people have indicated. 

I understand what you are saying, Mr. Bernanke, and that 

States need to get their house in order. They should not expect lowinterest loans from the Fed if they get in trouble. Is that correct? 

Mr. BERNANKE. They should not expect loans from the Fed, and 

I think the numbers that the Chairman referred to are prospective 

gaps obviously. They are a measure of how much spending cuts or 

tax increases are going to be needed to achieve balance. It is going 

to be difficult, but on the other hand, there is some improvement 

in the economy, and tax revenues actually have picked up some. So 

it is a difficult situation, but I hope the States will be able to address it. 

Senator SESSIONS. But I have just got to tell you, places like 

California have been living beyond their means for a very long 

time, even when the economy was in good shape. Our State is very 

frugal. We try to operate a good State, and I think I am not inclined to ask my constituents to rescue someone who has been improvident. 

I will note what Mr. Christie is doing in New Jersey: the agriculture department, reduced 24 percent; banking, 12 percent; community affairs, reduced 35 percent; education, down to 8 percent; 

human services, 4 percent; law and public safety, 7 percent; roads, 

3 percent. 

Now, I suggest New Jersey is not going to sink into the ocean. 

It is still going to be there. And this idea that cuts—and even this 

deficit commission, bless your heart, I hope I would have been willing to support the Commission’s recommendations. It is about as 

good as anything we have seen. But it does not call for anything 

like a reduction in Federal spending like this. It actually does not 

call for any, really, in discretionary accounts of a significant 

amount. So we can do better, and the American people are telling 

us this. 

Mr. Bernanke, I have criticized some of you folks, including 

President Bush and Mr. Greenspan. I do not think you realize the 

political world we live in, the real world we live in. You think, well, 

we can—in 2001, when we needed to stimulate the economy and 
55 

run a deficit, well, we have had a surplus for a few years, we can 

just ask the Congress to spend money, and then when they get to 

a certain point, we can tell Congress to stop. But those of us who 

committed and were elected to try to balance the budget and participated in tough votes to balance the budget really had our legs 

chopped off. We were not able then to warn against spending. Even 

the Republicans, some of them, and the Fed seemed to be saying 

deficits do not matter. And now, see how hard it is to turn off the 

spigot? I think the same thing—maybe you and the Fed can turn 

off the spigot just like that within your power. But for us politically 

it is not easy. So we have to get a consensus. 

I think the American people have a sense right now— don’t you, 

Mr. Chairman?—that they want us to do something now. And I 

want to ask you, are you telling us that you think it is premature 

to start reducing some of our spending levels and some of the Government accounts because it might hurt the economy? The Brits do 

not seem to think so. In a similar situation to our, they are cutting 

now. 

Mr. BERNANKE. What I said, Senator, was that it is a long-run 

issue. It has to do with—you know, the problems are not just this 

year or next year. The problems go out decades. And I think it is 

not too soon to have a strong set of measures that will bring down 

deficits over time so that we have at some point a stabilizing and 

then declining debt-to-GDP ratio. 

So I think action is needed, but I think you are not going to solve 

the problem by just making cuts for this year’s budget. You need 

to think about the whole future path and all the obligations both 

implicit—I mean, the Chairman talked about the debt held by the 

public and the gross debt and so on. All those debt numbers do not 

include the unfunded obligations that we have for entitlements, for 

example. So the true debt is probably 3 or 4 times bigger than 

what the Chairman is talking about. 

So we need to address that, but what I am saying is that we 

want to take—we should take a long-run perspective, and that is 

really what the markets are looking at, and that is what economic 

stability requires. 

Senator SESSIONS. Fair enough. I do believe we have an opportunity to limit waste and spending right now, and it would not 

damage the economy, and in the long run we need to work together 

to try to figure out how to create confidence that our economy is 

under control and our spending is under control. 

Chairman CONRAD. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Chairman Bernanke, I want to ask about China in a different 

way. I also chair the Senate Finance Subcommittee on Trade and 

Competitiveness, and I want to take you through what I think is 

going on with China and get your reactions in the American economy and particularly the cause of creating more good-paying jobs. 

A decade ago, when China was admitted to the World Trade Organization, in effect there was a commitment made to marketplace 

principles. That was essentially what their entry to the World 

Trade Organization was all about. 

In the last 6 months—and, frankly, we have seen this over a considerable period of time—it seems to me we have seen considerable 
56 

backsliding in China with respect to these marketplace principles, 

and two areas I have been especially concerned about most recently 

are rare earth minerals, which are so important for American manufacturing, green goods and others, where the Chinese in effect are 

saying, look, we are going to keep our rare earth minerals here; 

and if people in the United States want manufacturing, they got 

to come there. And we are also seeing it in what amounts to discrimination against American digital goods and services, which is 

another important area of good-paying jobs for our country. 

My question to you is: What is your sense about the implications 

of China backsliding on these marketplace principles that they in 

effect committed to? And I will tell you, just in my view, they are 

violating World Trade Organization principles in those two areas, 

the question of rare earth minerals and digital goods. What are the 

implications of what they are doing there? And what is an appropriate role that our Government ought to be taking? 

Mr. BERNANKE. Well, the WTO agreements have specific rules 

and procedures, and we have actually brought some actions under 

WTO, and I believe we won a couple of them. So within the rules 

that China has agreed to, the WTO process looks like it has been 

working. But I am not so sure that I would agree that China is 

backsliding. I mean, there have been issues all along with intellectual property and government procurement and a wide variety of— 

you know, access to— 

Senator WYDEN. Well, those are two areas most recently, and 

they are very important to the American economy. Rare earth minerals and digital goods, this is a pretty new phenomenon. This is 

the last 6 months, and that is why I am talking about the implications for the economy. 

Mr. BERNANKE. Well, on rare earth minerals, you know, I agree 

that that is a strategic input. I do not believe the United States has 

any current capacity or has very little capacity in that area, so we 

might want to consider some strategic investments in that area. 

But this is just a number—there are a number of areas, and the 

Chinese would raise issues with us as well about exports and so 

on, the technological exports and so on, where I think ongoing engagement is really going to be important. And, of course, the President of China is going to be here in a few days, and I hope that 

will be an opportunity for high-level discussions. But this is part 

of the ongoing process we have had with China for a while, which 

is to try to hold both sides to trade and investment obligations, and 

it has been a struggle in many cases. I am not disagreeing with 

you. 

Senator WYDEN. Well, I thank you. I clearly come to these trade 

issues looking for ways to open markets. That is why I think that 

we are at such a critical time. And I have voted for every marketopening agreement since I have been in public life. But I also think 

it is important to adhere to principles that ensure that in a global 

marketplace everybody has an opportunity to make markets work. 

And I think we are seeing in a number of areas considerable backsliding from the Chinese, and I look forward to following up with 

you on this as well, because we cannot meet our target of doubling 

exports, as we have set out to do in this country, and substantially 

lowering the unemployment rate as our constituents are demand-
57 

ing unless we have an opportunity around the world to have fair 

access to markets. And I think in a growing number of areas, that 

has not been the case. 

I look forward to working with you in the days ahead, and I 

thank you for your appearance today. 

Mr. BERNANKE. Thank you, Senator. 

Senator WYDEN. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator MANCHIN. Senator MANCHIN. Just to follow up very quickly on that, in the 

State of West Virginia we have been blessed with some of the highest quality coking coal in the world, and I brought this to the attention of people in higher places, that we are concerned about most 

of our assets are being purchased by foreign countries. We still 

have the good fortune of our miners working and we are mining 

the coal and the severance tax the State receives. But as the Senator just mentioned, most of this product is leaving this country. 

That is the ingredients of making the steel that is needed that 

builds industry, if you will. And I do not know if we know the critical juncture we are at, but I can tell you, we can see it every day, 

the outside interests and the amount of money they are paying for 

these reserves. 

With that being said—I know this has been talked about—I am 

the new kid, if you will, in town—the TARP, the whole bailout of 

the banking system. It is still in my area as far as in West Virginia, we are very much concerned that small businesses do not 

have access to capital, are having a hard time acquiring it. Individuals, if you will, commercial developers, the building industry. The 

thing that is really lacking and throwing us back right now is the 

access to capital. And we have heard it, you know, we bailed out 

Wall Street but not Main Street. 

When do we see relief or what do you think needs to be done, 

sir, for us to opening up the banking industry so it can start taking, if you will, some calculated risk and putting money back in the 

market? 

Mr. BERNANKE. Well, just on the narrow question of TARP, of 

course, capital went out to smaller firms as well as larger firms, 

and Congress just recently passed the small business plan that has 

non-TARP capital going to small banks that are willing to make 

loans to small businesses. So some of this money has gone to small 

firms as well as large firms. 

It is a tough problem because you have small businesses who 

were used to somewhat easier conditions before the crisis. Terms 

and lending conditions have tightened up to some extent for understandable reasons given what happened during the crisis and given 

the losses that banks took. 

It is also a situation where the economy has been weak and 

where the value of collateral, the value of stores or factories, et 

cetera, has come down, which makes it more difficult to borrow as 

well. So there are some fundamental reasons why credit is harder 

to come by. 

That being said, I think there is a tendency to overreact. There 

is a tendency after a crisis or in a weak period to tighten too much, 

to swing too far, the pendulum to swing too far, and— 
58 

Senator MANCHIN. Do you think that has been done? 

Mr. BERNANKE. I think in some cases that has been the case, and 

that as I have said, the Federal Reserve, we understand—we have 

a responsibility to keep banks safe and sound as best we can. On 

the other hand, we also have considerable interest in having the 

economy grow. And so we have been—and I would be happy to give 

you much more detail at a more convenient time and send you a 

letter or meet with you personally, however you would like to do 

it. But we have taken a lot of actions to try to create a better balance for banks to make sure that they can make good loans; that 

if they are following safe and sound procedures that we will not 

criticize them for making a loan to a small business or even a business where the collateral value has declined. So we are very sympathetic to what you are saying, and we have been working hard, 

and I do think that there is some progress. I think there is some 

improvement. And as the economy expands and as credit needs go 

up, I think we are going to see more lending take place. 

But we are very much aware of this issue, and we are reaching 

out to small businesses, we are reaching out to banks. And if you 

have any suggestions or you have—if anyone would like—we have 

an ombudsman who will be happy to take any complaints or concerns. We do want to be responsive on this issue. 

Senator MANCHIN. I will do that. I will bring specifics, if I may, 

and maybe you can give us some help. 

Mr. BERNANKE. Of course. 

Senator MANCHIN. Thank you. 

Chairman CONRAD. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chair, and I appreciated the 

reference, Mr. Chairman, to the Small Business Lending Fund, 

which was a proposal that I developed in response to a problem we 

saw in community banks in Oregon where they were noting that 

because of the FDIC requirements on leverage being firmly applied, 

healthy community banks were unable to lend. We do not yet know 

the results of that program, but it was one way to try to get funds 

into Main Street banks so that they could assist Main Street businesses. And in addition to banks that did no have the capitalization 

to make additional loans, we have banks that are not only healthy 

but do have funds but are kind of sitting on them waiting to see 

what happens with the economy. And so we look forward to continuing to brainstorm some of the ways we can get liquidity in the 

hands of small businesses, because if they cannot borrow money, 

they cannot seize business opportunities. And they are a job machine that we have to put fully to work, and finding the right way 

to do that is very important. 

I wanted to turn back to housing. Oregon produces a lot of lumber, and many other States produce lots of products that are not 

being consumed when the housing market is down. There are a series of ideas that are still being talked about. Again, a $50 to $100 

billion promise has turned into less than $1 billion of spending to 

assist homeowners. One of those concepts is to do a national short 

sale program in which families who have passed an economic distress test or filter, if their home is being sold at a far lower value 

after being foreclosed on or shortly before being foreclosed on, that 

the family itself might have a chance to buy it back using lending 
59 

that is fully underwritten based on their ability to pay, but maybe 

not the complete traditional FICO score structure. 

A second approach being talked about is downpayment grants to 

help first-time homebuyers. Of course, we have experimented with 

this program, but to help absorb that inventory of foreclosed 

homes, so that instead of having an empty home on the block, you 

have a family that is in that home, and to help arrest the downward direction of house pricing. 

A third is another examination of bankruptcy reform as a way 

to kind of adjudicate the issues involved in homeownership where 

every other contract can be adjudicated by a bankruptcy judge, a 

home contract cannot be. And with appropriate protocols that we 

have been alerted to in terms of being backward-looking not forward-looking, great concern to the banking community. 

So as we look at this national housing challenge, which I think 

you echoed the concern that it is a major factor in our economy getting back on track, if these are not the right ideas, what are the 

right ideas? What more can we do here in Congress to take on one 

of the really big domestic issues affecting the quality of life for families and the strength of our economy? 

Mr. BERNANKE. Well, I am afraid there are no simple solutions, 

as you might imagine, and the ones you mention are all interesting 

ones, and let me just offer in general that we would be happy to 

work—staff would be happy to work with you on the details of any 

of these ideas. If you would like to take us up on that, we would 

be more than happy to work with you. 

The short sale idea has been around. I think it is fairly similar 

to the idea of just having a principal reduction in the mortgage, 

which is something that is now— which the Federal Reserve actually advocated for a number of years, which I have talked about in 

speeches for some time as being a way of creating greater incentives for the homeowner to want to stay in the home. That is a program that is now currently in place, building on a program that 

was passed a couple years ago. I do not know how far along that 

hasten, but that is one approach. 

Senator MERKLEY. Not very far. 

Mr. BERNANKE. Not very fair. I think— 

Senator MERKLEY. And there is an important—I will just interject here on this. The challenge on the principal reduction is that 

as long as the family looks anywhere near viable, financial institutions are very, very reluctant to write down the principal. The idea 

of the short sale is at the point that a bank or a mortgage holder 

has concluded that the family is going to go under and the home 

is going to have to be resold, at that point there is no longer kind 

of this competition between writing down an existing loan on the 

books because the loan is going to be—the house is going to be foreclosed on, the loan is going to be gone anyway. So that is why the 

conversation has migrated in that direction. 

Mr. BERNANKE. Well, again, economists at the Board and around 

the Federal Reserve System have been working on various plans, 

schemes to try to address this problem, and I would be more than 

happy to work with you in more detail on these issues. But getting 

the principal down through some mechanism is obviously one approach. 
60 

On the downpayment assistance, I think you would want to design it in a way so that—one of the concerns that we had about 

the homeowners—the tax credit was that it created a temporary 

bump but did not seem to have a permanent impact on the housing 

sector. So you would want to do something that did not just shift 

purchases in time a little bit, but actually created a more sustainable demand for housing. And that is another difficult problem. 

But, you know, I have been—I am a member of the committee 

that oversees the TARP, and so we have been getting regular presentations from the Treasury on the various programs, and to their 

credit, you know, they have gone beyond their initial HAMP program to look at a number of different experimental approaches, 

giving States money to apply to their own strategies. So there are 

a lot of ideas out there and a lot of things that are being experimented with, but clearly, particularly in a world where unemployment is 10 percent and long-term unemployment is 44 percent of 

that unemployment, there are situations where it is very difficult 

to find a solution. 

Senator MERKLEY. My time has expired, but can I follow up on 

one piece of this? 

Chairman CONRAD. If it is brief, because we have made a commitment here that the Chairman would get out of here by noon and 

we are little past that now. 

Senator MERKLEY. Okay. The concept of a permanent downpayment grant at a lower level for first-time homebuyers addresses 

that issue you were talking about of just shifting demand forward, 

but it also addresses something more fundamental, which is our 

primary mechanism of reducing the cost of homes for families, is 

the home mortgage interest deduction. But that kicks in primarily 

when you buy a larger house and you are in a higher tax bracket. 

So the vast bulk of the subsidy goes to the families who need it the 

least in terms of actually becoming homeowners. And so the idea 

of a downpayment grant—and it should be in addition to. I am not 

taking anything away from the concept of interest deduction on 

your home. But the idea is that now you have a working family of 

modest means that is buying a very modest house, and we are 

helping them become homeowners, in which they would hardly 

benefit at all from the mortgage interest deduction. And so it 

serves as kind of a fairness factor because we should help working 

families buy homes as well as help successful families buy large 

homes, and yet also help absorb this inventory of empty homes. So 

that is kind of the broader, fuller picture of it. 

Mr. BERNANKE. The Commission that the Chairman was on 

talked a lot about the interest deduction and lots of, I think, interesting ways to think about whether that could be made more productive, more constructive. 

Senator MERKLEY. I will mention I am not addressing the interest— 

Mr. BERNANKE. No, no. I understand. But it raises the point that 

some people it does not really help very much. If you do not 

itemize, for example, you do not get the interest deduction. 

Senator MERKLEY. Thank you. 

Chairman CONRAD. I thank the Senator. 
61 

One final question that we have been asked, and that is, with 

the substantial expansion of the balance sheet by the Federal Reserve to make sure the flow of credit continued during this downturn, can you anticipate now what percentage of that expansion 

would be realized as losses? I have been told that it is very small. 

Can you give us some sense of that? 

Mr. BERNANKE. Well, first, as I mentioned in my testimony, this 

is not deficit spending. We are buying assets which we will either 

sell back to the market or allow to run off. Currently we are in a 

profit position. Our cost of funds is very low, so the interest that 

we are receiving we are remitting back to the Treasury. I got a new 

number this morning. For 2009 and 2010, we remitted back to the 

Treasury $125 billion from this program, which is much higher 

than our normal. 

Should it be the case that short-term interest rates rise, which, 

of course, could happen if the economy recovers and we need to 

normalize monetary policy, then those remittances could go down. 

But currently we are in a—you know, this is at this point a profitable program from the perspective of the Federal deficit. 

Chairman CONRAD. And is it your forecast at this point that you 

will then not experience losses on this extension of credit that was 

made during the downturn? 

Mr. BERNANKE. As a practical matter, what matters is not losses, 

because those are paper losses. What matters is the amount of 

funds, remittances we send back to the Treasury. Under most scenarios, because our cost of funding is so low, we will continue to 

remit back to the Treasury significant amounts of money. Under a 

scenario in which short-term interest rates rise very significantly, 

it is possible that there might come a period where we do not remit 

anything to the Treasury for a couple of years. That would be, I 

think, the worst-case scenario. But even in that case, we would 

have offsetting that both the early payments, which are above normal, and the fact that to the extent that this is a successful policy, 

it will strengthen the economy and increase tax revenues. 

So I think from a purely fiscal point of view, I think this is most 

likely to be beneficial, not harmful, to the Government’s financial 

position. 

Chairman CONRAD. The reason I asked the question and phrased 

it like I did is because in common parlance there has been a great 

concern that what the Federal Reserve did was going to result in 

large losses to taxpayers or there was the potential for that. And 

you do not see that. 

Mr. BERNANKE. I do not see that as likely, and our record so far 

not only in this program but in all of the lending and other special 

credit programs we have done, you know, has been very positive 

from a perspective of returns to the Treasury. 

Senator SESSIONS. With regard to quantitative easing on the 

Federal purchases, that money that you pay back is money that 

came from the Treasury. Is that right? It is the interest— 

Mr. BERNANKE. Well, yes, but it is, of course—another way of 

looking at it is that it is interest that the Treasury did not have 

to pay to the Chinese. 
62 

Senator SESSIONS. I am aware of that, but it is a zero sum game 

I guess in that sense. And you believe it is helpful to the economy. 

I understand that. 

Mr. BERNANKE. That is the main point. 

Senator SESSIONS. That is the main point of it. 

On ‘‘60 Minutes’’ a couple years ago, you made reference to this 

is the equivalent of printing money. Was that when the Fed buys— 

is quantitative easing the purchase of Treasury bills, is that what 

you meant when you said printing money? 

Mr. BERNANKE. So I was actually talking about a somewhat different issue at that point. So let me try to explain what really happens. What happens is that when we buy securities, the money 

finds its way into the banking system and shows up as reserves 

that the banks hold with the Fed. So currently banks are holding 

a large amount of reserves with the Fed which will have to at some 

point be unwound as we exit from this program. However, I think 

there are some folks out there who think that we are literally 

printing money and putting it in circulation. That is absolutely not 

happening. 

Senator SESSIONS. But it does have a tendency, does it not, to increase the circulation of dollars, which, like more apples in the 

marketplace, makes the apple less valuable? Or does it not? 

Mr. BERNANKE. The amount of currency and money in circulation 

has not really been affected by this program. Very slightly. And, in 

fact, money growth over the last year or so, 2 years, has been below 

normal. So it is not a situation where the Fed is dumping money 

into the economy. That is not what is happening. 

Senator SESSIONS. Thank you. 

Chairman CONRAD. Thank you. Thank you very much for your 

appearance. Thank you for your forthright testimony here, and we 

look forward to having you up for a meeting with the members as 

we try to craft a fiscal policy to get us back on track. 

Mr. BERNANKE. I look forward to it. Thank you, sir. 

[Whereupon, at 12:09 p.m., the Committee was adjourned.] 
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(83) 

THE BUDGET AND ECONOMIC OUTLOOK: 

FISCAL YEARS 2011–2021 

THURSDAY, JANUARY 27, 2011 

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

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Wyden, Nelson, Cardin, Whitehouse, 

Begich, Manchin, Sessions, Crapo, Ensign, Cornyn, Thune, 

Portman, Toomey, and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Budget Committee this morning. I know there are other members who are on their way, but 

they had other business. As you know, this is the day that Committee assignments are determined, and so there are members who 

will be here who are involved in that process. 

Today’s hearing will focus on CBO’s new budget and economic 

outlook. Our witness today is the CBO Director, Doug Elmendorf. 

Director Elmendorf, welcome back to the Committee. I want to 

take a moment to congratulate you on your reappointment that 

was formally made yesterday as CBO Director. That is a well-deserved recognition for your extraordinarily professional work. I just 

want to say the confidence that you enjoy on both sides of the aisle 

is a testimony to you and to the entire team at CBO. Over and 

over, you have demonstrated your independence. I might add that 

even when I had a proposal that was very important to me, you 

did not give it very good marks, and I think that demonstrates 

pretty clearly your independence. But that is healthy. That is what 

we need here. We need an independent scorekeeper who is going 

to give us their best assessment of the effect of the policies that are 

enacted by Congress. 

You have demonstrated, I believe, a very high degree of professionalism, as has your entire team at the Congressional Budget Office. You have been unbiased and a fair umpire, calling it like you 

see it. Your reappointment by a Democratically controlled Senate 

and a Republican-controlled House speaks volumes of the trust and 

respect that you and your team have earned on both sides of the 

aisle. We look forward to your testimony here today. 
84 

CBO’s report should be a red light flashing to the Nation. Our 

fiscal situation is serious and becoming more so. We are at a critical juncture. We are borrowing 40 cents of every dollar that we 

spend. Spending, as this chart indicates, is at its highest level as 

a share of the economy in more than 60 years; and revenue is at 

its lowest level as a share of the economy in more than 60 years. 

Let me just repeat that. Spending as a share of our national income is at the highest level in 60 years; revenue as a share of our 

national income is at its lowest level in 60 years. No wonder that 

we are headed for the largest deficit ever. This is utterly 

unsustainable, and the sooner we address it, the sooner we come 

to grips with it, the better. 

This next chart depicts CBO’s new 10-year baseline projections 

with additional policies added in. It shows that, due to passage of 

the tax extension package and the slow pace of the economic recovery, CBO is now expecting to see deficits of more than $1 trillion 

a year continuing through at least 2012. It shows that deficits will 

then briefly fall before rising again as the bulk of the baby-boom 

generation begins to retire and health care costs continue to climb. 
85 

Under the same scenario, gross Federal debt is expected to reach 

100 percent of gross domestic product this year and continue rising. 

It is important to remember that many economists regard anything 

above the 90-percent threshold as a danger zone. And as disturbing 

as those near-term deficits and debt are, the long-term outlook is 

even more dire. It is the deteriorating long-term outlook that is the 

biggest threat to the country’s long-term economic security. The 

warning signs are as clear as they can be. 
86 

Earlier this month, two of the world’s leading credit rating agencies, Moody’s and S&P, warned again that rising U.S. debt could 

lead to America losing its AAA credit rating. If such a thing were 

to happen, it would be a very serious blow and could set off continuing tensions in the global financial markets. 
87 

In his recent testimony before the Senate Budget Committee, 

Federal Reserve Chairman Bernanke called for a demonstration of 

political will to address the long-term fiscal imbalances. He stated, 

and I quote: ‘‘Nobody doubts the United States has the economic 

capacity to pay its bills. It is really a question of do we have the 

political will to do that. And demonstration of political will, that is 

what the markets are watching. Is the Congress and the public and 

the administration, are they able to demonstrate that they are serious and that they have enough willingness to work together to 
88 

make progress? At the point where confidence is lost, you could see 

a relatively quick deterioration in financial conditions.’’ 

That, again, all from the Chairman of the Federal Reserve. 

I hope people are listening. We cannot afford to wait until the 

markets lose confidence in the conduct of our financial affairs. We 

need to act, and we need to act this year. That does not mean we 

need to make steep cuts immediately. All of the bipartisan commissions have come back with recommendations and have recommended that we begin modestly because of the continuing economic weakness, but that we put in place a credible plan that convinces markets that we are going to get the result that is required. 

Enacting such a plan now, according to the Chairman of the Federal Reserve and others, would reassure the markets and help 

boost our near-term economy. 

I believe the deficit and debt reduction plan assembled by the 

President’s Fiscal Commission provides one way forward, and I 

want to emphasize I supported the Commission report. I did so 

proudly. There are things in it I do not like, but that is really not 

the point. The Fiscal Commission came back with a plan that 11 

of the 18 Commissioners supported, five Democrats, five Republicans, one Independent. And I can tell you it is not very popular, 

certainly by the phone calls I have received and the letters I have 

received. We understand that. But it is necessary. It would reduce 

the debt by some $4 trillion over the next 10 years, and it would 

get us on a path that would take us back from the brink and do 

so in a very important way. 

The Commission plan was also important because it showed how 

to reduce the deficit and debt in a balanced way. It included substantial cuts in discretionary spending. It included entitlement re-
89 

form. It included tax reform—tax reform that broadened the base 

and lowered rates to help America be more competitive. If you 

focus only on non-defense discretionary spending, the cuts will 

have to be so Draconian that they will simply not be sustainable. 

That is my judgment. Tax reform that raises revenue also, I believe, must be part of the plan. 

The result of this balanced approach was to get the deficit and 

the debt first stabilized and then over time to bring it down quite 

sharply. To solve the long-term challenge, it will require real compromise and a great deal of political will. We need everyone at the 

table, and that includes the President of the United States. And we 

need to have both sides, Democrats and Republicans, willing to 

move off their fixed positions and find common ground. We cannot 

continue to put this off. We need to reach an agreement this year. 

It is time for the administration and members on both sides in 

Congress to come together to get this done. 
90 

With that, we will turn to Senator Crapo, who is going to do the 

opening statement for the Republican side. I want to welcome Senator Crapo. He served on the Fiscal Commission as well. He was 

one of the 11 that supported its conclusions, as did I. Thank you, 

Senator Crapo, for that, and please make whatever statement you 

choose, and then we will go to our witness and then open it for 

questions. 

Senator CRAPO. Thank you very much, Mr. Chairman—— 

Chairman CONRAD. If you would withhold—— 

Senator CRAPO. Yes. 
91 

Chairman CONRAD. I want to welcome—we have not formally 

recognized the new members to the Committee. That will happen 

in a process a little later today, but we now know who the new 

members are going to be, and we want to welcome them here this 

morning. Senator Portman, Senator Toomey, Senator Johnson, I 

know later today you will be formally added to the Committee, but 

we want to include you this morning, and we will extend the courtesy of giving you the chance to ask questions as well. 

With that, again, thank you, Senator Crapo. 

OPENING STATEMENT OF SENATOR CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman, and we 

also welcome our new members. We look forward to working with 

them, and as you can see, knowing who they are, they bring a high 

level of new talent to this Committee, and we appreciate their willingness to support us. 

I also wanted to give Senator Sessions’ apologies. He had a conflict that was unavoidable. He asked that I sit in until he could get 

here. He will be the Ranking Member on our side this year, and 

we look forward to his solid leadership as well. 

I agree very strongly with the concerns that you have raised as 

we move forward to deal with America’s fiscal dilemma. And, Dr. 

Elmendorf, I have appreciated working with you in the past and 

look forward to working with you very closely as Congress moves 

forward to develop a proposal that is credible and that will get us 

out of this difficult problem. 

I just want to highlight a couple of points, most of which, Senator 

Conrad, you have already made. 

First, the time for delay, the time for gridlock, the time for debate is over, and we must take action. One of the strongest messages that the economists and experts who testified to the President’s Fiscal Commission gave was that the single act of the 

United States Government—Congress and the President coming together—and developing a credible plan that had a realistic expectation of being followed would be one of the most significant things 

we could do to strengthen our economy, to give confidence to investors, and to help rebuild the revenue side of the equation that we 

are dealing with as we try to build a solution to this problem. We 

must act, and we must act now. 

We must demonstrate the political will that will require us to 

make a lot of tough decisions. The Chairman was correct. Those of 

us who voted in favor of this plan, I do not think a single one of 

us liked everything in the plan. But I do believe that every one of 

us faced very, very serious criticism because of the ability to pick 

apart a proposal to get out of this difficult fiscal situation that we 

find ourselves in, and the fact that there are going to be plenty who 

will pick it apart, whatever we choose to do. And we must be prepared to move forward aggressively, and I give my commitment. I 

know that on our side and your side there is the will to engage in 

this issue, and we have to move it forward now. 

I also believe that the President must be heavily engaged in this 

process. To his credit, he established a Fiscal Commission to deal 

with the issue. That Fiscal Commission has now issued a report. 

The President has an opportunity to either accept or modify that 
92 

report or propose some other approach and give us a detailed plan 

to move forward on. It will not necessarily be the plan that Congress adopts, but the President needs to engage. We need to engage. And we must get past the politics of the past and deal with 

this issue, making the hard decisions that have to be made. 

As we move forward in that context, I personally very strongly 

believe that all aspects of the spending and revenue side of the 

equation must be on the table. They were in the President’s Fiscal 

Commission’s approach. I thought some were too lightly treated 

and some were too heavily treated, but they were all on the table. 

And as a part of that, I strongly believe that we must have tax reform. 

One of, I believe, the most beneficial developments of the President’s Commission’s activities was the elevation of the understanding that our Tax Code today is so complicated, so unfair, so 

expensive to comply with, and puts America as a Nation in such 

an anticompetitive position with the rest of the world that we have 

a tremendous difficulty on the revenue side of the equation achieving a solution. We must eliminate those problems and create a Tax 

Code in which Americans can thrive in powerful economic activity. 

And I know, Dr. Elmendorf, that your side of that may be more 

focused on the budget numbers, but ultimately I believe as a Committee that we need, Mr. Chairman, to guide as we engage and put 

our approach together, we need to guide this Nation in a comprehensive path toward a solution, a credible plan that can be put 

into place and implemented today. I mean literally this year we 

have to act. 

The last thing I will say is this: Any plan for us to get out of 

this difficult fiscal hole in which we have put ourselves as a Nation 

must be a plan that will be implemented over a period of time, a 

period of years. And that will require that more than just this Congress participate and more than just this President participate in 

implementing this plan. Because of that, I believe that process reforms are as critical as the substance reforms dealing with spending and tax policy. And process reforms are going to have to be 

strong. What I mean by that is we need to not only create the plan 

we have been talking about and pass the plan and make it law, but 

also make it law that Congress must follow that plan and that 

super majorities of votes must be achieved in order to change it so 

that we can send the strong message to our people and to the world 

that we not only have put a plan on the table, but that we will implement it. 

So there are a lot of tough parts of the task that we have before 

us, and, Dr. Elmendorf, we are going to be relying on you for the 

numbers and the analysis. We have done that on difficult issues before. I look forward to doing it as we move forward in this process. 

But nothing could be more important. This is the most critical 

threat to our Nation, in my opinion, and I include the threats that 

we receive from external sources. In fact, the head of the Joint 

Chiefs of Staff has said that the greatest threat to our security is 

our debt. And I believe that we have to get it right. We have to 

get the numbers right, we have to get the policy right, and we have 

to get the process right. And I hope that we will be able to build 
93 

a strong, bipartisan solution to move forward and achieve that 

promptly. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you so much, Senator Crapo, and 

thank you for your strong statement here this morning, and thank 

you for your service on the Fiscal Commission. Thanks, too, to the 

other members from the Senate who supported that effort: Senator 

Coburn, Senator Gregg, who is now retired but was the Ranking 

Member of this Committee, and Senator Durbin. Along with my 

vote, that made five of the six from the Senate who supported the 

Commission report, even though we, I think all of us, believe that 

if we would have done it, we would have done a different job and 

perhaps a better job; but at the end of the day, we have to get a 

result. At the end of the day, we have to find a way to get a result, 

and—— 

Senator CRAPO. Could I just interject one quick point there? 

Chairman CONRAD. Certainly. 

Senator CRAPO. I think everyone in America knows that the 

Commission’s report failed to get the necessary 14 votes that would 

have been required to force a vote in Congress on it. But I think 

it is important to just note that it did get more than 60 percent 

of the votes, which is what is sufficient in the Senate to pass legislation. 

Chairman CONRAD. That is a very important point. Eleven of 

18—again, five Democrats, five Republicans, one Independent— 

supported the recommendations of the report. 

With that, we will turn to Dr. Elmendorf. Again, welcome back 

to the Committee, and please proceed with your testimony. 

STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ELMENDORF. Thank you, Mr. Chairman, Senator Crapo. I appreciate very much your confidence in me and, much more importantly, your confidence in the analysis that my colleagues and I at 

CBO have been doing and will continue to do for you. 

Among my colleagues I want to recognize for one moment Bob 

Dennis, who is sitting behind me and who has led our Macroeconomic Division for many years. He has been one of our most important people for many years, and he is retiring from CBO at the 

end of next month. 

Chairman CONRAD. If we could ask Bob to stand and be recognized. 

[Applause.] 

Mr. ELMENDORF. Mr. Chairman, I also want to pass on, on behalf 

of my and my colleagues, our unhappiness at hearing about your 

plans to retire at the end of this session, as we were unhappy at 

Senator Gregg’s plan to retire at the end of the previous Congress. 

But we look forward to working with you very intensively for the 

next 2 years, and we look forward to working with Senator Sessions and Senator Crapo and the other members of the Committee 

throughout this Congress. 

Chairman CONRAD. Let me just say that I am not going to retire, 

but I am just not going to run again. 

[Laughter.] 
94 

Mr. ELMENDORF. I understand. 

The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession. The pace of growth in output has been anemic compared with 

that during most other recoveries, and the unemployment rate has 

remained quite high. 

Federal budget deficits and debt have surged in the past 2 years, 

owing to a combination of a severe drop in economic activity, the 

costs of policies implemented in response to the financial and economic problems, and an imbalance between spending and revenues 

that pre-dates the recession. 

Unfortunately, it is likely that a return to normal economic conditions will take years, and even after the economy has fully recovered, a return to sustainable budget conditions will require significant changes in tax and spending policies. 

Let me discuss the economic outlook first and then turn to the 

budget outlook. 

CBO expects that production and employment will expand in the 

coming years, but at only a moderate pace, leaving the economy 

well below its potential for some time. We project that real GDP 

will increase by about 3 percent this year and again next year, reflecting continued strong growth in business investment, improvements in both residential investment and net exports, and modest 

increases in consumer spending. But we have a long way to go on 

the employment front. 

Move to the next slide, please. The next one after that, please. 

Keep going. I am sorry. And again. So let us focus on this. 

Payroll employment, which declined by 7.3 million during the recent recession, rose by only 70,000 jobs on net between June 2009 

and December 2010. The recovery in employment has been slowed 

not only by the slow growth in output but also by structural 

changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers. 

We estimate that the economy will add roughly 2.5 million jobs 

per year for the next 6 years, similar to the average pace during 

the late 1990s. Even so, we expect that the unemployment rate will 

fall only to 9.2 percent in the fourth quarter of this year and 8.2 

percent in the fourth quarter of 2012. Only by 2016 in our forecast 

does the unemployment rate reach 5.3 percent, close to our estimate of the natural or sustainable rate. 

CBO projects that inflation will remain very low in 2011 and 

2012, reflecting the large amount of unused resources in the economy, and will average no more than 2 percent a year between 2013 

and 2016. 

Economic developments and the Government’s responses to them 

have, of course, had a big impact on the budget. We estimate that 

if current laws remain unchanged, the budget deficit this year will 

be close to $1.5 trillion, or 9.8 percent of GDP. That would follow 

deficits of 10 percent and 8.9 percent of GDP in the past 2 years, 

representing the three largest deficits relative to the size of the 

economy since 1945. As a result, debt held by the public will probably jump from 40 percent of GDP at the end of fiscal year 2008 

to nearly 70 percent at the end of fiscal year 2011. 
95 

If current laws remain unchanged, as we assume for CBO’s baseline projections, budget deficits would drop markedly over the next 

few years as a share of output. If we can go back, I think, two 

slides, the darker line shows the deficit under our baseline projections reflecting current law. Deficits would average 3.6 percent of 

GDP from 2012 through 2021, totaling nearly $7 trillion during 

that decade. As a result, the debt held by the public would keep 

rising, reaching 77 percent of GDP. 

However, that projection is based on the assumption that tax and 

spending policies unfold as specified in current law. Consequently, 

it understates the budget deficits that would occur if many policies 

currently in place were continued rather than allowed to expire as 

under current law. 

For example, suppose instead that three major aspects of current 

policy were continued during the coming decade: first, that the 

higher 2011 exemption amount for the alternative minimum tax is 

extended and, along with the AMT tax brackets, is indexed for inflation; second, that the other major provisions in the recently enacted tax legislation that affected individual income taxes and estate and gift taxes were extended rather than allowed to expire in 

January 2013; and, third, that Medicare’s payment rates for physician services were held constant rather than dropping sharply as 

scheduled under current law. All of those policies have recently 

been extended by the Congress for 1 or 2 years. If they were extended permanently, deficits from 2012 through 2021 would average about 6 percent of GDP rather than 3.6 percent—that is the 

lower dashed line in that picture—and cumulative deficits over the 

coming decade would total nearly $12 trillion. Go to the next slide, 

please. Debt held by the public in 2021 would rise to almost 100 

percent of GDP, the highest level since 1946. 

Beyond the 10-year projection period, further increases in Federal debt relative to the Nation’s output almost certainly lie ahead 

if current policies remain in place. Spending on Social Security and 

the Government’s major mandatory health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and insurance subsidies to be provided through exchanges—will increase 

from roughly 10 percent of GDP to about 16 percent over the next 

25 years. 

To prevent debt from becoming unsupportable, the Congress will 

have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue 

some combination of those approaches. The longer the necessary 

adjustments are delayed, the greater will be the negative consequences of the mounting debt, the more uncertain individuals 

and businesses will be about future Government policies, and the 

more drastic the ultimate policy changes will need to be. However, 

changes of the magnitude that will ultimately be required could be 

disruptive. Therefore, Congress may wish to implement them 

gradually so as to avoid a sudden negative impact on the economy, 

particularly as it recovers from the severe recession and so as to 

give families, businesses, and State and local governments time to 

plan and adjust. 

Allowing for such graduate implementation would mean that 

remedying the Nation’s fiscal imbalance would take longer and, 
96 

therefore, that major policy changes would need to be enacted soon 

in order to limit a further increase in Federal debt. 

Thank you very much. 

[The prepared statement of Mr. Elmendorf follows:] 
97 
98 
99 
100 
101 
102 
103 

Chairman CONRAD. Thank you, Director Elmendorf. 

You know, one of the things we say a lot on this Committee is 

the current trajectory, projected trajectory on our deficits and debt 

is unsustainable. You have used that language as well. What do 

you mean by that? 

Mr. ELMENDORF. As the debt rises relative to the size of the 

economy, so does the burden on the economy, on American citizens, 

of making the payments on that debt, of making the interest payments. And as that burden rises, it becomes more difficult to prevent a further increase in debt because the rising interest payments are tending to squeeze out the other forms of Government 

spending or push up tax revenue in ways that are difficult for the 

country to absorb. 

So the rising debt payments can start to snowball in a way that 

can make the debt rise faster and faster, and one sees that in our 

longer-term projections as one goes out beyond the coming decade 

where the path of debt to GDP can rise quite sharply. 

In order to continue the borrowing implicit in those kinds of pictures, the Government needs to find investors willing to purchase 

Government securities, both to roll over the existing debt as it matures and to acquire the new debt necessary to finance the ongoing 

budget deficits. 

At some point investors are likely to become increasingly nervous 

about whether the Government can, in fact, manage its budget. 

That is what we and others have called a fiscal crisis, and we have 

seen very recently other countries encounter a crisis of that sort in 

which it becomes impossible for the Government to finance the trajectory of debt that it has in mind at affordable interest rates. 

Now, we have been very clear that we do not have an analytic 

capability of predicting what a tipping point might be and when it 

might happen. But as the debt rises relative to GDP and as the 

trajectory continues to be steeply upward, the risk of that sort of 

crisis increases. 

Chairman CONRAD. So part of your analysis and reason for the 

trajectory of our debt being unsustainable is that puts upward 

pressure on interest rates in order to satisfy those who loan us 

money to take on greater risk, and that has the effect of slowing 

the economy. Is that part of your analysis? 

Mr. ELMENDORF. Yes, that is right. So as the Government needs 

to work harder to find buyers for its debt, it has to pay higher interest rates over time. And more importantly, from an economic 

point of view, the Government’s borrowing is crowding out the borrowing that private firms or households might do to support investment in plant and equipment or to support new housing. And it is 

the crowding out of that private investment that makes future incomes lower than they would otherwise be. 

Chairman CONRAD. Well, I think that analysis is very much in 

line with what every economist has told this Committee and what 

the Chairman of the Federal Reserve has told this Committee. 

Let me go a little bit further because part of your analysis of the 

trajectory of future deficits and debt is tied to the question of interest rate levels. And you have a projection of what interest rates are 

likely to be during the term of this forecast. What would happen 

if the interest rates were, for example, 1 percent higher than you 
104 

project? I think you did a sensitivity analysis to determine what 

would happen to our debt if interest rates were just 1 percent higher than what you project currently. Could you tell us what you 

found? 

Mr. ELMENDORF. Yes, Mr. Chairman, and for others, this is in 

Appendix B of our outlook where we illustrate the sensitivity of 

those budget projections to a variety of pieces of the economic forecast. 

If interest rates are 1 percentage point higher than we project 

throughout the entire decade for both short-term and long-term 

rates, we estimate that the budget deficit would be $1.25 trillion 

larger over the coming decade than in our baseline projection. 

Chairman CONRAD. So you would add another $1.25 trillion— 

‘‘trillion,’’ that is with a ‘‘T,’’ not billion, not million, trillion—if interest rates were just 1 percentage rate higher than in your forecast? 

Mr. ELMENDORF. Yes, that is right. 

Chairman CONRAD. Let me ask you this: As you evaluate where 

we are headed, the Chairman of the Federal Reserve testified before this Committee in recent days, and basically his advice to us 

on deficit and debt reduction was start modestly but then grow the 

effort in a very determined way once the economy is on stronger 

ground. His argument to the Committee was that this recovery is 

still fragile. One in every six Americans is either underemployed or 

unemployed. And so what he was saying to this Committee was 

you ought to begin the process, but begin fiscal discipline in a modest way, but put in place a plan that goes way beyond modest to 

get the debt first stabilized and then to bring it down to more manageable levels. 

Is that your advice to this Committee as well? Or what is your 

advice? 

Mr. ELMENDORF. Well, as you know, Mr. Chairman, I will not 

make policy recommendations to you and your colleagues. I think 

in judging the speed of policy changes that you are considering, you 

and your colleagues face a difficult trade-off. On the one hand, as 

I said, the longer that you wait to make those policy changes, the 

more the debt will mount, the greater the negative consequences 

of that will be, including the crowding out other investment, increased loss of flexibility to respond to future emergencies that we 

cannot foresee now; the greater will be the burden of interest payments and crowding out other forms of spending or pushing up tax 

receipts to keep the debt from growing yet faster; and the greater 

the risk of a fiscal crisis. 

At the same time, the faster that you make policy changes, especially those of the magnitude required to fix a fiscal imbalance of 

this size that I have shown and you have talked about, those 

changes can be disruptive to the households that are planning for 

certain sorts of benefits, to the businesses that are planning around 

certain features of the Tax Code, to State and local governments 

that are depending on the Federal Government to continue its relationship with them as it has been in the past. And the faster you 

move, the harder it is for them to adjust. 

Chairman CONRAD. Let me ask you this question: I think that 

analysis that you have given is very much in line with what other 
105 

economists have told this Committee of a broad range of philosophical backgrounds. Because when we have witnesses before this 

Committee, we try to provide a broad range of philosophical input. 

Some are telling us that tax cuts are so beneficial that if we enact 

tax cuts, they really will not lead to additional deficits because the 

cost is offset by the economic growth that they encourage. 

What is your analysis with respect to the effect of tax cuts on the 

budget? 

Mr. ELMENDORF. So the answer, of course, depends to some extent on the specific tax cuts that one has in mind. As a general 

matter, reductions in marginal tax rates, which affect the incentives faced by households and businesses, reductions in those rates 

can encourage work and savings and, thus, boost the economy, and 

through that provide some offset to the direct loss in tax revenue 

from the reductions in rates. 

For broad-based reductions in taxes, I think the consensus in the 

economics profession is that the offset provided through the extra 

work and saving is significantly smaller than the direct revenue 

loss, and thus that the net effect on the budget is a reduction in 

revenues. As I said, one might reach different conclusions for particular changes in tax rates, but for broad-based changes, I think 

that is the professional consensus. 

Chairman CONRAD. So give us an understanding—and, look, I 

supported extending the tax cuts. I supported extending all of them 

because I believed the economy was in such weak condition that we 

needed some certainty and we needed the additional lift that those 

tax cuts can give in the short term. Isn’t the CBO analysis that tax 

cuts have a differential effect short term and long term? 

Mr. ELMENDORF. Yes, that is right. Again, I do not think that is 

unique to us either. In the results that we presented to you in testimony at the end of September about the effects of different ways 

of extending the expiring tax provisions that you and your colleagues were considering, we looked at both the effects in the next 

few years and the effects at the end of the decade and beyond in 

future decades. 

In the short term, we think that reductions in tax receipts that 

put more money into the hands of taxpayers that they can then 

spend can stimulate economic activity, the demand for goods and, 

thus, production and employment. And that is especially true, I 

should emphasize, under current economic conditions where there 

is so much unused labor, so much unused industrial capacity, and 

where the Federal Reserve has already pushed the interest rates 

that it controls most directly down essentially to their lower bound. 

But over the longer term, as we showed in these results in September, reductions in tax revenue that are not matched by reductions in Government spending and, thus, lead to wider budget deficits tend to reduce the level of economic activity, and there are different forces at work there. The lower tax rates do spur work and 

saving, as I said, and we incorporate that in our estimates. At the 

same time, the larger deficits—again, on the assumption that 

spending is not cut commensurately, the larger deficits crowd out 

private capital formation. And for most of the different parameter 

values, most of the models that we use—and we us a variety to illustrate the uncertainties. For most of those approaches that we 
106 

have taken, the loss of future output and income from the extra 

deficits outweigh the boost from the lower tax rates. 

Chairman CONRAD. And isn’t it your analysis that the tax cuts 

we just enacted in fact do add to the deficit and the debt? 

Mr. ELMENDORF. Yes, that is correct. The legislation, as we report in our outlook, that legislation increased budget deficits this 

year and next and over the entire decade by around $800 billion, 

I believe. 

Chairman CONRAD. All right. Let me go to Senator Crapo, and 

then we will go to members for questions in order of arrival. We 

use the early bird rule here, and we will follow that as well. I think 

given the number of Senators, we better do 7-minute rounds. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

I want to followup briefly on the last line of questioning. In your 

analysis—and I describe what the Chairman and you were talking 

about as ‘‘dynamic scoring of tax policy.’’ I do not know if that is 

the accurate description of it, but do you take into consideration 

the dynamic impacts of tax policy as you provide us your numbers? 

In other words, when you do your analysis and come up with that 

$800 billion number for a deficit impact, are you calculating into 

that the dynamic impact of tax policy on the economy and on revenues? 

Mr. ELMENDORF. People use these words in different ways. Let 

me distinguish two sets of words and tell you what I mean by 

them. 

Dynamic scoring I think of as incorporating in a revenue estimate or a cost estimate a full range of microeconomic and macroeconomic behavioral responses. 

The revenue estimates that you get, like all the revenue estimates have done for decades in the Congress, are done by the staff 

of the Joint Committee of Taxation, not by CBO. Those estimates 

incorporate a vast array of microeconomic behavioral responses. 

They do not incorporate effects of changing economic aggregates 

like GDP. 

Separately, we and our colleagues on the staff of the Joint Tax 

Committee do dynamic analyses of various sorts, analyses in which 

we do allow the macroeconomic aggregates to change through these 

behavioral changes along with the various sorts of microeconomic 

behavioral effects. And we reported to you that sort of dynamic 

analysis in the testimony I did in September about the effects of 

tax policy. We do this every year in an analysis of the President’s 

budget. We have done this for the American Recovery and Reinvestment Act. We do this in a whole variety of circumstances. It 

is a great deal of work to do. We tend to do it only for particularly 

significant pieces of legislation for which we have weeks or months 

of lead time in terms of your interest. And the staff of the Joint 

Tax Committee does similar sorts of analyses as well. 

Senator CRAPO. All right. Let me ask you, what kind of revenue 

growth estimates are you using throughout the decade in your projections? 

Mr. ELMENDORF. So revenue grows slowly for the next—certainly 

for this year, because we have the economy growing slowly. 
107 

Senator CRAPO. You are at 3.8 for this year, right? That is 

your—— 

Mr. ELMENDORF. I believe—— 

Mr. BOOTH. 3.1. 

Mr. ELMENDORF. So for this year—yes, OK. So for this year we 

have total revenue growing by 3.1 percent. 

Senator CRAPO. 3.1, OK. 

Mr. ELMENDORF. And then much faster on average for the remainder of the decade, but much of that is from the expiration of 

a whole set of these tax provisions at the end of this year or the 

end of next year. So over the next few years between now and 

2014, tax revenue rises by about 5 percentage points of GDP, and 

three-quarters of that is from the expiration of expiring tax provisions, and the other quarter is a variety of other effects, including 

economic growth. 

Senator CRAPO. Do you use projections as to what rate of inflation you expect in the economy? 

Mr. ELMENDORF. Yes. So obviously the nominal growth rates of 

revenues and of spending depend on our projection of inflation. As 

I mentioned earlier and as we describe at greater length in the report, we expect inflation to remain low in the next few years, then 

to move up toward the Federal Reserve’s implicit target, which, according to Chairman Bernanke and others, is at 2 percent or a little under. If there were faster inflation, that would lead to more 

revenues. It would also lead to more spending, and in particular it 

would lead to higher interest payments on the debt. And in this 

Appendix C that was referenced before, one of the experiments that 

we did was to look at what happens if inflation is higher—I am 

sorry, Appendix B—is higher than it would otherwise be. Higher 

inflation of 1 percentage point a year would add about $900 billion 

to deficits over the next decade. 

The important part of that is that with higher inflation there 

tend to be higher interest rates, so this already large and growing 

burden of interest payments would grow even faster. 

Senator CRAPO. And are you familiar—I am shifting gears here 

a little bit, but are you familiar with the studies done by Rogoff 

and Reinhart comparing debt to GDP of different nations and so 

forth? 

Mr. ELMENDORF. Yes, I am actually. Carmen Reinhart is a member of our panel of economic advisers. 

Senator CRAPO. You are aware then that they use gross debt in 

their analysis. You have indicated that debt owed to the public, 

which is significantly lower than that, is going to be approaching 

the 90 to 100 percent mark by the end of the decade. Could you 

comment, given the context of their analysis and the fact that 

using literally debt owed to the public as opposed to gross debt, we 

are rapidly approaching those markers, on what you expect to be 

the consequences of our failure to change that dynamic, that 

growth in debt? 

Mr. ELMENDORF. U.S. debt, publicly held debt, is already in unfamiliar territory for our country, and over the course of the next decade, if current policies are continued and debt pushes up toward 

100 percent of our GDP, we will be entering unfamiliar territory 

for all developed countries over the past several decades. Not com-
108 

pletely unknown territory. Some countries have gone there. Their 

experiences have usually been poor. 

The U.S. is different from other countries in a variety of ways 

that might affect how far we can push up debt before we encounter 

larger negative consequences. People do view the U.S. economy as 

a vibrant one and the U.S. financial system, notwithstanding the 

events of the past few years, as a reliable one. That gives us a little 

more room perhaps. 

On the other hand, we have low private saving rates compared 

with other countries, so our Government debt cannot be absorbed 

as much in U.S. saving. It has to rely on the saving and investment 

of others. That may give us less room than other countries. 

Senator CRAPO. I want to interrupt because I have one more 

question I am going to ask, and so I would just—well, let me just 

interrupt and move to the next question—— 

Mr. ELMENDORF. Yes. 

Senator CRAPO [continuing]. Because time is so short. I do want 

to followup on that in a future round. 

Quickly, there are four major housing and banking activities that 

are reflected in the Federal budget to various degrees: TARP finance programs, the Federal Government’s obligations to Fannie 

and Freddie, the premiums paid by and loss share payments to 

banks through the Deposit Insurance Fund, and the Federal Reserve’s remissions of interest income to the Treasury earned on 

their open market operations and other portfolio investments. 

Could you explain to me what the budget numbers associated 

with each of these entities actually reflects? For instance, do the 

numbers for these programs in the budget reflect cash, credit scoring, or actuarial costs? And are we treating these different aspects 

differently in our budget analysis? 

Mr. ELMENDORF. So the answer to the last part of the question 

is yes, they are treated differently. The Federal budget is primarily 

a cash-flow accounting, money coming in and money going out. 

About 20 years ago, in the Federal Credit Reform Act, there were 

some changes made to try to better reflect the true cost of some of 

the Government’s financial activities, the credit programs. In fact, 

that methodology, which we apply to credit programs under the 

law today, does not reflect the full cost of the Federal Government, 

the full cost in particular of the risk that the Government takes on 

in credit programs. 

Beyond that, some of these other particular parts of the Government’s activities that you mention have been put in place with different budgetary treatment. The TARP was set in place with instructions to us to treat it not exactly under the credit reform 

basis, but under a credit reform basis with an adjustment for the 

extra risk the Government is taking on, and we have done that. 

Fannie Mae and Freddie Mac were brought into the Government 

in our assessment through the conservatorship, and the ownership 

and control of the Government has demonstrated. There is nothing 

in law that specifies how they should be treated in the budget. We 

are treating them, after discussion with the Budget Committees, on 

the same risk-adjusted basis that we are treating the TARP. 

The administration, however, still views them as being outside of 

the budget. When they record the history of transactions, they 
109 

record cash payments to those entities as if they were outside entities. 

Unfortunately, in contrast, our projections, which view them as 

part of the Government, which we think is appropriate, treats them 

more on—does not record the cash transactions but imputes to the 

Federal Government the transactions those entities are engaged in. 

So it is a very complicated business, and we are in ongoing discussions with the Budget Committee, both sides—here and also in 

the House—to try to think through if there are better ways for us 

to communicate to you and your colleagues what is really going on. 

Chairman CONRAD. Can I just intercede on this point, Senator 

Crapo? Because I think it is important for members of the Committee to know that CBO, when they have a question about how 

to do these things, consults the Chairman and the Ranking Member of both the House and the Senate Budget Committees. They did 

consult us on the question of treating Fannie and Freddie off the 

books or on the books. We insisted that they be included because 

we think that is the most accurate reflection of the effect on the 

Federal books. And we were unanimous in that view. Senator 

Gregg was the Raking member here at that time. Congressman 

Ryan was Ranking in the House. And former Chairman Spratt, the 

four of us were consulted. The four of us agreed unanimously—— 

Senator CRAPO. And I agreed with—— 

Chairman CONRAD [continuing]. That they ought to be included. 

Senator CRAPO. Thank you. 

Chairman CONRAD. And I still believe that was the correct decision and that CBO wanted to do it that way, and we thought that 

was the appropriate way, so that we are not having things off the 

books here. 

Senator CRAPO. Hopefully OMB will follow that lead. 

Chairman CONRAD. I thank you. 

Next, Senator Cardin. 

Senator CARDIN. Mr. Chairman, thank you very much. Mr. Elmendorf, I very much appreciate your service. 

Mr. ELMENDORF. Thank you. 

Senator CARDIN. I agree with the comments of our Chairman and 

Senator Crapo that we need a credible plan, we need a credible 

plan now. The support and our enactment of a credible plan would 

have an incredible impact, I think, on our economy, and that all 

factors need to be part of the solution. 

The difficulty is that Congress will normally take up issues on 

a specific matter, and then the discipline seems to break down. We 

will have a true emergency—a natural disaster, a Katrina. We will 

have a national security issue that we obviously have to respond 

to. And then we sort of say, well, we will take care of that, and 

we do it in a different manner. Well, we understand that. But then 

other matters get categorized as emergencies or urgent issues, and 

we make separate exceptions. 

I agree that we need to do this in a balanced way, but it seems 

like domestic discretionary spending is always the one that is in 

the focal point and usually takes the brunt of this type of discussion. 

So I was pleased that the President mentioned discretionary domestic spending first, and I want to try to get the relative impact 
110 

of what the President said. In your CBO baseline, what projections 

are you making in regards to discretionary domestic spending? 

Mr. ELMENDORF. So the procedure that we follow and have followed for years is to take the latest level of appropriations that the 

Congress has approved and then to increase that over the remainder of the decade with our estimate of inflation so as to maintain 

the same inflation- adjusted or real level of appropriations for those 

programs. 

Senator CARDIN. And the President mentioned the freeze for 5 

years. Would that be different than what you had in your baseline? 

Mr. ELMENDORF. Yes, that would. 

Senator CARDIN. Could you tell us what additional savings would 

be brought in by the President’s recommendation if we, in fact, did 

a freeze on discretionary domestic spending over the next 5 years? 

Mr. ELMENDORF. So we did a calculation that I think is relevant. 

I do not know precisely what the President is proposing, and, of 

course, he has not released his budget. But we did a calculation 

that involved freezing all non-defense discretionary spending except that that was directed by the Subcommittee on Homeland Security of the Appropriations Committee. And if one freezes that for 

5 years and then at the end of the 5 years increases with inflation, 

but at a level that remains below the level that would otherwise 

have been in place, the savings over the decade are about $400 billion. 

Senator CARDIN. Thank you. Now, you mentioned three policy 

issues that are not in your baseline but are actively being considered by Congress for extension: the alternative minimum tax, the 

extension of the tax issues that were passed in December, and the 

physician reimbursement under Medicare. Let me take them, if I 

could, separately. 

Could you give me a comparable number as to what negative impact each of those three policies would have on your projections? 

Mr. ELMENDORF. Yes, I think I can. For other people, there is a 

table in our outlook, Table 1–7 on page 22, that gives the budgetary effects of a variety of policy alternatives from which these 

numbers are drawn. 

The effect of extending the income tax and estate and gift tax 

provisions, scheduled to expire at the end of next year, is about 

$2.5 trillion over the decade. 

The effect of indexing the AMT for inflation is about $700 billion 

over the decade. 

In fact, there is an interaction between those two policies. The 

money collected under the AMT depends on the level of regular tax 

rates. So if one both does the extension and indexes the AMT for 

inflation, there is another almost $700 billion of revenue. 

So the extension of those tax provisions and indexing the AMT together add $3.8 trillion to deficits over 10 years, and then additionally there would be extra interest costs as well. 

The effect of maintaining Medicare’s payment rates to physicians is about $250 billion over the decade. 

Senator CARDIN. Thank you. The reason I mention that is that, 

you know, we spend a lot of time on the spending bills here, and 

there is a lot of pain as we talk about bringing down Federal participation in programs that our local governments need or we need 
111 

for our roads or we need for those who are the most vulnerable. 

And we have to do that. I think we all understand that. Part of 

bringing the budget into balance is that we are going to have to 

make those types of sacrifices. If we do that, we will bring about 

savings in the budget. 

But then if we talk about the tax issues and just say, OK, well, 

you know, taxes are different, it pales in comparison, the extra 

deficits, what we are doing on the tax side based on all the good 

work we do on the spending side. 

Now, I have not gotten to the military yet. Your baseline assumes what for military spending? 

Mr. ELMENDORF. Well, as for non-defense spending, we take the 

latest level of appropriations provided by the Congress and increase that with inflation. Under the current circumstances where 

a good deal of money is being spent in Afghanistan and Iraq, that 

level may not be a good representation of what you or your colleagues would think of as the sort of base level of defense spending 

you would like to provide. And we also provide in the same table 

in the outlook some alternatives that involve different paths for defense spending. 

Senator CARDIN. So you are taking a lower projection for the future than using the current—— 

Mr. ELMENDORF. No. We are taking the current. That is what I 

am trying—— 

Senator CARDIN. But you believe there will be some savings in 

the next 10 years as far as the spending in Afghanistan, or you—— 

Mr. ELMENDORF. Well, I am just saying that you and your colleagues have often asked us the question about, well, we think— 

you think this is higher than what you anticipate to provide in the 

future, so—— 

Senator CARDIN. So your baseline starts with the current level of 

military action that we are participating in. 

Mr. ELMENDORF. Yes. 

Senator CARDIN. So if, in fact, we bring down the military action 

and do not have to spend as much on our soldiers overseas, we can 

bring some back, that in and of itself would give us some savings 

that are not in your baseline. 

Mr. ELMENDORF. Yes. In and of itself—let me just add—— 

Senator CARDIN. I understand there are going to be tradeoffs. 

Mr. ELMENDORF. Let me just add quickly, when Secretary Gates 

has talked about savings that he would like to implement in the 

base defense budget, not counting those operations, the savings 

that he is discussing is from a higher level than our baseline. He 

is discussing savings relative to the budget plan that the Defense 

Department has put out. So those savings bring down that budget 

plan in the direction of but not all the way to our baseline. 

Senator CARDIN. Of course, if the recent years are any indication, 

the numbers are going to probably be higher, because they have 

been higher than, I think, your—if we go back 3 or 4 or 5 years 

ago, what CBO’s baseline was on military spending as to what we 

are spending today, we are spending more, if I am—— 

Mr. ELMENDORF. Well, so part of the problem is that depending 

on where in the year we have done the projections, whether the 

Congress has at that point enacted the sort of supplemental appro-
112 

priations that have gone for overseas contingency operations, we 

tend to be extrapolating first the higher number, then a lower 

number, then a higher number. There has been an odd sort of pingponging that I think has been hard to follow. 

Senator CARDIN. My time is up. I wanted to do the same thing 

with the entitlement spending. I did not have a chance to go 

through the analysis. But I guess my point is this: All of the major 

areas need to be on the table, and that was, I think, the credibility 

of the Debt Commission, Mr. Chairman. I must tell you, I think all 

of us were proud that the recommendation was balanced. Again, 

you know, we do have problems with provisions, but you have to 

have all at the table. Let us not just pick on discretionary domestic 

spending. 

Chairman CONRAD. Thanks, Senator. 

Senator CORNYNis next. I want to welcome Senator Thune to the 

Committee. He was not here when we welcomed new members. I 

want to extend our welcome to Senator Thune as well to the Committee. We look forward to working with you. 

Let me just indicate to members, I try not to interrupt Senators 

when they are questioning, even though they may be at the end of 

their time. If you will kind of look, when I hold up the gavel, I prefer not to tap it on members, but if you will try to stick close to 

the time, in fairness to others. 

Senator Cornyn. 

Senator CORNYN. Thank you, Mr. Chairman. 

Dr. Elmendorf, welcome, and let me start out by saying how 

much I, and I know other members of the committee and Members 

of Congress, appreciate the professionalism and integrity of your office. I know the numbers that you report are often batted around 

and spun in different ways, which must be a source of tremendous 

frustration to you, but you have always seemed to keep your cool 

despite that, and it is important that we get good numbers and 

thank you for that. 

Mr. ELMENDORF. Thank you, Senator. That means a lot. 

Senator CORNYN. You know, unfortunately, when we talk about 

the budget and the economic outlook, though, I feel like Mark 

Twain when he said, ‘‘Everyone talks about the weather but nobody ever does anything about it.’’ I think Congress is guilty of 

that, and that is why I was pleasantly surprised, Mr. Chairman, 

when you and other members of the President’s Fiscal Commission 

came out with what I thought was a bold and dramatic and sobering report. And so I hope, and I still hope, that we will take the 

opportunity to deal with this crisis, and I do believe it is approaching a crisis. We do not know when the tipping point will come, but 

we are almost there. And so we cannot just talk about the economic 

outlook and the budget. We have to do something about it. I do 

think that there is an opportunity, a window for us to do it. 

Now, I heard you say we have to be careful about the pace of 

some of the austerity measures because it could further depress the 

economy, and I hear you loud and clear on that. But I think the 

political reality is we have a short time to do this, and if we do not 

do it within this six to 9 months, then the opportunity will be lost. 

So I am anxiously awaiting the President’s budget, which will 

come the week of February 13, to see whether the President him-
113 

self is serious about the crisis that was so well documented and explained by his own Fiscal Commission, and I hope that opportunity 

is not squandered by the same old, same old sort of thing that 

seems to happen time and time again. 

But just to—I know we have talked a lot about the need to cut, 

but you alluded to the crowding out effect of more Federal Government borrowing on private access to private credit and I would like 

to just talk to you briefly about the importance of not just cutting, 

but growing the economy. I know when Senator Portman was over 

as OMB Director at the beginning of 2007, the budget deficit was 

1.2 percent—1.2 percent. Now, it is around 10 percent. One reason 

why it was low is not because we were not spending money, because we were, but because the economy was booming. Jobs were 

being created. The coffers, the Federal Treasury was getting a lot 

of money. But now, for the reasons the Chairman mentioned, not 

only are we continuing our bad habits in terms of spending, indeed 

growing spending, the amount of money coming in because the 

economy is hurting, because people are out of work, losing their 

homes, it is a double whammy. 

So let me ask you, on page 51 of the Budget and Economic Outlook, you have some economic projections in terms of growth of our 

Gross Domestic Product, and I believe I heard you say, and this appears to say on page 51, that in 2011, you are projecting the Gross 

Domestic Product to grow at 3.1 percent, is that correct? 

Mr. ELMENDORF. Yes, that is right. 

Senator CORNYN. Can you tell us at what point, how much 

growth of the Gross Domestic Product is required to see a net increase in employment? In other words, I assume with new people 

entering the work force that there is a level—I have heard it before, but I cannot recall the specific number—is there a range of 

growth that we need to see before we are going to start to see the 

unemployment rate coming down? 

Mr. ELMENDORF. Well, at that pace that we project, Senator, we 

think the unemployment rate will begin to come down, but slowly. 

We think that the potential growth rate of the economy—I should 

explain what I mean by that, that apart from the cyclical issues, 

if the labor force were almost fully employed, if productive capital 

were almost fully in use, that the economic output would grow by 

maybe up to 2.5 percent a year. So if economic growth exceeds that 

rate, then we are in the process, we think, of closing the gap a little 

bit between the potential level of output and the actual level of output. That means putting people back to work again and putting 

equipment and plants back to work again. 

Senator CORNYN. Chairman Bernanke testified a couple of weeks 

ago that he thought by 2012, we would still see unemployment 

stubbornly high, in the 8 percent range. Do you agree with that, 

or what is your view? 

Mr. ELMENDORF. Yes, I do. So we think that the unemployment 

rate will be down to about 8.25 percent by the end of 2012. That 

is better than it is today, but obviously still well above the level 

that we have seen in strong economic conditions in the past. 

Senator CORNYN. Since time is so short, let me just conclude on 

some matters that are of grave concern to me, and that has to do 
114 

with energy costs and some of our policies emanating here from 

Washington having to do with our domestic energy supply. 

First of all, I do not think it is any secret that the moratorium 

that was imposed on drilling for oil in the Gulf of Mexico, and now 

that the formal moratorium is lifted, what is sometimes called the 

‘‘permitorium,’’ the failure of the bureaucracy to issue permits to 

responsible producers to develop domestic energy, that it is having 

a dramatic negative impact on employment, particularly in the 

Gulf Coast States, but the ripple effect throughout the economy. 

Likewise, we have discovered in the last couple of years as a result of modern technology a huge amount of natural gas here in 

America that is available from shale formations. I guess as I heard 

the President talk about green jobs, which sounds very good, and 

certainly we are all for conservation, looking for ways to protect the 

environment as we develop energy sources, I was concerned that 

there was not a whole lot of talk about what I would call red, 

white, and blue jobs, and those are jobs created from our domestic 

energy sources. 

Let me just conclude on this, and I know the Chairman has held 

up his gavel, but let me conclude on this and say, what do you see 

in terms of energy costs, rising energy costs, particularly gasoline 

costs? We see $4 a gallon gasoline by summer. What are the rising 

costs of energy going to do to our economy? 

Mr. ELMENDORF. I do not know offhand what our projection is. 

Normally for oil prices, which are an important economic factor, of 

course, we look to the futures markets as our starting point and 

follow the path that people buying and selling the right to have oil 

in the future, look at the price that they are putting on the oil. I 

do not think that calls for further large increases at this point in 

the price of oil. I am not sure about gasoline prices. 

Mr. DENNIS. Oil prices are here. 

[Document handed to Mr. Elmendorf.] 

Mr. ELMENDORF. OK. So oil prices, we have rising. They are now 

about $90 a barrel. We have them rising to about $100 a barrel by 

2017 and $110 a barrel by 2020. Of course, as we have seen historically, the price of oil can easily shoot up well beyond that and can 

fall well short of that for periods of time. So I think this is an aspect of the forecast that you could picture having a very large confidence range around these numbers. But we think this is consistent with what is in futures markets and with the historical experience. 

Senator CORNYN. Certainly, if a conflict broke out in the Middle 

East and people became concerned about it, those numbers could 

skyrocket almost immediately, could they not? 

Mr. ELMENDORF. Yes. That is right, Senator. 

Senator CONRAD. Thank you. 

Chairman CONRAD. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman, and Dr. Elmendorf, 

thank you for all your good work. 

In the middle 1980s, Democrats and Ronald Reagan got together. 

They got together on taxes, cut taxes, kept progressivity, and grew 

the economy. And we found a startling number a few days ago. In 

the 2-years that followed that bipartisan work, the economy cre-
115 

ated 6.3 million non-farm jobs. That is twice as many jobs as were 

created between 2001 and 2008, when tax policy was partisan. 

Now, in your analysis, you, of course, just assume that between 

now and 2012, there will be no changes, and then after 2012, we 

will see what happens. What could you tell us—and this, of course, 

would just be a very rough analysis—would your fiscal outlook be 

if, say, in the next 2 years, Democrats and Republicans picked up 

on the kind of work that was done in the 1980s and grew the economy? Can you give us any sense of how your fiscal outlook would 

change? Obviously, it would change because you are not making 

any calculations based on anything else being done. But just what 

roughly would you suggest might be part of the changed fiscal outlook if a tax reform along the lines of what was done in the 1980s 

was enacted? 

Mr. ELMENDORF. As you know, Senator, my capacity for analysis 

usually falls well short of your questions. As a very general matter, 

it is a widely held view among experts that a tax code that had a 

broader base, with fewer special exemptions, deductions, credits, so 

on, and thereby could have lower tax rates to raise the same 

amount of revenue, would be a more effective tax code in terms of 

raising revenue while producing less distortion to private economic 

behavior. 

So all else equal, and there is a lot being swept into that phrase 

from your question, a tax code with a broader base and lower rates 

is one that we would expect to be more conducive to economic 

growth. But, of course, we would have to look at—— 

Senator WYDEN. Which would mean that the fiscal picture you 

have painted today would not be quite the bleak one that you have 

offered. 

Mr. ELMENDORF. Not quite as bleak. As you understand, the gap 

between spending and revenues under extension of these policies 

that have been extended in the past is very large. That is not a 

gap that the economy can grow its way out of even with—— 

Senator WYDEN. Understood. 

Mr. ELMENDORF [continuing]. The world’s best tax system. 

Senator WYDEN. Let us talk about the international implications 

of tax law for a minute, if we can. I am very interested in seeing 

the corporate rate cut considerably and have proposed cutting it 

from 35 to 24 in order to encourage manufacturing in the United 

States. In effect, that would provide us an opportunity to repatriate 

some of the money that is parked overseas back here in the United 

States again to grow the economy. 

Have you all done any analysis with respect to an approach that, 

in effect, would promote that kind of repatriation through a tax 

code that incented job growth in the country? 

Mr. ELMENDORF. I do not think we have studied that in particular, Senator. We actually are doing some work right now on different approaches to taxing international corporations in work that 

we hope to present to the Congress in a few months. I do not think 

we have studied that particular proposal, at least as of yet. 

Senator WYDEN. I hope you will, and I will followup with your 

staff on it because I think it is important. I think we know that 

billions and billions of dollars are parked offshore right now and 

we ought to make it more attractive to repatriate that money 
116 

through tax law and incent private sector job growth in our country. 

I am going to ask you the same question I asked Dr. Bernanke 

with respect to tax law, and that is the effect of doing just corporate tax law changes rather than individual tax law changes at 

the same time, because my sense is, because most businesses pay 

taxes as individuals, not as C Corporations, you really have many 

interactions. And Dr. Bernanke said that he thought tax reform 

needed to be done in a holistic way, corporate changes and individual changes concurrently. Do you generally share that view? 

Mr. ELMENDORF. Well, I think from the perspective of an analyst, 

tackling all the aspects of a general problem at once seems most 

effective. Of course, it is up to you and your colleagues to judge 

how many changes you can think through and agree upon in a finite period of time. I mean, as you understand, both the corporate 

tax reform and individual tax reform agendas are incredibly long 

and complicated. But yes, I think from an analytic perspective, trying to think about all the pieces of the tax code together would be 

most effective and most appropriately. 

Senator WYDEN. I simply think the interactions between what individuals pay and what businesses pay is now so intertwined with 

sole proprietorships, LLCs, partnerships, and others that to just 

say you are going to split off one piece of the tax code and touch 

on reform there is to vastly oversimplify this and create a lot of distortions. 

One other question. What are the growth implications of doing 

taxes on a temporary basis? Let me just read you a sentence from 

the Wall Street Journal toward the end of the year, and I will 

quote it. ‘‘The United States now has no single permanent tax regime for levies on salaries, capital gains and dividends, a Social Security tax, or a slew of targeted breaks for families, students, and 

others.’’ So in effect, what America has done is to put the tax system on a permanently temporary basis. We are phasing things in. 

We are taking things out. We have a permanently temporary tax 

code. 

What are the growth implications of having something that is 

now a gerry-built, temporary system rather than to look, as I tried 

to do at those 1986 numbers, which to me are just eye-popping. To 

think that when Ronald Reagan and Democrats got together, in 2 

years, they created more jobs than you saw in 8 years of partisan 

tax policy, what would be the benefits of looking beyond a temporary approach? 

Mr. ELMENDORF. I think the temporary nature of our current tax 

system, if you will, is damaging to the economy. We hope and expect that businesses and families are planning ahead, that they are 

making decisions now, making investments for the future, and it 

is very difficult for them to make those sorts of decisions in an informed and thoughtful way if the tax rates that will apply to them 

a year or two or three or four down the road are so uncertain. And 

I think that resolving that uncertainty would encourage and support household decisions, business decisions, investment, and hiring, probably. 

Senator WYDEN. Mr. Chairman, my time has expired, but because we are all going to be working closely under your leadership 
117 

over the next 2 years, I want to touch on this last point that Dr. 

Elmendorf made about the nature of a temporary set of tax policies. If we have, Mr. Chairman and colleagues, the same debate in 

the lame duck session of 2012, where we are once again talking 

about extending the tax law today for two more years, Dr. Elmendorf has told us that will be damaging for the economy and the 

country. So with your leadership and Senator Sessions, my hope is 

that this time, over the next 2 years, we can make permanent progrowth changes to tax law, get it done in this Congress, and not 

just re-litigate another set of temporary tax law changes in the 

lame duck session of the 2012 Congress which Dr. Elmendorf has 

just told us would be very damaging. 

Mr. Chairman, thank you for that extra time, but I think the 

point Dr. Elmendorf made is especially important there at the end. 

Chairman CONRAD. Thank you for that. 

Senator Sessions is now back. He was at another hearing that 

required his presence. I think it is probably most appropriate that 

we go to him for any opening statement he would want to make 

and then we will resume questions. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Mr. Chairman. It was a critical 

hearing that I had to be at involving my State—— 

Senator WYDEN. Your microphone is not working. 

Senator SESSIONS. Maybe I can just move over here. 

Chairman CONRAD. It is working now. 

Senator SESSIONS. OK. That is better. Senator Wyden, fundamentally, you are absolutely correct. I mean, a permanent tax 

policy is better than an uncertainty, and we have too much uncertainty in our economy and we do need more stability. You have 

come forward with some proposals and ideas that I think are worth 

serious consideration and I look forward to working with you on it. 

I truly believe that you are attempting to accomplish something in 

an effective way. 

I congratulate you, Mr. Elmendorf, for your reappointment at 

CBO. You have carried out your duties, I believe, with honesty and 

integrity and I look forward to working with you again. You have 

some rather specific controls on how you score and evaluate matters. It is not your fault. They have been established and you follow 

them, I think, objectively, whether we like the outcome or not. The 

rules are set up mostly by Congress. 

So we got the new baseline from CBO yesterday. The news was 

not good. Our deficit is expected to reach nearly $1.5 trillion this 

fiscal year as of September 30. That is well above what we were 

projecting not long ago. Our gross debt is expected to reach 100 

percent of GDP, meaning the amount of all the money our nation 

owes will soon be equal to the value of everything our nation produces. That is above the level, the 90 percent level that Rogoff and 

Reinhart can calculate in their fine, valuable book and analysis of 

nations who have defaulted on their debts. The 90 percent rate is 

significant. They find it is a significant number, and we are above 

that. 

Forty cents of every dollar we spend is borrowed. By the end of 

the decade, the interest on our debt is expected to rise to nearly 
118 

$750 billion in 1 year. That crowds out spending. People would like 

to spend more on a host of projects, and I would like to do that, 

too, but we are going to have $750 billion less because, first, we 

have to pay interest on the surging debt that we have. 

Former Federal Reserve Chairman Alan Greenspan said recently 

that we have almost a 50–50 chance of a bond market crisis in the 

next 2 years. That is the quote up there. It was apparently at the 

Wall Street Journal interview, and I thought that was something 

that we should hear. I mean, this is a man of wisdom. He has been 

around a long time and he said the only question is will this debt 

bond crisis be before—excuse me, that the kind of budget numbers 

that we need be passed before or after the crisis. It would be a lot 

better, I think we would all agree, critical, actually, that we do it 

before the crisis. 

So the path we are in unsustainable, yet I have to say that President Obama in his State of the Union Address announced fundamentally we would just continue as we are. To hear the President’s remarks, one would think his speech had been written 10 

years ago. They were disconnected from the reality of the debt crisis that we face. 

Earlier this week, I said his State of the Union Address would 

be a defining moment for his Presidency and I do not think he rose 

to the occasion. It was a timid speech. It squandered a historic opportunity to rally the American people behind true spending reform. He had the opportunity to look them in the eye, say what the 

real dangers we are facing are, and call on us to meet the challenge 

as Americans will, if properly called. It was far short of the standards set by Governor Chris Christie in New York and Prime Minister David Cameron in the U.K., in Britain, who are making tough 

choices. 

No one forced Mr. Obama to be President. As my wife says, do 

not blame me. You asked for the job. He asked for this job and he 

has a real tough job now, and I think he did not lead effectively. 

He proposed instead that we continue a 5-year plan, and this socalled freeze on domestic spending is not a plan to reduce deficits. 

It is a plan to preserve the deficits, really locking in place the very 

spending levels that had been dramatically increased by President 

Obama in the past 2 years. 

The plan is remarkable not for its strength, but for its weakness. 

In defense of his proposal, the President argued that the government spending is the engine of the economy, that the government 

is the engine of the economy, basically, and he had this airplane 

metaphor backward. The engine of our economy is the private sector, not the public sector. When the private sector grows, it creates 

jobs, new industries, new ideas, and more tax revenue. But when 

the public sector grows, it simply consumes more of what the private sector produces and big government waste is funded on the 

back on small business thrift. 

The American people deserve candor and directness from the 

elected officials. The money to sustain the President’s big government vision, the more investments he called for, is simply not 

there. We do not have the money. Meaningful spending reductions 

are not a choice, they are an obligation. There is no serious alternative. We need to take the tougher road, but the road that leads 
119 

to prosperity. Reducing the size and cost of government may not be 

easy, but it is the only responsible course, the only one that will 

lead us to a better future. 

So, Mr. Elmendorf, I look forward to discussing the issues with 

you now and as we go forward through the next years. Together, 

I believe we can make some progress. 

Mr. Chairman, there is nobody that has seen this and studied it 

more carefully than you, and I look forward to seeking your advice 

as we go forward, also. 

Chairman CONRAD. Thanks, Senator Sessions. You know, it may 

turn out it just falls to us on this committee to put forward a plan. 

It may be that since the Commission did not get 14 of 18, it may 

just be that we have to go back to a process that worked on this 

committee when I first came here, which is to have a real markup 

and for this committee to lead. 

Frankly, I have never thought that on a problem of the dimensions of this one, where we typically do 5-year budgets, almost always do, in this circumstance, which really requires a plan that extends way beyond 5 years, that this was not the forum to sort it 

out. But I am not sure anymore. I am not certain that it is not 

going to fall to us to put a plan out there for our colleagues on the 

floor. I am going to be having discussions with members of the 

committee on both sides to see what the feeling would be about our 

taking this on and laying a plan before our colleagues, because this 

is the Budget Committee. Even though we have typically been limited to 5-year plans, maybe we are the only ones who are going to 

have the opportunity to lay out a comprehensive plan absent some 

kind of summit. 

I prefer, I think the thing that makes the most sense is there is 

a summit between the White House leaders and the House and the 

Senate, because at the end of the day, the White House has to be 

at the table, and unfortunately, in the congressional budget process, the President is left out. The President sends us a budget, but 

then Congress passes a budget and it never goes to the President. 

It never goes to the President for his signature or his veto. 

But if there is not going to be a summit, there is not going to 

be some kind of negotiation, maybe it is going to fall to us on this 

committee to put forward a plan. 

Senator MANCHIN is next. 

Senator MANCHIN. First of all, let me congratulate you on your 

reappointment. 

Mr. ELMENDORF. Thank you, Senator. 

Senator MANCHIN. We are glad too that we all agree on something. With that being said, sir, a couple questions very quickly. 

On health care, as you know, you scored health care, and you see 

where we are right now with the bill being sent over in a repeal, 

and I have heard of the $200 billion score on that that it would cost 

us. Can you elaborate on that and a little bit about the mandates, 

what the mandates would do if they were eliminated? And also 

from a State’s perspective, the 133 percent, Medicaid. And I am not 

sure if anyone really understood where we were—as States at that 

time, where we were coming from, the Governors were coming 

from. Most States do not cover 50 percent of the people that qualify, and we jumped from, let us say, the 50 percent all the way to 
120 

133, which we had a hard time swallowing. If you could talk about 

that, and then I have one final question, sir. 

Mr. ELMENDORF. OK. You raise a lot of complicated issues there, 

Senator. 

The original legislation as enacted last March, both the Patient 

Protection and Affordable Care Act and the health care parts of the 

reconciliation act, set in place substantial expansion of Federal entitlements for health care and paid for that expansion by setting 

in place new tax revenues and by trimming money from existing 

health program, in particular Medicare, and by trimming the 

money from Medicare in a way in which the gains to the Government budget would increase over time because the trimming was 

of a sort of reducing the rate of increase of payments to providers. 

And in our analysis, the combination of the extra tax revenue and 

the reductions in spending laid out in the legislation exceeded the 

cost of the new entitlement, so the legislation had in our assessment last March a small positive effect on the Federal budget. 

Therefore, in the preliminary analysis that we prepared in time 

for the House vote, we concluded that repealing that legislation 

would have a small negative effect on the Federal budget. We are 

in the process of constructing a full cost estimate of the repeal legislation and which we make available, of course, as soon as we 

have completed it. 

One of the many questions we were asked along the way of the 

health debate of the past 2 years, in addition to the Federal budgetary effects, was the effect on State government budgets. And as 

you said, the expansion of Medicaid in that legislation put additional burden on States. The expansion was set in place in a way 

where the Federal Government would pay a larger share of the cost 

of the new people made eligible for Medicaid than it does under the 

current Medicaid program but, nonetheless, would not pay all of 

that bill. And, in fact, the share the Federal Government will pay 

of those newly eligible people actually declines a little bit over 

time. 

Our latest estimate is that the State’s share of the costs associated with that Medicaid coverage expansion will be a little over $60 

billion during the 2011–2021 period, the period covered by this latest outlook. 

Senator MANCHIN. But 2014, that is when the States—it basically goes into effect, the expansion of Medicaid? 

Mr. ELMENDORF. Yes, that is right. We tend to report 10-year 

numbers—11 years counting now, but, yes, it is principally 2014 

and beyond. It is not our place to judge, of course, how States can 

deal with that or whether it is appropriate to do that. I will say 

that estimate incorporates our expectation of changes in State behavior in response to the higher burden that they will face. So our 

estimates cannot incorporate changes in law that you and your colleagues might implement at the Federal level—— 

Senator MANCHIN. Yes. 

Mr. ELMENDORF [continuing]. But our estimates do incorporate 

responses by families and businesses, in this case it is doctors, and 

in this case by State government. 
121 

Senator MANCHIN. If you would do me a favor, because I want 

to move on to another question, if you would just give me—and if 

you could score the reduction from 133 to 100. 

Mr. ELMENDORF. I would have to talk to you about—— 

Senator MANCHIN. 133 to 100, and also if the mandates were removed and if there is an offset there. If we could talk about that 

after. 

Mr. ELMENDORF. Yes, we will talk with you, Senator. 

Senator MANCHIN. The other thing, the Debt Commission, I was 

very proud of the Debt Commission. I will tell the Chairman that, 

and everybody that worked so hard and the courageous stance you 

all took, and I appreciate that very much. But, you know, in West 

Virginia every family sits down and works through their budgets, 

and they set a budget and stick with it. Most States have a budget 

balance amendment, and I want to know what your thoughts would 

be for this Federal Government, because it does not seem to me 

that we are ever going to have the will to tackle the problems that 

we have to and the votes that are going to have to be made unless 

there is a balanced budget amendment that forces us. And it would 

do it over a period of time because ratification would take some 

time to do it, and it would give us a chance to get our financial 

house in order. But it sets a firm grip, and you know the States 

are going through some very, very challenging, difficult times and 

making some difficult cuts, and they are looking at the Federal 

Government and saying, ‘‘Why can’t you all do it? We are doing it. 

We are taking these severe cuts. We are making these tough votes. 

But we do not see anything coming from Washington.’’ 

If I could hear your response on a balanced budget amendment 

on constitutional change of how we do business in Washington. 

Mr. ELMENDORF. So, Senator, I do not think it is appropriate for 

me to make a recommendation for or against that sort of change, 

but—— 

Senator MANCHIN. Can you tell me if it would be—— 

Mr. ELMENDORF. I would make a few observations. 

Senator MANCHIN. Yes. 

Mr. ELMENDORF. I think one is that the set of budget rules set 

in place in 1990 regarding caps on discretionary spending and a 

pay-as-you-go system for mandatory spending and taxes seemed to 

analysts to have been effective at helping to guide decisions of the 

Congress, as long as there was the focus in the Congress on the 

deficit reduction. Once the budget improved and that focus dissipated, then those restrictions were no longer effective. It was 

the—— 

Senator MANCHIN. But wouldn’t a balanced budget amendment—— 

Mr. ELMENDORF [continuing]. Combination of rules—— 

Senator MANCHIN [continuing]. Hold this check in balance? 

Mr. ELMENDORF [continuing]. And the focus in the Congress. 

Amending the Constitution to require this sort of balance raises 

risks that you are aware of. The automatic stabilizers that the Government has, the Federal Government has, the fact that taxes fall 

when the economy weakens and that spending and benefit programs increase when the economy weakens in an automatic way 

under existing law is an important stabilizing force for the aggre-
122 

gate economy. The fact that State governments need to work, as 

you said, against those effects in their own budget, need to take action to raise taxes or cut spending in recessions undoes the automatic stabilizers essentially at the State level. Taking those away 

at the Federal level risks making the economy less stable, risks exacerbating the swings in business cycles. 

Senator MANCHIN. But you would agree that we are very unstable right now? 

Mr. ELMENDORF. Yes, the automatic stabilizers are not perfectly 

stabilizing, but taking them away would have costs that you and 

your colleagues would have to weigh. 

The other thing to say, of course, is that that amendment does 

not suggest—it does not by itself say how you or your colleagues 

would change taxes or spending—— 

Senator MANCHIN. Would you be asked to score a balanced budget amendment? 

Mr. ELMENDORF. No, I do not believe that we score amendments 

to the Constitution. We estimate the effects of legislation that you 

and your colleagues are considering. 

Senator MANCHIN. That would be good. I would like to talk to 

you further about that, but the balanced budget amendment is 

very, very important to me and to every Governor, to every State, 

to every household, especially in West Virginia. And if they can do 

it, they think we can do it also. 

Senator SESSIONS. Mr. Chairman, I did not ask any questions on 

my first comment. Could I have just 2 minutes to ask a question? 

Chairman CONRAD. Senator Ensign, is that OK with you? 

Senator SESSIONS. Without Senator Ensign losing his place. 

Chairman CONRAD. OK. We sort of have an unusual situation. It 

is a little unfair to do that, but you are the Ranking Member, so 

we will make an exception. 

Senator SESSIONS. You are a great Chairman, and I thank you. 

[Laughter.] 

Senator SESSIONS. Magnanimous. 

Governor Manchin, with regard to the score of the health care 

bill, Mr. Elmendorf, the money that you have referred to that came 

in through the bill was Medicare trims or Medicare cuts and tax 

increases, most of which were Medicare tax increases, I believe, 

and that money was used to fund the new program. 

But two things are important. First, Mr. Elmendorf has made 

crystal clear you cannot count that money twice. It cannot increase 

Medicare and fund the new program. This is a very serious matter 

that we are talking about. Very serious. And so isn’t it true that 

the Treasury—the new health care program is not given new 

money to fund the new health care program, but the money they 

got from the Medicare tax increases and the Medicare cuts is borrowed by the Treasury and that the Treasury owes that money 

back when Medicare continues in default or goes into default and 

claims its money back? 

Mr. ELMENDORF. So let me try to—so Senator Sessions is referring to a set of letters that we sent at his request in December of 

2009 and January of 2010, and the way I would describe this is 

that the analysis that CBO does of legislation is done on a unified 

budget basis, taking into account all the pieces of spending and 
123 

revenues. And we report the net effect of legislation on spending 

and revenues and the deficit as a whole. 

The cutbacks in Medicare spending, which were large in that legislation, as I have said, together with revenue increases, more than 

offset in our judgment the extra spending on the new health entitlements and expanded health entitlements. 

It is also the case, as you are saying, Senator, that the savings 

in Medicare, and particularly the savings in the Hospital Insurance 

part of Medicare, HI or Part A of Medicare, then lead to a greater 

accumulation of bonds in the HI trust fund. As we wrote in the letter to you, those bonds have important legal meaning. They are 

real U.S. debt backed by the full faith and credit of the U.S. Government like the debt sold to the public. 

They do not have independent economic meaning in the sense 

that the fact that the trust fund has an accumulation of bonds does 

not give the trust fund some separate way to pay Medicare benefits, except, as you say, Senator, by coming back to the Treasury, 

redeeming those bonds, and getting that cash in the future. 

Another way to say that is just that paying Medicare benefits in 

the future relies on tax revenue that will be raised in the future 

or borrowing that will be done in the future, cannot depend directly 

on the bonds in the trust fund. 

Senator SESSIONS. I think that is fair. I think all of us need to 

understand that. But I would go a little bit further. It increased 

the internal debt of the U.S. Treasury because the money expended 

for the health care program is borrowed from Medicare, at least a 

substantial portion of it. And when Medicare, since we know it is 

going into default, inevitably will call those bonds, the United 

States Treasury will either have to raise taxes or borrow it on the 

economy or deflate the currency, which are the three choices governments have. Isn’t that basically correct? 

Mr. ELMENDORF. I mean, you are right. The money is being borrowed from the Medicare Trust Fund, and that—— 

Senator SESSIONS. It increases the internal debt, the gross debt 

of the United States. 

Mr. ELMENDORF. And it increases the gross debt of the United 

States, yes, absolutely. 

Chairman CONRAD. I thank the Senator, and I thank him actually for making the point because we have that same issue with Social Security. You know, the hard reality is—I hear it all the time. 

Social Security has trillions of dollars of assets. That is true. There 

are trillions of dollars of assets. They are special purpose bonds 

backed by the full faith and credit of the United States. Those are 

real assets. The problem is the only way those bonds are redeemed 

is out of current income, and Social Security is going to go permanently cash negative in 5 years. 

So I have to say, those who have—and I have received the lash 

from those who say, well, you should not have to touch Social Security because there are trillions of dollars of assets. It is true there 

are trillions of dollars of assets. It is true that they are backed by 

the full faith and credit of the United States. It is also true that 

the only way those bonds get redeemed is out of the current income 

of the United States. And we are about to see a dramatic shift in 

the budget circumstance when we go to having hundreds of billions 
124 

of dollars a year of surplus in Social Security that the general fund 

could borrow to having a circumstance in which there are hundreds 

of billions of dollars of debt that has to be serviced out of current 

income. 

Senator Ensign, I apologize to you because you kind of got delayed here. 

Senator ENSIGN. It is OK, Mr. Chairman. The important thing is 

getting some of these issues out on the table. What you just talked 

about I think is of absolute critical importance. You talked about 

the full faith and credit of the United States. That is really what 

we are dealing with here. 

The Chairman held up, at the beginning of your talk, about 

Moody’s and Standard & Poor’s, talking about the AAA rating of 

the United States. Japan was just downgraded to AA. What would 

a downgrade from AAA to AA of the United States credit rating do 

to the interest rates and do to your budget projections? Because, 

by the way, your budget projections, in my opinion—I know you all 

try to be conservative, but just as we have seen last year, I think 

this year you projected a $1.1 trillion deficit last year, the year before for this year, right? And it turned out to be 1.5. And some of 

that was because of the tax policy that was passed at the end of 

the year. I realize that. I am going to ask a question on that. But 

the bottom line is these things can change radically very quickly, 

and this full faith and credit idea, this idea of if the bond raters 

downgrade our bonds, if the Fed is successful—and a lot of people 

think they are going to be successful in raising inflation, because 

that is what they are trying to do right now with their monetary 

supply. Those all lead to higher interest rates, higher than what 

you are projecting. And so that is basically the question. If it goes 

to AA, what does that do to your projections for this deficit? 

Mr. ELMENDORF. So if the Federal Government’s credit rating 

were lowered, that would certainly push up the interest rates the 

Government would pay, and thus the interest payments we would 

have to make. We have not attempted to quantify how much a 

given reduction in rating would affect interest rates, but it certainly would be an adverse effect for the budget. 

Senator ENSIGN. And it would not be insignificant. it would be 

very significant. Would you agree with that statement? 

Mr. ELMENDORF. I think it would be significant, Senator, absolutely. 

Senator ENSIGN. Yes. And so the point is here we do not—I think 

that you talked about this. The sooner we make these changes, 

maybe the—they are going to be painful. But the sooner we make 

them, maybe a little less painful. As Alan Greenspan talked about, 

we are going to have to make these changes. It is just a question 

of do we do them in the middle of a crisis or do we do them to 

avoid the crisis. And that I think is the significant part of this. 

Senator Cornyn mentioned, and, actually, I think Senator Sessions mentioned, we need Presidential leadership right now, and 

the Chairman has talked about this, talked about this Committee 

doing its job. I could not agree more. The President needs to lead 

right now. These issues that we are talking about—and you have 

been around. You have seen this, Dr. Elmendorf. These cuts—it is 

much easier to get reelected by giving money away, OK? None of 
125 

us want to make these tough political votes. But we have a Democrat President, a Republican House, and a Democrat Senate right 

now. In my opinion, if the President would lead, join the two parties together, we could do actually what is right for the American 

people. But it is up to him to lead. He is the President. He is the 

only one with the bully pulpit. Our little microphones here do not 

echo through the country. He had it on the State of the Union. I 

think he failed on the State of the Union, personally, but he still 

have plenty of opportunity. We have the CR coming up. We have 

the debt ceiling coming up. There are other opportunities. He has 

his budget coming up. We have plenty of opportunities for the 

President to lead. And forget our party labels. This is about the future of our country. The debt that you are talking about, the interest on the debt, you have said that is unsustainable. It is. It is 

unsustainable. 

Dr. Elmendorf, the reason you got reappointed by Republicans 

and Democrats is because you do try to call, you know, the fair 

shots. We do not always agree. You know, there is always—because 

what you do is unbelievably difficult to predict. But you play within 

the rules that you are given, and some of the rules are not necessarily the best rules for making the most accurate predictions as 

well. But the bottom line is I think all economists agree that our 

country is in serious trouble if we do not deal with this debt and 

deficit problem. 

Four hundred billion dollars that the President talked about the 

other night, what percentage of that is of the debt that we are 

going to accumulate over the next 10 years based on your projections? 

Mr. ELMENDORF. Well, under the baseline projections in which 

these various tax provisions expire and so on, we expect the Government will accumulate about $7 trillion in debt over the next 

decade, so $400 billion is a little over 5 percent of that. 

Senator ENSIGN. It is a drop in the bucket, and actually it will 

probably—we all think it will probably be lower, especially if you 

talk about spending projections, if you talk about the alternative 

minimum tax, if you talk about the doc fix, if you talk about all 

those things that we know are going to happen. 

Mr. ELMENDORF. So if we extend all of those expiring provisions 

in the way that I talked about at the beginning, we look for a debt 

of $12 trillion under that view of current policy over the next decade. And $400 billion is a few percent of that. 

Senator ENSIGN. Yes, and as far as total spending during that 

time, projected spending during that time, what percentage of it? 

My back-of-the-napkin calculations are it is less than 1 percent. 

Mr. ELMENDORF. Yes, that is right. 

Senator ENSIGN. So the President has basically said, OK, we are 

going to reduce spending by less than a penny out of every dollar, 

OK? When this country—all economists say it is unsustainable. 

This country is literally headed for a financial crisis that we maybe 

have never seen. And for us to sit here—that is why it is so important for us, in my opinion, to join together as Republicans and 

Democrats with the President to tackle this problem. 

You know, Mr. Chairman, what you said with the budget, I am 

willing to join whoever it is, but we have to make such difficult— 
126 

these are going to be painful—politically painful is what I mean by 

painful—politically painful choices to make. 

I agree with Senator Wyden. We have to have the kind of tax 

policy because you cannot just cut your way out of this. You have 

to actually cut and grow. You have to do those at the same time. 

It is the only way you are going to solve this crisis, this financial 

crisis that could be looming on our country. 

So I know there was a lot in there. The only last thing I have 

is State pensions now, Moody’s is talking about requiring the 

States to put their pension obligations on their books. OK? Now, 

you talked about these stabilizing factors. What does that do potentially to, you know, the whole economic projections going off into 

the future? 

Mr. ELMENDORF. So we are actually in the process of completing 

an issue brief on State pensions, which we will release very shortly, 

Senator. I think that is an important topic. The issue about the 

stabilization was mostly in the context of sort of year-to-year behavior of State budgets during a recession, an economic downturn 

and a recovery. But as you say, a very important long-term financial issue for States and local governments is the commitments 

they have made to pay certain benefits to retired government workers and whether they have or have not put aside sufficient money 

to meet those. 

Senator ENSIGN. Right. Mr. Chairman, I realize my time has expired. Just a last comment. It is not in the future. You are seeing 

this. My State is dealing with it right now. My cities are dealing 

with this right now. Cities and States across the country are actually dealing with this problem right now. They know most of it is 

in the future, but it is actually affecting their State budgets currently. 

Mr. ELMENDORF. Yes, that is right. 

Senator ENSIGN. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, and thank you for your courtesy, 

Senator Ensign. 

Senator WHITEHOUSE. Thank you, Chairman. And with respect to 

your comment about this Committee becoming a forum for doing 

some of the significant debt and deficit work that we may need to 

do, I can assure you that I am prepared for that work, and I think 

every member of this Committee would be prepared for that work. 

So if it is your judgment to proceed in that way, I think you will 

find that you have both interested and hard-working Senators who 

are prepared to engage in that discussion. 

Chairman CONRAD. I thank the Senator for that. You know, I 

have thrown this out as an idea. I think it is going to take discussion among all the members of this Committee. Again, I personally 

would prefer that we have a summit that involves the President 

and the leadership of the House and the Senate. But if that is not 

to occur, it has to start somewhere. 

Senator WHITEHOUSE. Director Elmendorf, if you have an insurance company and it collects premium in order to make payments 

in the insurance program, it builds up reserves that the insurance 

company holds. And there are times when fires take place, 

Katrinas take place, lives that are insured expire, and you have to 
127 

draw on those reserves. And in those periods, the insurance program may go cash negative but remain fully actuarially sound. 

As I understand it, our problem with Social Security is that it 

is and has been actuarially sound, will be actuarially sound 

through 2037; but that reserve fund of the incoming premium that 

was set aside was not left alone. Congress took it, borrowed it, left 

an IOU in its place, and spent it on other stuff. But I think—I see 

you nodding. I think it is important to point out that Social Security as a program is not actuarially at fault for the need that we 

will have to fund the cash needs. The problem that caused the need 

to fund the cash needs is not that there is an actuarial problem 

with Social Security, at least not for a quarter century. And I suspect with the President’s recommendation that you raise the payroll tax cap, that even goes away and it becomes fully solvent indefinitely. What has happened is that management went into the 

reserves and took them out and spent them on something else. And 

if this were a private company and I were still an Attorney General, I would probably be prosecuting that management. But this 

is Congress, and it is all done in the light of day, and everybody 

was in on it, and it is part of the way in which we have done business. 

Is that a fair description of our Social Security problem? 

Mr. ELMENDORF. So let me just say, back to the parts that I 

think I understand and that I think I agree with. Social Security 

has sufficient resources, meaning the bonds held by the trust fund, 

that together with the expected inflow of payroll taxes it can meet 

benefits under current law for decades to come. 

As you are saying and as Senator Sessions said, and Senator 

Conrad as well, the rest of the Government in a sense used the 

cash, left the trust fund with bonds, which are valuable assets. If 

you were running a private insurance company and had U.S. 

Treasury securities in its vault, you would view that as a pretty 

safe investment for that insurance company. The problem is that 

the rest of the Government used that cash. If, in fact, the Government had run surpluses equal to the saving of the trust fund over 

all of those years, then the Government as a whole would be in better financial shape due to the surpluses. It would be in much better 

shape to meet those commitments in the future. But, in fact, the 

Government has not run surpluses commensurate with the increasing balances in the trust fund, and thus, the Government has not 

improved its financial condition using that money. It has mostly 

used that money for other purposes. As Senator Sessions notes, the 

health legislation enacted last March essentially does with the 

extra money building up in the HI trust fund. 

Senator WHITEHOUSE. But it is not an actuarial flaw in the Social Security program that causes the need to fund the reserves. It 

is the fact that the reserves were removed and spent on other 

things and now need to be replaced. 

Mr. ELMENDORF. I think that is fair, Senator, but I would just 

say again CBO tends to look at the budget in a unified budget 

sense. 

Senator WHITEHOUSE. No, I understand. 

Mr. ELMENDORF. In some ways, the underlying problem here is 

to have a trust fund which is building up assets—— 
128 

Senator WHITEHOUSE. That has no funds and nobody—— 

Mr. ELMENDORF [continuing]. Inside a budget that is essentially 

a cash-flow budget. And that is true for the Social Security trust 

funds, and it is true for the Hospital Insurance trust fund in Medicare as well. And once one has a trust fund building up assets inside a budget that is essentially viewed on an annual cash-flow 

basis, there is intrinsically in that a disconnect—— 

Senator WHITEHOUSE. It is similar to the—— 

Mr. ELMENDORF [continuing]. And the risk of the double counting 

that Senator Sessions refers to, just to emphasize, not that we cannot keep the numbers straight, but that one has to be careful in 

thinking and talking about—— 

Senator WHITEHOUSE. My time is running out. I am sorry to interrupt. But is it not similar to the difference between a liquidity 

shortfall and an insolvency problem? You still need—— 

Mr. ELMENDORF. The Federal Government as a whole, there is 

a problem that the total revenues that are expected to come in are 

not up to the total spending expected to go out. And it is really at 

the level of the overall Government that I prefer to focus, and I 

think that budgeteers have focused for a number of decades. 

Senator WHITEHOUSE. Let me go on to one other point. I do not 

have a lot of time remaining, but it has been recently said that our 

debt is the product of acts by many Presidents and many Congresses over many years. I do want to single out one President, and 

that was President Clinton. As I recall, under President Clinton 

the Nation saw its first budget surpluses in decades. And if my 

recollection is correct, in January of 2001, immediately after President Clinton left office and when the Bush administration assumed 

office, it was the finding of the nonpartisan Congressional Budget 

Office, your operation, that the Clinton era trends, if they had been 

continued forward, would have led to a debt-free United States of 

America by the end of the last decade. Is that correct? Do I recall 

correctly? 

Mr. ELMENDORF. I believe that is correct, Senator. 

Senator WHITEHOUSE. So I think it is fair in terms of that to at 

least exempt President Clinton from responsibility for our deficit. 

He left us on track to being an actual debt-free Nation. 

Mr. ELMENDORF. So as you know, Senator, I do not take sides on 

Presidents or Members of Congress. It is worth emphasizing that 

a number of things happened in 2001 that the CBO baseline projections in January of that year did not anticipate. One was very important changes in tax policy, which our baseline is not designed 

to anticipate. The other was—— 

Senator WHITEHOUSE. But those were not—— 

Mr. ELMENDORF [continuing]. A recession—— 

Senator WHITEHOUSE. But those were not the fault of President 

Clinton. He was out of office by then, correct? 

Mr. ELMENDORF. Again, I am not—I do not talk in President 

terms. I am talking about—— 

Senator WHITEHOUSE. They took place after the President had 

left office. 

Mr. ELMENDORF. That is correct, Senator. 

Senator WHITEHOUSE. It is a matter of calendar. 
129 

Mr. ELMENDORF. The other thing that happened was that the 

economy fell into a recession, suffered a very large decline in the 

value of stock prices, and then—— 

Senator WHITEHOUSE. Again, after President Clinton left office. 

Mr. ELMENDORF [continuing]. Revenues fell very—well, in fact, at 

the time there was some dispute about exactly when the recession 

had started. The—— 

Senator WHITEHOUSE. But as of January 2001, you were predicting a debt-free Nation. Your organization was predicting a debtfree Nation. 

Mr. ELMENDORF. Yes, but the point I am trying to make is that 

there were economic developments and changes in the amount of 

tax revenue collected for a given economy that were also adverse 

to the budget outcomes. And I do not remember offhand—I think 

CBO has looked at this, but I do not remember offhand how much 

of the deterioration in the budget that occurred after that was due 

to legislation and how much was due to revisions to the economic 

and technical projections based on—— 

Senator WHITEHOUSE. I understand, and I am not trying to fault 

your predictive capabilities, and I am not trying to fault the January 2001 report. I am just trying to point out that at least one 

President really did the best that he could. And that is not something you need to react to, because I know you do not speak in 

those terms, but for the sake of my colleagues. 

Thank you. My time has expired. 

Chairman CONRAD. Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. I would like to just 

comment on your earlier comments in terms of I believe this country hungers for leadership, and I certainly would be one willing to 

step up to the plate, also, and take the lead on this budget, trying 

to restore some fiscal sanity to this nation. 

Chairman CONRAD. Well, I thank the Senator for that. 

Senator JOHNSON. Thank you. 

Dr. Elmendorf, just a couple of quick questions. Getting back to 

dynamic versus static scoring, does the CBO ever go back and 

study what estimates it had done from the standpoint of revenue 

and figure out what the actual results were and just compare what 

your estimates were? 

Mr. ELMENDORF. We certainly do go back and look at our performance as best as we can evaluate it. We do not do the revenue 

estimates. We do the revenue baseline projections in this report, 

but the estimates of the effects of particular pieces of revenue legislation are done by the staff of the Joint Committee on Taxation, so 

we do not go back and reevaluate those. 

We do look at our economic forecasts and report once a year, I 

think, on how accurate they have been. Every outlook or update reports on the revisions from the previous outlook, so one can see 

where—you can see as well as we can see where we have gone 

wrong. 

We also look back when we can at how different pieces of legislation have unfolded relative to our estimates on the spending side. 

That can be harder to do than one might expect, because many 

forces are impinging on the outcomes, and the fact that the outcome looks different than we thought it would at the point the leg-
130 

islation was passed might be that we had the wrong estimate of 

the legislation, or it might be we had the wrong estimate of everything else that was going on. 

Senator JOHNSON. Sure. 

Mr. ELMENDORF. So it is harder to tell, but we do try. 

Senator JOHNSON. I guess I am really trying to zero in on revenues, in particular, and I am thinking in reaction to if taxes are 

going to increase, do we really get this tax revenue that we were 

expecting, to do those types of studies. So if you know of anybody 

who has done that, I would be interested in seeing that in my office. 

In terms of scoring the health care bill, did you estimate how 

many businesses would probably drop coverage, and as a result, 

how many individuals would be put into the exchanges and then 

what the cost of that effect would be? 

Mr. ELMENDORF. Yes, Senator. So our estimate of the effects of 

the legislation on the number of people with employer-sponsored 

insurance, which was a small net decline, represented the net of a 

larger gross decline with some offset of additional insurance coverage by some employers. And that estimate accounted for the new 

subsidies being created through the insurance exchanges and the 

expansion of Medicaid. It also accounted for the existing subsidy 

provided through the tax exclusion for employer-sponsored health 

insurance. It accounted for the penalties that were imposed on individuals and businesses and the small business tax credit and so on. 

And we thought that the overall effect of that set of provisions 

would be that some number of people would not receive insurance 

through their employers who otherwise would have. Some others 

would get insurance through their employers who would not have 

otherwise. And the net of those was fewer people getting health insurance coverage from their employer than would have been the 

case under prior law. 

Senator JOHNSON. Do you have some estimated numbers? Is it a 

million people—— 

Mr. ELMENDORF. We do, actually. So we estimated that in 2019, 

that three million fewer people would have employer-sponsored 

health insurance, and that reflects the net of eight to nine million 

who would have had an offer of employer coverage under prior law 

and would not under the legislation that was enacted, six to seven 

million who would not have been covered under prior law but 

would have had the coverage under the legislation, and another 

one to two million people who would have an offer of employerbased coverage but would get covered in exchanges instead either 

by having an exemption to some of the rules or by sneaking around 

the rules. 

Senator JOHNSON. Can you give my office the details of that? 

Mr. ELMENDORF. Yes, of course. 

Senator JOHNSON. OK. I would like to talk a little bit about—you 

were talking about the automatic stabilizers of a balanced budget 

amendment. Would an amendment that would just limit spending 

to 20 percent of GDP, or 18 or 19 percent of GDP, would that kind 

of circumvent that problem? Would that allow us to have those 

automatic stabilizers still be effective? 
131 

Mr. ELMENDORF. Well, it would allow the stabilizers on the revenue side of the budget to still be effective, but it might impinge 

on the stabilizers on the spending side of the budget. The fact that 

even apart from an extension or expansion of unemployment insurance benefits, if more people lose their jobs, more people can collect 

benefits. Under a given set of rules for what used to be called Food 

Stamps and is now called the Supplemental Nutrition Assistance 

Program, more people get benefits. So you would still be impinging 

on that. 

I also, again, do not know what changes in policy you and your 

colleagues would choose to make to bring outlays down from the 

share of GDP they are now to the sort of levels that you are talking 

about. And as we discussed a few minutes ago with a number of 

members of the committee, the discretionary spending, and particularly the non-defense part of discretionary spending, is only one 

piece of the budget and not as large a piece as I think many people 

believe. As you understand, most of the spending the government 

does goes to Social Security or Medicare or Medicaid, that the defense spending—everything apart from those large health programs 

and Social Security and defense and the net interest payments on 

the debt, everything else is about a fifth of government spending 

at the end of the decade, by our projections. So the sort of reduction 

that you are talking about would, as you understand, require 

changes across a large swath of government spending programs. 

Senator JOHNSON. I guess the point I am getting at, if you had 

a preference to choose between a constitutional amendment to balance the budget versus one to just limit spending to a certain percentage of GDP, do you have a preference? 

Mr. ELMENDORF. I have not thought about that question, Senator, and even if I did, we are not—I do not come here to discuss 

my preferences but the analysis that CBO has done, and we can 

look more carefully into that question. 

Senator JOHNSON. OK. Just one final question. It might actually 

be kind of a long answer, but maybe not. Can you, in layman’s 

terms, describe to a family what a debt crisis would look like. What 

is going to be the effect on individuals? 

Mr. ELMENDORF. So if—I will try. If the people we are relying 

upon to lend the Federal Government money became skeptical that 

the government would manage its budget in a way that they would 

get repaid and thus would start to demand higher interest rates to 

compensate them for that extra risk, that could push up interest 

rates throughout the economy that would make it harder for households to borrow money. It could make it harder for the businesses 

for which they work to borrow money to invest and expand. 

It could—and on the Federal side, if the government were unable 

to borrow the money that it was needing to borrow given the paths 

of spending and revenue, it could require drastic changes, sudden 

large changes in the taxes people are paying to the government 

and in the benefits they are receiving from the government of the 

sort that we are seeing in some European nations that have hit a 

fiscal crisis. And the magnitude and suddenness of the changes and 

what the government would have to do under those circumstances, 

combined with the effects on the rest of the economy of that rise 

in interest rates, would clearly be damaging to people. 
132 

Senator JOHNSON. Thank you. 

Chairman CONRAD. I thank the Senator. 

Senator Begich is recognized. 

Senator BEGICH. Thank you very much, Mr. Chairman. 

A couple quick things. First, Mr. Chairman, I think the idea of 

a summit is fine, but I really believe that the role of the Budget 

Committee should—as a former mayor, what we used to do, we 

would present our budget to the Budget Committee. We would 

have to spend the time to explain. Departments would come in and 

go through it. I know there are jurisdictional issues, but it is a 

Budget Committee, and in my view, I think that is a role, and 

rather than wait to find out what the role is, we should seize it and 

do it and I think this is a great year to do it. I am a strong believer 

in that. 

I am happy to sit here and go through departments and try to 

figure out what the heck they are up to and give our version, hopefully in a collective way, of how to move this budget forward, or future budgets, because the process of a CR is damaging and is irresponsible. Those that continue to move that forward on 1-month increments, and I think you would agree, I am hopefully not speaking for you here, but CRs are bad. They are not healthy for any 

type of government to do. So I think it is in our role and ability 

to do it, so I would—— 

Chairman CONRAD. If I could just intercede for one moment, because I think this point—— 

Senator BEGICH. Do not take too much of my time—— 

Chairman CONRAD. No, I will not take any of your time. 

Senator BEGICH. OK. 

Chairman CONRAD. I will not take any of your time. 

Senator BEGICH. I did that so the staff would take note. 

Chairman CONRAD. It is the Chairman’s time. Here are things 

people on this committee need to appreciate, especially new members. No. 1, we typically only do a 5-year budget. Almost all of the 

budgets that have been done by Congress have been 5 years. And 

the problem is, the plan that the country needs goes well beyond 

5 years. 

The second big problem we have is we do not determine the specific policies that are adopted by the committees of jurisdiction. We 

give them numerical targets. We tell the appropriators how much 

they can spend. We do not tell them how to spend it. We do not 

have that authority. We tell the Finance Committee how much 

money to raise. We do not tell them how to raise it. And one of the 

difficulties of the Budget Committee being the lead on taking on 

this task is a lot of the compromises that need to occur go to the 

details, and unfortunately, we do not control the details. 

So we tell the Finance Committee how much money to raise. We 

cannot impose on them our views of the policy that ought to be attached to that. That is, we cannot tell them, OK, broaden the base 

to raise this money and simultaneously lower the rates. We might 

make that assumption, and in anything we pass, we can state what 

our assumptions are. But this committee does not have the authority to determine those specifics. 

So it really puts the Budget Committee in a very difficult position to reach agreement on a multi-year plan that has many di-
133 

mensions to it because the specifics become critical. You know, 

what do those revenue numbers really represent in terms of policy? 

Again, that will not come out of the Senator’s time. 

Senator SESSIONS. But it also is a little bit easier, too. So we do 

not have to tell exactly what to cut. Maybe we do have an opportunity to provide a little leadership. 

Chairman CONRAD. Well stated. Senator Begich. 

Senator BEGICH. Mr. Chairman, I agree with both of you on that. 

You know, if we have those discussions, we may have assumptions 

that we can lay down, but then we at least can know what those 

numbers will be, so I would encourage that. 

The second thing, I think, and before I ask you a question, I 

want to echo what Senator Wyden said on a broader sweep, and 

that is if I was to pick two items, if we were limited to two items 

that this committee would focus on, one would be the larger budget 

and the second would be tax reform. The discussion of tax reform 

in the broader sense, not these temporary fixes which I think you 

said earlier, and I know this as a small business person, there is 

no certainty with these 2-year fixes. Businesses are not going to invest hundreds of millions of dollars, let alone billions of dollars, 

when they have no clue what the tax policies of this country are. 

They are going to go to countries that are more stabilized in this 

element and invest there. And so the certainty of what our tax policies are, I think, are going to be very critical long-term, and these 

2-year fixes, again, I do not think are responsible. We need to look 

at the longer term. So I would echo what Senator Wyden said in 

regards to tax reform. 

A couple quick questions, and it may be information you can just 

provide to my office. One is we hear on a regular basis, and I do 

not know if it would be out of your office or maybe it is out of Joint 

Tax, I am not sure which one would be the right one, but I want 

to get a good, clear picture. I think I know this answer, but the picture on who really owns our debt, because every time you hear it, 

you hear all these foreign countries, which they do own a portion 

of it. But the biggest holders are retirement funds, Social Security, 

trust funds, is that a fair statement? 

Mr. ELMENDORF. Yes, and we actually released a report in December on Federal debt and interest costs—— 

Senator BEGICH. And who owns it? 

Mr. ELMENDORF [continuing]. And it is owned largely by people 

in this country, but also importantly by people overseas. 

Senator BEGICH. Right. 

Mr. ELMENDORF. So it is a combination of both domestic and foreign—— 

Senator BEGICH. Do you know the percentage ratio, just roughly? 

Is it about 70–30? Sixty-forty? 

Mr. ELMENDORF. It is about half-and-half. 

Senator BEGICH. Fifty-fifty? 

Mr. ELMENDORF. Yes. 

Senator BEGICH. If you could provide that—we may have it, but 

just if you can provide that segment, that would be great—— 

Mr. ELMENDORF. Yes. Of course, we will do that. 

Senator BEGICH [continuing]. Because every time you hear it, it 

is the foreign countries own ours, and actually, the big chunk of 
134 

our retirement funds—I can tell you, as a former mayor, we invested in U.S. securities all the time because it is the safest and 

the right place to put the money. 

The second, and I know Senator Johnson asked this question, is 

it also fair to say to families’ impact, it would be on a local level, 

that it would impact direct services and potential services that 

local governments could provide because their ability to borrow 

would diminish if there is a debt crisis. Is that a fair-I just want 

to make sure that is on the record, too. 

Mr. ELMENDORF. Yes, I think that is right, Senator. I mean, it 

is very difficult to predict what will happen if there is a sudden 

shift of sentiment against buying U.S. Treasury debt. We have not 

seen that in this country. We have not seen it in the world’s most 

important financial market. We do not know—— 

Senator BEGICH. But it is a multi-layer effect. It is not just the 

Federal Government—— 

Mr. ELMENDORF [continuing]. But the effects, I expect, would ripple through the financial system in this country and would make 

it harder for borrowing for local and State governments as well as 

families and businesses. 

Senator BEGICH. Very good. Let me ask you, and it was an interesting question that Senator Johnson asked—and I have actually, 

when we have had some meetings, this is a question I always 

have—in these reports, which are great reports, what I would love 

to get, and if it is possible, and some of the baseline information, 

maybe the GDP, maybe unemployment, whatever those items are 

that you kind of utilize as some of your base data in projecting, 

what I want to see is when I see a chart like this, I actually—not 

that I want to question necessarily your track record. It helps me 

get a sense. 

If I look at 2010, it is a flash point. What I want to see is projections that were projected and what happened actually, and the reason that helps, at least me, have a better discussion of—an analysis of it. So, for example, the questions you had from Senator 

Whitehouse, here are some of the things that changed. Why is that 

important for me? Then I know policy that we impact has some impact of what you projected originally. Is that available? If we said 

to you, here are four or five areas that you project on into the future, can you go back 5 years and tell us, when you sat here, or 

whoever sat here, projected, and then what those deviations and 

what happened, is that something that—— 

Mr. ELMENDORF. Yes. I think we can do that, Senator. We are 

willing to talk with you about exactly which—— 

Senator BEGICH. Sure—— 

Mr. ELMENDORF [continuing]. Of the thousands of variables you 

are most interested in, but we certainly keep the records and look 

at them ourselves about how these projections have turned out. 

Senator BEGICH. Great. 

Mr. ELMENDORF. So we can put together, I think—— 

Senator BEGICH. We will have our staff work with your staff. 

Mr. ELMENDORF. Yes. 

Senator BEGICH. And the goal there is, I believe if you get information like that, you can kind of look back and then we know if 

we are the cause which has an effect, or is it something else, and 
135 

that helps, I think, form policy or future discussions we might have 

here. 

The last thing, just as I sit on the Armed Services Committee 

and we are going through, and we are going to go through a process here from Secretary Gates and all the reductions that will be 

occurring or are projected, do you participate in that at any level 

in the sense of this. As we know, 95 percent, approximately, of 

every Defense Department dollar has a U.S. impact, because they 

are very focused. Have you done any cross-analysis of, OK, if that 

cut occurs as projected, this is the kind of job impact it would be, 

because they are one of the highest in every department we have 

that puts money into this economy. Have you done anything like 

that? 

Mr. ELMENDORF. Umm—— 

Senator BEGICH. Or are you equipped? Two parts. Have you done 

it? Are you equipped to do it if you have not? 

Mr. ELMENDORF. I think we have not done it. I think we could 

do it. 

Senator BEGICH. OK. 

Mr. ELMENDORF. So we have looked at the economic effects of a 

variety of policies being considered by you and your colleagues, including about a year ago we did an analysis of a whole collection 

of policies that were being discussed as possible ways of increasing 

output and employment, boosting the pace of the recovery, and we 

looked at a number of changes on the tax side, a number of possible changes on the spending side. 

Senator BEGICH. OK. 

Mr. ELMENDORF. We did not look at defense spending separately. 

We looked at infrastructure spending and we looked at changes in 

grants to State and local governments. 

Senator BEGICH. My time has expired, so maybe we will work 

with you on it, because Defense Department spending, as you 

know, is a huge part of our budget and the cuts that he is recommending are fairly significant, probably the most significant of any 

department that will be reviewed. But because they have such a 

high percentage of job impact of any department in U.S. jobs, we 

will talk to you about, maybe through the Armed Services Committee or—I just think it is an analysis that should be done. 

Mr. ELMENDORF. Yes, Senator. We will be happy to talk with 

you. 

Senator BEGICH. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Senator. 

Senator Portman. 

Senator PORTMAN. Thank you, Mr. Chairman. 

It is good to be here to hear from you, Dr. Elmendorf. I appreciated working with the Congressional Budget Office when I was 

on the House Budget Committee, and, of course, at OMB. We did 

not get a chance to work together since you came after that, but 

I appreciate your testimony today. 

We find ourselves here at a very difficult time, do we not, a day 

after you have told us that we are facing the biggest deficit in the 

history of our country, in fact, in the history of the world this year. 

By the way, these projections are notoriously wrong. 
136 

Mr. ELMENDORF. Yes. 

Senator PORTMAN. Unfortunately, this one looks like it is more 

accurate than some. I think Senator Whitehouse, perhaps inadvertently, just explained to us how wrong CBO projections can be 

sometimes, as they were in 2000, but the fact remains, we face a 

fiscal crisis. I am delighted to be on this committee. I just found 

out last night I was going to be joining Senator Conrad, Senator 

Sessions, and others, and I was really encouraged as much as I was 

discouraged by your projections, encouraged by what I heard today 

from my colleagues, including you, Mr. Chairman, and you, Mr. 

Sessions. 

I think what you said earlier, Chairman Conrad, is very significant in terms of looking perhaps beyond the 5-year, maybe a 10- 

year budget and also trying in a bipartisan way to do what all of 

us, I think, acknowledge needs to be done, which is to find common 

ground and solve this crisis before we have the kind of economic 

repercussions you talked about earlier. 

I had a couple of questions that I wanted to focus on and that 

really kind of just go to me understanding more how you feel about 

this crisis in your gut. If you were to say what is the single largest 

fiscal crisis or fiscal problem, fiscal issue facing our country today, 

what would you say it is, if you had to identify one thing? 

Mr. ELMENDORF. Well, Senator, again, I appreciate your confidence in my gut, but I rely on the analysis that we do at CBO. 

The risk of fiscal crisis, in our view, comes from the imbalance between spending and revenues. That imbalance comes in the projections because spending rises to a share of GDP that we have not 

seen before in this country—— 

Senator PORTMAN. OK, but what is—— 

Mr. ELMENDORF [continuing]. And revenues rise above their historical average, but not as far as spending, in these baseline projections. 

Senator PORTMAN. But what is it in the spending and in the revenue side that troubles you most? What is the single thing? 

Mr. ELMENDORF. Again, it is not a matter of troubling. It has to 

be your choice and your colleagues’ choice what parts of the budget 

you want to address. As an arithmetic matter, of course, the part 

of the spending that is growing very rapidly and growing much 

faster than GDP is spending on the government’s large health care 

programs, both because of the aging of the population, and much 

of that money goes to older Americans, and because of rising health 

spending. 

Senator PORTMAN. All right. I am encouraged by your answer, 

because I think it is health care, and I think it is not just health 

care as it relates to Medicare and Medicaid, which obviously drives 

the growth of those programs, and your projections here of 7 percent growth is, in the Chairman’s words, unsustainable. But it also, 

of course, affects the private sector job growth, which leads to lower 

revenues than we would otherwise have. So I am going to take 

your answer to be health care, which I think is the right answer. 

What do you think the most significant risk is in your baseline 

projections? 

Mr. ELMENDORF. I have a long list of worries, Senator. You 

know, I think in terms of the budget projection, as you said, these 
137 

projections are notoriously wrong because it is a very difficult business. But the crucial underlying factor here, as we were just discussing, is the rising number of older Americans relative to working Americans and the rising cost of health care relative to other 

things in the economy. And those fundamental forces have been 

foreseen for decades and, I think, are inexorable under current 

policies. So although the specifics will undoubtedly not turn out 

this way, I think there is a reason that for many, many reports 

now, CBO and many outside analysts, of course, have been looking 

at a deteriorating fiscal picture. But I do not view that as—— 

Senator PORTMAN [continuing]. Your projection, do you feel the 

biggest risk is in the area of government expenditures on health 

care? 

Mr. ELMENDORF. So I think that is one very large uncertainty. 

Senator PORTMAN. How about interest rates? We talked about it 

earlier, but one of the concerns I have in looking at your analysis 

is, and correct me if I am wrong, but I think the risk premium that 

the private sector is looking at, and this is why the Blue Chip estimate, I think, is above yours, I do not see embodied in your analysis. Do you feel you take into account the risk premium of these 

higher debts? 

Mr. ELMENDORF. Well, in fact, our projection of long-term interest rates over this coming decade is actually above the interest 

rates that you can deduce from the current prices of Treasury securities in the financial markets. Our projection here reflects a combination of what we see in financial markets and our own modeling. Our own modeling actually points to interest rates being a 

little higher than the financial markets have built in, particularly 

in the latter half of the decade for the longer-term securities. So 

we have constructed a projection that puts some weight on our 

modeling and some weight on the financial markets. 

But I think the point, as we have made a number of times, is 

that the swings in sentiment that drive fiscal crises are not usually 

telegraphed very well ahead of time. They often occur very suddenly. 

Senator PORTMAN. Well, I would love some more information on 

the interest rate calculation because I think that is going to be, obviously, a big part of the uncertainty going forward, and I think it 

relates directly to the point that has been made many times here 

today, that we need to focus, all of us, our constituents, the American people, on this issue, and part of it is what is going to happen 

with rates, because that will affect everybody’s everyday life as well 

as our business climate. 

Obviously, three issues here. The discretionary side, we have 

talked about today. The entitlement side, which we have not talked 

about enough today. I wish I had more time. The third one is growing the economy, and we have talked some about that and I applaud Senator Wyden, who has now left, for his comments on tax 

reform. 

I would just ask you one simple question with regard to the corporate rate. There is some recent research, and you have probably 

seen it—I think it is Hassett and Brill—that says there is a maximization point in the corporate rate of about 26 percent, and I 

guess that is somewhat obvious. That is lower than or about at the 
138 

average of the OECD or the developed country rates. Have you all 

looked at that, and do you think we are leaving revenue on the 

table now? In other words, by having a relatively high corporate 

rate, are we getting less revenue than we would otherwise get? And 

do you think we have a misalignment here because of the competitive nature of the global economy? What is your view on what the 

right corporate rate ought to be? 

Mr. ELMENDORF. Senator, I am sorry. I am aware of that paper, 

but we have not studied that analysis carefully, so I can’t directly 

answer your question. If you are interested in our—I am interested, of course, myself. But more importantly, if you are interested, we can take a closer look at that report. 

Senator PORTMAN. Since we are both interested, let us get some 

views from CBO on that, because I think it is a very interesting 

analysis, and although, as you said earlier, whether tax relief pays 

for itself or not depends on the tax relief, that this is one area 

where we might be able to find a consensus. 

Thank you, Mr. Chairman. 

Mr. ELMENDORF. We will be in touch, Senator. Thank you. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. A big part of the discretionary outlays that 

grew during 2010 was the stimulus bill, and a big portion of the 

stimulus bill was the money going to the States, the State fiscal 

stabilization. What do you expect would have happened if a lot of 

that money, for example, such as Medicaid money going to the 

States for 2 years, if that had not gone to the States, what do you 

think would have happened? 

Mr. ELMENDORF. We think that States would have had to make 

larger changes to boost revenues or decrease other sorts of spending, and that would have had a negative effect on their economies, 

and that is why in our analysis of the Recovery Act we think those 

provisions and others provided an important boost to output and 

employment relative to what would have occurred in the absence 

of that legislation. 

Senator NELSON. In my State, Florida received about $4.5 billion just for Medicaid over that particular period of time, another $2.2 

billion for education. So it was huge. But we are coming to the end 

of the 2-year period and we are not going to be able to continue 

that. So what do you think is going to happen? 

Mr. ELMENDORF. Well, the waning of the effects of the Recovery 

Act on the economy is one of the reasons that the economy is not 

growing more rapidly over the next few years in our projection. 

Senator NELSON. So we see less of a robust recovery as a result 

of all this Federal money not going to the States for things that are 

hard to see because they are not roads and bridges that are being 

built. It is Medicaid and education assistance from the Federal 

Government to the States, and as a result of that going away, it 

is going to lessen the acceleration of the economic recovery. 

Mr. ELMENDORF. I think that is right, Senator. That is analogous 

to what happens with the automatic stabilizers, the parts that you 

did not directly change but that occur automatically in downturns. 

Picture the economy running into a hole. The hole is shallower, but 

on the way out, then the recovery is also a little more shallow than 

it would otherwise be. And, of course, the tradeoff that you and 
139 

your colleagues confront is that the large accumulation of debt to 

pay for the Recovery Act and for the automatic stabilizers and 

other things in the past few years has pushed debt to GDP up in 

a way that creates damage and risks itself. 

Senator NELSON. OK. So that is one consequence, that by us not 

being able to send more money to the States, it is going to slow the 

economic recovery. 

All right. Now, let us look on the other side. We passed the 

health care bill, and if you would state this for the record, as you 

have already publicly many times, the health care bill as it is 

passed right now and as it is law is roughly going to save the Federal Government in the next 10 years about a quarter of a trillion 

dollars, and your projections for the second 10-year period, that the 

Federal Government spending will be saved about a trillion dollars. 

Is that correct? 

Mr. ELMENDORF. So, Senator, you are right that over the next 

decade, pending our actual full cost estimate of repeal which is underway, we think that over the next decade, the repeal of the 

health legislation would increase budget deficits by something on 

the order of $230 billion. 

Over the longer horizon, we think that repeal of the legislation, 

assuming that it would be implemented as enacted without any future changes, the repeal would widen future budget deficits. That 

is an estimate that we have not offered in dollar terms because we 

think that it is difficult to get a good sense of dollars figures over 

such a long horizon in an economy with rising prices and that is 

growing. We have said instead that repeal of the legislation would 

reduce—rather, would increase Federal deficits in that second decade, in a broad range around one- half percent of gross domestic 

product. If you want to convert that yourself to dollars, as some 

members of the Committee have, you can do so. But for our purposes, we think it is more constructive for us to report the number 

in that sense. 

Senator NELSON. OK. But the average American does not understand that percentage of the GDP, and so in our calculations, has 

it not been, Mr. Chairman, widely accepted that we are somewhere 

in the range of $1 trillion? 

Chairman CONRAD. Yes, $1.3 trillion. One-half of 1 percent of 

GDP over the second 10-year period. The projected GDP during 

that period is forecast to be about $260 billion, so one-half of 1 percent would translate to $1.3 trillion. 

Senator NELSON. OK. Well, then I think it is pretty clear, as we 

are going forward, we are going to have a slowed economic recovery 

because we helped out the States for 2 years with a massive infusion of money into the States that people do not ordinarily see, 

such as Medicaid spending as well as education. We enact a health 

care bill that does from a fiscal standpoint help the economy by 

saving the U.S. Government from spending close to a quarter of a 

trillion dollars in the next 10 years. So let me conclude by asking 

you now if you would help—let us put a fine point on this, on Social Security. We went through a long discussion of that with one 

of the other Senators earlier. But what is it that is happening in 

or about the year 2037 with Social Security that we need to underscore? 
140 

Mr. ELMENDORF. Well, in some year out there—and we have not 

updated those estimates since our last long-term budget outlook 

last summer—the Social Security trust fund will have redeemed all 

of the bonds that it holds and will have incoming payroll tax receipts that are not sufficient to pay the benefits that we project 

under current law. At that point the full benefits could not be paid 

without some action by the Congress to increase the money going 

into the trust fund or reduce the benefits being paid out. 

Senator NELSON. OK, that is 26 years down the road. What is 

going to happen 10 years down the road with Social Security? 

Mr. ELMENDORF. Well, as the baby-boom generation retired, of 

course, there will be increasing numbers of beneficiaries. We think 

at the end of the decade there will be about a third again as many 

Social Security beneficiaries as there are today. That will increase 

the benefit payments. But there will be enough money coming in 

and money in the trust fund—actually there is a picture at the 

back of the outlook that shows the path of the Social Security trust 

funds, but the OASI fund and the Disability Insurance fund. For 

those who want to check, it is on page 123. And in our estimate, 

the trust funds together will be running a surplus at the end of the 

decade, including the interest payments they receive from the 

Treasury on the bonds in the trust funds. 

I should mention perhaps the disability—as you know, the Social 

Security trust funds—there are actually two of them. They are legally separate. The Disability Insurance trust fund we think will 

actually be exhausted in 2017 and would need some further action 

to pay benefits after that point. 

Senator NELSON. At the end of this 10-year period—— 

Chairman CONRAD. Can I just say to the Senator, he has gone 

beyond his time. 

Senator NELSON. I have. As you have been very generous and liberal with other Members of Congress, may I conclude with this one 

question? 

Chairman CONRAD. Go ahead. 

Senator NELSON. At the end of this 10-year decade, what is the 

effect of the trust fund of Social Security on the operating budget 

deficit of the U.S. Government? 

Mr. ELMENDORF. I am not sure what you mean by ‘‘operating,’’ 

I am afraid, Senator. 

Senator NELSON. The budget deficit that we are working on. 

Mr. ELMENDORF. Well, so the Social Security—there will be a 

surplus, as I said, in the Social Security trust funds reflecting the 

direct flows from payroll taxes and benefits, but also interest payments in the rest of the Government. Excluding those interest payments, Social Security will be in deficit, which is to say that the 

benefit payments will exceed the collections through payroll tax receipts and some other sources of revenue. 

So apart from the interest payments from the rest of the Government to the Social Security trust funds, Social Security will be in 

a deficit situation. The dedicated revenues will fall short of the 

benefit payments that are promised. 

Chairman CONRAD. I thank the Senator. 

We are now past the hour of 12:30, and we had promised to get 

the Director out by that time, so that would mean Senator Thune 
141 

would have no time to ask questions. But because he is from South 

Dakota and I am from North Dakota, that seems fair, at least to 

this Senator. But I am sure it does not sound fair to the Senator 

from South Dakota. 

The Senator from South Dakota is recognized. 

Senator THUNE. Thank you, Mr. Chairman, and to you and Senator Sessions, I welcome the opportunity to serve on this Committee. There will be some big issues debated here, and I look forward to engaging in that debate. 

I want to thank you, Dr. Elmendorf, for your service and willingness to take on another stint here in what is under the best of circumstances a very difficult job, but under these circumstances an 

even more difficult and painful job. 

You have kind of, I think, touched on this a little bit in response 

to some questions already, but Chairman Greenspan recently said 

the odds of a debt crisis in the next few years is nearly 50/50. And 

I know you would probably have trouble quantifying that, but what 

do you view those odds are? 

Mr. ELMENDORF. As you said, Senator, I would have trouble 

quantifying that. I think it is very difficult to make an assessment 

of that sort, all respect, of course, to Chairman Greenspan. A crisis 

depends not just on the existing level of debt; it depends on, I 

think, the projections of debt. In the cases of some countries, it is 

dependent on how much debt they have had to roll over in a very 

short period. It depends importantly on the willingness of foreign 

investors to hold the assets of this country. And it depends I think 

most crucially on investors’ perception of the sorts of policies that 

Congress and the President are inclined to enact. 

So it is a very difficult business, and I think we have seen in 

other countries that have had very high debt-to-GDP ratios that 

things generally turn out badly unless they correct course. But exactly what the tipping point might be is just beyond our analytic 

capacity. 

Senator THUNE. But the odds worsen the longer we wait, correct? 

Mr. ELMENDORF. Yes, I think the higher the debt gets relative 

to the size of the economy, in particular the higher it gets and still 

looks to be pointed upward in projections like the ones that we 

show you, the greater the risk of a fiscal crisis. 

Senator THUNE. You talked, I think, in response to some questions about the impact of—I think you were asked about energy 

costs. And if you talk about $100 a barrel for oil, which is what we 

are approximating now, that is one thing. If it were to go up to 

$150 a barrel, have you done some sensitivity analysis about how 

that impacts inflation and how much of the inflationary assumptions that you make are based upon the cost of energy? 

Mr. ELMENDORF. So the energy is certainly important for our 

projections of overall consumer prices. It is not as important for 

core consumer prices, prices excluding food and energy. It matters 

a little bit because some amount of an increase in oil prices or the 

price of energy more generally will end up being passed through to 

the cost of other goods and services in a way that might get built 

into the underlying inflation process of the economy. But the evidence is that that passthrough is actually pretty small, so that 

means on a year-to-year basis, of course, changes in the price of en-
142 

ergy affect household budgets, but that those movements tend not 

to become ingrained in the inflation process over the past few decades, based on what we have observed. 

A similar point I should say about food prices. It is very, very important to households, but they do not seem to get built into the 

underlying inflation process. They rise and they fall in a way that 

seems more or less separate. So we do our best to try to project 

changes in those prices, but I think it is not as large a risk for inflation over the longer run as one might worry. 

Senator THUNE. And it strikes me that what probably the biggest 

factor impacting interest rates—many factors, but inflation being 

one. If inflation starts to pick up, then I think the markets are just 

going to start demanding a premium for that, and that impacts our 

borrowing costs and everything else. 

How confident are you in your inflation assumptions? Based 

upon what you are seeing globally right now, a lot of European 

countries and Asian countries are experiencing upticks. We have 

seen a little bit in December, probably not as much as other places 

in the world. But if we have to where we started having an issue 

with inflation, I suspect that the correlation between inflation and 

interest rates is really going to drive borrowing costs. What is your 

level of confidence in your assumptions with regard to inflation? 

Mr. ELMENDORF. You are certainly right, Senator, that if inflation goes up, interest rates we expect would go up, too, and that 

would create further damage to the Federal budget. We do not 

think inflation will get high. It is currently below the rate that the 

Federal Reserve seems to view as consistent with their mandate for 

price stability. It has fallen a good deal in the past few years. It 

has fallen in a way that is broadly consistent with a lot of evidence 

that when tremendous numbers of people are unemployed and a 

tremendous amount of plant and equipment is not being used, that 

firms restrain price increases and inflation comes down. 

Now, as the economy recovers, we think that inflation will move 

back up, but we see no reason why it will move above the range 

that the Federal Reserve is aiming for. The Fed balance sheet, as 

everybody understands, is very large, and they will need to withdrawn that liquidity to prevent inflation from going up. But we see 

no obstacle to their doing that, and certainly the statements of 

Chairman Bernanke and others show that they are very focused on 

the need to do that when the time arises. 

So, of course, all these projections are uncertain, but we do not 

view a large increase in inflation beyond the level we have seen 

over the past decade or two as a significant risk in the forecast. It 

is a possibility, but it is not one of the risks that I am more worried 

about. 

Senator THUNE. You said a 1-percent increase in interest rates 

would generate about $1.25 trillion in additional deficits over the 

decade. What does a 1-percent increase in interest rates add to the 

borrowing costs that we have today? Which the number I have 

seen, at least in the 2012 estimate, is interest will be at or exceed 

the amount that we spend on national security. So if we are assuming that number or thereabouts and you saw a 1-percent increase 

in interest rates, what does that do to the annual finance charges, 

borrowing costs for the Federal Government? 
143 

Mr. ELMENDORF. Well, an increase that occurred right now would 

not raise interest costs that much in the near term because much 

of the debt is outstanding, and we have a fixed rate. So when one 

looks at the pattern, we show for a rise in interest rates, it rises 

over time. It gets, for example, in 2015 to be about $100 billion in 

that year of higher interest payments. 

Senator THUNE. At 1 percent—— 

Mr. ELMENDORF. The 1 percentage point increase. 

Senator THUNE. Annually? 

Mr. ELMENDORF. Annually. And by the end of the decade, 1 percentage point higher interest rates is worth about $200 billion a 

year. And it is growing so much because the debt is growing very 

rapidly. 

Senator THUNE. Right. 

Mr. ELMENDORF. In addition to the redemption of maturing securities and the issuance of new ones. 

Senator THUNE. All right. Mr. Chairman, my time has expired. 

Chairman CONRAD. I thank the Senator. 

Senator THUNE. In deference to the Director, thank you. 

Chairman CONRAD. I would like to just for a moment followup on 

this point that Senator Thune is raising, and I talked about it in 

my questioning period, too, because I think it is very, very important for people to understand. In a forecast you are trying to give 

us the best assessment on critical variables. You are trying to give 

us an assessment on economic growth, on interest rates, on rates 

of inflation, how all that comes together to affect Federal expenditures and Federal revenues, to give us an assessment of what is 

happening to the deficit and debt. 

Many economists have told us they do not believe the economic 

world is perfectly predictable with respect to especially at the 

breaks. That is, when something turns, it can turn rapidly, and no 

forecast tends to capture that accurately. 

How would you assess the risk of the basic underlying assumptions in the forecast that you provided to us yesterday on economic 

growth, inflation, and interest rates? Of those three, which are you 

most concerned about in terms of your underlying forecast not coming true or being at some significant variance? 

Mr. ELMENDORF. Well, Mr. Chairman, I worry about all of them. 

Interest rates are the ones that can move around most dramatically in short periods of time. The inflation rate can spike. Economic growth, of course, can slow very sharply in recessions. But 

the variable that is most volatile on an average day or a month is 

interest rates, and all three are very important, of course, to the 

Federal budget. And that is why we look—in our appendix that illustrates the effects of changes in economic projections, those are 

three of the four experiments that we examined, precisely those 

three variables that you mentioned. 

So I would hate to convey a sense that I am not worried about 

any of them, but I think the interest rates are the ones that are 

intrinsically most volatile and also, I think, given the Government’s 

fiscal position and the fiscal trajectory, are the ones that are the 

greatest risk. 
144 

Chairman CONRAD. All right. I thank you for that. I think it is 

just important that we have that on the record for the benefit of 

the Committee. 

Senator Sessions. 

Senator SESSIONS. Isn’t it a fact the Fed is artificially keeping 

the interest rates low through their quantitative easing and there 

is a limit at some point on how much that can be utilized? 

Mr. ELMENDORF. The Fed is keeping interest rates low. I would 

not describe the current situation as any more artificial than what 

they normally do. They move interest rates up and down, as you 

know, to affect inflation and the path of the economy. And it is certainly right that they have pushed interest rates down. Both the 

Federal funds rate that they directly control, but also interest rates 

at longer maturities, they have pushed down through a variety of 

measures, including the latest quantitative easing. And we do not 

expect that to continue. 

Senator SESSIONS. There is a limit to how much that can be— 

I just hate to press this health care cost. Someone could interpret 

your testimony as saying that the health care bill, if eliminated, 

would raise the deficit, and under one method of accounting, perhaps that is so. But under these circumstances, I have to say in 

my view it is not accurate, because we know that Medicare will be 

going into deficit, and they will call their bonds. It is not as if we 

do not know outside this 10-year window what is going to happen. 

So when the United States Treasury spends money on a new program and that money is borrowed from Medicare, and Medicare we 

know is heading into default, it really increases the debt of the 

United States. It absolutely increases the internal debt, and I think 

any fair reading would suggest it increases the overall debt exposure of the United States. 

Mr. ELMENDORF. So, Senator, you are correct that it increases 

the internal debt. I certainly agree that Medicare will redeem those 

bonds at some time in the future. And as we have discussed, that 

obligation can only be met by revenues that are available in the future. 

When I refer to deficit effects, I refer, as my many predecessors 

as CBO Director have, to effects on the unified budget deficit. But 

you are correct, there are other ways of toting up what is happening in the Government’s accounts. I will try to be more specific 

about that when I mean unified budget deficit. 

Let me go back one more time to the internal debt, the gross 

debt, and I have agreed with you about the effects on gross debt. 

The way that CBO—again, this is not idiosyncratic to my leadership of CBO. The way that we look at budgets is to focus on the 

unified budget, the debt held outside of the Government, the debt 

held by the public. And then we show you projections of spending 

for Medicare and Social Security and Medicaid and so on going forward. And we think that the best way to assess the sort of current 

financial state of the Government in terms of the immediate obligations is debt held by the public or perhaps debt net of financial assets, as we show in our report; and that the best way to look at 

what the Government is going to encounter financially in the future is to look at our projections of spending and revenues and the 
145 

effect that those paths have on future debt held by the public relative to GDP. 

So we are consistent in our treatment of that. The future Medicare obligations are not lost in the approach that we take. They appear in the projections of spending and revenues that I have shown 

and that lead to that path of debt that most of this hearing has 

been about. But I understand, Senator, that there are different 

ways of looking at the pieces of the budget that may be useful to 

you and others for some purposes. 

Senator SESSIONS. And is it your policy decision to use a unified 

score? Is that statutory or congressionally mandated that you 

produce first a unified budget score? 

Mr. ELMENDORF. The focus on the unified budget began in the 

late 1960s. There was a Commission on Budget Concepts, and part 

of what that Commission did was to realize that at the time there 

were lots of different pieces of the Government where the money 

was being kept track of, observed, followed separately. And the 

judgment of that Commission, and I think of most budget experts 

in the subsequent 40-some years, has been that it is most effective 

to look at the budget of the Government as a whole in assessing 

the demands on credit markets and, thus, the crowding out of private borrowing and in assessing the Government’s fiscal trajectory. 

It does not mean that all those people have been right, but I think 

that has been the standard in place for a number of decades. 

Senator SESSIONS. It clearly has been the standard, and you have 

always made clear how you account for it, so I am not criticizing 

you. 

Chairman CONRAD. Can I just followup on what Senator Sessions 

is raising? Because, you know, we have a budget responsibility in 

this Committee, and we understand that economists look at this, 

and they prefer looking at it on a unified basis. I think the problem 

that it leads to is when you look at this from a budget perspective, 

that alters your view, because the hard reality is all this debt has 

to be serviced, and it has to be serviced out of current income. And 

the frustration that some of us have had is that the press tends 

to focus on the unified concept. We understand that is because that 

is what affects the overall borrowing by the Government. On a unified basis—when you look at everything coming in, everything 

going out, that is a unified basis. 

The problem that we run into in a budget context is those bonds 

that Social Security holds that are real assets, the redemption of 

those bonds can only occur out of current income. And what has 

been happening from a budget perspective is the general fund has 

been borrowing from Social Security, and we have borrowed well 

over $2 trillion. That money has to be paid back. How is it going 

to be paid back? It is going to be paid back by the other general 

expenditures of the Federal Government having to be reduced to 

make way for the payments that we are going to have to make on 

those bonds. And so it has a very specific and, we are going to see, 

dramatic impact on budgets because we have been enjoying in effect a subsidy from the Social Security trust fund of several hundred billion dollars a year. And that is about to change—in fact, 

has changed. 
146 

I want to correct one thing I said earlier, because I was working 

off the old forecast that Social Security is going to go permanently 

cash negative in 5 years. My staff informs me, under the new report, Social Security has gone permanently cash negative now. Is 

that the case? 

Mr. ELMENDORF. Yes, that is right. As you are viewing cash, not 

counting interest payments from the rest of the Government. 

Chairman CONRAD. Yes. 

Mr. ELMENDORF. Yes. 

Chairman CONRAD. So the budget problem that presents us with, 

instead of having several hundred billion dollars a year coming in 

from Social Security that we could send somewhere else, those days 

are over. Those days are over. 

Mr. ELMENDORF. Yes, that is right, Senator. I would just emphasize one more aspect of this. The bonds that are held in the Social 

Security trust fund and those held in the Hospital Insurance trust 

fund are much less than the total future obligations. That is what 

we mean by saying the trust funds will exhaust their resources at 

some point. So the projections that we do of the spending for Social 

Security and Medicare under current law capture all of the benefits 

that would be paid under current law. 

So in that sense, the gross debt that you are talking about is only 

capturing a subset of the future obligations. If you look at our projections of total spending and total budget deficits over a decade 

and beyond, they capture all of the benefits that we pay under current law, not just those for which there are bonds tucked away. 

Chairman CONRAD. Yes. 

Mr. ELMENDORF. It is also true there are some things in gross 

debt that may not reflect future obligations. It is not just the Social 

Security trust fund, although that is a big part of it. There is right 

now almost $2 trillion held by other Government—bonds held by 

other Government accounts. Not all of that does represent future 

obligations. So that is why we have focused, again, for many years 

on the overall budget situation, but we do report projections of 

gross debt. We report the Social Security surplus and the surplus 

in—which is almost all the off-budget surplus, and the surplus or 

deficit in the rest of the Government for you to use as you think 

about the budget. 

Chairman CONRAD. Well, look, again, we recognize the professional job that CBO does, and we respect—there has to be an independent scorekeeper, and you are it. We also know that these 

things—— 

Senator SESSIONS. You are all we have. 

Chairman CONRAD. Yes. We know that these are based on assumptions, and you have to make assumptions about growth, about 

inflation, about interest rates. And we all know they are going to 

be wrong. We all know they are going to be wrong because we look 

back in history and see that they have been wrong in the past, and 

they are very likely to be wrong going forward. But they are the 

best, most professional estimates that can be had at the time, and 

that really has to be what governs our decisions. 

Let me just conclude by saying I think we are going to need at 

some point to maybe focus a little more directly on the entitlements 

and on their budgetary effects longer term. We do not have that 
147 

scheduled at this point, but I do think—and I will talk to Senator 

Sessions about this. There is so much misunderstanding, I find, in 

the general public and in the news media with respect to the liabilities of the United States that I think we may need a hearing just 

on that. We have a lot of new members who may not understand 

quite how these funds flow and what their budgetary impacts are 

as well as their economic impacts. 

With that, thank you very much, Dr. Elmendorf. 

Mr. ELMENDORF. Thank you. 

Chairman CONRAD. We stand adjourned. 

[Whereupon, at 12:57 p.m., the Committee was adjourned.] 
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THE U.S. ECONOMIC OUTLOOK 

TUESDAY, FEBRUARY 1, 2011 

UNITED STATES SENATE, COMMITTEE ON THE BUDGET, Washington, D.C. 

The Committee met, pursuant to notice, at 10:00 a.m., in Room 

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

Present: Senators Conrad, Wyden, Warner, Begich, Sessions, 

Thune, Toomey, and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today we will focus on the U.S. economic outlook. This is 

one of a series of hearings on the economy. We are taking a close 

look at how the economy is performing and where it is headed. 

Later this week, we will examine specific challenges the economy 

faces, such as housing, unemployment, and the State fiscal crises 

that are occurring around the Nation. 

Today we are fortunate to have three really outstanding witnesses, economists who all have a long history of providing valuable testimony to this Committee and others. We look forward to 

hearing from Dr. Richard Berner, a Managing Director and Cohead of Global Economics, Chief U.S. Economist at Morgan Stanley. Good to have you back, Dick. Dr. Simon Johnson, Senior Fellow, the Peterson Institute for International Economics and a professor of entrepreneurship at MIT’s Sloan School of Management. 

Good to have you back, Simon. And Dr. David Malpass, president 

of Encima Global. Am I pronouncing that correctly? 

Mr. MALPASS. That is right. 

Chairman CONRAD. Thank you, sir. We thank all three of you for 

making yourselves available to the Committee. We deeply appreciate that. 

Let me begin by having a brief review of where we have been, 

my own analysis of what has brought us here and where we are 

headed. Let me just start by saying I believe TARP and stimulus 

were critically important to averting a global financial collapse. I 

was in the room when the Secretary of the Treasury in the Bush 

administration and the Chairman of the Federal Reserve told us 

that if we did not act on TARP, there could be a global financial 

collapse in days. Those are the words they used to us. They minced 

no words with us. They were as clear and compelling as they could 

have been. 

So TARP was put in place—and let me just put up the first chart 

that shows what I think is the very clear evidence that TARP was 

effective. This chart shows the TED spread, the difference between 

what the Government can borrow for and what the private sector 

can borrow for. And during the height of the crisis, the TED spread 
158 

was 9 times normal. You can see it at the peak. When TARP was 

put in place, it came back very markedly to more normal levels and 

only now has really gotten back to its historic relationship. 

Again, the TED spread is the difference between what the private sector can borrow for and what the public sector can borrow 

for, and we have seen a normalization in the TED spread. In fact, 

one of the tipoffs that we had that we were headed for trouble in 

2008 was we saw erratic behavior in the TED spread in the year 

before. 
159 

Let me go to the next chart, if we can. Economic growth, we had 

a negative 6.8 percent in 2008, the fourth quarter. We now see that 

economic growth has resumed. In the fourth quarter of 2010, we 

saw positive growth of 3.2 percent, and we have now had six consecutive quarters of growth. And we see the same evidence, evidentiary pattern in the private sector job growth. I think we all recall in January of 2009 the economy was losing more than 800,000 

private sector jobs a month. In December 2010, the last month we 

have data for, the economy gained 113,000 private sector jobs. We 

have now had 12 consecutive months of private sector job growth. 
160 
161 

Third, we have also seen a dramatic rebound in the stock market. After falling to a low of 6,500 in March of 2009, the Dow has 

now risen back up well above 11,000—in fact, approaching 12,000. 

Two highly respected economists—Dr. Alan Blinder, the former 

Vice Chairman of the Federal Reserve, and Mark Zandi, who was 

an adviser to the McCain campaign—completed a study last summer that measured the impact of Federal action, including TARP 

and stimulus, including both the Fed’s monetary policy actions and 

the fiscal policy actions by Congress and the administration. Here 

is a quote from their report: 

‘‘We find that its effects on real GDP, jobs, and inflation are huge 

and probably averted what could have been called ‘Great Depression 2.0.’ When all is said and done, the financial and fiscal policies 

will have cost taxpayers a substantial sum, but not nearly as much 

as most had feared and not nearly as much as if policymakers had 

not acted at all. If the comprehensive policy responses saved the 

economy from another depression, as we estimate, they were well 

worth their cost.’’ 

The next chart shows Dr. Blinder and Dr. Zandi’s estimate of the 

number of jobs we would have had without the Federal response. 

It shows we would have 8.1 million fewer jobs in the second quarter of 2010 if we had not had the Federal response, specifically the 

TARP and the stimulus. 
162 

A similar story can be told by studying the unemployment rate. 

The unemployment rate averaged 9.7 percent in the second quarter 

of last year. According to Dr. Blinder and Dr. Zandi, if we had not 

had the Federal response, the unemployment rate would have been 

15 percent in the second quarter and would have continued rising 

to 16 percent in the fourth quarter of 2010. There is no question 

that the unemployment rate has remained stubbornly high. Just a 

little over 3 years ago, it stood at 5 percent. It nearly doubled within a year’s time and has fluctuated in the 9-percent-plus range ever 

since. 
163 

Last week, the nonpartisan Congressional Budget Office issued 

its budget and economic outlook projecting the unemployment rate 

will fall only slightly, to 9.2 percent by the fourth quarter of this 

year, and fall farther, to 8.2 percent by the fourth quarter of 2012. 
164 

And the economy is growing at a much slower pace when compared to past recoveries. When measured against the nine previous 

recoveries over the past 60 years, we see the current recovery lags 

considerably the nine previous recoveries. Why is that? I believe it 

is because so much damage was done to the fiscal and financial 

system in this downturn. 
165 

If you look at the previous recoveries since World War II, some 

of them have been relatively sharp, but none have seen the damage 

to the financial system done in this downturn. And so that dramatically affected the credit markets, and that dramatically affected business. That obviously affected economic growth and economic activity. 

You know, I will never forget when Ms. Romer put out her forecast that we would see 8 percent unemployment, and I told the 

White House at the time and told anybody listening that they could 

throw that forecast right out the window, because that forecast was 

based on the last nine recoveries since World War II. And there 
166 

was no basis for comparison because there was not the damage to 

the financial system in the previous recoveries as we experienced 

in this one. And so I thought it was a forecast that had no merit. 

But we are now at a critical juncture. We have been borrowing 

about 40 cents of every dollar that we spend. That is clearly not 

sustainable. Spending is at its highest level as a share of the economy in 60 years. Revenue is at its lowest level as a share of the 

economy in 60 years. It seems to me readily apparent we have to 

work on both sides of the equation. 

Gross Federal debt is already expected to reach 100 percent of 

gross domestic product this year, well above the 90-percent threshold that many economists see as the danger zone. Let me just recommend to my colleagues the work that has been done by two of 

our most distinguished economists. Carmen Reinhart was the lead 

author of the book reviewing 800 years of financial crisis. In her 

work and the work of Professor Rogoff at Harvard, they concluded 

that when countries reach a gross debt of 90 percent of GDP, they 

see future economic growth reduced substantially. And we are at 

90 percent gross debt to GDP. 
167 

Now, one thing I want to be clear on is in the press typically you 

do not read about gross debt. You read about the publicly held 

debt. Publicly held debt is about 30 percentage points lower than 

the gross debt. So our publicly held debt today is in the 60 percentile range, but the gross debt is over 90 and will be at 100 by 

the end of this year. And, again, the work that was done by Carmen Reinhart at the University of Maryland and Dr. Rogoff at Harvard concluded that when your gross debt reaches 90 percent, you 

see future economic growth impaired, and impaired in such a way 
168 

that it translates into a million fewer jobs. That at the end of the 

day, I think, is what we must keep in mind. 

I believe that the deficit and debt reduction plan assembled by 

the President’s Fiscal Commission on which I served got it about 

right. The plan would stabilize the debt by 2014, lower it to 60 percent of GDP—let me emphasize that is on a publicly held debt 

measure—by 2023, and roughly 30 percent by 2040. So publicly 

held debt would first be stabilized, then be brought back from the 

brink, and over time worked down to what most economists say is 

a far more sustainable level. 
169 

There were 18 members on the Commission. Eleven supported 

the report—five Democrats, five Republicans, one Independent. 

That is, 60 percent of the Commissioners supported the conclusions 

of the report that would reduce the debt by $4 trillion over the next 

10 years. I believe that proved that Democrats and Republicans 

can join forces when we face an imminent threat to this country, 

and I believe this debt threat is an imminent threat to the Nation. 

We can put together a credible, responsible, realistic bipartisan 

budget plan, and this year we need to finish the job. It will require 

Presidential leadership, and it will require a Congress that is willing on both sides to come together to do things both of us would 

prefer not to have to do. 

I hope very much we face up to this because a failure to do so 

would mean very serious consequences for the country in the future. 

We will now turn to Senator Sessions for his opening remarks, 

and I want to thank members for their attendance here today, and, 

again, I thank the witnesses for their participation. Senator Sessions, welcome. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Senator Conrad. You have raised 

the challenge that is facing us very well and I know have made a 

case that a lot of what we have done has been successful. I understand that, but there are others who have concerns about what we 

have done and how well it has worked and how much we have accomplished. 

I would like to get into a good discussion with our excellent 

panel, and I am sure we will learn a lot from them. It does appear 

we have been kicking the can down the road, and I thought that 

the roundtable discussion in Barron’s with some of the world’s biggest financial investors earlier this year raised some of the same 

problems and questions that you have raised and maybe some others also that lead us to a conclusion we are facing a very, very serious national challenge that I believe this Committee, as you indicated at our last meeting, will have to provide leadership for. And 

I would be glad to be with you in that effort. 

I had the honor to meet with Mr. McTeague, former Prime Minister of New Zealand, who took over a country that was running 

systemic deficits for quite a number of years, and he participated 

in leading that country to sustained surpluses and unprecedented 

economic growth, growth in sound currencies, and he told me recently that he believed we need to have a goal of a balanced budget. I think that is a psychological, political question for us to ask. 

It is not easy to get there. I am convinced we can get there, but 

the American people are goal oriented, and if we can articulate for 

them a real substantial reduction in this debt and show them how 

there may be some short-term pain but long-term gain, I believe 

politically we are in a better situation to accomplish that than we 

have been in some time. 

I just would quote from that Barron’s roundtable interview some 

interesting questions. Mr. Zulauf out of Switzerland said, ‘‘There 

are two worlds: the industrialized world and the emerging world. 

The industrialized world continues to live in a fiction that it can 
170 

afford its current lifestyle by going further into debt. At some point 

the bond markets will rot against that. The private household sector, not only in the U.S. but several industrialized countries, remains stretched financially and will continue to deleverage, reduce 

their debt, but the public sector is leveraging up, and there is the 

threat,’’ he suggests. 

Bill Gross, who I guess handles more money than any man in the 

world, at PIMCO Bond Fund said, ‘‘Printing your way out of this 

or kicking the can is possible for some countries, but the solution 

is not to create paper. It is to create goods and services the rest 

of the world wants to have.’’ 

They asked, ‘‘What are the prospects for that?’’ And he said, ‘‘The 

Obama administration has failed miserably in that regard. It has 

focused on consumption and fiscal stimulation that will give us 4- 

percent growth in 2011′′—his estimate. The estimates of these experts were from 2.5 to 4. He had the highest growth projection for 

this year. But then he adds, ‘‘But it gives us nothing more than 

that. It is a sugar high that quickly disappears in 2012.’’ 

So we are facing some serious, grim prospects. Unemployment 

has not come back well, as we would like to see it. Indeed, at the 

end of the year, the Government survey indicates that the hours 

worked had not increased, which is an indicator that unemployment will go down if weekly hours are going up. That is not a good 

factor. The wage increases were slight, very slight this year, and 

below inflation, so that puts our net wage income not in a very 

good position. The amount of jobs added looked better than they 

are because we have to add 150,000 a month to stay level, and so 

we have seen job increases, but not much above the level you have 

to have to really reduce unemployment. And if wages are not increasing, the net money circulating is not where it needs to be. So 

I am worried about that. 

And what I think—what I would like to be in a position where 

we were with Mr. Volcker. One of his associates just retired from 

the Fed. Brookings said that Mr. Volcker said, ‘‘Enough is enough. 

We have to get off this road. And he stood firm. They protested. 

They asked for his resignation. Tractors circled his building, probably some from North Dakota, and Alabama, too, probably. But he 

said, ‘‘We knew we were right.’’ ‘‘We knew we were right.’’ And I 

just do not sense we have that kind of leadership today. 

I was disappointed that the new chief of staff, Mr. Daley, taunted 

the Republicans on his show Sunday, saying, ‘‘Where is the beef? 

You tell me where you are going to cut.’’ 

What did that mean? I say that means that the administration 

is not prepared to lead. They are not prepared to discuss the seriousness of the challenge we face and suggests that if somebody else 

steps up and makes suggestions about how to reduce this deficit, 

they may well even be attacked by the President and his administration. So I hope that is not true, but that is what it seemed to 

suggest for me. And I did not see the kind of leadership I hoped 

for in the State of the Union. 

So, Mr. Chairman, you said a few things political, I said a few 

things political, but the truth is our country is in serious trouble. 

You and I both agree with that, and we are going to have to work 

together to do better. And thank you for calling this hearing. 
171 

Chairman CONRAD. Thank you, and let me just say to members 

of the Committee, what I said at the last hearing, I think even 

more strongly today, it has to start somewhere. And in the congressional process, we are it. I do not know what other Committee is 

going to take this on. The Appropriations Committee, they are not 

in a position to do it. The Finance Committee is not in a position 

to do it. So I think very clearly it is going to fall to us. 

Look, I would much prefer that there would be a summit with 

the White House, the congressional leaders, Republican and Democrat, House and Senate, sit down and craft a long-term plan to get 

us back on track. I think that would be the best way to proceed 

because I think it is very important this be done before we get into 

a debate on the debt limit extension, because if the debt limit extension has to be the way of getting a result to get a plan, that in 

itself has serious risks attached to it. We could lose credibility in 

the bond markets globally if that is the leverage that has to be 

used. So we are much better off as a country if a plan is put in 

place prior to getting to the debt limit debate. 

But if there is not going to be that kind of summit, then I do not 

know of an alternative to this Committee and the Committee in the 

House trying to craft a long-term plan and begin sort of bottom-up. 

So, again, I issue again a call for a summit involving the leaders 

of the House and the Senate and the President or his designees to 

come up with a credible long-term plan before we get to the debt 

limit crunch, which I think will come probably in May. 

But I do not think we can wait for that. I think we have to prepare ourselves to begin crafting a plan here. And, look, it is not 

going to be easy. But we have a good beginning. We have had an 

excellent hearing with the head of the Congressional Budget Office. 

We have an excellent hearing today, and we will turn now to our 

witnesses. 

Dr. Berner, welcome back to the Budget Committee, and please 

proceed. I understand that you are going to be retiring soon from 

this position, not retiring but leaving this position. You have always been somebody who has been an important resource for this 

Committee. Thank you. 

STATEMENT OF RICHARD BERNER, PH.D., MANAGING DIRECTOR, CO–HEAD OF GLOBAL ECONOMICS, AND CHIEF U.S. 

ECONOMIST, MORGAN STANLEY 

Mr. BERNER. Thank you, Senator. Thank you, Chairman Conrad, 

Ranking Member Sessions, and other members of the Committee 

for inviting me to this hearing to discuss the outlook for the economy, to outline some things that you can do to improve it, and 

briefly to discuss some of our budget challenges. 

And, Senator Sessions, let me tell you that your anecdote reminded me of when I was back at the Fed, because I was in the 

building when the tractors were circling the building. 

In the 6 months since I last appeared before this Committee, the 

economy has improved. Aggressive and unconventional monetary 

policy and fiscal stimulus helped. While the recovery remains subpar, recent additional monetary and fiscal stimulus will promote 

faster growth this year. 
172 

But the legacy of the crisis endures. Lenders are still hesitant to 

lend. Home prices are still declining. State and local budgets are 

strained, and we need much faster job gains to lower the unemployment rate. 

Now, we expect the economy to grow by 4 percent after inflation 

over 2011 and about 3.25 percent over 2012. Two policy-related factors assure at least moderate growth and raise the odds of a somewhat better outcome: first, the one-two punch from new fiscal stimulus and a Fed committed to achieve its dual mandate; and, second, a dramatic reduction in political uncertainty after this summer. 

Three key temporary elements in the stimulus package—a 1-year 

payroll tax holiday, a 13-month extension of emergency unemployment benefits, and expensing of business investment outlays—will 

boost growth this year, as you can see in the slide here that I am 

putting on the screen, but partly at the expense of 2012. 

Now, there are four other factors that are already promoting 

more sustainable growth. First, ongoing balance sheet healing is 

easing financial conditions, except in mortgage credit. Second, the 

handoff from rising output to increased hours, employment, and income is slowly underway. Third, stronger global growth is finally 

boosting U.S. output. And, finally, pent-up demand for capital 

spending is healthy. 

Thus, however, we have a two-tier economy. Strong leadership 

from exports and capital spending are offsetting the drag from 

weak housing activity and home prices and from cuts in State and 

local government budgets. Low inflation has promoted low bond 

yields. In turn, this has helped restrain Federal interest costs. We 

believe that that will be changing as inflation bottoms and begins 

to move higher. Significant economic slack will depress inflation. 

But rising inflation expectations and global pressure on food and 

energy quotes will push it higher. 

Let me talk about six risks that still lurk for the economy. Two 

of those are domestic. Home prices could decline by more than the 

6 to 11 percent in our baseline forecast, and State and local budget 

cuts could be more intense than we expect. 

Four risks are global. There could be more spillover from Europe’s sovereign credit crisis; more intense policy tightening in 

China and other emerging market economies. Crude quotes could 

surge past $120. That would be a risk. And politics could interfere 

with appropriate policy responses, as you alluded to. 

That last risk has a new domestic dimension: The battle over 

budget priorities here does seem likely to crystallize in a showdown 

over increasing the Federal debt ceiling, which could disrupt financial markets. 

So the outlook is improving, but we certainly cannot be complacent. Congress might consider other policies to improve the outlook 

for housing and employment, and thus the economy. Two years ago 

in testimony before this Committee I argued that tax cuts and 

stepped-up infrastructure outlays really do not get to the causes of 

this downturn. They mainly tackle its symptoms and can only 

cushion the blow. 

Likewise, the recent fiscal stimulus package will boost near-term 

growth, but I will not put our economy on a strong, sustainable 
173 

path. It will boost deficits and debt, netting to a negative for the 

economy over a longer time frame, unless we adopt policies aimed 

directly at the cause of our problems. 

So what are some of those policies? America’s housing and mortgage markets remain dysfunctional, thwarting recovery. Reducing 

principal is the right remedy. Only when some cushion of owners’ 

equity returns and there is less risk of declining home prices will 

lenders readily offer credit. 

Policy options to reduce principal take two forms: those encouraging writedowns to avoid default and those encouraging short 

sales, which allow underwater borrowers to sell their house at market value without writing a check to the current lender. 

Adding incentives for both borrowers and lenders could energize 

such policies. Earned principal forgiveness is one such. Streamlining short-sale programs would help the writedown process for 

those borrowers facing foreclosure. 

The recent discussion about fixing housing finance has involved 

the right role for Government and how to reform the GSEs. This 

debate is entirely appropriate, but it does create uncertainty for 

lenders, and it overlooks the critical need to sequence policy choices 

correctly. First, focus on repairing the legacy of bad loans. Only 

then can policymakers implement reform. 

What about policies to improve employment? Private payrolls 

have risen by about $1.2 million over the past year, but over the 

past 18 months have been essentially flat. Much of that weakness 

is cyclical. However, there are four structural culprits involved: 

labor immobility from housing lock-in, mismatches between skills 

needed and those available, rising benefit costs, and uncertainty 

around policies in Washington. Briefly, fixing housing will improve 

labor mobility and help employment, and better training will improve worker skills. I will discuss remedies for benefit costs and 

uncertainty in a moment. 

The economic outlook has clear cyclical implications for the Federal budget, and addressing our structural budget problems will 

improve long-term economic prospects. I would like to conclude 

with a couple remarks on each. 

A healthier economy would directly improve the cyclical budget 

outlook, as we all know. More indirectly, fixing our housing and 

employment problems with targeted remedies would sustainably 

boost the economy and narrow the budget gap. Then we could safely unwind the fiscal stimulus now in place, further reducing deficits. But addressing structural budget challenges by reducing entitlement outlays will free up resources and capital for productive investment. 

In the long run, the structural budget deficit is almost entirely 

about Federal health care spending, directly through Medicare and 

Medicaid and indirectly through the tax treatment of employer-provided health care benefits. 

In addition, addressing health care costs would improve employment and the budget. High and rising health care benefits provided 

through the workplace drive up labor costs, reduce employment, 

and hurt growth. The cost of employee health care benefits is fixed 

because benefits are paid on a per worker basis. In my view, that 
174 

helps explain why American employers cut payrolls relative to GDP 

more aggressively than other countries. 

The plunge in employment also increased Medicaid eligibility, 

pressuring State budgets. FMAP grants plugged the States’ budget 

holes but added to Federal red ink. The upshot is that high fixed 

costs of health care benefits have enlarged both our job deficit and 

our budget deficits at every level of Government. 

Reducing health care costs is the next logical step in health care 

reform. The Affordable Care Act includes reforms aimed at Medicare cost savings, but more is needed to reduce the costs of health 

care for employers and employees alike. Changing the tax treatment of health care benefits would be a good place to start. 

We are only starting to debate solutions for our long-term budget 

challenges. We need your bipartisan leadership to tackle them and 

steps that are fair and call for shared sacrifice and benefits. Proposals to freeze or cut non-defense discretionary spending do not 

address these challenges. In contrast, the Commission that you 

mentioned, Senator, the Commission’s report offers sound principles and a balanced menu for action. 

In the heat of those debates, let us remember that uncertainty 

about coming policy changes, including the size of prospective tax 

hikes, may weigh on decisions to hire, to expand, to buy homes, 

and to spend. You can reduce that uncertainty by crafting a credible plan to restore fiscal sustainability. 

Mr. Chairman and members of the Committee, we have many 

challenges ahead. Our short-term challenge is to enhance the odds 

for a more vigorous, sustainable recovery. Our long-term challenges 

are to promote a sustainable fiscal policy and to preserve our important safety nets. Thanks for your attention and for the opportunity to offer advice. I would be happy to answer any of your questions. 

[The prepared statement of Mr. Berner follows:] 
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Chairman CONRAD. Thank you very much. 

Now, we will go to Dr. Johnson. Welcome back, Simon, and 

please proceed. 

STATEMENT OF SIMON JOHNSON, SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS AND 

RONALD A. KURTZ PROFESSOR OF ENTREPRENEURSHIP, 

SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY 

Mr. JOHNSON. Thank you very much, Senator, and I would like 

to begin, if it is appropriate, by endorsing your call for a summit 

on these issues before the debt limit comes to a point and before 

we have a crisis. 

I am, among other things, a former Chief Economist of the International Monetary Fund, and as you know, the IMF feels constrained in what it says to the U.S. Government for fairly obvious 

reasons. I do not feel so constrained. I would like to channel that 

experience and those kind of sentiments you would hear from 

them. They are very worried. They think that you face a potential 

issue with the U.S. debt, particularly as international investors 

shift around the world, which, as I will explain in a moment, I 

think is going to be happening in the shorter term towards Europe 

and in the longer term towards Asia. 

And Senator Sessions, I think your citation of Bill Gross in this 

context is entirely appropriate and exactly right. My recollection, 

though, is that Mr. Gross, who was in no way responsible, I think, 

for the financial crisis, was at the forefront of people in the fall of 

2008 calling for various kinds of bail-outs and calling for the public 

sector to use its balance sheet to support the financial sector and 

prevent a second Great Depression. We can go and check the 

record, but I am pretty sure that is where Mr. Gross was. And actually, I think at that moment, his advice was fairly appropriate. 

But now, of course, we see people like himself, people who are seeking appropriate levels of yield at reasonable and acceptable levels 

of risk, they will start to look elsewhere. They start to press us. 

And I absolutely think that the Chairman put the emphasis in 

the right place at the beginning, which is saving the financial sector given the alternatives in fall 2008 was the only reasonable, responsible thing to do. But the fiscal costs of that were enormous. 

I actually like to quote, Senator, the change in net Federal Government debt held by the private sector as you compare the CBO 

baseline from early 2008, before the crisis really broke in earnest, 

to the latest one. That is about a 40 percentage point increase, a 

roughly doubling of net Federal Government debt as a result of the 

measures the government had to take, most of which were the 

automatic stabilizers, most of which were the fall in tax revenue 

that you get from having a massive recession. A very small part 

of that was the stimulus. 

And I would also remind you that the Bush administration had 

a stimulus in early 2008 and the Obama administration had a 

stimulus in early 2009. We can go back and second guess how 

maybe you would like to redo the composition. It does not really 

matter in terms of the impact on the debt. The fiscal issue we face 

is because the financial system blew itself up, and I think on this 
184 

dimension, the financial crisis inquiry commission got it exactly 

right. The financial system, particularly some of the bigger players 

in the financial system, got out of control, captured the hearts and 

minds of the regulators, took on reckless risks, and caused enormous damage. 

The Bank of England, by the way, talks of their experience, 

which is parallel to our experience and, of course, part of our experience, as part of a ‘‘doom loop,’’ where you go through repeated cycles of boom, bust, bailout. But, of course, you cannot do it indefinitely because you run up against a debt constraint, which is what 

Professors Reinhart and Rogoff have pointed out to us. That is the 

general experience. And there is no reason why the U.S. would be 

exempt from that. 

And if we look at where we are in this cycle, I agree with much 

of what Dick just said, but I am less positive, I am afraid, on even 

this moment in the cycle when we should be having some recovery. 

If you look at what is happening to employment and compare the 

same metric as you used, Senator Conrad, but just focus on loss of 

employment compared with peak employment before the recession 

started, we are down by six percent—we went down by six percent. 

We are still down five percent from that peak. That is not like any 

other recession in the post-war period. Every other recession goes 

down, you go down by two or three percent in terms of employment 

and you come back within 12 to 24 months. The 2001 recession was 

a slow recovery, but we did not lose anywhere near as much employment. 

This, I would submit to you, is actually not a recession of the 

post-war variety. It is a mini-depression of the pre-1907 variety, 

when there used to be big financial crises in the United States, a 

lot of balance sheet damage, a lot of farmers would go bust, for example, out in the West and the Midwest, and it would take a long 

time to climb out of those debt holes. I think that is what we are 

looking at. 

And I think in terms of the employment picture, I am very pessimistic. I was in Davos at this World Economic Forum last weekend 

and was asking everyone I could find, where are the jobs, because 

the corporate sector has come back. The big companies, the 1,600 

companies represented at that forum are doing very well. Their 

CEOs are happy. There are plenty of profits, but they are not hiring in the United States. They are hiring elsewhere. And I think 

even this part of the recovery is not going to go very well for us. 

We are going to struggle. 

And we have not fixed the problems in the financial sector. The 

financial sector still has too little capital. Again, this is the view 

of the Bank of England. David Miles, a member of the Monetary 

Policy Committee of the Bank of England put out a very influential 

paper last week. The Financial Times has its lead editorial on it 

today. We do not have enough capital. We did not fix the other dimensions of risk within our financial sector. Even after we propped 

them up and put them back on their feet on extremely generous 

terms, they do not want to lend, at least to the small- and mediumsized business sector. So that is not a good deal for the rest of the 

economy. It is not supporting the recovery and employment. And 
185 

there is, I am afraid, an incentive for them to take on exactly the 

same kinds of risks as they had before. 

Professor Admati at Stanford University and about 24 colleagues 

have been working on this issue and writing about it very clearly 

and very forcefully. We do not have enough equity in our financial 

system. We did not have before. We did not learn that lesson. And 

this is not just about the United States. It is a global problem, but 

we should be the leaders of this and we are not. We are, if anything, the laggards, at least compared to the British and compared 

to the Swiss, who are moving more decisively on this question. 

In summary, I would say that while we are in a recovery phase, 

while we should expect the next four months to improve and we 

should expect some jobs to come back, this is going to be very slow 

and very painful. It is already worse than any other recession we 

have seen. It is primarily because the financial sector got out of 

control, and unfortunately, when we had the opportunity to fix it, 

we did not do it completely. 

The Financial Stability Oversight Council, which has a macroeconomic responsibility—financial stability, we have learned, is absolutely critical to overall macroeconomic policy. You cannot separate it from monetary policy and from fiscal policy in the way we 

thought we could separate it over the past 40 years. The Financial 

Stability Oversight Council, I am afraid, is not so far doing a very 

good job on these dimensions. There is too much trying to push the 

banks forward with very thin capital levels and there is too much 

encouragement of or allowing them to take on what begins to look 

again like irresponsible levels of risk and excessive leverage, which, 

of course, again, will come back and hurt us. 

Whether or not we fix the fiscal problem—and I share your worries that we will not fix it in the short term—the financial sector 

will come back and hurt us again and again and again unless we 

really reform it. 

[The prepared statement of Mr. Johnson follows:] 
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Chairman CONRAD. Thank you very much. 

Now, we will go to Mr. Malpass. Again, welcome. 

STATEMENT OF DAVID MALPASS, PRESIDENT, ENCIMA 

GLOBAL 

Mr. MALPASS. Thank you very much, Mr. Chairman and Senator 

Sessions and others on the committee. It is a great pleasure to be 

here, and thank you for the invitation to testify. 

I think we have a full-blown fiscal crisis. We have been kicking 

the can down the road and it is time now for action to hold the line 

on spending. I think we need a full upheaval in the culture of 

spending and deficits that is controlling our government processes. 

Before turning to my testimony, I would like to give a little background. My slides are available on EncimaGlobal.com and also 

GrowPAC.com, which is dedicated to smaller governments, so people watching can follow on. I am going to go through some of the 

slides. 

As an aside, Senator Sessions mentioned Paul Volcker. I was in 

this room—before I worked for the Reagan administration, I was 

on the staff of the Senate Budget Committee, like many of the people here, and I was in this room when Paul Volcker said, ‘‘Enough 

is enough.’’ And I think we are at that point where people need to 

be saying, we cannot afford it, even though it might be a good program. 

If I may, I will go to the first slide. My testimony is broken into 

four parts. One is the economic outlook, which is for moderate 

growth. The second is the fiscal outlook, which is for lots more debt 

and deficits. The third part, I address the risks of this high a debtto-GDP ratio. The question is whether we are at a turning point— 

a tipping point where we could see investors turn away from U.S. 

debt, so I am going to address that in some detail. 

And then in my testimony, I give some policy suggestions. In particular, I think we need to start cutting spending now rather than 

the summit approach which has been tried so often. I think the 

goal should be to find a cut that you could make tomorrow or late 

this week and find a process that can actually implement that. You 

will have the Continuing Resolution expiring on March 4, so that 

gives a very good opportunity to begin cutting spending. 

A second policy suggestion is that we need a debt-to- GDP limit 

that is not there right now. When they wrote the Constitution, they 

had no idea that people would be able to borrow $9 trillion, as we 

are now, and CBO’s numbers put us up to $24 trillion. So if the 

Founding Fathers had known that that was possible, they would 

have put a limit on that into the Constitution, and I think they 

also would have said that the maturity of the debt needs to be 

long-term, because we make ourselves riskier by having a short 

maturity for the debt. I am going to show you a graph on that. 

And then two more policy points. I am very concerned about the 

Fed’s policy of quantitative easing where it is buying up the government debt. This is a huge new role for the Federal Reserve that 

should be wound down without delay. 

And fourthly, tax reform is critical, and I advocate putting a permanent extension of the existing tax rates into the baseline so that 

there can be an actual process where growth-oriented tax reform 
195 

could be produced by Congress. With the baseline the way it is 

now, with many of the tax rates temporary, it is too high a hurdle 

for Congress to actually come up with growth-oriented tax reform. 

So in the next slide here, I show you the economic outlook. You 

know, we have had a very severe recession. What this shows you 

is the GDP of the country and the hammer blow that was hit in 

2008 and 2009. I expect GDP growth to rise from 2.8 percent in 

2010 to 3.5 percent in 2011, but that is still not going to be enough 

to make up for the losses. 

We have structural problems. I will mention three, the tax code, 

the labor barriers, and the regulatory expansion. So those slow 

down the private sector. 

Secondly, we have growth of the Federal spending and debt, 

which is a burden on the private sector. And third, the debt and 

credit problems which still plague, and I will show you a graph on 

that. 

The next slide here gives you a little bit of good news. Tax receipts are rising. This is the fourth quarter of 2010 divided by the 

fourth quarter of 2009. We are up eight percent in tax receipts. 

The problem is— 

Senator SESSIONS. Of what period? 

Mr. MALPASS. So that is the fourth quarter of 2010 over the 

fourth quarter of 2009. So it is up through December, eight percent 

growth, eight percent higher money coming into the Federal Government. The problem is, as you can see, that was from a very low 

base, and so in our next slide, you can see the dip in receipts. 

Under CBO’s very optimistic projections, that is going to gradually 

be made up, but even so, the debt is yawning widely. And so the 

problem is that the growth that we are envisioning does not really 

reduce the magnitude of the deficit. 

You can see that the budget moved into surplus in the Clinton 

administration. It narrowed in the Bush administration, the expansion in 2007 and 2008. And so what we need is to get it much narrower than what the current CBO projections are doing. Unfortunately, in their work last week, in their new baseline, they increased the deficit to $1.5 trillion just for this current fiscal year. 

This is a yawning deficit. 

This is the total debt of the United States, and one point for concern is even though the private sector is deleveraging, the government is borrowing as fast as the private sector is deborrowing, is 

deleveraging, and so we have 245 percent of GDP in debt. 

The next slide shows you the break-up of that debt. So as we 

break down, where is that debt, so it is $35 trillion of debt in the 

country and it is broken down here. Household debt is roughly $13 

trillion. The Federal, State, and local debt is $11.4 trillion, but let 

us pause. Where is that number going to go? The Federal, State, 

and local debt is going to $28 trillion, meaning way up in the ether 

of this hearing room, way off the chart, in just the next five or ten 

years because of the large deficits. And you can also see the noncorporate businesses at the bottom here are shrinking. They are 

losing credit and they are getting taken over by bigger businesses. 

We have an economic policy that favors big government and big 

business right now and that is hurting jobs. 
196 

On the next slide here, you can see the projection, Federal Government marketable debt going to 100 percent of GDP, assuming 

the Bush tax cuts are extended. 

And on nine—I will go quickly through these first ones because 

I want to dwell on the maturity of the debt later on. This shows 

you the detailed numbers, $35 trillion, and the breakdown of the 

various debt, including $9 trillion of marketable Federal debt and 

then an additional $4.6 trillion that is in the Social Security Trust 

Funds. So that shows you—this is a way to tie out where the national debt really is residing. 

The next slide shows you a barrier on— 

Chairman CONRAD. David, can I just stop you on that point— 

Mr. MALPASS. Yes. 

Chairman CONRAD. —so the people that are listening maybe are 

able to understand. I think the point that you have just made is 

the total debt in the United States, Federal, State, local, corporate, 

individual, about $36 trillion. 

Mr. MALPASS. Yes. 

Chairman CONRAD. So if we were to have a one percent increase 

in interest rates, that would add $360 billion a year in burden to 

this economy. That would be like a tax increase, right? It would be 

the effect of a tax increase. If we had a one percent increase in interest on $36 trillion of debt, it would be like a $360 billion tax increase. 

Mr. MALPASS. That is true. It would be a burden on people who 

are borrowing money. Now, the good news on an interest rate increase is the U.S. household sector—I will show you a graph in a 

minute showing that the U.S. household sector is the biggest net 

creditor in the world, and so much of that interest would be paid 

to the people in the United States who are saving money. And so 

you are right that it would be a burden on the people who are now 

maybe growing, expanding, borrowing money, but it would sure 

help a lot of seniors who are right now getting nearly zero interest 

on their savings. 

I actually favor some increase in the short-term interest rates by 

the Fed in order to bring some stability in the short-term credit 

markets. It is very odd to have a country running with interest 

rates near zero. 

But the point is exactly right. There is a giant debt burden out 

there, and so as we think our way through this crisis, one of the 

hard parts is we have not reduced the total amount of debt at all 

and probably will not and it makes us sensitive to interest rates. 

So what are the banks doing? Here, the large banks are beginning to lend a little more. The top line is large banks. The bottom 

line is small banks. And you can see there is no loan growth going 

on from the smaller banks. They are still under the regulatory 

thumb. It is a very harsh regulatory environment— 

Chairman CONRAD. David, can you just tell us, in terms of the 

chart, what is the period of time we are dealing with? I cannot read 

the— 

Mr. MALPASS. This runs from December of 2008 through present. 

So just in 2009, large banks reduced their lending from $850 billion 

down to $650 billion— 
197 

Chairman CONRAD. So very dramatic. That is what I was referencing earlier in terms of financial crisis, dramatic effect on credit markets, huge effect on the economy. 

Mr. MALPASS. That is exactly right, and we are still, as these 

show, not exactly digging our way out of that. Most of the new 

credit that is being created in the economy is coming from the government, which may have been stabilizing as it goes along, but it 

creates its own set of risks. 

To wit, the next chart shows us CBO’s various forecasts. So every 

couple of years, CBO says the debt-to-GDP is going to stabilize at 

an ever-higher level. So in 2005, they said it looked like 30 percent 

debt-to-GDP. In 2009, they said 50 percent debt-to-GDP. Just in 

August of 2010, the debt was expected to stabilize at 65 percent of 

GDP, and now CBO is up to 77 percent of GDP. This is not—I am 

not making the point that CBO cannot forecast. No one can forecast. I am making the point that the government debt is growing 

at a huge rate and CBO is recording it. 

The next chart shows us two kinds of debt. The lower line is the 

publicly held debt, the marketable debt, and that is the $9 trillion 

number— 

Chairman CONRAD. What page is that in your— 

Mr. MALPASS. This is on page 12 in the graphs, and in the testimony, it is on page nine. 

Chairman CONRAD. Okay. 

Mr. MALPASS. And the testimony gives the background and the 

numbers to it. And so what we see is that the debt limit, the statutory debt limit is now up at $14.3 trillion, almost at the size of the 

GDP, and certainly going to go above it. My own view is that the 

debt limit has to be increased. It is not the right debt limit to try 

to regulate because it goes up with inflation. It goes up with the 

growth of the economy and also with the Social Security Trust 

Funds and the other trust funds. And so that number, Congress 

really, I think, could not use as an appropriate limitation on the 

amount of debt and I am recommending that we shift over to marketable debt-to-GDP as a ratio that you could limit for the next 100 

years. That number should be decided on and then used as a limitation on government debt. 

On page 13, then, this shows you—and I will not dwell—you 

know better than I the various breakdowns of spending, but I will 

note, this shows you the spending per GDP for various parts of the 

budget, and notable is that the interest costs are going to go up 

very dramatically, even in CBO’s really optimistic—they are assuming interest rates stay really well behaved, nothing like what 

has gone on in Greece, well behaved interest rates. The interest 

costs shoot up, and look where the loss comes from. Defense spending is—this is the President’s budget from fiscal year 2011, and 

also all other spending, meaning you are not controlling Medicare 

costs, Medicaid costs, or Social Security. It is going to come out of 

huge cuts just in the next five, eight years for all the other government spending and services that come out of the Federal Government. 

The next chart shows us the same kind of presentation, but in 

dollar terms. So what you can see is the Medicare and Medicaid 

costs are $1.6 trillion, and notable on this graph is interest costs 
198 

will almost overtake the entire defense budget by 2021 in the CBO 

ten-year budget window. 

One point I will make on this graph is I think Congress should 

be looking at spending this way, meaning that there are all these 

things that you spend money on, and it does not matter so much 

whether it is an entitlement, whether it is a mandatory, whether 

it is discretionary. It is all just dollars and it goes out very rapidly. 

So rather than dividing the debate into what we do about entitle- ments and what we do about the rest, just find a way to cut $1 

billion this week and $2 billion next week and we would be ahead 

of the game. And whatever it comes out of, the public will cheer 

and say, good job, and then you will get some support for doing the 

next round of restraint. 

On 15—I only have a few more here—on 15, this shows you—I 

am going to show you two or three graphs that are the optimistic 

side of the CBO forecast. CBO is assuming that tax receipts go 

above the 20 percent level that we have never gone above before. 

So look how much it does. By 2016, 2017, 2018, 2019, we are above 

20 percent of the economy in tax receipts. I do not think we can 

achieve that. I think once you get up to that barrier, you kind of 

hit a wall for the economy. So I doubt—you know, we have been 

talking about how huge the debt projections are coming out of 

CBO. I am afraid it is going to be worse than that. 

The next page shows you—I mentioned one saving grace for the 

United States that is not available in Southern Europe is we have 

a huge amount of assets that have been built up. This country has 

been growing for 200 years and people put it away in houses where 

the mortgage has been paid off, in corporations where you have a 

lot of assets. And so it is 425 percent of GDP in household assets 

versus that 245 percent debt. So that should give us some hope. We 

can dig our way out of this hole if we start restraining spending. 

The next chart shows you, again, an optimistic CBO forecast. 

Again, these are legitimate forecasts. I am not saying anything 

wrong with CBO doing it this way. They get guidance from the 

committee, from Congress itself. What I am saying is that we will 

be lucky if we get the deficit and debt numbers that they are projecting because it can be worse. 

This shows you the net interest per debt goes up to 4.5 percent 

or maybe five percent of debt, which is a lower interest rate. They 

are assuming the interest rates are lower on this coming debt than 

what we have had on the past debt, which is hard to imagine since 

we have so much more debt. Normally, as your debt grows, you 

have to pay more on it. We are assuming in their forecasts that we 

pay less than historical. 

I want to shift now to the tipping point. The next chart shows 

you the difficulty here. Here is CBO’s forecasts. What they shows 

you is that interest rates are expected to rise to the four to 4.5 percent yield curve. That means at the short end, by the end of this 

budget window, we will be borrowing at four percent on the short 

end and 4.5 percent on the long end. 

That sounds good, but as the next—but challenging that is, and 

the next chart shows this, the very short maturity of our debt. This 

is a key point, that we have not only a huge, record amount of 

debt, but it is also a record short-term nature of that debt, which 
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means that if we get into a hiking cycle, we are in deep trouble, 

and I am worried that that is what we will get to. 

What this chart shows you is the effect of the Fed now buying 

back the long-term debt. Look, the Treasury has issued long-term 

debt which stabilizes the country because it means we do not have 

to roll it over. The Fed is buying precisely that safest debt and buying it back into the U.S. Government. And so the effective maturity 

on the national debt has gone down to 40 months, which is—we are 

back to the 1970s level of risk in terms of the short nature of the 

debt. 

A couple more charts. If we think about how a crisis happens, 

a tipping point happens, the yield curve for Greece—next chart— 

shows you what happened to Greece. They were going along happily in 2007 with that low-yield curve, and then whammo. They hit 

a tipping point and the debt exploded higher. 

And the same thing happened on Greece—excuse me, on Ireland. 

When they went above 90 percent, as the Chairman noted, the 

Reinhart and Rogoff book points out what happens when you hit 

90 percent, and the U.S. is headed there. They hit that in 2010, 

and look what happened to their interest rate. They spiked interest 

rates in the middle of 2010 and that just created a catastrophic 

problem in the budget deficit as they hit that. 

So as we think about the tipping point, my concern is that we 

are going to be stuck with such slow growth that the living standards will continue going down. Look at the two periods. The 1970s 

and the 2000s have seen a decline in the median household income 

and that puts us at risk. If we are not an economic superpower 

that adds to the median household income, we are in trouble as a 

country, and that is where we stand right now. 

The next chart shows you that we do not want to get to this 

point. This is Europe hitting the tipping point and the interest 

rates shoot up, the deficits explode, and they cannot roll their debt. 

So that is what we are trying to avoid, and 25 shows you the Fed’s 

explosion of assets, which is one thing that has been distorting the 

markets because the Fed is absorbing such a huge amount of the 

fiscal deficit right now. They are using extreme leverage, 40-to- one 

type leverage. The Fed now has its balance sheet up to, or is heading toward $3 trillion of assets with little oversight from the normal Congressional appropriations process. 

So in conclusion, I will mention four policy points of view. I think 

you should use the opportunity of the Continuing Resolution on 

March 4 to cut spending. Just do a little, or do more. Do more 

every day, if you can. Second, you should use the opportunity of the 

debt limit increase— which I support, you have to increase the 

statutory debt limit—but use that opportunity in a thoughtful way 

to add new controls to the national debt. 

I recommend a debt-to-GDP limit as opposed to the current 

nominal debt limit. A debt-to-GDP limit, say, at 50 percent and 

also a limitation or a requirement that the average maturity of the 

debt stay at five years or longer. We are cheating ourselves by having the current government issue short-term debt, putting us at 

risk. 

And then, thirdly, the Fed should wind down its asset purchases. 

They are shortening the effective maturity of the debt. They are 
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causing substantial market disruptions and they are climbing rapidly. 

And finally, tax reform is a high priority and I think in order to 

get it done, what you should do is make the extensions of the current tax rates permanent in the baseline, and that way you could 

have a legitimate discussion about what to do about future tax 

rates. 

Thank you very much, Mr. Chairman and Senators. 

[The prepared statement of Mr. Malpass follows:] 
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Chairman CONRAD. Thank you. Let me just go to each of you and 

ask you in turn, look, we have—this Committee is the Budget Committee, and our obligation is to provide a budget outline to our colleagues. We have a lot of decisions to make. One of the fundamental questions is how quickly do we impose fiscal discipline, fiscal austerity. 

The Commission concluded—and it is interesting. Not only did 

the President’s Fiscal Commission conclude this; the DomeniciRivlin Commission concluded this, and the Esquire Commission 

concluded this—all of them bipartisan Commissions. All of them 

concluded for the next 18 months to 2 years we ought to make 

modest changes, but put in place a plan that over time, over the 

next 10 years, substantially reduces the debt, on the rate of the 

President’s Commission, $4 trillion of debt reduction. DomeniciRivlin was even more aggressive on deficit reduction, as was the 

Esquire Commission—all of them bipartisan Commissions. 

What would your advice to us be in terms of a 10-year plan? How 

aggressive should we be on the front end with imposing austerity? 

How big a chance should we be seeking to achieve over a 10-year 

budget window? Dick? 

Mr. BERNER. Well, Senator Conrad, I think that I would generally endorse the timetable and the general tone of each of those 

three Commissions, namely, that we do not have a short-term debt 

problem; we have an enormous long-term debt problem, and we 

need to come to grips with that. If we had a short-term debt problem, then the market and market participants would be reflecting 

that. 

One of the things we can use as a barometer to gauge whether 

we have a short-term debt problem is the response of markets, and 

when markets start to question whether or not you can service 

your debt, then you will see a rise in interest rates and a widening 

in spreads relative to other benchmarks in the marketplace on a 

global basis. We do not have that yet, so we enjoy low interest 

rates, and we enjoy favorable borrowing terms right now. But, of 

course, that is going to run out, and I think, as I emphasized in 

my testimony and as you just mentioned, the important thing is to 

craft a credible plan to address our long-term problems. And I just 

want to emphasize that credible does not mean saying that we are 

going to cut $100 billion here or that we are going to have a 5-year 

freeze on discretionary spending. Credible means that we are going 

to attack those long-term problems. We are going to look at them 

specifically and address the root cause of our long-term fiscal problems. 

Chairman CONRAD. Dr. Johnson, what would your advice be to 

us with respect to the question of timing? 

Senator SESSIONS. Mr. Chairman, could I ask him to do that in 

an economic sense, not adjusting your comments to what you might 

think the political realities are, because that is up to us to try to 

face. But we would like to have your best opinion on what we 

should do. 

Mr. BERNER. Senator, if I could just add, my comments were not 

adjusted for political reality. 

Senator SESSIONS. I felt that. Thank you. 
239 

Mr. JOHNSON. Well, I think we are—I am not in favor of precipitous, immediate fiscal austerity of the kind the British Government 

is now embarked on, and we will see in the quarters ahead how 

that program does. The data from the last quarter is rather shocking. They had a decline in GDP far below all the private sector 

forecasts in the U.K. Partly it was bad weather in December, but 

also October and November were very bad months. 

As Dick said, we do not need—they do not need also, but we do 

not need that kind of immediate cuts, but I think we do need something over the medium term, in my opinion, that is even more aggressive than I think where Dick is and certainly than where 

David is. I think when you are carrying massive financial sector 

risk, which is what we are carrying—and it is also, by the way, 

what the Irish carry. If you look at page 21 in David’s charts, the 

Irish were considered to have responsible fiscal policy. They blew 

themselves up on the fiscal side because three banks went rogue 

and destroyed themselves and were taken over by the government, 

because the government felt they did not have an alternative. That 

is where we are. So 50 percent of GDP or 60 percent, the number 

commonly used, I think is to high when you have—unless you want 

to deal with the financial risk. But we did not do that. So when 

you are carrying this amount of implied contingent liability over a 

10-year period, I want to get the debt down even lower because I 

fear that the markets can turn very quickly. This is the Bill Gross 

test, Senator Sessions. Next time you or I see Mr. Gross, we should 

ask him: How long would it take you to change your mind and shift 

your portfolio, for example, towards the euro zone if they sort out 

their fiscal financial problems? Which I think they will do in the 

next 12 to 18 months. I think he would tell you it takes, you know, 

20 minutes for him to move his portfolio. That is how fast the yield 

curve can move against this, and that is what happened, as David 

said, to the Irish. 

Chairman CONRAD. That is what Tom Friedman called ‘‘the electronic herd.’’ 

David? 

Mr. MALPASS. I think the goal is to avoid that electronic herd 

and actually to get the private sector to start hiring people. So I 

think I feel a little differently than many economists, that if we cut 

a lot now in the Federal Government, people would perk up and 

take notice. Global investors would start putting their money into 

the United States rather than moving it to Asia and elsewhere. So 

I want to emphasize that positive feedback mechanism from going 

on a diet now. If you are going on a diet, do not say, well, 3 months 

from now we will have our plan laid out. Just stop eating as much 

this evening, and then if you can, start your exercise program. 

Chairman CONRAD. But, David, let me just say to you, you know, 

the problem is that is not the way the schedule of Congress works. 

Mr. MALPASS. Yes. 

Chairman CONRAD. You know? We have a schedule here, and the 

schedule is we have to have a budget resolution that guides the Appropriations Committees. I happen to agree with you. I think it 

would be wonderful if we could do it. But it does not work with the 

schedule of Congress. So we have to deal with that, and that is 

why, again, I asked for a summit. I think if we want to send a sig-
240 

nal that America is going to face up to this problem and we are 

going to put together a credible plan, nothing would be more effective than the leadership of this country sitting down and coming 

up with that plan and not wait for the debt limit. You know what 

I am saying? I mean, we are not going to have appropriations bills 

for months because they come later in the cycle. So we cannot do 

what I think you would like to see happen, what I think would be 

helpful to credibility, because, you know, we just do not get to that 

stage until a little later. 

Mr. MALPASS. Yes, this is a tough fix. I agree with all of you that 

we need the longer-term cuts and rethinking of how we spend 

money, and it needs to be rather substantial. So a wonder in the 

markets right now is whether there will be any ability by the U.S. 

Government to actually do some of these cuts. So is there some 

middle ground between what the U.K. did and doing nothing over 

the next 6 months. That at least would, I think, begin to change 

the minds—right now U.S. corporations are taking their money 

outside the United States. They borrow in the U.S. at very cheap 

rates and invest in Asia because they are worried that the U.S. 

cannot cut spending. So if there could be some symbolic or concrete 

types of changes to give them reassurance, I think we would start 

getting jobs right away. 

Chairman CONRAD. All right. My time has expired. 

Senator Sessions. 

Senator SESSIONS. Dr. Johnson, I would just say that the TARP 

bailout has not cost the taxpayers a lot, but the stimulus bill cost 

$900 billion at 4 percent interest. that is $36 billion a year we will 

pay for the rest of our lives, I suppose, because of this one effort. 

Nobel Laureate Gary Becker, whom I quoted on the floor before 

that bill passed, said he did not think it would be sufficiently stimulative, and I believe he is proven to be correct. He said it would 

be far less than—I think he said 0.7 and should try to be above 

that if you could get there. But anyway, neither here nor there. 

I guess in one sense you could say this is not a crisis now, but 

I would contend that a $1.5 trillion deficit is a huge thing, and we 

will pay interest on that forever, presumably. Interest is crowding 

out so much of our future potential to invest, as the President 

would say, in things we would like to spend money on. It is just 

going to be a huge thing even if the interest rates stay at the rate 

CBO projects. 

Mr. Malpass, you did not comment, I do not think, on the RogoffReinhart theory, but it is that if you get debt so high, it reduces 

growth and puts you in a serious stagnant position. Do you agree 

with that theory? Does that provide greater urgency for us at this 

point in time? 

Mr. MALPASS. I think it definitely does. So as more and more of 

the economy is directed by the Government, as the debt goes up, 

that reflects the Government directing more parts of the economy, 

and your growth rate goes down. And I think we are already seeing 

that in the slower average growth rate for the U.S. over recent decades. It is a grave concern. 

Senator SESSIONS. The income, revenue to GDP, you referred 

to—I believe you referred to it. 

Mr. MALPASS. Yes. 
241 

Senator SESSIONS. 14.8 percent. One thing I believe causes 

that—and I have not seen any research done on it, but we have 

skewed our revenue to high-income individuals whose income tends 

to be more volatile. So now I understand it is down to—is expected 

to be 14.8 percent of GDP by 2015, and Moody’s is concerned with 

our debt rating. How would you comment on that, Mr. Malpass? 

Mr. MALPASS. The slower economy hits people that were earning 

more, and so that is showing up in this lower rate— or smaller percentage of taxes coming from high earners. I think it also means 

and helps explain why job growth has been so weak, that we really 

depend a lot on new businesses and small businesses for creating 

jobs. And so in the current environment, they are not doing that 

as much. They are not then scoring, you know, creating things like 

Google. We are going to have this dry period of entrepreneurism 

and innovation. So that will be costly to us in the long run, too. 

Senator SESSIONS. Dr. Berner and Mr. Malpass, to follow up on 

Dr. Johnson’s comment about what the U.K. is doing, I think a fundamental question is: Are they taking their medicine now that will 

put them in the longer term on a healthy growth path? Or is their 

reduction in spending and increase in taxes—I think it is three to 

one revenue cuts to tax increases. Is that too much austerity? And 

I would like the two of you to add your views on that. 

Mr. BERNER. Well, you know, Senator, each country has to determine the pace at which they decide to impose austerity, and in the 

U.K. they have decided to stretch out over a 4-year time frame the 

kind of austerity that we are seeing. I think the U.K.’s particular 

problems right now in terms of growth relate to other things besides the fiscal austerity that they have imposed. But one thing we 

know is that they also have an inflation problem in the U.K., which 

is higher than ours and higher than most of the developed world’s, 

and so that limits their flexibility to maneuver as well. So they 

have a little bit less flexibility to maneuver than we do. Right now 

we have low interest rates, low inflation, a Federal Reserve that is 

very supportive of growth. We may not have that flexibility in the 

future. 

So the answer, I think, is to— 

Senator SESSIONS. Well, with regard to the U.K., just looking at 

them, do you think in the long run they will benefit from the austerity measures? 

Mr. BERNER. In the long run, they will benefit from those austerity measures. The question is whether they have the right balance given their other policies. That is absolutely right. 

Senator SESSIONS. And, Mr. Malpass, you comment. 

Mr. MALPASS. I agree with that. I think we would be better off 

if we could move faster even in the short run on fiscal austerity. 

I take to heart the Chairman’s point that our system is not a parliamentary system. They have a way where a small group of people 

can say, look, let us change the fiscal course. Ours is going to take 

a lot of work among a lot of Senators, Congressmen, the administration, and so on to get it done. 

I would note the pound strengthened quite a bit when the U.K. 

made this change, and that helps them in terms of their living 

standards. If you think of the dollar per capita incomes in the U.K., 

they have gone up while ours are going down because of that 
242 

change. And, also, I do not think we should measure it only in 

terms of their GDP growth rate, which was weak in the fourth 

quarter. We have to look at jobs and future jobs that are being created, and I think by the Government showing some discipline, that 

is attractive to the business environment, and we will see the job 

growth doing a little bit better even in the short run for the U.K. 

than what we have been experiencing here. 

Senator SESSIONS. Well, to you economists, thinkers, Masters of 

the Universe, as I affectionately call you, the political world is unusual. It is not quite the same. And the idea that we can just move 

in and out and make changes is not accurate. It happens that there 

are opportunities to make changes. My firm belief is right now 

there is an opportunity to go further than Wall Street thinks is 

possible in reducing spending and put us on a sound path. Now, 

we do not want to do something that, you know, would be disastrous to the economy, but I think we better take advantage of the 

opportunity to reduce spending now. 

I criticized the Bush administration. We had surpluses, and 

somehow it got around that deficits do not matter. They forgot the 

political world. I am in here saying we cannot spend more because 

it is going to run up the debt and we will lose our surpluses, and 

they are saying it does not matter. But once you politically get that 

ideology going, it runs out of control. And so the American people 

are at a point of wanting to be more frugal right now. I think we 

better go meet them halfway and push them a little further and 

take the gain that we can get now. 

Thank you. 

Chairman CONRAD. Thank you. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman, and I thank all three 

of you for a fine presentation. 

Before this meeting, there was an extraordinary discussion that 

you do not see very often in the Senate. Senator Conrad, Senator 

Coburn, and others put together a meeting on the debt and where 

the economy is headed. At a little after 8:00, there were more than 

30 United States Senators there interested in actually getting into 

the details. You do not see many meetings like the one that was 

held this morning. 

And what I was struck by—because the numbers are just a clear 

wake-up call. I mean, if you are spending $3.7 trillion and you have 

receipts of 2.2, it is not hard to figure out that math and what the 

implications are. And what I was struck by was the sense that the 

single most important thing here is to send a major message to the 

country and to the financial markets that you are getting serious, 

that you are doing something significant. And what Senators 

seemed to get focused on was the idea that you would make a substantial downpayment this year in deficit reduction and deal with 

at least one major long-term problem, one major structural problem. 

I admit that I think the structural issue ought to be tax reform. 

Senator Gregg, Senator Sessions’ predecessor, and I introduced legislation that would create, according to the Heritage Foundation, 

2.3 million new jobs per year, and I think because of what you have 
243 

described in terms of the economy, what is done in terms of the 

long term has to give a shot in the arm to the economy. 

But I would just like to go down the row and ask each of you 

to give us your sense, first of all, of a number, an actual number 

that would constitute a real message that you are making a downpayment this year in terms of deficit reduction, and then your take 

on what would be the major long-term issue that Congress would 

actually tackle this year and enact it into law. And you have already heard my judgment that it ought to be tax reform because 

of growth.? 

So we will just go all three of you, and I would also note Mr. 

Malpass spent years in Oregon, and we are glad to have an Oregonian before the panel. We will claim you. 

Mr. Berner. 

Mr. BERNER. Thank you, Senator Wyden. You know, we do not 

know exactly what the number is, but— 

Senator WYDEN. Just a ballpark. 

Mr. BERNER. —$100 billion is not impressing financial markets. 

Something, you know, quite a bit larger than that, something on 

the order of $400 or $500 billion. And I think what is really important here is not so much, as the discussion has revolved around, 

that that be implemented today, but that you commit to a large 

number and you have a plan to make that number understandable 

and to make it credible so that financial markets will take it on 

board and will be positively surprised by that number. 

And I want to say I fully support—and I support David’s argument and yours for tax reform. I think that would have enormous 

benefits for the economy in a number of respects, and I hope you 

find a co-sponsor on the Republican side— 

Senator WYDEN. We will. 

Mr. BERNER. —to support your proposal, because I strongly support it. 

Senator WYDEN. Very good. Mr. Johnson. 

Mr. JOHNSON. I think this is absolutely the right question at the 

right time. Clearly something on the order of tens of billions does 

not do anything in this context, and I doubt that even if you are 

talking about hundreds of billions that makes that much difference. 

I think you need to be talking about the big trillion-dollar items 

over a 10- to 20-year horizon, and there are two. One is tax reform, 

where the good news is our tax system is so antiquated and so 

messed up that even if you do not want to raise revenue as a percent of GDP over the cycle, there are plenty of ways to improve incentives. And when you are improving incentives, you will actually 

get some additional revenue. We take in, in terms of taxes relative 

to GDP, 10 to 15 percentage points less than other industrialized 

countries that have better-run tax systems. So you decide whether 

or not the revenue—it certainly makes the tax system better. 

And the second is health care, Medicare in particular. That is a 

big budget buster by 2030, 2040. I doubt that you want to take on 

Medicare in this Congress, but those are really your two choices. 

Those are the two things that would really make the difference 

here. And I have to say in this context I did not support the tax 

deal at the end of last year. That was a big number over the next— 

over the foreseeable future. That was a big number in the wrong 
244 

direction. That was a bipartisan consensus away from fiscal responsibility, quite contrary to the spirit of everything that has been said 

here this morning. And I am sorry that Senator Sessions stepped 

out because he said that somebody said deficits do not matter during the Bush administration. I believe that was Vice President 

Dick Cheney who specifically said, ‘‘Ronald Reagan taught us that 

deficits do not matter.’’ And I hope as we approach Ronald Reagan’s 100th anniversary next week we all reflect on how far from 

being appropriate for today’s reality is that message. 

Senator WYDEN. I do think one other part of your testimony that 

is very helpful is you are conveying a sense of urgency, because in 

this town it is all about the politics of procrastination. What I 

wanted as part of the end-of-the-year agreement was a 1-year extension of the Bush tax cuts so that you would force Congress to 

step up this year and actually deal with these kinds of issues, because my concern is unless you all and others can help us convey 

this sense of urgency, we will have exactly the same debate in the 

lame duck session of the 2012 Congress as we had during the lame 

duck session of the 2010 Congress. And that was why I wanted 

something that would force action this year. 

Mr. Malpass, your thoughts, the number and the question of the 

big structural issue, if you get to pick one. 

Mr. MALPASS. Thank you for representing Oregon. The markets 

are cynical about how much can be done here in our system, and 

so I think as you go through this, one of the most heartening 

things, if 30 Senators this morning were together, as you mentioned, that is a big step. That is the kind of change that people 

want—I mean that markets will be looking for and say, Golly, if 

you got all those people in the room, something might come out of 

it. 

My view is—and I think you are hitting on it—that short extensions of existing spending where you take many bites at the apple 

I think would be a procedure that might work. So as the continuing 

resolution discussion comes up, whatever the amount of spending 

cuts that can be done in that resolution, if you can do it multiple 

times in a given year, that is going to get you a lot of credibility 

in terms of the financial markets and job creation from the private 

sector. 

So I think $100 billion in near-term spending cuts would be very 

useful. Whatever the number is, then kind of make a promise or 

a pinky promise of some kind that you are going to come back 2 

or 3 months later and try to do another round of things that you 

can work on. 

As far as what is structural reform longer term, I think tax reform would be—Wyden-Gregg was very good, if you can get another 

co-sponsor and go forward with that, and I recommend a baseline 

where you look at directing the baseline so that it gives a more 

level playing field. Otherwise, you are swimming up this fast current. The CBO scoring undercuts the tax reform process to such a 

degree, the normal scoring, that you will not be able to get a 

growth-oriented reform. 

The other procedural change I am suggesting is that you fill this 

vacuum of limits. A debt-to-GDP limit would be very comforting to 

markets because markets’ concern right now is you are going from 
245 

60 percent debt-to-GDP, marketable debt-to-GDP, right up to 90, 

and it looks like we might go to 110, meaning right across that 

threshold that the Chairman mentioned. So if we could have some 

new kind of limitation other than the statutory debt limit, that 

would give some underlying confidence. 

I need to make one defense of President Reagan. There was the 

idea that his economics were not the right economics. Remember 

what he was saying, that we cannot look at the deficit alone; we 

have to look at the tax rates and at the spending. And so we needed to cut both of those to enable the private sector, and my view 

is that worked very well in the 1980s, and we created a huge 

amount of jobs and growth out of good, sound economic policy in 

those years. 

Senator WYDEN. My time has expired. Thank you. 

Chairman CONRAD. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. I would like to 

thank the panel for their testimony as well. 

I have several questions. The first is I would like to follow up on 

something that Mr. Malpass addressed, which is the increase in 

the debt limit. You have advocated that we make some structural 

changes essentially to get this escalating deficit and debt under 

control. I happen to share the view that we should make structural 

changes. We might have a difference as to exactly which ones to 

make, but I do think it is very important that we use this occasion 

to begin to get our long-term spending problem under control. 

So I am not in the camp that argues that under no circumstances 

should we raise the debt limit. I also accept your general premise 

that it is a rather blunt instrument, and the disruptions that would 

occur are to be avoided, if we can. However, I think it is very important as we approach this that we understand exactly what 

might occur and what would not occur if there is some period of 

time during which we do not raise the debt limit upon reaching it. 

So my first question is a simple and factual, historical question, 

and that is, is it true that we have had recent episodes in the past 

several decades where we have reached our debt limit, we have not 

raised it immediately upon reaching it, and we nevertheless did not 

default on the marketable debt securities issued by the Government? 

Mr. MALPASS. To me, sir? Yes. In the late 1990s, there was a period of roughly 4 years. It is on page 9 of my testimony. My view 

is those were rather unique years. One of the things that was happening was defense spending was being cut sharply. Another thing 

that was happening was there was a temporary slowdown in the 

entitlement spending. It had to do with the generation—you know, 

the baby-boom generation had not yet started to retire. So on page 

9 it goes through those. 

Also, in those years something was happening—yes, here it is on 

the screen. Fannie Mae and Freddie Mac were really ramping up, 

which operated almost like Government spending. Remember they 

were kind of off-budget, and yet they are really ending being taxpayer liabilities. So that helped paper over that particular period 

of time. 

I do not think we could mimic that right now. 
246 

Senator TOOMEY. Well, if I could interrupt for just a second, the 

point is that for a short period of time the debt limit was not 

raised. 

Mr. MALPASS. Correct. 

Senator TOOMEY. And when the debt limit is not raised, is it true 

the tax revenue still comes in? 

Mr. MALPASS. That is right. Money floods in. 

Senator TOOMEY. Right. And next year, for instance, if my numbers are right, something on the order of 70 percent of all the 

money that the Government is expected to spend is going to come 

in in the form of tax revenue. Is that true? 

Mr. MALPASS. Yes. 

Senator TOOMEY. And something on the order of 6 percent of all 

the money the Government is going to spend is currently scheduled 

for interest on our debt. 

So I guess the question is: Is it possible for the Treasury, in the 

event that the debt ceiling is not raised, and acknowledging that 

this is in some ways a disruptive thing if that does not happen, but 

that the Treasury could, nevertheless, ensure that those people 

holding the marketable securities of this Government would receive 

their interest payments and that those payments can be made? 

Mr. MALPASS. Yes, that is plausible. The fiscal deficit is large 

now, so each month, the government is in a negative cash flow of 

roughly $120 billion. So what would happen each week is someone, 

meaning the Treasury Department or you, members of Congress, 

would have to be deciding who not to pay— 

Senator TOOMEY. Right. 

Mr. MALPASS. —and my concern is the disruption as— 

Senator TOOMEY. I understand this is very disruptive and I have 

acknowledged this. The point is a narrow point, and that is do 

those people holding securities necessarily need to not get their interest and principal payments, and I think you are acknowledging 

that. 

Yes, sir? 

Mr. JOHNSON. Senator, I think you are playing with fire in this 

scenario. One point that was not covered in David’s otherwise comprehensive review of the debt situation is borrowing from abroad. 

You have to remember that it is not just an internally funded debt. 

We are the world’s largest borrower and this is very dangerous. 

There are alternative assets out there in the world. I know that the 

Eurozone does not look very appealing right now, but I think they 

will turn themselves around. The Chinese are working very hard 

to create alternative reserve assets— 

Senator TOOMEY. Right. 

Mr. JOHNSON. —including the Renminbi. I really do not think 

that you want to create potential disruptions of this kind, because 

there is nothing that says that the dollar has to be the number one 

reserve asset forever, and the British pound lost this position earlier in the 20th century exactly through fiscal irresponsibility and 

global overreach. 

Senator TOOMEY. I would simply argue that I think the fiscal irresponsibility is what hasten us into this situation, and the refusal 

to do anything about it is the worst message we could send to the 

market. The fact that revenue will be more than ten times the ex-
247 

pected cost of interest makes it very clear to me that no responsible 

Treasury Secretary would ever allow a default to occur on our debt. 

It would be so disruptive and so damaging to our entire economy, 

to the millions of savers, Americans as well as others, that I cannot 

foresee how a Treasury Secretary would permit that to happen 

when he or she would have more than ten times the revenue needed to prevent it from happening. 

Let me move on to another question, if I could, and that is as 

alarming as the magnitude of the debt that we have discussed 

today is, I may have missed this, but I do not recall a discussion 

about another component that worries me, in fact, I would argue 

is even bigger than what we have talked about, and that is the unfunded liabilities implicit in the promises we have made through 

the big entitlement programs. If you quantified the present value 

of that shortfall, is it true that that is actually several multiples 

of the actual publicly traded debt that we have? 

Mr. BERNER. Yes, it is, Senator. It is, and obviously different calculations will give you different results, but I think everybody 

agrees that the present value of those liabilities is enormous. In 

fact, if you add up Medicare, Medicaid, and Social Security, you 

come up with an unfunded liability, when added to the debt, really 

would exceed the value of the assets that David showed in his 

charts. 

Beyond that, if you look at another issue, which is the unfunded 

liabilities of State and local governments, those that are on the 

books as the gap between the promises they have made for their 

pensions and the assets that they have, as well as the unfunded 

liabilities for the health care promises that they have made, that 

would add, on top of the Federal liabilities, to what you are talking 

about. So the answer is definitively yes and resoundingly so. 

Mr. JOHNSON. But we also need to add and score appropriately 

the contingent liabilities that arise out of the financial sector— 

Senator TOOMEY. Right. 

Mr. JOHNSON. —because we just pushed up debt by 40 percentage points of GDP because of the way the financial sector— 

Mr. TAYLOR. Agreed. 

Mr. JOHNSON. So I think all of this needs to be included, and I 

think we agree on that. 

Mr. MALPASS. And can I add one more? I agree with those points. 

The actual size of government is going to go on. Fifty years from 

now, there is going to be a defense budget and there is going to 

be probably a Federal education budget and so on. So I think as 

you think about the problem, I am not as focused on dividing entitlements from discretionary spending. They are all commitments to 

the people that there is going to be a government in the next generation and the next and we just do not have the money for it right 

now. 

Senator TOOMEY. Thank you very much. I see my time has expired. If there is time in a future round, I would like to address 

yet another respect in which I think this problem is even worse, 

and that is something that Mr. Malpass mentioned briefly, which 

is what strikes me as potentially a very optimistic forecast about 

the level of interest rates, and when, of course, you have a huge 
248 

debt, if you are wrong about your optimistic forecasts about interest rates, then that has devastating consequences. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you for that point, because I think 

that is one of the critical points, somehow, we need to be able to 

persuade our colleagues of. What is the risk of a failure to act? 

You know, we have a very benign interest rate environment now, 

very low interest rates, even record low interest rates. Some are 

saying that is an indication we do not need to act. My own view 

is it is giving us a period of time within which to act. A failure to 

act within that period of time could lead to much more serious consequences. And if you look at that ten-year CBO outlook, they are 

projecting a low interest rate environment for a decade. Well, 

maybe that happens, maybe it does not. If there is one thing that 

is clear, we have seen it in the case of Greece, it was clear in Mr. 

Malpass’s presentation, Greece, Ireland, everybody else that has 

run into one of these situations, the change in your interest rate 

environment can happen like that and then you are really in the 

soup. 

Senator. 

Senator TOOMEY. Mr. Chairman, thank you. Just a quick observation about how very optimistic this interest rate assumption 

strikes me, and that is the assumption is that interest rates revert 

to something less than their 20-year mean over the last 20 years. 

That, despite the fact that the Fed is embarking on an absolutely 

unprecedented program, the very purpose of which is to increase 

inflation expectations. It is my fear that they will be very successful at increasing inflation expectations, quite likely increasing inflation itself, and it is very hard to fathom how interest rates do 

not respond by going considerably higher. If that happens, all of 

these numbers change pretty dramatically. 

Mr. BERNER. Senator, if I could— 

Chairman CONRAD. Yes, go ahead. 

Mr. BERNER. If I could add a point to that, I think one of the— 

beyond the inflation issue, it seems to me that one of the biggest 

issues that is out there is that in this global environment, market 

participants around the world view us as the best credit around the 

world. If they start to question our ability to service our debt and 

our ability to meet our obligations, that is when interest rates adjusted for inflation will start to rise and the risk premium on our 

debt will start to rise, and as you put it so eloquently, that is when 

we are really in the soup. 

Mr. JOHNSON. But Senator— 

Chairman CONRAD. Simon? 

Mr. JOHNSON. Let me pile on. It is worse than this, I think, because again, thinking globally, I would commend to you this new 

report by McKinsey Global Institute on real interest rates. So what 

are global savings going to be? What is global investment going to 

be? In their assessment—this is a very good report led by Michael 

Spence, a Nobel Prize winner—their assessment is, just in real 

terms, looking globally, interest rates will head up. So you should 

add your concerns about nominal interest rates, about inflation expectations onto the real rate, and they say we are coming out of 

a period where we have had unusually low real rates globally be-
249 

cause we have had savings that were higher than investments for 

reasons that are now receding. 

Mr. BERNER. And let us be clear. If real rates go up because economic performance is good, and as Simon just put it, if we see 

strong growth around the world, then real rates actually should go 

up. But if real rates are going up because there are concerns about 

our creditworthiness, then that is where our economic performance 

on a long-term basis will really suffer and where the spiral becomes quite negative. 

Chairman CONRAD. Can I just make this point? One of the concerns I have in listening to the discussion that is unfolding in this 

town is the focus on non-defense discretionary spending, because 

non-defense discretionary spending is about 16 percent of our budget. The President used the number 12 percent in his State of the 

Union because he had an unusual treatment of Homeland Security 

and some other things that he put in the defense pot that normally 

would not be there. I think he put international in the defense pot. 

But let us go back to that basic formulation. Non- defense domestic discretionary spending is about 16 percent of our budget, and 

yet it is getting almost all the attention for how we solve this problem. And we are borrowing 40 cents of every dollar we spend. If 

you eliminate it all, you have not solved this problem. 

So the part of our budget that is growing as a share of the size 

of the economy are our entitlement accounts— Medicare, Social Security, primarily the health care accounts, much bigger than Social 

Security. That is seven times the problem of Social Security. And 

yet, you know, somehow, we do not want to talk about it. I think 

I know why we do not want to talk about it, because if you ask the 

American people, they say you do not need to touch Medicare. You 

do not need to cut Social Security. You do not need to touch defense. You do not need to touch revenue. 

Well, I just say this. If that is really the conclusion, that Social 

Security does not have to be touched and it is cash-negative today, 

Medicare does not have to be touched, defense does not have to be 

touched, revenue does not have to be touched, you cannot solve the 

problem. There is a mathematical certainty you cannot solve the 

problem. 

So some of us are going to have to help the American people understand the unfortunate reality here, and the unfortunate reality 

is, I believe, all those things are going to have to be touched, and 

the sooner we do it, the better, because the less draconian the solutions will be later on. The worst time to deal with this is when you 

are in a crisis. If there is anything Greece should have taught us 

and Ireland should have taught us and Portugal should teach us 

is the worst time is when you are in a crisis. 

Dr. Johnson, you are the former Chief Economist at the International Monetary Fund. Probably nobody that I am aware of has 

a deeper understanding of global economics than do you. What 

would be your advice to this committee with respect to the question 

of how you deal with this in a systematic way? What parts of the 

budget have to be dealt with over the longer term? Does domestic 

discretionary spending, non-defense, does that get you out of this 

hole? 
250 

Mr. JOHNSON. No, Senator, it obviously does not. The IMF advice 

would be, or maybe will be if we get sufficiently desperate and we 

need to take their advice, would be you need a medium-term fiscal 

framework. You need some very clear agreed upon rules. You need 

your summit. You need a bipartisan consensus. You need to say, 

this is what we are going to do on tax reform. This is what we are 

going to do, particularly on Medicare. Social Security is a problem, 

I agree, but that can be addressed in a relatively straightforward 

way. Medicare and medical costs explode as a percentage of GDP. 

And by the way, compared with other countries like, for example, 

in Europe, they have the same problem. They just do not account 

for it as honestly as we do. If they scored their future medical 

spending like the CBO scores for us, we would see the same problems in most of Western Europe, also, if that is any consolation. 

But if you had that framework, if you had rules that were agreed 

upon, then you have the flip side of the point David made about 

us not being a parliamentary democracy, which is it is not easy to 

change our rules. So if you have locked into those rules in the U.S. 

constitutional framework, the markets are going to know it would 

take a lot to undo them and you can lock into something five, ten, 

15 years down the road which the markets would respect because 

it is hard to undo. Now, it is also hard to get there, I understand, 

but that is, from a global comparative perspective, the advice that 

you would get. 

And honestly, that is what the Chinese—we are very big creditors to the Chinese. I guess the Chinese President paid us a visit 

recently to see how his money is doing and felt okay about that. 

But ultimately, they will not feel okay. Ultimately, our creditors 

will demand this kind of change, too. This is what the IMF has demanded on behalf of the IMF to highly indebted countries around 

the world. 

So we should do it ourselves now, as you said, before we are 

rushed and before we are in a situation where it is a crisis and you 

can only do really, really damaging cuts that hurt a lot of people. 

Chairman CONRAD. Let me say one other thing and then we will 

go to Senator Sessions. I hope very much when we deal with these 

opportunities this year we are not just dealing with short-term 

non-defense domestic discretionary spending. We are talking about 

$60 billion, $100 billion. In one year, we got a $1.5 trillion problem. 

And while that may send a useful signal, it does not touch the 

problem. 

We need a multi-year, comprehensive plan that reduces the debt over the next ten years by, I believe, at least $4 trillion. Now we 

are talking on the scale that really has some credibility. 

Senator Sessions. 

Senator SESSIONS. Thank you. This is a very difficult issue. I 

have been with my staff since I have been Ranking Member and 

I still do not have a handle on it, but I can tell you, anybody who 

thinks it is easy to get this house in financial order is not correct, 

as you indicated, Mr. Chairman. 

I would note, though, we ought not to think that we should ignore discretionary spending. I feel very strongly about that. We 

had 35 percent in the State Department just last year, 35 percent 

increases for EPA, double-digit increases for agriculture. President 
251 

Bush was criticized for agriculture increases. I saw his ten-year 

budget. I do not think he had a single year over a two percent increase. We had a 12 percent—I think it is a 12 percent increase. 

I am just saying, we have—2010 levels are unusually high and we 

are going to have to go back to 2008, if not lower. 

I criticize the Debt Commission and their work on one point. 

They certainly served a national purpose and I may well have 

voted for the product if I had been on the committee. But I would 

just say, their goal as given to them by President Obama was to 

reduce the deficit to three percent of GDP over ten years, and that 

is what they did. I understand that projected—that deficit in ten 

years, three percent of GDP, is $700 billion to $1 trillion. So I 

would ask the three of you first, is that a sustainable deficit, first, 

just briefly, if you would. 

Mr. BERNER. Senator, if that is the end of the story, then the answer is no. 

Senator SESSIONS. It would be good progress. 

Mr. BERNER. It would be good progress, absolutely, if the story 

continued and there was a continuing credible commitment to 

make further progress so that you got that deficit down, because 

ultimately, in order to stabilize the debt in relation to our economy, 

you are going to have to make further progress on it over time and 

that is really what is important. 

Chairman CONRAD. Could I just make a point on— 

Senator SESSIONS. Yes. 

Chairman CONRAD. I just want to make a correction. In terms of 

the Commission, the President gave us the goal of three percent, 

but we exceeded it. 

Senator SESSIONS. Oh, you did? 

Chairman CONRAD. We went to 2.3 in 2015 and then down to 1.2 

in 2020 because we believed, and I think it was a strong consensus, 

that we had to go further. 

Senator SESSIONS. Well, thank you, Mr. Chairman. I am glad to 

correct that because it was depressing me more than I should have 

been depressed. 

Mr. JOHNSON. Senators, could I— 

Senator SESSIONS. Yes, Dr. Johnson? 

Mr. JOHNSON. Look, I think you should push this as far as you 

can. It is a question of the risks in the global economy, where you 

do not know—you are going to want to borrow this money from 

somebody else. They may have a better use for their money. They 

may prefer to keep their funds in another currency. Over a 20-year 

horizon, I would be very surprised if the U.S. dollar has the same 

level of predominance as a reserve currency as it has today, and 

I would not be surprised if we shared the stage with a stronger 

Euro and a much stronger and liberalized Renminbi, the Chinese 

currency. 

You quoted earlier that somebody said during the Bush administration, deficits do not matter. I think that was Vice President Dick 

Cheney— 

Senator SESSIONS. I heard—I was on the— 

Mr. JOHNSON. But I wanted to make sure—I said you were in the 

room, and I think, did he not actually say, Ronald Reagan taught 

us that deficits did not matter? 
252 

Senator SESSIONS. I am not sure, but I think that was a private 

conversation that sort of leaked out and became part of the agenda. 

But Mr. Greenspan recently said to a luncheon I was at that, well, 

in the early 2000s, we had surpluses. We could handle a little extra 

debt. So even, I think, the Fed was in the view that when we went 

into the recession in 2001, a little deficit would not hurt us. But 

the truth is, politically, once you lose the high ground— when you 

lose the political high ground in Congress, it is hard to get it back. 

Mr. JOHNSON. If I could just reinforce that point, Senator, with 

regard to David’s proposed debt-to-GDP limit. Certainly debt-toGDP is the right way to think about this, but if you go with a 50 

percent limit, or, of course, the Europeans have a 60 percent limit 

under the Maastricht Treaty, an intergovernmental treaty, it has 

not done them any good at all. It is far too high. In the modern 

world when you are hit with these nasty shocks and you want to 

be able to use fiscal policy to respond and to offset something that 

just strikes you completely out of the view, 50 or 60 percent of 

GDP, I think, is too high because the shocks are going to be big, 

very big, and push you over the 90 percent level that we are all 

worried about. 

Mr. MALPASS. I take that point well, and maybe a lower number, 

40 percent debt-to-GDP ratio, would be more acceptable. What you 

need to do, I think, is have escalating penalties if you are above 

it, in other words, some discipline on the budgeting process, on 

OMB to produce budgets that bring us down below the debt-to-GDP 

limit or some kind of mechanism to give it some teeth. 

If I may, I have written down several—I think in terms of this 

problem as one where you should begin today making small decisions, or they are not really small, but do the things that you can, 

so I will list several things that we have talked about. 

One is I think the Fed should wind down its buying of Treasury 

bonds. This is a huge problem where the Fed is buying the longterm debt and therefore shortening the maturity of our national 

debt. That puts us at risk. 

Second, in the same vein, Treasury should be issuing more longterm debt. We have to get our debt maturity longer to be prepared 

for what comes in the future. 

Third is the directed baseline in order to open a window for tax 

reform. Right now, the way Congress procedures work, it is not 

credible to embark on tax reform because you have to soak up 

the—making permanent the existing rates. The Alternative Minimum Tax, for example, expires, and yet everyone knows it is going 

to have to be patched into the future. That should not be part of 

the baseline, the cost of that. And so you need a directed baseline 

in order to create a more level playing field. 

Fourth is using the Continuing Resolution— 

Chairman CONRAD. David, can I just stop you on that point? 

Mr. MALPASS. Yes, sir. 

Chairman CONRAD. This is one—the only thing I have heard you 

say today with which I strenuously disagree— 

Mr. MALPASS. Uh-huh— 

Chairman CONRAD. —and the reason I do is if it is not in the 

baseline, what does that say to Congress? That it is free. And you 

and I know it gets added to the debt. And I will tell you, I am in 
253 

the Sessions camp on this. As soon as you send a signal around 

here that you can cross lines and it does not matter and things are 

for free, that psychology takes a hold around here. When we 

crossed the line on Social Security and went back to raiding the Social Security Trust Fund—and I use those words, I know economists have a different view—I tell you, that broke a discipline 

around here. I begged Chairman Greenspan not to take that position because it is, yes, it is psychological, but it matters around 

here. And when you cross a line around here, Katy, bar the door. 

Mr. BERNER. Senator, if I could just interrupt for a moment and 

agree with you on that point. One thing we have not discussed 

today is budget process, and back when David and I were working 

in Washington together, budget process was really important and 

Congress had a process in both Houses. That process was stuck to. 

Your predecessors, really Gramm, Rudman, and Hollings came 

along and reinforced that process. That is something we have not 

discussed today and something we need to restore to the discussions about the budget, because if we think in terms of credibility, 

what will help restore our credibility besides the commitment to 

really deal with our long-term structural problems is a game plan 

for getting there and the process— 

Chairman CONRAD. Let me just say that the dirty little truth in 

this town is that people do not want to deal with budget process 

disciplines because the truth is, they do not want the discipline. 

Mr. BERNER. Right. 

Chairman CONRAD. They want to be free to cross every line, and 

it is on both sides of the aisle, I regret to say. And you are right. 

We should have, I think, a return to some of the strict disciplines 

we had that helped us get out of the hole in the 1980s and in the 

1990s that really proved to be quite effective. But, you know, absent will, absent will, no process solves the problem. 

Now, I took away from your time. 

Senator SESSIONS. No. Well, this is fabulous. These are really serious, important issues, I think. Senator McCaskill and I offered 

legislation, and we got 59 votes, that would have made statutory 

caps using the President’s budget and it would take a two-thirds 

vote to violate that. It would have been a firewall, although in 

truth, now, I think we realize that those numbers were too high. 

We will have to wrestle with it. 

This is about the economy, and one question I would like to pursue a little further—Mr. Malpass made reference to it—is the QE2 

and the Fed’s action. That same Barron’s article I was reading, Mr. 

Hickey, the editor of High-Tech Strategist in Nashua, New Hampshire, said we continue to print money, and am I not correct, Mr. 

Malpass, that the Fed buying Treasuries is printing money? Is that 

fair to say? 

Mr. MALPASS. It risks that. I will make maybe a rhetorical point 

or a mild point here. Technically, the Fed borrows it from banks, 

and so as long as—and creates excess reserves at the Fed. So as 

long as we have this stoppage in the regulatory process where 

banks are not lending, then there has not been an actual expansion 

of the amount of money in the private sector. So— 

Senator SESSIONS. But with the leverage that the Fed uses— 
254 

Mr. MALPASS. All that has happened so far is the Fed is taking 

on the risk of the private sector by owning long- term debt. So they 

are exposed if interest rates go up. We, the taxpayer, are exposed. 

But from the standpoint of the actual lending going on by banks, 

it has not expanded. 

Now, this may be a distinction without a difference. So I think 

the point is well taken that by the Fed going down this line, people 

worry about the Fed. They worry about the dollar. They worry 

about the United States, and that is not good for us. 

Senator SESSIONS. Mr. Bernanke answered similar to you at the 

hearing a few weeks ago when I asked that question. He said—I 

quoted him as being 100 percent certain that he could pull back 

and not allow inflation to take off. But he said he really said he 

is certain he has the tools to avoid that. 

Mr. MALPASS. And I would say we should not be taking this risk. 

His original goal was to lower the interest rates on corporate 

bonds. That has not worked. And what we are exposing ourselves 

to is this shorter maturity of—they are buying the long-term bonds 

in. That is the opposite of the direction we should be going. 

Senator SESSIONS. Leaving us more exposed to short- term. 

Mr. MALPASS. That is right, and so it is like you are taking—here 

you are, worried about keeping your job, and the banker calls up 

and says, hey, would you not like to move from a 30-year mortgage 

down to a three-year floating rate mortgage? Now, you know what 

to do. Do not take that choice. And that is what the Fed is doing. 

They are moving the country from a long-term fixed rate mortgage 

to a short- term floating rate mortgage at a time when we are already a little bit shaky. 

Senator SESSIONS. Well, with regard to this question, maybe I 

will let any of you who would like to comment on it do so. I think 

it is a matter out there in the public and in the financial markets. 

Mr. Hickey says that in 2000, easy money led to gross imbalances. 

In the mid-2000s, one percent interest led to a housing bubble, and 

then the credit crisis, and now rates are zero. To get a response 

from the economy, the Fed must print ever more money. It did, and 

everything looks great right now. But as of June when the $110 billion they are printing per month ends, things might not look so 

rosy. The economy has structural problems and we are not dealing 

with them. Money printing will not work, yet that is the prescription we continue to give the patient. If the Fed keeps printing after 

June, we will have higher gasoline and food prices and more imbalances until this ends, and at some point, it will end because the 

dollar will fall apart, and what we are now doing makes everything 

appear rosy, but it is devastatingly terrible policy for the long run. 

I think that is a perception out there by a lot of people. You guys 

are really sophisticated. Let me ask you to respond to that. 

Mr. MALPASS. May I interject one thing briefly? Paul Volcker in 

this room in the 1980s, facing a big fiscal deficit, said, ‘‘The Fed 

could have a looser monetary policy if Congress would have a tighter fiscal policy,’’ meaning spend less and we will have the looser 

monetary policy. We are breaking that rule now in the way that 

you said. We are putting a near zero interest rate on top of a massively stimulative fiscal policy. So this is simply not the right mix. 
255 

Chairman CONRAD. Can I just intercede on this point? Because 

when I go back to what led to the financial crisis in 2008, my own 

reading of economic history is it was a combination of an overly 

loose fiscal policy—we were running massive deficits then, even in 

good times—an overly loose monetary policy because the Fed was 

very accommodating after 9/11 for an extended period of time, coupled with a failure to regulate very risky financial instruments. 

You know, Warren Buffett called derivatives ‘‘a nuclear time bomb 

waiting to go off,’’ and in some ways that occurred, certainly with 

AIG. 

And so you had a perfect seed bed for bubbles to form, and, boy, 

did we get bubbles. We got a housing bubble. We got a commodity 

bubble. Wheat went to $20 a bushel. We got an energy bubble. Oil 

went to $100 a barrel. So we did not just have a housing bubble. 

We had a whole series of bubbles in which we had really laid the 

foundation by loose monetary policy, loose fiscal policy. Unusual to 

get them at the same time. That is another whammy to the economy. And here we are cleaning up the economic wreckage. Dr. 

Johnson? 

Mr. JOHNSON. Morgan Stanley has a very nice report on the socalled global carriage rate which is fed by this very low interest 

rate environment. I do not have my copy with me. I am sure Dick 

can send it to you. I think you should look at that, Senator Sessions, and think about these dynamics. 

The points, by the way, that the two of you are making strike 

me as just incredibly parallel to the debate we had in the United 

States between 1907 and 1913 before the founding of the Federal 

Reserve. One the one hand, there was Nelson Aldrich who was 

making very similar points to you, Senator Sessions, worrying 

about the fiscal implications and the inflationary finance that 

would be facilitate by an overloose Fed. On the other hand, there 

was the Pujo Committee and Louis Brandeis, Senator Conrad, who 

was articulating a position very much like yours, which was that 

the financial sector, without a surety that the financial sector was 

going to be reined in and regulated and controlled—they did not 

use exactly those words—financial stability would be the ruin of us 

all. And I have to say, a hundred years later both of those individuals were right. 

Mr. BERNER. And I agree with that, Senator. I would say beyond 

that, you know, we are using monetary and fiscal tools, which are 

blunt tools, to try to solve our problems. But as we have all talked 

about, we are just still experiencing the legacy of this financial crisis. And as I indicated in my testimony, we have not employed the 

tools that we could to clean up the legacy of that financial crisis. 

If we did, then the Fed would not have to run the kind of monetary 

policy it is running. And as I also indicated, we would have a better-performing economy. We could unwind some of that fiscal stimulus that we have used to help the economy in the short run. 

Mr. MALPASS. Mr. Chairman, your statement was one of the best, 

succinct statements of the causes of the crisis. You mentioned loose 

monetary policy, loose fiscal policy, poor regulatory policy, and I 

would add in mistakes on Wall Street, and that is the sum of it. 

And if everyone would accept that and then try to avoid that in the 

future, we would be a step ahead. A very good statement of it. 
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Chairman CONRAD. Senator Toomey. Could I just say to my colleagues, we promised to end this hearing at noon for our witnesses, 

but Senator Toomey has not had his second round, and we will go 

to him now. 

Senator TOOMEY. Thank you, Mr. Chairman, and I will just be 

brief. It seems to me that if you look at many traditional measures 

of monetary policy, we are currently embarking on a very unusual 

and, it seems to me, dangerous course. Please correct me if I am 

wrong, but my understanding is prior to the recent huge purchases 

of Treasuries by the Fed, the traditional measures of money supply 

were already growing significantly, M1 and M2 and so on. 

If you prefer to look at the Taylor Rule, for instance, which some 

do and some do not, but by that measure interest rates are well 

below where they ought to be. 

If you look at commodity prices across a very broad range—precious metals, agricultural, other commodities—we are seeing very, 

very high rates, in some cases record rates. Does not the cumulative evidence here suggest that there is a very significant risk of 

much higher inflation? And when CBO projects less than 2 percent, 

I believe, over the next several years, could each of you just suggest 

whether you think it is likely that inflation in the United States 

will remain at or about 2 percent in the coming years? 

Mr. MALPASS. I think it will be above. I think you are exactly 

right in describing the problem. I will add in we already see the 

inflation in other countries where they are closer to commodities in 

their CPI baskets, so that evidence is there. And I will add in the 

point that the Fed has been very wrong on that inflation estimate 

in the past. So, in 2003, 2004, and 2005, when the Chairman was 

describing the 1-percent interest rate policy and the small increases, the Fed drastically underestimated the core PCE deflator 

that would come out and— 

Chairman CONRAD. David, can we just stop you on that? For people who are listening, the core PCE, can you explain what that is? 

Mr. MALPASS. Yes. PCE is the personal consumption expenditures, and that just means consumption, and the Fed uses the core 

measure, meaning excluding food and energy, let us measure inflation by core prices. 

Chairman CONRAD. And they underestimated at the time that increase. 

Mr. MALPASS. There is, I think, a huge mistake in the technique 

the Fed is using because when they look at the number today, it 

is based on what people bought last year and the prices of those 

old items. And because people are very fad oriented, meaning they 

want to buy the hot items, when you measure your inflation based 

on what people bought last year, those prices are going down. That 

is like taking the sale items, the old model cars, where the new 

model cars are going up in price. And what happened very distinctly in 2003, 2004, and 2005—and 2005, really—is after revision, 

the inflation was above the Fed’s top limit, above the 2- percent 

ceiling every quarter from 2003 to 2007. And yet the Fed kept saying and promising during that period that inflation was moderating. So it is making Senator Toomey’s point that we really should 

not be so confident of that—I mean, I am not confident at all that 

we are avoiding inflation. Now the Fed is very loose. 
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Mr. JOHNSON. I think we are definitely not avoided inflation. To 

state this in a slightly different way, headline inflation, which is 

the inflation that you care about, is going up, and there you will 

feel it. The Fed takes food prices and energy prices out of its measure of core inflation. Other central banks do not do that. The Canadians, for example, take out the most volatile items, but those are 

different items from what the Fed takes out. And this is a very conscious decision based on the historical view of what drives inflation 

over a longer period of time. We will see whether that turns out 

to be right, but certainly in terms of purchasing power of consumers, David’s point, people who consume particularly things that 

are really commodity intensive, relatively poor people have a larger 

pot of—their consumption goes on food, for example. They are going 

to be hurt by what happens. 

Mr. BERNER. Inflation is partly set globally. We are clearly seeing commodity prices and food and energy prices rising. It is already rising, as my colleagues have pointed out, in other countries. 

And so, you know, the Fed, as you pointed out, Senator Toomey, 

is trying to boost inflation expectations. We do have a tug of war 

going on. There is a lot of slack in the economy, and that is keeping 

inflation in check. But those global forces together with rising inflation expectations are going to lift not just headline inflation but, in 

my view, core inflation over time. 

Now, a little bit of that in the next year is not a bad thing. What 

would be a bad thing is if we got a lot of it, obviously, we would 

see not only inflation rise, but we would see the interest on Federal 

debt, as you pointed out earlier, rise very significantly. 

Senator TOOMEY. Thank you, Mr. Chairman. I would just point 

out that we learned in the 1970s that we can have a lot of slack, 

weakness in the economy, and still have very high inflation. So it 

is a real concern of mine. But I thank you all for answering the 

question. 

Chairman CONRAD. Thank you, Senator Toomey. 

Senator Sessions. 

Senator SESSIONS. Well, forgive me if I do not think they are 

Masters of the Universe that fully understand the complexities of 

the market. You would all be billionaires instead of millionaires, I 

suppose. It is hard to predict what is going to happen, and I certainly do not think Mr. Bernanke has had—I do not think he deserves credit for advising Mr. Greenspan to prolong easy money too 

long. And I would just—Mr. Zulauf in the roundtable added this— 

and I will ask this as a final question since we made reference to 

Mr. Volcker. ‘‘In the late 1970s and 1980s, Paul Volcker crunched 

inflation by applying very real high interest rates for several years. 

Now we are seeing the same process just in reverse. Just as it took 

several years for the market to see that Volcker’s policies would 

lead to declines in inflation and interest rates, it will take years 

for the market to realize the Fed’s current policies are highly inflationary.’’ 

Any comment on that? 

Mr. MALPASS. I agree with that concern, and I think the Fed 

should stop buying bonds. It is a high priority from both a fiscal 

standpoint and a monetary policy standpoint that they do that. 
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As far as the risk then for us of higher inflation, one problem 

that we run into is whenever the problem is distant, then people 

will not focus on it. So if I say when do I think we are going to 

go over 5 percent inflation, probably not for 1 or 2 years, and so 

that does not give you the urgency. 

So one of the things we are doing today is trying to say, look, 

we do not know what is going to happen next month or next year, 

but what we do know is we are too close to the brink on the tipping 

point. So if you can, please stop spending. Try to find procedures 

that give us some confidence about the 10-year outlook on spending 

as well. 

Mr. BERNER. I would just reiterate, Senator, the points I made 

earlier. Number one, if we adopted the right policies to fix our economic problems and housing and other problems, then the Fed 

would not be running the policy that it is running today. And I 

agree with David that, you know, inflation is a process that works 

gradually, and that gives us a little bit of leeway in terms of where 

it is going to go. But, of course, because it has a lot of inertia to 

it, once it gets going then we need to be careful, and the market 

reaction to higher inflation will not be kind to the Federal budget. 

Mr. JOHNSON. Senator, I think there is a floor in the Federal Reserve Act. The Federal Reserve Act says that the mission of the 

Board in this instance is to aim for full employment and price stability. There is no mention about financial stability. None of the 

discussion that you were both putting before us in terms of the financial dynamics and how things went wrong and what is likely 

to happen in the cycle, none of that is seen as their top priority. 

And as a result, they feel the need to pursue this policy that makes 

you uncomfortable, and I think you are right to feel uncomfortable 

and very nervous about it. This is a very bad place to be. It would 

be better if we had had more fiscal space coming out of the last 

boom. Then you would—I mean, you could still argue whether you 

want to do the tax cuts or the spending increases. Fine. But you 

would have had more space within which to react to the financial 

crisis without pushing up against the Reinhart-Rogoff limit or David’s debt limits. But that is not how we ran things in the boom, 

and as a result, we have over 9 percent unemployment. The Fed’s 

job is to get that down, and that resulted in this monetary policy 

that is a huge Hail Mary pass, if I may use a Super Bowl metaphor. 

Chairman CONRAD. Thank you. Thank you all. We appreciate 

very much your contributions to this Committee, and I think this 

has been an excellent hearing. I want to thank Senator Sessions 

for his contributions as well. 

We will stand adjourned. 
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(265) 

TAX REFORM: A NECESSARY COMPONENT 

FOR RESTORING FISCAL RESPONSIBILITY 

WEDNESDAY, FEBRUARY 2, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:01 a.m., in room 

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

Present: Senators Conrad, Murray, Wyden, Nelson, Stabenow, 

Cardin, Sanders, Whitehouse, Warner, Merkley, Begich, Coons, 

Sessions, Grassley, Enzi, Crapo, Ensign, Cornyn, Graham, Alexander, Thune, Portman, Toomey, and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The Committee will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today we focus on tax reform and the important role that 

many of us believe it can play in addressing our Nation’s long-term 

budget challenges. 

We are fortunate to have four outstanding economists with us 

this morning who are deeply knowledgeable about tax reform. 

Dr. Gene Steuerle, Senior Fellow at the Urban Institute. Gene 

has been before this Committee many times. He is somebody that 

enjoys credibility on both sides of the aisle. Dr. Donald Marron, the 

Director of the Urban-Brookings Tax Policy Center, somebody who 

is very familiar to the Committee as well, and we very much respect his advice. Dr. Rosanne Altshuler, Professor of Economics at 

Rutgers University, who testified before the President’s Fiscal 

Commission, as did Dr. Marron and Dr. Steuerle. And Dr. Larry 

Lindsey, President and CEO of the Lindsey Group, very well 

known in economic circles as well. We thank all of you for agreeing 

to give us some of your time. We deeply appreciate it. 

Let me just begin by reviewing the State of our fiscal affairs. 

Last week, the Congressional Budget Office released its annual 

outlook report. That report should serve as a wake-up call to everyone who is concerned about the Nation’s finances. The chart depicts 

CBO’s new 10-year baseline projections, with additional policies 

added in, those policies that are most likely to be adopted. We all 
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know that CBO does not do a forecast of what might be adopted. 

They do a forecast based on current law. Then we try to add to that 

things that are most likely to be adopted to get the most realistic 

look at where we are headed. 

That shows that due to passage of the tax extension package and 

the slow pace of economic recovery, CBO is now expecting to see 

deficits of more than $1 trillion a year continuing through at least 

2012. It then shows that deficits will briefly fall before rising again 

as the bulk of the baby-boom generation begins to retire and health 
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care costs continue to climb. Now, if this is not a sobering picture 

of where we are headed, I do not know what would be sobering. 

Make no mistake. We are at a critical juncture. We are borrowing 40 cents of every dollar that we spend. Spending is at the 

highest level as a share of our economy in 60 years. Revenue is at 

its lowest level as a share of our economy in 60 years. 

Many of us believe that tax reform must be part of an approach 

to addressing our fiscal problems. The current State of the Tax 

Code is simply indefensible. Our Tax Code is out of date and clearly hurts U.S. competitiveness. 

No. 2, it is hemorrhaging revenue. The tax gap, tax havens, and 

abusive tax shelters undermine the effectiveness of the Tax Code, 

depriving the Treasury of revenue. I believe the combined effect of 

the tax gap, offshore tax havens, and abusive tax shelters is leading us to lose more than $500 billion a year. More than $500 billion 

a year. 

In addition, the Tax Code is riddled with expiring provisions. 

This creates enormous uncertainty for citizens and businesses, 

making it difficult for them to plan. If we took steps to simplify and 

reform the Tax Code, we could reduce tax rates below where they 

are today and still get more revenue. 

Now, let me repeat that. If we were to broaden the base and fundamentally reform the tax system, we could actually lower rates, 

helping America be more competitive and generate more revenue. 

Along with lower tax rates, the tax reform would then allow us to 

increase revenue to help reduce the deficit. 

I think we also need to be realistic about what is necessary to 

meet the needs of the Nation and return the Nation to a sustainable, long-term fiscal trajectory. Looking at revenues has led some 
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to argue that revenues should be held at the historic level over the 

past 40 years, about 18 percent of GDP. Revenues, I want to point 

out, at that level would not have produced a single balanced budget 

in all of that time because spending exceed 18 percent of GDP in 

every year. In fact, on the five occasions when the budget has been 

in surplus since 1969, revenues have ranged between 19.5 percent 

of GDP and 20.6 percent of GDP. It is this higher level of revenue 

that I believe provides a more useful guidepost for what is needed 

if we hope to dig ourselves out of the fiscal hole and set the budget 

on a sustainable path. Let me indicate that would mean we would 

have to have very significant cuts on the spending side because we 

are well over 21 percent of GDP on the spending side. We are over 

24 percent of GDP on the spending side. 
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Tax reform gives us an opportunity to lower tax rates at the 

same time we are raising revenues. Tax reform achieves this goal 

by broadening the tax base by eliminating or scaling back so-called 

tax expenditures. Tax expenditures are all of the deductions, exclusions, credits, and set-asides in the Tax Code. They are costing the 
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Treasury more than $1 trillion in revenue a year. That matches all 

of domestic discretionary spending, and many are no different than 

traditional spending programs. They are simply spending through 

the Tax Code. 

Here is how well-known conservative economist Martin Feldstein 

described tax expenditures in a recent piece in the Wall Street 

Journal, and I quote—this is, again, from Martin Feldstein: ‘‘Cutting tax expenditures is really the best way to reduce Government 

spending. Eliminating tax expenditures does not increase marginal 

tax rates or reduce the reward for saving, investment, or risk taking. It would also increase overall economic efficiency by removing 

incentives that distort private spending decisions. And eliminating 

or consolidating the large number of overlapping tax base subsidies 

would also great simplify tax filing. In short, cutting tax expenditures is not at all like other ways of raising revenue.’’ 

I think this is a critically important point. 
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The President’s Fiscal Commission, of which I was a member, 

issued its report last December, and I believe that tax reform may 

be the most important component of the Fiscal Commission’s plan. 

Here are the key elements of tax reform included in the Fiscal 

Commission’s plan: 

One, eliminates or scales back tax expenditures and lowers tax 

rates. This promotes economic growth and dramatically improves 

America’s global competitiveness. It makes the Tax Code more progressive. The Commission’s report included an illustrative tax reform plan that demonstrates how eliminating or scaling back tax 

expenditures can lower rates. Instead of six brackets for individuals, the plan includes just three brackets of 12, 22, and 28 percent. The corporate rate would also be reduced from 35 to 28 percent, helping improve the competitive position of the United States. 

Capital gains and dividends are taxed at ordinary rates. The 

mortgage interest and charitable deductions would be reformed, 

better targeting these tax benefits. The child tax credit and earned 

income tax credit would be preserved to help working families. And 

the alternative minimum tax would be repealed. That is the kind 

of tax reform that I believe we need to adopt. 
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The Commission plan was also important because it showed how 

to reduce the deficit and debt in a balanced way. It included cuts 

in discretionary spending, entitlement reform, and tax reform. You 

need to have those three fundamental components to be successful. 

At least I believe that is the case. 

In total, about two-thirds of the deficit reduction between 2012 

and 2020 in the plan resulted from reductions to spending. The 

proposed spending cuts were significant. I would even argue on the 

domestic side probably went too far. Taking revenues out of the 

equation would have made it impossible to obtain the desired deficit reduction goals. Cutting spending alone or, as some would suggest, only cutting non-defense discretionary spending would require 

such Draconian reductions that they simply could not be sustained. 
273 

Let me just conclude on this chart. Chairman Ryan’s road map 

that he has laid out—this is the Chairman of the House Budget 

Committee—I believe proves the point that revenues have to be 

part of a plan to reduce the deficit and the debt. He proposes discretionary and mandatory spending cuts, but actually makes things 

worse on the revenue side. The result is that his plan increases the 

debt as a percentage of GDP for the next 30 years. In fact, he does 

not achieve balance for 53 years. He does not achieve balance for 

53 years. He dramatically increases the debt, both in dollar terms 

and as a share of GDP. 
274 

To solve the long-term challenge, it will require real compromise 

and a great deal of political will. We need everyone at the table, 

and we need to have both sides, Democrats and Republicans, willing to move off their fixed positions in order to achieve a result important for the Nation. We cannot continue to put this off. We need 

to reach an agreement this year. It is time, I believe, for the administration and leaders of Congress, Democrats and Republicans, 

to sit down and hash out a long-term plan. 

We will now turn to Senator Sessions for his opening remarks. 

I apologize to my colleagues for the length of that introduction, but 

I thought it was important in light of the subject we have before 

us today. Senator Sessions. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Mr. Chairman. I am glad to see 

your passion and leadership showing itself on this issue because we 

have to do some things. We cannot continue business as usual. The 

article in the Wall Street Journal in which the International Monetary Fund—I believe it was in the Washington Post, in which the 

International Monetary Fund called on the United States to get its 

house in order like other nations in the world, used the phrase that 

all the other developing nations who are facing debt crises—and 

most of them are—are entering into a dialog with their people to 

explain to them why changes have to occur. So I have been critical 

of the President’s State of the Union address in which he spent 

very little time in an honest, direct, open way discussing with the 

American people why business as usual cannot continue. 

I so much appreciate your Statement that this Committee may 

be where the leadership has to come, and I would be there with 

you. 

I am totally appreciative of the concept that you, Senator Wyden, 

the Deficit Commission, and others—conservatives, writers, and intellectuals—who favor tax simplification. Mr. Lindsey, I was really—I hope you do not mind me quoting from your remarks. But you 

quote a number of economists who say that sensible, revenue-neutral tax reform could result in 5 to 10 percent more of GDP growth 

over 10 years in one study, an 18-percent increase in GDP output. 

Larry Summers, the recent former adviser to President Obama, 

found in another study that there was 19 percent more growth. 

These are stunning numbers. So we would leave that on the table. 

Frankly, I doubt they are that high, but if we could get close to 

that, if we could get a third of that, that would be marvelous for 

us because it would be, as you indicated, sort of free money, Mr. 

Chairman. In other words, it would create more growth which 

would create more revenue. 

President Obama in his State of the Union address said, ‘‘For example, over the years, a parade of lobbyists has rigged the Tax 

Code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no 

taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to 

change. So tonight, I am asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. 
275 

And use the savings to lower the corporate tax rate for the first 

time in 25 years—without adding to our deficit. It can be done.’’ 

Well, I think if we simplify the corporate tax rate properly, we 

can in a revenue-neutral way probably create more revenue. 

But let me tell you, the problem is far more serious than that. 

We have, even in the real rate terms, one of the highest if not the 

highest corporate rate in the developed world. Corporations are 

making decisions every day where to expand, where to hire workers. We learn things in airports. I happened to be on the plane 

with a very impressive CEO of an international corporation. CEO 

North America had an Alabama plant, and he was so frustrated. 

I ended with an empty seat, and he came by and sat by me and 

told me this story. This is the story he told: that they had competed 

within their plants worldwide in this big company to do a new 

chemical process that would create 200 jobs. They had worked extremely hard at the Alabama plant and had won the competition. 

He submitted it, and they had the lowest cost per gallon of chemical stuff, and the plant was going to be expanded in Alabama, we 

were going to gain 200 jobs—until the people back in Europe said, 

‘‘We have to calculate the taxes,’’ and they recalculated the bid 

based on taxes. We lost 200 jobs. 

This is not academic. This is going on every day. We have an unemployment rate that is unacceptable, and to have the highest corporate tax rate virtually in the world, and other nations are seeing 

the light and reducing it, and we remain high. So even if we eliminate certain deductions and have a flat rate that appears lower, it 

seems to my simple mind that we have no less real burden on the 

corporate community than we had before. So I think we need to figure out a way to reduce the rates. And if it has to be paid for by 

some tax increase in some other area, I am willing to consider 

doing that. 

So I believe we need to simplify, but I also think it would be a 

big mistake if we do not reduce the rates. Of course, the U.K. is 

reducing their rates. Canada, I understand, is going to 16 percent. 

So if we are at 28, 27 after we have adjusted, we are still way 

above that, and a company making the decision of where to 

produce a product might well choose another country than our own 

country to produce that product and cost us jobs. 

So, Mr. Chairman, that is kind of where I am. I do not think I 

am prepared to support just a tax simplification of the corporate 

rate because I believe the entire world is recognizing that the corporate rate is a job factor, a big job factor. And I think in terms 

of the Laffer factor, if you want to call it that, reducing the corporate rate I believe is—one of our colleagues said the other day 

a study has come out and shown that if you reduce that rate, you 

get more economic growth than you would in almost any other 

place in the economy. 

Thank you for your leadership. Thank you for this good hearing. 

I look forward to the testimony of our excellent panel. 

Chairman CONRAD. Thank you very much, Senator Sessions. 

Now we will turn to our panel. We will start with Gene Steuerle, 

Senior Fellow, the Urban Institute. Welcome back to the Committee, Gene, and please proceed. 
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STATEMENT OF C. EUGENE STEUERLE, PH.D., INSTITUTE FELLOW AND RICHARD B. FISHER CHAIR, THE URBAN INSTITUTE 

Mr. STEUERLE. Thank you, Mr. Chairman, Mr. Sessions, and 

members of the Committee. Many tax and budget reforms know no 

ideological or party boundaries. No one favors the unequal justice, 

inefficiency, and complexity we see in our Tax Code today. Neither 

does anyone really favor the ways that tomorrow’s scheduled deficits threaten our economy and our children. 

You have asked that I concentrate my remarks on what makes 

reform most likely. Reform often starts from a common consensus 

that a variety of fixes would be better than what we have. Bipartisan agreement led to past successful tax reforms such as in 1986, 

1969, and 1954. Such bipartisan consensus also informed close to 

two-thirds of the members of President Obama’s own Debt Commission. And such agreement, I would suggest, with admitted bias, 

is displayed by the panel before you. Three of us are from the Tax 

Policy Center. We are former Deputy Assistant Secretaries and 

heads of CBO, and senior economists on advisory panels, appointees by both Republicans and Democrats, often come to very 

common conclusions. We are not led by any party identification. 

The more general point is that good Government at either 17 

percent or 23 percent of GDP trumps bad Government at both levels. When Theseus, the mythical founder-king of Athens, went into 

the Labyrinth to slay the half-bull Minotaur, he was able to escape 

only by following a ball of string back to where he had entered. If 

we are ever to escape the tax labyrinth into which we have journeyed, I suggest that, like Theseus, we follow the string back along 

four dimensions that define our larger budgetary problems. 

First, we must move to an era of more fundamental reform. A 

simple explanation of the Tax Code’s evolution in recent decades is 

that it broke away from its narrow revenue-raising foundation and 

began to evolve much like the spending side of the budget. Yet 

large systemic reforms require fundamentally different strategies 

than the tax cuts and benefit expansions that seem only to identify 

‘‘winners.’’ Many domestic reforms—like Social Security reform in 

1983, tax reform in 1986—are the harbingers of the types of tradeoffs that modern Government must increasingly engage. 

Second, we must limit how much any Congress can commit for 

the future—before that future arises. I no longer divide the budget 

balance sheet into spending and taxes, but into give-away and 

take-away. Especially after the 1990 and 1993 budget administrations, both political parties have increasingly come to believe that 

it is political suicide to operate on the take-away side of the budget 

to balance the sheets. The consequence of fiscal democracy I have 

developed shows that in 2009, for the first time in U.S. history, all 

revenues were committed before the new Congress even walked in 

the door. 

Third, we must account for and report to the public in a more 

honest way. Right now, for instance, tax subsidies show up in the 

budget as a reduction in taxes when they are bigger Government 

in disguise. 

And, fourth, we must cut across institutional boundaries. Even 

today, tax reforms are unable to replace an education tax credit 
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with the higher Pell grant or a housing tax credit with a housing 

voucher. At the same time, I believe that serendipity arises by 

playing the odds in the right way. Tax reform’s probability of success can be increased by the following steps. 

First, we must seize today’s and not yesterday’s opportunities. 

Yesterday’s included large individual tax shelters, very high tax 

rates, and ever increasing taxation of families with children on 

children and the poor. Today’s include the deficit, high corporate 

rates, and the extraordinary complexity of the tax system. 

Second, we must base reform on well-established principles of 

public finance. Principles like equal justice have powerful appeal 

and lead logically to a whole host of reforms. 

Third, we must comprehensively tackle the problem. Yes, reforms 

create headlines over who loses some subsidy and who pays more 

tax. But the size of the headline is often indifferent to the size of 

the reform. If one is going to take a political hit, one ought to 

achieve something valuable, such as a simpler Tax Code or a more 

sustainable budget. 

Fourth, we need to shift the burden of proof. Let opponents argue 

why they oppose a standard based on equal justice or simplicity. 

When the standard is current law, the burden of proof resides with 

reformers who appear to be picking on particular groups. 

Fifth, we must form coalitions based on legitimate liberal and 

conservative principles. Tax reform in 1986, for instance, in no 

small part was supported by two broad coalitions: pro-poor and profamily, and lower rates and reduction in tax shelters. 

Sixth, we must seek better ways to present information. In 1986, 

the old way of presenting tax burdens would have treated those 

with tax shelters as poor people with large tax increases. 

Seventh, we must empower knowledgeable, non-partisan staff to 

navigate the complexities before too many political constraints are 

placed down. The tax reform acts of 1986 and 1969 came out of 

studies of the Treasury Department that were conducted mainly 

with non-partisan staff, with most of the political decisionmaking 

held off until later. 

And, finally, at the political level, we must encourage elected officials, A, to lead; B, to be held accountable; and, C, to be empowered. In 1986 tax reform, Dan Rostenkowski and President Reagan 

led by agreeing not to criticize each other. Also, as the effort moved 

through at least four different stages, someone was always held accountable and feared being shamed by the failure to enact tax reform. At the same time, tax reform succeeded because leaders were 

empowered to execute a strategic plan as they moved through the 

political minefield. 

Thank you, Mr. Chairman. 

[The prepared Statement of Mr. Steuerle follows:] 
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Chairman CONRAD. Thank you, Gene. Excellent testimony. 

Dr. Marron? It is good to have you back. 

STATEMENT OF DONALD B. MARRON, PH.D., DIRECTOR, 

URBAN-BROOKINGS TAX POLICY CENTER, AND VISITING 

PROFESSOR, GEORGETOWN PUBLIC POLICY INSTITUTE 

Mr. MARRON. Thank you, Mr. Chairman, Ranking Member Sessions. It is a pleasure to be here to talk about the important issue 

of fundamental tax reform. 

Kind of echoing some of the things that have already been said, 

America’s tax system is clearly broken. It is needlessly complex, 

economically harmful, and often unfair. It fails at its most basic 

task, which, lest we forget, is raising enough money to pay for the 

Federal Government. And increasingly, it is unpredictable, with 

large temporary tax cuts not only in the individual income tax, but 

also in corporate payroll and eState taxes. 

For all of those reasons, our tax system cries out for reform. Such 

reform could follow many paths. Some analysts recommend the introduction of new taxes, such as a value-added tax, national retail 

sales tax, or pollution taxes to supplement or replace our current 

system. Those ideas are worth serious discussion, but in today’s 

testimony, I would like to focus on a more traditional approach to 

tax reform, redesigning our income tax. 

I would like to make seven main points. First, as has already 

been mentioned, tax preferences pervade the tax code. These preferences total more than $1 trillion annually, which almost as much 

as what we collect from individual and corporate income taxes combined. These preferences narrow the tax base, reduce revenues, distort economic activity, complicate the tax system, force tax rates 

higher than they would otherwise be, and are often unfair. 

Second, the first step in any tax reform should be to broaden the 

tax base by reducing or eliminating tax preferences. Doing so 

would help level the playing field among different economic activities, reduce the degree to which taxes distort economic behavior, 

and make taxes simpler to file and administer. 

Third, policymakers can use the resulting revenue, potentially 

hundreds of billions of dollars each year, to lower tax rates, reduce 

future deficits, or both. Lowering tax rates would further reduce 

the economic distortions created by the tax system and would encourage economic growth. Reducing future deficits would help tame 

our Federal debt, which threatens to grow to unsustainable levels 

in coming years and thus poses a significant risk to our economy. 

Fourth, many tax preferences are effectively spending programs 

run through the tax code. That poses a challenge for how we talk 

about tax reform and the size of government. Any cuts to these 

spending-like preferences will increase Federal revenues, but will 

reduce the government’s influence over economic activity. Advocates of smaller government are often skeptical of proposals that 

would increase Federal revenues. When it comes to paring back 

spending-like tax preferences, however, an increase in revenues actually means that the government’s role is getting smaller. 

Fifth, other tax preferences, however, are not spending programs 

in disguise. More and more observers have embraced the idea that 

tax preferences resemble spending through the tax code. That is a 
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promising development. Unfortunately, that enthusiasm has sometimes led to the misconception that all items identified as tax preferences are akin to spending. That is understandable, given that 

these items are often called tax expenditures, but it is not correct. 

Preferential tax rates on long-term capital gains and qualified dividends, for example, are an admittedly imperfect effort to limit the 

double taxation that can occur when investment income is subject 

to both personal and corporate taxes. Such provisions should be 

viewed and evaluated as tax measures, not as hidden spending programs. 

Sixth, many tax preferences provide benefits to millions of taxpayers. They are not just tax breaks for special interests. For example, the three largest tax preferences are the exclusion for employer-provided health insurance, preferences for retirement saving, and the mortgage interest deduction. Americans should understand that to get the benefits of tax reform, lower rates, simpler 

taxes, and a more vibrant economy, they will need to give up some 

popular tax breaks. 

Seventh, policymakers should reevaluate the design of any tax 

preferences that they decide to keep. Some preferences are needlessly complex and could be simplified. That is true, for example, 

of the preferences aimed at low-income workers and families. Other 

preferences might operate more efficiently as credits rather than as 

deductions or exclusions. Credits can provide more uniform incentives to particular activities, for example, home ownership, than deductions or exclusions whose value depends on whether a taxpayer 

itemizes and what tax bracket they are in. 

Bottom line: By reducing, eliminating, or redesigning many tax 

preferences, policymakers can make the tax system simpler, fairer, 

and more conducive to America’s future prosperity, raise revenues 

to finance both across-the-board tax cuts and much-needed deficit 

reduction, and improve the efficiency and fairness of any remaining 

preferences. 

Thank you. I look forward to any questions. 

[The prepared Statement of Mr. Marron follows:] 
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Chairman CONRAD. Thank you. 

And now we will go to Dr. Altshuler. Welcome. 

STATEMENT OF ROSANNE ALTSHULER, PH.D., PROFESSOR, 

RUTGERS UNIVERSITY 

Ms. ALTSHULER. Thank you. It is an honor to appear today to 

discuss the need for and the benefits of fundamental tax reform. 

Building the case for tax reform is easy. The current system is 

riddled with tax provisions favoring one activity over another or 

providing targeted tax benefits to a limited number of taxpayers. 

These provisions, as you know, create complexity, generate large 

compliance costs, breed perceptions of unfairness, create opportunities for tax avoidance, and encourage the inefficient use of our economic resources. 

The many changes we have made to the tax code, more than 

4,400 over the past 10 years, have made the income tax even more 

difficult for taxpayers to understand, less stable, and increasingly 

unpredictable. We seem to have forgotten that the fundamental 

purpose of our tax system is to raise revenues to fund government. 

Reducing the deficit to an economically sustainable level, as we 

must do, will require both a scaling back of expenditure programs 

and an increase in tax revenues. 

The question I address today is how best to reform the tax system so that it can raise revenue in a manner that is simple, efficient, and fair. I will make three broad points. 

First, the fiscal challenges ahead require that we reform our income tax system or turn to new revenue sources. Raising significantly more revenue from the current tax system is politically infeasible and would be damaging to economic growth. 

Second, we must broaden the base of our income tax. Although 

politically difficult, this type of reform is implementable and follows 

a wave of similar base-broadening, rate-reducing tax reforms that 

have been enacted in developed countries over the past 30 years. 

Third, the current U.S. approach to international corporate taxation needs to be updated to reflect the increased competition our 

U.S. multinationals face from foreign-based corporations. Broadening the base and lowering the rate are essential and straightforward first steps to international tax reform. We should also consider updating our system to reflect the international tax rules 

used by our major trading partners. The remainder of my testimony elaborates. 

Before considering fundamental reform, you might ask, can we 

not just dial up the current system, increase statutory marginal tax 

rates to raise the revenue required to bring the deficit under control? A 2010 Tax Policy Center study suggests that the answer is 

no. We considered illustrative changes to the current system aimed 

at reducing the deficit to an average of 3 percent of GDP. Let me 

briefly summarize the results. 

It cannot be done. We cannot reduce the deficit to a sustainable 

level with personal income tax increases alone. It is not feasible. 

We looked at the revenue raised by proportional increases in all of 

the current marginal tax rates. Roughly speaking, if the system we 

have today were extended, we would have to increase all statutory 

rates by 50 percent to reach our deficit target—all statutory rates. 
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What if we tried to protect low- and middle-income taxpayers from 

these marginal tax increases? This would result in top rates that 

would stifle economic activity. The two top rates would need to rise 

to 84 and 89 percent. It is shocking. And we did not even take individual behavior into account. Changes must be made to the tax 

base if we hope to raise much more revenue from the current system. 

What about the corporate tax? Can it raise significant revenues 

for us, significantly more than now? In my written testimony, I 

argue that the answer is no. Most revenue from today’s corporate 

income tax comes from corporations that are competing in a global 

market. Increasing the corporate rate is problematic given how 

high our rate is. In 2010, the average combined national and State 

corporate tax rate in the OECD was 25 percent. The U.S. rate was 

39.2 percent, second only to Japan. But do not worry. On April 1, 

Japan will reduce its corporate rate by 5 percentage points and we 

will have the dubious honor of imposing the highest corporate tax 

rate in the OECD. 

Keep in mind that any increase in the corporate tax rate can be 

expected to induce tax avoidance through transfer pricing and 

other methods of income shifting. This leakage in revenue, along 

with the small role played by the corporate tax in the current U.S. 

revenue structure, suggests that corporate rate increases can, at 

best, move the deficit only marginally toward a sustainable path. 

Our fiscal challenges require either more comprehensive income 

tax reforms or new sources of revenue. 

What are the economic benefits of base-broadening reforms? The 

income tax imposes efficiency costs on the economy when taxes distort the economic decisions of individuals and businesses and divert 

resources from productive uses. Economists call the efficiency cost 

the excess burden, and economic theory shows, while it is hard to 

understand that, roughly speaking, if you double the tax, you quadruple the excess burden. So as you increase the tax, the burden on 

the economy increases more than proportionally. 

It is easy to understand that raising a set amount of revenue 

with a narrow base requires higher tax rates, but what is often ignored is the drag on the economy created by higher rates. The National Commission on Fiscal Responsibility and Reform demonstrated that cutting back tax preferences and broadening the 

base—by doing so, the current system could generate revenues of 

about 21 percent of GDP, with top individual and corporate statutory rates of 28 percent. 

Stripping away tax provisions that distort economic activity and 

lowering the rates would leave us with a system that is less costly 

to our economy. It would be fairer than the current system, less 

complex, and easier to administer. Senators Wyden and Gregg also 

have a plan that shares these attributes. 

Let me focus on the corporate base for a second. Broadening the 

base and lowering the rate could reduce a number of distortions 

caused by the current system. It will not be easy to cut corporate 

tax preferences to raise revenue for a corporate rate reduction, 

however. While some preferences benefit only a limited number of 

businesses, and we hear about those a lot, others cut taxes for a 

broader set, and in addition lower the costs of domestic invest-
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ments. But it is just not possible for us to stay competitive and 

grow our economy with a tax rate that is 14 percentage points 

above the OECD average. 

One often hears that the statutory rate, the fact that it is high 

is not important, since our narrow rate reduces the effective tax 

rate. But this argument ignores the important role that statutory 

rates play in business decisions. They influence where our corporations do business, how they finance investments, how much they 

invest, and their incentives to shift income to avoid taxes. Retaining a corporate rate that is significantly out of line with our competitors is just not a viable path for increasing U.S. investment, 

jobs, and economic growth. 

What about the international tax system? You will not be surprised to hear ours is very complex and induces inefficient behavioral responses. Under our system, all income of U.S. corporations 

is subject to U.S. corporate tax whether it is earned at home or 

abroad. A number of reform proposals have recommended a territorial tax system, which would exempt foreign-source income from 

U.S. corporate income tax. All other G–7 countries and all but six 

other OECD countries have adopted territorial tax systems. Abandoning our worldwide approach would be a major policy move and 

it deserves careful analysis. We should be doing this analysis now. 

The fiscal challenges ahead are daunting. Instead of spending 

the next 2 years engaging in an endless debate of whether to extend the 2001 and 2003 tax cuts, I urge you to instead focus on 

building support for and designing a base-broadening reform of the 

current system that can reduce our future unsustainable debt burdens and enhance the growth of the U.S. economy and the wellbeing of Americans. 

Thank you. I look forward to questions. 

[The prepared Statement of Ms. Altshuler follows:] 
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Chairman CONRAD. Thank you very much. 

Dr. Lindsey, thank you for coming, and please proceed. 

STATEMENT OF LAWRENCE B. LINDSEY, PH.D., PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, THE LINDSEY GROUP 

Mr. LINDSEY. Thank you, Mr. Chairman. I appreciate your invitation and that of the members of the committee. 

It is amazing, listening to my colleagues. I have to tell you, we 

did not collaborate in writing our testimoneys and I will change 

what I am going to say, in part to avoid redundancy. 

As Senator Sessions pointed out, there is a broad consensus in 

the economies profession that substantially more economic growth 

can be had through a sensible tax reform. I would add to that that 

in addition to the growth issues, it is important to take a look at 

the static behavioral issues that my colleague, Professor Altshuler, 

mentioned, and that is she observed that the excess burden of a tax 

doubles—is proportional to the square of the tax rate. So if you 

double the tax rate, you quadruple the excess burden. 

Senator SESSIONS. What does that mean? 

Mr. LINDSEY. Well, it is how much—— 

Senator SESSIONS. It sounded important when I heard her say it. 

Mr. LINDSEY [continuing]. you distort the taxpayers’ behavior, 

how much more you make them worse off on top of the rate that 

he has to pay. So you not only have to send a check to the government, but because you face these high rates, you have to do things 

you would not ordinarily do just to comply with the tax code. 

Just to put it into context, in the current income tax, when you 

add all taxes in, including things like the Medicaid tax, we are now 

debating whether we should be at 40 percent or 50 percent. When 

you go in that range, the excess—the burden on the taxpayer, the 

total, the tax check he has to pay and the excess burden is at $1.70 

for every dollar the government collects. When you start going over 

50 percent, the numbers become quite high. You make the taxpayer 

four times as worse off as you make the government better off. 

So no sensible person should think, you know, let us make the 

government as well off as we can simply by taxing the population 

when we know we are making the people we are taxing one-anda-half, two times, three times, four times worse off than we are 

making the government better off. That is not the way to enhance 

the wealth of the Nation. 

Where I would separate myself from my colleagues, and I certainly endorse their ideas of trying to make the income tax better, 

I think looking at the problem here, we really have to move away 

from an income tax-based system toward something else. The current high economic cost of the tax system is due to a number of 

factors that I think lead me to that conclusion. 

The first is complexity. A lot of the tax code is really a judgment 

call about what income should be taxed and what should not. Now, 

in the context of our various financial problems in the last two decades, a line came up that we should all bear in mind. Cash is a 

fact. Income is an opinion. And in our income-based system, a tax 

system is really about creating an opinion about what should be 

taxed and what should not. 
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We have a lot of opinions out there. There is GAAP accounting, 

Generally Accepted Accounting Principles. Those, by the way, are 

not fixed over time. They change. The SEC has certain modifications to GAAP accounting to get another opinion about what income is. And then our tax code has a third opinion about what income is and that changes over time. It seems a little bit odd that 

the government at one time is rendering three or more different 

opinions about what income is. We have to move toward a cashbased system. 

Let me give a very simple example. I have a small company and 

just one of the peculiarities I face every year has to do with my 

health insurance premiums for my company. Now, I am obviously 

an employee of my company and that cash item is considered deductible. It is a business expense for my employees. I am in exactly 

the same health system. It is not considered a business expense, 

what I pay for myself and my family. And then when I take that, 

it is considered an adjustment on the income tax, but it is fully 

taxed on the payroll tax side, but not to my employees. So here you 

have one cash item, identical across the board, two different taxes 

have a different opinion about it, and they have a different opinion 

depending upon whether you are the owner of the company or 

whether you are an employee of the company. 

That leads to the second problem, which people have talked a lot 

about. It is horizontal inequality. Because you have all these different taxes and each has a different opinion, essentially, similarly 

placed individuals pay radically different amounts of tax. I know 

Mr. Buffett is often up here talking about tax reform and he has 

admitted that his taxes are too low. He has an average tax rate of 

about 16 percent, if I believe the papers. That is about half what 

other entrepreneurs have. 

Now, how do you fix that? Well, you do not fix it by raising the 

taxes on the other entrepreneurs. You fix it by moving toward a 

system that defines the income he gets in a way that is similar to 

what others receive, and that is why I think we have to move to 

a cash-based system. 

The third problem has been touched on by a number of comments, and that is that our income-based system, because of the 

nature of the opinions that it renders about what should be taxed, 

encourages economic activity to go abroad. So, for example, an item 

that is manufactured in China but purchased in America has a cost 

structure that involves no U.S. income or payroll taxes on its labor 

content or on the profits that are rendered. China, of course, does 

have a tax system, but its rates are quite low relative to ours. The 

Chinese individual income tax produces just 1.2 percent of GDP. 

Ours produces 7 percent. So our income tax burden is six times 

what China’s is. The largest tax in China is the value-added tax, 

which produces a third of their revenue and is rebated on the exports they send here. 

So having an income-based system while most other countries in 

the world, including Europe and Canada, are moving away from an 

income-based system and toward value-added taxation or indirect 

taxation, puts us at a competitive disadvantage. We complain a lot 

about the advantages the Chinese give themselves through their 
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exchange rate, but we have a major self-inflicted wound that we 

cause ourselves because we have income-based taxation. 

So again, I do not believe that these fundamental problems with 

our tax structure can be adequately addressed by changes to the 

income-based system. Rate reductions within the current system 

have been economically successful because the excess burden within that is so great. But further revenue reductions are not possible. 

America must move away from its income-based system toward a 

cash-flow system. 

This should not be done as an add-on. We do not need extra complexity. We need simplification. So adding yet another layer of complexity is inappropriate. 

Goods that are imported from abroad, even those that find their 

way into products produced here, would not have to pay an American business receipts tax, and so would not be available for such 

a deduction by an importing firm. 

Governments and nonprofit entities could be given separate 

treatment so that only the labor component of their expense structure would be covered by the tax. 

The problems of horizontal inequality in such a system would be 

minimized by having all receipts taxed once and at a single source, 

regardless from where they were derived. Issues of vertical inequality, making sure that the rate was higher for higher-income individuals, could be accomplished through the two-tier business receipts tax system, where the higher tax rate exempted employee 

compensation below a certain amount. The problem with encouraging lower taxes for very low-income people could similarly be incorporated in there. 

We certainly need to address our budgetary challenges, but I do 

not believe that we can move forward tackling those issues with a 

tax system that imposes such high economic costs when we raise 

our rates to produce additional revenue. Our tax system is limiting 

American prosperity through needless complexity, horizontal inequities, and implicit subsidies of economic activity outside of our 

borders. A switch to a cash-flow-based tax system, such as a business receipts tax or even a value-added tax, would greatly facilitate 

our ability to address these budgetary issues. 

Thank you very much, Mr. Chairman. I would be happy to take 

your questions. 

[The prepared Statement of Mr. Lindsey follows:] 
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Chairman CONRAD. Thank you. Thank you. Really excellent testimony, Mr. Lindsey. All of the members, I think, have made a real 

contribution to the beginning of this discussion. 

Let me go, if I could, to a concept that was proposed by Professor 

Graetz at Yale. I think he is now at Columbia. He made a proposal 

that we go to a system that is really a hybrid, which is what most 

countries do. He proposed we go to a consumption tax for the vast 

majority of people, take 100 million people off the income tax system completely, substantially reform and reduce the corporate rate, 

broaden the base, and he argued that this would dramatically improve the efficiency of collection, that is that we would have less 

leakage in the system; No. 2, that it would make America far more 

competitive. 

Let me just go down the line and ask if you have looked at Dr. 

Graetz’s work and what you think of his proposal and what it 

would mean for both helping us reduce the deficit and at the same 

time improving the competitive position of the United States. Dr. 

Steuerle? 

Mr. STEUERLE. Well, as I tried to outline very briefly in my testimony, I think there are actually a variety of fixes that would be 

better than current law, so I would certainly say what Michael 

Graetz suggests is better than what we have now. The question is 

how far you want to go in adding on what would be essentially a 

VAT, a value-added tax, which is the basic tax that he would use 

to collect revenues from the majority of people. 

My principal concerns with Mr. Graetz’s proposal, and I think it 

actually is very illuminating, is at the very bottom of the income 

distribution, the very top, and not the middle, so he solves and simplifies a lot of things in the middle of income distribution. 

At the bottom, I do not think he has really grappled with the 

very tough issue of how you integrate things like Earned Income 

Credits and Child Credits—we could have separate testimony on 

this—with Food Stamps and TANF and now health subsidies that 

phaseout when your income goes up. So we have all these indirect 

tax systems at the bottom that are based on income and I do not 

believe that he actually has solved that problem for the bottom. 

And at the top, he leaves in place all of these deductions and 

credits for high-income people, so the notion of high-income people 

getting a home mortgage interest deduction and low-income people 

not getting any subsidy for their housing, it seems to me, does not 

quite work, either. 

But if you asked for the base, the core of the proposal, would you 

consider replacing a significant portion of the current income tax 

with a value-added tax, I think that a lot of economists might not 

agree that that is the reform they would favor—Mr. Lindsey indicated another way he would go about it—but I think they would 

say it is better than the current law. 

Chairman CONRAD. If you were to move in that direction, how do 

you protect the most vulnerable among us? How do you protect 

those that are at the lowest end of the income scale? 

Mr. STEUERLE. This is a subject that has not gotten much attention lately, but as I say, we now have low-and moderate-income tax 

payers and so many phase-outs of so many programs that their 

marginal tax rates are among the highest in the Nation. Some of 
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them face 70 or 80 percent rates. Forty or 50 percent rates are very 

common. You lose your Food Stamps. You lose your—the new 

health law, there is a ten cents or more phase-out of your health 

benefit. You lose your Earned Income Credit. You lose your Child 

Credit. All these phase-outs basically start adding up, and then you 

add on the Social Security and the income tax rate. 

I think we have to actually think about reform of what we want 

to do at the bottom of the income distribution, in the middle of the 

income distribution, and at the top of the income distribution, almost think about them separately so we take the progressivity 

issue on the side. We decide how much we are going to collect or 

how much we are going to get from these groups and then we try 

to simplify for each group. I think that requires a reform effort that 

even goes beyond what we are discussing today. 

Chairman CONRAD. Dr. Marron. 

Mr. MARRON. Thanks. I guess my approach is to say that there 

are several things we are trying to accomplish in a tax system. One 

is to raise as much revenue, the revenue we need to pay for the 

government without harming the economy, and the best way to do 

that is to go toward a consumption tax. 

One of the other things we would like to do is achieve certain 

progressivity goals. The tax system is a very important way that 

we think about the distribution of after-tax income in the United 

States, and frankly, income taxes tend to be a better lever for doing 

that. And what the Graetz proposal is trying to do is, in essence, 

find a compromise sweet spot in there that is recognizing that for 

the economy as a whole, it is better to have more of the tax base 

be consumption-based—that is why he introduces a VAT—but then 

recognizing that if you want what I think is widely held as kind 

of a fair conception of what the distribution of the tax burden ought 

to be, that you are going to need something like an income tax at 

the higher level to collect that, and he is trying to strike that balance. 

My sense is that he succeeds in the sense of creating a tax system that would strengthen the economy, be beneficial for competitiveness. As Gene says, there are a lot of difficult details about how 

you actually implement that and accomplish all the goals throughout the income distribution, but as a basic structure, I think it is 

an interesting one to think about. 

Chairman CONRAD. Dr. Altshuler. 

Ms. ALTSHULER. Yes. I agree with Donald. I am a fan, and I very 

much believe that all roads lead to a VAT. I just think that that 

is where we are going to have to end up. Adding a VAT onto the 

system would allow for lower rates, so you get all the benefits of 

the lower rates. You would have a system that is much less complicated, I believe. You would have much less incentives for income 

shifting. 

It is implementable. We can do this. Canada, I mean, all other 

countries in the OECD have a VAT. This is how they raise their 

revenue. Virtually every other country in the world has a VAT. So 

it is something that could be done. 

Chairman CONRAD. But how do you protect those who are at the 

lowest end of the income distribution, those who are the most vulnerable among us? How do you protect them in that system? 
329 

Ms. ALTSHULER. That is the difficulty and that is what Gene and 

Donald have also talked about. Now, remember that you are going 

to be retaining the income tax, so you can run refunds and transfer 

programs through the income tax. So by retaining the income 

tax—— 

Chairman CONRAD. You could keep the Earned Income Tax Credit—— 

Ms. ALTSHULER. Absolutely. 

Chairman CONRAD [continuing]. you can keep the Child Care 

Credit-—— 

Ms. ALTSHULER. Exactly. So you can help the distributional consequences of moving to a VAT through the income tax system. I 

know—I believe the Tax Policy Center is studying this right now, 

and as Gene said, with more study into this, I do think that we 

could get the distributional consequences to be something that we 

desire, and I think what we need to remember is that we are keeping the mechanism of the income tax, so that is going to help us 

out at the bottom of the income distribution. 

Mr. LINDSEY. Well. first of all, I think we all agree that almost 

anything would be better than what we have, and that would be 

what I would think about Mr. Graetz’s comment. 

I also agree that, as I said in my testimony, I think we have to 

move toward a business receipts tax or VAT. 

I would reject retaining the income tax along with it because I 

do not see where adding yet another definition of income or another calculation everyone has to do is a net gain. I think within 

the context of a business receipts tax, you can have substantial progressivity. 

For example, you could have a base business receipts tax rate, 

call it 20 percent. 

Chairman CONRAD. Explain that for those listening and for the 

members of the Committee. What do you mean by that? How does 

that work? 

Mr. LINDSEY. Well, a business receipts tax or a VAT are very 

similar concepts. Essentially, the base would be total receipts by 

the company minus what was paid and taxed to a different company. So, for example, if I am making a car and I buy steel, I send 

the steel company a check to buy the steel, and the value-added tax 

on that steel is part of that. So to avoid double taxing, if I can show 

that I have-—basically it is called an invoice. If I have an invoice 

that says you paid tax on that once, you do not have to pay tax 

on it a second time. So the base would be all the money coming 

in minus the cash going out that you paid a tax on. 

Now, if I bought that steel from China, I did not pay a VAT on 

it or a business receipts tax, no deduction, and so we would be leveling the playing field between purchases of goods here and purchases of goods from overseas. 

Chairman CONRAD. So that would help the competitive position 

of the United States vis-a-vis taxes with respect to one of our 

toughest competitors, and all of our competitors who have a similar 

system. 

Mr. LINDSEY. Absolutely. And if you think of it, that is the central issue, and I think that it really is our central economic issue. 

You have to say why wouldn’t I want to throw as much—if I am 
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going to move to that system anyway, why wouldn’t I want to move 

as much of our tax base into that system as possible? If I know I 

am going to gain competitiveness by doing it, why would I only 

want to gain competitiveness on half my tax system? Why wouldn’t 

I want to gain competitiveness on all of my tax system? And that 

is why I would move to the one tax. Now—— 

Chairman CONRAD. This one goes to—it takes us right back to 

this fundamental question. If you do it all on that side of the ledger, how do you maintain progressivity in the system so that especially those who are the least vulnerable who benefit from the current tax system through the earned income tax credit, child care 

tax credit, how do you maintain that support for that end of the 

spectrum? 

Mr. LINDSEY. Sure. Let me mention the high end as well. There 

is no reason why—again, you have the business filling out its tax 

form. They do the calculation on the base I just said. Then you 

have a second line that says subtract the first $10,000 a month you 

paid to every employee; in other words, wages up to $10,000. You 

get another line. You put another tax on top of that. So that highend wages and profits, including interest and dividends, would be 

subject to the higher rate. I think that is how you get progressivity 

on the higher end. 

On the lower end, this is not a hard problem. I mean, there is 

no reason why you cannot have wage subsidies built into an EIC— 

an EITC. Right now we incorporate the EIC right into the payroll 

checks of most companies. You can get—I think it is called prepaid. There is a way. We have it in the tax system where you can 

get—you do not have to wait for April 15th to get your earned income tax credit now. You can get it in every paycheck you file. 

There is no reason why you cannot do that in the VAT system either. 

The other aspect of the help for people on the lower end of the 

income distribution, it has been pointed out that right now we have 

among the most complicated set of rules because we have different 

rules for food stamps, for health care, for what have you. So that 

is something that you can reform separately. You can run it 

through the tax system. You can run it through a direct payment 

system, which is what a lot of what we do now is. When you think 

about ‘‘welfare’’ in the old days, it had nothing to do with the tax 

system. It was a direct payment to people based on their income 

and based on the number of children they had. So I do not see 

where there is an obstacle toward providing progressivity in our 

combined tax transfer system by moving to a value-added tax or a 

business receipts tax. 

Chairman CONRAD. All right. Senator Sessions. 

Senator SESSIONS. Thank you. Mr. Chairman, I would yield my 

time to Senator Portman. I would just note that we have three new 

Senators that have joined our Committee. Senator Portman was, of 

course, at OMB, which is the heartbeat of Federal money management, and a member of the Ways and Means Committee in the 

house for a number of years. And Senator Toomey was on the 

Budget Committee in the House for a number of years and was a 

businessman. And Senator Johnson, who is not with us now, is a 

full-time career businessman who got elected to the Senate. So I 
331 

think they all three are going to add some real experience and perspective to our debate. Senator Portman, thank you for being with 

us, and I yield my time to you in the first round. 

Senator PORTMAN. Thank you, Senator Sessions. I appreciate 

your yielding your time. You know, we have all got four or five 

things going on at once here, so I am going to have to step out after 

my questions. But I really enjoyed the testimony, and, Mr. Chairman, thank you for bringing this panel together. It looks like we 

need to get Michael Graetz here next time so he can talk about his 

ideas. You know, I did read his book, and I am intrigued by his 

concepts. I will tell you, I think in the politics of today and with 

the urgency of addressing our fiscal crisis, I am not sure where to 

make that leap. 

I will also say to the Chairman’s question that one of the 

thoughts that came up in relation to the Graetz ideas was to deal 

with progressivity among lower-income workers by offsetting the 

payroll tax, which is a good way, I think, to both simplify the Tax 

Code and also to provide relief because most low-income workers 

are working and do pay payroll taxes. Those who do not, there are 

other ways to do it, as the panels have talked about. 

But I kind of want to take us maybe back to the kinds of proposals that the Commission has looked at and the kinds of proposals that the Wyden-Gregg legislation would indicate, and that 

is simplifying the current code. Again, as interested as I am in 

what Dr. Lindsey and others are talking about in terms of moving 

to a VAT tax, I am not sure I see that as politically viable here 

in the short term. 

But perhaps we could move to an income tax that is simpler, that 

has fewer economic distortions, that makes us more competitive, 

that moves us toward eventually looking at some of the more dramatic changes in terms of a consumption-based tax. So a couple 

questions for you. 

One, what should the corporate rate and the individual rate be? 

There is a study we talked about in the last hearing that is out 

recently by Alex Brill and Kevin Hassett from AEI indicating that 

we are leaving money on the table right now with the corporate 

rate being so high. In fact, I think they say the optimal corporate 

rate is in the mid–20s, and the point has been made here this 

morning that we are not competitive with our OECD trading partners. Japan is going to relinquish first place to us in terms of the 

highest corporate rate come April. And this is a jobs issue. 

What should the rate be? And what should the interaction be between the individual rate and the corporate rate? The question I, 

of course, have is: Given the fact that most businesses in America 

do not pay their taxes at the C rate but rather at the sub-chapter 

S or as partnerships and sole proprietors, what kind of behavior 

will result if the corporate rate, let us say, were at 26 percent and 

the individual rate was relatively higher? Would you see that shift 

back to the C corporations? And is that good for taking the economic distortions out of our system? I do not think so because then 

you would have more double taxation on the corporate side. 

So I will start with you, Gene, if you do not mind and just go 

down the panel, if you all could tell me again in sort of a realistic 

scenario here of getting a corporate rate down, what is the right 
332 

corporate rate? And what should the right top rate be for individuals? 

Mr. STEUERLE. Well, thank you, Senator Portman. It is good to 

work with you on this side of the Congress this time. 

Let me answer your second question first, which I think is the 

easier one. I think the individual rate and the corporate rate 

should be fairly near to each other. That is the conclusion we came 

to in the mid–1980s, and I think it is the right conclusion today. 

And I think if you ask me personally where I would come, I would 

actually try to keep the rates down into perhaps the high 20s. 

But here is my dilemma. I believe that the effective rate of tax 

on the public is equal to the spending rate, and the spending rate 

right now is about 24 or 25 percent of GDP. The typical tax base, 

the income tax, Social Security, value-added tax, is only about half 

of GDP. So you are really running rates. If we really add them all 

together, so you add in how you come in the back door, through Social Security taxes, you phaseout this, you phaseout that, most people are facing 40, 50 percent rates if you really look through the 

system. So the statutory rate is hiding the effective rate that they 

are facing from being phased out of all these programs, from having all these combined tax systems. And so it is very hard for me 

to give you a rate in the individual and the corporate tax that get 

balanced. And the system is so out of balance—in fact, one thing, 

Mr. Chairman, I hope you will consider that I think you could even 

work with the House Budget Committee on is ways to report to the 

public better. I really think that one way to get at the deficit issue 

is to start reporting to the public that the tax rate is equal to the 

spending rate, that what we are spending as a society now and 

what we are spending in the future is the taxes we are collecting, 

just as if it were a household, and we’re spending $100,000 and 

borrow $50,000, we are still spending $100,000. We still have to 

pay that $100,000, and somebody is going to pay it, and we need 

to report that unidentified payer, which is the person who has to 

pay for that deficit in the future. We need to start reporting that 

as a tax or a burden on future generations or on future taxpayers. 

So to answer the question, I would put the rates near to each 

other, but I have to solve the question of where you want the system as a whole to come out. I think that the rate of tax we pay 

should be equal to the spending we promise the public as a way 

to get the deficit in order. And even if that makes the tax rate way 

too high for where I want Government to be, at least it is an honest 

system, and we are not trying to hide the rates in the deficit. 

Senator PORTMAN. We also need to do both. The Chairman talked 

about that earlier, on the spending side as well. 

Dr. Marron. 

Mr. MARRON. So perhaps not surprisingly, I will be in a similar 

place to Gene. On the corporate side, the pressures around the 

world are such that the world is moving into, you know, tax rates 

that have a 2 at the beginning of them, and that would seem to 

be where the United States ought to go if it can figure out a way 

to get there. You would like the individual rate, the personal rate 

to be near that. I am not sure they need to be necessarily identical, 

so it could possibly be somewhat higher. But you are going to want 

them to be similar. 
333 

But you have the challenge that Gene said, which is, you know, 

we have to pay for the Government that we are going to have and 

whether that is going to be possible with those lower rates. And I 

would say, you know, going back to my testimony, the emphasis on 

the tax preferences, that how one feels about being able to bring 

the rates down by a sizable amount I think is going to depend a 

lot on how aggressive folks can be in rolling back tax preferences, 

both in finding what will count as revenue, although often I think 

as effectively spending to offset any budget impacts from that. And 

then also if you are concerned about the distributional impacts, you 

know, if you are bringing down top rates, you are going to want 

to find—look at the tax preferences in particular that systematically benefit those folks as an offset to that. 

Senator PORTMAN. Let me just ask, Dr. Altshuler, before you answer, just a simple year or no. Does it make sense to reduce the 

corporate rate, which I think there is a broad consensus on now, 

without dealing with the individual rates? Yes or no. The answer 

is no. Just say it. 

[Laughter.] 

Ms. ALTSHULER. I am going to lead the witness. 

Ms. ALTSHULER. It is going to be difficult. 

Senator PORTMAN. But, seriously, if you still have a top rate of 

35 percent and you do reduce the corporate rate to the mid–20s, 

that creates—— 

Ms. ALTSHULER. I think there is going to be a problem, yes. Yes, 

yes. 

Senator PORTMAN. So yes, no. 

Ms. ALTSHULER. I guess the answer is no, right. 

Senator PORTMAN. Thank you. 

Ms. ALTSHULER. And so can I go on to—— 

Senator PORTMAN. Yes. 

Ms. ALTSHULER. OK. Now I am confused as to what yes and no 

mean. 

Well, just getting back to the question that you asked me directly, I think it is going to be hard through revenue-neutral corporate income tax reform to get the corporate rate down to 25 percent. So I do not really see that—I would love to be able to do that, 

but just looking at corporate tax expenditures and just cleaning up 

the base, I do not think we get to 25 percent. And I think that is 

where we do need to go. 

So in answering your question, you know, it makes sense to try 

to get to the OECD average because of the competitive pressures 

that we face that are not going away. Other countries besides 

Japan, Canada and the U.K. are also lowering the rates. I am not 

saying that we should engage in a race to the bottom. I do not 

think that is good for the world either. But the reality is that our 

rate is 14 percentage points higher than the OECD average right 

now. 

As Donald said, the two rates do not have to be identical, but 

they should not be too far apart. What you are pointing out is absolutely right. If you have a corporate tax rate that is much lower 

than the individual tax rate, then all of a sudden the corporation 

becomes a tax shelter for high-income individuals, and there are 

tax lawyers that are just going to jump all over that and advise 
334 

people how to deal with that. But you should keep in mind that 

once I incorporate myself to get money out, I am going to be paying 

the corporate rate along with the individual rate, and that is why 

there is room for there to be a little bit of a difference between the 

two rates. 

How do we get to these rates that begin with a 2? Well, I think 

we have all been saying the same thing, and the Commission 

showed us: broaden the base. Take a deep breath; broaden the 

base. 

Senator PORTMAN. Larry. 

Mr. LINDSEY. Yes, the answer to your question is I think you do 

have to lower the rate. What has increasingly happened since S 

corporations have become common is that the corporate rate is 

really a way to purchase—it is a convenience for the business organization to be structured that way. And the only people for whom 

it really makes sense anymore are large institutions that are internationally competitive. 

So I actually think that although it would be ideal to lower both, 

the damage done would probably be manageable in part for a reason that Professor Altshuler mentioned, which is if you are now a 

sub-chapter S and you switch over to a C, you pay the 25-percent 

rate that a C corporate rate would be. But then your money is 

stuck in the firm, and you have to take it out somehow; and as 

soon as you take it out, you are subject to the personal rate. So the 

advantages, I think—I mean, this gets back to the main point that 

an income-based tax system really, really does not make sense, because you get into all these complexities. Is it going to be taxed 

once, twice, two and a half times, three times? And I know it is politically difficult, but in the end, as Rosanne said, we have no 

choice. All roads are going to lead to a VAT. If we intend to be competitive, that is where we are going to end up. 

Senator PORTMAN. Thank you, Mr. Chairman, for the time. 

Chairman CONRAD. Thank you. 

Let me just say to colleagues we are at 11:10. We have a good 

turnout. We have more colleagues coming, so I think we are going 

to have to go to 5-minute rounds, and we will start with Senator 

Wyden. Senator Portman was on Senator Sessions’ time. 

Senator WYDEN. Thank you, Mr. Chairman, and I thank all the 

panel. 

As far as I can tell, reforming the Federal income tax is the only 

major policy response with an actual track record—an actual track 

record of creating millions of private sector jobs without adding to 

the deficit. And here are the numbers. 

Two years after a big group of populist Democrats and Ronald 

Reagan worked together, the economy created 6.3 million non-farm 

jobs. That is twice as many—twice as many jobs as were created 

between 2001 and 2008, the period of time when tax policy was 

partisan. 

So my question particularly for you, Mr. Steuerle, because you 

have this great history of 1986: Is there any reason why the principles of tax reform that were pursued in 1986 would not be once 

again an engine for job growth? The Heritage Foundation scored 

Senator Gregg’s proposal with me as creating 2.3 million new jobs 

per year. That is in the here and now. We have to create more 
335 

good-paying jobs, and because of your history, the first thing I want 

to ask is: Do you see any reason why the principles of 1986 tax reform would not be an engine for job growth again? 

Mr. STEUERLE. Well, you sort of set me up, Senator Wyden. I 

agree with your conclusion. I think tax reform, lowering the rate, 

broadening the base, is good for the economy. 

Now, how far and how fast it goes, I am one of these people who 

is always a little reluctant to make that type of prediction, but it 

is in the right direction. And I believe that there are so many areas 

of tax and budget reform where we know what to do, and if we do 

them and move in the right direction, we often get surprised. And 

what actually happened in 1986, we actually thought that perhaps 

there was a transition period where we might have actually had a 

little bit of a slow growth to be able to compensate for the reform. 

And you may remember, by 1986 we were already into about the 

third or fourth year of an expansion at a time when we often slow 

down. Instead, what happened after tax reform was that things actually sped up. 

So, yes, I think tax reform especially is good for long-term 

growth. What happens in the short term is hard to predict, but the 

lessons of 1984 to 1986 actually are fairly positive. 

Senator WYDEN. Well, those numbers are just stunning. I mean, 

twice the job growth in the 2 years after bipartisan tax reform compared to the whole period between 2001 and 2008, and that is a 

matter of public record. 

The second question I want to ask, we will get you, Mr. Marron, 

and you, Professor Altshuler. I will tell you, I find it pretty alarming how short shrift small business is getting in this whole discussion about tax reform. Now, in the proposals Senator Gregg and I 

put together, we get the corporate rate down to 24 percent. That 

was scored by Joint Tax, so, again, that is a matter of public 

record. But small business, that is 80 percent of the businesses in 

this country, sole proprietorships and partnerships and the like. 

And it seems in much of the discussion small business is almost 

getting to be an afterthought. And I am going to do everything I 

can to keep that from happening. 

I wonder what your sense is about how small business is fitting 

into this discussion, Professor Marron and Professor Altshuler. 

Mr. MARRON. Well, the first point, which is I think where you are 

going, is that, as was discussed before, we now have many businesses that are structured so that they pay their taxes through the 

individual income tax, and that as passthroughs—as you think 

about tax changes, it may make life easier for businesses to create 

jobs, you are going to want to think not just about corporate tax 

reform but possibly about the benefits of, say, lowering rates and 

what-not on the individual side. 

Now, the caveat with that is that while many, many companies 

and businesses show up on personal income taxes, the really, really 

large ones and the multinational ones are still over on the corporate side. 

Then, with the security and safety of being a think tank and academic guy, I will inject the one thing that there has been a lot of 

interesting recent research on what are the key things for creating 

jobs and moving the economy forward. And it turns out that small 
336 

business is not exactly the slice that drives it; that it turns out that 

there are a lot of small businesses that do not grow—I mean, the 

perfectly respectable businesses we like, but that if you are interested in kind of what are the job creators, the things that move the 

economy forward, it is a small subset of them that turn out to be 

really the gazelles that really create a lot of jobs. And one of the 

challenges in thinking about public policy is how do you design 

things particularly if you want to help those. 

Senator WYDEN. I would only say—and I want to get you into a 

different area, Professor Altshuler, because I know my time is up. 

That is where most of them are, and certainly small businesses can 

become big businesses because of the entrepreneurial ingenuity, 

and that is why I just do not want them forgotten. 

A question for you, Professor Altshuler and Dr. Lindsey. More 

than 90 United States Senators voted against a VAT, and as far 

as I can tell listening to the debate, the only surprising part was 

that it was not more than 90. And I think the big concern for those 

who have been for a VAT is there is a sense that it is just a backdoor plan to hike taxes, and particularly taxes that are seen as regressive. 

Since both of you are for this, how would you deal with the politics today of more than 90 United States Senators coming out 

against this concept? And, of course, the Volcker Commission did 

not bring forward a proposal that was in favor of it. I look back 

at the Bush proposal, and they said, well, you can talk about it, 

but they certainly did not come out for it. How would you deal with 

trying to bring people around to your point of view given that recent Senate vote and certainly the product of the other reports. 

I thank you for this extra time, Mr. Chairman. 

Chairman CONRAD. Let me just say it is very clear 5-minute 

rounds are not going to work, so we will go to 7-minute rounds. 

Senator WYDEN. Great. Thank you, Mr. Chairman. 

Ms. ALTSHULER. Senator Wyden, thank you for the question. The 

answer is perseverance; education, education, education; helping 

people understand that the current income tax is broken and that 

the VAT is an efficient tax, and it is not necessarily a money machine. This is what people are afraid of. There is this idea that it 

is a hidden tax. It absolutely does not have to be a hidden tax. You 

just put it right on the receipt like Canada did. Speak about the 

Canada experience. They are just north of us. They adopted a Federal VAT. It is not a perfect VAT, but if you talk to Canadian policymakers, they will say that it works very well for them. 

So I think education—I mean, the problem is that when you support a VAT, it is politically very difficult. 

Senator WYDEN. My time is up, but, Dr. Lindsey, the people of 

my State have voted against a VAT something like 850 times, 

which is barely an exaggeration. So you should know that your 

education challenge will be great. 

Mr. Chairman, you have given me lots of time. Can Dr. Lindsey 

just respond quickly? 

Chairman CONRAD. Go ahead. 

Mr. LINDSEY. Thank you. First of all, if it were an add-on VAT— 

in other words, you were adding it on to what we already have— 

I think the 90 Senators were correct. Why do we want to add an-
337 

other layer of complexity? But I do think in the end, if you want 

to regain competitiveness, that is going to be the only avenue that 

is available. 

Chairman CONRAD. Senator Toomey. And we will go to 7-minute 

rounds now for everybody. 

Senator TOOMEY. Thank you, Mr. Chairman. I just want to followup on a point that Dr. Steuerle made earlier with which I fully 

agree, which is the idea that we ought to really equate and think 

about the total tax burden by looking at the total amount of spending. Ultimately, all spending has to be funded, and it is all going 

to come from taxes, whether the—at any given point in time there 

is a combination of debt and taxes. The real measure of the burden 

on the economy is the level of taxes. 

Now, to just connect a few dots here, it is also interesting to hear 

the discussion about how there is a disproportionate negative impact—in other words, the negative impact from higher taxes exceeds the revenue benefit to the Government from an increase in 

taxes. If we are saying that taxes are essentially equivalent to 

spending, then what we are saying is that as Government spending 

grows and, therefore, the corresponding taxes, we are doing harm 

to our economic growth, which is what—I think we are well within 

the range at which increases in spending are doing net negative 

consequences to our economy. 

The question I have is also about the VAT. Now, Dr. Lindsey has 

argued against a combination of income taxes and VAT, and I 

think if I understand you correctly, it is because of a concern about 

an additional layer of complexity. But I wonder about something 

else also that concerns me, which is if we had both, we could at 

least initially have both at what would appear to be nominally relatively low rates since you have two different sources of revenue. 

And I worry that that would make it easier politically to raise rates 

and to increase the total tax burden on the economy, which we 

have already established from this panel has a disproportionately 

negative impact on economic growth and, therefore, job creation. 

So I wonder if those of you who, I think, you might support a 

combination of a VAT and an income tax, if you share that concern 

that it could lead more easily to a higher total tax burden and, 

therefore, poorer economic performance and lower job creation. 

Mr. STEUERLE. Well, Senator, again, part of the dilemma is our 

spending rate is so much higher than our tax rate where basically 

for every $2 we collect in taxes, we are spending $3 now. And, actually the spending rate goes up in the future, particularly because 

we have these mandatory spending programs that have growth 

rates that are faster than the economy and they are 

unsustainable—as well as, by the way, a number of tax subsidies 

as well that have very high growth rates. 

So we have a dilemma here, and I go to some elaborate ways in 

my testimony a little bit, but the dilemma for both political parties 

is that there is a sense that if they do not control the future, the 

other party will. So for Republicans, it is often—you know, if I actually raise rates to balance the budget, all that is going to happen 

is that is going to keep spending higher. And for Democrats, you 

know, our experience is if we basically get spending under control, 

which some of them believe that they did in the 1990s, well, then 
338 

all that happens is we end up financing these tax cuts. And, actually, I think both parties are right. I mean, in technical academic 

language, they are in what I call a classical prisoner’s dilemma. 

Without going into the details of it, it is basically you always want 

to argue for one side because if you do not, somebody else is going 

to take advantage of you. But it is an unsustainable situation, and 

so to me, the answer to your question, which sort of goes beyond 

tax policy, is I think you have to come up with budget rules that 

limit both political parties, whether they are in power or not in 

power, from controlling the future. So that, yes, if the public wants 

to vote for higher spending in the future and finance it with a higher VAT, then they get it, but they cannot do it in a way that they 

vote for higher spending now that forces the taxes to go up. But, 

similarly, on the other side of the aisle, you cannot vote for tax cuts 

now that basically try to force spending cuts into the future because of these deficits, because what both political parties have 

succeeded in doing is creating not only this enormous deficit but 

boxing themselves in so much that, as I say, we have now got a 

Government where when you walk into the office—when you walk 

into the Congress, both this Congress and the last Congress, every 

dollar of revenue was already committed. You did not have a single 

dime of discretionary to spend on discretionary spending or to do 

any reform because it had already been committed by your colleagues in the past. 

Senator TOOMEY. I understand. I am wondering if we could focus 

a little bit on the narrower question I am trying to pose, the danger 

of escalating—the increasing danger of escalating taxes if we had 

both a VAT and an income tax. 

Mr. STEUERLE. I guess the bottom line is I am saying, yes, I 

think the danger is there. The danger is on both sides of the aisle 

unless you figure out ways to constrain both parties as to how 

much deficit they can do now that they ended pushing the tax rate 

up or, if you want, the spending rate down. 

Senator TOOMEY. Dr. Marron. 

Mr. MARRON. So a couple of thoughts. First, as Rosanne said, I 

would invoke the example of Canada as an interesting, important 

one to keep mind, where they introduced a VAT in the early 1990s 

at a 7-percent rate. They made it very visible. And then eventually, 

over time, they actually brought it down to 6 percent and, I believe, 

5 percent, which shows that a country that is relatively similar to 

ours in many regards was able to introduce a VAT as an add-on 

and not let it grow like Topsy. 

The other would be I would just sort of echo some of what Gene 

said. Ultimately, the challenge is that we have to afford the government that we are going to choose. What you discover if you look 

internationally is that societies that have chosen to have larger 

governments tend to choose more efficient tax systems. So they 

tend to do more consumption taxation in relative terms and less income taxation in relative terms. 

And I think the reason folks here have been talking about a VAT 

as a possibility is that we think that given the pressures of an 

aging population and rising health care spending, that that may be 

what the future looks like for the U.S., and that rather than try 
339 

to pay for that by just racheting up income taxes, it would be much 

better to go to a mix and more toward the consumption end. 

Ms. ALTSHULER. I do not think I can add much more to what 

Donald just said. I think I agree with everything that he just said. 

I think the idea that by having a VAT you automatically have a 

bigger government is based on this idea that it is a hidden tax and 

that people will just let that tax go up and up because they do not 

feel it or because they do not see it, and I just do not see that as 

being the case. 

Senator TOOMEY. But Dr. Marron did seem to be suggesting that 

there is certainly at least a correlation between big governments 

and a VAT and that some here who are advocates for expanding 

government see that as a good way to get there. My concern is that 

ever-bigger government, however you fund it, leads to slower economic growth and lesser job creation and a lower standard of living. 

Dr. Lindsey, I would if you could comment. 

Mr. LINDSEY. I think you are exactly right on the hybrid system. 

Because you have two apparently lower rates, it makes it easier to 

raise one and then the other. So I think you are right. 

I was struck by Senator Wyden’s question. I had an answer 

which I will direct to you, but it is really to his, on a political issue. 

You know, there is a large movement in the country for something 

called a fair tax. Now, I personally do not think that is as effective 

as what I am suggesting, but economists disagree. But there is an 

example of something that is close to a VAT that has a large political constituency for it in a place you would not expect. And so I 

do not think it is at all an impossible task. 

Chairman CONRAD. Thank you. Let me go to Senator Coons. Senator Coons, I want to welcome to the committee. He is a new member here, actually filling out the term of Senator Biden, who was 

a founding member of the Senate Budget Committee. Senator 

Coons was the County Executive of Newcastle, the largest county 

in Delaware, so he has actually balanced budgets and worked on 

ways to promote economic growth. We are delighted to have you 

join the committee, Senator Coons, a graduate of Amherst, a Bachelor of Science in Chemistry and Political Science. He holds a graduate degree from Yale in Law and Divinity, so maybe we can get 

some spiritual guidance here, as well. That would be valuable to 

the Budget Committee. And he is the first Truman Scholar to serve 

in the Senate. 

Senator Coons, welcome to the committee. 

Senator COONS. Thank you very much, Mr. Chairman, and thank 

you for your leadership on these very important issues. I very 

much look forward to working with you and with Senator Sessions. 

As you both said in your opening Statements, we recognize, I 

think, across the partisan divide of the Congress and broadly 

across the country, regardless of region, background, experience, or 

education, that we have, as this panel has so uniformly and compellingly testified, a simply unsustainable and unworkable tax system in the United States. We face a crushing national debt burden, 

a challenging deficit. You have all worked clearly very hard in putting together a series of proposals, and as the questioning so far 

has surfaced, one of our big challenges is taking insightful, de-
340 

tailed, thorough proposals and actually moving them into political 

reality, and we have some very real challenges doing that. 

In my role as County Executive, as you mentioned, Chairman 

Conrad, I did balance six budgets. It was not easy. It required a 

broad recognition of a need for shared sacrifice, both reductions in 

spending and broadening our base and increasing revenue. And before that, I spent 8 years as in-house counsel for a multi-national 

corporation that is one of Delaware’s most innovative manufacturers. 

I will focus my questions, if I might, on the question of corporate 

taxes. I am very interested in how we might successfully encourage 

or incentivize through repatriation of foreign-earned profits, increase corporate investment in R&D, in manufacturing, and in new 

hiring in the United States, and in what our longer-term trajectory 

for it ought to be on treating corporate tax rates, and I am really 

more interested in this exchange, in larger corporations who have 

significant offshore balances. 

One of the comments that was made, I think it was by Dr. Marron, was about the sort of distorting effect of temporary tax programs. As a participant in the lame duck session, I was particularly disappointed that we made some large tax moves that were 

for 1 year. As someone who was long concerned about or interested 

in the R&D tax credit, for example, it makes absolutely no sense 

to me that it is here, gone, here, gone. We do not do long-term sustainable tax policy. 

So if I might, to every member of the panel, please, I would really appreciate a response. If we are in a global situation where, as 

I have heard from you, most of our competitors are at a VAT style 

system, a cash system rather than an income system, and we do 

have, or will have the honor as of April of having the highest of 

the OECD countries combined corporate income tax rate, what is 

the best path forward to incentivize both in the shorter term the 

repatriation or the mobilization and deployment of capital from 

American-led corporations, and then in the longer term, what is 

the balance that makes us most competitive as a national economy, 

given the political realities that were pointed to by the panel of the 

difficulty of moving easily to a VAT. 

Is it to dedicate the VAT to particular purposes? Is it to apply 

it only to narrow classes of economic activity? Some have proposed 

a repatriation of foreign-earned profits holiday or for limited purposes. How do we strike a balance here that allows us to most effectively access and mobilize the innovative capital reserves of the 

American corporate sector? Please. 

Mr. STEUERLE. Senator Coons, I confess that when it comes to 

international, my complication is I do not think there is ever a perfect answer. You start with inconsistent tax systems—— 

Senator COONS. Of course. 

Mr. STEUERLE [continuing]. because different countries have different tax systems. So you never can get all the neutrality you 

want across the systems. You start with inconsistency and then 

you have to decide how can you try to minimize some of the distortions that result. So I can only make some suggestions that I think 

move in the right direction without giving you a perfect solution. 
341 

I should comment that in tax reform in 1984, I went around to 

every staff member—I had divided up tax reform into 20 modules 

with like several hundred pieces, which is an issue we have not 

even gotten to here today. There are thousands of provisions we 

are talking about here and we are talking in a very shorthand 

basis. I went to the national people. They hesitated. They hesitated. They hesitated on what form to propose. They ended up suggesting something. We finally got it in our proposal at the last 

minute. Three weeks after we got it in the proposal, they came and 

they said, you know, we do not think we got that right. So ever 

since then, I have been skeptical about getting a perfect solution. 

So my colleagues, especially Rosanne Altshuler, who is a real expert in international, have made several suggestions. If you lower 

the rate, you move in the right direction. Nothing else that really 

helps a lot. Just lowering the rate moves it in a long direction. 

With the value-added tax, you can do border tax adjustments to the 

extent that makes a difference. 

The repatriation issue, I think, is a bit of a bogus issue. You 

know, basically, that is where the people put a little check mark 

on where they are keeping their account. I mean, the money is accessible in a lot of different ways regardless of whether they repatriate. I do think that we have not given much attention to the way 

that our current system allows people to arbitrage—— 

Senator COONS. Right. 

Mr. STEUERLE [continuing]. moving debt abroad. But it is not 

just corporations that can do it. We individuals can do it, too. 

Senator COONS. Individuals do it, too. 

Mr. STEUERLE. We borrowed to put money in our pension accounts, and that is one way of getting at some of the arbitrage in 

the system. 

So I think there are several things we can do to move in the 

right direction. I am less enamored of whether—I am not opposed 

to it, but I do not necessarily favor whether going to a territorial 

or not makes a difference. 

Senator COONS. And Dr. Altshuler in her testimony said that we 

really should not have a race to the bottom in terms of lowering 

corporate rates. Is there a point below which—I mean, this is obviously a hypothetical—is there a point below which you should not 

keep reducing income tax rates for corporate income? 

Ms. ALTSHULER. Is this a question—— 

Senator COONS. Sure. 

Ms. ALTSHULER [continuing]. a question for me? Is there a rate— 

boy, then what you are thinking about is we are all in this together 

as a world and how are we all going to behave as a world, and I 

think that you are not going to get—— 

Senator COONS. No, I am pretty narrowly interested in how we 

are going to—— 

Ms. ALTSHULER. Yes, exactly. You are not going to get cooperation. The point is, just to answer your original question in terms 

of what can we do, as Gene pointed out, step one, lower the rate. 

Step two, look at that rate. If the rate is low enough, then it really does not matter if you are territorial or if you are worldwide. 

That becomes less important. Getting the rate to that level is going 

to be very difficult. You could not do it without a VAT. 
342 

So step three is deciding—is stepping back and saying, incremental reform at this point does not work anymore. We cannot just 

do a repatriation tax holiday. As Gene mentioned, it does not necessarily lead to firms bringing back money and then investing it in 

the economy. It is just—it keeps us going down this temporary tax 

holiday path that is very unhealthy, unpredictable, and not good 

for the economy. It is time for us to sit down and get the information that we need to decide whether or not territorial would be 

good for us, and that does depend on what rate we get down to, 

or should we go to a worldwide system, for instance, that gets rid 

of deferral. But we need to be thinking about fundamental reform 

of the international tax system, not incremental reforms. 

Senator COONS. Thank you. 

Chairman CONRAD. Thank you, Senator. 

Senator COONS. If I might, Mr. Chairman, any other comments 

from the panel just in response to that? 

Chairman CONRAD. I think we had better, in fairness to the colleagues who are here, we should go—— 

Senator COONS. Thank you very much. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you. 

Chairman CONRAD. Oh, I am sorry. Wait a minute. I skipped 

Senator Sessions. He had ceded his time initially, so we have to go 

back and forth here. 

Senator SESSIONS. I will followup on Senator Coons’s excellent 

line of questioning. It is something I do not fully understand. Mr. 

Lindsey, you did not get to comment on it, but maybe you could 

start. I understand we are one of the very few nations that tax outof-territory income, and is this good for jobs in America? Is it good 

for the economy? And do you have any comments to followup on 

Senator Coons’s question? 

Mr. LINDSEY. I am going to give you an answer that you are 

going to hate and I hate, and the answer is it depends, and I think 

that was the comment about whether or not we should move to a 

territorial system. We set it up that way. Remember, we tax everything, but then we give a credit against the foreign income taxes 

paid, and then we tax the money when it is repatriated. It gets to 

be very complicated. 

If one looks at why we did what we did when we did it, it was 

really a decision post-World War II to encourage the global participation of American firms in the rebuilding of the world. At that 

point, it made sense because we did not have competition. It makes 

less sense now. 

I think, Senator Sessions, that the theme you heard here was the 

single first thing you can do here is lower the rate, and as evidence, in all the agony that Ireland has gone through recently, the 

one thing they refused to give on, with all the pressure on them, 

was their 12.5 percent corporate rate, because for them, that is a 

key competitive advantage and it just underscores the importance 

of us lowering our rate as a first step if that is what you are going 

to focus on. 

Senator SESSIONS. I have heard it Stated, some might suggest 

that that low rate was somehow a problem in causing their eco-
343 

nomic difficulties. I have been told that is really not so. Do you 

have an opinion on that? 

Mr. LINDSEY. Well, they have—most of their problems are selfinflicted and has to do with their financial system. 

Senator SESSIONS. Financial condition. 

Mr. LINDSEY. But what they have been able to do is attract a lot 

of headquarters from manufacturing companies, particularly the 

European headquarters, by offering that low rate and it is of enormous competitive advantage to Ireland. We are not Ireland, but I 

think lowering the rate would be the consensus first thing you 

could do. And again, there is a lot of evidence that you could raise 

revenue without broadening the base simply by lowering the rate 

here to something that is more of an international norm. 

Senator SESSIONS. A lot of people do not realize how close the 

competition is among businesses in the world for market share. Let 

us say Canada goes to 16.5, as I think they are, and we were to 

reduce our rate to 28 or 27. Companies seeking to build a plant 

along the border, would that be a factor in whether or not they 

built that plant in the United States or Canada? 

Mr. LINDSEY. It would certainly be a factor, and it might be a 

decisive factor, but there would be a lot of issues. 

Senator SESSIONS. There would be a lot of factors, but I do not 

think there is any doubt that it has the potential to cost economic 

growth in our country. A corporate tax higher than the worldwide 

rate is a threat to us, and at this point in history, job creation is 

so important. Everybody is saying the corporation is doing pretty 

well and this is happening, the stock market is doing well, but jobs 

are not moving much and we cannot have tax policies that depress 

job creation. 

Briefly, let me ask you, committee members, as part of complexity, should not we consider the uncertainty of our tax situation, 

the temporariness of it? For example, we have the rates just for 2 

years. The death tax is set for 2 years. The AMT comes up every 

year. Nobody ever knows for sure. Physicians are worried over 

their doctor fix on Medicare. Are those factors that have an adverse 

impact on our economy, the uncertainty of what will be in the future? Mr. Steuerle? 

Mr. STEUERLE. Mr. Sessions, the answer is clearly yes, and I 

think everybody at the table will say that. I am going to give one 

caveat, though. Sometimes people say, well, let us deal with this 

uncertainty by making permanent everything in the code, and 

there is this tendency to look at mandatory spending and say, well, 

gee, we have all this stuff on automatic pilot. We need to get it off 

of automatic pilot. I think we have to be careful when we talk 

about getting rid of the uncertainty. We do not want to put everything in the tax code, including a lot of things we do not like, say 

five educational subsidies instead of one or none if we put it in the 

direct spending budget, to put those on automatic pilot, too. 

So when you go toward certainty, that not mean you have to 

make something permanently growing. You may put it on a 5-year 

fix or 10-year fix or something like that. I am hesitant on solving 

that problem by making everything permanent. 
344 

Senator SESSIONS. I recognize that is a fair point, but I think all 

of you would agree that that uncertainty is another negative factor 

for our economy. 

Mr. MARRON. Yes, if I can, absolutely. I think, as I said in my 

opening remarks, I think it is quite striking today that every single 

significant component of the U.S. Federal tax code now has significant temporary tax cuts in it. That is not something that we should 

aspire to in the long run. We ought to eventually settle in for everyone understands what the tax code is, and as Gene says, make 

sure you have a system in place so you can review important provisions periodically to see if they make sense, but allow people to 

have some notion of what is coming. 

The one caveat I would put on that is just the elephant in the 

room is the unbalanced fiscal situation we have, which even if we 

allegedly passed a permanent tax system today, unless we have 

some solution to that so that we are going to be able to avoid the 

unsustainable buildup of debt, there is still going to be uncertainty 

out there about where we are going. So solving the long-run fiscal 

challenges is going to be part of eliminating uncertainty. 

Senator SESSIONS. Well, Mr. Lindsey, you have been there in the 

government. To do tax reform and deficit reduction all at the same 

time sounds almost unthinkable, but in a way, politically, sometimes it may come together better in a crisis than in a non-crisis. 

Do you agree, Mr. Chairman? 

Chairman CONRAD. I do. 

Senator SESSIONS. So would you agree with that, Mr. Lindsey? 

Mr. LINDSEY. Yes. I think that we have no choice. Sometime in 

this decade, economic circumstances are going to force us into solving our problems. 

Senator SESSIONS. Briefly, let me just say, Mr. Chairman, that 

I think Senator Toomey is correct, and for you thinkers, the reality 

politically is that it is not that American people oppose something 

like a value-added tax. The Neal Boortz Fair Tax idea is very popular with a lot of average American people. But what they believe, 

and I think they are correct, if we make another revenue stream 

possible for the government to extract a larger percentage of their 

wealth to send to Washington, they are not happy about it. 

So, Mr. Lindsey, you suggested you could solve that problem. 

Briefly—maybe we should not go there, Mr. Chairman, but do you 

think you could do it in a way that would give confidence that we 

were not just adding a new way to extract more money from the 

American people? 

Mr. LINDSEY. Well, I am not the expert at the politics of it, but 

it would seem to me one of the concerns is if you add on another 

tax, not only is it bad from an economic point of view because of 

the complexity, but you also have the issue that you are talking 

about. And so, again, I would stress of getting rid of all of the current taxes, and I would add the payroll tax, as well. If we are 

disadvantaging American workers because we do not have border 

adjustability, you want to make everything border adjustable. 

Throw as much of the tax system into something that is rebatable 

at the border as you can. 

Senator SESSIONS. And you think that is doable? I mean, we 

could actually accomplish such? 
345 

Mr. LINDSEY. Well, the members of the panel might be able to 

think it is doable. We do not have to run for reelection, so—— 

[Laughter.] 

Senator SESSIONS. Thank you. 

Chairman CONRAD. All right. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman. 

I noticed the other day that the IRS had reported that the 400 

top income earners in the country, who averaged income each of 

$344 million in the year that they were reporting, had paid total 

Federal taxes of 16.6 percent. So I asked my staff to tell me at 

what point in the income level an ordinary working American got 

to start paying 16.6 percent. It turns out it is $28,100. So I said, 

well, what are some regular jobs that are in that area? Give me 

an example I can use. Well, a hospital orderly in Providence, Rhode 

Island, earns, on average, $29,100 a year. 

So if you look at our current tax system and you start with the average taxpayer, who makes $60,000 a year and pays about 20 

percent in taxes into the system. And then you drop to my orderly 

who makes less and so he pays less. He pays 16.8 percent, it turns 

out. Then you drop to the 400 highest income earners in the country, who pay less still. They pay only 16.6 percent. Then you drop 

to General Electric, which on $11 billion in income paid 14.3 percent. Then you drop to Prudential Financial, which on three-plus 

billion dollars in income over 5-year averaging here paid 7.6 percent. And if you go to the Ryan plan, those $344 million earners 

will drop to around zero percent, maybe one or 2 percent at highest 

because of the elimination of the capital gains. 

I cannot help but agree that the facts show that we have a tax 

system that is upside down and that the better off you are and the 

more powerful you are, the less taxes you pay as a percentage of 

your income, with the poor hospital orderly in Providence, Rhode 

Island, paying a higher percentage of his income than the average 

of the top 400 income earners in the country at $344 million a pop. 

So I applaud your direction. I think we need to go there. 

In evaluating the VAT tax, which a great number of you have 

talked about, my question is this. Could you tell me a little bit 

more about the trade and competitiveness effect of the VAT tax, 

particularly in light of how many other nations have gone to one, 

and given what appear to be its trade and competitiveness benefits, 

do you believe that the huge move by other nations which export 

a great deal into our economy was done strategically to take advantage of those trade and competitiveness effects? So in a nutshell, 

are there valuable trade and competitiveness effects to a VAT tax, 

and do you think other nations that have gone to it did it with that 

purpose? 

Mr. STEUERLE. I think most economists would argue that competitiveness is not driven by whether you have a VAT. The competitive—if you want to call it the competitive advantage of a VAT 

is that it keeps you from raising high tax rates through an income 

tax. That is—— 

Senator WHITEHOUSE. Well, let me give you an example—— 

Mr. STEUERLE [continuing]. if that makes sense. 

Senator WHITEHOUSE. Let me give you an example. Let us say 

that you have a car made in Sweden or Germany and they have 
346 

a VAT tax. So the revenue that they are collecting from the VAT 

tax, it never attaches to that product. It leaves their country taxfree and it comes over to our country and is sold tax-free here in 

our country, in effect, from their home tax burden. 

We, on the other hand, have home companies that pay corporate 

income tax and various other taxes. That tax burden gets put into 

the price of the car, so when the Ford comes up against the Volvo 

in the American market, the Volvo is, in fact, tax advantaged 

versus the Ford because Sweden chose to collect revenue in a VAT 

tax that we choose to collect through a corporate tax. The VAT tax 

does not go into the price of their export product. The corporate tax 

does go into the price of our competitiveness product. And if that 

is accurate, does that not create a competitiveness effect, at least 

as to that transaction? 

Mr. STEUERLE. Again, your analysis is correct. I think that the 

higher tax rates on the income taxes do create some minor competitive disadvantages. I do not want to overState the case, however, 

because I do want to emphasize that a lot of issues of competitiveness have to do with wage levels, have to do with entrepreneurship, have to do with education levels, and so I just do not want 

to over-emphasize—— 

Senator WHITEHOUSE. I was trying to isolate that. 

Mr. STEUERLE. The advantage of the VAT that I see—I do favor 

a VAT for those reasons, but I do not want to over-emphasize that 

I see the main advantage is that it keeps you from raising rates 

outside the VAT. It is not that putting on a VAT gives you a competitive advantage, it is avoiding some of these high rates. 

Senator WHITEHOUSE. Dr. Altshuler? 

Ms. ALTSHULER. Let me answer the question about why the other 

countries had a VAT. I think when you look back at history, what 

happened was they had very inefficient cascading retail sales taxes, 

and the reason that they went to the VAT was to replace those retail sales taxes with a more rational system of VAT as a more efficient sales tax. 

If you look at Canada, and I have looked at that experience, it 

really was, we have a big deficit problem. We need this revenue. 

I do not think that us adopting a VAT on its own is going to have 

huge competitiveness—if we were to just take the system today 

and add a VAT on, what would happen is, over time, exchange 

rates would adjust and it would not add to competitiveness. What 

Gene said is exactly right. What the VAT would allow us to do is 

buy down—the VAT in combination with broadening the base 

would allow us to buy down our corporate income tax rate and that 

would have a big competitiveness impact for us. 

And do keep in mind that those other countries do have corporate income taxes, also. It is not like they do not have corporate 

income taxes. They do. 

Senator WHITEHOUSE. Thank you all very much. 

Chairman CONRAD. Senator Sanders. 

Senator SANDERS. Thank you very much, Mr. Chairman. These 

hearings are like a narcotic to me. I can be here all day. I really 

get hooked on these things because they are absolutely fascinating, 

and I appreciate the panelists who are here. As we mentioned the 

other day, Mr. Chairman, I do applaud the panelists, but they have 
347 

a perspective and I hope at another point we can bring in some 

economists who have a somewhat different perspective. 

I think Dr. Steuerle made a point a moment ago which I agree 

with, that you cannot just look at one—if you are talking about 

international competitiveness, for example, you just cannot look at 

tax rates, for example, or a dozen other factors. I live an hour away 

from Canada and my Canadian friends would be very impressed by 

the degree to which you laud Canada. We do not always hear that. 

The Canadian health care system costs about half of what our 

health care system does. 

By the way, do you think that moving to a single-payer national 

health care system, as they have in Canada, would help our economy? I mean, if we are going to talk about the Canadian government and their policies, they have a single-payer national health 

care system which spends about half per capita that we do. Health 

care is a huge burden, as you all know, on our economy. How is 

the Canadian health care system? Should we adopt that? Dr. 

Steuerle? 

Mr. STEUERLE. Well, I would not necessarily say that it is that 

Canada is successful because it has a single-payer system, but the 

simple fact that they have a much lower health spending rate—— 

Senator SANDERS. Right. That is what I am talking about. 

Mr. STEUERLE [continuing]. means that they can keep a much 

lower tax rate, which is an advantage. 

Senator SANDERS. And everybody who has studied the issue understands that if you wanted to go forward with a cost-effective 

health care system—and I do not want to get into a health care debate now—single payers, Canada versus the United States. Should 

we look at that? 

Mr. STEUERLE. I guess what I would suggest is that—this is the 

Budget Committee. My own belief is what—we always have a debate over what health system we will adopt—— 

Senator SANDERS. But you told us—— 

Mr. STEUERLE. To me, the simple answer I have is whatever 

health system we adopt, no matter what the hybrid, it should be 

within a budget, and you—— 

Senator SANDERS. But that is not my question. My question—— 

Mr. STEUERLE. You cannot have an open-ended system. 

Senator SANDERS. But you talked about the Canadian tax system. You lauded certain provisions of that. 

Dr. Marron, should we look at the Canadian single-payer system 

which provides health care to all of their people at about half the 

cost of the American—— 

Mr. MARRON. I am trying to figure out the right words to wiggle 

out of this question the same way Gene did. 

[Laughter.] 

Mr. MARRON. it is absolutely true that there is a lot of wasted 

spending on health care in the United States, and if we could eliminate that, that would be broadly—— 

Senator SANDERS. All right. You wiggled out of it. Canadians are 

doing just great. How about our health care, Dr. Altshuler? 

Ms. ALTSHULER. I am not an expert on health—on health care. 
348 

Senator SANDERS. But economically you will all agree that health 

care is a huge burden on our economy. No one disagrees with that. 

Canadians seem to have done substantially better. 

Dr. Lindsey, something we should look at? 

Mr. LINDSEY. Oh, we should look at everything, and I think what 

really decides competitiveness is cost-effectiveness. So you could 

have a—I mean, the worst thing you can have is a high-tax, lowbenefit system. If you have a State, for example, in the United 

States with, you know, relatively modest taxes but efficiently delivered public services, those States are the ones that are gaining population and jobs. So I do not think you can look at anything in isolation, but we need to improve efficiency. 

Senator SANDERS. And that is my point. I think we look at—for 

example, we could talk about Canada again. Again, I live an hour 

away from Canada. When Wall Street collapsed here, their banking 

system did not collapse because of much heavier levels of regulation. Right? 

Mr. LINDSEY. Senator, that is something I do know something 

about, and I would not wish the Canadian banking system on 

America. It is basically a four-company oligopoly and—— 

Senator SANDERS. Good point. 

Mr. LINDSEY [continuing]. and that is what protects—— 

Senator SANDERS. All that I am saying—all that I am saying is 

that on these issues you cannot isolate—if you are talking about 

international competitiveness, not to talk about wages, not to talk 

about environmental protection, not to talk about trade policy, they 

are all lumped together. I do not think anyone disagrees with that. 

All right. The other point that I wanted to make, not to talk 

about a Canadian single-payer system, is what I have not heard 

discussed, while taxes are enormously important, everybody agrees 

that our current system is not working, needs fundamental reform, 

we have to look at it within other contexts as well. 

For example, during the Bush years, we saw substantial tax reductions given to the wealthiest people in this country, and yet we 

had perhaps the worst record of job performance at any time since 

Herbert Hoover. So it is not quite so clear, and other factors may 

be involved in that. But under Bush in 8 years, we lost 500,000 private sector jobs. We gave tax breaks to the very wealthy. Gentlemen, we lost jobs. Dr. Steuerle? 

Mr. STEUERLE. Well, Senator, there are a lot of factors involved. 

At the end of the Bush years, we went into a recession. When politicians in the executive branch brag about the job growth they have 

had, 90 percent of what they are talking about is the influence of 

demographics. And what we have dodged for several decades is 

when we moved into the—after 2008 and we have all these people 

starting to retire almost at the rate that we are bringing people 

into the work force, it is going to dramatically decrease the amount 

of jobs. And I would suggest—— 

Senator SANDERS. And I am not arguing—I am just saying that— 

my only point was that these things are complicated. 

Mr. STEUERLE. Yes, but as a matter of revenues, I mean, I have 

emphasized in a lot of other testimony it is something that has 

been hard to get into the budget calculus. But if we can figure out 

ways to get older workers to work who I think are the largest 
349 

group of potential workers, the most—the largest pool of underutilized human capital in our economy, people 55 to 75 to 85, it has 

a revenue effect that right now we do not score—a potential revenue effect we do not score—— 

Senator SANDERS. When we have such a—— 

Mr. STEUERLE [continuing]. when we talk about revenue. So 

there are other reforms that can affect revenues beyond—— 

Senator SANDERS. I do not have a whole lot of time. Great—that 

is what I mean, I get hooked, Mr. Chairman. We could go on for 

many hours. 

Dr. Lindsey, you mentioned that you thought it might be advantageous to eliminate the payroll tax. You just said that a couple of 

minutes ago, if I heard correctly. 

Mr. LINDSEY. What I said was that if you go to a value-added 

tax, you want to roll everything into it. 

Senator SANDERS. OK. 

Mr. LINDSEY. Because the value-added tax—again, it gets back 

to the competitiveness issue and how you play it out. If you are 

going to take advantage of the competitiveness advantages of the 

value-added tax—and I think there are some, and I also acknowledge exchange rate issues—then why wouldn’t you want to do it for 

all our taxes? I mean, it is American labor that gets—— 

Senator SANDERS. All right. But because we live in the real world 

and as of today, to the best of my knowledge, Social Security is 

completely funded by the payroll tax, what would you do with Social—do you believe in Social Security? 

Mr. LINDSEY. Of course. 

Senator SANDERS. OK. 

Mr. LINDSEY. What I am suggesting is that if you are going to 

take advantages of tax reform, you want to roll as much of the Tax 

Code as you possibly can into the most efficient tax you can. And 

obviously you would continue to fund Social Security with that new 

tax. I do not see where there is any inconsistency there at all. 

Senator SANDERS. Well, the—— 

Mr. LINDSEY. Also, Senator—— 

Senator SANDERS. Let me—one second. Excuse me. I—— 

Mr. LINDSEY [continuing]. you said something about the 

Bush—— 

Senator SANDERS. Hold it, hold it. Hold it, hold it. Mr. Chairman, 

I do not have a whole lot of time here, so let me just ask you the 

questions, OK? My point was that right now we are having a major 

debate about the future of Social Security. 

Mr. LINDSEY. Yes. 

Senator SANDERS. And Social Security is funded independently of 

the U.S. Treasury by the payroll tax. Lumping—let me finish. That 

is a fact. Lumping all—you can certainly fund a retirement program for the elderly in ways other than the payroll tax. I am not 

arguing that. But right now the strength of the payroll tax in 

terms of protecting Social Security is that it has nothing to do with 

the deficit. If you lump everything together—and there are guys 

around here who say, well, you know, we have to make cuts. You 

will agree with me that one of the areas that could be cut if you 

are funding a retirement program for seniors out of the general 
350 

Treasury could be programs for the elderly. Is that a fair Statement? 

Mr. LINDSEY. This Congress has cut Social Security any number 

of times, even though it is funded by the payroll tax. So there is 

no linkage between how a program is funded and whether or not 

it is cut. 

Senator SANDERS. Oh, I would not say that. 

Mr. LINDSEY. 1981, 1978, those would be two good examples. 

Changes in the tax on Social Security benefits, I forget which year 

it was passed. Mr. Chairman, you may remember. 

Senator SANDERS. 1983, I think. 

Mr. LINDSEY. So, yes, there were many, many times when we 

have adjusted Social Security—— 

Senator SANDERS. You adjusted Social Security, yes. 

Mr. LINDSEY. Cuts. We cut Social Security benefits without 

changing the payroll tax one bit, so I—— 

Senator SANDERS. Well, actually, we raised the payroll tax in 

1983 so that it is now a viable program. All right. I do not want 

to belabor the point. 

I guess I have run out of time, Mr. Chairman. Thank you very 

much. Thank you. 

Chairman CONRAD. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thanks 

to the panel for your presentations. I want to compliment my colleague from Oregon, Senator Wyden, for consistently and effectively raising the issue of tax simplification and putting forward 

the bill he has this year. 

One dimension of this is that Oregon and our Federal taxes may 

have something in common; that is, a fairly high marginal rate, but 

then tons of exceptions in terms of deductions and credits. A few 

years ago, when I was in the State legislature, I went to the Portland Development Agency and said, you know, Oregon is 47th in 

the Nation—in other words, one of the lowest States in terms of 

the tax burden it places on business. Is this a selling point in attracting business to the State of Oregon? And the answer was, no, 

it is not. And I said, well, we are 47th, one of the lowest effective 

tax systems in the country. Why isn’t it a selling point? And the 

answer was, well, we have a very high marginal rate, and companies largely look at that marginal rate. They do not count on getting the exceptions and the credits of the deductions and the credits, and so it has proved of little value in attracting business to our 

State. 

So I said, well, wouldn’t it make a lot more sense for us then, 

if we are going to be 47th, to be 47th with a very low marginal rate 

and fewer deductions and credits, and wouldn’t that prove more attractive? And the answer was, yes, that would be a much better 

sell. And I think the United States as a whole seems to have a parallel problem. So I just wanted you all, as you would like, to comment on this question of whether we become much more attractive 

to companies deciding whether to site themselves in the U.S. or 

overseas if we had—we collected the same amount of tax we do 

now, but did so with a far lower marginal rate. 

Ms. ALTSHULER. Just a quick answer. Absolutely, and that is 

what I wrote about in my testimony. You hear a lot of people say-
351 

ing, well, you know, the statutory rate is really high, but once you 

take all of those credits and deductions and loopholes into account, 

the effective tax rate is really low. So we really do not have to do 

anything about the statutory rate. 

I have two problems with that. One is that I think if you look 

at effective tax rates, they are not as low as you may think. They 

are not that much lower than the statutory tax rate. But most importantly is it depends—it is very individual firm-specific. The statutory rate is an important factor as you just pointed out. It affects 

location decisions. It affects financing decisions. It affects how 

much wasteful tax planning you do. It affects how much you invest. 

So it is a very important policy lever, and it does make sense to 

lower the corporate tax rate. 

Senator MERKLEY. Anyone else want to comment on that? 

Mr. STEUERLE. Senator, I think we would all agree. I have a 

somewhat tangential point, but a lot of the discussion we have had 

at this table has gone to issues like international tax, which can 

be very complex. But I would like to bring us back to where maybe 

all our testimoneys began, which is there are a whole variety of tax 

changes that appeal to both sides of the aisle that are not—when 

we have these debates on taxes—but, remember, taxes is the entire 

revenue side of the budget and a quarter of the expenditures, so 

we are talking about thousands of programs. There are so many 

things that cut across the aisle that both sides would agree we do 

not need five educational subsidies, we do not need ten capital 

gains tax rates. We could report on the burden on taxpayers is including the deficits we are putting on them. This is the type of 

thing Senator Wyden I think went through when he did his tax reform, is you can narrowly—you can start with the issues on which 

there is a consensus, and then build out to the issues on which 

there is not a consensus. And one of them is the one you are including, that if we can broaden the base—at least to the extent we 

broaden the base and lower the rate, that there are a lot of common elements. There is a certain beyond which—well, that does not 

work because, as Dr. Altshuler keeps mentioning, there are certain 

rate reductions that are hard to finance with the base broadened. 

That does not mean you cannot go as far as you can with the type 

of proposal you are suggesting. 

I think there are a lot of things that we can agree to across the 

aisle if we are just willing to sit down and do them. Start with 

them as a base and hold off the issues on which there is more controversy across the aisle. 

Senator MERKLEY. Let me turn to another topic. When I was 

here in 1976 as an intern, there was a tax reform up that addressed a lot of various exemptions, deductions, credits, and so 

folks from Oregon were writing in with all their perspectives on 

could their home office be deducted and blah, blah, blah and so 

forth. Just a lot of anxiety over each and every one of those potential changes. 

But a number of changes were made, and then in 1986, Senator 

Packwood led a major effort, a much larger effort, to do the same, 

to simplify in large degree. But it appears to me that between 1986 

and now we basically have had a 24-year period where we have not 

gone back. So instead of having 10 years of handing out credits and 
352 

deductions and then kind of, OK, let us come back to some form 

of sanity, we have had 24 years in which we have been handing 

out complexities in the Tax Code without coming back. Are we long 

overdue for this type of major discussion? 

Mr. MARRON. Yes, absolutely. And I think going back to one of 

the issues I raised in my testimony, I think one of the things that 

has driven that over the last 25 years is that you can dress up special deductions, exemptions, and credits as tax cuts, which are 

often politically more palatable than if you form them up as spending increases. Nonetheless, many of them look from an economic 

and budget point of view basically to be the same thing, where you 

are using the Federal Government to direct resources to a certain 

kind of activity, but politically they have looked to be tax cuts. 

And going back to one of the things that Gene has emphasized 

several times, I think there is a challenge in the way we communicate about these issues and that clarifying that some of these 

provisions really are effectively spending programs will be part of 

the steps toward addressing them. 

Mr. LINDSEY. Senator, in addition I would point out we took the 

top statutory rate up from 28 to 39.6 over that same period of time, 

and the two go hand in hand. And so both I think is what is on 

the table. 

Senator MERKLEY. OK. I want to slip in one final question—oh, 

go ahead. 

Mr. STEUERLE. It is just that when I have looked at the numbers, 

what has increasingly happened over the years you are talking 

about is that Congress has increasingly gone to what I call the 

give-away side of the budget, that is, on both spending and—both 

tax cuts and spending increases, which is what one wants politically, and the challenge always for the Budget Committee is you 

recognize there is the other side of the ledger. And we have to figure out a way to raise the importance of what that means. We cannot let deficits act as if they are free money when we do spending 

increases and tax cuts. 

Senator MERKLEY. Mr. Chair, I think I am out of time. Is there 

a possibility of slipping in one more question? 

Chairman CONRAD. Yes, sir. 

Senator MERKLEY. OK. Thank you. 

I have asked my team to help identify specific examples of how 

our Tax Code subsidizes the export of manufacturing or jobs overseas, and one specific example that they have put forward is that 

when an American company decides to build an overseas factory, 

if they take their loan out to build that factory in the United 

States, the interest becomes tax deductible. So essentially the 

American taxpayer is, therefore, subsidizing the financing of the 

overseas construction that then incentivizes the shifting of jobs 

overseas. 

Is there a rational argument for this? Or is this just plain out 

a crazy thing to do, to subsidize the construction of factories that 

compete with American factories? 

Ms. ALTSHULER. Do you have an hour to get into this and a lot 

of headache medicine? 

Senator MERKLEY. It sounds like we are going to have a followup 

discussion. 
353 

Ms. ALTSHULER. Yes. It is not the case that all corporations are 

able to deduct all of their interest expenses that support foreign investment from the U.S. rate. We do have a system where interest 

on domestic lending is allocated abroad so that you are not allowed 

to deduct 100 percent of your interest on foreign—domestic interests to—you are not allowed to deduct 100 percent. There are interest allocation rules. They are very, very complicated. We have a 

better rule that actually is on the books to be enacted, but we just 

keep pushing it out. I am not sure when it is. It is called worldwide 

fungibility. Maybe it has been pushed out to 2018 now? I am not 

sure, but we keep pushing it out. 

What you raise is a really interesting issue because if a firm can 

deduct interest on loans that they take out in the United States to 

build a company abroad, they have generated for themselves a negative marginal effective tax rate, which means that we are subsidizing their investment abroad. 

The difficulty of this is understanding the extent to which this 

is happening to specific corporations. It is complicated. 

Chairman CONRAD. But it is happening. I mean, I have had people come to me who are in very large multinational accounting 

firms who have had clients who were doing precisely this. And it 

so troubled them that they came to me, and they did not divulge 

the company because that would be a breach of their confidentiality 

agreements. But they showed me very specifically companies from 

the United States developing a net marginal negative tax rate and 

in effect being subsidized by American taxpayers to put jobs overseas. And I tell you, this is, I think, a bigger problem than has 

been acknowledged. It is, according to people who have come to me 

from very large accounting firms, they believe, a rapidly growing 

problem as people figure out this mechanism. 

Before I go to Senator Wyden for an additional question, just as 

a factual matter, earlier on we were talking about Canada’s deficits, so I asked to look into that. They were at 101.7 percent of 

GDP in 1996. They brought that back down to 69.7 percent of GDP, 

partially with the institution of a VAT. It was not exclusively a 

VAT, but they used a VAT in combination with other taxes. You 

do not see many countries that have exclusively a vat. Almost always they are hybrid systems, part income tax, part VAT. And 

there was an earlier question from Senator Whitehouse with respect to the competitiveness advantage. One part of the competitiveness advantage is those taxes are rebatable at the border. And 

so the example that Senator Whitehouse was giving is quite accurate. We have our taxes built into our products that we are trying 

to compete with foreign countries. They have a tax that at least 

partially is rebatable at the border, so when those goods come into 

this country, they have less of a tax burden on them. That confers 

a competitive advantage. 

Now, we have tried to counter that with DISC and FSC and how 

many iterations. Mr. Lindsey, you would probably know. And the 

problem is we keep getting ruled GATT illegal on the things we do 

to try to level the playing field for our manufacturers. Many of us 

believe that we are on a course here that at some point we are 

going to lose our ability to try to make our people competitive. That 

is, we are going to get ruled GATT illegal. We are not going to be 
354 

able to fix it. And then we are going to face a 20-percent, 25-percent, depending on what the VAT is, advantage going to the foreign 

manufacturer. 

So, you know, one of the reasons we wanted to hold this hearing 

today, I mean, these are serious, serious matters for this country’s 

competitive position. And I do not think we want to allow ideology 

on either side here to get us away from the practical reality of 

what we confront as a country, and that is the competitive position 

of the United States. 

Senator Wyden. 

Senator WYDEN. Thank you very much, Mr. Chairman. I think 

you make an important point. My friend and colleague from Oregon, Senator Merkley, as usual does as well. These international 

questions are enormously important, and I thank my colleague for 

making it. 

That was the one I wanted to ask you about, Dr. Altshuler, and 

that is transfer pricing. Just to kind of put this in a little bit of 

context, Senator Gregg and I went at the tax reform issue week 

after week for 2 years in order to get where we were, essentially 

a modernized version of 1986, and my guess is we could have probably spent another 5 years working through the territorial and the 

international situation. 

I think we got to where we were by asking the 1986 question, 

which was how low would you have to get the business rate to be 

in order to get rid of some of what you are doing in terms of deferral and credits. And that is how we got to the corporate rate of 24 

percent and junked a lot of what currently goes on internationally 

in terms of deferral and foreign credits. 

Transfer pricing takes this to a whole different level, and here 

is the question for you, Dr. Altshuler. In effect, the definition here 

is you can create paper transactions between subsidiaries of the 

same company to allocate expenses and profits to selected companies. That essentially seems to be the consensus view of the definition of transfer pricing. 

What we found is people like Ed Kleinbard, who was then the 

head of the Joint Tax Commission, who said, look, if all you do is 

go to the territorial system, you are going to make these problems 

of transfer pricing worse, and we are already losing $60 billion offshore and it is a significant problem. Territorial will not do anything about it. 

The question for you, Dr. Altshuler, and I appreciate the time the 

Chairman is giving me. Dr. Altshuler, do you agree essentially with 

that Kleinbard theory that pure territorial tax approaches as constituted today would not do anything about transfer pricing, could 

make the problem worse? And if you do, what would you do about 

it? Because that is where we bog down, and a lot of my colleagues 

clearly are interested in this. I want to be responsive to them. But 

if you agree with that Kleinbard theory, what would you do about 

it in order, again, to try to bring folks together like they did in 

1986 and actually get something done? 

Ms. ALTSHULER. This is a tough one. Going to a territorial tax 

system does increase transfer-pricing pressures, income-shifting 

pressures, but only to the extent to which the repatriation tax is 

a burden in the first place. So let me just be simple. Yes, income- 
355 

shifting incentives will go up with the territorial tax system. How 

much they go up is an open question, which, again, I guess I am 

saying yes to you. And the question that I have these days is: How 

much worse does income shifting and transfer pricing get if we go 

territorial and lower the rate to 24 percent? Because the studies 

that I have been looking at and the studies that have been done 

in the past always look at territorial with the 35-percent rate. But 

if you are lowering the rate to 25 percent to the OECD average, 

you are taking some of the pressure off. Of course, there is still 

zero percent taxes out there. 

Both solutions to the international tax problem are not perfect. 

I like your solution quite a bit. I wrote a paper on it. It is elegant 

because by getting rid of deferral, you get rid of the transfer-pricing 

problem faced by—with U.S. multinationals. That does not mean— 

but there are two problems that we have and territorial has problems, too, but just to bring them up. 

What I worry about is if we were to get rid of deferral and what 

we would be doing is going in the—and I am playing a two-handed 

economist here, OK? So if we were to get rid of deferral going in 

the opposite direction of other countries, yes, we get rid of this 

transfer-pricing problem with our U.S. multinationals. But we are 

still at, you know, this 24-percent rate. The OECD average is 25 

percent. Are we going to lose headquarters? In other words, you are 

going to have foreign multinationals that are going to be able to 

enjoy our lower rate, OK, but not face worldwide taxation. So do 

we lose U.S. headquarters? And I do not have the answer to that 

question, but I think it is really important. 

Senator WYDEN. Mr. Chairman, you have given me a lot of time, 

and I think Dr. Altshuler puts her finger on really a very appropriate point as we wrap up. What the whole exercise is about is 

creating incentives for this economic renaissance that this country 

wants so much at this time. And, in fact, the reason, if you go to 

a labor union meeting or a business meeting, that you can get applause for a 24-percent rate, is you are junking these incentives for 

taking jobs overseas in order to get red, white, and blue jobs here 

in America by the incentives for bringing those kinds of operations 

back and having the headquarters you are talking about. 

Mr. Chairman, thank you so much for all this time. It has been 

a great hearing. 

Chairman CONRAD. Yes, I think it is very important time. Let me 

just say I used to be tax commissioner; I used to be chairman of 

the multi-State tax commission. I engaged in negotiations in the 

Reagan Administration on the question of these multinational jurisdictional issues. I have spent a lot of time in it. When I was tax 

commissioner, we found some amazing things. I will never forget. 

We followed transactions of a major grain company and found that 

one shipment of grain changed hands eight times before it left the 

continental United States before we lost track of it offshore. 

I have seen other examples, not in my tax work but in conjunction with the revenue service, where a company showed no profits 

in the United States, a series of transfer-pricing transactions 

showed $20 million in profits in the Cayman Islands where conveniently there were no taxes, with one employee. And I always said 

that one employee was the most efficient worker in the world to 
356 

produce $20 million of profits, and he actually produced nothing. 

The only thing he produced was tax returns and corporate Statements showing that they had had periodic board meetings to meet 

the requirements of that. 

So, look, these are enormously complex subjects, but we have an 

obligation to sort through them, and I think this has been an especially valuable meeting. I also want to commend my colleague Senator Wyden. I said this in another forum. There are very few members who have come up with such significant contributions in tax 

reform and health care reform, operating with just his own individual staff, not a Committee staff, not a Committee chairmanship, 

and really sweeping, well-thought-out, bipartisan proposals. And he 

deserves tremendous credit for that, and I am glad we pursued the 

questions here today. 

I thank this panel so much. I think you have been terrific and 

really thought provoking. I appreciate all of your participation here 

today. 

The Committee will stand in adjournment. 

[Whereupon, at 12:23 p.m., the Committee was adjourned.] 
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(363) 

CHALLENGES FOR THE U.S. ECONOMIC 

RECOVERY 

THURSDAY, FEBRUARY 3, 2011 

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

The Committee met, pursuant to notice, at 10:01 a.m., in room 

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

Present: Senators Conrad, Cardin, Whitehouse, Merkley, Begich, 

Sessions, Thune, and Portman. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today we will focus on challenges that are facing the U.S. 

economic recovery. We are going to look specifically at challenges 

in the areas of unemployment, housing, and the State fiscal crises. 

We are really fortunate to have four outstanding witnesses with us 

today: 

Dr. Mark Zandi, Chief Economist at Moody’s Analytics. Dr. Zandi 

has been very helpful to this Committee and has testified here several times in the past. We are grateful to have you back again 

today. 

Dr. Till von Wachter, Associate Professor of Economics at Columbia University, and I would just say parenthetically my daughter 

is getting a Ph.D. there. I was up there a few weeks ago. She was 

teaching a great books class. It was very interesting. 

Dr. Ray Scheppach, the Executive Director of the National Governors Association. We understand that after nearly 30 years he is 

retiring and going to go to UVA. I commend you on your years of 

public service, Ray. Always somebody that has enjoyed credibility 

on both sides of the aisle for his professionalism. 

And Mr. Chris Edwards, Director of Tax Policy Studies at the 

Cato Institute. Good to have you back as well. Thank you very 

much. 

Let me begin by providing a brief overview of my own on the economic challenges that we currently confront. The Federal response 

to the recession and the financial crisis successfully pulled the 

economy back from the brink. In the fourth quarter of 2008, the 

economy was showing negative growth of 6.8 percent. Economic 

growth has since returned, although not as strongly nor as quickly 
364 

as we would have liked. In the fourth quarter of 2010, we saw positive growth of 3.2 percent. 

Private sector job growth has also returned, although not as 

much as we would like. In January 2009, I think it is important 

for us to remember, the economy was losing more than 800,000 private sector jobs a month. In December of 2010, the last month we 

have data for, the economy gained 113,000 private sector jobs. So 

we now have 12 consecutive months of private sector job growth. 
365 

Despite this improved picture, it is clear the economy is growing 

at a much slower pace than in past recoveries. When measured 

against the nine previous recoveries over the past 60 years, we see 

the current recovery lags considerably the typical recovery. I personally believe a key reason for that is the damage done to the financial sector. 
366 

And the unemployment rate has also remained stubbornly high. 

Just a little over 3 years ago, it stood at 5 percent. It nearly doubled within a year’s time and has fluctuated in the 9-percent-plus 

range ever since. The Congressional Budget Office now projects the 

unemployment rate will fall only slightly to 9.2 percent in the 

fourth quarter of this year and still remain stubbornly above 8 percent in the fourth quarter of 2012. 
367 

Another concern is the number of long-term unemployed, those 

unemployed for 27 weeks or longer, which is extraordinarily high. 

The average rate of long-term unemployment over the period from 

1948 to 2007 was eight-tenths of 1 percent. Just prior to the recession, in December of 2007, the rate was very similar, at nine-tenths 

of 1 percent. Now the rate of long-term unemployed has surged to 

4.2 percent. This is a clear sign of the persistent economic weakness experienced by Americans across a broad front. 
368 
369 

We also continue to face a crisis in the housing market, the sector of the economy that sparked the recession. One out of five mortgages remains underwater, meaning the home is worth less than 

the remaining balance on the mortgage. And in some markets, that 

number is much higher. In addition, one out of eight mortgages is 

delinquent or in foreclosure, and home prices have fallen 31 percent from their peak in 2006 and are expected to continue falling 

in the near term. 
370 

We can see that new home building has fallen dramatically and 

remains low. In January of 2006, we had 2.3 million housing starts. 

In December, we had just 529,000 housing starts. 

Finally, the Nation’s economic recovery also faces a challenge 

from the fiscal crises occurring at the State and local level. Here 

is a recent headline from the New York Times. It reads: ‘‘Mounting 

Debts by States Stoke Fears of Crisis: Costs remain hidden; analysts who predicted mortgage meltdown see a similarity.’’ 
371 

Since most States have balanced budget requirements, they are 

forced to close their budget gaps with layoffs and cuts in social 

services and tax increases. Such cuts have a ripple effect through 

State and local economies. This undercuts the recovery efforts underway nationally. 

I think it is very clear there is little appetite in Congress for providing further help to States, so we need to consider what else can 

be done to help States get through this challenging period. I hope 

this hearing can shed light on all of these issues. 

Senator Sessions is not here yet. He is delayed. So I think what 

we will do is go right to the witnesses, and we would ask you to 

limit your stated remarks to 5 minutes or thereabouts, and then 

we will have a chance to get to questions. 

Again, thank you very much for participating. This is an important day for the Budget Committee because we are trying to deal 

with a series of challenges that the country faces all in one hearing. I cannot think of a better panel of witnesses to do that. 

Mr. Zandi, why don’t you proceed. 
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STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, 

MOODY’S ANALYTICS 

Mr. ZANDI. Thank you, Mr. Chairman, and thank you and the 

rest of the Committee for the opportunity to participate in today’s 

hearing. I should say that the views I express are my own and not 

those of the Moody’s corporation. And you should also know, because I will be speaking about the housing mortgage markets, that 

I am a Director of MGIC, the largest private mortgage insurer in 

the country. 

I will make three points in my remarks. 

Point No. 1 is that I am optimistic with regard to the economy’s 

prospects; that after 3 very lean economic years, a year and a half 

of recession, a year and a half of weak economic recovery, I think 

we will experience much stronger growth this year and in 2012. 

Just to give you a sense of what that means, in terms of GDP, 

the value of all the things that we produce, that fell 2.6 percent in 

2009, obviously a very bad year; grew 3 percent, almost 3 percent 

in 2010. I expect GDP growth to be near 4 percent this year, and 

roughly the same in 2012. 

In terms of jobs, we created 1.35 million private sector jobs in 

2010, December to December. I expect double that in 2011 and 

roughly the same in 2012. And I agree with the CBO’s projections 

on unemployment. The unemployment rate should end this year 

closer to 9 percent and closer to 8 percent by 2012—still, obviously, 

a pretty deep hole. It will be a number of years before we get back 

to anything anyone considers to be good, but we are making our 

way in the right direction. 

There are a number of reasons for this optimism. I will just mention two quickly. 

First is businesses are very profitable. Big companies, mid-sized 

companies in particular, their balance sheets are very strong. I do 

not think it is any longer a question of can they invest and hire 

more aggressively. I think it is just a question of willingness. And 

I think they are going to become more willing. Sentiment is improving quite rapidly, and I expect conditions to improve. 

The other key reason for the optimism is policy. I think the policy response by the Federal Reserve, by you and Congress and the 

administration has been excellent and has made all the difference; 

that without your policy response, the downturn would have been 

measurably worse, the cost to taxpayers measurably greater. I 

think you did the right thing. We can take exception with any individual aspect of the response, but the totality was, I think, quite 

impressive. 

Point No. 2 is, despite my optimism, obviously there are challenges and risks, and I clearly could be wrong, and we are going 

to talk about a few of those today. State and local governments obviously face very serious challenges. The European debt situation 

remains very unsettled. Policymakers there need to do more, and 

until they do, obviously that is a concern. 

The events in Egypt and the Middle East remind us of the risks 

posed by higher oil and other energy prices, and that is worthy of 

concern. 

But at the top of my list of concerns, at least for the near term, 

the next 6 to 12 months, is the ongoing problems in the housing 
373 

market, the foreclosure crisis, and let me just turn to a few slides 

to make the point clearer. 

The foreclosure crisis continues on. You can see here the number 

of first mortgage loans that are in default, somewhere in the foreclosure process, or headed in that direction. They are seriously delinquent and likely to go into default. That is close to 4 million 

loans. For context, there are roughly 50 million homeowners with 

first mortgage loans, so 4 million is a lot of loans. 

You will note that the good news here, if there is any good news, 

is that the problems appear to have peaked. But the concern is, at 

least in the near term, that there are many, many loans now coming to the end of the foreclosure process. REO, which is the last 

stage in foreclosure before a distressed sale, is building again, and 

you can see that here. This shows the number of properties in 

REO, and I have broken that down for you—— 

Chairman CONRAD. What does REO stand for? 

Mr. ZANDI. Other real estate owned. So it is when the lending 

institution takes back title from the homeowner. That is now in 

their inventory, and that is the last point before they actually sell 

it into the marketplace as a foreclosure sale. And you can see it is 

building. And this is very important because these distressed sales 

will put further downward pressure on housing values. 

Chairman CONRAD. Can I stop you on this point? Let me just say 

we are going to run this hearing a little differently than we typically do. If you are wondering why I am the only one here, the 

Prayer Breakfast is this morning, and the Prayer Breakfast is running long because of events, as you know. Our colleague Gabby, her 

husband is giving the final prayer. The President is at the Prayer 

Breakfast. We were informed that it would be concluded by this 

time. That is why we scheduled the hearing for this time. But because of the unusual circumstances, the Prayer Breakfast is running quite long. So I apologize to you that we do not have the typical turnout we would, but people will be here. 

Let me just say this to you: I have been watching the question 

of short sales, and it is very clear that short sales where the property is underwater—they owe more than the property is worth—requires a two-level negotiation. First you negotiate with the homeowner, and then it goes to the bank for approval. And I am being 

told by people in the real estate industry that the gap in time is 

losing a lot of sales; that is, that the inability to turn around the 

decision at the lending institution leads a lot of people to just get 

frustrated. They need a house. They bail out. They go in another 

direction. 

Is that an accurate assessment of part of the problem here? And 

is there anything that could be done about short sales? 

Mr. ZANDI. Yes, that has been a problem, in part because the 

lending institutions, the banks, are very nervous of being defrauded, and they need to make sure that the short sale is an 

arm’s-length transaction. 

Moreover, many institutions really did not have the infrastructure necessary to engage in a significant number of short sales. 

They had not done many in the past, and to ramp up has been difficult. It is not an easy thing to do, to do well. 
374 

My sense is that the impediments to short sales are abating, that 

we are seeing more short sales. I will just give you a sense of the 

magnitude, and these are rough orders of magnitude. 

If you go back to, say, 2007, 2008, in the start of the crisis, we 

were getting 25,000 to 50,000 in short sales per annum. We are 

now running probably closer to 250,000, 300,000 per annum— 

which is still small in the context of all the problems that we have, 

but it is moving in the right direction. And some of the major institutions have established within their organizations groups that are 

focused solely on the short-sale process. 

Also, the administration, in its HAMP efforts to facilitate loan 

modifications and short sales, has provided incentives to all the 

various parties involved—homeowners, mortgage servicers, mortgage owners—to engage in more short sales. This is much preferable to everyone involved than going down the road to a foreclosure sale. That has not been nearly as successful as HOPE IV, 

but it is helping, I would say. So I think we are moving in the right 

direction. 

With regard to what else can be done in this regard, I think the 

best thing that can be done is vigilant oversight. So I would continue to ask very strong questions of the lending institutions: 

Where are we? Where were you? Where do you think you are going 

to be? What are you doing to facilitate this? Just to make sure 

that, you know, they understand that everyone is watching this 

very, very carefully. 

I think all the tools are in place, the policy tools are in place to 

make this work better. I just think it needs a little bit of oversight 

push to make sure that it works in a reasonably orderly way. 

Chairman CONRAD. OK. 

Mr. ZANDI. So as you can see, the REO inventory is—would you 

like me to proceed with—— 

Chairman CONRAD. Yes. 

Mr. ZANDI. OK. So the REO inventory is rising. There has been, 

I would say, a reasonable effort to try to forestall foreclosures and 

short sales through loan modification efforts. But I would say I 

think it is now widely understood, and I think appropriately so, 

that the modification efforts have been inadequate or they have 

certainly not lived up to anyone’s expectations. And you can kind 

of get a sense of the modification efforts here. They have improved. 

If you go back to 2007 at the start of the foreclosure crisis, we had 

250,000 in loan mods, private sector loan mods. That has ramped 

up. We are now seeing loan mods of somewhere between a million 

and a half and 2 million per annum, which is helpful but, you 

know, in the context of all of the problems we have, it is still quite 

small. 

My own view here, though, is I do not know that policymakers 

should do anything else with regard to the HAMP program, which 

is a major effort of policymakers to facilitate loan mods. One of the 

problems has been that the HAMP plan has been changing so 

much; it has been very difficult for servicers and lenders to get 

their arms around it and to implement it. I think we have it where 

it needs to be. We just need to let them use it as best they can. 

And, again, vigilance here would be, I think, very therapeutic to 

make sure that they are remaining engaged. 
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But, nonetheless, having said that, the mods are not going to 

solve our problem. We are going to see a lot of loans go through 

the foreclosure process to a foreclosure or short sale, and I would 

anticipate more house price declines. You can see that here. This 

shows house price growth per annum. 

Chairman CONRAD. Somehow we are not getting it on the screen 

here. We have a little technical issue here. 

Mr. ZANDI. OK. Well, I will just describe it. 

House prices, as you pointed out in your slides, are down from 

the peak just over 30 percent. I would anticipate this year another 

5-percent decline in national housing values. If that is all it is, I 

think, you know, we are going to be OK, and my script for the 

economy will roughly hold. But this is where the risk lies, a significant risk, and that is, we have 14 million homeowners underwater. 

If house prices decline more—— 

Chairman CONRAD. 14 million underwater. 

Mr. ZANDI. 14 million homeowners underwater. 

Chairman CONRAD. They owe more than the house is worth. 

Mr. ZANDI. Yes. The value of their home is less than the mortgage debt they owe on that home. 

Just to flesh that out a little bit more for you, of the 14 million, 

4 million are—and these are my estimates, and they are approximations. Four million are underwater by more than 50 percent. 

That is deeply underwater, and obviously that is the fodder for default. 

You know, in many cases these homeowners want to hold onto 

their home, but suppose you spring a leak in your roof and you are 

told you have to put $3,000, $4,000 in your home. I mean, does that 

make any sense to anybody for them to do that? Or your air-conditioning unit breaks, you know, and it is another $2,000, $3,000. 

So with house prices falling more people will be underwater. 

That is fodder for more default. You get more default, that puts 

more foreclosure short sales, more downward pressure on prices, 

and you can construct a scenario where you get into a very vicious 

cycle—the very same vicious cycle we were in back in 2008 and 

early 2009 before the policy response. In this go-round, it is not 

clear how you would respond to that. I do not think this is the most 

likely scenario, but certainly it is a very significant threat and risk, 

a challenge to the economic recovery. 

So point No. 2 is that at the top of the list of concerns is the ongoing foreclosure crisis. I do not think the coast is clear. 

So this goes to point No. 3, and that is, well, what can policymakers do to try to mitigate this potential threat, this potential 

risk. We talked a little bit about some policy, but let me mention 

a few things. In fact, I will focus on—am I taking too much time? 

Chairman CONRAD. No. 

Mr. ZANDI. OK. So I would focus on three things. 

First is I think there are things that can be done to facilitate the 

loan modification/foreclosure process, and let me mention a few aspects of what I mean there. 

First, I think it would be very important if mortgage servicing 

companies appoint one person as a point of contact for the homeowner. So right now, if you are a distressed homeowner and you 

call a mortgage bank, each time you call, you get someone else. 
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They have no idea who you are. It is just a nightmare and very 

frustrating for everybody involved. You get documents lost. The 

loan officer says, ‘‘Send me this information, this information, and 

this information.’’ You send it in. You hear nothing. You call back. 

You get a different person, and they do not know what you are 

talking about. They say, ‘‘Oh, you sent it to the wrong department. 

You should have done this. Send it here.’’ And so the process is 

very elongated and very cumbersome, and I think it would be prudent for—and this is a regulatory, I think, point of contact to require servicers to have one person in charge of each loan file. 

Another aspect of this is there is so-called dual tracking that creates a great deal of confusion in the foreclosure process. That is, 

when you are a distressed homeowner, you are considered for a 

loan mod, but you are also put in the foreclosure process at the 

same time. They are both occurring at the same time. So you could 

be talking to one person in the institution about your modification. 

Then you get a notice in the mail saying, you know, ‘‘You are in 

default, and we are going to take you to court.’’ So this becomes incredibly nerve-wracking, frustrating, everyone is very upset by this. 

I would suggest, another regulatory point of contact, to end the 

dual tracking. You go through loan modification. If you do not 

make it through loan modification, you cannot get through these 

programs. Then you go through the foreclosure process, and that 

gives everyone enough time to sort of get their minds around what 

is happening, get all the loan documents in place, and really make 

a good decision here. 

The other thing I would suggest is third-party review. Some 

States—Connecticut, I believe New York, New Jersey, Florida—are 

now asking mortgage companies to work with a third party, and 

this third party would help the homeowner to go through the process: makes sure that the homeowner knows all of their rights, 

knows all of the options open to them, helps them get all their loan 

information together, and shepherds them through the process. 

They are an advocate for the homeowner. This is an incredibly 

complex, difficult, messy thing. Most homeowners really do not 

have the skill sets to do it well, and I think they should be given 

resources to do that. It would not be very costly, and I think it 

would make the entire process more efficient, and we would get 

better results. 

Finally, Sheila Bair, Chairwoman of the FDIC, has made a very 

good proposal that I would advocate, and that is, establishing a 

fund financed by the mortgage servicers that would compensate 

homeowners that are shown to be wronged in the foreclosure process. As we know, there is a range of problems, affidavit signing 

issues and other related issues. I think this would be a way to light 

a fire under the industry and say, you know, if it is shown to be 

that you messed up here, then you have to compensate these individuals for the screw-up. 

So these are foreclosure modification process changes that can 

be, I think, tweaked in the regulatory process that would make this 

a much better process. 

I will mention one other thing because I am taking a lot of time. 

One other policy response which would be helpful in the next 6 to 

12 months is to try to facilitate mortgage refinancing activities. As 
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you know, fixed mortgage rates are very low. They are below 5 percent for the prime borrower. Part of this reason is because the Federal Reserve is engaged in quantitative easing and keeping—the 

whole intent of quantitative easing is to keep long-term rates, particularly fixed mortgage rates, down. And one of the key conduits 

through which low rates help the economy is through refinancing, 

mortgage refinancing. 

The level of refinancing is incredibly low. One of the reasons for 

this is that for borrowers with poorer credit scores and who are underwater, they do not get that interest rate. They get a much higher interest rate. Fannie Mae and Freddie Mac, for example, charge 

much higher rates for people with lower credit scores and higher 

LTVs, even if they own the loan. Even if they own it in their portfolio or they insure it, they own the credit risk. But they are still 

charging these higher rates, which is forestalling refinancing activity. So I would suggest that there is a requirement on Fannie and 

Freddie not to charge those higher rates to facilitate more refinancing activity. And it will cost Fannie Mae and Freddie Mac in 

interest income, but it will benefit them in the form of fewer foreclosures, because these homeowners are going to have lower 

monthly mortgages payments and be less likely to go into default. 

And they own the loan. I am not suggesting this for anyone but 

Fannie Mae and Freddie Mac. So net-net it is not clear to me that 

they would lose money, right? And this would facilitate more refinancing now when mortgage rates are still low before they start to 

rise. And they will definitely rise by the end of the year. And this 

will put money in their pocket to distressed homeowners, like a tax 

cut, and it costs the Government nothing. And I think this is a very 

efficacious way to help very, very quickly. 

So there are other things, but I will stop there. 

[The prepared statement of Mr. Zandi follows:] 
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Chairman CONRAD. Well, this has been very useful. You have 

given us a lot of good ideas in a very short period of time. 

Senator Sessions is now here. I was explaining the National 

Prayer Breakfast was this morning, and that was running long. 

Senator SESSIONS. Yes. 

Chairman CONRAD. Would you want to make your statement at 

this point, or would you prefer that we continue with witnesses? 

What is your preference? 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. I will just briefly say thank you for the hearing. I thank the witnesses for being here. We did have a good 

breakfast this morning. The President spoke eloquently, as he usually does. And I guess I have given him a hard time lately about 

not leading on the budget, and I think that was a valid criticism, 

but we all have some challenges. We have to be honest about it and 

see how we can work our way through this deficit cycle, and I appreciate the insights each of you bring to the key issues that face 

us. 

Mr. Chairman, we have had a lot of hearings this week. This is 

the third one this week. I believe you are correct to push us because these are critical issues facing the country. We do not have 

time to put off decisionmaking, and it is well that we are moving 

forward, and I support your strong leadership. 

Chairman CONRAD. I thank you so much, Senator Sessions. I appreciate you being a partner in this effort to really get serious 

about our deficit and debt. 

This morning, we really are focusing on these special areas: State 

debt, housing crunch, long-term unemployment, these special challenges to the economy and what could be done. 

We will now go to Dr. von Wachter for your testimony. Dr. von 

Wachter, Associate Professor of Economics at Columbia. 

STATEMENT OF TILL VON WACHTER, PH.D., ASSOCIATE 

PROFESSOR OF ECONOMICS, COLUMBIA UNIVERSITY 

Mr. VON WACHTER. Chairman Conrad, Ranking Member Sessions, it is a great honor to be with you today. I am going to read 

my testimony, but feel free to ask any questions at any moment in 

time. 

Unless we see an unprecedented job growth in the near future, 

our best available estimates, as we have seen earlier, suggest the 

process of reintegrating the large number of unemployed into employment is going to be very long lasting and gradual. During this 

process, many individuals are at risk of permanently leaving the 

labor force. Those most likely to drop out are older, partially disabled, and less educated workers. This development is potentially 

costly for society, since these workers, while able to work, do not 

pay taxes, are more likely to draw Social Security benefits early, 

or enter costly programs, such as Federal disability insurance. 

Moreover, in the process of searching for jobs, many workers are 

likely to exhaust unemployment insurance benefits. It is well 

known that upon exhaustion of unemployment insurance benefits, 

families’ consumption falls and the incidence of poverty rises. More-
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over, only a very limited fraction of individuals exhausting UI actually find a job. 

Upon finding a job, for those who do, experience from previous 

large recessions has suggested earnings of laid-off workers are substantially lower. For example, the average mature worker losing a 

stable job with a good employer in the last big recession saw earnings reduction of 20 percent lasting 15 to 20 years. So there seems 

to be a permanent decline in earnings of job losers. 

And during this period of earnings decline, job losers can also experience a decline in health. So in severe downturns in the past, 

these health declines have led to significant reductions in life expectancy of one to 1.5 years. 

The effects of unemployment and job loss are also felt by workers’ children, who can suffer from the consequences even as adults 

and by their families. Similarly, evidence from past recessions suggests that entering the labor force in a large recession such as this 

one can lead to reduced earnings for young workers for ten to 15 

years. 

Now, the rest of my comments will focus on government policies 

that I think can reduce the impact of extended joblessness on both 

affected individuals and possibly on government finances. So my 

recommendations fall into the following four areas. 

My first recommendation, and this is not news, to extend unemployment insurance benefits for those who are about to exhaust. On 

the one hand, extensions of unemployment insurance benefits prevent large declines in consumption for the substantial number of 

workers who are at risk of exhausting benefits. On the other hand, 

research implies that the negative effects of extending unemployment insurance benefits on employment are not that large in a 

large recession such as this one. So on balance, if you count the 

benefits for those workers who are about to exhaust benefits and 

the cost to society for lower unemployment, the net suggests that 

extending UI benefits in recessions are likely to outweigh the costs. 

Extension—— 

Senator SESSIONS. Extensions are raising benefits. The phrase 

‘‘unemployment benefits’’—— 

Mr. VON WACHTER. Say that again? 

Senator SESSIONS. Your written remarks said that raising unemployment insurance. Does that mean raising the amount received 

or extending the time that they are received? 

Mr. VON WACHTER. Thank you, Senator Sessions, for clarifying. 

I mean extending the time, not the amount of benefits. So my research is focused on the typical policy, which is extensions and the 

durations, and what this means is that you target those workers 

who are really at the risk of going to zero after exhausting, not the 

workers who have already benefits and then would consume more. 

Now, one added advantage of extending the duration of benefits 

is that it can prevent some of those individuals who are at risk of 

permanently leaving the labor force from doing so and possibly 

apply for disability insurance or claim Social Security benefits. 

Now, these possible cost savings should be incorporated into the 

calculations of the overall costs of UI extensions, and the available 

approximations we have suggests that cost savings from UI extensions through these channels could be substantial. However, al-
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though the exact quantifications of these mechanisms is in principle possible using available data, this data is currently not available to researchers. So we cannot really exactly say, tell you how 

much we would save in terms of Social Security benefits or disability payments by extending UI, but we could. 

My second policy recommendation is the need to prepare an exit 

strategy for unemployment insurance recipients once the labor 

market shows signs of recovery, and there are several policies that 

have been evaluated within the current UI system that seem to be 

cost effective. These policies would make sure that once the labor 

market improves, both the unemployed would benefit and also the 

finances of the unemployment insurance system would benefit. 

One of these mechanisms is job search assistance, and job search 

assistance has been widely shown to be very cost effective and efficient in getting workers back to employment, and this is very helpful because searching for a job in environments such as this one 

is very time consuming and also frustrating and uncertain, because 

many individuals do not know where the economy is leading. Now, 

we all do not know where the economy is leading, but there is a 

lot of potential information that can be provided to workers in this 

long and time consuming process, starting with that it is a long 

and time consuming process. If workers want to go back to work 

at the level that is not too low in terms of earnings, they really 

have to do a lot of work and stay in the game of searching for five 

to 10 years. 

Now, research has also suggested that the current infrastructures of one-stop shopping or career centers could be improved and 

extended. So we have a system in place that could provide services 

to workers, but it could do a better job, and we can talk about what 

fixes have been proposed. 

Another typical suggestion is that workers could be trained, and 

not all training programs work as well as others, and so finding out 

which training programs really work and then advising workers 

what training programs to take is a really important step. And 

again, I think the data is there to evaluate these training programs, but not all of it is available to researchers. 

For some workers, a long period of time may elapse before finding a job, and especially for those workers on unemployment insurance, providing them with bonuses to find jobs might actually be 

cost saving from the point of view of the unemployment insurance 

system. Workers may have lost touch with the labor market, lost 

touch with what they can expect in the new labor market, may 

search for too long, and providing them incentives to take the job 

earlier may be cost savings. And if these incentives are targeted to 

the workers who are most likely to exhaust benefits, they have 

been shown to be cost effective. 

Now, although these mechanisms to help workers to find a job 

help raise employment, at least that is what our past experiences 

say, none of these mechanisms have been shown to actually help 

reduce the earnings loss of job losers, meaning even once workers 

find a job, partly because of these programs, because of the economy recovery, their earnings will be lower for a very long time. 

And so a recommendation I have made before—that is my third 

recommendation—it is worth considering trying to reduce the mas-
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sive amount of layoffs that we have seen in this recession in the 

future, and there is a program in place to do that that is called 

work sharing, and 17 States have work sharing, but it is currently 

underutilized. It is partly underutilized because it is not a very 

generous system, partly because it is not well known. And more research into how we could prevent such costly layoffs in the future 

is very useful. 

My fourth recommendation concerns assistance for those who are 

unlucky enough to be looking for a job for the first time in this recession. One way to help those workers who are bound for college 

is to provide financial aid. Financial aid can be an important buffer 

against labor market shocks that affect parental income or students’ own ability to work while in school. But it turns out that not 

all eligible students apply for the aid that they could have, and current research suggests that reducing the complexity of financial aid 

and informing or even assisting students with applications will 

probably raise the take-up of financial aid and raise college attendance. 

And another concern which I only touch on briefly is that many 

resources available for low-income college students are provided at 

the State level. This is subsidized community college or merit 

scholarships. And these resources are at risk as State budgets are 

being cut, and so it is worth considering how one could maintain 

these resources for young college graduates at the risk of dropping 

out. 

Let me just conclude. Something could also be done for those 

young individuals not bound for college. In particular, recent research has shown that sectoral training programs—these are relatively small programs in which the program cooperates with an 

employer to find out what type of training is needed—these programs have been evaluated in randomized studies and have been 

shown to be very effective in placing young workers into jobs. 

An alternative, of course, is to encourage the use of financial aid, 

such as Pell Grants, to send individuals to private institutions, private vocational schools, and that has been a tremendous growth 

area in the past. But again, we know very little how these private 

colleges and private vocational programs really affect workers’ 

earnings outcomes later. And so mandating scientific evaluations of 

the returns of private schools receiving Federal funding through financial aid would be a useful policy. 

To conclude, job loss and unemployment during severe recessions, such as this one, can impose substantial and long-lasting 

costs on affected workers, their families, in terms of earnings, 

health, and other outcomes. This testimony has focused on potentially cost effective ways to alleviate the burden for these workers. 

It is also recommending making data and information available to 

allow researchers to give a better assessment of the full costs and 

benefits of these programs. Thank you. 

[The prepared statement of Mr. von Wachter follows:] 
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Chairman CONRAD. Thank you. We appreciate very much your 

testimony. I think you have given us some interesting ideas that 

we can hopefully pursue as we go through the budget process this 

year. 

Next, we are going to turn to Dr. Ray Scheppach, Executive Director of the National Governors Association. One of the things 

that has come before the attention of this committee and other 

committees is the fiscal crisis at the State level, There is probably 

nobody better positioned to help the committee understand the dimensions of that challenge than Ray. Welcome. It is good to have 

you here, and please proceed. 

STATEMENT OF RAYMOND C. SCHEPPACH, EXECUTIVE 

DIRECTOR, NATIONAL GOVERNORS ASSOCIATION 

Mr. SCHEPPACH. Thank you, Mr. Chairman and Senator Sessions. I am pleased to be here on behalf of the nation’s Governors. 

Let me say first, if you drop back and look at the long-run 

growth of State revenues, really over the last 30 years, 1978 to 

2008, it grew about 6.5 percent per year, relatively robust. There 

was only 1 year during that period, 1983, when revenues were negative, and it was only negative by about less than 1 percent. 

If you look now about what happened during this so- called great 

recession, we had five quarters in a row of negative revenues and 

the numbers went from 4 percent, to 12.2 percent, to 16.8 percent, 

to 11.5, and then 4 percent again, so huge declines in revenues 

over that five quarters. 

There is some good news. Really, we have now had positive revenue growth over the last four quarters. The first three of those, 

it was about 3 percent. But just yesterday in a preliminary way, 

it seems to be that revenues for the fourth quarter of 2008 were 

up 6.9 percent. Now, that is based on about 41 or 42 States, so it 

can be modified, but it is an encouraging number. I will say, however, in spite of that, we have to remember that revenues in 2010 

versus 2008 are down about 9 percent. 

States reacted to this by cutting spending by $75 billion and raising taxes and fees by about $33 billion, so close to well over a $100 

billion swing. Those cuts would have been much more draconian if 

the recovery package had not provided States with an additional 

about $103 billion in Medicaid and about $48 billion in education 

money, and then there was an additional $10 billion that went 

through States to locals. 

In spite of that money, however, the States are still looking at 

a shortfall over the next two-and-a-half years or so of about $175 

billion, and that includes the so-called cliff when the Federal Medicaid money goes away at the end of State fiscal year 2011. 

When I look at this impact, this great recession was so deep and 

so broad that, unfortunately, it is going to send implications 

through State government for almost the rest of this decade. I 

think of it really in terms of three stages. 

The first is we know from the previous downturns the biggest 

impact on States is one, two, and sometimes 3 years after the recession has been declared over, and that is largely because that is 

when you lose the maximum amount of income tax revenues and 
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that is when you see the explosion of Medicaid. I think we are still 

in the end of that stage. 

The second stage, however, is going to be the so-called jobless recovery. We do not expect States to come back to the 2008 revenue 

level until 2013 or 2014, and in some cases 2015. That means, Mr. 

Chairman, literally five to 6 years of zero revenue growth relative 

to a baseline where we were getting 6.5 percent per year. So that 

is virtually over that period, like at the end of it, a 30 percent 

swing. 

The third stage is that at some point, they have to go back and 

take care of some of the unmet needs that they did not fund during 

the downturn. So that goes all the way from maintenance, rebuilding rainy day funds. I think the big one, of course, is the pension 

thing because States did not pay into the pension. 

States have always had what I would call long-run structural 

problems, largely because they have antiquated tax systems on one 

hand, and you have had Medicaid, which is about 22 percent of 

State budgets growing at nine or ten or 11 percent. Unfortunately, 

what has happened with the great recession is that that long-run 

structural problem is a lot worse now. I would probably argue that 

the revenue path going forward over the long run is not going to 

be 6.5 percent. I suspect we may see slower economic growth. 

But the revenues that are being lost in the sales tax now, which 

is about 40 percent of State taxes, is quite significant because we 

do not tax services, we do not tax downloads from the Internet, we 

do not tax goods sold over the Internet. In other words, if it is a 

new economy good and growing, we do not tax it. If it is an old 

economy good and contracting, the odds are we tax it. The erosion 

of this tax base over time now, I think, is getting to be a particularly big problem. 

Medicaid is the 400-pound gorilla. It continues to be that. If you 

just look at the actuaries from HHS estimates, they say that the 

rolls will increase by 11.6 million people in 2014 and almost 20 million people by 2019. And the numbers that they have are essentially between 2010 and 2014, States will have to pay an additional 

$90 billion, and between 2014 and 2019, an additional $100 billion. 

So you are looking at States’ growth over the next 10 years of virtually $190 billion. 

Now, you might ask, why is that so big? There are three things 

coming together at the same time. No. 1, because of the recession, 

the case loads are higher and therefore you start with an increase 

with that. The second problem is, of course, that the enhanced Federal match goes away at the end of fiscal year 2011. And then you 

have the impact of health care reform. 

So when you add those three impacts together, they make a huge 

change. I would have to say, as we get on the telephone with State 

budget directors every other week, what they will tell you is we do 

not know how to get from here to there, largely on the Medicaid 

issue. 

On the unfunded pension liabilities, the numbers here are always a little bit suspect depending on the discount rate assumption 

and so on. But clearly, as of the year 2000, I would argue States 

and municipalities were in pretty good shape. It began to deteriorate. I think we probably have an unfunded liability of about 23 
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percent of obligations now, so it is significant. On the other 

side—— 

Chairman CONRAD. Can I stop you on that point? 

Mr. SCHEPPACH. Sure. 

Chairman CONRAD. Can you repeat—I want to make sure I understood this last point, the 23 percent. 

Mr. SCHEPPACH. Well, that is sort of the unfunded portion of it. 

So if you are assuming that whatever that commitment is, and the 

numbers change a little bit depending. If it is a trillion dollars, 

then you are down $230 billion in terms of the unfunded portion 

of it. But the pension contributions are generally less than 4 percent of State budgets. 

Chairman CONRAD. What is the—can you help us understand, 

because this became a source of discussion in a previous hearing 

when we had Chairman Bernanke before the committee. It seems 

to be concentrated in a relatively small number of States. Is that 

your understanding? That is, a disproportionate share of the unfunded liability is in a relatively small number of States. 

Mr. SCHEPPACH. Yes. It is not four or five, but it is eight or ten, 

I would say, yes. 

Chairman CONRAD. Eight or ten States that are really in—— 

Mr. SCHEPPACH. Right. And some of those are—I mean, Connecticut is one, for example, Hawaii, or smaller States. But then 

there is also the New Jerseys, the Illinois, and so on. As I remember, actually, California is better on this issue than in a lot of others. 

Chairman CONRAD. My recollection was Illinois was in the most 

serious shape. 

Mr. SCHEPPACH. Correct. I think that is right. 

Senator SESSIONS. This shortfall, some of that is tied to the stock 

market? 

Mr. SCHEPPACH. That is correct. There are two things-—— 

Senator SESSIONS. The market being down, so it is not 23 percent 

if the market were to continue to go up? 

Mr. SCHEPPACH. That is exactly right. 

Senator SESSIONS. So it is hard to exactly estimate, but it is dangerous. The numbers are so high that it should raise red flags, that 

number. 

Mr. SCHEPPACH. No, you are right. It is the return in the markets, in bonds, and then it is States did not pay in during this crisis. It is a twofold issue. 

But as I said, it is probably less than 4 percent of State budgets. 

And I will say that we tend to track what is going on in States here 

and you will find that 30 States have made changes in pensions 

over the last 5 years and we have 20 States that have made pension changes this year. So they are really beginning to face up to 

it. What is happening is that they are forcing current employees to 

pay in more. They are making adjustments on COLAs. They are 

extending the number of years. So there is a lot of activity in this 

particular area right now. 

Chairman CONRAD. Ray, could we stop you on the point, because 

Senator Sessions and I were wondering, how could States fail to 

pay into their pension plans during this period? What legally allowed them not to pay in? 
419 

Mr. SCHEPPACH. Well, it differs by State, but some States just do 

not have requirements on it. In fact, I think some actually borrowed from the fund. So you will find them sometimes borrowing 

from different trust funds when times, you know, highway trust 

funds or such. 

Chairman CONRAD. We know a lot about that here. 

[Laughter.] 

Mr. SCHEPPACH. I did not want to say that. 

[Laughter.] 

Mr. SCHEPPACH. So in terms of what else is going on, I do think, 

as I said, the shortfall is about $175 billion, and—— 

Chairman CONRAD. And what period is that over? 

Mr. SCHEPPACH. It is really over the next two-and-a-half fiscal 

years. But I do see a commitment among Governors that they—you 

know, initially, I think, there was a feeling that they needed to cut, 

furlough, consolidate, and eventually the economy would come back 

and sort of save them. I do not think anybody believes that now. 

I mean, I think the feeling is among Governors that they have to 

continue to do this to make the long-run sustainability. 

In fact, we do not really believe we can cut our way out. We 

think we have to really redesign State government in terms of how 

it delivers services. So—but I think this group of Governors are 

moving on it and I think that I am fairly optimistic that they will 

work through this problem, including the pension problem. 

In terms of things that you can do, I would say the first thing 

is please do no harm. As you begin to cut budgets, please do not 

cap the Federal share of Medicaid and shift it to States. I would 

encourage you to look for things, and there are a number of them 

where we could both save money, both the Federal Government 

and States, and so please do not do any harm. 

And then the other areas are more around flexibilities on programs. Maintenance of efforts are causing big problems. So to the 

extent waivers in certain areas, all would be very helpful. 

I will reiterate that the Governors are not requesting any additional assistance, financial. They are appreciative of what has happened. But they feel that they need to work their way through it 

and make these programs sustainable. 

The only final comment, again, is that all roads lead back to 

Medicaid. This is a serious problem. I think that it has to be dealt 

with, where the Feds and the States sit down and try to make this 

program much more efficient. Plus, I am not sure States can continue to pay for the long-term care of the dual eligible portion of 

it as the demographics changes. There is just not the tax base 

going forward to support it. 

With that, thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Scheppach follows:] 
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Chairman CONRAD. Thank you very much. 

Mr. Edwards, thank you for your patience and thank you for 

being here. Dr. Edwards—I am not sure it is Doctor, is it? 

Mr. EDWARDS. I am not a doctor. 

Chairman CONRAD. But, you know, you have that credibility. You 

seem like a doctor. 

Mr. EDWARDS. I appreciate that very much. 

[Laughter.] 

Chairman CONRAD. Chris Edwards, Directors of Tax Policies at 

the Cato Institute. Welcome back. 

STATEMENT OF CHRIS EDWARDS, DIRECTOR OF TAX POLICY 

STUDIES, CATO INSTITUTE 

Mr. EDWARDS. Thank you very much, Chairman Conrad and Senator Sessions, for having me here today. I am going to talk a little 

bit about challenges for Federal spending and then a little bit 

about challenges for State budgets. federally, we have seen an extraordinary increase in spending over the last decade, from 18 percent under President Clinton’s last budget to 25 percent today. I 

believe the spending explosion really is sucking the life out of the 

private sector economy, and the real problem I see is that the 

United States is no longer really a small government country. In 

my testimony, I have OECD data showing that total Federal, State, 

local spending in the United States is now 42 percent. We used to 

be about 10 percentage points smaller than the average OECD 

country in terms of spending. Over the last decade, that gap has 

closed to just 5 percent. 

So I think, historically, our uniquely high living standards in this 

country were built partly on our relatively smaller governments 

and I think we are really risking becoming sort of just another 

stagnant welfare state in the years ahead, which I think is mainly 

going to result in less opportunities and higher tax burdens for 

young people. 

So we need to cut spending. Obama’s fiscal commission, of 

course, had lots of great spending cut ideas. I know, Chairman, you 

have been a real supporter of that report, as I am. I put together 

all kinds of spending cut ideas at Cato’s website, 

downsizinggovernment.org. And here is the thing that really 

strikes me, is that other countries have cut spending when they 

haveten into crisis. We see cuts in the U.K. right now. 

And I think Canadian reforms in the mid-1990s are a real model 

that we can look at. In the mid-1990s, Canadian government 

spending was up to 53 percent of GDP. Their debt was exploding. 

Then their liberal government really changed course and they 

chopped spending from their Federal budget 10 percent in 2 years, 

which would be like us chopping $370 billion in just 2 years. Then 

they held spending flat for a number of years after that. The result 

was dramatic. The Canadian economy—— 

Chairman CONRAD. What years—— 

Mr. EDWARDS. Yes? 

Chairman CONRAD. And I apologize for stopping you, but—— 

Mr. EDWARDS. No, that is fine. 

Chairman CONRAD [continuing]. This is very interesting to us. 

We were talking about this actually in the committee yesterday. 
431 

Canada, with respect to a VAT, because they imposed a VAT at 7 

percent, actually have reduced it to 5 percent—— 

Mr. EDWARDS. Right. 

Chairman CONRAD [continuing]. And during this period, brought 

their debt as a share of GDP down from over 100 percent, 101 percent of GDP—— 

Mr. EDWARDS. Right. 

Chairman CONRAD [continuing]. Down to 69 percent. So it was 

this combination of revenue and spending cuts, and the spending 

cuts were quite tough, were they not? 

Mr. EDWARDS. They were, again, 10 percent in 2 years. They 

brought the VAT in in the late 1980s under a conservative government. Then it was the left-of-center liberal government in the 

1990s that dramatically cut spending, as well as they privatized a 

lot of their government corporations. This was the liberal party, 

and the liberal party did two rounds of corporate tax cuts. So the 

politics are really kind of strange up there. But the Canadian economy boomed for 15 years and I think we really need to look at 

what they did. 

Let me switch over to State and local budgets for a couple of 

minutes, and my views will, I think, contrast pretty sharply with 

Ray’s, I think. There have been a lot of horror stories in the papers 

over the last couple of years about how States are in a crisis and 

drastically slashing their budgets, and it is true State general fund 

budgets have been cut pretty substantially in 2009 and 2010, although they are growing again. But if you look at total State and 

local spending in Bureau of Economic Analysis data, it was never 

cut. Total State and local spending, according to the BEA, rose 55 

percent between 2000 and 2008. Then it was flat for 2009. Now it 

is growing again, 2010, 2011. So I do not—— 

Chairman CONRAD. Does this—— 

Mr. EDWARDS. Yes? 

Chairman CONRAD. I apologize. I just want to make sure I understand. You are talking now all States? 

Mr. EDWARDS. Yes, all States and local governments. So, you 

know, general fund budgets are only about half or so of State budgets. So if you look at total State budgets as well as the local together, it has been a lot more stable than just the State general 

fund budgets, which as you know, they have to balance every year. 

So I think the States can solve their short-term problems. The 

real challenge, as has already been touched on here, is this longterm problem with debt. State bond debt, State and local bond debt 

has doubled over the last decade, from about $1.2 trillion to $2.4 

trillion. 

Unfunded pension liabilities, depending on what the accounting assumptions here, are $3 trillion or so. On top of that, as you probably know, there is the problem of unfunded retiree health plans 

in the States, which I think is about another $1.5 trillion problem 

on top of the pension problem. 

I agree with these comments, and this is something I think the 

media often misses. These problems vary dramatically by State. So 

if you look at bond debt, you get States like Massachusetts that 

have very high bond debt. Other States, like Nebraska, have virtually no bond debt. I mean, Nebraska—— 
432 

Chairman CONRAD. Let us talk about North Dakota. 

Mr. EDWARDS. You know, I should have brought the North Dakota numbers. I do not know off the top of my head. Maybe you 

know, but—— 

Chairman CONRAD. Very low. 

Mr. EDWARDS. Right. 

Chairman CONRAD. Very low. 

Mr. EDWARDS. And so a lot of States, they rely on—their capital 

budgets rely on pay-as-you-go financing more than issuing debt. 

Pension debt, according to figures by economist Andrew Biggs, 

vary from 11 percent of GDP, again in Nebraska, up to 49 percent 

in Ohio. 

And I would say something else that is interesting is that State 

worker unionization rates vary dramatically in the States and this 

affects fiscal policy. So California, New York, two-thirds of State 

and local workers are unionized. Other States, like Virginia and 

North Carolina, they do not have unionization in their public sectors. So this affects fiscal policy because I think unions can affect 

the flexibility of managers to cut costs and make needed reforms. 

So I think the upshot here is that the States have taken widely 

divergent paths, which is OK. We have a Federal system. I wish 

the poorly managed States would learn more from the well-managed States. But ultimately, I think, the States should be left to 

solve their own problems. I do not believe in Federal bailouts because I think that is unfair to the frugal States. 

But I must say, I also do not favor this idea that has been talked 

about in the last couple of months about a new Federal statute for 

State government bankruptcy that some conservatives have been 

pushing. I think that is interference in State local affairs that we 

do not really need. I think the States have the tools at their disposal to solve their own problems without that sort of intervention. 

So that is all my comments, and thanks again. 

[The prepared statement of Mr. Edwards follows:] 
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Chairman CONRAD. Thank you. I am going to diverge from typical practice because I have been asking questions as we have gone 

along here. So we will go to Senator Sessions for his questions, and 

then we will go to other members of the Committee, and I will 

withhold my questions until others have had a chance. 

Senator SESSIONS. Thank you, Mr. Chairman. It is, I believe, 

pretty much a truism of State and local and even the Federal Government that financial crises provide the opportunity for improvement of efficiency and productivity. While money is flowing in generously, we just add, we spend more, and we do not focus on the 

difficult task of productivity. 

Forgive a personal story. I was elected Attorney General, and my 

predecessor mismanaged the finances very badly. That is probably 

the only reason I could get elected. And it came out he was not able 

to pay the light bill right before the election. And it turned out to 

be a $5 million deficit on a $15 million budget. This was 1994, and 

people were not happy with Government them like they are today. 

And I did not want to ask the legislature for more money until I 

had done everything I could. 

So we examined the office. We found that one-third of the people 

had been hired outside the merit system. It was a 200-person offices, and I terminated 70 people and brought on seven new people. 

We closed offsites. We got rid of automobiles that people were driving home, lawyers were, and we reorganized entirely, and the office 

today—and that was in 1994—is well below 200 employees today, 

and I think doing at least as good, or better job of serving the taxpayers. 

So I just want to say that State governments are challenged, we 

are challenged. The idea that we cannot reduce 10 or 15 or 18 percent spending on most of our agencies is not accurate. We will be 

leaner, more effective, and more productive if the leaders get on 

board and do what they should do instead of, as the Interior Department does, close down the Smithsonian when you ask them to 

cut their budget. So this is big-time stuff. So I am not timid about 

the challenge and opportunity of tight budgets. 

Mr. Scheppach, the spending on the States, it has been suggested, has been too often driven by matching funds from the Federal Government, and this has lured the State to commitments 

that now they are not able to meet, Medicaid I suppose being one 

of them. I see Governor Christie was having to make the choice 

about the tunnel, and he was attacked for turning down Federal 

money. And he said, ‘‘Well, I do not have the money to build a tunnel. I do not have the money. I cannot help it if we are turning 

down money. 

In your opinion, have Federal policies seduced or encourage the 

States to undertake expenditures that they might not otherwise 

have? Is that part of the problem that we have? 

Mr. SCHEPPACH. Yes. It is particularly acute, I think, in the Medicaid area. If you trace Medicaid historically, what happened was 

the Federal Government would provide options to States, and those 

States who were a little wealthier than some others would exercise 

those options. And then you would have 25 or 30 States exercising 

the option, and then Congress would say, ‘‘Well, if it is easy for 

those 35, let us make a mandatory.’’ 
442 

And so we have been in this iterative process around Medicaid, 

and now, depending on how you measure it, you have 60 million 

people in Medicaid, and you are picking up another 20 million. So 

that is going to be 80 million people in Medicaid. And it is an engagement, and there are very few cost control strategies that 

States can utilize, and particularly around the long-term care and 

the dual eligibles. 

I mean, you would never build a system from scratch to say if 

you are in relatively good health and relatively high income, you 

are in Medicare. Now your health deteriorates and your income deteriorates, and you get half of your services from Medicaid and the 

other half from Medicare. It makes no sense. People are confused. 

The incentives are all wrong because we do not do certain things 

to save money because we end up saving money from Medicare. 

And you do not do things in Medicare that make sense because the 

savings come to Medicaid. So you have expanded this program that 

at its very fundamental basis has huge problems. 

Now, we could talk about some of the other areas, you know, discretionary grants. There are like 200 discretionary grants, from the 

big ones in education and highways right down to a lot of small 

ones. But it is true that at some point there are some of those that 

certain States really cannot utilize the money. Moving to broader 

block grants in areas where States had a lot more flexibility would 

increase efficiency. 

So, you know, I think you are right, but I think Medicaid is the 

biggest problem. 

Mr. EDWARDS. Can I make a comment on that? You know, another example of this is like in transit systems where the Federal 

Government has traditionally funded the capital costs, the new 

light rail systems and now new fancy high-speed rail systems. And 

the problem is that States get induced to build these really expensive systems, but the Federal Government does not fund the operating costs. So these cities and States are going to be left down the 

road with these very fancy new systems when bus systems would 

have been cheaper with, you know, lower operating costs, and now 

they are stuck with all this expensive infrastructure. So there are 

others areas where this is a problem. 

Senator SESSIONS. I would agree, and I might as well be frank 

about it. I am going to oppose the high-speed rail idea. We do not 

have the money. I do not believe it is going to be effective. And you 

cannot pour money into projects that are not going to prove to be 

effective. We do not have the money. We do not have the money 

to do things we have to do much less new programs even though 

they may appear to be popular. 

I do want to say, Dr. Scheppach, that many of the Governors are 

doing great work. If we were running the Federal Government like 

many of the Governors are running their States, we would be a lot 

better off. I know Governor Riley in Alabama faced up to his problems. I saw where Haley Barbour in Mississippi reduced spending 

9 percent. I see California now, a bit late, but they are stepping 

up some real reductions, and others are. Governor Christie I mentioned in New Jersey. And that kind of leadership is what we need 

in Washington, and I do not think we have been getting it. 
443 

Dr. Zandi—my time is up—thank you for your work, and I just 

would say I saw the Case-Shiller housing index predicts another 

bad year for housing. Are you in agreement with that? 

Mr. ZANDI. Yes, I think there will be more house price declines, 

on the Case-Shiller probably another 5 percent nationally. That 

would make the peak-to-trough decline in housing values about 35 

percent. So it will be another tough year for housing, yes. 

Chairman CONRAD. I am going to in my questioning time want 

to come back to that question, because as I look across the horizon 

here and we look at potential threats to this economic recovery, 

housing, the State and local, the European debt situation, and the 

Middle East, I would put those four at the top of the list. This 

Committee, we cannot do much about the Middle East. State and 

local, really I think Ray and Mr. Edwards have described very well 

the States are really taking on their own challenges. The European 

debt situation we cannot do a thing about on this Committee. The 

one thing where we might be able to make a difference is in the 

housing, and so I want to come back to that. 

With that, we will go to Senator Whitehouse. Then it will be Senator Begich, Senator Merkley, Senator Thune on this side. So we 

will go to Senator Whitehouse, and then come back to Senator 

Thune. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. I would urge 

the distinguished Ranking Member to at least keep a bit of an open 

mind as to the potential for high-speed rail. I think if the same approach that he indicated toward high- speed rail had been applied 

to high-speed road back when we were trying to build the highway 

system and we were trying to move goods and people around this 

country on local road, through stoplights, you know, over bumpy 

surfaces, and through local intersections, you would find that it actually was worth spending that money because it carried follow-on 

economic effects that were far more than—— 

Senator SESSIONS. I recognize the Northeast could justify it more 

than a lot of the places I see it is being projected to go. 

Senator WHITEHOUSE. That is all I needed to hear. I appreciate 

it very, very much. 

[Laughter.] 

Senator WHITEHOUSE. Mr. Zandi, you have talked a little bit 

about the housing market, and when I look at the failure of the 

HAMP program by its own standards, let alone any outside standard, when you look at the foreclosure crisis, when you look at the 

horrible nature of the short- sale market—I had Rhode Island’s realtors in yesterday, and it is completely defective across the country. They come in over and over again with stories about having 

a short sale ready at a price, the bank cannot get its act together, 

the short sale disappears; the bank then says, ‘‘OK, we are ready.’’ 

Sorry, buyer gone. So then they come back to the same bank with 

the same property later. Now it is $100,000 less. They try again. 

The bank cannot get its act together. Again, they do not get 

through the process. And finally, you know, here you are with 

$200,000 in value out of a house, the bank still in the state of confusion. 

Wherever you go in this process, whether it is through the 

HAMP or through foreclosure or through short sale, you see the 
444 

same thing, which is that no matter who you are, almost no matter 

who you are, you cannot get a person representing the owner of the 

mortgage who can make a decision. 

I had a witness in the other day in a Judiciary hearing who had 

been 20 months fighting through the HAMP program and through 

his bank’s modification program to try to get a change, and for 20 

months he never once got in touch with somebody who would even 

give him his last name or you could even call back to. 

I mean, if there is something that is sort of basic and American, 

it is that when you are dealing with somebody else, you ought to 

be able to get a person on the phone who can make a decision in 

your case instead of being stuffed into this nightmarish bureaucracy. And for me that is confirmed by what I see at home in Rhode 

Island, which is that the local banks that held the loans, that have 

bank officers in the community, are not the problem. We do not 

have short-sale problems with them. We do not have foreclosure 

problems with them. All of the problems are in the big banks that 

sold off these mortgages, and now there is this incredibly complex 

infrastructure, and there is no way to cut through it. And whether 

it is you are a person in danger of foreclosure trying to keep your 

home, your realtor being driven nuts by having to spend 3 or 4 

hours on the phone trying to get an answer on a deal that they are 

beginning to lose faith would ever happen anyway, the HAMP applicant trying to work through the process—they are run, whack, 

into this same bureaucratic nightmare. And I think it is a little bit 

like—you know the story about the men who each find an elephant, 

and one finds a leg and they think that the elephant must be a column, and one finds a trunk and they think the elephant, you know, 

must be a snake hanging in a tree; the other one finds a tail and 

thinks it must be a broom. It is all the same elephant. 

And I wonder what your thoughts are—you have observed this— 

on this being a same elephant of a vast and completely 

unapproachable bureaucratic meltdown, basically, a nightmare that 

prevents intelligent decisions from being made, that prevents properties from being cleared, that discourages participants, and that is 

in many ways a vicious cycle, because you are driving property values down when that first buyer cannot get an answer from the 

bank on the short sale in time. The second buyer is going to be 

more fed up, and the seller is going to be more discouraged. 

So I think we are creating some of our own negative energy by 

not clearing the fundamental problem of the system, which is that 

at some point somebody should be able to have a human being with 

a first and a last name who can make a decision, who they can get 

in touch with. It seems to me it is as simple as that, and I would 

love your thoughts. 

Mr. ZANDI. Well, I think your characterization of the problem is 

excellent, very good, and the frustration that you have expressed 

I have heard many times as well from—— 

Senator WHITEHOUSE. Every one of us has heard it from our constituents. 

Chairman CONRAD. This is how we started the conversation, actually. 

Mr. ZANDI. So I completely sympathize with what you were saying, and I agree—— 
445 

Senator WHITEHOUSE. So how do we fix it? 

Mr. ZANDI. I think there are few things that can be done to improve the modification/foreclosure process. I think Senator Merkley 

has actually done a fair amount of work in this area, and I will 

mention a few things. 

To your point about a point of contact, I think it would be prudent if mortgage servicers who are on the front line with the homeowner are required to have one individual as point of contact for 

each homeowner so when you call you get that same person. Right 

now you call, as you say, you can get numerous people, each one 

in a different part of the elephant, and they do not even understand the elephant. So it makes for a—— 

Senator WHITEHOUSE. And each telling you to submit the same 

paperwork you have already submitted four times again. 

Mr. ZANDI. And telling you you sent it to the wrong person the 

last time you did it. 

Senator WHITEHOUSE. Right. 

Mr. ZANDI. So I think this is a regulatory fix, I think. You can 

go to the—I do not know if it is legislative, but it is certainly regulatory. Put pressure on the servicers to adopt one point of contact. 

Another thing that can be done, I think, to improve the process 

is end the dual tracking that is going on. Right now a person comes 

in with a problem; you are put through modification and foreclosure at the same time. So you are talking to someone about trying to get a mod, and then you get a letter in the mail saying you 

are in default, we are going to take you to a sheriff’s sale. 

Senator WHITEHOUSE. I met with maybe 14 of our realtors in 

Rhode Island a couple of months ago. Every single one of them had 

the experience of a short-sale agreement with the bank pending, 

and in the middle of it, another part of the bank whacked them 

with a foreclosure notice, blew up the short sale, and it ended up 

going into foreclosure inventory for way less than the short sale 

that the bank had itself agreed to. I mean, it is nutty out there. 

Mr. ZANDI. Another fix, you do not dual track; you go through 

modification. If you fail the modification, then you go through foreclosure. They both do not occur at the same time. 

A third thing that could be done is a third-party review. A number of States have adopted this approach. You know, this is a very 

complex process. Homeowners are ill equipped to navigate through 

this process. They need help. You know, I think there are TARP 

funds that are sitting out there that were, at least in theory, allocated for HAMP and HARP that will never be used. They could be 

redirected to provide some help in this area, and I think it saves 

everybody a lot of money if, in fact, they—— 

Senator WHITEHOUSE. Dr. Zandi, I am going to cut you off there 

out of respect for my colleagues because we have gone over my 

time. But I am happy to follow the discussion afterwards and appreciate the thought you have given to this. 

Mr. Chairman, thank you. 

Chairman CONRAD. Thank you, Senator. 

Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman. I appreciate the testimony of our expert witnesses today, and like many of my colleagues am very concerned about steps we can take to get the econ-
446 

omy back on track and to deal with these problems of spending and 

debt which continue to explode on us; and if we do not start making some of the hard decisions now, I think the decisions will get 

that much harder. 

Mr. Zandi, I would like to ask you a question about how much 

you believe that the debt and the deficit is currently a drag on our 

economy. And if you do not believe it is today, when does that effect begin? 

Mr. ZANDI. I think the Nation’s fiscal challenges are our No. 1 

long-term economic challenge, that if we—you—do not address it 

quickly in a clear and credible way, it will have significant negative 

implications for financial markets and our economy quickly. I do 

not think it is this year, but I certainly think by 2012 and certainly 

2013, we are going to be seeing the ill effects of inaction. 

I would counsel, however, that while it would be very prudent to 

lay out a clear, credible path to fiscal sustainability—and we can 

talk about what that means if you would like now—I would not 

begin that process in 2011; that the recovery is still very fragile. 

And, in fact, imposing fiscal austerity in 2011, calendar year 2011, 

would be working at cross purposes with your own actions. The tax 

cut deal that you came to at the end of last year, in my view, was 

a very important piece of legislation, very positive, and for me 

sealed the deal for 2011 and 2012 that the economy is going to do 

measurably better because of that piece of legislation. 

It would also be working at clear cross purposes with the Federal 

Reserve. The Federal Reserve is maintaining a zero interest rate 

policy and quantitative easing through the mid-part of this year, at 

least. So I do not think it would be prudent to begin this process 

in 2011 but by 2012 and 2013, certainly. And, moreover, to lay out 

a path for the future to achieve fiscal sustainability in 2011 would 

be incredibly therapeutic. 

Senator THUNE. And you say we can talk about what that means. 

What does that mean, in your view, path to fiscal sustainability? 

Mr. ZANDI. Yes, I believe that your bogey, your target should be 

to reduce the deficit-to-GDP by 2.5 to 3 percentage points out 5 to 

7 years. I will explain how I get there. 

The deficit this year, in fiscal year 2011, will wind up being, in 

my view, somewhere around 9 percent of GDP. When the economy 

is functioning properly—and I think we are headed in that direction—and functioning reasonably well, the deficit will settle in 

close to 5 percent of GDP. 

The deficit-to-GDP that we can manage—and I am not saying 

this is what I would espouse, but we can manage—is about 2.5 percent. At 2.5 percent of GDP, our interest payments will not swamp 

us. We can manage that. 

So we have to go from 5 percent in a well-functioning economy 

to 2.5 percent. You have to close that 2.5-percent gap. You have to 

close that in the next 5 to 7 years. If you can lay out a clear and 

credible path to doing that, then you will forestall the consequences 

that will occur in financial markets and into the broader economy. 

We do not solve our problems forever. There is Medicaid and 

Medicare and health care costs that need to be readdressed, but I 

think the immediate target should be reducing the deficit by 2.5 

percent of GDP. 
447 

Senator THUNE. You talked about the potential for sovereign debt 

crisis in the euro zone. What do you think the potential is for a 

debt crisis here in the U.S.? 

Mr. ZANDI. I think if there are no significant policy changes over 

the next couple years, certainly over the next couple, 3 years, then 

those risks would be very, very high and rising quite quickly. So 

I think we have a window. We have latitude. Our economy is moving in the right direction, but we have 2 to 3 years to get our act 

together. 

Senator THUNE. You mentioned the Fed’s policies on quantitative 

easing. What effect do you believe those are having on both inflation and growth? 

Mr. ZANDI. I think the quantitative easing was the appropriate 

thing to do. I think it is a net positive. There are negatives. You 

know, obviously it has contributed to higher commodity prices. It 

complicates the conduct of monetary policy overseas, particularly in 

emerging economies. But the positives, including lower long-term 

interest rates, the 10-year Treasury yield is 3.5 percent, fixed mortgage rates are below 5 percent, and the stock market is up significantly, and I think in part because of the QE, the positives trump 

the negatives in a measurable, meaningful way, and it was the appropriate thing to do. 

I do not think we will need—based on what is happening to the 

economy today and my expectations, I think we do not need any 

further QE. And I think it would be appropriate for the Federal Reserve to start tightening monetary policy, probably sometime in 

2012. But what they have done so far, in my view, has been entirely appropriate. 

Senator THUNE. Mr. Edwards, in order for the markets to think 

that Congress is credible on cutting spending, what do you think 

those reductions have to be? And when do they have to take effect? 

Mr. EDWARDS. Well, I mean, the basic mathematics is we have 

to get the deficit down to about 3 percent of GDP in order to stabilize debt. 

I disagree with Mark really on the timing of this. You know, the 

view that we have to wait until we start growing again to start cutting spending does not make any sense to me, because, you know, 

we all assume that—you know, we look at the CBO projections and 

we all assume that everything is going to be hunky-dory again in 

a few years because we are going to be growing again. But we 

might have another recession in 2014, 2015, and, again, folks like 

Mr. Zandi are going to be coming and saying, oh, no, we need to, 

you know, spend more money and we cannot cut spending now. 

So there is always going to be an excuse for not cutting spending. 

The longer we wait, the higher Federal debt becomes. It is going 

to be harder to solve the problem. And I think cutting Federal 

spending moves resources from the less efficient Government sector 

to the more efficient private sector. So I think it helps growth. 

I talked a few minutes ago about Canada. Canada’s experience 

was that they dramatically cut government as a share of GDP by 

about 10 percentage points. The economy did not go into recession. 

It boomed for 15 straight years. 

Senator THUNE. What does $4 gasoline or, worse yet, $5 gasoline 

do the economic recovery? 
448 

Mr. ZANDI. I think that would be—if that were to occur now, in 

the next 6 to 12 months, I think that would be—I do not think $4- 

a-gallon gasoline would be enough to put us back into a recession, 

but it would be awfully painful. It is a tax increase, right? If you 

put more into your gas tank, you have less to spend on everything 

else. And just for context, every penny increase in a gallon of gasoline costs the American consumer $1.5 billion over a year. So, you 

know, you add it up, you go from $3 a gallon to $4, that is a $150 

billion tax increase in 2011. That would be very difficult, particularly for lower-income households who obviously do not have a lot 

of latitude. In parts of the country like the South, the hardest-hit 

group will be low-income households in the South because that is 

where they drive the most, and a high share of their budget goes 

to gasoline. 

Senator THUNE. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you to all of you for sharing views. It is very helpful. 

Dr. Zandi, there was a quote in your testimony which was, 

‘‘Nothing works well in the economy when house prices are falling.’’ 

And you placed a lot of emphasis on addressing the housing market, and I appreciate that you are bring that to the forefront. We 

are still in this period where we have had 300,000 foreclosure filings a month for the last 20 months, and certainly in my home 

State, every community is affected by this. And it is not just a disaster for the family, but that empty house is helping to further 

drive down the value of adjacent homes, certainly discouraging consumer confidence, and it is certainly having a broader impact since 

the construction industry is not going to recover as long as there 

is a lot of empty homes. 

I do appreciate your drawing attention to the several different 

ways of helping to take on the foreclosure crisis, the single point 

of contact, and ending the dual track. I want to note that, after 

talking with a lot of homeowners back in Oregon, it is not simply 

that the bank cannot complete the last stage, which is the actual 

foreclosure on the dual track; it is that they suspend all the steps 

on the dual track during a time period in which they review and 

conclude up or down whether a modification is going to work. And 

I assume that that is the—but I wanted to ask if you are talking 

about suspending the entire track or just the final step. 

Mr. ZANDI. Precisely what you say. I think the entire foreclosure 

process, from default through to sale, should be suspended until it 

is determined that the borrower cannot qualify for any form of 

modification, HAMP or private mod. 

Senator MERKLEY. And then there were three ideas that I had 

put out in the paper that you referred to about further intervention, and one was the fire break before foreclosure, mediation, mandatory mediation that you addressed—in other words, an expansion 

of short refi programs, which you addressed. A third was to revisit 

the power of bankruptcy judges, at least in a very constrained format with appropriate sideboards on it, maybe take it in a little narrower direction than we did last time Congress took a look at it, 

primarily not because those judges will exercise that power, be-
449 

cause they do not exercise that power much in the other areas that 

they can modify contracts, but because it gives an incentive to close 

the deal. 

And so since that was one point that I brought forward that you 

did not address, I just wanted to get your thoughts on that. 

Mr. ZANDI. I think that it is a good idea. As you know, right 

bankruptcy judges can reduce the debt owed for everything but a 

first mortgage, and that, in my view, should be changed. 

Now, there had been some effort in times past during this crisis 

to make that change on a historical basis, so loans that were already originated, allow bankruptcy judges to change the terms on 

those loans. At this point, I do not think that is appropriate. But 

changing the bankruptcy reform law for the future, you know, for 

future loans, I think that would be entirely appropriate. In fact, I 

think that would be therapeutic and would make for a better system. 

Senator MERKLEY. So let me press that a little bit because the 

problem seems to be—and we have folks calling our offices every 

day in Oregon describing how difficult it is to deal with the 

servicers—is to create a little bit of countervailing incentive for the 

servicers to close the deal. And, in fact, at this point I want to mention that there seemed to be a number of perverse incentives for 

the servicers. 

I just did a tour of Oregon in four different cities where I did a 

presentation with homeowners who have been affected, and I heard 

the same stories we have been hearing in our office, which is, ‘‘I 

called the bank to tell them we had a decrease is income. They 

said, ‘Hey, you are preapproved. Stop making your payments for 3 

months.’ ’’ And, really, they were calling the servicer, if you will, 

and not always a bank. 

But it turned out that the servicer charged a huge amount of fees 

once they reduced their payment or stopped making their payments, fees that the servicer would not otherwise have had access 

to. 

Then there was a recent article also noting that servicers make 

a tremendous amount of money when they put on substitute property insurance, sometimes charging up to 10 times what a homeowner would normally pay, and the servicer gets a huge fee back, 

hidden to the homeowner in that regard. And so servicers kind of 

have an incentive to get families into trouble, almost, and I am not 

sure that has been thoroughly explored. It is certainly a new element to me. I had not come to think that this was part of the challenge with servicers. But any comment on that would be helpful, 

but, also, that is why I felt lifeline bankruptcy power, even on existing loans, would be helpful because it creates a countervailing 

incentive to close the deal and help address these problems. 

Mr. ZANDI. Well, this is what I would suggest. FDIC Chairwoman Sheila Bair has recently proposed the establishment of a 

fund financed by the mortgage servicers and mortgage companies 

designed in the same way as the BP fund. So if you are a homeowner who has been wronged by this process, you can go before 

this commission and air your grievances, and if it is determine that 

you have been wronged, then the fund would pay you a fee. 
450 

I think this would be an appropriate way of getting the attention 

of the servicers and the mortgage companies, and it would provide, 

as you said at the beginning of your comment, the catalyst for getting them to work on this process in a more effective and prudent 

way. 

So that would be my approach as opposed to there are potentially 

significant unintended consequences from going back and rewriting 

bankruptcy law on existing mortgages that are—you really have to 

think that one through. You know, in deep crisis, I was sympathetic to that argument, particularly when the private label securities market was at the heart of the problem. But, increasingly, that 

is no longer the problem. It is the loans on the books of the banks, 

at Fannie Mae, Freddie Mac, and the FHA. So I am less sympathetic to that, and I do not think that would be the way I would 

go. 

Senator MERKLEY. I would ask everybody else to weigh in except 

my time has expired, so thank you very much. 

Chairman CONRAD. Thank you very much. 

Senator Begich. 

Senator BEGICH. Thank you, Mr. Chairman. 

I want to followup on—— 

Chairman CONRAD. Can I just say, for Senator Cardin’s benefit, 

Senator Begich was here earlier. 

Senator BEGICH. I apologize. I had to rush out and make a quick 

call, so thank you, Mr. Chairman. 

Let me, if I can, followup on a couple of things. One, Mr. Edwards, I agree with you in regards to States and bankruptcy that 

we should not go down that path. That would be very—I mean, 

even the talk of it right now, from what I understand, talking to 

multiple people who deal in the business of municipal bonds, State 

bonds, tax-free bonds, it is having an effect on the market, and I 

know States are probably feeling that, even though they will not 

say that the rates have been adjusted upwards, but there is some 

risk now being calculated into what we might do or not do. So even 

the notion of talking about it, I think, is not very healthy for what 

we need to get through. So I want to say I agree with you in that 

regard, that we should not be going down that path. 

I would be interested in each one of your quick comments on 

that. Obviously, Mr. Edwards, you have already made a comment. 

If each one of you could just quickly comment on the idea of States 

walking down that path of declaring bankruptcy, which again, I 

think it would be a huge mistake. 

Mr. SCHEPPACH. Senator, I can tell you that we have discussed 

it and we have—basically, Governors are pretty united in opposition to that legislation. Nobody is asking for it. Nobody wants it. 

And we agree with you that the mere conversation around it is 

foreseeing a small risk premium to be built into the bonds. So we 

are very strongly opposed to it across the board. 

Senator BEGICH. I know they call it on the market sometimes 

headline risk. Go ahead. 

Mr. VON WACHTER. So I second the views of Mr. Edwards and 

Dr. Scheppach. I agree that we should not talk about bailouts. 

However, there are some areas where there is a close connection 
451 

between Federal and State funding. When I give an example, it is 

the unemployment insurance system—— 

Senator BEGICH. Sure. 

Mr. VON WACHTER [continuing]. Where the Federal Government 

stands in by design of the system after the States run out. And one 

thing that this administration has already done, has given an impulse to the reform of State-level unemployment insurance systems 

to funding from the ARRA. And one additional step that could be 

taken to help the long-term sustainability of these programs and 

sort of then relieve both State budgets and the Federal budget is 

to mandate a higher wage base. The wage base—— 

Senator BEGICH. I do not want to get into the program. I specifically narrowed in on the fact that States could declare bankruptcy. 

In other words, I understand the program. You are right. There are 

partnerships and relationships that the Federal Government has. 

Mr. VON WACHTER. The UI system is particular because inherent 

in the system is the States can essentially lend—would borrow 

from the government—— 

Senator BEGICH. Sure. 

Mr. VON WACHTER [continuing]. Once the trust funds went out, 

right. 

Senator BEGICH. Right. 

Mr. VON WACHTER. So there is a typical system where you see 

them in a small way. So States have not an incentive to buildup 

sufficient trust funds because they know they can come get more 

from the government. So this is a system where it is more concrete, 

but concrete steps could be taken to avoid the behavior that the incentive—the availability to borrow later on creates setting too low 

a tax base and collecting taxes. So the same thing happens, then, 

at a broader level, the State budgets. But the possibility to possibly 

be bailed out. But it probably leads to a pay-as-you-go in situations 

where you really should be building up funds—— 

Senator BEGICH. Building up a fund. 

Mr. VON WACHTER [continuing]. In good times for bad times, and 

in many States, you see the opposite. Taxes are low in good times 

and then they have to rise in bad times. And so talking about bailouts would encourage that and we want to go in the other direction, and UI is a particular example. 

Senator BEGICH. Dr. Zandi? 

Mr. ZANDI. Yes. I do not think that is a good idea. I think the 

bankruptcy—— 

Senator BEGICH. Bankruptcy. 

Mr. ZANDI. Yes. I think that the States have all the tools they 

need and that this would be an error. 

Senator BEGICH. And I appreciate that. I just, again, want to 

kind of put that out there because I think we create a problem by 

going down the path of discussion when we know Governors are 

not asking for it. No one is asking for it, really, and it is just a very 

bad thing. 

Let me go into two other areas, but first, I want to give a 

thought. I, like Senator Sessions, in a different way, I was elected 

a mayor of a city that walked into a $215 million budget with a 

$33 million hole in it and we had to resolve it. We had a threeprong attack. One was spending issues. One was revenue. One was 
452 

also investment in basic core infrastructure—water, sewer, roads, 

so forth. I have turned down—when I was mayor, I turned down 

the Federal resources when offered for the simple reason we do not 

have the money, and so you cannot do it, and also sustainability 

of those resources. 

I guess I want to—Senator Sessions brought up a good point, and 

you are right, there is kind of this addiction, and the reality is, it 

is really up to the Governors and, I would say, mayors, which have 

actually a larger amount of the debt out there than States do in 

the sense of what is out there, but they have just got to say no. 

It is about leadership. For them just to say, well, maybe I will get 

10 percent from the Feds, there are many times I just said no. And 

what we did, we actually changed our policy. We never used onetime resources for ongoing expenses. That was—I had to tell the 

local city council, which was hard for them to get off of that gravy 

train. Once we did that, we created stability, and that is—I mean, 

Governors, mayors—mayors, and I am biased, I am a former 

mayor, I am not a Governor, never have been—we have to do it because otherwise we will get yelled at at the grocery store. So we 

do not get really a choice. There is no more hiding us. 

So I guess part of it is this gap of sometimes leadership just to 

say no, even when your constituents may think it is a wise thing, 

but getting off these one-time moneys are, to me, the right way to 

deal with budget, even from the Federal end. You know, we use 

one-time moneys to kind of solve a problem and then hope it all 

works out next year. That is very dangerous. 

But one thing I want to mention and make sure I heard you 

right, because I think I heard the same statistic, the pension 

issue—and our State had to deal with it. We dealt with it. Cities 

dealt with it. We are more sound than ever before. But really, 

when you figure it all out, it is about 4 percent or whatever the 

percent is. It is a small percentage of the overall budget and I want 

to echo and make sure I heard what you said. 

States are managing their way kind of through it painfully. But 

should there be a more consistent rules of the game on how they 

do this, because each State does it differently. And you are right. 

It is very convoluted, and especially to the bond markets, to understand how stable is that State, how stable—can you give some 

thoughts on that? I am not suggesting more regulation, but I am 

just trying to figure out, how do you get some more uniformity here 

so the financial markets can respond the right way when crediting 

and scoring States for their bonds as well as cities. 

Mr. SCHEPPACH. The problem is that the pension things are pretty much considered to be legal contracts—— 

Senator BEGICH. Correct. 

Mr. SCHEPPACH [continuing]. And each State—— 

Senator BEGICH. Ours is actually vested in our Constitution. 

Mr. SCHEPPACH. OK. Yes, you are right. 

Senator BEGICH. That is how legal it is. 

Mr. SCHEPPACH. But sometimes it includes issues. A lot of times, 

for example, the COLA is not in the contract, so you have a lot of 

flexibility there. Or it may be that the age is not in it and other 

components of it. 
453 

So I think they are working through it. As I say, we had 30 

States in the last 5 years and we have ten now, and they have 

moved from sort of these small incremental to bigger. The basic 

problem, though, is that they still have defined benefit as opposed 

to defined contribution—— 

Senator BEGICH. Right. 

Mr. SCHEPPACH [continuing]. Although some, like Utah, are beginning to move at least hybrid types of systems. 

Senator BEGICH. That is what we have done. 

Mr. SCHEPPACH. So, I mean, I think the rating agencies are able 

to look at the liabilities there and the liabilities on bonds and make 

informed decisions. So I do not know that uniformity is really necessary. I am pretty confident in this area that there is serious focus 

on this right now. 

Senator BEGICH. And I will end on this, because my time has expired, but I know there are always these headlines about the crisis 

in the States. But really, what you are stating, and I want to make 

sure I am hearing you right, the majority of the States have really 

started to deal with this because they recognize the ongoing cost 

is not millions, but billions. Is that a fair statement? 

Mr. SCHEPPACH. Yes, I think it is, and it is—I think States 

should be given some credit. They have cut spending by $75 billion 

over the last two years. That is not from what I would argue is 

CBO’s sort of inflated baseline. That is against actuals. 

Senator BEGICH. That is real dollars. 

Mr. SCHEPPACH. That is pretty tough stuff. And I think they understand that they have a lot more to do, but I think they are prepared to do it. 

Senator BEGICH. Very good. Thank you. 

Thank you, Mr. Chairman. I know my time is up. 

Chairman CONRAD. I thank the Senator. 

Senator Cardin. 

Senator CARDIN. Thank you, Mr. Chairman. Let me thank you 

for the series of hearings that we have held on the national deficit, 

and I want to thank this panel. 

Dr. Scheppach, I want to followup on Senator Begich’s point because we have talked about the States, but I do not think we have 

talked enough about the risk factors of municipal and county governments. And if you are a Governor, you have proprietary interest 

to avoid a problem with a county or a municipality within your 

State. Today, our State governments have limited capacity as to 

how they can respond. They have to take care of their own budgets. 

So they are not as well prepared as perhaps they would need to 

be to avoid a consequence in their State that could have impact not 

just on that town or on that county, but could have impact on the 

entire State, in fact, could have impact well beyond the borders of 

one State. 

So I just want to get your assessment as to how much attention 

the Governors are paying to the problems of municipal and county 

governments, as they are obviously in a more difficult position. 

Mr. SCHEPPACH. I hate to say this. In a sense, they are into survival for themselves, to some extent, focusing on their own problems. There are some States, like Pennsylvania, who actually had 

laws that did not necessarily require but allowed them to help mu-
454 

nicipalities and so on, but a lot of States do not have that. So I 

think that they are not focusing on that issue a lot, although personally, I think, because I looked at it to some extent relative to 

the States, it is a bigger problem. But again, I think if there are 

some that go into default, my sense is that they are going to be 

fairly small, that, again, you look historically and there has not 

been a lot of defaults in this particular area. So particularly if we 

begin to get some positive revenue growth, I think they will be able 

to work through this, as well. 

Senator CARDIN. I think that is a pretty direct, honest answer, 

and I appreciate that. We are all in a mode right now of survival, 

and that is true at the national level, also. But I would just like 

to remind my colleagues of the concept of federalism, that the Federal Government has responsibility as it relates to the States, 

working with the States. But I also believe that our municipalities 

and counties, which are creatures of our State, the State has a responsibility to work with our municipal governments. They have no 

other place to go. 

A lot of Governors are now—at the national level, we are clearly 

going to be providing less resources to our States. There is no question. At the State level, you are going to be providing less resources 

to the counties. The counties are going to be providing less help to 

municipalities. The municipalities do not have anywhere else to go. 

So I think we all need to understand, as we look for this credible 

plan to deal with our national debt, that it is the same people who 

live in municipalities, counties, States, and the Federal Government and that it does not do a person in Baltimore City any good 

if the plan is credible at the national level but dumps its problems 

to the taxpayers of Baltimore City and the people who live in Baltimore City and they have no chance of survival under the policies 

taken by the Federal Government and the State government. 

So I like the language that our Chairman has used, and I think 

this is worth repeating. The Chairman said that we need a credible 

plan. It does not have to be a radical change overnight. We need 

a credible plan that gets us to the numbers that, Mr. Edwards, you 

were referring to. We want to get to those numbers. So I think we 

need to be mindful that we do not want to see the people of our 

nation harmed because we have taken care of our own problem at 

the national level, but we have dumped everything off on the 

States, or the States have dumped it off on local governments. 

Dr. Zandi, I want to get back to the mortgage issue because it 

is still a huge problem in our community and all communities, and 

your exchange with Senator Merkley. Do we have a structure in 

place that could implement the policy that you are suggesting? 

That is, do we have a credible way of being able to determine 

whether a potential person who is subject to foreclosure quickly 

could determine whether they are entitled to some form of help? 

Mr. ZANDI. No. I do not think we have a mechanism in place that 

is appropriate and is helpful enough. Some States have been more 

aggressive than others. I think the State of Connecticut, New York, 

I think probably New Jersey put in processes with third parties involved to try to facilitate this for homeowners, but it is not something that is being done nationwide or in parts of the country 

where the foreclosure problem is particularly acute. It is a problem 
455 

coast to coast, but in some places, it is obviously very acute. So, no, 

I do not think that we have addressed that adequately enough. 

Senator CARDIN. So if we were just to put in a moratorium without having a process in place, is that really going to help the situation or not? 

Mr. ZANDI. No. I am not advocating that we have a moratorium. 

I am advocating that we, through the regulatory process, require 

some changes in the way the mortgage services conduct their business. So one point of contact, no dual tracking, a third-party review, a fund established to compensate homeowners that are 

shown to be wronged in the process. I think if you do those things, 

and I do not think—it is going to be very difficult to do this legislatively, but through the regulatory process, I think that that would 

be helpful and make a difference in facilitating the foreclosure 

modification process. 

I think we are at a point now where we have some tools. We 

have just got to make them better. We need to work through this 

process as fast as we can. We need to get on the other side of this 

so that the housing market can begin to function properly and 

house prices start to rise. And we need to work through the foreclosure modifications. 

Senator CARDIN. Well, I agree. We are still in a very, very difficult position on these issues, and there is uncertainty in the marketplace, also, which is not helpful. So the further we could clarify 

this, and I agree with you, I think we have enough tools out there. 

We just need to make sure that they are used and that the regulators do their jobs. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Let me—I had deferred my questioning time, 

because we were late because of the prayer breakfast this morning, 

to members being here, so I kind of asked questions as we went 

along, but I want to come back to some of the fundamental questions I wanted to ask. 

As I see it, in terms of the work of this committee, one of the 

most important things we can do is contribute to getting on a more 

sustainable course. How serious a threat do you believe it is to our 

long-term economic strength to having deficits of 10 percent of 

GDP this year and being on a course to a debt that would be 233 

percent of GDP, according to CBO, if we stay on the current trend 

line? Dr. Zandi, how big a threat do you see that to our long-term 

economic security? 

Mr. ZANDI. It is lethal. I mean, I think if you do not make 

changes to change those forecasts in a substantive way, our nation’s economy will be—and our living standards will be diminished 

for generations to come. So I think it absolutely, positively has to 

change. 

Chairman CONRAD. Well, that is about as clear as it can be. Lethal is pretty strong. And, frankly, I agree with it. I believe that. 

So then the question becomes a matter of timing. I personally believe, and the commissions, all of the bipartisan commissions have 

come to roughly the same conclusion, that is, do not make big 

changes right now, but put in place a plan that makes big changes 

over this decade. In the case of the Fiscal Commission, we reached 

a determination we needed to reduce the deficit $4 trillion over 
456 

that period of time—four trillion. That is real money. What do you 

say with respect to timing and size of the changes that are required? 

Mr. ZANDI. I think the Fiscal Commission laid out a very good 

road map for you. There are two commissions, and both roughly 

came to the same place and laid out roughly the same path, and 

I think we should move in the direction that they have laid out for 

us. 

So the deficit-to-GDP, let us call it nine, 10 percent this fiscal 

year. If we can get that down to two to 3 percent of GDP by the 

end of the decade and do that in a way that everyone believes we 

are going to do that—and we do not have to do it in 1 year. We 

can do it over that period. 

And we do not have to begin now, and we should not. We should 

start that process when the economy is moving forward in a clear 

and definitive way, and my benchmark for that would be a falling 

unemployment rate. As soon as the unemployment rate is definitively moving south, I think at that point we can conclude that we 

are off and running and we need to then refocus and start imposing 

real fiscal discipline and austerity. Before that point in time, I 

think it would be—we will probably make our way through, but it 

would be, I think, a risk that we should not take. 

And so, therefore, in 2011, I think you have done what you need 

to do. I think we are in good shape. I would not change fiscal policy, the thrust of fiscal policy for calendar year 2011. But beginning 

in 2012 and through the end of the decade, I think at that point, 

we need to very, very disciplined with respect to reducing those 

deficits, get it down to 2 percent of GDP. 

Chairman CONRAD. So in dollar terms, what size of package 

would be required? 

Mr. ZANDI. So if you meet my, sort of the numbers I gave you 

earlier, and your bogey is two-and-a-half percent of GDP, that is 

$375 billion a year in today’s dollars, right. So to get that down to 

zero, that $375 billion to zero in five to 7 years, that is $50 billion 

a year in today’s dollars. Obviously, it is more dollars in the future, 

but that is roughly what you need to do. It has to be very clearly 

done. 

Chairman CONRAD. It has to be credible that it is going to be 

done. 

Mr. ZANDI. Credible, and I think there are many elements of 

credibility. I mean, one is, and again, I am hearkening back to the 

commission—— 

Chairman CONRAD. So we are talking—just in dollar terms of the 

total package, you are very close to the kind of $4 trillion number 

that the commission came up with. 

Mr. ZANDI. Yes. Exactly. 

Chairman CONRAD. Dr. Scheppach? 

Mr. SCHEPPACH. The only point I would make is that, let us face 

it, 95 percent of our problem is health care costs. We kind of know 

what to do in Social Security when we get the political will. So I 

think the structure of the package is also very, very important. 

Again, you can cut domestic discretionary and get the generated 

savings there, but I suspect you are not going to get the impact on 

financial markets if it is a package of domestic discretionary. It 
457 

seems to me it has to be health care, and that is a problem because 

I do not think we know how to do that and we have some more 

experimentation. But I think 90 percent of that problem is health 

care. 

Chairman CONRAD. You know, let me just say this. All roads lead 

to health care, but what the commission concluded, and I think correctly so, everything has to be on the table. You have to do revenue. You have to do domestic discretionary spending on both the 

defense and non-defense side. I will tell you, testimony before the 

commission on some of the things that are happening at the Department of Defense was startling in terms of cost. You have to do 

the entitlements. And obviously, the biggest entitlement, the place 

where we have the biggest unfunded liability is in the health care 

accounts. 

Now, I know I do not want to reopen the health care debate, but 

I would say this to my colleagues. I was deeply involved in that effort, however imperfect it is. We took every idea, virtually every 

idea for reducing health care expenditure that analysts gave us 

from whatever perspective. 

So the best analysts—in fact, Senator Gregg and I wrote a letter 

to CBO and asked them, what are the things that we could do that 

would give us the biggest bang for the buck at reducing health care 

expenditure? CBO came back and told us, No. 1, you have to 

change the tax treatment of health care, and economists from almost every philosophical perspective said that is the case because 

you are encouraging over-utilization. 

No. 2, they told us, you have to change the payment methodology. You have to quit paying for procedures and you have to move 

to paying for health care outcomes. 

Third, they told us, you have to put in place some ongoing mechanism to get the ideas that work in terms of bringing down costs, 

getting them implemented. And so we put in place this whole new 

institution to try new things, and if they work, to implement them 

nationally. 

I am sorry. Did you want to add a point to that? 

Mr. SCHEPPACH. Well, the only point I would mention, and this 

is not a position of the organization, but having spent a fair 

amount of time on this, I almost think one thing that you ought 

to look at is to—because we now have all-payer data systems in a 

bunch of States which means we have a much better sense of what 

is driving the cost of health care, and it has to be done for everybody. One of the things I am concerned about, if you cut Medicare 

or Medicaid, it just gets shifted to the ERISA firms and so on. 

I almost think it has to be done State by State now, and one 

thing that may be worth looking at is you provide some incentives 

to States if, in fact, they begin to reduce the rate of increase in 

health care costs for everybody in the State, because I think it has 

to be addressed across the board. Some States may want to regulate. Others may want to do transparency. But I think it is an approach that may be worth looking at. 

Chairman CONRAD. All right. Senator Portman has joined us. 

Welcome. Why do you not take your time. And let me just indicate 

that Dr. Zandi needs to leave here at right about noon, so why do 

you not proceed, Senator Portman. 
458 

Senator PORTMAN. Thank you, Mr. Chairman, I appreciate it, 

and thank you for allowing me to come and speak. I have not figured out how to be at three hearings at once yet, so I apologize I 

did not get to hear all of your testimony, but I really wanted to 

come by and have the opportunity to speak briefly and hear from 

you. 

I love the fact we are talking about health care, and I think, Ray, 

you just mentioned the 95 percent figure. I am not sure that is accurate, but you should know that at this very table last week, Dr. 

Elmendorf said that health care is the No. 1 fiscal concern he has, 

and that is not a surprise because it is and it does drive the cost 

of Medicare and Medicaid, of course. 

I have a more sort of fundamental question for you about the impact of current deficits on our economic growth. There is all sorts 

of data out there about the future impact of the enormous debts 

that we are building up, and the CBO projections are sobering, to 

say the least. But what is the impact today? What we do not talk 

about enough, I think, and maybe you can correct me on this, but 

I believe that we are crowding out private investment. I believe 

that with a $1.5 trillion debt this year projected, or deficit this year 

projected and a debt that is on track to double in the next 10 years, 

that we are impacting our ability to get out from under the difficult 

economic conditions we have been in over the last couple of years. 

I just wonder if you could comment on that. I have heard people say that with a $1.5 trillion deficit, building on the $1.3 trillion and 

$1.4 trillion the last couple years, that there is maybe a point or 

point-and-a-half off of GDP. Do you agree with that? And if you 

could take it to the next level for me in terms of its impact on the 

economy, which would be the impact on jobs. What does that mean 

in terms of job growth in this country as we are struggling to deal 

with this exorbitantly high unemployment number even as the 

economy is beginning to grow? 

So I would start with Dr. Zandi, if it is OK, and then if we could 

work down the panel. 

Mr. ZANDI. I do not think the current budget deficit is crowding 

out private investment. I do not see evidence of that. The 10-year 

Treasury yield is 3.5 percent. B-double-A corporate borrowing 

yields are incredibly low. Even junk corporate bond yields are very 

low by historical standards. I do not think the cost of financing is 

an issue for companies. 

In fact, I think the large budget deficit is helpful in that it is 

supporting demand. For example, the tax cut deal that you came 

to at the end of last year, I think, has a very important provision 

that will cost money but will be very important to supporting investment in 2011, and that is expensing of any investment, and I 

think that is a very under-appreciated aspect of that deal that will 

provide a lot of investment and actually will add a lot of jobs. Businesses will go out and buy an airplane and they have to fill it, or 

they buy a piece of machinery and they have to install it and they 

have to man it. So I think that was very appropriate and very good 

policy. 

Now, having said all of that, I think I would entirely agree that 

we need to reduce these budget deficits moving forward when the 

economy is clearly off and running, and I think we are very close. 
459 

If everything sticks to my script, by next year, we should be in a 

measurably better place and the fiscal austerity that I think is important should begin at that point and we should engage in the 

kind of discipline necessary to ensure that we do not crowd out private investment because we will if the Federal Government does 

not pull back quickly once the economy is moving forward. 

Senator PORTMAN. Dr. von Wachter? 

Mr. VON WACHTER. So I agree with what Dr. Zandi said earlier, 

that we should be ready, or put mechanisms in place today to gain 

fiscal stability conditional on the unemployment rate falling. We 

should not start tightening our belts at a moment when we may 

need to do important investments, for example, support unemployed workers and help them when the time is coming, when their 

businesses are starting to hire to help them get out in the labor 

market. 

For example, we were talking earlier about the housing market. 

The difficulty, the regulatory difficulties in the housing market 

may take longer to fix. So if job growth is picking up beforehand, 

we want to be ready to, for example, give people unemployment insurance mobility bonuses to take up jobs in other regions. So we 

have to be able to spend and invest in areas that allow us to grow, 

to get out of the current situation, to then achieve fiscal sustainability when the unemployment rate is down. 

Senator PORTMAN. Dr. Scheppach? 

Mr. SCHEPPACH. Yes. I would probably agree with Mark, but I do 

think the faster you can enact the changes, the better, even if they 

are not going to go into effect really for a year or a year and a half. 

So to the extent that you can put together a package now and do 

it, I think that is very, very positive. 

Senator PORTMAN. Mr. Edwards? 

Mr. EDWARDS. I think the way—you know, I agree with Mark 

that the usual way economists think about crowding out is through 

interest rates. The government borrows more. Real interest rates 

go up. Less investment flowing to the private sector. But you can 

also think about it—and I agree that you do not really see that 

now. 

But Federal spending crowds out real resources in the private 

sector. You can think about it this way. If the Department of Defense is—the procurement budget is going way up or the size of our 

force structure is rising, you are taking very high-skilled and talented people out of producing stuff for the private sector for private 

markets and they are producing in the government sector. So the 

spending crowds out real resources, even as a separate sort of a 

mechanism from interest rates. 

I would say, in going back to the previous question on when we 

need to make these cuts, we should not think about this in terms 

of one big change, one big giant reform. We obviously have to do 

incremental stuff over time. This year, Congress can cut some defense. Next year, we can raise the Social Security retirement age, 

and on and on. I do not envy the job of House and Senate members 

over the next few years. It is going to be very painful to be a Member of Congress because you are going to have to cut every year. 

There is no more getting elected and just promising all kinds of 

goodies. That is all going away, I think, for—— 
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Senator SESSIONS. Well, as for paying and not cutting, as the 

past election showed, some people got shellacked in the past election—— 

Mr. EDWARDS. Right. 

Senator SESSIONS [continuing]. And a lot of that was because we 

spent too much. So the myth that somehow it is harder to cut than 

it is to spend—— 

Mr. EDWARDS. Right. 

Senator SESSIONS. I should not have interrupted. Excuse me, Mr. 

Chairman. 

Mr. EDWARDS. So one—— 

Chairman CONRAD. No, I think that is a very important point, 

because, frankly, we have—one thing Senator Sessions and I absolutely agree on is the need to put in place a credible plan as soon 

as possible. A place where we may have a difference is the timing 

and the make-up of the plan. We do not have a difference on the 

absolute essential need to put in place a plan that is serious and 

credible. 

Now, the place where I might differ from what I just heard you 

say is I think you need to have a plan that takes a series of votes 

now that makes these changes over time. That is, I do not want 

to see us in a situation where we do a little bit here and then we 

hope somehow that there is going to be a little more done, because 

my experience around here is you had better act while you have 

the window of opportunity and you had better put in place a multiple-year plan that has real discipline associated with it. This operating year by year around here is, I think, one of the things that 

gets us into trouble. 

Mr. EDWARDS. Yes. I mean, I sort of partly agree with that, and 

I think you can think about mechanisms you can put in place to 

kind of force changes. I think David Malpass might have testified 

here the other day that he is proposing an idea that he puts sort 

of a cap on public debt as a share of GDP which would force sort 

of constant annual changes to get under that limit. 

I proposed the idea in my testimony of putting a cap on the 

growth in total annual outlays. You pick a number, three or 4 percent, put it into a statute. Congress has to make sure outlays do 

not rise more than that every year, which would sort of be like the 

1990 BEA, except it would be the overall budget. And again, that 

would force change, force Congress to focus on discipline every 

year. 

Chairman CONRAD. We need to shut down because we had promised witnesses that they would be out by about noon, and I apologize we are a little beyond that. But I want to thank this panel, 

just outstanding and we very much appreciate your taking the time 

and energy to present to us here this morning. Thank you. 

The committee is adjourned. 

[Whereupon, at 12:06 p.m., the committee was adjourned.] 
(461) 

THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

PROPOSAL 

TUESDAY, FEBRUARY 15, 2011 

U.S. SENATE, COMMITTEE ON THE BUDGET, The committee met, pursuant to notice, at 2 p.m., in room 608, 

Dirksen Senate Office Building, Hon. Kent Conrad, chairman of the 

committee, presiding. 

Present: Senators Conrad, Murray, Wyden, Stabenow, Cardin, 

Whitehouse, Merkley, Begich, Coons, Sessions, Enzi, Crapo, Ensign, Cornyn, Graham, Thune, Portman, Toomey, and Johnson. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to say for my colleagues, there will be a full turnout of 

the committee for this hearing, but we have a series of things going 

on simultaneously. The Tuesday caucuses of both parties are still 

underway. There is an event at the White House that has members. The Finance Committee is meeting with the Secretary of 

Health on the President’s budget simultaneously. And we have a 

vote scheduled at 2:35. 

Senator SESSIONS. But you are minding the store. 

Chairman CONRAD. We are minding the store, Senator Sessions. 

I want to indicate that because of the kind of turnout we are anticipating and because of the interruption for the vote, my intention 

will be to do 5-minute rounds, and then if we get a chance, we will 

go deeper, have a second round. But with all these hurdles, I think 

that is the only way we can get through this afternoon. 

I want to welcome everybody. Today’s hearing focuses on the 

President’s budget proposal for 2012. Our witness today is the 

OMB Director, Jack Lew. Welcome back to the committee, Jack. 

You are no stranger here. Thank you again for agreeing to take on 

this very challenging task at this difficult time. I am sure when 

you finished your first term, you never imagined you would be 

serving again and that it would be at a time when the Nation faces 

a 1-year deficit of over $1.5 trillion. When you last left, you left a 

balanced budget. In fact, you left surpluses, and I think you can 

be forever proud of your legacy. 

This is a challenging time for the country and the budget certainly reminds us of that fact. I have said consistently over the last 

2 years that during the financial crisis and economic downturn, I 

think the administration acted quickly and decisively to make decisions that rescued us from a financial collapse. And I would credit 

the ending days of the previous administration for starting to put 
462 

in place those policies to prevent what I believe would have been 

a financial collapse. 

At the same time, I have been critical about the need for similarly decisive action now to pivot to dealing with our long-term 

debt threat. Make no mistake, we are at a critical juncture. We are 

borrowing 40 cents of every dollar we spend. Spending is at the 

highest level of a share of our economy in more than 60 years and 

revenue is at its lowest level as a share of the economy in over 60 

years. Not surprisingly, we are seeing deficits, then, at record levels. Deficits are now projected to be over 10 percent of GDP this 

year. 
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This next chart depicts the gross Federal debt as a percent of the 

economy under the President’s 2012 budget. It shows the debt 

reaching 100 percent of GDP this year and rising slightly throughout the remaining budget window. It is important to remember 

that many economists regard anything above 90 percent as the 

danger zone. And let me repeat what I have said at every meeting. 

The findings of economists Carmen Reinhart and Ken Rogoff in 

their book about 200 years of financial crisEs, and I quote, ‘‘We examine the experience of 44 countries spanning up to two centuries 

of data on central government debt, inflation, and growth. Our 
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main finding is that across both advanced countries and emerging 

markets, high debt-to-GDP levels, 90 percent and above, are associated with notably lower growth outcomes.’’ 

So, look, these deficits and debt are not just numbers on a page. 

They are the fundamentals that have a lot to say about our future 

economic prospects. What is the economic opportunity going to be 

for our people? What are the job creation opportunities going to be? 

What is the economic position of our nation going to be? 
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And unfortunately, as disturbing as the current situation is, the 

long-term outlook is even more dire. It is this deteriorating longterm outlook that is the biggest threat to this nation’s future economic strength and security. 

Now, let me give credit where credit is due. The President’s 

budget does include modest steps for addressing the fiscal situation. Here are a few key savings that I have identified in the President’s budget. 

No. 1, a 5-year non-security discretionary freeze with estimated 

savings of $400 billion. That is not insignificant and I praise the 

administration for it. 

They also have paid for the doc fix for 2 years with specific offsets. That, too, is an advance. 

Third, they have advocated significant changes to the Pell Grant 

program, eliminating the second Pell Grant payment and ending 

in-school interest deferment for graduate students. 

Fourth, they have improved the ability of States to repay the unemployment insurance fund. 

And five, they have authorized the Pension Benefit Guaranty 

Corporation to raise premiums to better ensure the program’s longterm solvency. 
466 

Critically important steps. I applaud the President for those proposals. I wish there had been even more. I supported the deficit 

and debt reduction plan assembled by the President’s Fiscal Commission, and while not perfect, continue to believe that it provides 

a better way forward beyond the next 2 years. I give the President 

good marks for the next 18 months to 2 years. What I am concerned about is the longer term, and over the next decade, I believe 

we need a package of debt reduction approaching what the Fiscal 

Commission laid out of some $4 trillion. 

What we need, I believe, is an entire package with everything on 

the table that deals with fundamental reform of our tax system, 

and we have to address the entitlements, because with a doubling 

of people eligible over the next coming years, we are on an 

unsustainable course. I believe what is needed is bipartisan recognition that we have to face up to the budget realities. Both sides 

have to be willing to move off their fixed position and find common 

ground, and that means we must look beyond the mere 12 percent 

of the budget that is being focused on when we look at just nonsecurity discretionary spending. That is only 12 percent of the 

budget. That cannot carry the full load of facing up to the debt 

threat. You cannot solve this problem by looking at just 12 percent 

of the budget. This problem is too large and too important. 
467 

Let me conclude by citing recent testimony from Federal Reserve 

Chairman Bernanke in which he cites the benefits of acting now. 

Specifically, he stated, ‘‘Acting now to develop a credible program 

to reduce future deficits would not only enhance economic growth 

and stability in the long run, but could also yield substantial nearterm benefits in terms of lower long-term interest rates and increased consumer and business confidence.’’ 
468 

I hope people are listening. I hope my colleagues are listening. 

We cannot afford to wait until markets collapse, and I say to my 

colleagues, that is the course that we are on. I believe it without 

question, that we are on a course that will lead to a financial disaster, and it is our responsibility to bring the country back from 

the brink. It is our obligation and it has to start here. 

With that, we will turn to Senator Sessions for his opening statement, and I want to at this point thank Senator Sessions and his 

team for the courtesy that they have given us in working out the 

scheduling of hearings going forward. It has been a very positive 

and constructive working relationship. I want to thank Senator 

Sessions and your entire team for the cooperation. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you. Thank you. We have a lot to do 

and you have had a lot of hearings and a lot of work. We have no 

choice but to support you in that and we will continue to do so. 

Mr. Lew, thank you for joining us at this hearing, and it is an 

important one at a critical point in history. 

Yesterday, the President submitted his formal budget to the Congress, as law requires. It is the President’s third budget and the 

last budget that will cover a full year of his current term in office. 

It was one of his last chances to put forward a serious proposal to 

address our growing financial crisis. 

Our crushing debt undermines confidence in our economy, weakens our standing in the world, and results in devastating job losses 

to Americans. A recent study showed that our debt may already be 

costing us a million jobs a year. Nearly every expert that has testified before this committee has sounded the warning call. So, too, 
469 

has the International Monetary Fund, Moody’s, our own Federal 

Reserve. All have cautioned us to turn back from the abyss of runaway spending and debt. 

And yet the President has submitted a budget yesterday that 

fails to change course. It was a very un-serious response to a very 

serious problem. The President’s budget would increase spending 

every single year, doubling the nation’s debt by the end of his first 

term and tripling it by the end of his budget. It would also impose 

$1.6 trillion in new taxes on families and businesses, a further barrier to jobs and growth. 

Erskine Bowles, the Democratic Co-Chair of the President’s own 

Fiscal Commission did not mince words Sunday. Speaking to the 

Washington Post, Mr. Bowles said that the budget goes, quote, ‘‘nowhere near where they will have to go to resolve our fiscal nightmare.’’ 

Across the nation, editorials rebuked the President for not rising 

to the occasion. The Washington Post said the President punted. 

The Los Angeles Times said the budget landed with a thud. USA 

Today said the budget was a shame and economically risky. The 

Wall Street Journal said it was transparently cynical. The New 

York Times said the budget is most definitely not a blueprint for 

dealing with the real long-term problems that feed the budget deficit. Investors Business Daily said the President’s plan, quote, ‘‘will 

lead inevitably to a weaker economy and perhaps even default.’’ 

My goal here is not to excoriate the President, but for me, it is 

a point of sadness, not satisfaction, that we have seen such a weak 

response. A historic opportunity has been lost. Maybe it can be recovered, but at this moment, it has been lost. Like when President 

Nixon went to China or President Clinton signed welfare reform, 

this could have been the President’s moment to rally diverse political factions behind a common cause. I believe the country is ready. 

Our nation is confronted with a defining challenge. Our financial 

future hangs in the balance, but the President has suggested he is 

waiting for Congress to put forward a serious proposal first. That 

is not leadership. It is going to be hard for Congress to fulfill that 

role without Presidential leadership. 

Did Winston Churchill say he was waiting for Parliament to 

come up with a plan to win the war? When a nation is faced with 

any threat, great or small, financial or military, it is the job of the 

nation’s chief executive to step forward with a plan. But not only 

has the President failed to lead, but his administration, sad to say, 

has consistently attacked Republicans when they do step up and 

put forward bold ideas to reduce spending or address our spiraling 

debt. 

In recent days, it seems the White House has been more interested in spend than in honest conversation about the serious challenges we face. What the President does not seem to realize is that 

the fight over our budget is about much more than politics. It is 

about economic survival. 

But while I am deeply disappointed, my confidence in the future 

is not diminished. If Washington does not change direction, the 

American people will change the direction of Washington. We see 

Governors like Governor Christie and Governor Cuomo in New 

York gaining popularity and strength from making tough choices. 
470 

Significant spending reductions may not be easy; they are, indeed, 

not. But they will make us stronger and more prosperous. It is a 

tough road, but it is the right road. It is the road which leads to 

a better future. It is the road we have to be on, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Sessions. 

Now we will turn to Director Lew for his opening statement. 

Then we are going to go to questions. 

I would say to my colleagues, again, because we face a vote at 

2:35 and because of the notice by our colleagues that all of them 

intend to be here, we are going to do five-minute rounds and we 

will try to get to a second round. 

Director Lew, please proceed. And again, welcome back to the 

committee. 

STATEMENT OF HONORABLE JACOB J. LEW, DIRECTOR, U.S. 

OFFICE OF MANAGEMENT AND BUDGET 

Mr. LEW. Thank you, Mr. Chairman, Senator Sessions. Thank 

you both for the kind words personally about me. It is good to be 

back here. I remember very fondly my last testimony as Director 

on the last day I was in office and I had a chart that projected a 

surplus of $5.6 trillion over the next 10 years. How far away that 

seems, and that is what we are going to be talking about today, 

how we can turn the tide. 

After emerging from the worst recession in generations, we face 

another historic challenge. We need to demonstrate to the American people that we can live within our means and invest in the 

future. We need to work our way out of the deficits that are driving 

up our debt and at the same time make tough choices to out-educate, out-build, and out-innovate so that we can compete with our 

rivals around the world. This is what it is going to take to return 

to robust economic growth and job creation in the future. 

This is the seventh budget that I have worked on at the Office 

of Management and Budget and it is the most difficult. It includes 

more than $1 trillion of savings from policy, two-thirds from lower 

spending, and it puts the Nation on a path toward what we are 

going to call for the moment fiscal sustainability. That means that 

by the middle of the decade, the government will no longer be adding to our debt as a share of the economy. Clearly, it is not far 

enough. We all agree there is more work to do. But in order to 

start bringing down the debt, we have to stop adding to it, and this 

budget would get us there. 

By the middle of the decade, we will be able to pay for our current bills and remain in what is called primary balance for many 

years after that. The President has called this budget a downpayment because there is still going to be work to do to deal with our 

debt and to address the long-term challenges. But we cannot start 

to pay down the debt until we stop adding to it. 

The budget lays out a strategy for significant deficit reduction. 

It is the most significant deficit reduction in a comparable period 

since the end of World War II. It will bring our deficit into the 

range of 3 percent of the economy by the middle of the decade and 

stay there for the rest of our budget window. 
471 

Changing this trajectory of our fiscal path is a significant accomplishment, but to do it, it will take tough choices and I would like 

to just highlight a few of them. 

The budget, as you have noted, includes a 5-year freeze on nonsecurity discretionary spending. This will save $400 billion over the 

next decade and it will bring spending for this part of the budget 

down to the level it was at when President Eisenhower was in the 

Oval Office. To achieve savings of this magnitude, it is going to require more than just cutting waste and fraud and abuse and duplicative programs. We clearly need to start there, but we will not get 

the job done if that is all we do. 

We are going to need to make cuts in places where, if we were 

not facing the kinds of difficult fiscal challenges that we face, we 

would not be making cuts, places like the Low Income Home Energy Assistance Program and Community Development Grants for 

cities and counties. 

In national security, where we are not freezing the budget, we 

are also making real cuts. Defense spending over the past decade 

has been growing faster than inflation and we can no longer afford 

to sustain that. This budget will cut $78 billion from the Pentagon 

spending plan over 5 years, which will bring defense spending 

down to zero real growth. This is a level that the Secretary and the 

military leadership believe we can do without harming our national 

security, but it will require reductions, and reductions in weapons 

programs that we do not need and we cannot afford. 

We also have additional savings that come from bringing our 

troops home. The troops coming home from Iraq will mean that the 

spending on overseas contingency operations will go down, and 

when you look overall at our defense spending, that means they 

will be 5 percent—more than 5 percent below the request level last 

year. 

As has been noted before and I think we hopefully all agree is 

the case, just cutting discretionary spending will not solve our fiscal problems, and this budget deals with many other issues and it 

deals with mandatory spending and revenue to help deal with our 

fiscal challenges. 

I would like to use two examples of what we are doing in this 

budget to confront these fiscal challenges. For the past number of 

years, there are two areas where Congress has year after year 

taken legislative action for reasons that have bipartisan support. I 

think there is, for good reason, bipartisan support that we should 

not see Medicare reimbursement rates for doctors go down by 30 

percent and we should not see middle-class families be pushed into 

the Alternative Minimum Tax. The problem is that the legislation 

to deal with that has not been paid for, and until last December 

when, frankly, there was a very good and right decision to pay for 

the doc fix, it had not been paid for. 

This budget says we have to stop that. We have to start paying 

for this. And we have specific savings proposals, as the Chairman 

noted, that would pay for the doc fix for the next 2 years. That 

means $62 billion of savings in mandatory programs, dozens of specific program changes so that we can have a $62 billion offset to 

pay for 2 years of the doc fix, so between action taken last year and 
472 

that, we will be able to have time to work toward a new sustainable set of reimbursement policies. 

In the case of the Alternative Minimum Tax, it has not been paid 

for in the past. This budget proposes to pay for it and it proposes 

to do so by putting into the tax code a provision that would limit 

the value of itemized deductions for the top taxpayers, that is families of $250,000 and above, so that they would get the same benefit 

for their itemized deductions that the bracket just below them gets. 

This would return the value of deductions to where it was in the 

Reagan administration. It would be a step toward doing something 

that the Commission proposed, which is that we start to control 

spending in the tax code. These are both downpayments on longterm reform to reduce the deficit further and the administration 

looks forward to working with the Congress. 

The President has in the State of Union and the budget made 

clear that we are going to need to work together to solve a number 

of additional problems. In the State of the Union and the budget, 

the President called for deficit-neutral corporate tax reform so that 

we can simplify the system, eliminate special interest loopholes, 

level the playing field, and importantly, lower the corporate tax 

rate for the first time in 25 years so that American businesses will 

be more competitive. 

And while it does not contribute to our deficits in the short- or 

medium-term, the President has laid out his principles to strengthen Social Security and he has called on Congress to work in a bipartisan fashion to address this compact for future generations. 

As we take these steps to live within our means, we also invest 

in areas critical to the future economic growth and jobs creation. 

We invest in education, innovation, clean energy, and infrastructure. But even in those areas, we have had to make tough tradeoffs 

in order to fund our high-priority programs. 

As the Chairman noted in his opening remarks, we worked hard 

to maintain the Pell Grant levels that we worked together to put 

in place so that nine million students can get a Pell Grant of 

$5,550 a year. We pay for it in this budget with $100 billion in savings, primarily from ending the summer school Pell Grant and by 

changing the way we treat interest when graduate students have 

loans while they are in school. 

In the area of innovation, we support $48 billion in research and 

development, which includes $32 billion for the National Institutes 

of Health and it meets visionary goals to bring a new clean energy 

economy into place. To help pay for these investments, lower-priority programs are cut, and we do eliminate 12 tax breaks for the 

oil, gas, and coal companies that will raise $46 billion over 10 

years. 

And to build the infrastructure that we need to compete, the 

budget includes a proposal for a $556 billion Surface Transportation Reauthorization bill, and the plan consolidates over 60 duplicative programs which have often been earmarked into five, which 

demand more competition for funds, and we insist that it be paid 

for, because we cannot afford to do this if we do not pay for it. 

Mr. Chairman, I have no illusions, and we have very difficult 

challenges ahead. We need to make tough choices if we are going 

to put our country back on a sustainable fiscal path. As we make 
473 

these choices, it is important that we not cut the areas that are 

critical to helping our economy grow and make a difference in families and businesses. 

Finally, cutting spending and cutting our deficits is going to require that we put our political differences aside and that we work 

together. I look forward to working with you as we craft a set of 

policies so that we can live within our means and invest in the future. 

I thank you and look forward to answering your questions. 

[The prepared statement of Mr. Lew follows:] 
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Chairman CONRAD. Thank you, Director Lew. 

Let me start with what I see as the best news in the proposal 

of the President, and that is that he brings down the deficit as a 

share of the Gross Domestic Product quite sharply, from almost 11 

percent of GDP down to just over 3 percent of GDP during the 10- 

years. That is critically important because that does stabilize the 

debt. 

But let me go to the question of the level of our gross debt, because as I see the President’s proposal, we get to a gross debt of 

over 100 percent of our GDP and just stay stuck there. So it is true 

the debt is stabilized, but it is stabilized at a level that is too high. 

Why do I say 100 percent of GDP is too high? Because the best information we have available to us, the Reinhart-Rogoff study of 200 

years of fiscal history and 44 countries say when your gross debt 

is over 90 percent of GDP, the chances increase that your future 

economic growth will be substantially reduced. 

And this is what we see in terms of the gross debt as a share 

of GDP the 10-years of the President’s budget. It is over 100 percent the entire time. That, to me, is just not wise. It is not acceptable. It is not a fiscal strategy that the country should embrace. 

I understand that the President’s budget is an opening bid. We 

all know there is a negotiation that will have to ensue. It will have 

to involve both houses of Congress, both parties and the President. 

The question that I would have for you is how does that serious 

conversation get started? We have a budget, but a budget resolution, as you know, is purely a Congressional document. It never 

goes to the President for his signature or veto. So the question I 

have for you and the question I think many of us are struggling 

with is how do we get to the serious discussion of getting not only 

the debt stabilized—I will grant you, you do that. To me, that is 

not enough, because the second step is we have to work this debt 

down, and just stabilizing it for 10 years at a level that is too high, 

that cannot be the answer. At least, to me it cannot be the answer. 

So how do we get, in your judgment, this more serious negotiation 

started? 

Mr. LEW. Senator, I think that, first, stabilizing the debt is not 

something that we can take for granted. There are a lot of hard decisions that we are going to need to make in order to bring the deficit down to 3 percent of GDP. If we do not take the tough actions 

that are laid out in this budget, we will be closer to 5 percent of 

GDP, not 3 percent of GDP. 

So I think as a first matter, it is not just a question of building 

confidence. It is kind of like you have to walk before you run. We 

have to do this in order to get to the next step. So I think that 

when we describe this—when the President has described this 

budget as a down payment, I think it is important to note that getting that down payment is in and of itself going to be a hard accomplishment and it is something we are going to need to work together on, because I know there are a lot of things in our budget 

that will not be immediately accepted and we are going to have to 

work toward a set of policies that get us there. 

In terms of the long term, you know, I think the process always 

begins with the President putting a budget on the table. The President has a comprehensive responsible budget. That is the first, not 
490 

the last, step in the process. The President has worked very hard 

to try in the State of the Union, in his budget, in his remarks 

today, to establish an atmosphere where we could start to build 

trust that builds on the success we had at the end of last year 

where I think there was a process of beginning to learn how to 

work together across party lines. 

I have worked on bipartisan agreements from both ends of Washington, from the Congress when I was in the Speaker’s Office in 

the Democratic Congress and a Republican White House, and from 

a Democratic President’s White House working with a Republican 

Congress. Developing that relationship of trust is the key to there 

being success. And I think that we have tried very hard in everything we have done in this budget to put things on the table to expand the range of things that can be discussed, but it is not always 

the case that putting a specific proposal out there advances things 

most quickly. I personally believe that if you look at the last 20, 

30 years, sometimes putting out a proposal slowed things down because it polarized the sides and they dug in. We need to figure out 

a way to have a conversation that gets the parties talking together. 

So I cannot give you a date or a time. I think that we have put 

a budget forward. We have a lot of immediate issues facing us in 

terms of the funding of the government after March 4, the extension of the debt ceiling in the spring, the budget resolution that 

Congress has to pass. I would say that one of the things I believe 

is that we have to separate these issues. We should do the things 

that we have to do to keep our business going. And we have to figure out how to engage on this as different plans are put down and 

we see what the differences are and look toward working together 

toward the middle where we can agree. 

Chairman CONRAD. Let me just say this to you, because I am 

going to try to follow 5-minute rounds. You know, I have enormous 

respect for you. I know what you did. I know the role you played 

in getting us back on track previously. In that answer, I do not 

hear a plan for how we get to a serious discussion. I hear the reasons for doing the budget proposal that is out there. I understand 

that. I might even accept it. But I cannot accept that if I do not 

hear a way forward that gets us to the discussion we have to have 

because it cannot be the answer that we are going to have a debt 

over 100 percent of GDP throughout the next decade. That cannot 

be the answer for this country’s fiscal future. 

Senator Sessions? 

Senator SESSIONS. Thank you, Mr. Chairman. I agree with you 

100 percent. This idea that you are balancing the budget somehow 

when you are not is the Washington theory that got us into this 

fix, and stabilizing the debt is so dangerous because we are at the 

upper limit already and we could have an economic shock at any 

time. Another recession is not projected in your budget that I know 

of. It is not in there. So it is a high-risk thing, and as leaders, I 

agree with the Chairman, we have to take the steps that we know 

need to be taken today to protect our people from danger in the future. 

Have you, Mr. Lew, explained the budget to the President an do 

you think he fully understands the choices of the decisions and direction it undertakes? 
491 

Mr. LEW. Senator, this is the President’s budget. I have the 

honor of presenting his budget. So he understands and has made 

the decisions to drive this budget. 

Senator SESSIONS. Well, in his radio address to the Nation Saturday, he said, so after a decade of rising deficits, this budget asks 

Washington to live within its means, and that is what our country 

has to do. That is what families do. Does this budget say that we 

are going to live within our means at any single year in the 10- 

year plan you have set forth? 

Mr. LEW. Senator, this budget would get us to the point where 

in the middle of the decade, we will be paying for our current expenses and we will be in what is called primary balance. That 

means that the only thing that is putting us into deficit is payments of interest on the national debt. And if I could put it in 

terms that—a family’s terms, it is like saying we are going to cut 

the credit card, not add to the balance, and then we will work on 

paying down the old bill. 

Senator SESSIONS. But we are adding to the balance and we are 

not cutting up the credit card. That is just the fact. Do you believe 

that the American people who heard the President on his radio address Saturday say that this budget calls on Washington to live 

within its means, do you think that it is misleading in the sense 

not in the lowest deficit year of the ten, by your own budget, the 

deficit will be over $600 billion that year? 

Mr. LEW. Senator, having sat in this chair and presented three 

budgets with surpluses, I know the difference between a surplus 

and a deficit. We are not going to get to a surplus until we can pay 

down the debt because of the interest payments. 

Senator SESSIONS. Oh, you mean reducing the debt is paying 

down the debt? Is that Washington-speak? 

Mr. LEW. What I said was we are going to stop adding to the 

debt. Our spending will not add to the debt. 

Senator SESSIONS. Well, what year can you say that under your budget it gets below $600 billion a year in added debt? 

Mr. LEW. Senator, I understand the arithmetic of paying interest 

on our national debt. We have accumulated a lot of debt. This has 

been a very deep recession. We have had an enormous number of 

decisions made that have caused the deficit to grow. We are going 

to have to work together to reverse that, but we cannot—— 

Senator SESSIONS. Are you just saying that—— 

Mr. LEW [continuing]. We cannot make the debt go away and we 

have to pay the interest on it until we start reducing it. 

Senator SESSIONS. Well, I know there is some idea that somehow 

you can say you are in balance when you do not pay your interest, 

you do not count the interest payment, which is obviously not a legitimate way to analyze it. There is no dispute that I can see that 

your budget costs for not a single year in which we add less than 

$600 billion to the debt, and you said in your interview Sunday 

with Candy Crowley, our budget will get us over the next several 

years to the point where we can look the American people in the 

eye and say we are not adding to the debt any more. We are spending money that we have each year and then we can work on bringing down the national debt. Was that an accurate or misleading 

statement to the American people Sunday? 
492 

Mr. LEW. Senator, I think it is an accurate statement that our 

current spending will not be increasing the debt. We do have interest payments. It is going to take us a while to work down those 

interest payments and—— 

Senator SESSIONS. Well, you did not say that. You said that we 

will be bringing down the debt during the period of this budget and 

that we can look them in the eye and say we are not adding to the 

debt any more. 

Mr. LEW. And that—— 

Senator SESSIONS. That is not accurate, is it? 

Mr. LEW. No, I believe it is accurate. Our current programs, the 

things we are doing that we are making decisions on, we have 

stopped spending money that we do not have. We cannot just wish 

the national debt away. 

Senator SESSIONS. Well, I think the American people—— 

Mr. LEW. They are going to have to make hard decisions—— 

Senator SESSIONS [continuing]. Heard it and—— 

Mr. LEW. It is going to take hard decisions to bring that down. 

Senator SESSIONS. My time is up, and Mr. Chairman, I would 

just add one comment, that the budget says it will save a trillion 

dollars over 10 years. The way the budget is scored by your own 

analysis, that means we will reduce the total debt added to the 

American people over that 10 years from $14 trillion to $13 trillion, 

which is an insignificant amount in the scheme of that number and 

does not get off the trajectory we are on, which is toward a financial abyss. 

Chairman CONRAD. I thank the Senator. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Director Lew, to drive the deficit down dramatically, we need 

more economic growth, and you have talked about corporate tax reform. I am certainly in favor of taking tax breaks away for companies that are doing business offshore and using that money to dramatically lower rates for companies that do business here. But 

what troubles me is that your comments mean that there will not 

be real tax relief for 80 percent of American businesses that are organized as sole proprietorships or partnerships, or the typically 

hardware store, the electronics firm. And, in fact, my concern is the 

approach that you are going without trying to get these small businesses that pay taxes as individuals is going to create more complexity and more uncertainty for those small businesses that are a 

vital part of the economic engine we need for growth. 

What is the plan to make sure that we have broader tax reform 

and particularly pick up the 80 percent of business entities that 

pay taxes as individuals? 

Mr. LEW. Senator Wyden, I think when the President put the 

proposal for corporate tax reform out there, he did not mean for 

that to be the end of the conversation. We have to start somewhere. 

We have a corporate tax system where it has been a long time 

since we have gone through and taken away the special provisions, 

where in order to lower the rates without increasing the deficit, we 

are going to need to broaden the base. And that is going to be a 

hard process. 
493 

He has also said that he wants to work together on a broader 

basis to deal with the tax system, but we do have to start somewhere, and the corporate tax reform proposal is the first place. 

Senator WYDEN. We should not start in a place that is going to 

further distort the code and make it more complicated. Dr. 

Bernanke said you have to recognize the interactions between the 

individual portions of the code and the corporate portions of the 

code. I just hope—you talk about the conversation. Right now small 

business is getting short shrift in the conversation. That is not 

right, and we cannot generate the economic growth that the President wants to see and you want to see. 

Let me ask you about a Pacific Northwest matter, and that is 

timber payments. We are glad that it is in the budget, but it falls 

dramatically short of the historic obligation. In fact, let me tell you 

what the President said during the campaign in 2008. He said, 

with respect to county payments, ‘‘I completely agree it is an obligation we have to meet. I think we are not meeting it well right 

now because we are doing it piecemeal year after year by year.’’ 

That is exactly what you are proposing again. You are talking 

about giving us one more year, then having a study, and in effect 

putting in place the uncertainty that the President correctly said 

in the campaign that we ought to move away from to get these 

rural communities—and there are hundreds of them around the 

country—off the fiscal rollercoaster. 

So what can we tell our folks in the Pacific Northwest is the plan 

to really provide a way to meet the historic obligation and get these 

rural communities off the rollercoaster? 

Mr. LEW. Senator Wyden, we have had many discussions about 

this provision, and I hope you can see the impact of those discussions on this proposal. What we have done is we have tried to put 

in a funding level that would meet the immediate need. We proposed different things that we have discussed in the past which 

create economic alternatives so that there would be real economic 

vitality in the areas and ultimately not as much of a need for the 

payments. And we have indicated an openness to being flexible in 

terms of working through doing it either as a discretionary or mandatory program. 

So we think we have put together something that is a very solid 

starting point. It is a proposal. And it is obviously going to be 

something we have to work with Congress on over the coming year, 

and I look forward to working with you on it. 

Senator WYDEN. We are glad it is in the budget, Director Lew. 

I just want you to know that if you are talking about the historic 

obligation—and we recognize that times have changed. We are trying to get into new areas, biomass opportunities for the private sector. I am concerned that with the proposal that you are offering 

now in the rural West we are going to see rural counties go bankrupt. And we have to do better than that. We will work with you. 

It will be a bipartisan effort. I am glad it is in the budget. We have 

a long way to go. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, and thanks for respecting the 

time. Thanks to all colleagues for respecting the time with the 

number of colleagues here. 
494 

Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Director Lew, I have to join in what a number have said. As I 

reviewed the President’s budget when it came out, I was discouraged. I felt the President took a pass. And, frankly, as one of those 

who served on the Fiscal Commission and voted for the recommendations that the President’s Fiscal Commission made, I saw 

very little of the recommendations in the budget, and, frankly, 

when comparing the numbers that we see in the budget to what 

I think are going to be the reality, it appears to me that the budget 

that is proposed does not even go as far as it has claimed to. And 

I want to get into a couple of aspects of that with you. 

First, you use the term ‘‘primary balance,’’ and I think we all understand that here in Washington in the Budget Committees and 

so forth. But when the American people hear that, I am not sure 

they quite understand what it is we are saying. 

Is it not accurate to say that when you use the words ‘‘the budget 

comes into primary balance,’’ is means that if you do not pay any 

interest on the national debt, you can say that you are covering the 

ongoing expenditures? 

Mr. LEW. Yes. It means that the only deficit is coming from paying the debt. 

Senator CRAPO. And is that the entire budget, including mandatory spending? 

Mr. LEW. That is the entire budget. 

Senator CRAPO. And can you tell us what the amount of interest 

adding to the debt is throughout the totality of the 10 years? 

Mr. LEW. I would have to look up the number. I can get back to 

you with the number. 

Senator CRAPO. Well, I have what I think are some of your 

charts here. Would it be fair to say that the gross debt of the 

United States over the 10 years of this budget will grow from about 

$13.5 trillion to $26.3 trillion? 

Mr. LEW. That would be the total debt, not the debt held by the 

public. 

Senator CRAPO. Understood. 

Mr. LEW. The debt held by the public is a lower—— 

Senator CRAPO. That is the gross debt. And the debt held by the public would grow from about $9 trillion to about $19 trillion. Is 

that not correct? 

Mr. LEW. Correct. 

Senator CRAPO. So I think it is just important that, as we talk 

about this, you understand the reason for the frustration that 

many of us have is that this does not change the course that we 

have been on. Our debt, whether you count the public debt or the 

gross debt, is going to double in the next 10 years under this budget, and that is not sufficient. As I think the Chairman said, this 

may be a good opening bid, but we should not be in a bidding process here. We should be engaged with solid leadership from the 

White House, and we should, as Congress, be engaged heavily in 

that process as well. 

A couple of other aspects of the report that I would like to highlight, if I can. As I look at the budget report as we have analyzed 

it so far, you are projecting about a $1.7 trillion increase in revenue 
495 

relative to the same baseline that the Congressional Budget Office 

projected in January, as I analyzed the two differences there. Can 

you tell me why the difference? 

Mr. LEW. Over what period are you—— 

Senator CRAPO. I understand that to be over the period of the 

budget. 

Mr. LEW. There are differences in our budget because, first of all, 

we have policy proposals, but there are also some differences because of economic assumptions. And I can tell you what the impact 

of the policy proposals are in our budget, and I can also tell you 

what the impact of the economic is. But—— 

Senator CRAPO. Would it be fair to say the policy proposals you 

are talking about assume over $1 trillion in new taxes? Is that correct? 

Mr. LEW. Well, I apologize for being a little bit complicated, but 

we consider the baseline to leave the tax rates from the top bracket 

where they will be when the 2-year extension expires. So we are 

not counting the savings that come from leaving that provision in 

place as savings. That would be, you know, roughly speaking, $700 

billion of savings. We are not counting it as savings because it is 

in the baseline. 

Senator CRAPO. Understood. 

Mr. LEW. We have $368 billion of net additional revenues in our 

budget. 

Senator CRAPO. But aren’t you signaling that you want to see 

those taxes—— 

Mr. LEW. Oh, yes. No, our policy position is they should be allowed to expire. 

Senator CRAPO. All right. 

Mr. LEW. But we do not count them in our $1.1 trillion of deficit 

reduction because they are in the baseline. 

Senator CRAPO. All right. And because of time, I want to go on 

here. I know there are other policy matters we could—in fact, I 

would like to get into. I would love to, but also with regard to your 

economic projections, it appears to me that you are projecting a significantly increased economic performance over what either the private sector in, say, the blue chip reviews show or CBO’s projections 

that came out in January. Is that not—— 

Mr. LEW. I am not sure I would agree that they are substantially, but they are somewhat more optimistic. The assumptions 

that we have are in the middle range of what the Federal Reserve 

looks at when it looks at economics, and it is consistent with the 

recovery from past financially led recessions. In fact, it is a little 

bit slower in getting to recovery. The basic difference between the 

two is that we assume that over a longer period of time we will get 

back to the economic growth we had before the recession. 

The other assumptions assume that we are permanently going to 

be lower. We think that our assumption there is right. The trajectory may or may not be right. We may be year-to-year—you know, 

it is hard to hit these things on a bull’s eye. But conceptually I 

think we have the right assumption. 

Senator CRAPO. Thank you. Again, I would love to go deeper, but 

I am out of time. Thank you. 

Chairman CONRAD. I thank the Senator for respecting the time. 
496 

Senator Coons. 

Senator COONS. Thank you, Mr. Chairman. 

Director Lew, thank you for your presentation so far today. I am 

hopeful that this budget—that this conversation at this Committee 

and elsewhere will serve as a catalytic event, that the members of 

this Committee who are expressing disappointment at the failure 

to sort of grasp the larger challenges in front of us in this budget 

will be able to work in a bipartisan way to find a path forward. 

I do find there are some things in this budget about which I am 

encouraged. R&D tax, credit permanence is something I have 

championed, and the domestic spending freeze, and the willingness 

to make differing cuts, deep cuts in some areas, but still sustain 

innovation, education, and infrastructure investments I think is 

wise, and being willing to pay for the doc fix and the AMT fix I 

think are good moves, and there are a number of things I would 

love to get into—the pay-for-success bonds, the race-to-the-top 

methodology, and Federal property disposition—if we have time 

later. 

But your written testimony and the comments of two Senators 

before me really focus on the Commission. The written testimony 

you submitted says that while the administration does not agree 

with every recommendation in the Commission’s report, there are 

many areas of this budget that reflect the work of the Commission. 

I would be interested—I think the Bowles-Simpson Commission 

laid out the kind of strong, broad vision that we need to take on 

to tackle not just the deficit but, as was mentioned before, the debt 

for the long term. 

Where does the administration differ with the Commission’s proposals? And where do you see them incorporated in this budget? 

Because I think in large part, the strongest, toughest work of the 

Commission is absent from this budget. 

Mr. LEW. Well, let me give you a few examples of ideas from the 

Commission that are in the budget: the move toward reforming 

medical malpractice policies so that we can deal with the impact 

that that has on health care costs; the approach to the corporate 

tax reform issue; our pay freeze for the Federal work force; the approach to tax expenditures. The way we are paying for the alternative minimum tax is essentially scaling back on spending on the 

tax side in a way that is consistent with the report. 

You know, I think if you look at the—— 

Chairman CONRAD. Could I stop you for a minute? Just to alert 

colleagues, a vote has started, and we are going to continue the operations of the Committee. Senator Murray has gone to vote. So I 

would recommend, looking at the line-up here, Senators Toomey 

and Johnson might want to go vote now so that you could come 

back and be in line. It might work best. I think others, you know, 

can stay because Senator Graham is next on this side, and on our 

side Senator Whitehouse is next. But I do think it would be wise 

for the two gentlemen to go vote now so they do not lose out on 

time. 

Senator SESSIONS. We need the official to add some time to the 

game clock here. 

Mr. LEW. Now I have to remember where I was in answering 

your question. 
497 

Senator COONS. You had gotten to tax reform as being an approach for paying for—— 

Mr. LEW. So, you know, I think if you look at what the charge 

to the Commission was, the charge to the Commission was to come 

up with a plan that would reduce the deficit to 3 percent of GDP, 

not because we believe that that is an endpoint, but because we believe in order to get beyond that to do deficit—debt reduction, you 

have to first get to the place where you get to what we are calling 

primary balance. 

I think that, you know, there has been a lot of debate about Social Security, a lot of debate about Medicare. Let me say a word 

about Social Security. 

The President has indicated very clearly that he would like to 

work on a bipartisan basis to deal with Social Security, but not because it is contributing to the deficit in the short term. It is not 

contributing to the deficit in the next 5, 10 years. The Social Security Trust Fund is in surplus until 2037. A lot of the expenses in 

the budget are driven by Social Security. As more of the baby 

boomers retire, they are going on to the Social Security program, 

as they have a right to and should, and that is driving spending 

up. And we have to be sure that we are funding Social Security so 

that it can keep that promise for this generation and the next generation. But it would not affect the window of this 5 to 10 years, 

and we need to keep them separate. The President would like very 

much to work together on a bipartisan basis to be able to deal with 

that. 

Senator COONS. So, Director, my question to you was which of 

the recommendations of the Commission has the administration rejected or differed with and unwilling to accept as we get going with 

the broader conversation about how to tackle not just sustainable 

deficits but what is a sustainable national debt. 

Mr. LEW. And I have to respond that you have heard a reticence 

to say what is unacceptable because it is important to leave ideas 

on the table. It is important that if we are going to have the serious bipartisan conversation, we not take hard lines on either side 

of an issue and that we allow the conversation to continue. I actually think that that is part of leadership in terms of how do you 

prepare the environment for the kinds of discussions that I hear so 

many people in this room—and we ourselves agree—believe need 

to happen. 

The easiest thing to do in Washington is to take an idea that is 

controversial and to kill it. The hardest thing to do is to create an 

environment where it is safe to have conversations and look for 

middle ground where reasonable people can agree. 

Chairman CONRAD. I thank the Senator. 

Senator GRAHAM IS NEXT. 

Senator GRAHAM. Thank you, Mr. Chairman. And before I start, 

I would like to congratulate you and Senator Crapo and all the others who participated in the bipartisan Commission to kind of get 

us out of this mess. I really appreciate what you did. 

Mr. Lew, I want to pick up on your comments about Social Security. You sort of made an invitation on behalf of the President to 

see if we can find some common ground in saving Social Security 

from—I do not know if ‘‘bankruptcy’’ is the right word, but cer-
498 

tainly a collapse down the road. Am I hearing you right, you would 

like us to work together? 

Mr. LEW. I can only point to the President’s word in the State 

of the Union. 

Senator GRAHAM. OK. Well, I am going to take you up on it right 

here in front of the whole country, anybody who is watching C– 

SPAN, cannot sleep. I really do believe that this is the year for Social Security reform and that the age adjustment from 65 to 67 was 

accomplished by Tip O’Neill and Ronald Reagan working together. 

Do you believe that adjusting the age for Social Security is something the President would be interested in if it was in a bipartisan 

fashion? 

Mr. LEW. Senator, I had the honor of working for Speaker O’Neill 

in 1983, advising him on Social Security, and I think the reason 

they were able to reach an agreement in 1983 was that for a prolonged period of time there were conversations going on where 

ideas were thought through and developed where, after a very, very 

bruising political battle in 1981, some trust was built up and there 

was the exploration of middle ground. I think that is what we need 

to do now. I do not think this is the time for—— 

Senator GRAHAM. Are we there yet for the middle ground, like 

means testing? You know, when I speak about this back home, I 

talk about my personal situation. When I was in college, my Mom 

died and then 15 months later my Dad died, and my sister was 13, 

my family owned a restaurant and a liquor store, and if it were not 

for survivor benefits coming into our family from Social Security, 

it would have been very difficult for us to make it. That check 

mattered. Well, I am 55, no kids, not married. When my time 

comes to retire, I could accept less benefits than those promised. 

I think a lot of people would probably do what I just said. Do you 

think the administration is open to talking about a means test in 

some realistic way? 

Mr. LEW. Well, I am going to be reluctant to address positions 

because I do not think it would be helpful to the process. 

Senator GRAHAM. OK. 

Mr. LEW. But I would say this about 1983: The reason there 

could be an agreement in 1983 was that there was a provision that 

had not been law before which subjected Social Security benefits to 

income taxation. That was essentially saying that if you had other 

income and it put you in a place where you did not need the benefit 

as much, it was subject to taxation. One side considered it a tax 

increase. The other side considered it a benefit cut. 

Senator GRAHAM. I understand the idea. 

Mr. LEW. It took a lot of work to get to that point. 

Senator GRAHAM. Sure. What do we need to do to get to that 

point? 

Mr. LEW. I think having the kinds of conversations that we are 

having, continuing it. There will be—— 

Senator GRAHAM. Well, we are having a good conversation, but, 

you know, every time I put something on the table, you say we 

have to talk about—we need to talk about it behind closed doors. 

That makes sense. But you had a Commission—get back to me because I have only got a minute left and tell me where I need to 
499 

go and who I need to meet with about finding a way to save Social 

Security from what I think is an unacceptable demise. 

Very quickly, to the President, this is the year—there are a lot 

of Republicans who understand entitlements have to be put on the 

table. We are reluctant to go by ourselves because, you know, this 

issue is easily demagogued. So I am just suggesting to you that 

there is a moment in time in 2011, before we get into the 2012 

cycle too deeply, to find a way to do something meaningful on Social Security that would help our long-term indebtedness. Do not 

let that opportunity pass. 

Now we are going to go to a different issue right quick. Are you 

familiar that in 2014 the Panama Canal is going to be widened and 

deepened to allow sort of super cargo tankers to come through the 

canal? 

Mr. LEW. I will confess that I am not familiar with the current 

policy on the Panama Canal. 

Senator GRAHAM. Well, I understand that, but there is a new 

way of shipping goods coming, and harbors on the east coast have 

to be deepened to accept these ships. The Charleston harbor needs 

$400,000 for the Corps of Engineers to study how deep the harbor 

will be. There is no money in the President’s budget for that harbor. Only one million out of a hundred and something million dollars was spent on east coast harbors in the President’s budget to 

get these harbors ready for the super tanker. Could you please 

study this and get back with me? Because if we do not deepen the 

Charleston port, that is the economic engine for the State of South 

Carolina and for the Southeast. These ships are coming. I want to 

make sure America is a place for them to dock. So could you get 

back with me about a plan to make sure we can service these ships 

coming through the Panama Canal? 

Mr. LEW. I am happy to look at it, and I do know that in terms 

of our general policy, we were very constrained because of the savings that we were looking for in the discretionary budget, and there 

are things that would be good policy and things we would like to 

do that we just did not have the resources to do. So not knowing 

that particular project, I suspect we did not put enough money into 

the category and, therefore, a good project could not get funded. 

But I will get back to you. 

Senator GRAHAM. I look forward to working with you. 

Mr. LEW. Likewise. 

Senator MURRAY [presiding]. Senator Whitehouse. 

Senator WHITEHOUSE. To followup quickly on Senator Graham, 

would you mind including me in his report as well? Because we 

have the port at Quoset Point and the port of Providence that are 

also in a similar situation. 

Mr. LEW. Sure. 

Senator WHITEHOUSE. On the question of Social Security, when 

you were working for Speaker O’Neill back in 1983 on that compromise, the perils facing Social Security were imminent, were they 

not? 

Mr. LEW. They were imminent. There was—— 

Senator WHITEHOUSE. And now Social Security is sound at least 

until what year? 

Mr. LEW. 2037. 
500 

Senator WHITEHOUSE. 2037, OK. I want to shift to the question 

of the revenue and tax side, and I want you to imagine a hospital 

orderly who is pushing a trolley late at night down the halls of 

Rhode Island Hospital and is earning $29,100 a year, which is the 

average pay for a hospital orderly in the Providence area. That person will pay about 16.7 percent of their income in total Federal 

taxes. At the same time, the IRS just reported, based on the most 

recent information available, that the 400 top income earners in 

the United States of America who earned on average $344 million 

each that year, more than a third of a billion dollars each that 

year, actually paid taxes to the Federal Government at the rate of 

16.6 percent; i.e., the hospital orderly pushing the trolley down the 

halls of the hospital at 2 in the morning is paying a higher tax rate 

right now in this country than the 400 top income earners who are 

bringing home a third of a billion dollars a year. 

Now, I have nothing against people making a third of a billion 

dollars a year. That is America and this is wonderful. But does it 

make sense for the hospital orderly to be paying a higher Federal 

income tax rate all in than they do? 

Mr. LEW. Is that a question you want me to answer? 

Senator WHITEHOUSE. Yes. 

Mr. LEW. I think you have put your finger on something that is 

a real issue, that we have a tax system that is very lopsided, and 

the proposals that are in this budget to let the rate cut for the 

highest earners, the top bracket, not remain at the lower level but 

to revert. The proposal we have to limit the value of itemized deductions in the top bracket would do something to kind of rebalance the system. 

I do not know what it would do to that specific comparison. I 

would have to go and look. But it certainly would affect it. 

Senator WHITEHOUSE. And if you look at corporate taxes and 

take a sort of long view through history, if you go back to 1935, 

for every dollar that an American chipped in to fund the Federal 

Government, an American corporation chipped in a dollar to fund 

the Federal Government. By 1948, for every dollar that an American chipped in, an American corporation was only chipping in 50 

cents. It was two bucks in individual revenue for every one dollar 

in corporate revenue. In 1971, it got to $3 in individual revenue for 

every dollar in corporate revenue. In 1981, it got to $4 in individually paid—regular Americans paying taxes, revenue, for every $1 

that corporations paid. And in 2009, we hit 6:1. So for every dollar 

that an American pays in, a corporation only pays one-sixth of a 

dollar. Or otherwise said, for every dollar that an American corporation pays in revenue to support the Government, American 

human beings have to pay $6. 

There is a pretty clear trajectory on this. Where do you think 

that trajectory should end? And if you could put that in the context 

of the $123 billion in corporate tax loopholes that the Joint Committee on Taxation calculated in the 2010 fiscal year 2009, I would 

appreciate it. 

Mr. LEW. Senator, this budget does a number of things. First, it 

has a number of proposals that would limit certain corporate deductions, things like in the fossil fuel area that I mentioned in my 

opening remarks, some of the provisions with regard to companies 
501 

that move jobs overseas. So it would have an effect on the margin 

of shifting that balance. I do not know that it would shift it materially because there are, as I say, individual proposals. 

At the core of what this budget says on corporate taxes is that 

we need to do corporate tax reform so that we can be more competitive and can create jobs in the future. And to us, what that means 

is that we have to in a revenue-neutral way—we cannot increase 

the imbalance. We have to broaden the base by reducing the deductions, the special interest provisions, and lower the rates. 

That is something that we think is critical to our economic future 

and to our competitiveness, and that is why the President spoke to 

it both in the State of the Union and the budget. 

Senator WHITEHOUSE. Thanks, Mr. Lew. My time has expired. 

Thank you, Chairman. 

Senator MURRAY. Senator Ensign. 

Senator ENSIGN. Thank you and, Director Lew, thanks for being 

here. I, too, want to compliment you for your service in the past, 

and we all have a great deal of respect for you and understand you 

are working within the constraints of an administration. 

We have talked about this, and many of us have said that these 

votes that we are going to take politically are going to be very, very 

difficult votes. It is much easier to get re-elected when you are giving money away, basically. When you are creating new programs, 

new initiatives, you go back home and you tout those. Those are 

much easier to get re-elected. And I realize the President is very 

concerned about his re-election, as all Presidents going toward a 

second term are. But this is not a time in our country where we 

can afford to worry about our elections nearly as much as we can 

the country. And I actually—this was not a time for, in my opinion, 

political cowardice. I believe that this budget misses the mark dramatically because the ideas, the cuts, there are no entitlement reforms in this bill, and we are still adding massive amounts of debt. 

You said we are living within our means. Now, let me just try 

to ask you, if you were a family—you used the family credit card 

as the example. OK? And you said that, well, we first—and I agree 

with you. We first have to tear up the credit cards. But tearing up 

the credit cards means you are not increasing spending. OK? You 

are not increasing spending. Does this—not as a percentage of the 

economy, does this bill increase spending? 

Mr. LEW. If I could just use the example again, if you stop adding 

to the balance on your credit card, you still add interest while you 

are paying it down. 

Senator ENSIGN. That is right. So—— 

Mr. LEW. The analogy is the same. 

Senator ENSIGN. It is correct, and so we are getting further in 

debt because of our interest rates. 

Mr. LEW. Yes. 

Senator ENSIGN. Every family knows that. So this bill, because 

the spending cuts are not enough, allows the interest rates to take 

us further into debt is the point. Is that correct? 

Mr. LEW. I do not disagree with that. 

Senator ENSIGN. OK. I just wanted to make sure because some 

of the other stuff to me is double talk because we are still going 

further into debt massively. 
502 

Mr. LEW. The terminology that we use in Washington of primary 

balance is a little confusing, but—— 

Senator ENSIGN. Well, it is because I believe it is dishonest. It 

is the way politicians, Republicans, Democrats, for years have 

talked about things in order to not have to make the tough votes. 

It is critical, I believe, because the debt that we are facing and the 

interest payments on the debt—the CBO Director sat there and 

said it is unsustainable. He has said Government spending is actually crowding out private sector investment to create jobs. 

The report that the Chairman talked about in his opening statement, or maybe it was in his questions, he said that when gross 

debt equals 90 percent of a country’s economy, which is where we 

are today, that is a decrease, a net decrease of 1 percent of GDP, 

which translates into about a million jobs in America. So we are 

hurting future prosperity of Americans because of this overspending that we have, and that is why I said we are willing to 

join the President on entitlement reform. Republicans are standing 

ready for the President’s leadership. I hope you take that message 

back to him. We will make the tough votes. We will take—but we 

cannot do it alone. Republicans are in the minority in the U.S. Senate. We need to join with Democrats to do this. I think the Chairman has shown leadership on this. But we need desperately White 

House leadership, and this budget, this State of the Union address, 

did not do it. We have two more chances this year—we have the 

CR and we have the debt ceiling—to show Presidential leadership 

where we are going to be serious about spending. And I hope that 

you will take that message back to the President that we are willing to join him so that neither side is taking as much political heat 

as would normally be taken in a situation like this, so we can both 

show the political courage to do what is right for the country. 

Mr. LEW. Senator, if I may, you know, I think that in order for 

there to be bipartisan agreement at any point, you need bicameral 

and bipartisan participation. I think there are different kinds of 

conversations happening in different places, and that is not unusual that you do not just get to the point where you have an 

agreement. You have to work your way to it. 

I have to take issue with your characterize of the budget. I do 

not agree that it is a budget that has the flaws you describe. 

Senator ENSIGN. Then answer me this: What percentage of total 

spending over the 10 years did you decrease? What percentage of 

total spending did you decrease in this budget? 

Mr. LEW. I mean, obviously there is a lot of different categories 

of spending and—— 

Senator ENSIGN. Total spending. Just total spending. 

Mr. LEW. The reason I am resisting just accepting the framing 

of your question—— 

Senator ENSIGN. How about it is less than one penny out of every 

dollar? 

Mr. LEW. But it is important to unpack what is driving spending. 

Senator ENSIGN. I asked the CBO Director that question, and 

that is what he said. It is less than one penny. 

Mr. LEW. But if I may just take 1 minute to answer? 
503 

Chairman CONRAD [presiding]. Let me just say that the Senator’s 

time has expired, but you can answer this question, and then we 

have to go. 

Mr. LEW. Thank you, Mr. Chairman. 

The spending that we control on an annual basis is coming down quite dramatically. The $400 billion that we save in the non-security discretionary part of the budget would bring spending in that 

category down to its lowest level as a percentage of the economy 

since the 1950s. There is continuing growth of spending in programs like Social Security and Medicare because the baby boom is 

retiring, people are taking the benefits that they have paid for, and 

there is nothing wrong with that. So spending will go up during 

this period even while we are taking action to cut spending that 

we control. And I think we just have to be careful to separate those 

issues. 

I do not think that the solution to spending as a percentage of 

the economy going down is simply to put an arbitrary number in 

there because what that would have the effect of doing, it would 

mean that you would say that people turn 65 or 67 and they cannot 

get their benefits. And that is not what anyone means. 

Chairman CONRAD. Senator Murray. 

Senator MURRAY. Thank you very much, Mr. Chairman, and 

thank you, Director Lew, for your experience and credibility on 

bringing this budget to us. 

I wanted to just mention on the Veterans Affairs funding, I see that the President has requested an increase of $2.7 billion over 

the current year, and that appears on my first review to be sufficient. I did want to say, as Chair of the Veterans Committee I believe construction money does have to follow a vision on health care 

spending. And I am going to be talking with Secretary Shinseki 

over the coming few weeks about the mental health and women 

veterans’ issues and making sure that some of the cost-saving proposals do not affect the quality of VA care. 

I did want to ask you specifically while you are here a real immediate concern that I do have on the veterans caregivers benefits. As 

you might know, VA’s implementation plan for that bill that we 

passed here in Congress without one negative vote was overdue, 

and once the VA did submit it, it veered dramatically from the bill 

that we cleared here in the House and Senate. Rather than following Congress’ intent, the administration set some overly stringent hurdles that are really going to deny help to caregivers that 

we intended that bill to be for. We are talking about a very small 

population of wounded warriors, and I cannot think of any reason 

why the administration would err on the side of diminishing that 

benefit. And I wanted to ask you while you were here if you would 

commit to taking another look at the VA’s plan, compare it to the 

law that we passed, and remove some of those unnecessary benefits. 

Mr. LEW. Senator, I am familiar in general with the provision. 

I have to apologize. In the 8 weeks I have been at OMB, I have 

followed this issue some. I know there are conversations going on 

now that I frankly have not been able to participate in because of 

my work on putting the budget out. But I will get back into that 

conversation. 
504 

Senator MURRAY. OK, and I think I said ‘‘benefits.’’ I meant 

eliminate the barriers. If you could look back at that and come 

back to me within 30 days, I would really appreciate it. There are 

families out there waiting for this benefit that passed, and we want 

to make sure it is implemented accurately. 

I did want to ask you about the work force section of your budget. There are about 14 million people today in this country that are 

unemployed. More than 40 percent of them have been without a job 

for 6 months. So I am very concerned that the administration is 

choosing to cut funding for job training programs. I was at home 

recently and talked to a small business owner who serves on a local 

work force investment board, and he was telling me about a recent 

hire that he did make through a one-stop career center, and the 

success of that, particularly because it was a veteran that he hired 

through that. And it just seems to me at this time when we are 

trying to match skills and get people with the skills that they need 

with an unemployment this high that job training is really a critical part of our investments. So I wanted to ask you if you can give 

us the administration’s rationale for cuts when jobs and economic 

recovery should be our central focus. 

Mr. LEW. Senator, we have had obviously many difficult decisions to make in this budget to live within the spending restraints, 

and one of the things we have done is consolidated programs in 

areas where there was duplication. We have looked to try and fund 

programs that were high- performing programs, and this is a case 

where, you know, we have training and employment services funded at roughly the level they were at in 2010. It is a little bit higher. 

In general, we looked at 2010 as kind of the base because we do 

not know what 2011 is with the appropriations still undecided for 

the year. So we looked to put together a program that was overall 

balanced and investing in the programs that work and consolidating, and I would be happy to get back to you with more detail. 

Senator MURRAY. OK. I would appreciate that. I just think it is 

really important that we do not leave that out when that is what 

is getting people jobs today. 

And real quickly in just my last minute, I really wanted to tell 

you thank you for the EM budget. I know it is something you and 

I have talked about for a long time, and I think the administration 

recognizes it has legal obligations when it comes to that funding. 

And I really appreciate the effort you put into that. 

I think we still have work to do moving forward. I see that the 

administration is committed to modernizing our nuclear weapons 

facilities in the coming years. I notice that OMB has said it will 

ensure that future allocations to that effort are going to occur in 

the required amounts, and that is something that is unusual for 

OMB to commit to. So like I have been saying for a long time, it 

is exactly where we need to go with the EM budgets for fundamental legal reasons and because there is also massive amounts of 

human and monetary capital wasted when EM does not have a stable budget. We have to make sure that those budgets are effectively done right for the long term. So that is something I am going 

to keep working with you on, but I wanted to thank you for your 

commitment in this budget. 

Mr. LEW. Thank you, Senator. 
505 

Chairman CONRAD. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Director Lew, thank you very much for being with us today. I 

have to share the concern and disappointment that several of my 

colleagues have already expressed about what I see as a real lack 

of leadership here, a lack of taking this critical moment to seize the 

opportunity. I really think the American people want us to make 

the big, tough decisions that assure us that it will restore a fiscally 

sustainable path. And I do not think this budget does that. 

By your numbers, the total debt held by the public levels off 

somewhere in the mid to high 70s as a percentage of GDP, I guess 

around 76 percent or thereabouts. It starts to move up toward the 

end of your 10-year outlook. My suspicion is it is on a trajectory 

that continues to rise higher after that. 

But what really concerns me is I think there is a significant likelihood that the numbers are actually considerably worse than what 

we are looking at here, and three things come to mind. I want to 

make sure that I have these things factually correct, though. 

The first is the way you are dealing with the AMT. My understanding is that for a limited period of time, I think 3 years, the 

assumption is that the AMT will not capture the new group of people that it would otherwise capture. There are offsets to that. But, 

thereafter, the assumption implicit in these numbers is that the 

AMT will not be patched anymore and that there will be this revenue coming in to the Government as it goes unfixed in subsequent 

years. Do I have that right? 

Mr. LEW. Not exactly, Senator. What we have done is we have 

paid for 3 years of the so-called patch so that the AMT will not 

cover middle-class families. We have said we think it should be 

paid for permanently. We have not taken the credit for that, so our 

deficit projections assume that it is fixed and not paid for. Were we 

to pay for it, which is what we would like to do on a bipartisan 

basis, it would reduce the deficit by an additional 1 percent of 

GDP. 

Senator TOOMEY. OK. 

Mr. LEW. So there is a substantial upside if we can do the right 

thing on the AMT. 

Senator TOOMEY. If we did. So your numbers assume that no 

middle-class family is ever captured by the AMT. 

Mr. LEW. It assumes the patch continues, but it is only paid for 

for 3 years. 

Senator TOOMEY. OK. 

Mr. LEW. We thought it was a bit of a heroic assumption to assume we paid for it over the whole period. 

Senator TOOMEY. Right. I would agree. 

Mr. LEW. We put in the offsets for the first three. 

Senator TOOMEY. Right. With respect to the doc fix, my understanding is that there is a period of time—I think it is 2 years— 

for which the assumption is that the doctors would not experience 

a draconian cut in reimbursement rates. After that 2-year period, 

is it implicit in these numbers to assume that the doctors will, in 

fact, have that cut? 

Mr. LEW. So the doc fix is a little bit different. In the case of the 

doc fix, first, Congress last year paid for it. So we have, unlike the 
506 

AMT, a first case of Congress saying even though the budget rules 

did not require it to be paid for, the right thing to do was to pay 

for it, and I applaud the Congress for doing that. We worked with 

the committees to make that happen. 

We have now put in $62 billion of specific offsets to pay for two 

more years of the doc fix, and what we have said beyond that is 

that we need to work together to come up with a reimbursement 

system that does not have to be patched from year to year. And we 

think that the pattern and practice of paying for the doc fix last 

year, delineating specific offsets for the next 2 years, and working 

together to reform the reimbursement system and pay for it, we do 

not—we assume that it is fixed going forward. 

Senator TOOMEY. I am not sure I understood your answer, because the question—my question fundamentally is do these numbers assume that the doctors take the cut in reimbursements that 

is currently projected in law but the Congress has always postponed. 

Mr. LEW. What it assumes is that we fix the system so we do 

not have to cut the rates. 

Senator TOOMEY. So does it assume the savings to the government—— 

Mr. LEW. Well, it assumes net zero because it assumes we would 

work together to fix it and pay for it. 

Senator TOOMEY. Although we have not figured out how we are 

going to do that. 

Mr. LEW. We now have 3 years to do it if we get this. 

Senator TOOMEY. I think that is quite an assumption to make 

given the circumstances. 

The other concern that I have is the assumptions that go into 

calculating our interest expenses, our projections on interest expenses. My understanding is, right now, the average cost of servicing our debt is something less than 3 percent, is the average 

weighted cost of our Treasury securities. 

Mr. LEW. Right. Our current rates are lower than that—— 

Senator TOOMEY. Closer to two, in fact, right? 

Mr. LEW. Yes. 

Senator TOOMEY. The average rate that you assume in these 

numbers is a little bit higher than that, right? 

Mr. LEW. Umm—— 

Senator TOOMEY. I think it is on the order of a little over 4 percent. 

Mr. LEW. I think so, yes. 

Senator TOOMEY. I think, historically, over the last 20 years, it 

has averaged closer to 6 percent. My point is—— 

Mr. LEW. I have to confess, the economic assumptions were 

locked while I was awaiting confirmation, so I am not quite as familiar with them as I otherwise would be. 

Senator TOOMEY. Here is my concern. We are at a time where 

we are accumulating an unprecedented amount of debt. We have 

a Federal Reserve that is pursuing a policy of unprecedented easy 

money. They are creating a staggering amount of money. We have 

a huge growth in the money supply. We have a spike in commodity 

prices. And it is, I think, extremely optimistic to think that we are 
507 

not going to have at least a reversion to the historical average of 

interest rates and a distinct risk that it would be much higher. 

I understand you have to pick a number and you have to make 

an assumption, but my point is that I think there is a very, very 

dangerously high risk that our interest expense ends up being 

much, much higher than these numbers. 

Mr. LEW. You know, obviously, the economic assumptions are 

based on a number of factors. We think they are in the middle 

range in terms of being reasonable assumptions. There is one aspect of our assumptions on the growth side where there is a conceptual difference, but on the interest rate assumptions, I think 

they are in the mainstream, and we can get back to you with details. 

Senator TOOMEY. Thank you. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Stabenow. 

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

First, I would followup on my colleagues, Director Lew. I would 

just answer, as the person who had the legislation to completely fix 

the doc fix, or what has been called the sustainable growth rate 

problem, which does not work at all. I would say I am going to assume, and you can assume, that doctors are never going to get that 

cut because I cannot imagine that happening. So we have to get 

that fixed, and I appreciate that you at least put in a 2-year fix 

going forward. 

There are a number of things that I would like to ask. I will 

focus on a couple, but first start by saying that I appreciate the 

work that has been done. I know that cutting discretionary spending back to the percentage of GDP under President Eisenhower is 

no small thing, and so I appreciate very much what you are focusing on. It is tough. There are things that we know we need to do. 

Every family has to cut their budget, has to tighten their belt, and 

we do at the Federal level, as well, and so we have to start from 

that premise but also be smart about it. And so I think those are 

the challenges for us, as to what we need to strategically invest in. 

The first point goes to something specific to the Great Lakes. The 

President cares about the Great Lakes. I care about the Great 

Lakes. We have had a significant investment in Great Lakes restoration in this budget that is cut. My question is whether or not 

you believe that there are the resources available to protect the 

Great Lakes from Asian carp coming into the Great Lakes. This is, 

as you know, a serious issue that would undermine our tourism 

and boating industries and cost us jobs and would have a tremendous impact, the fact that these fish are coming up through the 

Mississippi River and are dangerously close to the Great Lakes. 

And so whether it is Great Lakes restoration or the Army Corps 

of Engineers, I need to know that there are sufficient resources 

available to make sure that stopping the Asian carp is a top priority for the administration. 

Mr. LEW. Senator, the funding level for the Great Lakes Initiative obviously is reduced, but it is not eliminated. We continue with 

the initiative. I would have to go back and check on exactly what 

the status of preventing the carp from swimming upstream, as it 

were, is. I am happy to check and get back to you. 
508 

Senator STABENOW. Thank you. Let me turn now to the other important piece of this and that is the fact that we have a serious deficit. I was proud in 1997 to cast a vote with many of my colleagues 

to balance the budget for the first time in 30 years under President 

Clinton and very dismayed that we are right back in a worse position now and we will dig our way out of it again. We have to. 

But we also know that we are never going to get out of deficit 

with more than 15 million people out of work. 

Mr. LEW. Absolutely. 

Senator STABENOW. And so that is why we have to focus on jobs, 

as well. Andrew Liveris, who is the CEO of Dow Chemical Company, based in Michigan, is the author of a new book called Make 

It In America, which I would recommend you taking a look at. In 

his book, he says, at a time when U.S. companies run by patriotic 

people are moving offshore at the fastest rate in history, we should, 

at a minimum, recognize that the model we are relying on is not 

working. It is time to recognize that if we do not act soon, if we 

continue to let markets rule in every instance, we will become the 

global economy’s biggest bystander and potentially its biggest 

drain. Our U.S. companies are competing with countries that are 

subsidizing entire industries. As Mr. Liveris says in his book, we 

need to get into the game and play to win. 

I believe that the budget makes some important steps in that direction, focusing on smart investments like clean energy technology 

and advanced manufacturing, education, work force development. 

So I am wondering, Director Lew, if you could please explain how 

the administration analyzed the various programs in the budget 

and how you determined which programs to invest in to strengthen 

our competitiveness and to create jobs making things in America. 

Mr. LEW. Thank you, Senator. I think if you look at the investments in this budget, in education, in innovation, in building our 

infrastructure, they are all tied to answering that question. When 

you talk to CEOs, as I have over the last months, one of the things 

they say is they need to get high school and college graduates who 

have the skills in science, math, engineering, technology to do the 

work. It is becoming more of a challenge. So that is something that 

our education system, we can do that. 

Innovation, we know that in innovation, America has been the 

leader in the world and it is drive by a great partnership between 

Federal funding, government funding of basic science and innovation in the private sector, adapting it and taking it to commercial 

application. 

And in terms of infrastructure, we have to have both the ports 

and roads that make it possible to be connected to the world, but 

also the electronic connections so that we can communicate and 

create virtual hubs in any part of our country, and the budget invests in all those things. 

Senator STABENOW. Thank you. 

Chairman CONRAD. Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman. 

Director Lew, nice to meet you. 

Mr. LEW. Nice to meet you, Senator. 

Senator JOHNSON. I am hoping you are hearing, at least from our 

side of the aisle, that there is a real readiness here to seriously ad-
509 

dress these problems, and I guess I agree with my colleagues that 

we are not seeing real leadership being presented by the President 

here and it is disappointing. So if the President is willing to show 

real leadership, I think you have an awful lot of people on this side 

that are really willing to work with him and take the hard votes. 

As the new kid on the block here, I might have some nuts and 

bolts questions that I would like to ask. First of all—— 

Mr. LEW. That usually precedes the hardest questions. 

Senator JOHNSON. Oh, I do not think so. These should be easy. 

I am looking at your proposed budget spreadsheet form here and I am seeing numbers that go from a deficit of $1.645 trillion out 

to $774 trillion. That adds up to $8.9 trillion cumulative deficit 

over that 11-year period. But the gross debt is growing by $12.9 

trillion, or $12.8 trillion. Can you explain that $3.9 trillion difference to me? 

Mr. LEW. Well, the gross debt includes both debt held by the 

public and the trust fund debt, so—and from now until 2025, the 

Social Security Trust Fund will be building up balances, and then 

it will only be actually in deficit after 2025. So from now until 

2025, we have additional Social Security balances being built up. 

I do not know if it explains the whole amount, because there are 

other trust funds, but that is probably the phenomenon. 

Senator JOHNSON. How realistic is that, though, because have we 

not for the first time slipped into deficit imbalance in terms of Social Security payments versus payouts? 

Mr. LEW. Social Security is drawing on the trust fund, but it is 

not in deficit, no. 

Senator JOHNSON. OK. So again, that 3.9, you are saying, is 

probably—most of that would probably be Social Security Trust 

Fund. 

Mr. LEW. Yes. 

Senator JOHNSON. What is the rationale for even—— 

Mr. LEW. I can get back to you and check. 

Senator JOHNSON. OK. What is the rationale of even talking 

about a primary balance? 

Mr. LEW. So primary balance is a term I did not invent, and I 

can say after today it is probably not the most artful turn of 

phrase. The concept is a sound one. The concept is that we need 

to have spending and revenue policies such that our current obligations, not counting interest, are all paid for. And then you have 

your built-up debt and you have to start paying down your debt. 

Until you pay down your debt, it still accrues interest. So primary 

balance means you are at the point where the only reason you have 

a deficit is that your built-up debt is still earning interest, paying 

interest. 

Senator JOHNSON. Yes, but you have to pay the interest—— 

Mr. LEW. You have to pay the interest, yes. Yes. 

Senator JOHNSON. So it seems kind of silly to me to even talk 

about it because—— 

Mr. LEW. Well, it is—— 

Senator JOHNSON [continuing]. We are obligated to pay those interest payments, correct? 

Mr. LEW. Yes, but it is a very meaningful—if you think of a road 

that we have to be on where our goal is ultimately to pay down 
510 

the debt, where ultimately to get to balance and then surplus, we 

have to cross through the point of stopping spending more on real 

expenses now and being in the place where we can freeze the principal, and if the interest is compounding, start to pay it down so 

it can be reduced. 

Senator JOHNSON. Well, again, we are a long ways from that because we are—— 

Mr. LEW. A long ways. 

Senator JOHNSON [continuing]. We are not getting serious about 

it. 

Let me—in business, when you are putting together a budget, 

generally, you kind of look at worst-case scenario. I mean, you do 

not put in the most rosy scenario. From my standpoint, this is 

maybe not totally rosy, but certainly not the worst case scenario. 

I look at three areas of pretty primary risk here: Interest payment 

on the debt, the health care law—I believe you are probably still 

assuming that that will actually decrease the deficit, and then just 

your growth assumptions. What do you, of those three, which one 

do you think is the greatest risk in terms of not actually coming 

to fruition? 

Mr. LEW. You know, I think with any long-term economic assumptions, there are risks on both sides. In our budget documents 

and in our analytical perspectives volume, we show the risks, positive or negative. I cannot actually tell you—none of us know whether we are going to be above or below in a lot of these areas. We 

have tried to come in in each of the cases with middle-of-the-line 

assumptions. 

In the one case that I described before, we have a conceptual difference and I think ours is right. We believe that the economy will 

return to where it was before the recession. It is just a question 

of how long it takes to get there. If you assume the economy will 

forever be reduced because of the recession, that will be the first 

time that we did not have a full recovery from a recession. 

On the others, I would be reluctant to hazard a kind of higher 

or lower than risk. We have tried to use middle-of-the-range assumptions so that they can balance each other out. 

Senator JOHNSON. One quick question. Do you really believe the 

health care bill will reduce the deficit? Do you really believe that? 

Mr. LEW. Yes, I do. 

Senator JOHNSON. OK. 

Mr. LEW. So does the Congressional Budget Office. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. Good afternoon. 

Chairman CONRAD. Oh, I am sorry. Senator Cardin is back. Senator Cardin is—I apologize, Senator Nelson. Senator Cardin is 

back. 

Senator CARDIN. Thank you, Mr. Chairman. Senator Nelson and 

I both serve on the other committee that we were balancing back 

and forth, but I promise I will not take very long. 

First, Director Lew, I want to ask the question following up on 

the confirmation hearings dealing with the Title 17 Loan Guaranty 

Program Senator Crapo and I both asked about during your confirmation hearings and that is the scoring the OMB does for these 

loan guarantees. And I will ask that you get back to me and ask 
511 

whether you can handle this administratively or whether legislation is going to be needed in order for us to be able to move forward 

with these loan guaranty programs so that we can advance on the 

nuclear power front. So would you get back to me on that? 

Mr. LEW. I will get back to you, Senator. I mean, we have 

worked—in the brief time I have been back at OMB, we have 

worked on all these loan guaranty programs trying to get to a place 

where it is more transparent what is going on, and the responsiveness is clear, and if you have questions, I would be happy to respond. 

Senator CARDIN. Well, we believe—it is really causing a problem, 

the way that the scoring has been done, and discriminates against 

certain States over others based upon their regulatory structure. 

That was never our intent. So I would ask that you would take a 

look at this again—— 

Mr. LEW. I will take a look at it. 

Senator CARDIN [continuing]. So that we can move forward. 

Thank you. 

I want to sort of get to the overall thoughts. Unfortunately, your 

budget is being released at the same time we are dealing with the 

Continuing Resolution in the House, and we will have to deal with 

that also in the Senate, and there is a lot of focus right now on discretionary spending because of the Continuing Resolution that 

needs to be passed. Now, I think you have come in with a rather 

aggressive approach for discretionary spending. The $400 billion 

savings, to me, is a significant part of the overall strategy to bring 

the deficit under control. A freeze is a freeze. It is going to cause 

us to make some very painful judgments. And we saw in your 

budget that you made some painful suggestions. I disagree with 

some of those and I am hoping that we can adjust the priorities. 

But I think the overall goal that you have set is attainable and can 

be done without disruption to our economy and to our programs. 

But at the same time, you need to look at the other major factors, whether it is entitlement spending or the revenue side and 

tax reform. It is interesting that your budget extends a lot of the 

tax policies, whether it is AMT or the rates for under $250,000. Do 

you have a dollar amount associated with how much the extension 

of those tax provisions will cost over the next 10 years so we can 

try to put this in proper perspective as to what we are doing with 

the budget deficit? 

Mr. LEW. Senator, do you mean the AMT pay for or—— 

Senator CARDIN. The AMT pay for. You also extend some of the 

other tax provisions, particularly for those under $250,000 income—— 

Mr. LEW. The AMT is $321 billion over 10 years, and the others, 

I would have to—I can look them up. 

Senator CARDIN. But they are substantial. 

Mr. LEW. Oh, yes, yes, yes—— 

Senator CARDIN. I mean, they are going to be—— 

Mr. LEW. They are substantial. 

Senator CARDIN. We are getting into the trillion dollar range, if 

not higher than that. 

Mr. LEW. The extension of the middle-class tax cut that is in the 

baseline is very substantial—— 
512 

Senator CARDIN. Substantial—trillions. 

Mr. LEW [continuing]. And were we to extend the upper-income 

tax cut, which we do not, it is very substantial, as well. 

Senator CARDIN. I think that was about $700 billion—— 

Mr. LEW. Seven-hundred-and-nine billion. 

Senator CARDIN. Yes, if I remember correctly. 

Mr. LEW. And the additional cost of the estate tax provision that 

was enacted in December for 2 years compared to the 2009 policy 

is another $98 billion. We assume that it goes back to the 2009 policy. 

Senator CARDIN. And the reason I mention that is that we are 

getting into this debate on the discretionary spending side, and I 

think the proposal that you brought forward is one that is going 

to cause some really difficult choices to be made, but it is the right 

policy for us to achieve. But if we do not achieve that by also reforming our tax code, we are never going to get to the type of results that are going to be fair for the American people in balancing 

the budget but also balancing our priorities. 

And I think that we need to know how much money we are 

spending, for example, on tax expenditures. We do not exercise 

anywhere near the same discipline on tax expenditures as we do 

on discretionary spending. So if we are going to be able to have a 

credible plan for the deficit, we cannot just talk about the discretionary spending side. We really need to get beyond that. 

Mr. LEW. I totally agree, Senator, and the reason that we have 

put forward as a way to pay for the Alternative Minimum Tax, limiting the deductions in the top bracket, is because it begins to get 

at that question of tax expenditures and curtailing how much we 

are spending on the tax side. It is obviously not the last word on 

the subject, but it is an important step. 

Senator CARDIN. We need tax reform, and we desperately need 

it. We are going to need leadership from the White House and we 

are going to need bipartisan leadership here in Congress in order 

to be able to achieve that. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator Portman. 

Senator PORTMAN. Thank you, Mr. Chairman, and Director Lew, 

having been in your shoes 4 years ago, I remember this being a 

very hectic week. You seem more relaxed than I was at the time, 

probably because you have been through it before. 

You probably heard some of the commentary from my colleagues 

today and from me about this budget. I am very disappointed because I do not think it rises to the challenge that you yourself have 

set out or the President had set out, and I wish I could say otherwise. By the way, I think there are some opportunities, and Senator Cardin just talked about one, and the Chairman has talked 

about this, as well, which is tax reform that is not in the budget 

that would help in terms of creating the economic growth that enabled us 4 years ago to be able to propose a balanced budget over 

5 years because we had substantial revenues coming in and a deficit that was roughly one-ninth of today’s deficit. 

So at the risk of doing sort of the specific critiques that used to 

drive me crazy, let me give you some critiques that I see in this 
513 

budget and get your response, because I may be misreading it. As 

I look at it, getting into some of the details, I see about $960 billion 

in what I would call either imaginary or unspecified savings, in one 

case wishful savings, and we have talked about some of them 

today, but not all of them. 

The doc fix we have talked about, and Senator Stabenow said she 

was pleased to see that you covered the doc fix through 2013, I look 

at that very differently. I see about $62 billion in savings, but those 

are 10-year savings, and actually on an annual basis over those 

years it covers only about 8 percent of the costs for those two fiscal 

years and I wonder how that is considered a doc fix. If you look 

at the $315 billion in unspecified savings that you have for the doc 

fix, I am not sure where that comes from. 

You look at the trust fund for transportation, it is called the Bipartisan Financing for Transportation Trust Fund—I guess that 

means Democrats and Republicans are both going to pay higher 

taxes—but I am not sure what that means. I have been told it is 

a gas tax hike, but that is not what it says in the budget, and I 

have been told by others it is not a gas tax hike, so it seems to me 

that is unspecified. 

And last, of course, the AMT relief. We have talked about that. 

I guess you have clarified today for me that it is a reduction in tax 

expenditures related to limiting deductions on high-income individuals. That has always been considered a dead-on-arrival proposal, 

as it was last year in the budget, so I think that may not be imaginary or unspecified but may be wishful. 

If you add all these up, you get to a deficit that would be higher by about $964 billion, almost $1 trillion. Of course, that virtually 

eliminates the, I think, $1.1 trillion savings that you all are claiming in the budget. So I am just—I am concerned about the overall 

budget and the big picture we have talked about today because it 

does not address the fundamental issues. It does increase the debt 

substantially, doubles it over the 10-years. But also, even the savings here, I wonder if you could tell me why you think these are 

real savings. 

Mr. LEW. Senator, I am happy to. You know, I think if you take 

these items individually, the offsets that we use to pay for the 2- 

years of the so-called doc fix are very real savings. There is in the 

program integrity area 16 specific line item proposal. We have policy behind each of them. 

I think the notion of pay-as-you-go rules are that you can take 

savings over 10 years and apply them to spending within the 10- 

years and that is how we pay for it. So it is consistent with payas-you-go scoring and I think that is a very solid set of proposals. 

Senator PORTMAN. These are Medicare savings over 10 years—— 

Mr. LEW. It is a combination of Medicare, Medicaid, Federal Employee Health Benefit Program. It is a variety of very specific policies. 

Senator PORTMAN. You pay for the 2-years—— 

Mr. LEW. I would say that on the surface transportation bill, we 

are very clear in the budget that if we can work together on the 

policy for the investments, we need to also work together on the 

policies of paying for it because we do not get one without the 

other. So I do not think that—it does not increase the deficit. It 
514 

just increases the risk of whether or not we can fund the surface 

transportation priorities. There are a lot of different ways that one 

could fund them, and in the past there has been—it has been an 

area where there has been the ability to work together on a bipartisan basis. We may have disagreements on the priorities. It may 

not be that the program is one where we all agree. 

Senator PORTMAN. No, I think—let us assume we agree on that, 

but there is—— 

Mr. LEW. The pay-fors will have to follow or we do not get the 

investment. 

Senator PORTMAN. This is a budget that claims the pay for and 

you are just out there that the pay for, we will figure out. 

Mr. LEW. On the AMT, we do not count savings beyond the provision I have described. And on the doctor fix in the out years, you 

know, it is—there is going to need to be a debate on what to do 

to resolve this so that we do not have to deal with it on an annual 

basis, so we have a reasonable policy on reimbursement and we do 

not keep going back to something that everyone agrees cannot happen. And that is what we are proposing that we work together to 

do in this 3-year window that we pay for. 

Senator PORTMAN. Mr. Chairman, I do not know how much time 

you are allotting us. It went down to zero and back up to 3 seconds—— 

Chairman CONRAD. No, that means you are 32 seconds over. 

[Laughter.] 

Senator PORTMAN. OK. All right. Well, I have a number of other 

questions. Again, thanks for being with us today, Director Lew, and 

I hope we will have a chance for a second round. 

Chairman CONRAD. Senator Nelson. 

Senator NELSON. Thank you for your public service. Putting this 

together has been tough for you. It is a good first step, but we have 

a long way to go. 

And one of the President’s stated goals is to expand the economy 

by expanding exports through our trade, and it was raised earlier 

and I want to underscore it. With the Panama Canal being expanded so that it can accommodate the very largest of the cargo 

ships coming from Asia so they do not have to dock in California 

and then incur the cost of taking the cargo off and putting it on 

rail or trucks and sending it to the East Coast, these large ships 

are going to be able to come right through the Panama Canal and 

come to East Coast ports and that is going to increase a good bit 

of activity both coming in and going out, a lot of economic activity. 

But most of the ports on the East Coast cannot receive the new 

large cargo ships because you have to get the channels dredged 

deeper. There are just about three ports on the East Coast that can 

accommodate the deep ships and there are others that want this, 

and yet there was no, despite pleas and begging on my knees for 

a de minimis new start, which we can match local and State funds 

for deepening channels, there are none in here. So this has already 

been addressed. I want to add my comment and you are to get back 

to us and I would appreciate it if you would get back to me, as well 

as to the other Senators who raised the issue. Thank you. 

OK. Now, you go through and you make up a budget. These are 

the President’s priorities. In the case where there is an authoriza-
515 

tion for appropriations, what is the guidance that the President 

gives you in following an authorization? 

Mr. LEW. Senator, the—in general, the policy is to look at each 

program and each department and to look to what the right policy 

for the next year is. An authorization in some cases is going to be 

the upper limit. In some cases, you propose than more it. In other 

cases, you propose lower than it. Senator, the President’s budget 

often proposes policy. If there is a specific program that you are 

asking about, as I suspect there is, I would be happy to address 

it. 

Senator NELSON. Well, for example, the President signed the 

NASA authorization bill last September and yet the budget does 

not necessarily follow the authorization bill. I am not talking about 

the overall level of funding. I am talking about the allocation of the 

dollars within the agency. Do you want to comment on—— 

Mr. LEW. Well, I think that, in general, we did try and fund programs in a manner consistent with the authorization. There is a 

general tightness in this budget where we did not have as much 

money to allocate as—— 

Senator NELSON. That is not what I am talking about. 

Mr. LEW. I understand, and we have tried to reflect the policy 

in the authorization and the budget. If there are specific areas 

where we have not, I am happy to discuss them with you. 

Senator NELSON. Yes. For example, in the authorized budget for 

the new heavy-lift rocket, you all in fiscal year 2012 have cut it 

over a billion dollars. You cannot build a rocket cutting it a billion 

dollars. And I am talking about the capsule, as well. But, on the 

other hand, when we put this delicate balance together between 

the heavy-lift and also the commercial rockets, which we support, 

and Senator Cornyn’s colleague from Texas is the one that helped 

me put this thing together, the fact is that you all decided, well, 

the commercial rockets ought to have more money than was authorized, and I am just wondering why you are not following the 

law. 

Mr. LEW. Well, I think the President’s budget is an opportunity 

to propose funding levels that are consistent with the policy requirements. We looked at the authorization and tried to track it. 

We had lower total funding levels. We saw there as being real need 

for the commercial satellite. We tried to hit the right balance. I understand that that may be something that we have some different 

views on and I look forward to working with you on it. 

Senator NELSON. OK. And the law is the law, and the good news 

is, Mr. Chairman, the President proposes and the Congress disposes. 

I know my time is up. I am going to submit a question for the 

record about the difference in the budget that you assume the cost 

of acquiring the takeover of Fannie and Freddie, and that is much 

different from the Congressional Budget Office estimate, and so I 

will submit that for the record. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. Thanks for your respecting the 

time. 

Senator Thune is actually next. 

Senator THUNE. I see everybody is really happy about that. 

[Laughter.] 
516 

Chairman CONRAD. Let me just say this for colleagues. I am not 

going to be able to do a second round. I have to stop at 4. So we 

have three left and we are going to have to press ahead. 

Senator SESSIONS. Mr. Chairman, I know you do have a very serious schedule problem, but I had hoped that we would have a second round. I do not think we have begun to sufficiently inquire into 

this budget at this critical point in time. Perhaps if you cannot extend it, could you extend the time by which we could file written 

questions? 

Chairman CONRAD. Yes, I would be glad to do that, and I apologize. Normally, it is my practice here to go as long as people want 

to go. Today, I cannot do it, so we have to close at 4. Obviously, 

we are not going to quite meet that. 

Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman, and Director Lew, 

thank you for being here today. I know that—I do not want to rehash a lot of the old ground because everybody has been very critical of the budget proposal, and forgive me if I ask questions that 

have been asked already. I have not been in the room when some 

of the others have asked. 

But it does seem like everybody knows this entitlement thing is 

just a time bomb waiting to blow up and that there would be some 

proposal, particularly given the fact that there was a debt commission that made a number of recommendations, at least on Social 

Security reform. I understand that the Medicare-Medicaid aspect of 

that which is health care attributable is a more difficult nut to 

crack. No less, we need to get after that, as well. But why is there 

not any attempt to deal with these long-term problems? I mean, 

you have a budget which literally goes from $13 trillion in gross 

debt, or $14 trillion in gross debt, which is where we are today, to 

$26.3 trillion in gross debt. 

Mr. LEW. Senator—and I apologize if I repeat for others what I 

said in response to an earlier question—the Social Security issue 

is a very complicated one, but I think it is important to understand 

that it is not contributing in the short run to the deficit problem. 

And I just want to correct something I said before, because I may 

have used a number incorrectly. 

The Social Security Trust Funds will not be exhausted until 

2037. You know, they do not—they continue to grow because of 

both the balances that have been built up and the interest that is 

paid on those balances until 2025. And it is something that we 

ought to deal with because it is the right thing to do. We ought to 

be able to tell our children and our grandchildren that they can 

rely on Social Security just like our parents could. We need to separate it from the short-term deficit discussion. I actually think that 

will be the only way that we can have the kind of serious bipartisan conversation, because it is not contributing to the problem in 

this window. 

The President said in the State of the Union that he wants to 

work on a bipartisan basis to do it. He laid out some principles 

there. Those principles are repeated in the budget. 

It is a challenge to have a conversation about Social Security in 

a bipartisan way. I have worked on the issue for 30 years. It has 

always been a challenge. The easiest thing in the world to do is to 
517 

polarize the debate over Social Security. The President has worked 

very hard to extend a hand to have a conversation, and I think 

that is leadership. I think it is leadership to say we need to have 

that kind of adult conversation. 

Now, we have to figure out how to do it. I understand that, you 

know, there is an impatience to get on with it. But we ought to 

look at when the problem really hits. If you have a problem where 

the trust fund will be exhausted in 2037 and we are saying in 2011 

that we want to have a conversation about it now, we think we are 

taking a pretty long look, and I hope we can work together on it. 

Senator THUNE. Well, we are putting IOUs, like we do all the 

time, into these trust funds. I mean, it is operating at a balance 

with less coming in and more going out. But I guess that was my 

point. 

Mr. LEW. I would just take issue with the IOU description because they are Treasury bonds and the Federal Government has always honored bonds. 

Senator THUNE. But it is debt. But my point, though, is this: I 

understand, OK, so Social Security, let us say that that is not as 

big of a factor as perhaps the other two are. Why would you wait? 

I mean, the adult conversation occurred during the Debt Commission. The Debt Commission made recommendations. The President 

appointed this debt Commission. You have all the experts who got 

together and said this is what we need to do, and to me, saying 

we need to have a conversation somewhere down the road about 

this, that is not leadership. And why would you—if Social Security—if your perception is that it is not a problem until some point 

in the future, what about Medicare and Medicaid? I mean, we all 

know that this is 60 percent, and growing, of the budget all the 

time. 

Mr. LEW. The administration has done quite a lot in the area of 

health care in the first 2 years. There may be different views about 

the merits of what we have done, but the Congressional Budget Office agrees with us that we save hundreds of billions of dollars in 

the first 10 years and $1 trillion in the second 10 years. In addition 

to that, in this budget we have $62 billion of additional savings in 

health programs. So we have put quite a lot forward in health programs. 

We are open to new ideas. The President made it clear; he does 

not think that we have a monopoly on good ideas. He wants to 

work together to move forward in this conversation. But I do not 

think it is fair to say that the President has not taken leadership 

on health care. He has taken a lot of leadership. 

Senator THUNE. Well, I think we disagree about that question, 

but quickly—— 

Mr. LEW. We may disagree on the policy. I do not think we can 

disagree that he has taken leadership. 

Senator THUNE. On a technical point, the economic assumptions 

about growth that you come up with are at least a point higher annually than are those that come up—that the CBO came out with. 

How do you come that far apart? That is a significant amount. 

Mr. LEW. Our assumptions are in the middle range of the Federal Reserve Board’s analysis. The basic difference between the 

Congressional Budget Office assumptions and ours is that we be-
518 

lieve that, consistent with past history, we will recover from this 

recession, and as in all financially led recessions, we will ultimately 

get back to the level of economic growth that existed before the recession. 

CBO assumes that we will permanently have a loss of economic 

capacity. We disagree with that assumption. One can disagree 

about the trajectory, and, you know, we may be right or wrong on 

how many years it gets there. But we believe strongly that we will 

get back to that rate of growth. 

Senator THUNE. Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Senator. 

Senator SANDERS. 

Senator SANDERS. Thank you, Mr. Chairman. I apologize for 

being late. I was chairing a hearing. 

Mr. Lew, the President has proposed in his budget to let the 

Bush tax cuts for the wealthiest 2 percent of Americans expire at 

the end of 2012. 

Mr. LEW. Correct. 

Senator SANDERS. Now, a few months ago, when the Democrats 

controlled the House, when Democrats had a larger majority in the 

Senate, the President conceded that point to the Republicans and 

extended the tax breaks for 2 years. Why do you have any belief 

whatsoever—and maybe my Republican colleagues would like to 

chime in on this—that, in fact, these tax breaks will be terminated 

when Republicans, who are adamantly for these tax breaks, are in 

power in the Senate? 

Mr. LEW. Senator, when we worked on the tax bill in December, 

the President made it very clear that his position had not changed, 

that he believes that these tax rates should not be extended permanently. In the context of trying to work together to do something 

that was very immediate so that we would have economic growth 

this year and not have a tax increase this year, we had a 2-year 

extension. This is consistent with the position he took then, and we 

are going to—— 

Senator SANDERS. But I asked you a question. Given the dynamics of politics, when Democrats controlled both bodies, I do not 

think any of my Republican friends would disagree, it ain’t going 

to happen. 

Mr. LEW. But I think there were very few who predicted that the 

tax agreement would happen, so I think in the area of predictions, 

lots of times—— 

Senator SANDERS. Well, many people did not predict that that 

tax agreement, which gave hundreds of billions of dollars in tax 

breaks to the top 2 percent, would have happened. Many of us wish 

it did not happen. 

Let us talk about Social Security. When the President ran for office, he was very clear in saying that Social Security has been an 

absolute success for the last 75 years, it is vital to the well-being 

of the working people of this country, and campaigned and saying 

that he wanted to extend the life of Social Security and its financial solvency by lifting the cap on taxable income coming from people who made more than $250,000 a year. He saw that as the solution. He saw that as fair. I happen to agree with him. Is that still 

his position? 
519 

Mr. LEW. You know, Senator, I think that what the President 

said is that he thinks we ought to work together on a bipartisan 

basis—— 

Senator SANDERS. No, I asked you a question. Is that still his position? 

Mr. LEW. I think his position, as he stated it then, that there is 

room to raise the cap and that will help extend solvency remains 

true. 

Senator SANDERS. That will extend it. That will solve the problem. 

Mr. LEW. The challenge we are going to have to work together 

for a bipartisan solution is going to be to find something we can 

all agree on. And I think he has tried to indicate that it is not necessary to cut benefits for current retirees or to—— 

Senator SANDERS. For current retirees. 

Mr. LEW [continuing]. Benefits in the future. And that is a 

framework for a conversation. 

Senator SANDERS. A framework for a conversation. Let us stay 

on that point a little bit. Is the framework for a conversation cutting benefits for younger workers? 

Mr. LEW. I do not want to address hypothetical provisions. I 

think that the issue of Social Security is one that ought to cross 

party lines. I think we—— 

Senator SANDERS. What position are the Republicans stating that 

you feel that we can work with them on? 

Mr. LEW. I think that there is going to be a need for us to look 

at options where—— 

Senator SANDERS. What options? 

Mr. LEW. Senator, it is premature for me to address the specific—— 

Senator SANDERS. Are we going to cut benefits for workers? 

Mr. LEW. The President said clearly that we are not going to cut 

benefits for current retirees, and we are not going to slash benefits 

for future retirees. 

Senator SANDERS. ‘‘Slash’’ is a big word. What does ‘‘slash’’ 

mean? 

Mr. LEW. I am going to stick with the words the President used. 

Senator SANDERS. Slash? Or we can cut. You can cut but not 

slash. Well, let me ask you this question—— 

Mr. LEW. Senator, I really—— 

Senator SANDERS [continuing]. About Social Security. 

Mr. LEW. I really think I should leave the President’s words to 

say it. 

Senator SANDERS. All right. Let me ask this question. Has Social 

Security, which is funded by the payroll tax, contributed one nickel 

to the deficit of this country? 

Mr. LEW. Social Security is fully funded through 2037. 

Senator SANDERS. Has it contributed one nickel to the deficit? 

Mr. LEW. No, it has actually been helping with—— 

Senator SANDERS. That is right. 

Mr. LEW. Yes. 

Senator SANDERS. If Social Security has not contributed one nickel to the deficit, why are we looking at it within the context of deficit reduction? 
520 

Mr. LEW. I agree. Senator, I have said four times at this hearing 

it should not be looked at in that context. 

Senator SANDERS. OK. How many years will Social Security pay 

out every benefit to every eligible American? 

Mr. LEW. If we take no action, the trust fund is exhausted in 

2037. 

Senator SANDERS. So that is another twenty—and there are varying opinions, 23, 24 years. Some say longer. 

Mr. LEW. These numbers—— 

Senator SANDERS. Some say—— 

Mr. LEW. When the trustees do new estimates, the numbers 

could change. 

Senator SANDERS. Right. Exactly. At which point it would pay 

out about 75 or 80 percent of all benefits. How does—— 

Mr. LEW. Because current revenue will fund benefits, correct. 

Senator SANDERS. Right. How does that issue of paying out every 

nickel owed to every eligible American for the next 23, 25 years, 

whatever it may be, compare to the fact that in real terms unemployment today in terms of official plus people who have given up 

looking for work, people who are working part time who want to 

work full time, is at 16 percent? I mean, is that more of a crisis 

than worrying—— 

Mr. LEW. Mr. Chairman, should I—— 

Chairman CONRAD. For you to answer the question—— 

Mr. LEW. Mr. Chairman, I am looking for direction as to whether 

I should go on. 

Chairman CONRAD. Answer the Senator. 

Mr. LEW. Senator, the President has made clear that he views 

getting the economy moving and creating jobs is an immediate priority. This whole budget is built around the premise that we need 

to build an economy for today and for the future to create jobs. We 

have to be able to handle multiple challenges, and we are not comparing the immediacy. The fact that Social Security is important 

and we should look at it as a long-term issue, we should not wait 

until it is on the eve of crisis, shows a real concern that we have 

a compact across generations that we need to keep. It is not a deficit reduction question, and we have not tried to suggest that it has 

that kind of urgency. It does have that importance, though. 

Chairman CONRAD. Senator Cornyn. 

Senator CORNYN. Mr. Lew, assuming the Federal Government 

spends $3.7 trillion but only receives $2.2 trillion in revenue, that 

leaves an annual deficit of $1.5 trillion, correct? 

Mr. LEW. That would be the arithmetic. 

Senator CORNYN. Well, that is about as sophisticated as I get 

when it comes to arithmetic, so bear with me. But the cumulative 

effect of that annual deficit represents the debt, which is currently 

roughly $14 trillion. Isn’t that right? 

Mr. LEW. Right. 

Senator CORNYN. So here is my question, and it is not a trick 

question, I assure you. We are talking about cutting spending—and 

I agree with my colleagues that I am disappointed that the President’s proposed budget does not do a better job, and I trust that 

the House and the Senate will do a better job. In fact, from 2008 

levels this budget represents a 33-percent increase in discretionary 
521 

spending, leaving out emergency and the Department of Defense 

spending. But, really, I do not want to talk to you so much about 

the cuts, in other words, what that top line should be. I want to 

talk to you about what do we do to grow that bottom line, because 

that is the gap we need to close, right, both within sensible cuts 

or limits in Federal spending but also how do we get the economy 

growing again to bring that bottom line up? Would you agree with 

me? 

Mr. LEW. If you look at our projections over the next 10 years, 

the most important single thing is getting the economy moving. If 

we do not get the economy moving, there is no way for us to make 

enough policy to close the gap. So—— 

Senator CORNYN. Thank you. You and I agree—— 

Mr. LEW. Which is why this budget is built around keeping the 

economy moving. 

Senator CORNYN. Well, you and I may disagree about that. 

Mr. LEW. I thought we might. 

Senator CORNYN. You project the unemployment rate or assume 

the unemployment rate next year will be 8.6 percent, right? In 

other words, it is still going to be stubbornly high. Would you 

agree? 

Mr. LEW. Yes, the unemployment rate is higher than we want it 

to be now, and it remains too high for too long. 

Senator CORNYN. And that is because the private sector is not 

creating jobs adequate to hire enough people to bring that number 

down. Wouldn’t you agree? 

Mr. LEW. It is because we are recovering from the deepest recession in a generation, and historically the recovery period and the 

job creation after financially led recessions is longer. So we are on 

a path, but we are doing everything we can to push that path harder. 

Senator CORNYN. But with all due respect, you are not answering 

my question. My question is: The reason why unemployment rates 

are high is because the economy is not growing faster in a way that 

would create those jobs and bring unemployment rates down, correct? 

Mr. LEW. To be clear, the economy is now in recovery. We are 

growing at rates that are, you know, 3 to 4 percent. That is not 

good enough. But we see a return to growth rates in this immediate forecast period that starts to get back on our feet. 

Senator CORNYN. Well, I would say that most Americans would 

believe that 8.6 percent unemployment next year is unacceptably 

high, and we need—— 

Mr. LEW. And we agree with that. 

Senator CORNYN. And we need to find ways to grow the economy, 

primarily by encouraging the private sector to invest and to expand 

businesses and create jobs. 

I want to ask you, how in the world is the private sector supposed to do that when this budget assumes tax increases of $1.6 

trillion? 

Mr. LEW. You know, I think if you look at the tax policies in this 

budget, they are consistent with the tax policies that were in place 

when we had the longest period of uninterrupted growth in our Nation’s history. 
522 

Senator CORNYN. And that is not my question. How is economic growth consistent with the tax increase of $1.6 trillion? Are you 

going to say the economy is going to grow in spite of that anti-stimulus effect of increased taxes or because of it? 

Mr. LEW. The challenge we have is coming out of a deep recession, dealing with a structural deficit that was caused by a series 

of a policy decisions that were made to have tax cuts and spending 

increases and not pay for them. We are now paying that price, and 

we have to work together to close that gap, and we have to do it 

by having everything on the table. We cannot do it by just cutting, 

as people said, the 12 percent of the budget that goes to annual appropriations. 

Senator CORNYN. But you are not saying, are you, that a $1.6 

trillion tax increase will stimulate that economic recovery? Are you 

saying that? 

Mr. LEW. I am saying that we have tax policies in this budget 

that are consistent with economic growth. We have tax incentives 

to encourage economic growth. We have spending policies to encourage economic growth. We may disagree on some of the composition. We do not disagree on the goal, and I hope we can work together on working through the differences— 

Senator CORNYN. I agree we disagree that this budget does encourage economic growth, and indeed I think it discourages it. But 

let me ask you my last question since we have just a short time 

together. 

You project in this budget that interest on the debt will over a 10-year period of time total $5.7 trillion. I wonder if you would 

comment on a Bloomberg article that reports a Treasury Department meeting with a 13-member committee of bond dealers and investors where they say that interest expense on the debt will rise 

to 3.1 percent of gross domestic product by 2016 from 1.3 percent 

in 2010 with the Government forecast to run cumulative deficits, 

so forth and so on. My question is: We are right no seeing relatively low interest rates because the Fed is trying to help with the 

recovery. But if interest rates double or triple, the assumptions 

that you make on the debt service, the interest that is paid on that 

debt could well—will double and triple along with that, correct? 

Mr. LEW. And our economic assumptions do assume an increase 

in interest rates over the period consistent with the economic 

growth that we forecast. 

Chairman CONRAD. I thank the Senator. 

Senator ENZI. 

Senator ENZI. Thank you, Mr. Chairman, and thank you, Director Lew. I was a strong—I was a cosponsor of the Deficit Commission, the Conrad-Gregg Deficit Commission, and I voted for it. And 

I was pleased that the President picked up the reins on that and 

appointed a committee. And I was pleased with almost everything 

that they proposed and think that probably all of them could be 

passed if they were done in steps rather than as one lump sum. 

I think the opposition—but I noticed in the budget that there are 

provisions for repealing a bunch of the oil and gas tax expenditures, and that was a proposal of the Deficit Commission, but it 

was in exchange for lowering the corporate rate so that we could 

be more competitive internationally. Instead, we are taking that 
523 

money and utilizing it as a pay-for, and we are going to drive up 

the cost of energy. Can you explain to me why we are stealing it 

from there instead of doing what the Deficit Commission suggested? 

Mr. LEW. Senator, we do have policies in this budget to undertake corporate tax reforms that will be deficit neutral, broaden the 

base, and lower the rates. We also have policies in the budget that 

we think make sense on their own, and these oil, gas, and tax provisions are a part of them. I think that as we engage in the conversation, we are going to have to work through these issues together and see if they should be treated together or apart. But 

I—— 

Senator ENZI. If the expenditure has already been made, then it 

cannot be used to do the other piece there. I noticed there was a 

piece in there about LIFO, too, and I do not think they realize the 

impact that that will have on small business having to put cash up 

front to pay for the things there, just as the small oil and gas companies would have to put cash up front to do what has been proposed in this. 

When I talked to the Commission, primarily the two co- chairs, 

I suggested that any of these provisions were done had to be done 

over a period of time for the businesses to be able to adjust. The 

cash up front is not available for anybody right now. So it looks 

like it would put a lot of people out of business and raise prices. 

So we will be getting a little more information on that, too. 

I have a whole series of questions. I will not ask them all. I do 

want to mention that in 2006 we reauthorized the Abandoned Mine 

Land Trust Fund. That was done over a point of order because it 

was mandatory spending. That is a trust fund like the Social Security Trust Fund. If we default on that debt, I think we are saying 

something about how valuable our trust funds are. 

One of the things that we passed just recently was a Form 1099 

reporting under health care, and that covered both the $600 in a 

calendar year for corporations and for property. And I noticed in 

the budget that you only did the part that applied to corporations. 

Why is the administration rejecting the Senate amendment and offering a proposal—and it is an amendment that has come up before 

and had very substantial support—offering a proposal that only 

gets half the job done? 

Mr. LEW. Senator, we support addressing the 1099 provision and 

look forward to working together on that. This budget was put together before the Senate provision that recently was passed, and 

I would have to go back and study the two to understand the difference. 

Senator ENZI. Well, the President in his State of the Union 

speech even promised that the 1099 would be gone, but only half 

of it is going to be gone. I appreciate the question that Senator 

Wyden asked about the effect the budget is going to have on the 

750,000 small businesses. And I know we are in a hurry, so I will 

submit the rest of my in written form. 

Chairman CONRAD. I thank the Senator for his courtesy. 

Senator MERKLEY. Senator MERKLEY. Thank you, Mr. Chair, and thank you for your 

testimony. And I wanted to start with the county payments, and 
524 

I know from the conversations that we have had and other Senators have had with you that you understand the basic framework 

in which BLM lands were set aside to produce timber and to 

produce revenues for the counties. The Federal Government has 

come along and said, well, we are going to put some restrictions on 

this, but we will compensate for those restrictions. And now the 

Federal Government has come along and said, well, maybe we will 

not compensate you for those restrictions. 

I do want to applaud the fact that you have this in your budget 

for 2012. We are still trying to understand exactly what that number is. There is a little bit of a cryptic nature to it. But it also appears that it has been moved from the mandatory funding into the 

discretionary funding, which is an item of tremendous concern. It 

has always been a mandatory funding because it was a contract between the Federal Government and the timber counties. And so I 

just wanted to ask that question of you and try to get some sense 

of whether we are reading this correctly, that it has been moved 

to discretionary, and if so, why. 

Mr. LEW. Senator, we did fund it on the discretionary side, but 

we also indicated an openness to working with Congress to resolve 

the matter in the course of the legislative process and did not take 

a firm position that it had to be discretionary versus mandatory. 

We thought that fitting it within the tight caps, given the pressures, saving $400 billion over 10 years, was a way to make a real 

commitment to the funding request. And we look forward to working with you and Senator Wyden and others as we go forward. 

Senator MERKLEY. Thank you. Then for now I will just register 

that that is of significant concern because it suggests that it is not 

being viewed as a contract as it has been in the past. And, of 

course, we are calling upon the Federal Government to honor its 

contract with the counties. 

I wanted to turn to the President’s support for renewable energy 

and energy efficiency and clean energy technology in the budget request, and there are several pieces in there I am delighted to see. 

One of them is related to the funding of low-cost loans for energy 

renovations. Another is related to electric vehicles. And I am coming at this from the point of view of trying to think of our economy 

the way you would think about positioning a company. And if we 

are in a world where we are importing $1 billion a day of oil and 

sending that money overseas, there are national security issues associated with that. There is certainly the fact that those dollars do 

not stay in our grocery stores and our retail outlets and create additional jobs for Americans. And then there is the fact that as we 

substitute for oil, we can also produce less carbon dioxide and read 

some of our goals for addressing global warming. 

So I would like to see all of that, and I just want to know if you 

know of any potential barriers, either in budgeting or in procurement procedures, that would be problematic as we attempt to undertake one piece of that, which is electrifying the Government 

fleets. 

Mr. LEW. Senator, we have put in a broad range of proposals 

from research and development to incentives for commercialization 

to try and get the United States into the leadership position we 
525 

should be in, both in terms of developing and producing these technologies and in using them. 

I am happy to take a look at the provisions regarding the Government fleet. That is not a provision I off the top of my head remember the details of, but I am happy to get back to you. 

Senator MERKLEY. Well, I have really come to this point of view 

of applauding the administration of taking this seriously. We have 

had administrations in the past that have talked about attacking 

our dependence on foreign oil and our addiction to oil in general. 

And we have not been able to follow through with coherent American policies to end this. I think we can simply look at the turmoil 

of these last few weeks in the Middle East and recognize that not 

only are we sending a ton of money to governments abroad, but 

many of those governments are governments that do not always 

share our national interests and end up funneling some of that 

money into groups that we are actually in opposition to around the 

world. 

So for a whole host of reasons—— 

Mr. LEW. We win in three ways if we succeed in this policy. 

Senator MERKLEY. Absolutely. 

Mr. LEW. We reduce our dependence on foreign oil, we create 

American jobs, and we have environmental benefits. That is why 

we think it is so important to do it. 

Senator MERKLEY. And thank you so much for your effort in the 

budget to take on that area. 

In the 6 seconds I have left, community development block 

grants, I just want to express a lot of concern about the cuts that 

are there. Many of these benefit low-income people through affordable housing projects and many other projects within communities. 

We are still facing a situation with 300,000 foreclosure filings a 

month across America, and I look forward to working with you all 

to make sure that we do not balance this budget on the backs of 

those who are struggling in their community and are hardest hit 

by this recession, which was caused by the deregulatory policies of 

the Bush administration, with predatory lending and runaway 

Wall Street gambling, and we should not solve this problem by further kicking those who have been hurt by this economy. 

Chairman CONRAD. That will have to be the last word. Let me 

just thank Director Lew. I thank all colleagues. Because of the inability to get to a second round given the number of colleagues who 

participated today, instead of closing out questions at the end of 

today, we will extend that until noon tomorrow, give colleagues a 

chance—— 

Senator SESSIONS. How about all day tomorrow, Mr. Chairman? 

Chairman CONRAD. Would you prefer that we do it until the end 

of tomorrow? 

Senator SESSIONS. Yes, if you would, at least. 

Chairman CONRAD. All right. We will do that. So, Director Lew, 

I would ask you to take up those questions expeditiously. 

Mr. LEW. I would be happy to. 

Chairman CONRAD. Senator Sessions. 

Senator SESSIONS. Briefly, Mr. Lew, I want to stress again my 

displeasure with your statement that our budget will get us over 

the next several years to the point where we can look the American 
526 

people in the eye and say we are not adding to the debt anymore, 

we are spending money we have each year, and then we can work 

on bringing down the national debt. I believe that is inaccurate. I 

believe any American that heard that would believe that this budget balances. It does not come close to do so. And this chart up here, 

I know it is on this primary balance theory that does not count the 

interest, but under your plan, the President’s plan, at the end of 

your 10-year budget the interest will be $844 billion in 1 year, 

dwarfing all of these other agencies and departments and expenditures—something which we have never seen before in our country, 

and it threatens our debt structure and our economy. 

Mr. LEW. Senator, I do not disagree that we have to take on the 

debt and we have to pay down the debt and reduce the interest 

payments. The only thing I take issue with—— 

Senator SESSIONS. Does this budget do it? 

Mr. LEW. I think we get to the point where we—— 

Senator SESSIONS. Does it do it? 

Mr. LEW. It gets us to the point where we stop adding to the 

problem with our new spending, and that is—— 

Senator SESSIONS. The debt goes up every year, and the deficit 

is—the debt has increased—doubled over this period. 

Mr. LEW. I just think that if we are going to have the kind of 

conversation we need to have to resolve this, we have to have it 

in a way where we respect each other, and I respect your position, 

Senator. 

Senator SESSIONS. Well, I cannot respect a position that suggests 

this budget reduces the debt. If you take that position, we are talking beyond each other. The Wall Street Journal said about this 

budget—— 

Mr. LEW. I said we stop adding to the—— 

Senator SESSIONS [continuing]. That it is as detached from reality as—— 

Mr. LEW. No, we stop adding to the debt—— 

Senator SESSIONS. —Mr. Mubarak. 

Mr. LEW [continuing]. With our new spending. We do have interest payments. We have to control those interest payments in the 

future. This is a downpayment. We have to finish the job. 

Senator SESSIONS. Forgive me, Mr. Chairman, but this is a—I do 

not think it is a matter of opinion. I believe, Mr. Lew, it is flatly 

in error, and it cannot continue. And I hope the President and he 

never repeats that this budget balances at any point in the 10 

years. 

Chairman CONRAD. Director Lew, do you want to respond? 

Mr. LEW. No, I mean, I really do not mean to be argumentative 

about this. I think there is a very complicated idea here that we 

are trying to work through together. You know, in order for us to 

get to the point of reducing the debt, there are several things that 

have to happen. We have to have taxes and revenues that cover 

our current spending, and then we lock in an amount of the debt 

that will continue to have interest. That interest compounds until 

we pay down the debt. We have to then reduce the principal of the 

debt so the interest stops compounding. I think we agree on that 

in principle, and if the language of Federal budgeting is confusing, 

I apologize for that. I did not invent the language. And I would 
527 

like- -I really would like to work together, because I do not disagree 

with you in the core principle that we have not solved the problem 

until we have really brought down the debt. And I think what we 

have put on the table is a huge step to put us in a place where 

we have the kind of stability to then go forward and take the next 

step. 

Chairman CONRAD. Let me just conclude on my own. Senator 

Sessions has expressed himself clearly. Let me express myself 

clearly. I believe in the near term this budget has it about right. 

I believe as passionately as Senator Sessions does that for the long 

term we are going to have to do a whole lot more. I do not believe 

it will happen next year in an election year. I personally believe we 

have to have a long-term plan agreed to this year. I believe it has 

to be on the range of what the Commission proposed, which is $4 

trillion of debt reduction over the 10 years. The administration’s 

description of its plan is $1 trillion. We will see what CBO says 

when they do a re-estimate. 

But, honestly, we have a responsibility to this country that is 

sober and somber and serious, and I believe history will condemn 

us all. I believe history will condemn us all if we do not do substantially more for the decade than is in this budget. I believe it fundamentally puts at risk the economic security of the country. And 

I believe that. I believe the evidence is quite strong that the risks 

that are being run are unacceptable risks. 

So I give you good grades for a beginning. Somehow—somehow— 

we have to find a way—and the administration has a big responsibility here—to help us understand their vision of how this process 

comes together. And, you know, we do not have a whole lot more 

time. Sometime very soon there is going to have to be a negotiation 

that involves the leadership of the House and the Senate, Republicans and Democrats, and the White House. And, honestly, I think 

the seriousness of this to the country cannot be overstated. 

With that, we will adjourn the hearing. 

[Whereupon, at 4:22 p.m., the Committee was adjourned.] 
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(639) 

THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

AND REVENUE PROPOSALS 

THURSDAY, FEBRUARY 17, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m., in room 

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

Present: Senators Conrad, Cardin, Sanders, Whitehouse, Begich, 

Coons, Sessions, Ensign, Cornyn, Thune, Portman, Toomey, and 

Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today we will focus on the President’s budget and revenue 

proposals. Our witness today is Treasury Secretary Tim Geithner. 

Mr. Secretary, welcome back to the Committee. We look forward 

to your testimony. We also value your wise counsel as we have 

come through some of the most difficult times in our economic history. I believe history will record the steps that were taken at the 

end of the Bush administration and the initial days of the Obama 

administration were absolutely critical to averting a financial collapse. I believe that history will make that clear. And I believe you 

played a hugely constructive role, as did Secretary Paulson at the 

end of the Bush administration. 

I believe the President’s budget gets it about right. In the first 

year or 18 months, even as it moves to cut spending, it continues 

critical investments in the areas of education, energy, and infrastructure. These near-term investments will help strengthen economic recovery and lay the foundation for long-term economic 

growth. 

I was raised by my grandparents, and my grandmother was a 

school teacher. We called her ‘‘Little Chief.’’ She was 5 feet tall, but 

she commanded respect. And in our family, she told us over and 

over, ‘‘There are three priorities in this household: No. 1 is education, No. 2 is education, No. 3 is education.’’ And she meant it 

and we got the message. So I know that she would feel very strongly that education has to be the cornerstone for future economic 

growth. 
640 

But I do take issue with the President’s budget in the medium 

and long term where I believe we simply have to do more to address our deficits and debt. According to the administration’s estimates, the budget brings the deficit down from 10.9 percent of GDP 

to 3.1 percent by the end of the 10-year budget window. So that 

is the good news of this budget, as I see it. 

The President’s budget does make substantial progress in bringing down the deficit as a share of the gross domestic product, which 

most economists say is the most valid measure. So a very substantial improvement in our deficit path by that measure. 
641 

Let us go to the next, if we can. 

If we are looking at dollar terms, the changes to the gross Federal debt under the President’s budget goes from $15.5 trillion to 

more than $26 trillion at the end of the 10 years. So over 10 years, 

we are averaging an increase in the gross debt of $1 trillion a year. 

That to me cannot be the path. 
642 

If we look at gross debt as a share of the economy under the 

budget, we can see it reaches 100 percent and continues rising 

slightly throughout the remaining budget window. Why is this important, that the debt is now—the gross debt, I want to emphasize, 

the gross debt, not the publicly held debt that you often see in the 

newspaper. The gross debt, taking all of the debt of the United 

States, is over 100 percent of GDP. Why does that matter? 
643 

Well, it matters because the best analysis that has been done of 

financial history, work done by the economists Carmen Reinhart 

and Kenneth Rogoff, found this: We examine the experience of 44 

countries spanning up to two centuries of data on central government debt, inflation, and growth. Our main finding is that across 

both advanced countries and emerging markets, high debt-to-GDP 

levels—gross debt above 90 percent—are associated with notably 

lower growth outcomes for the future. That is why this matters. A 

debt that is too high acts like an anchor on the economy, reduces 

future economic growth, reduces opportunity for the American people, reduces job prospects for those seeking employment. 

So these debt figures are more than numbers on a page. This 

matters to real people and their lives. It matters to the thing I 

think everyone around this table cares the most about, which is future economic opportunity for the people of our Nation. 
644 

Make no mistake. We are at a critical juncture. We are borrowing 40 cents of every dollar that we spend. Let me repeat that. 

We are—you know, this is reality. We are borrowing 40 cents of 

every dollar that we spend. Spending is at its highest level in 60 

years as a share of the economy. Revenue is at its lowest level as 

a share of the economy in 60 years. Revenue the lowest it has been 

in 60 years, spending the highest it has been in 60 years. No wonder we have record deficits. 

This has to be addressed, I believe, on both side of the equation. 

Yes, we have to cut spending. Yes, we have to reform entitlements. 

But, yes, we also need tax reform to help reduce the deficit and 

make America more competitive. We need to be realistic about 

what is necessary to meet the needs of the Nation and return the 

budget to a sustainable long-term fiscal trajectory. 
645 

Looking at revenues in isolation has led some to argue that revenue should be held to the historical level of 18 percent of GDP. 

That has been the level over the last 40 years. Let me point out 

revenue at that level would not have produced a single balanced 

budget in a single year in all of those 40 years. In fact, on the five 

occasions when the budget has been balanced or in surplus since 

1969, revenues have ranged between 19. 5 percent of GDP and 20.6 

percent of GDP. So I would just say to those who say, you know, 

revenue, no more than 18 percent of GDP, we would not have balanced the budget ever in the last 40 years—not one time. 
646 

The five times we have balanced, revenue has been from 19.5 

percent to 20.6 percent of GDP. I would argue it is going to have 

to be at the high end of that range given the retirement of the 

baby-boom generation. 
647 

Fundamental tax reform must be a part of the approach to addressing our fiscal problems. The current state of the Tax Code is 

simply indefensible. As a former State tax commissioner and chairman of the multi-state tax commission, I am acutely aware of what 

has happened to the Tax Code, and it is a Chinese riddle. You 

know, you have to be a contortionist to deal with this Tax Code. 

It is out date, this Tax Code. It is hurting U.S. competitiveness. It 

is hemorrhaging revenue. The tax gap, offshore tax havens, abusive 

shelters undermine the effectiveness of the Tax Code and cost confidence in the fairness of it. 

This Tax Code is riddled with expiring provisions. This creates 

enormous uncertainty for citizens and businesses, making it difficult for them to plan ahead. If we took steps to simplify and reform the Tax Code, we could reduce tax rates below where they are 

today and produce more revenue. Tax expenditures are running at 

over $1.1 trillion a year. That is as much as all of domestic discretionary spending. 

Although the President’s budget called on Congress to work with 

the administration to begin the process of tax reform, it did not include any significant tax reform recommendations. I believe the 

only way we are going to solve the Nation’s long-term fiscal imbalance is by enacting a comprehensive debt reduction plan. We need 

a plan in size and scope of what was proposed by the President’s 

Fiscal Commission. 

Here are the key elements of tax reform that were included in 

the Commission’s plan. It eliminated or scaled back tax expenditures and lowered tax rates to promote economic growth and dramatically improve America’s global competitiveness, which needs to 

be a goal. We are in a different world. When this Tax Code was 
648 

written, we did not have to worry about the competitive position 

of the United States. We were dominant. Now we are in a tough, 

competitive global environment, and we have to be competitive. 

The Commission proposal makes the Tax Code more progressive. 

I was proud that we made the Tax Code more progressive. The 

Commission’s report included an illustrative tax reform plan that 

demonstrates how eliminating or scaling back tax expenditures can 

lower rates. Instead of six brackets for individuals, the plan includes just three: 12 percent, 22 percent, and 28 percent. The corporate rate would be reduced from 35 to 28. Capital gains and dividends would be taxed as ordinary income. The mortgage interest 

and charitable deductions would be reformed, better targeting 

those benefits to people that actually need them. The child tax 

credit and earned income tax credit would be preserved to help 

working families, and the alternative minimum tax would be repealed. The Commission’s plan also increased revenue to 21 percent of GDP by 2022. That is the kind of tax reform I believe that 

we need to adopt. 

Let me just conclude on that point. I have gone longer than I 

would normally, but I do think that it was important to lay out 

some of the elements of what the Commission said and what I 

strongly believe. I will be quick to say there are many things that 

I disliked intensely about the Commission’s report. I remember one 

of my colleagues called me the night before we were to vote and 

said to me, ‘‘What are you going to do?’’ I said, ‘‘I tell you, the only 

thing worse than being for this is being against it.’’ And, you know, 

at the end of the day here, we are going to have to put together 

a package nobody is going to like. It is going to be controversial. 

Nobody is going to be happy. But it has to be done. It has to be 

done. 

Senator SESSIONS. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Mr. Chairman, thank you once again for your 

wise comments, your warnings to us. I think they absolutely should 

be heard, and the most important thing I think cannot be overemphasized is that we are not here fighting over spending and 

other issues and sacrifices that would have to be made for academic or political reasons, but because of the reasons you stated, 

our economy is in danger as a result of the path we are on. 

Thank you, Secretary Geithner, for appearing before us in the 

Committee today and discussing the budget. I know you did face 

a serious challenge after our financial crisis, but it would have 

been better if Mr. Paulson and Mr. Bernanke and the Chairman 

of the New York Fed had seen it coming before the financial crisis 

hit, and maybe we could have avoided it. And so now we have some 

suggestions that we could be heading to another one, and we need 

to take steps now to avoid it. 

It is clear that the plan submitted by the President does not seriously address the Nation’s growing fiscal crisis. Here, Mr. 

Geithner, is how you described our fiscal situation earlier this 

week, correctly: ‘‘Our deficits are too high. They are unsustainable 

and, left unaddressed, these deficits will hurt economic growth and 
649 

make us weaker as a Nation.’’ Admiral Mullen said it is the greatest threat to our national security. 

But the President’s budget does not confront this danger. In fact, 

the President’s budget continues the unsustainable course. The 

plan creates 10 straight years of deficits that never once fall below 

$600 billion and adds $13 trillion, at least from 2010, overall to our 

gross debt. Under the President’s plan, interest alone on the debt 

will rise to $844 billion in 1 year, more than we pay for Medicare 

or Medicaid. It is almost unthinkable that the President would put 

this budget before Congress and the American people as a longterm plan for our Nation. But to hear his supporters and certain 

administration officials describe the budget, you would think they 

had achieved balance and brought the debt crisis, the deficit crisis 

to an end. 

Here is what the President’s Director of Budget Jack Lew said 

over the weekend: ‘‘Our budget will get us over the next several 

years to the point where we can look the American people in the 

eye and say we are not adding to the debt anymore. We are spending money that we have each year, and that we can work on bringing down the national debt.’’ 

And here is what President Obama said just 2 days ago: ‘‘What 

my budget does is to put forward some tough choices, some significant spending cuts, so that by the middle of this decade our annual 

spending will match our annual revenues. We will not be adding 

more to the national debt.’’ 

Clearly, these statements, as heard by the American people, are 

incorrect, false. Yet, remarkably, the President’s new press secretary, Jay Carney, was asked about the President’s claim yesterday whether it would withstand scrutiny, and he said, ‘‘Absolutely.’’ In what fantasy world do we double our gross debt to $26 trillion 

and then say we are not adding to the debt? This is a serious matter, and to tackle our fiscal challenges, we need to work together 

and the President needs to lead the Nation in an honest conversation. 

But we have not seen from our President the willingness to look 

the American people in the eye and have a candid conversation 

about the challenges and what we will have to do to solve them. 

The message seems to be there is no problem; we have it taken 

care of; we are going to be living within our means under this 

budget. 

So I do think the President is taking a risk here with his credibility. During the same press conference, he complained about 

the—he expressed a desire to work with Republicans toward meaningful reforms. I do hope that can be accomplished. But I have to 

note it was kind of a mixed message when a couple of hours later 

he threatened to veto if Republicans took steps to reduce current 

spending by $59 billion, which is $100 billion less than his proposal 

for spending in that year. 

So let us remember, those arguing that we cannot reduce spending are the same ones who argued 2 years ago that the massive 

stimulus plan would speed our economic recovery. I believe they 

were wrong. Our recovery has lagged behind past recessions. Unemployment has remained painfully high. The failed effort to revive 

the economy through a surge in Government spending has instead 
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imperiled our economy with a crushing debt that stifles job growth 

today, as economists have shown, and threatens our prosperity tomorrow. 

So, Mr. Geithner, you will forgive me if I am unconvinced that 

arguments that are being made that we must preserve every cent 

of this year’s $1.65 trillion deficit is critical and we cannot change 

the course we are on. So we need to stop growing the Government 

and start growing the economy. That means reducing spending 

now. The situation is too urgent and the need for a new direction 

too great for us to delay action any longer. Significant reductions 

in spending may not be easy, but the reason they are not easy is 

because we have been heading in the wrong direction for so long. 

So, yes, we will have to make some tough choices, but they will put 

us on the right road, the road that leads to a better future. 

And, Mr. Chairman, we absolutely need to reform taxes. Thank 

you for raising that point. But I do want to emphasize that historically periods of frugality have helped us achieve a balanced budget 

also. 

Chairman CONRAD. I thank the Senator. 

Now we will turn to our witness. Secretary Geithner, thank you 

for your patience in listening to us. Thank you for your service. I 

have had a chance to work with you, and I have high confidence 

in you. And I know we are at really a defining moment in many 

ways for the fiscal future of the country. So please proceed with 

your testimony. 

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Thank you, Mr. Chairman, Ranking Member Sessions, and members of the Committee. Thanks for giving me 

a chance to come talk to you about these important questions, and 

I want to compliment both of you for running a very high quality 

debate, conversation, discussion of options on this critical issue. 

The President’s budget presents a comprehensive strategy to 

strengthen economic growth and to expand exports, with investments in education and innovation and infrastructure. And alongside these investments, the budget presents a comprehensive, detailed multi-year plan to cut spending and reduce deficits. 

As you quoted me saying, Senator Sessions, our deficits are too 

high. They are unsustainable; left unaddressed, they will hurt economic growth and weaken us as a Nation. We share a critical obligation to restore fiscal sustainability, fiscal responsibility, and go 

back to living within our means as a country. 

Now, the President’s budget cuts the deficit he inherited in half 

as a share of GDP by the end of his first term. These cuts are 

phased in over time in order to protect the recovery, the expansion. 

And in order to make it possible for us to invest in future growth 

and to reduce future deficits, the President proposes to reduce nonsecurity discretionary spending to its lowest level as a share of the 

economy since Dwight Eisenhower was President. 

To achieve this, as you know, the budget proposes a 5-year freeze 

of non-security discretionary spending at its 2010 nominal level, 

which will reduce the deficit by more than $400 billion over the 

next 10 years. But the President also proposes to cut defense 
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spending, to freeze civil service salaries, and to improve efficiency 

in Government by eliminating and reducing a very substantial 

number of Government programs. 

These savings create the necessary room for us to make targeted 

investments in support of reforms that will help strengthen future 

growth. The most important things we can do for future growth are 

to improve the quality of our education system, to invest in innovation, and to rebuild America’s infrastructure. Without these investments, America will be weaker and less competitive. 

Now, as part of this strategy for growth, the President proposes 

reforms to our tax system that are designed to encourage investment. We proposed to put in place a permanent and expanded tax 

credit for research and development; to eliminate capital gains 

taxes on small businesses; to encourage advanced manufacturing in 

clean energy technologies; to keep taxes on investment income, 

dividends, and capital gains low; to reform and extend the Build 

America Bonds program; to make college more affordable for middle-class Americans. 

Now, these tax incentives are accompanied by reforms that 

would reduce incentives to shift income and investment outside of 

the United States and to close loopholes and tax preferences that 

we cannot afford. 

Now, in addition, we propose to pursue comprehensive corporate 

tax reform that would lower the corporate tax rate. Our present 

system, as you all know, combined a very high statutory rate with 

a very broad range of expensive tax preferences for specific industries and activities. We need a more competitive tax system for 

businesses that allows the market, not tax lobbyists and tax planners, to allocate investment, a system which businesses across industries pay a roughly similar share of earnings in taxes, a system 

that provides more stability and certainty and is more simple to 

comply with. And we need to do this without adding to our future 

deficits. 

Now, we have begun the process of trying to build support for a 

comprehensive corporate tax reform plan, and I hope we have the 

chance, the opportunity to move forward on that soon. 

The President’s budget also outlines some responsible reforms on 

the individual side. We propose, as we have in the past, to allow 

the 2001 and 2003 tax cuts for the wealthiest 2 percent of Americans to expire on schedule; to limit certain deductions for those 

same high-income Americans; to restore the estate tax levels and 

exemptions to 2009 levels; and to close the carried interest loophole. These proposals—and I want to emphasize this. These proposals are designed to help ensure that the savings we achieve together in reducing spending are devoted to deficit reduction, not to 

sustaining lower tax rates for the most fortunate 2 percent of 

Americans. 

Now, this budget would achieve the dramatic reductions in our 

deficits over the next decade that are necessary, that are essential 

to stop the national debt from growing as a share of the economy 

and to stabilize the debt burden as a share of the economy at a 

level that will not threaten future economic growth. 

Could I just pause there for a minute to make the following point 

clear? When CBO scores these proposals in the next few weeks, 
652 

they will show higher deficits than we project. And, therefore, they 

will show deficits that are unsustainable over time. They will show 

debt rising as a share of the economy even in these next 10 years. 

Now, we recognize, as you do, that these reforms, even if enacted, would represent only a first step, only a downpayment on 

the longer-term reforms that are necessary to address our longterm deficits. To address the deficits we face beyond the next decade, over the next century, we have to build on the progress we 

achieve in the Affordable Care Act to substantially reduce the rate 

of growth in the costs of entitlement programs, health care costs. 

And although Social Security is not a contributor to our short- or 

medium-run deficits, we have to work together across the aisle to 

try to strengthen Social Security for future generations. 

Now, it is very important to understand that we cannot grow our 

way out of these deficits. They will not go away on their own. They 

will not be solved by cutting deeply into programs that are critical 

to future growth and competitiveness. And we have to find consensus on a multi- year plan that cuts where we can so that we 

invest where we need to and that reduces deficits over time. Making a multi-year commitment will allow us to make sure that these 

changes are phased in as the expansion continues, as the economy 

recovers from the crisis, and making a multi-year commitment will 

give businesses and individuals the chance to plan to adjust, to prepare for the impact of those changes on the economy over time. 

Now, these proposals, as I said, represent a starting point for the 

discussion. We recognize that there are different ideas, different 

proposals from both sides of the aisle for how to achieve the necessary reduction in our deficits. And we know, as you know, that 

we need both parties and both Houses of Congress to come together 

to enact solutions. 

Now, in December of last year, we were able to find bipartisan 

consensus on a very strong—not perfect in everybody’s views, but 

very strong package of tax incentives to help sustain the recovery 

and restore confidence. We have to bring that same spirit of compromise, of bipartisanship to the challenge of fiscal responsibility. 

Thank you. 

[The prepared statement of Secretary Geithner follows:] 
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Chairman CONRAD. Thank you very much for your testimony. 

Let me go to the—not that one, but that. This to me is kind of 

the nub of the issue. It is true that the President’s budget is stabilizing the debt, that is, that you are bringing down the deficits in 

a way that the debt as a share of the gross domestic product does 

not continue to increase. 

The problem that I see is that it is stabilized at a level that is 

too high, that it is stabilized at a level of gross debt of over 100 

percent of GDP. 

I go back to the Reinhart-Rogoff study. Two hundred years of financial history, 44 countries, their conclusion: When you have a 

gross debt of over 90 percent of GDP, future economic growth is diminished, and pretty significantly. 

Have you assessed the Reinhart-Rogoff study? Do you agree with 

it? Do you think that they are correct in terms of high levels of 

debt affecting economic growth adversely? 

Secretary GEITHNER. Absolutely. It is an excellent study, and you 

could say in some ways from what you summarize understates the 

risks, because it is not just that governments or countries that live 

with very high debt-to-GDP ratios are consigned to weaker growth; 

they are consigned to the damage that comes from periodic financial crises as well. 

Now, could you put that chart back up there for a second? 

Chairman CONRAD. Yes. 

Secretary GEITHNER. Let me just say two things about this. In 

some ways, that overstates the near-term problem because, as you 

know, we hold substantial financial assets, and you really want to 

look at debt net of financial assets, and you want to look at debt 

held by the public. But in many ways, that still understates the 

problem because that does not capture the future liabilities that 

are embedded in Medicare, Medicaid, and Social Security, which, of 

course, grow at a very rapid pace in the decades beyond that. 

So if you are going to look at a true measure today of our full 

obligations to our citizens, the commitments we have made, of 

course, as you know better than anybody, it would be much higher 

than that. 

Chairman CONRAD. You know, having served on the Commission, 

having served here on the Budget Committee for 24 years, if there 

is one thing I am absolutely persuaded of, the risk to this country 

is untenable. Absolutely untenable. So that takes me to the next 

one. 

If we have agreed that this is too high a level of debt, that this 

does compromise future economic growth, then the question is: 

How do we go beyond what the President has proposed? I give him 

credit for stabilizing the debt, but it is stabilized at a level that is 

too high. And I am not one that expected the President to lay out 

a detailed plan in his budget because I know how this town works. 

Had he done that, the other side then spends all their time lacerating the plan. 

The question is: How do we get to the table to have a serious negotiation between the House of Representatives, the U.S. Senate, 

the White House? What is your vision of how in the coming days 

and weeks we find a way to get to the table for a serious negotiation? 
663 

Secretary GEITHNER. Excellent question. I know you have 

thought a lot about that and offered a lot of ideas on that. I guess 

I would say that what we are going to see in the next few weeks 

is the following: In the House, the Republican leadership will have 

to propose and pass a budget resolution that lays out, like the 

President’s budget does, a comprehensive plan, revenues and outlays to bring deficits down over the next 10 years. And they in that 

context will have to make the kind of choices we make in this 

budget, which is to answer the question: How far do you have to 

reduce the deficits? How far do you have to go? How deep do you 

have to go? How quickly or how gradually should you get there? 

What should be the composition of tax changes and reductions in 

spending to achieve that objective? What are you doing about 

things that matter to how we grow as a country in the future? So 

they will lay out those basic fundamental choices. 

Now, there is a process in the Senate that is engaged in looking 

at a way to adapt the kind of comprehensive framework you saw 

on the Commission and see if you can translate that into consensus 

here. That, when it comes, will provide another contrasting vision 

about strategy. And then you will have a chance at that point for 

people to confront the tough choices you have to make in choosing 

among those basic paths. 

Again, I think it is important to recognize that the President’s 

budget does not solve all the problems facing the country. It is not 

a budget for the next century. What it does do is tell you how to 

get to a level over the next 10 years that leaves us with a level of 

debt as a share of the economy that is probably stable and would 

not weaken future growth. But, of course, it does not solve the 

questions beyond that. 

If the Congress finds the will to go deeper, lower deficits over 

that 10-year period of time, which, as you said, would be desirable 

because it would start to bring the debt-to-GDP on a downward 

path, then—like the Commission did, the Commission achieved 

that—then people will say—will be able to look at it and they will 

say, Are we prepared to make the choices necessary to go beyond 

that? 

And I think, again, the fundamental reality that I think we all 

have to confront—and it is both the Executive and the Congress— 

is that the current process we use for making these choices does 

not work. It has not worked. It is completely dysfunctional, in part 

because it leaves us with year-by-year incremental uncertainty creating changes to taxes with no clarity on spending. And the reason 

Rogoff-Reinhart produced the study that shows this effect on 

growth, opportunity incomes from high deficits, is because you 

leave the American people and American businesses to deal with 

a deeply uncertain future about what is going to happen to things 

that deeply affect their income and their business prospects. 

So the costs of leaving that uncertainty out there are very, very 

high, and to resolve that you need something beyond a year-by-year 

political fight on incremental change. You need something that 

locks in comprehensive, multi-year reductions. That way people can 

look at it, and they can plan. They say, OK, I know what is going 

to happen now, I now know Congress is going to solve the problem, 

and I can plan and adjust and prepare for those changes. 
664 

Chairman CONRAD. Well, let me take you right—my time has almost expired. Let me just take you right to the Commission, because we did get 11 of 18 to agree—five Democrats, five Republicans, one Independent. And we reduced the debt $4 trillion over 

the next 10 years—$4 trillion. The President said about $1 trillion. 

Not only did we stabilize the debt, we started bringing it down as 

a share of GDP and over time brought it down markedly to a place 

where you would not only be—you would be guarding against—you 

would be hedging against future economic risk. 

Is the size of what the Commission recommended a package that you believe would make sense, that is, $4 trillion of debt reduction, 

if we could get it on a bipartisan basis? 

Secretary GEITHNER. I think you have slightly overachieved in 

terms of what is necessary, but, again, our risk, of course, as a 

country is that we do too little, not too much at the moment. So 

I admire you for laying out that path. But what—— 

Chairman CONRAD. So if $4 trillion is overshooting, what do you 

think? Three trillion? 

Secretary GEITHNER. Again, I think the minimum test is to get 

the deficits comfortably below 3 percent of GDP for a sustained period of time. 

Now, again, as you know, the basic—— 

Chairman CONRAD. But that does not reduce the debt. I mean, 

that will just—— 

Secretary GEITHNER. Right. But if you—— 

Chairman CONRAD. That will keep it from growing. 

Secretary GEITHNER. You have to get them there soon enough 

that you stop the debt from growing as a share of the economy at 

an acceptable level. Again, I admire you for going further, and if 

we can do that, that would be excellent. But what is driving, you 

know, the 10-year deficits is not Medicare, Medicaid, and Social Security. What is driving the 10-year deficits is just a gap between 

resources and commitments outside those basic programs. It is beyond the 10-year window where you start to see those commitments, you know, eat an excessively large share of GDP. And so 

what really matters, if you want to go deeper than 3 percent of 

GDP, is what do you lock in for those entitlement programs outside 

that 10-year budget window. 

Could I say one more thing, Mr. Chairman? There is a chart that 

I would like you to put back up which shows outlays and revenues 

to GDP, because I think that is the right way to think about it. If 

they are gone, then I will not do it. But what the President’s budget does is to propose some changes in revenues that would leave 

revenues as a share of GDP slightly above the historic average. I 

think in the President’s budget they rise to a little bit below 20 

percent of GDP—a little bit less than what the Commission proposed. And outlays in the President’s budget minus interest fall to 

around 20. Interest is about 3 percent of GDP at the end of that 

period if you do that. 

So the reason I say that is because when you think about the 

choices we face, they are about like, What do you want Government 

to do? How large a share of income do you want the Government 

to take and spend? And what the President’s budget does is get you 

to the point where revenues are not high at a level that would 
665 

threaten future growth and outlays minus interest, which is just 

the cost of the cumulative mistakes of the past, are at a level that 

is really quite low in the historical period. You know, I said 20 percent of GDP minus interest, and, of course, the discretionary nondefense share is much, much lower as a share of GDP at the end 

of that 10-year window. 

Chairman CONRAD. You know, I would like to continue the discussion. My time has expired, so we will go to Senator Sessions. 

But I would like, if we have a chance to get to a second round, to 

come back to this point. 

Senator SESSIONS. Senator SESSIONS. Well, that is a big national discussion. I do not 

think the American people want to see the percentage of the take 

of the Government increase substantially. That charts shows that 

it is now 25 percent, well above where we have ever been in this 

kind of environment. And it is very dangerous, and people are not 

happy about it. They think this is a limited Government of limited 

responsibility. 

Senator Conrad, your chart, the one you have emphasized the 

most, having wrestled with these numbers, I think that is pretty 

close to the core chart. I have to give you credit. You have wrestled 

with it really hard, and when we are over 100 percent of GDP, we 

are in a danger area. 

Mr. Geithner, you indicated not only could it reduce our growth, 

but you have indicated it makes us more susceptible to crises, debt 

crises, perhaps like the one we had in 2007, like Greece and other 

countries have had. Is that correct? 

Secretary GEITHNER. I am very confident you are going to help 

us prevent that, but I am saying the reason why debt-to-GDP matters is not just because growth is weaker, but because—and if you 

look at all those countries in the past, they suffer—they are much 

more prone to crises in that context. But, of course, we are going 

to avoid that as a country. 

Senator SESSIONS. Well, we need to take some steps to do so. In 

my opinion, we are too close, and as responsible Government officials we have a duty to help our country avoid risk that is unnecessary. 

Let me just briefly run through this plan, because we are, I 

think, talking past us on the numbers. You do not contend that the 

10-year budget calls for a single year, do you, in which we will not 

be adding more to the national debt? 

Secretary GEITHNER. No. You are exactly right. The debt in aggregate terms does keep growing over this period of time, even if 

you achieve this deficit reduction, but the measure that economists 

use, just like families use, they look at the amount of debt they 

have relative to income. 

Senator SESSIONS. Well, one of the reasons we got into trouble 

is that kind of logic. I admit it started with President Bush. But 

when you start politically allowing and accepting substantial deficits, it is hard for those of us who try to contain spending to have 

any moral basis on which to make that assertion. It is always that 

you are hurting somebody when you try to contain spending. I 

think it is a dangerous theory. It is part of the reason we are here, 

this GDP argument. The debt goes up. 
666 

Now, the administration does insist that the plan will reduce the total debt by $1 trillion over 10 years, but isn’t it a fact that the 

debt is increasing substantially during that period and it is just $1 

trillion less than it would otherwise have been? And I guess it otherwise would have been $14 trillion, and you are suggesting that 

it increases about $13 trillion. 

Secretary GEITHNER. Well, I do not think those numbers are 

quite the way to think about it, and I want to—— 

Senator SESSIONS. Well, I am just asking you. The $1.1 trillion simply reduces the total debt by $1 trillion projected to accrue over 

the 10 years and that that is a $13 trillion range. 

Secretary GEITHNER. What I am saying is that that slightly understates the amount of deficit reduction. Let me just make one 

clarifying point. That does not count the revenue gains of allowing 

what we call the Bush tax cuts for the top 2 percent to expire. If 

you allow those to expire and you preserve the rates and exemptions for the estate tax at 2009 levels, then you achieve another 

roughly $1 trillion in deficit reduction. 

So, Mr. Chairman, if you look at the deficit reduction in our proposal relative to the Commission’s, we are closer to $2 trillion relative to the Commission’s $4 trillion. It is not really like $1 trillion 

versus $4 trillion. 

The reason why, Senator Sessions, that is so important, of 

course, is that if you are not going to let those tax cuts for the high 

end expire, if you are going to extend them, and you want to 

achieve the same deficit reduction, you are going to have to find 

another $1 trillion in spending cuts to achieve that. 

Senator SESSIONS. Well, my time is running, but I would just say 

to you that I am using your numbers, as I believe, and it is about 

$13 trillion, and it is not a very large reduction of the surge in 

debt, and we are still on the road to doubling it. And the plan, let 

me ask you, does not call for any change in Medicare, Medicaid, 

and Social Security as you mentioned? 

Secretary GEITHNER. You are right that this budget does not propose changes to Social Security, and it does not propose detailed 

changes beyond the cost savings in the Affordable Care Act. But I 

would just restate, of course, that CBO does estimate very, very 

substantial savings from the Affordable Care Act over the next two 

decades, about $200 billion the next decade and $1 trillion in the 

second decade. And those represent the largest cost-saving entitlement reforms than we have considered or adopted as a country—— 

Senator SESSIONS. Mr. Geithner, we will continue to debate that 

issue. I believe that CBO’s final letter right before the vote that it 

double counts the money is correct, and it is a miscalculation. And 

I do believe that it is driving up the cost of health care as CBO 

has said, not reduced it. 

Let me ask you this: It has been repeatedly suggested that discretionary spending has been cut and tough choices have been 

made. But isn’t it a fact that total discretionary spending increases 

every single year except maybe with the reduction in the military 

effort next year? But 2012 through 2021 discretionary spending increases every year is not reduced. 

Secretary GEITHNER. I do not think that is quite right. I am sure 

what I am about to say is correct, which is that if you freeze non- 
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security discretionary spending at the 2010 nominal levels and you 

do that for 5 years, and then after that you let it grow with inflation, then you do reduce the deficits by $400 billion over that 10- 

year period of time. 

Senator SESSIONS. Well, let me just note that Table S. 10 shows 

that 2013 through 2021 there is an increase in discretionary spending every year. I think that is indisputable. 

Secretary GEITHNER. I do not think that is quite fair, but, Senator Sessions, one of the great things about our system here is that 

CBO will resolve these debates for us, and we will have a chance 

to—— 

Senator SESSIONS. They will, and they are not dispute the numbers I read, I do not think. 

Now, the budget plan calls for average annual deficits over this 

10 years of $720 billion, that the lowest deficit in the 10-year period is $607 billion, and that in the last 4 years of your 10-year 

budget, the deficit is increased from 619 to 681 to 735 to 774, substantially increasing deficits. Would you disagree with that? 

Secretary GEITHNER. Those numbers are exactly right. But, 

again, I think you have to look at them as a share of the economy 

as a whole, as a family would do. They look at debt to income. 

Senator SESSIONS. We are not inclined to use a share of the economy anymore. That is why we are broke. 

Now, let us talk briefly, as my time is winding down, about our 

interest situation. Under your budget the interest increases each 

year. It was $187 billion in 2009. Under your proposal it increases 

to $844 billion. I do not know if we have a chart here. Would you 

not agree that that is a stunning figure, perhaps the fastest-growing item in it, and all of that is a direct result of the debt we are 

running up and only a modest expectation of interest rate increases? 

Secretary GEITHNER. Senator, absolutely. It is an excessively interest burden. It is unsustainable. 

Senator SESSIONS. Well, it is your plan for the 10 years. I mean, 

that is the one the President has submitted. That is what he has 

asked us to vote on. It will result—and those are your numbers off 

your budget. 

Secretary GEITHNER. Senator, you are absolutely right that with 

the President plan, even if Congress were to enact it and even if 

Congress were to hold to it and reduce those deficits to 3 percent 

of GDP over the next 5 years, we would still be left with a very 

large interest burden and unsustainable obligations over time. 

That is why we are having the debate. I completely agree with you. 

But the question, though, is, just to be direct about it: What is the 

alternative plan? And, again, the way our system works- -this is a 

good thing—you will be able to see from the House, we will be able 

to see from this body, whether people can find the political will 

here to go deeper. And if you can find—— 

Senator SESSIONS. But what your plan is, that plan is the one 

you are required by law to submit, and that is what you call for, 

and it is not acceptable. I am sorry. It is a plan not for winning 

the future but losing the future. 

Secretary GEITHNER. No, I—— 

Senator SESSIONS. I am disappointed, really. 
668 

Secretary GEITHNER. No, Senator, I would just disagree again. 

But, again, the test of this is let us see the alternative. You know, 

we have laid out something that goes very deep, much deeper than 

we have gone as a country ever before. 

Now, in terms of the scale of deficit reduction in a short period 

of time, if Congress can find a way to do that without gutting basic 

programs, killing investments, hurting growth, then we would welcome the chance to join you in embracing those reforms. But, 

again, the way our system works, we are proposing, and you will 

have the chance to see if you can do better. 

Senator SESSIONS. Well, obviously you—— 

Chairman CONRAD. Senator—— 

Senator SESSIONS. That is your plan. 

Chairman CONRAD. Senator, we have gone way over now. 

Senator CARDIN. 

Senator CARDIN. Thank you, Mr. Chairman. 

Secretary Geithner, once again it is good to be with you. I think 

we all agree the deficit—we need to have a credible game plan to 

bring the deficit under control. That requires the administration 

and Congress to work together. It requires Democrats and Republicans to figure out a way to come together on a budget plan that 

will be in the best interest of our country. I think we all agree on 

that. 

Now, there may be one area where we have some agreement, but 

from different sides, in that we all disagree with the Congressional 

Budget Office. My friends are telling me that they just want to ignore it in the House even though it is our impartial referee as to 

the scoring of costs. 

I am disappointed that the Congressional Budget Office has not 

scored a lot of the savings that will come from the health reform 

that you pointed out. I think it is intuitive to the people of this Nation that if we can really get access to care, if we can have people 

out of the emergency rooms and into primary care, if we can deal 

with readmissions to hospitals and better management of people 

with serious illnesses, that America does not have to stand out 

alone with the highest cost burden to any economy on health care, 

that we can bring it more into line and we can reduce our health 

care spending to help bring not only our budget into balance but 

our economy into better performance. 

So, yes, we do need action on spending, and I agree with Senator 

Conrad. I think the President’s proposal for a freeze on domestic 

discretionary spending and the way he is handling the military is 

a way that is a very credible plan on the spending side and that 

we need to lead on the spending side. But even if we get those savings and even if we get the savings from the health care bill that 

I expect that we will get, you cannot do it on that alone. If we extend all of the tax policies that are currently in place in this outdated income tax structure we have, we will not only negate all the 

savings—all the savings we are talking about—but we will also be 

further in debt. 

So you have to have a comprehensive plan that deals with all 

these, and quite frankly, I do not think the action in the House of 

Representatives this week is particularly helpful. I do not think it 

is helpful because I think it will negate the potential savings in the 
669 

health care bill the way that they are restricting us to put in place 

good common-sense ways to try to keep people healthy in America. 

But also I think it is unrealistic, it is budget cuts, and will not 

produce the type of deficit reduction that is needed for this Nation. 

So I just really want you to know, I think that the President in 

his budget has put forward a good-faith approach to dealing with 

the discretionary spending areas. And, yes, we need to work together and supplement that, as the Debt Commission did, in looking beyond just the discretionary spending in this country. We need 

to look at the entitlements. We need to look at the revenue side. 

And we need to come together for this country and not just make 

partisan speeches. 

Now, I want to touch on one particular area that we had some 

questions on yesterday before the Finance Committee, but I want 

to move forward on it as it relates to small business. In your budget, you are moving forward with the initiatives on small business, 

particularly as it relates to the availability of credit. That is an 

area that, when we first attacked the problem on our economy, in 

my view the small business community was not given the type of 

attention it needed in order to have credit. We all know that job 

growth is going to come primarily from the small business sector. 

Innovation is higher in the small business sector. 

Can you just give us the status of both the program at the national level that will extend credit to small businesses as well as 

the moneys that are made available to leverage State programs to 

help credit for small businesses? 

Secretary GEITHNER. Again, I am happy to do that, but let me 

just start with the tax changes. At the end of the year in the tax 

package, there is a very powerful, sweeping set of incentives for 

small businesses that provide a lot of help and assistance at a time 

when they want to be able to have a chance to take advantage of 

growing demand for their products. They are very powerful, and 

they are very good economic sense, very practical, very creative. 

But the two programs you referred to we think will help, again, 

make sure that small businesses are going to be able to get access 

to credit and, therefore, bring more people back to work, bring 

more production online as demand improves. And those two programs are, first, a program to give small banks the chance to come 

and get capital from the Government for a very economically attractive price. We have about 250 applications in. We are going to 

be approving those for eligible banks as quickly as we can, and 

they will help leverage a substantial amount of borrowing capacity 

available to small businesses. 

We also have approved three States now for some additional financial support to help reinforce their own small business credit 

programs. A lot of creativity around the country at the State level 

in those programs, and what Congress authorized last year was to 

provide a little additional financial resources for those programs, 

too. We think those will help, of course. 

But, you know, a lot of small banks across the country still have 

themselves way overexposed to commercial real estate and have a 

lot of digging out to do still, and that is going to be a problem for 

those small businesses that were, frankly, unlucky in their choice 

of bank. But what these programs will do is help provide alter-
670 

native sources of credit, make sure there is enough capital in the 

system to, again, help reinforce this recovery that is happening. 

You are seeing loan demand start to increase again for the first 

time, and you want to make sure that banks are able to meet that 

demand. 

Senator CARDIN. There is clearly a need out there, and there are 

clearly banks that are still sitting on the sidelines as it relates to 

making loans available to small businesses. If there is an existing 

relationship, it is a little bit easier for a bank and a small company. If you do not have that existing relationship, particularly if 

you are new company, it becomes very, very difficult. 

We had that debate last year as to whether we should be using 

leveraging the private sector lending or whether we should try to 

do direct, and we went with leveraging the private sector. I would 

really appreciate you keeping us informed as to how well that is 

working so that we clearly need to pay attention to this issue, and 

we want to make sure that the money really is being leveraged to 

more activity. 

I could speak for the program in Maryland. Governor O’Malley 

is one of those Governors that has a program and is requesting 

Federal participation. They leverage the public dollars at a very 

high ratio level. So for a relatively small investment of Federal 

funds, we leverage a lot of loans to small companies. That is critically important to companies that are having a hard time getting 

loans today. 

Secretary GEITHNER. And I think the loss rates on those programs are really very low. 

Senator CARDIN. Extremely low. 

Secretary GEITHNER. I think on net they make money for the 

State, not lose money. So if you design them well, then you can 

make a big difference. 

Senator CARDIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Ensign. 

Senator ENSIGN. Thank you, Mr. Chairman. 

I want to go back to what you were talking about, the exchange 

that you had with the Chairman about the gross debt, the 90 percent gross debt, because you said something that I thought was 

fairly interesting when you talked about the unfunded liabilities 

that are not on our balance sheets, because you said the situation 

was actually much more dire than what your budget or anybody 

else is really talking about. And even when we go back to the 

study, the Reinhart study, the 200 years that they talked about the 

90 percent of gross debt, almost none of those countries had those 

unfunded liabilities. 

So if you actually put those on the books, that 90 percent is 

much higher, and where you get to 110 percent is much higher 

with this country when you put the unfunded liabilities. And the 

reason I make the point is because this situation is much more 

dire. The criticality of us working together with President Obama 

on entitlement reform is so critical, and that is why I think that 

some of us on this side of the aisle are so disappointed with this 

budget, that the President did not show bold leadership. 
671 

It is politically risky. I will acknowledge that. And, Mr. Chairman, the one point that I disagree with you on is you said we 

would attack the President if he would have put that in his budget. 

I disagree, because you are showing—Paul Ryan, the Chairman of 

the Budget Committee in the House of Representatives, put out a 

proposal last year on entitlement reform, and he is putting it in his 

budget this year. 

I am encouraging you, I am encouraging Senator Sessions, to put 

entitlement reform in this year’s budget, so even though the President has not shown the leadership, the Congress needs now to 

show the leadership, and then to ask the President to join us, because we all know that these are politically, you know, third rails 

of American politics, but it is critical, because the numbers—and 

you agree, everybody agrees, everybody knows this is 

unsustainable. And if we do not show political courage right now, 

we are doomed as a country. We really are. 

Secretary GEITHNER. Well, Senator, I agree with you, but I would 

just try to make sure I emphasize one key thing, which is that you 

are absolutely right about entitlements, and if you look beyond the 

next decade, they again gradually, progressively, but at an alarming rate start to eat too large a share of national income. But do 

not forget the next 10 years, because if we do not get these deficits 

down over the next 3 to 5 years to a level that is sustainable, then 

we will face the risk of a significantly weaker expansion. 

I know everybody is showing a lot of ambition on entitlements 

now, which is good because it helps underscore the importance of 

making sure the Affordable Care Act reforms are allowed to get 

some traction, because they do reduce cost growth. But remember, 

the next 10 years are really important, too. 

Senator ENSIGN. Absolutely, and let me just interrupt you for a 

second. I actually disagreed with one of your statements, too, 

where you said Medicare and Medicaid are not contributing to the 

deficit. They have been growing at such a rapid rate, they are absolutely contributing to the deficit right now. And so we need to get 

control of these entitlements, not just for the next decades to come. 

We need to get control of these entitlements for today. We need to 

design better systems. 

I believe that, for instance, Medicaid, what we did on welfare reform in a bipartisan fashion during the 1990s, we block-granted it 

to the States because they were these institutions that had shown 

the ability to reform them and do it in a way with flexibility. And 

if we get the Federal Government out, we can cap the amount that 

we are sending. We know how much that could potentially save 

into the future. It could be huge amounts of money. And designing 

a better Medicare system that focused more on, you know, 

healthier behaviors for seniors and getting things under control, 

you know, chronic types of conditions. But we need to do that for 

this decade as well. 

I do not have a heck of a lot of time, so I do want to go to one 

other thing, because we know we need to do this. I am just encouraging you to get the President to join us and actually show some 

Presidential leadership. 

The comment, small business is the engine that drives the economy, do you think that that is a fairly true statement? 
672 

Secretary GEITHNER. Well, sometimes we get a little carried 

away, because big businesses matter, too. 

Senator ENSIGN. It does, but—— 

Secretary GEITHNER. But in general, you are right, that there is 

a lot of innovation and job creation that comes from small business. 

Senator ENSIGN. OK. The reason I bring this up is because in 

your budget, most small businesses—I was a small business owner. 

Most small businesses owners pay ordinary income because they 

are Subchapter S corporations, sole proprietors, LLCs, in various 

forms like that. And while I applaud you, I totally agree that we 

need to reform our corporate Tax Code. We need to bring it down. 

We need more of a territorial system. And I appreciated your comments yesterday about repatriating money back to the United 

States in a much easier way. All of that is good stuff. 

But if you allow the tax rates to go up, now corporations can be 

paying a 24-percent tax rate where, you know, most small businesses in the country could be paying almost a 40-percent tax rate. 

And if it is really the engine that grows the economy, I think that 

you are going to stifle a lot of growth in small businesses with 

these high tax rates. And so, you know, I would like to hear your 

comments on that. 

Secretary GEITHNER. I believe that if you are going to do a serious job of looking at corporate tax reform, comprehensive tax reforms, you have to look at business income more broadly defined, 

and you are going to have to look at how we treat income of businesses that are not corporations under the Tax Code. So I agree 

with that point. 

But could I make one qualifying point? 

Senator ENSIGN. By the way, I hope we can work together. I am 

actually working on something that treats them the same. It is a 

little expensive, and we are going to have to work on it, but I appreciate that comment. 

Secretary GEITHNER. I would welcome a chance to do that. I do 

want to make sure, though, we put in context what the implications are for small businesses of letting the top 2 percent tax cuts 

expire, and this is very important because that would only affect 

less than 3 percent of small businesses. The average earnings of 

the less than 3 percent of small businesses affected are about a 

million. The median is about $700,000. And most of the small businesses that fall into that category—again, it is less than 3 percent—are really what we would typically look at as law firms or 

partnerships or investment companies in that context. So we are 

not talking really about a significant number of the hardware 

stores on Main Street or the small manufacturing companies. We 

are talking about partnerships, law firms. But—— 

Senator ENSIGN. You need to get out there in the real world and 

talk to folks. The reason I am saying this, because I have been out 

there in the real world. It is the veterinary clinics, it is the dental 

offices, it is the—and they want to expand their businesses. They 

want to create jobs. And if taxes are part of the thing that they 

are looking in the future, if their taxes are going up, business owners—and, by the way, those 3 percent produce about a quarter of 

the jobs, the new jobs. And so that is a significant thing, and if 

they want to grow their business and we all want more jobs in 
673 

America, we have to understand that small businesses do create 

jobs, and we are going to hurt job creation, which hurts the growth 

curve of revenues coming into the United States. 

My time has expired. I apologize. 

Secretary GEITHNER. Mr. Chairman, could I just say—of course, 

I understand this concern, but, again, just two other context notes 

about—you know, we are proposing to restore the rates that prevailed in the 1990s. That was the best record of small business job 

growth, small business creation that we had seen in a long time 

and have seen since. It is something that is manageable, that we 

can afford as a country. We do not have unlimited choices, and we 

are proposing in the budget alongside those changes some very well 

designed, very powerful incentives directly related to small businesses, like, for example, zero capital gains on investments in small 

businesses. And we are proposing to keep taxes on overall investment quite low as a whole. 

But, anyway, happy to work with you on reform. You are right 

to say you have to look beyond corporates, although it is kind of 

difficult to do politically. 

Chairman CONRAD. I thank the Senator. 

Let me just say we are on 7-minute rounds to Senators. You 

know, typically with this number of Senators we do 5 minutes, but 

we went to 7 minutes today given having the opportunity to have 

the Secretary. So I am going to try to drop the gavel right at 7 minutes in fairness to the other colleagues who are here and waiting. 

Senator SANDERS. Senator SANDERS. Thank you very much, Mr. Chairman. And 

welcome, Secretary Geithner. 

I find this to be an extraordinarily strange conversation. We hear 

a lot of discussion about great concerns about the deficit and the 

national debt. But the people who talk most loudly and vigorously 

about this issue are those people who helped create this national 

debt. So let us be clear about how we got here in the first place. 

We might want to talk about that. 

This Senator voted against the war in Iraq, for a number of reasons, not the least of which it was unpaid for. Three trillion bucks. 

That is a lot of money. I did not hear too much discussion a few 

years ago about that war. 

This Senator voted against huge tax breaks for the wealthiest 

people in the country. And you know what? Budgets are two 

things. I know this is a radical concept. It is not just spending, but 

it is also money coming in. And if you give hundreds and hundreds 

of billions of dollars in tax breaks to the very wealthiest people, lo 

and behold, deficits go up. I voted against that. Most of my friends 

on the other side of the aisle voted for it. 

I voted against the Medicare Part D prescription drug program 

written by the drug companies and the insurance companies, not 

because we do not need a good program for seniors; that was a very 

wasteful, ineffective way to go. Most of my Republican colleagues 

who are now jumping up and down about the deficit, they voted for 

it. 

I voted against the Wall Street bailout, and I do understand 

much of that money has been paid back. But, nonetheless, I did not 

hear at that point when we bailed out the largest financial institu-
674 

tions of the world whose illegal behavior, whose reckless behavior 

drove us to a recession, I did not my Republican friends say, ‘‘Oh, 

we cannot give them $800 billion. That will drive the deficit up.’’ 

Maybe I missed that discussion. But I did not hear it too much. 

So that is one of the reasons we got to where we are right now. 

Under Bush, as we all know, the national debt almost doubled. 

The second part of the discussion I am not hearing about is we 

talk about America like we are all in this together. Well, let me 

give you some startling news. We ain’t all in this together. The people on top, the top 1 percent, the top 2 percent, are doing phenomenally well at the same time as the middle class in this country is 

collapsing. 

Mr. Geithner, when you respond, you tell me what I am missing 

here. All right? 

The United States today has the most unequal distribution of income and wealth of any major country on Earth. The top 2 percent 

earns more income than the bottom 50 percent. And I hear the 

words about political courage. Oh, we need to be really tough. We 

can throw old ladies in the State of Vermont off the heating assistance program when it gets 20 below zero. Man, that is real political 

courage. Well, how about some political courage about taking on 

the big money interests who fund our campaigns, who provide millions of dollars and want tax breaks for the very wealthiest. Let us 

see some political courage there rather than throwing senior citizens off the LIHEAP program or low-income people off of life and 

death programs for them. 

Now, Mr. Secretary, in 2007 the top 1 percent earned 23.5 percent of all income in this country. The top one-tenth of 1 percent 

took in 11 percent of all income. The percentage of income going 

to the top 1 percent has nearly tripled since the 1970s. Is that 

right, Mr. Secretary? 

Secretary GEITHNER. I think that is largely right. 

Senator SANDERS. From 8 percent to 23 percent. Between 1980 

and 2005, 80 percent of all new income created in this country 

went to the top 1 percent. 

Now, when we talk about how we move toward a balanced budget, I would appreciate my friends listening to this. In 2007, the 

wealthiest 400 Americans made an average of $345 million a year. 

Under the Bush administration, these 400 top earners saw their incomes double while their effective Federal tax rate was cut almost 

in half over the past 15 years. 

So here is the dynamic that you have which must be thrown into 

this discussion. The middle class in many ways is collapsing. Real 

unemployment in America today—I have not heard a word about 

unemployment yet, by the way—is 16 percent if you talk about people who have given up looking for work and people who are working 20 hours when they want to work 40 hours. Meanwhile, we 

have cut substantially taxes for the very, very wealthiest people in 

this country, and in this agreement, this very poor agreement that 

the Obama administration agreed to with the Republicans, those 

are extended again for another couple of years. 

So I would suggest that when we talk about sacrifice, maybe 

some of the campaign contributors and the wealthiest people in 
675 

this country might want to make some of that sacrifice rather than 

just the middle class. 

Let me ask Secretary Geithner a couple of questions. I was glad 

to hear you—and just let us go through this again. You would 

agree with me that Social Security has not contributed one nickel 

to the deficit and that Social Security has a $2.6 trillion surplus 

right now? 

Secretary GEITHNER. I think that is largely right, yes. 

Senator SANDERS. OK. And would you agree with me that, according to all the studies done, Social Security can pay out every 

benefit owed to every eligible American for roughly the next 25 to 

30 years? 

Secretary GEITHNER. I would have to check that, but I assume 

if you are quoting it, it is right. 

Senator SANDERS. Yes, it is. And after that, it can pay out about 

75 to 80 percent of all benefits. 

Secretary GEITHNER. That is true, but I would not be so comfortable about that because, as you know, the minimum benefit is 

not a very rich benefit for many Americans. 

Senator SANDERS. I know it. During the campaign, when President Obama was elected, he suggested that the solution to the 

long-term solvency of Social Security was to lift the cap on upperincome folks above $250,000, which I thought was exactly the right 

thing to do. Is that still the administration’s or the President’s position? 

Secretary GEITHNER. Well, I want to be careful in how I say this 

because, again, we want to preserve some capacity for people to 

come together on something that is going to work, but I will be direct about it. You cannot do this in a way that is fair and responsible by simply cutting benefits, even if you do it in a progressive 

way. You have to go beyond benefits if you are going to do it in 

a way that is fair and has any realistic prospect of people coming 

together around the plan. 

Senator SANDERS. I agree with you, and let me just say this. This 

is a quote from Candidate Obama during the campaign. He said, 

‘‘John McCain’s campaign has suggested that the best answer for 

the growing pressures on Social Security might be to cut cost-of-living adjustments or raise the retirement age. Let me be clear. I will 

not do either.’’ 

Do you think that that is still the President’s position? 

Secretary GEITHNER. Well, I think the President’s position, again, 

is he just wanted to be very careful, as you heard him say in the 

State of the Union, to not be solving Social Security in a way that 

cuts deeply into benefits for people who need it or puts an undue 

burden—— 

Senator SANDERS. You make me nervous when you say ‘‘deeply.’’ 

That is not what the President campaigned on. 

Secretary GEITHNER. Well, I did not mean to change his words, 

but the President has spoken on this several times in the last few 

days, few weeks. His words govern. I cannot quote them for you directly. But, of course, those are his choices and his words. 

Senator SANDERS. OK. Thank you very much. 

Chairman CONRAD. Thank you, Senator. Thank you for respecting the time. 
676 

Senator THUNE. Thank you, Mr. Chairman. Mr. Secretary, welcome again. We had Secretary Geithner in front of the Finance 

Committee yesterday, and I appreciate your willingness to endure 

our questions. 

I asked you yesterday about the individual mandate and whether 

you thought it was a penalty or a tax. You said that was up to the 

lawyers to decide. And I assume you have an opinion about that, 

but I will not go into that. I do have a question, though. Do you 

know how much that raises in your budget in terms of revenues? 

Secretary GEITHNER. I have to respond to you in writing. I do not 

know the number. I do not have it at my fingertips now. 

Senator THUNE. OK. 

Senator THUNE. Well, my own view on where we are today, I 

mean, obviously we have a big problem which has been contributed 

to over the years by a lot of different factors. I think in a fantasy 

world where we were not fighting a war on terror, we might not 

have had to spend money fighting a war on terror, which would be 

great. But the fact of the matter is we have had to do that. We 

have had the debt grow just in the last 2 years alone by $3 trillion. 

Now, my own view is that that is understated significantly because I believe that the health care bill, notwithstanding your assertions that it is actually going to reduce the debt and the deficit 

over time, is actually going to add significantly to it for a couple 

of reasons. One is I do not believe that this Congress is really going 

to cut $1 trillion out of Medicare. Now, maybe I am wrong, but 

when I first got here in 2005, we had a vote to try and achieve savings of somewhere on the order of $40 billion, and I think Vice 

President Cheney had to come back from Pakistan in order to try 

and break a tie on that. And at the end of the day, I do not think 

it ever happened. So I am very skeptical about whether or not we 

are actually going to reduce Medicare spending. 

Second, there are a number of things, as was alluded to earlier 

by the Senator from Alabama, about the way that was scored, 

which I think—and we have heard testimony from the CBO about 

that, that it double counts revenue. Medicare, Social Security Trust 

Fund revenue being credited to the trust funds as well as being 

used to pay for the new entitlement program on the order of hundreds of billions of dollars. 

The CLASS Act, which was scored in the near term as a revenue 

raiser, is, I think, going to be a huge deficit increaser in the outyears. That, too, is something that in my view is going to dramatically understate the fiscal picture, particularly when you look at 

the long run. And the SGR, which was not included in that, there 

are 2 years of offsets, I think, in this budget for the SGR, but the 

SGR is going to have to be dealt with as well. 

So you have all this spending associated with the Affordable 

Care Act, and everybody says, well, it is going to be budget neutral 

or, better than that, it is actually going to generate surpluses over 

the years. I just do not subscribe to that. So I think this situation 

is much worse than actually most of us believe. 

The other thing I would argue is that the growth rates that are 

assumed in the budget, which are significantly higher than the 

CBO’s growth rates—4.4 percent I think in 2012 is what OMB as-
677 

sumes, and CBO says 3.1 percent. That makes a huge difference 

in the deficits that we are going to be looking at and the debt that 

we are going to be looking at. 

So having said all that, I think this picture is much more grim 

than many of us realize, and it does come back, in my view, to a 

spending issue. You can look at—and the Chairman put up the 

chart. Over the period of time that he looked at, the five times the 

budget was balanced, the revenue was actually exceeding the historical average. But the other thing you have to look at, there was 

only one of those years that I saw where spending was not below 

the historical average. If we balance the budget, the assumption 

was that spending had to have been below the 20.6 percent average 

that we have seen over the past 40 years, too. 

And what are we spending today as a percentage of our GDP? 

25.3 percent. That is this year’s number. The historical average 

over the last 40 years is 20.6 percent. This is a spending issue fundamentally. And we have to deal with it. And as painful and hard 

as some of those choices are—and I think the only way you do that 

is with the long-term structural changes in these entitlement programs that are going to explode in the out-years. And this budget 

just does not address that. 

Again, I mean, I cannot tell you how disappointed we all are in 

that, and I know that they are saying, well, you guys come up with 

your plan. Well, there will be, I think, some suggestions made 

when the House Budget Committee does their budget resolution. 

But you still have 535 Members of Congress and only one President. The President is the CEO. The President has to lead. The 

President has to say, ‘‘This is what I would do to fix this problem.’’ 

And kicking the can down the road for another 2 years until we 

get past the next election just does not cut it. So I think many of 

us up here are prepared to work with him to address the long-term 

problem we face. 

Just a couple of quick questions for you. And, again, as we look 

at what we are going to be facing in the years ahead, the Treasury 

Department, of course, is tasked with running the auctions of U.S. 

securities, and I am wondering if you have any concern that any 

of the auctions are going to fail anytime within the 10-year budget 

window if we follow this budget. 

Secretary GEITHNER. No, there is no risk of that. In fact, if Congress were to enact these proposals, meaning bring about this level 

of deficit reduction as a share of the economy in this period of time, 

you would see a dramatic improvement in investor confidence 

about the political will in Washington to deal with these problems, 

recognizing that it does not go far enough. But if Congress would 

enact it, go this far, it would be historic deficit reduction on a scale 

we have never as a country even been able to consider. And I say 

that acknowledging that it does not solve all our problems. 

Senator THUNE. Maybe I am going to take issue with that, but 

it just strikes me that when you are—that the gross debt is going 

to grow to $26.3 trillion at the end of the decade. It is $14.3 trillion 

today. It is hard to see how you can get to where you are 100 percent debt-to-GDP, and in the second decade it goes above that, that 

the bond markets are going to recognize that and say this is something that we believe is actually going to get the fiscal situation of 
678 

the Federal Government back in line. I have a hard time understanding how that would be interpreted by the bond markets to be 

a positive thing. 

Secretary GEITHNER. Well, again, you know, Senator, this is all— 

you know, these things about confidence are all a judgment about 

the strength of political will in a country. And people do look at 

this country over history, and they say ultimately in the end Washington figured out how to fix it and get ahead of it. Right now, if 

we do not actually do that, we will suffer the risk of gradual erosion in confidence, and that will hurt us as an economy. 

But I want to state, I know that people would like us to go further, and, again, if Congress can find a way to go deeper and further in a way that does not gut basic programs critical to our capacity to grow without creating growth, then we will join you in 

that cause. But what troubled me about where you began is the following: You said that you are concerned Congress will not have the 

will to enact the cost savings in Medicare and Medicaid that are 

in the Affordable Care Act. So I guess I would ask in response to 

that, if you are troubled about those cost savings, then what does 

that mean about what plan you are going to provide us for how we 

get this deficits down? Because then if you are going to say we cannot actually do that, then you are going to have to look at other 

things, and that is going to put us in the position where, I think— 

I do not know where else you are going to go, because you have 

to go to defense, or you are going to have to go dramatically deeper 

than the House on discretionary, non-defense discretionary, or you 

are going to have to go to revenues, like the Commission did on a 

substantial scale. But, you know, it is just a question about where 

you make those choices. 

Senator THUNE. And if I could, Mr. Chairman, just in response 

to that, look, I do not disagree. I do not think Congress has the appetite to deal with some of these issues. But it was a fundamental 

mistake, in my view, to go after Medicare to fund yet a new entitlement program rather than using those savings to reform Medicare. 

I think you would have plenty of support up here for doing that. 

Secretary GEITHNER. But, Senator, again, I think I agree. That 

is an interesting strategic question. But you could also take the 

other view, which is that apart from the basic rationale of extending coverage to all Americans, and apart from the other changes 

that are designed to improve how we use health care, you could ask 

yourself, Would Congress have legislated those reforms without 

that? It seems to me highly unlikely. 

Again, if you jeopardize that law, then you will take off the table what is more than $1 trillion of cost savings for the taxpayer over 

the next two decades. And if you take that off the table, you have 

to say where are we going to find that revenue, where are we going 

to find those savings. And you will have to go places I think you 

are going to find it much, much harder to go. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman. Welcome, Secretary. 

Secretary GEITHNER. Mr. Chairman, could I ask one question? 

Well, I do not want to take your time up. Go ahead. Sorry, Senator. 

Go ahead. 
679 

Senator WHITEHOUSE. I am happy to defer my 7 minutes for a 

moment if the witness has a question he wants to ask the Chairman. We can restart the clock— 

Secretary GEITHNER. It is up to the Chairman. I can do it at the 

end, if you want. 

Chairman CONRAD. Yes, I think we should keep going because 

we have a lot of members left here. 

Senator WHITEHOUSE. Mr. Secretary, you have described in the 

past the importance of the housing market to the economic recovery, that you opposed the foreclosure moratorium basically on those 

grounds, and so I would like to ask a few questions about the housing market and specifically the mortgage situation, the foreclosure 

situation that is out there. And it strikes me that a lot of different 

arrows are pointing to a catastrophic bureaucratic failure on the 

part of the banks and the servicers in dealings with distressed 

homeowners. 

The HAMP program is operating at one-fifth of its self-defined 

level of success, which was about less than half of the actual foreclosure liability that we face as a country. So that cannot be seen 

as anything resembling a success. 

When I talk to my realtors in Rhode Island, to a person, literally 

at meetings with a dozen or more realtors, they have had short 

sales on the books with a bank, and that same bank has foreclosed 

on the property during the short sale, with the result that a property that was going to be sold for 90 percent of value is now 

trashed and is in the foreclosure pool at 40 to 50 percent of value. 

When you deal with, as we all do, our constituents who are trying to work their way through mortgage modifications, it is a nightmare. I have had people who have been dealing for 19 months. 

They never found a person who would give them their last name. 

They never had anybody involved who could make a decision. And 

recently in Rhode Island, to sort of put a fourth arrow on this, the 

local bankruptcy court has made findings that in virtually every 

case there is literally no response on the part of the banks when 

these problems come in, and so they have had to develop a special 

program to try to do something incredibly simple: get a human 

from the bank who will make a decision in the room with the 

homeowner before you throw him out of his house. That is so offensive to Deutsche Bank that they have actually challenged the regulation in court, and we are trying to resolve that legislatively. 

But when all those arrows point in the same direction—the 

HAMP failure, the foreclosure nightmare that people experience, 

the court decisions, the realtors’ short sale experience—they all 

point to a huge bank bureaucracy that is incompetent, that is tormenting people, that is doing great damage to the investors—I 

mean, who got hurt when the short sale got wiped out because the 

bank foreclosed on its own short sale? The investors did. 

We have been corresponding about this, and you have been sending me all these cheerful letters about how, you know—— 

Secretary GEITHNER. Not cheerful. 

Senator WHITEHOUSE [continuing]. Do not worry, good news is 

around the corner. 

Secretary GEITHNER. Not cheerful. Never cheerful. 
680 

Senator WHITEHOUSE. And I do not see good news around the 

corner. We have been doing this for more than a year. Have you 

analyzed the extent to which the HAMP incentives are overwhelmed by the existing financial incentives that the servicers 

have for dealing with foreclosure, dealing with programs? My take 

is that they are insignificant and, therefore, have not—that is one 

of the reasons the HAMP program has failed. 

And the second thing is you have kept issuing these sort of 

memoranda and suggestions as to the timeframe within which 

banks should be acting. They are not. They just are not. I do not 

care what timeframe you have said. They are not doing it. 

Where are you in terms of enforcement? Have you punished anybody for not doing it? And have you looked specifically at whether 

they are phonying up the file by continuing to demand—one of the 

things we hear all the time is that people have the same records 

asked of them six, seven, eight times. It strikes me that there is 

at least a reasonable case to be made that because your suggestions for the timing on this start with the close of the file, they 

have figured out that if you keep asking people for the same information over and over again and chucking it in the file or whatever 

they are doing, they can wait and never have the file closed and 

never start your clock. 

So either your suggestions to them for timing are just failing, or 

they are not being enforced, or they are being gamed. Please tell 

me where that is, because I do think that is important to the underlying economic recovery. 

Secretary GEITHNER. Senator, you are absolutely right that this 

is a tragic, terrible mess across the country still, and we are not 

coming to the end of that amount of pain and risk and trauma to 

homeowners caught up in this crisis. And many of them are completely innocent victims of the failures of the system before this. 

Now, you are also right that servicers and banks on the whole 

I would say are still doing a terribly inadequate job of meeting the 

needs of their customers, helping customers navigate through this 

basic process. And we are going to have to do a better job of trying 

to reach as many people as we can reasonably reach with these 

programs. 

Now, one thing about what we have accomplished, because it is 

important to recognize this, it is—about 4 million people have benefited from mortgage modifications since these programs were 

launched. Now, a relatively small number of those are permanent 

modifications in HAMP, but do not understate, please, the impact 

that it has had on millions of homeowners in reducing their monthly payments. 

There are people we are not going to reach with these programs 

because a lot of the people facing foreclosure are individuals for 

whom it is their second home, it is—— 

Senator WHITEHOUSE. I get it. Let me interrupt, because I understand your point. All foreclosures cannot be prevented. That is not 

the point. And that was not the point when I urged you to do a 

foreclosure moratorium. The point of the foreclosure moratorium 

was not to stop all foreclosures. The point of the foreclosure moratorium was to smack the banking industry and the servicers up the 

side of the head and let them know there are not going to be fore-
681 

closures until they sort out this mess that has been for 2 years a 

bureaucratic nightmare that is ensnaring millions of Americans. 

And it is that bureaucratic nightmare that is the focus of my question, not the fact that for some people foreclosures are inevitable. 

Secretary GEITHNER. I was going to agree with you, not disagree 

with you, in your characterization of the problem. You asked why 

isn’t it stronger, why isn’t it better, and you are right that this is 

always a mix of compulsion and incentive, and the incentives—— 

Senator WHITEHOUSE. Who have you whacked for failing? 

Secretary GEITHNER. Under the law, we do not have the power 

under the law to compel. We have the capacity financially to provide incentives. Now, I think those incentives have not been powerful enough in all cases to overwhelm the rest of the muck these 

servicers have created. I agree with you about that. But we do not 

have the power to compel, Congress did not give us that power, and 

that limits our leverage over the outcome. 

However, we are doing as much as we can given the tools Congress has given us to try to reach more people, and we are going 

to be able to reach substantially more people, although we will not 

come close to those initial estimates we laid out at the beginning 

of the program. 

Senator WHITEHOUSE. My time has expired. Thank you, Chairman. 

Chairman CONRAD. I thank the Senator for respecting the time. 

Let me just indicate to members, they have told us now- -we expect a vote at 11:50. We have five members left. We are doing 7- 

minute rounds. The math does not quite work. So I am just going 

to ask everybody please come right in at the 7 because I will stay 

here until we have 5 minutes left on the vote so everybody gets a 

chance. 

Senator JOHNSON. Senator JOHNSON. Thank you, Mr. Chairman. I can talk fast. 

Mr. Secretary, nice to meet you. There were a couple of interesting statements you made. The first one is basically it would be 

excellent if we could go further in deficit reduction. If you believe 

that, I guess my question is: Does the President believe that? And 

if he does, why doesn’t he lead? 

Secretary GEITHNER. Again, the question is how you do it. The 

challenge is not principally or only about how fast or how far you 

bring down the deficits, though that is really important. The question is how you do it. And the how matters because, again, you 

have to care a lot about the basic strength, competitiveness growth 

of the country, what you do to invest in incentives, education, 

things like that, but also you have to ask yourself what can you 

legislate. Because, again, if we sit here and we just talk about it 

forever and we do not legislate—— 

Senator JOHNSON. It would be far easier to legislate if there was 

leadership from the President. 

Another comment you made was—this is maybe an unfair paraphrase, but you said, ‘‘What is your plan?’’ I mean, is this just political—are we playing a game of chicken here? 

Secretary GEITHNER. No. Again, the way our system works—and, 

again, our system has a lot of strengths, but a lot of weaknesses, 

and I would say, as I said at the beginning, our current budget 
682 

process does not work, has not delivered sustainable outcomes in 

this context. The way our system works is the President has to propose. We have to take the burden, as we have done, to lay out a 

plan for how we choose, how we propose to address these challenges. 

Now, that is just the start of the process, and the way the process works is everybody else has the obligation and the opportunity 

to say we think here is a better way to do it. And then the process 

begins. So it is just the first stage of the process, and, again, we 

are not asking you to like the plan. You do not have to embrace 

it. But what we do want to see is if you want to go deeper or get 

there on a different path, tell us how you think we can do it. 

Senator JOHNSON. We only have one President, and I am just 

going to tell you, I think the American people is hungering for leadership. The reason I ran for the Senate is because I believe we are 

bankrupting this Nation. You mentioned the unfunded liability. 

The figure I look at is the U.S. debt clock, that website. They list 

the top three entitlement programs. The total unfunded liability of 

those programs are $112 trillion. Total U.S. assets—household, 

small business, corporate assets—is $73 trillion. That is a $39 trillion shortfall. That is a huge problem. 

And, again, what numbers do you use in terms of the unfunded 

liability? 

Secretary GEITHNER. Well, Senator, again, I assure you, you cannot make me more concerned than I am as Secretary of the Treasury about the unsustainability of these commitments. And, again, 

I welcome, as everyone should, the fact that after years where people said deficits do not matter, these things pay for themselves, we 

do not have to care about the cost of this kind of stuff, people are 

coming around today and saying we are for trying to deal with this 

basic challenge. So that is a good thing to happen. We are seeing 

it at the State level. That is a very good thing to happen. So we 

have a chance now to try to translate that hunger for change on 

this kind of stuff into stuff that will actually matter over time. 

But, again, we are not trying to put the burden on you. The Constitution puts the burden on you. What we did is lay out this is our 

path. Happy to work with you. And, again, we recognize there are 

different ways to do this, but you have to make choices about what 

you are going to do to programs and about growth and about fairness. 

Senator JOHNSON. OK. Let me ask a couple nuts-and-bolts questions. I asked Director Lew the same question. I look at your—on 

your Table S. 1, your total cumulative deficit over that 10- or 11- 

year period was $8.9 trillion. Gross Federal debt increases $12.8 

trillion. That is a $4 trillion difference. 

Now, I know about $1 trillion, as I am looking at the figures, 

looks like it is an increase in financial assets. Where is that other 

$2.8 trillion increase in debt? Do you follow my question? 

Secretary GEITHNER. I do not. I am sorry. 

Senator JOHNSON. Total cumulative deficit increases $8.9 trillion, 

but our debt over that same period is growing by $4 trillion—I 

mean, by $12.8 trillion, an additional $4 trillion in debt over the 

deficit. I do not have a good explanation. Director Lew said that it 

was an increase in Social Security surplus. That makes no sense. 
683 

Secretary GEITHNER. Can I think about that and then respond 

accurately in writing? I just need to think about it a little more 

carefully. I do not know how to explain it—— 

Senator JOHNSON. We will submit that in writing. 

Senator JOHNSON. I am concerned about three areas of risk in 

your budget. First of all, economic growth. Would you agree with 

the basic statement the more you tax something, the less you get 

of it? 

Secretary GEITHNER. No, I would not agree with that. I think 

that—well, let me put it differently. If you want to think about revenues and the effect on growth, you have to think about it in the 

context and the size of our deficits. You need to look at not just the 

overall level of revenues relative to GDP. You have to look at what 

is the resulting deficits you are still left with. And so, again, what 

we propose is something that brings revenues back to a level 

slightly above their historic average. Only slightly above. Only 

slightly above, and we think that is sustainable over time. 

Senator JOHNSON. The historic average is about 18.8 percent, 

correct? Regardless of marginal tax rates, isn’t that kind of 

Hauser’s Law? And what you are looking at is the last half of the 

1990s when we had an incredibly strong economy and we did increase tax rates, and people could not basically shield their income. 

But then it did end up resulting in a recession. 

Aren’t you relying on unhistoric rates of percent of GDP in terms 

of revenue? 

Secretary GEITHNER. No, again, the numbers are what they are. 

Again, you can disagree about what the impact is, but we are talking about rates overall that prevailed at a time when the economy 

was doing incredibly well relative to what we saw in the succeeding 

decade. So, again, I think our economy would do fine under those 

rates—— 

Senator JOHNSON. Now we have an extremely weak economy. 

How would increasing taxes produce that type of revenue? I think 

that is a really bad assumption? 

Secretary GEITHNER. No, I am not—again, I do not—I am not 

going to try to change your view about the economics. I am saying 

what we are proposing is a reasonably balanced set of revenue 

changes and spending proposals to achieve very substantial deficit 

reduction. And if you want to go deeper, then you have to figure 

out whether you do more revenues or you do more spending cuts, 

and those have consequences for growth. Again, you know, this is 

not—no one will say any plan is a perfect plan. 

Senator JOHNSON. I understand. 

Secretary GEITHNER. But it is a proposal. 

Senator JOHNSON. Let us talk about the risk in your health care 

projections. Basically the CBO, the way you gave them the figures, 

they are scoring it as a $1.5 trillion deficit reduction over two decades. 

Secretary GEITHNER. Well, again—— 

Senator JOHNSON. Are you familiar with the ex-CBO’s Douglas 

Holtz-Eakin’s study where he is talking, instead of 3 million people 

moving into those exchanges—— 

Secretary GEITHNER. Senator, again, a great strength of our system is you and I do not get to decide these numbers. We have an 
684 

independent, nonpartisan office that makes these judgments for us. 

So you do not need to take my word before anybody else’s. Only one 

word governs, which is a good thing for the country, and it will be 

CBO’s judgments. All I was doing is repeating them. They are not 

mine. They are theirs. 

Senator JOHNSON. Do you agree only 3 million versus—OK. 

Chairman CONRAD. Senator Coons. 

Senator COONS. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary, for being with us today for this engaging conversation. 

This morning, families in Delaware woke up to more tough news. 

About 100 folks are getting notice from Perdue they are getting 

laid off in our poultry industry. About 80 people due to A&P’s ongoing bankruptcy are going to lose their jobs in my home county in 

the grocery store. As I think Senator Sanders strongly pointed out 

earlier in this hearing, this continues to be a very tough time for 

working folks in this country. 

What in this budget gives them and should give me some optimism about the investments you are making to try and strengthen 

this recovery? 

Secretary GEITHNER. Well, I think you would have to look at the 

proposals for a very, very substantial improvement in public infrastructure, which is very good for you to think about these challenges, because a lot of the unemployment caused by the crisis was 

concentrated in construction. So that is one plan. 

A second piece of this I would look at is the tax incentives that 

are there for investment. It is very important we do everything we 

can to make sure the Tax Code is making it more likely that the 

great American companies, small and large—and foreign companies, too—are building their next facilities here so that we are creating and building more jobs in the United States. 

We are proposing a substantial set of changes to help improve 

export growth. There has been very good export growth in the early 

part of the recovery, and it is very broad-based. Manufacturing, industrial production, agriculture, high technology—there is a lot of 

job growth with that. 

There is a whole range of other proposals in there to help encourage innovation, education. That is what I would focus on. 

Senator COONS. Some have criticized your growth estimates as 

being overly ambitious. I am optimistic, given some of the proposals in here, that they are potentially achievable. Things like the 

zero capital gains and small business investment I think are particularly a good idea. Making permanent the R&D tax credit I 

think is an excellent idea. You testified yesterday in the Senate Finance Committee and touched on repatriation of foreign-earned 

profits and the possibility of tax reform, which I think has to be 

a piece of the solution here moving forward. 

Help me understand how you think it might be possible to 

change our current corporate rate, encourage repatriation in a way 

that would reinvest in hiring and in capital and in R&D rather 

than simply in bonuses or dividends, and how you might structure 

that. You also—I was interested—suggested that we could make 

fundamental change in the corporate rates and the corporate structure without doing it on the individual side. As Senator Ensign 
685 

mentioned before, there are some complexities to doing that. I 

would be interested in hearing your views. 

Secretary GEITHNER. Well, I guess I would just stay with these 

simple, basic principles, elements about design. Again, you want to 

bring the statutory rate, which is now the highest in the world, 

down very substantially. You want to bring it closer to the range 

that prevails across our major competitors. To do that, you have to 

substantially reduce, scale back a set of very broad-based tax preferences that go to businesses. You need to do that in a way that 

makes clear that we are reducing, not improving, opportunities to 

shift income and investment outside the United States. You want 

to change those incentives in the other direction to the extent you 

can. And you cannot do that responsibly if you are going to be adding to future deficits. You have to do it in a way that is revenue 

neutral. 

Senator COONS. Right. 

Secretary GEITHNER. You cannot, I think, offer the hope of raising more revenue from business as a whole over time because we 

live in a much more competitive world. But you cannot take the 

other risk, which is that we lose revenue. 

Senator COONS. And for those very folks I mentioned who today 

are getting bad news, how do I reassure them that by making that 

dramatic reduction in at least the statutory corporate rate I am not 

simply—were I to be supporting that, I am not simply encouraging 

more offshoring, more loss of American manufacturing jobs? You do 

have some specific incentives targeted at manufacturing, I think 

are a strong part of this plan. But I am very concerned about how 

we make sure that we do not further lose manufacturing in this 

country. 

Secretary GEITHNER. Well, again, the critical test we apply to 

any reform program that we are presented with or that we propose 

would be we improve, not reduce, the incentives to invest here; we 

reduce, not increase, the opportunities to shift income outside of 

the United States. That is a critical test. And it is very important, 

as you are implying, that when you look at these proposals for 

changing how we tax worldwide income, territorial options, you do 

not—not just risk losing revenue, but you do not want to create the 

incentives to have more of that stuff happen outside the United 

States. 

Senator COONS. There are a number of things about how budget 

scoring works here at the Federal level that are new to me. I got 

familiar with how to balance budgets at the county level. The Federal budget is fundamentally different. There are a number of 

things folks have brought to me that I am trying to get my head 

around. One of them is the idea that the student loans, when they 

have been moved to direct lending, are scored as being without 

risk, essentially presumed to be fully repaid, and that that creates 

the impression, the false impression of savings, when, in fact, any 

realistic assessment would include some risk. Can you comment on 

that? 

Secretary GEITHNER. You know, I need to think about that a little more carefully, but I would be happy to respond to you in writing about that. 
686 

Again, I think the general principles we try to abide by and we 

should abide by are that you need to show on the budget the full 

costs, the potential risks of loss associated with any type of loan 

or guarantee program, whatever its basic form. And obviously it is 

important we try to achieve—hold to that. But I would be happy 

to think about that more carefully and get back to you. 

Senator COONS. Please. 

Senator COONS. Then, last, there are some, I think, strong moves 

in this budget in terms of the sustainable growth rate, the doc-fix, 

so-called, and the changes to the Pension Benefit Guaranty Corporation. Could you just give me a little more detail on the PBGC 

changes and how that will ensure stability or solvency farther into 

the future and, thus, reduce some of the future liabilities that I 

think all of us on both sides here are quite concerned about? 

Secretary GEITHNER. Well, the way the current PBGC, the benefit scheme works is, just to be direct about it, we do not give the 

PBGC the capacity, the authority to charge a guarantee fee that 

covers their liability. And what that means is all sorts of other people pay the costs of those unfunded pension funds when companies 

fall into bankruptcy. So, again, a basic test of responsibility is you 

want to make sure, if you are providing guarantees, you need to 

charge for them. They need to be risk based, and they need to be 

fair in design. We do not allow them to do that now. We think that 

is important for Congress to do. 

Again, if you think about the consequence of getting that wrong, 

think about Fannie and Freddie. 

Senator COONS. I think the point and that model also should be 

applied to the student lending work that the Federal Government 

is now more directly involved in. 

I will close, if I might, Mr. Chairman, by saying, you know, while 

Senator Sanders I think laid out a very compelling case about how 

we got here, I was encouraged by Senator Ensign’s tone, which 

really focused on how do we solve the problems that all of us have. 

And I do think that we need to look to leadership across both sides 

of the aisle, by this Committee and by the other chamber of Congress, and invite the President to join us. 

Thank you very much, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator TOOMEY. Senator TOOMEY. Thank you very much, Mr. Chairman, and 

thank you, Mr. Secretary, for joining us today. 

I would like to address the debt limit debate that is upon us, but 

I want to start with a little bit of context, and we have touched on 

some of these things. But it is very important, I think, to inform 

our judgment as we debate the debt limit. And I want to emphasize 

a point that Senator Thune made earlier. While we rightly focus 

on the level of our deficits and our debt, it is spending that hasten 

us here. Since 2000, just since 2000, total Federal spending has 

doubled. And so we have debts now—deficits now far greater than 

deficits we were running recently. In 2007, for instance, as you 

know, Mr. Secretary, our deficit was only 1.2 percent of GDP. This 

year it is over 10 percent. It is over $1.5 trillion. 

This is a recent phenomenon. The public debt that we had in 

1988 was about 41 percent of GDP. In 2008, public debt was about 
687 

40 percent of GDP. Today it is 64 percent, and by October it is 

going to be 72 percent of GDP. The debt has doubled in 4 years. 

It is scheduled to triple in 11 years. And as we discussed briefly 

earlier, but I really want to stress, this is a fraction of the problem 

that we have. The unfunded liabilities that we have, the contingent 

liabilities through the guarantees of Fannie and Freddie, the big 

entitlement programs, you know, we could argue about how to do 

the math and how to discount this unfunded liability, but anyway 

you do it, within reason, it is a number that is at least well into 

the tens of trillions, and it might be, as Mr. Johnson says, over 

$100 trillion. So any way you look at it, those obligations dwarf the 

numbers that we have seen on the board, the actual publicly traded 

debt. 

So I think we have an enormous problem, and it is already upon 

us. And what concerns me is what this administration has done in 

this environment. What have we seen? The administration created 

a new trillion dollar entitlement program, launched an $800 billion 

stimulus spending, pushed huge increases in discretionary spending in recent years. The President is now calling for another—basically a stimulus bill, $50 billion to build high-speed rail, which I 

think would be a shocking waste of money. The President is threatening to veto a CR because the Republicans want to cut back the 

spending that was added in the last couple of years. And the President proposes a budget that increases our debt every year, and I 

think you acknowledge that CBO will observe that it increases it 

even as a percentage of GDP. And the President, as we have observed repeatedly this morning, does absolutely nothing about the 

entitlements that are ultimately driving this whole train wreck. 

In fact, I think part of the problem is the administration is populated with people who think at some level that the more Government spends, the richer we all become. And I just have to say this 

just is not working, and I think this is dangerous. And I think the 

administration thinks it is working, but I do not. 

So when the President says that now that the country has, metaphorically speaking, reached the limit on its credit cards and we 

should just give it a new one and not make any changes to the 

process, talk about that later, I just do not think that is a good decision. 

Now, let me emphasize—and I have said this before, and I have 

said this to you, Mr. Secretary—I am willing to vote to raise the 

debt limit. But I am only willing to do that if we are going to make 

the cuts in spending and the changes in process that got us here. 

You have acknowledged that the process is broken. I just do not 

think we can kick this can down the road anymore. 

Now, we apparently disagree about whether we should make increasing the debt limit contingent on getting the kind of process reforms that fix this problem. But there is one thing that I know we 

do agree on—and this is something I have also written about—and 

that is, under no circumstances should the United States ever even 

get close to defaulting on the debt that we have issued. And I know 

you agree with that. It would be a complete disaster. It is unnecessary. We have a moral obligation to repay people who have lent us 

money. 
688 

And so, as you know, I have introduced a bill that would simply 

guarantee that as we try to resolve our differences over what to do 

about the debt limit, if we have not got it resolved at the time at 

which we reach it, we would at least not default on our debts. And 

my bill would do that by simply requiring that the Treasury make 

as a priority payments on interest and principal, with the ample 

resources the Treasury would continue to have. 

Now, you have argued that my bill does not work, and while at 

least implicitly you have acknowledged that, yes, you could continue servicing the debt, even delays in payments to vendors would 

be perceived by the markets as much of a default as a missed payment on a Treasury bond. So basically you are telling us that if we 

have to delay a payment to the guys who mow the lawn around 

The Mall, that would have the same kind of impact and cause the 

same kind of financial crisis that would result if we failed to make 

an interest payment on a Treasury security. 

I have to tell you, Mr. Secretary, that is just not true. I spent 

years as a professional in the bond market. I was trading fixed-income securities, including U.S. Treasuries. But whether you are a 

bond trader or whether you are a pension fund manager in Pittsburgh or a senior citizen in Allentown investing your IRA savings, 

the market knows the difference between delaying a payment to a 

vendor and defaulting on our Treasuries. 

Chairman Bernanke was asked last week at the Budget Committee in the House if he thought it would be a good idea for the 

Federal Government to adopt this kind of bill. His answer was, and 

I will quote: ‘‘Well, it would reduce the risk of the debt limit, that’s 

for sure.’’ 

So I have to say I think it has been inappropriate for the administration to raise the specter of a default on our debt in the context 

of this debt limit, because you and I both know there is no circumstances in which we are going to default on our debt. We 

should not even really have to have this discussion because we 

know this. But since the administration has raised this specter, I 

felt it was necessary to try to clear this. 

I believe that we are already in the early stages of a fiscal train 

wreck. I think the problem is very, very serious. It is a spending 

problem that both parties are responsible for to varying degrees. 

The debt level, if you ask me, is already at dangerous levels. I just 

do not think we can kick this can down the road any further, and 

I think what the administration is implicitly asking us to do is to 

just go ahead and give them another credit card without making 

the fundamental process reforms that we need to get onto a sustainable path. 

Secretary GEITHNER. May I respond, Mr. Chairman? 

Chairman CONRAD. Certainly. 

Secretary GEITHNER. Senator, you and I probably disagree on 

less than you think, and I appreciate very much your review of history about what produced this big acceleration or debt burdens, because that is a very helpful context for everybody, and I very much 

appreciate your commitment to making sure that people understand we will meet our obligations to the country. You are right to 

emphasize the cost of not doing so, and we should not let the mar-
689 

kets start to build any risk that Congress will not ultimately pass 

that increase we need. 

But I just want to make sure that I clarify one thing that is very 

important which is that we agree that we have to work together 

on a plan that Congress can enact that will start to deal with these 

very daunting, very formidable deficit challenges. A hundred percent agree with you. That is critically important. We cannot put 

that off. And again, we look forward to working with the processes 

that are set up to try and make sure we achieve that. 

But I would caution everybody against taking any risk that Congress does not act to increase the limit within the timeframe we 

need, because for the reasons you said, we cannot afford to let the 

market lose any confidence that ultimately Congress will act well 

in advance of any time we are going to hit the limit, because that 

would be catastrophic, would cause grave damage to the recession, 

to the expansion underway, to our capacity to dig out of this recession, and we cannot afford to take that risk. 

Chairman CONRAD. Senator Portman. 

Senator PORTMAN. Thank you, Mr. Chairman. And, Mr. Secretary, thank you for your testimony today. I want to associate myself with the comments of Senator Sanders, actually, which might 

seem unusual to you. But he said he thought this was an extraordinarily strange conversation, and I agree with him for different 

reasons, as you might imagine. 

I just think we are at the point in our country’s history where 

we can’t afford to play politics, and I think this budget presentation, which has been talked about a lot, and Senator Toomey just 

talked about some of the numbers, it is a political statement and 

it does not rise to the challenge. In fact, it does not rise to the very 

challenge the President has laid out, including the challenge you 

have laid out and Director Lew has laid out and others. 

So that is what I find strange about this conversation. You said 

to us today that by doubling the gross debt between last year and 

10 years from now, which is in the budget, by ending up with interest payments on the debt alone that are in excess of all of the discretionary spending, by the fact that we have this fiscal time bomb 

on our doorstep and we are not dealing with this in this budget, 

you called it unsustainable today. 

You have acknowledged that there will be weaker growth in our 

economy because of the debt that is building up under this budget. 

Secretary GEITHNER. If we do not act. 

Senator PORTMAN. Well, under your budget, you are saying, you 

have acted—— 

Secretary GEITHNER. No, no, absolutely not. 

Senator PORTMAN. You have put forward your—— 

Secretary GEITHNER. No, no, no. 

Senator PORTMAN. You said that there will be weaker growth because of the debt which will be—the gross debt will be over 100 

percent of our GDP—— 

Secretary GEITHNER. No, if Congress does not—— 

Senator PORTMAN [continuing]. Under this budget. 

Secretary GEITHNER. If Congress does not act, then we face that 

risk, but—— 
690 

Senator PORTMAN. No. I am talking about the numbers in your 

budget. This is unsustainable. I assume you still agree with that. 

If you do not, this is an extraordinarily strange conversation, if the 

Secretary of Treasury does not believe that 100 percent of GDP is 

going to limit growth in our economy. 

And then you ask us, well, we are waiting to see what you provide us. Look, this has to be an effort, again, that gets away from 

the politics. We cannot afford it and we have to start solving the 

problem. I would say that, unfortunately, as you have noted yourself today, and I appreciate your candor on this, your budget is 

worse than it looks. CBO will end up saying that these deficits are 

higher than you have projected. In fact, I suspect they are going 

to end up saying that it grows our deficit not just in nominal terms, 

but as a percent of GDP. 

Let me give you one concern that I have here. Your growth assumptions are too high, and we have talked about this. But if you 

use the CBO growth assumptions and the Blue Chip, the private 

forecasters’ growth assumptions, compared to yours, and I am extrapolating here from CBO’s rule of thumb which is a lower growth 

rate of .1 percent, it would result in a 10-year deficit of about $310 

billion. If you assume .5 percent lower growth, which is what the 

difference is between the Blue Chip, CBO, and yours, we are talking about a higher deficit of over $1.5 trillion over the next 10 

years. 

Now, that wipes out all of the claimed savings in your budget, 

that alone. So this situation is even worse than, again, being stated 

in your budget and I think we will see this through the CBO analysis. 

My other concern, obviously, is that the growth side of the equation is not addressed. You and I have talked about this. And I commend you yesterday for talking about the necessary expansion of 

exports we need to get this economy growing again, and, in fact, 

you had specifically talked about your support for the three trade 

open agreements that have already been negotiated and giving the 

President the ability to negotiate further trade openings. 

I would ask you today to talk a little about the pro- growth side 

of things. We are looking at 9.6 percent unemployment in Ohio 

today. We have lost over 170,000 jobs in Ohio since the stimulus 

was signed into law 2 years ago today. Today is the anniversary. 

We still do not have the kind of growth we need, coupled with 

the spending restraint, to get this deficit and debt under control. 

I would just ask you about what you would support. I know you 

claim there are some things in the proposal on growth and on taxes 

that will help the economy. I see just the opposite. I see the tax 

increases. I see the lack of any tax reform, a huge opportunity 

missed. 

In fact, I look at your budget and you actually continue this assault on deferral, which is where you have a U.S. company that 

does business overseas being taxed more under your budget. There 

is a recent report out on this by Robert Shapiro, who was a Clinton 

administration official, and AEI that says the elimination of deferral would cost U.S. companies 159,000 jobs. 

In Ohio, by the way, there is a separate study that has been done 

by an economist at Kenyon College that says it is 17,000 jobs lost 
691 

in Ohio. And yet, your budget continues a number of changes to an 

international tax system that limits this practice. 

So if you could address, what do you think we ought to be doing 

in terms of taxes? Can we lower the rate and broaden the base and 

make our tax system more efficient and therefore add more to economic growth, which in turn will add more revenues? And why is 

that not in the budget? And what else would you propose to get 

this economy moving? 

Secretary GEITHNER. Senator, let me just start by again acknowledging that you have a long distinguished career in the Executive 

branch. It is nice to see you back here helping solve these problems. 

When I left the Treasury at the end of 2000, the CBO was projecting us to have surpluses in the range of, I would say, north of 

$5 trillion over the next 10 years, and when I came back in on January 1, 2009, CBO was projecting, I think, a $13 trillion swing in 

the projected deficits facing the country as a whole. And I think it 

is very good to hear, across the political spectrum now, a recognition that we have a deep imperative to recognize deficits matter 

and we have to fix them over time. Again, we are looking forward 

to working with you on how best to achieve that. 

I want to say a couple things in response to your points you 

made in your questions. A few things on the growth assumptions. 

CBO’s are lower in part because they have to assume that the 

Bush taxes, all of them, expire in 2013. That is a big hit to GDP. 

We are not proposing that. It forces CBO to show lower growth estimates because of that. 

Now, when they score our proposed policies, they will show a 

higher GDP growth than they did initially because of that basic 

change. Again, you have had the privilege of doing these assumptions before. Nothing perfect in them. 

Senator PORTMAN. How about Blue Chip? 

Secretary GEITHNER. And you are right. Our growth scenario is 

just a little above Blue Chip, but I actually look back and compare 

them to yours when you were OMB Director, and my suspicion is, 

you will find when you look at them—— 

Senator PORTMAN. When the deficit was one-tenth of what it is 

today. 

Secretary GEITHNER. No, but—well, again, not dramatically higher than when I left the Treasury. 

Now, if you look at our growth assumptions over the next 10 

years, we are assuming, as we should, that growth on average is 

significantly lower than it is in past recoveries, as we should expect 

given the nature of this basic crisis. 

But again, the good thing about our system is, CBO will govern. 

It is their assumptions that govern. You and I do not need to debate the future. They will decide for the Congress. 

Now, on deferral, just one quick thing on deferral. I know this 

is unpopular proposals for a lot of people in the business community, but let me explain what they are designed to do. They are designed to, again, reduce the incentive to shift investment outside 

the United States. 

So as you know better than anybody, if there are two companies 

in your state today and one builds their next plant outside the 
692 

United States, one builds their next plant in your state, that first 

company gets a lower effective tax rate. That means they have incentives to make that next marginal investment outside the country. 

We do not think that makes sense at a time when we want to 

encourage more job creation investment here, so we want to redress that, at least get it back to neutral. But again, I think our 

view is the best way to get there, is through a comprehensive reform that lowers the statutory rate very substantially, but does it 

in a way that is deficit neutral. 

Senator PORTMAN. That would have been great to have seen in 

the budget and we can talk about this, but what it does is it hurts 

jobs in this country because we are not able to sell as many products overseas. That is the point of growth. 

Chairman CONRAD. Senator Cornyn. 

Senator CORNYN. Thank you, Mr. Secretary, good to see you. Is 

it correct to say that this proposed budget relies, in part, on a $1.6 

trillion tax increase over the next 10 years? 

Secretary GEITHNER. Well, the way I encourage you to look at 

this, you should look comprehensively at the tax proposal in the 

budget, and I will just do the numbers for you. 

Senator CORNYN. With all due respect, would you answer my 

question? 

Secretary GEITHNER. Three trillion in net tax reductions for individuals. 

Senator CORNYN. I am not talking about—I am asking, does it increase taxes for some taxpayers on $1.6 trillion? 

Secretary GEITHNER. Oh, absolutely. As I said, we are proposing 

to allow the tax cuts for the top 2 percent to expire. We are proposing to reduce tax expenditures for the top 2 percent. And there 

is a series of other changes, more modest changes, that do raise 

revenues, but you have to look at the overall—— 

Senator CORNYN. Let me ask you specifically, Mr. Secretary, be- cause time is limited. $90 billion of tax increases in the President’s 

budget are going to be imposed on the domestic energy industry 

under this budget. This is a sector that is one of the largest employers in the country supporting more than 9.2 million jobs, contributing 7.5 to GDP, and which is already contributing $100 million a day to the Federal treasury. 

How does that tax increase on the domestic energy industry reduce our reliance on imported oil? 

Secretary GEITHNER. Well, Senator, you know the arguments in 

this context. What we are proposing to do is to scale back what are 

very expensive tax expenditures that go to a limited number of industries and distort overall investment and require all other businesses to pay more tax as a result. And that is one proposal in that 

direction. 

Senator CORNYN. Well, if you increase taxes on domestic energy 

supply, that will translate into increased costs of gasoline for consumers and diesel, will it not? 

Secretary GEITHNER. No, it will not have that effect because the 

price of oil and gas as a result is set in the world markets and 

modest changes in the subsidies we give the domestic oil company 

will not affect the price. 
693 

Senator CORNYN. So you can increase taxes on an industry and 

it will have no impact on price to consumers, is what you are saying? 

Secretary GEITHNER. In a market like this, I believe almost any 

economist would tell you that there will be no impact on the broad 

price of oil to the U.S. consumer. 

Senator CORNYN. Will you agree with me, if you increase taxes 

on domestic production of energy, it will necessarily increase our 

dependence on imported energy because they will not bear that 

same tax burden and it will be cheaper? 

Secretary GEITHNER. No, probably not materially at all. But you 

are right, we are proposing to reduce the subsidy we give through 

the Tax Code to that industry. Now, they still will benefit a whole 

range of other subsidies, but we are proposing to reduce those 

again because we do not have unlimited resources. And again, if we 

do not do that, we are going to have to raise taxes on somebody 

else. 

Senator CORNYN. Let me go on to another question, which I continue to be amazed that there is any really disagreement, that increasing taxes on an industry will not have an impact on consumers. But I hear your answer. 

Senator Sanders asked a number of questions about tax, who 

pays taxes, and isn’t it true that about 97 percent of the income 

taxes that are paid in America today are paid by the top 50 percent 

of income earners? 

Secretary GEITHNER. Well, again, you know these numbers. I 

think what the Senator was pointing out, which is true, which is 

if you think about—— 

Senator CORNYN. Well, I am asking what I am—my question, not 

his. 

Secretary GEITHNER. Again, what I would look at is, what is the 

effective tax rates for people who make, for example, in the top 1 

percent of income. What is their effective tax rate versus the effective tax rate of middle class America. And that is the question he 

was speaking to and I think he is right in that. 

Senator CORNYN. Well, but my question is, isn’t it true that 97 

percent of income taxes are paid by the top 50 percent of income 

earners in America? 

Secretary GEITHNER. Well, I am not sure exactly what those 

numbers are, but I would be happy to provide them in writing. 

Senator CORNYN. Well, if you are not sure about the exact number, isn’t that approximately correct? 

Secretary GEITHNER. I am not sure. Again, you are right to say 

that a large fraction—because income inequality is so high in the 

United States, a large fraction of tax revenues come from the relatively well-off, but their effective tax rate is, in many ways, sort 

of strangely much lower than the average, you know, a less fortunate American. 

Senator CORNYN. Mr. Secretary, I do not expect you to know the 

exact numbers, but I am, frankly, astonished that the Secretary of 

the Treasury would not know generally where the tax burden lies. 

But let me just ask another way. Would you agree with me that 

the top 20 percent of income earners in the country pay approximately two-thirds of Federal taxes? 
694 

Secretary GEITHNER. Again, that sounds broadly right, but I 

think what you are debating a little bit is what is the distribution 

of the effective tax burden, and one way to measure that is what 

is the rate they pay relative to income. 

Senator CORNYN. Well, I am not debating it right now. I am just 

asking for information from you to answer those questions. 

One of the hardest things I have found in Washington, D.C. is 

to get the facts because it seems like everybody spins. Once you get 

the facts, then it is a whole lot easier to figure out how to solve 

the problem. 

Secretary GEITHNER. I would never dispute the facts. Facts are 

easy to agree on. 

Senator CORNYN. So may I make just a respectful suggestion? 

Under the Budget Act, it is the President’s statutory obligation to 

produce a proposed budget. 

Secretary GEITHNER. Yes. 

Senator CORNYN. And we have talked about that and, frankly, I 

am among those who are disappointed that the President did not 

go further and deal with more than 12 percent of all Federal 

spending that included a $1.6 trillion in new taxes, and it appears 

to not engage is own fiscal commission’s recommendations, which 

I found to be dramatic and sobering and bold. 

And so, I hope that we will engage on these issues. The only way 

we are going to get a resolution of the crisis facing our country is 

if the President is engaged. And if the President is disengaged, it 

will not happen. It will not happen. We will sort of fall back into 

the traditional demagoguery— 

[sic] that occurs whenever we talk about dealing with important 

and large fiscal matters. 

So if I could just make a respectful suggestion, we saw in the expiring tax provisions in the end of December that the President 

and the Vice President got very directly engaged with the Republican leader and with the assistant Republican leader, Senator 

McConnell and Senator Kyle. My suggestion to you is, that if the 

President would invite those two individuals, along with House 

leadership, over to the White House and say, How can we work together to fix this problem, it would be a dramatically constructive 

move and help move this in the right direction, rather than to resort into the same old he said/she said and blame game. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Let me just say that this is something I have 

repeatedly asked for. I do not see any way around, and the question is timing. I understand that. We, in Congress, have an obligation to lay out our plans and we will do that. But some time very 

soon I believe it is critical that there be a summit, a negotiation, 

whatever one calls it, that involves the leadership of the House and 

the Senate, Republican and Democrat, and the President. 

That was really at the heart of the proposal Senator Gregg and 

I made for a commission that involved the Secretary of the Treasury and the head of OMB. That was our proposal. We got 53 votes 

for that proposition. We did not get 60. 

Senator CORNYN. I was one of them, Mr. Chairman, and I admire 

your leadership, along with Senator Gregg’s leadership, on this 

issue. But the fact of the matter is, unless the President is willing 
695 

to engage on this—and I am not suggesting they do it in public. 

I am suggesting they have a meeting and get to the solution, because as you have noted many times, we cannot kick the can down 

the road. Unfortunately, I see this history repeating itself. 

Chairman CONRAD. Let me just say that I do not think anybody 

who has listened to me does not know that I deeply believe this can 

can be kicked down the road. I appreciated the Senator’s support. 

I want to go to one point before we leave. I have heard over and 

over that what we have is a spending problem. Deficits are the result of spending and revenue, the difference between the two. We 

do not just have a spending problem, although we do have a spending problem, we also have a revenue problem. 

I am so, frankly, tired of hearing that there is just one side to 

the calculation of the deficit. There is not just one side. There are 

two sides. There is revenue and there is spending, and the reality 

is, the truth is, we have a problem on both sides of the equation. 

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

the GDP. The revenue is the lowest it has been in 60 years, as a 

share of the GDP. 

So let’s get real. Let’s get real. Yes, we have to do spending and 

yes, we have to do revenue. If people are not going to be serious 

about what has to be done here, we are not going to solve the problem. With that, I thank the Secretary. 

Senator SESSIONS. Mr. Chairman, I would agree with that. Both 

are factors, but we see as the economy comes back, revenue will 

come back to its historic levels. But if we get entrenched in spending at 25 percent of GDP, we are going to have a very difficult time 

getting back there. 

Chairman CONRAD. Look, nothing could be more clear. Anybody 

who has listened to me for 5 minutes knows I am serious about 

cutting spending and I voted to do it on the Commission. I wish 

others had. Five of the six Senators did. Five of the six representatives of the President did. Five of the six Representatives of the 

House took a walk. 

Senator SESSIONS. Thank you, Mr. Chairman. 

[Whereupon, at 12:11 p.m., the Committee was adjourned.] 
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(719) 

THE PRESIDENT’S FISCAL YEAR 2012 

EDUCATION BUDGET 

TUESDAY, MARCH 1, 2011 

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

The Committee met, pursuant to notice, at 10:01 a.m., in room 

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

Present: Senators Conrad, Sanders, Whitehouse, Merkley, 

Begich, Coons, Sessions, Cornyn, Thune, and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today we will continue our series of hearings on the President’s budget. Before the recess we heard from OMB Director Jack 

Lew and Treasury Secretary Tim Geithner. Today our witness is 

Secretary of Education Arne Duncan. Tomorrow we will hear from 

Energy Secretary Chu, and on Thursday our witness will be Transportation Secretary Ray LaHood. 

Next week we will also be holding a hearing on Defense and 

State Department budgets. I want to alert members that both of 

those Departments have asked to testify together. 

I am very pleased to welcome Secretary Duncan to the Budget 

Committee today. This is the Secretary’s first appearance before 

the Committee, and we look forward to his testimony. 

I personally believe that education is the key to our country’s 

economic future. The importance of education is something that 

was ingrained in me at a very young age. I was raised by my 

grandparents. My grandmother was a school teacher, Mr. Secretary. She was 5 feet tall, and we called her ‘‘Little Chief’’ because 

she commanded respect. And in our household, I will never forget, 

she said, ‘‘In this housing there are three priorities: No. 1 is education, No. 2 is education, No. 3 is education.’’ And we got the message, and she was right. 

So even as we look to cut spending to bring down the deficit, 

which we must do, we also need to ensure that we get our priorities right, and education needs to be a priority as we proceed with 

reducing Government expenditure. 

We need to be careful not to cut education in a way that would 

come back to hurt the Nation’s long-term economic growth and se-
720 

curity. We simply must maintain a strong education system if we 

want to keep pace with our global competitors. 

Let me just go through quickly a couple of charts that I think 

raise concern. 

First of all, we are now falling behind competitors in key areas. 

American students no longer are at the top of their class. We rank 

25th out of 34 Organization for Economic Cooperation and Development countries in math, well below the OECD average. We rank 

17th out of 34 OECD countries in science. Our global competitors 

are making education a priority. 
721 

The contrast with China is striking. In the mid-1980s, we produced nearly as many engineers in graduate schools as China, but 

now China is producing far more engineers than we do, as this 

chart depicts. 
722 

The education achievement gap that has opened between the 

United States and its global competition is already hurting our economic strength. Here are the findings of the study done by the consulting firm McKinsey & Company in which they quantified the 

economic impact of the education gap. They wrote, in part, ‘‘The 

persistence of educational achievement gaps imposes on the United 

States the economic equivalent of a permanent national recession. 

The recurring annual economic cost of the international achievement gap is substantially larger than the deep recession the United 

States is currently experiencing.’’ 
723 

Let me go to the next chart. 
724 

The reality is that we have not been focusing our Nation’s resources as productively as possible. This chart, which was made 

with data from the President’s budget, shows that our combined investment in infrastructure, research and development, and education has fallen as a share of GDP from 6.1 percent in 1962 to 3.6 

percent in 2012. That is, even while deficits and the share of debt 

to GDP has grown, our commitment to these areas—infrastructure, 

education, research and development—has shrunk. 

How can that be? Well, it can be because what is happening is 

the entitlements, the mandatory side of the budget has grown and 

displaced much of what has been traditionally domestic discretionary spending. So as a share of the economy, we are spending 
725 

a smaller amount of education than these other critical areas than 

we did in the 1960s. 

One of the key challenges we face in education funding is the 

Pell Program. It is important to remember that even the maximum 

Pell award of $5,550 offsets only a small portion of the cost of college, less than one-third of the annual cost of a public 4-year college. That portion hasten smaller as the rising cost of college has 

outpaced the increases in the Pell award. 
726 

At the same time, due to the recession and increased demand for 

Pell grants as well as changes that we made as to who qualifies, 

the cost of the program has increased. So we are paying a smaller 

share of the cost, but the overall cost of the Pell Program has increased. 

In 2008, the Pell Program cost $14.2 billion. CBO now projects 

that, without changes to the program, Pell costs in 2012 will be 

$37.8 billion. 
727 

Here is what the Obama administration has proposed in its 

budget for the Pell Program. It proposes to maintain the maximum 

Pell award at $5,550. It proposes savings within Pell by eliminating the second Pell payment, which was established to help students pay for summer school. It also proposes other savings in education accounts to help pay for Pell, including ending in-school interest deferment for graduate students, incentivizing conversion to 

direct lending, and modernizing the Perkins Loan Program. I look 

forward to hearing more from Secretary Duncan on these proposals. 
728 

I want to end by emphasizing again the importance of education 

to our Nation’s economic strength. Here is a statement from Harvard economist Claudia Goldin and Lawrence Katz from a paper 

they wrote entitled, ‘‘The Future of Inequality: The Other Reason 

Education Matters So Much.’’ They wrote: ‘‘An educated population 

is a key source of economic growth, both directly through improved 

labor productivity and indirectly by spurring innovation and speeding the diffusion of advanced technologies. Broad access to education was, by and large, a major factor in the United States’ economic dominance in the 20th century and in the creation of a broad 

middle class. Indeed, the American dream of upward mobility both 

within and across generations has been tied to access to education.’’ 

I think they have it right. Education is a key to our past success 

and our future strength. 

With that, we will turn to Secretary Duncan. Before we do that, 

I will turn to my colleague Senator Sessions for his opening comments, and then we will go to Secretary Duncan for his initial testimony. Then we will go to questions. We are going to have a large 

turnout today, so we are going to go to 5-minutes rounds. 

Senator Sessions, welcome. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Well, 5 minutes will be short, but maybe that 

will be satisfactory, Mr. Chairman. We have so much to do. 

Thank you, Secretary Duncan. Thank you for your service and 

for raising some tough questions about maybe some of the sacred 

cows in the education establishment. I appreciated your recent 

comments to the Governors’ conference, for example, noting that 

somewhat large classrooms with better teachers outperform smaller classrooms, and that is good, honest talk and can result in saving and improving education at the same time. 
729 

And I was also pleased you met with Dr. Katherine Mitchell of 

Alabama. She designed the Alabama Reading Initiative. That program, with very little cost except training and startup, has transformed teaching and learning and reading proficiency in Alabama. 

In just a few years, Alabama’s K–4 schools led the Nation in reading improvement. Massachusetts and Florida used the same type 

program. They were No. 2 and three in reading increase in 1 year. 

That kind of technique that costs less money is what we need— 

does not cost more money is what we need more of. It was technique and not funds, I think, that made that difference. 

So I strongly believe our education focus should be on advancing 

learning, increasing those magic moments in the classroom when 

a child gets it and learning occurs. For too long, we have judged 

our education system on whether the building is new, what kind 

of equipment they have, classroom size, and how much we spend. 

But just throwing money at the problem is clearly not the answer. 

The test for education can only be whether learning is occurring 

adequately. 

I think you believe this, and I see you nod at that. We are spending more, Mr. Chairman, than those countries that are beating us 

in education achievement, spending a good deal more than most of 

them. So I think it is time now for honest, fact-based budgeting. 

Everyone knows we are in a financial crisis. 

Admiral Mullen, Chairman of the Joint Chiefs, said our debt is 

the greatest threat to our national security. This year’s deficit 

alone is projected to be $1.65 trillion. That amounts to $7,500 for 

each American adult over the age of 25. 

While the President tells the American people that the budget 

asks Washington to live within its means, the facts show the opposite. The President’s budget adds $13 trillion to our gross national 
730 

debt, doubling it by the end of the decade. Over the next 10 years, 

the smallest annual deficit the budget calls for is over $600 billion, 

and the number rises to $800 billion in the tenth year. We borrow 

that money, of course. 

Interest on our debt was $196 billion last year, three times as 

large as the education budget this year. 

Interest was three times the education budget this year. But in 

10 years, under the President’s plan, because of the increased debt, 

the annual interest payment will be $844 billion, 10 times the size 

that the budget calls for education spending in that year. 

Interest, the fastest-growing item in the budget, will crowd out 

our future hopes for education and for all other programs. It is an 

unsustainable path. That is why I am flabbergasted by the education budget. I think it only could have been written in Washington in a bubble detached from the reality I have just described. 

Over the last 3 years, we spent 68 percent more on education 

than the 3 years before that from the Federal Government. 
731 

The budget now calls for an 11-percent increase in Federal 

spending on education. Sir, we do not have the money. Everyone 

knows that. American families are tightening their belts every day, 

doing more with less, as are cities, counties and States. It is time 

for the Federal Government to do the same. We have to. 

All of us favor education, but we cannot continue these large increases in spending, every dollar of which is borrowed. 
732 

This request for an 11-percent increase, more than 30 percent 

more than we were spending in 2008, is an affront to common 

sense, an affront to the will of the voters. These charts show that 

education has been the beneficiary of unprecedented increases in 

recent years without, let me add, any significant increase in student performance. And with the stimulus money, education has 

risen by stunning unprecedented amounts. Your prepared statement acknowledges a 4-percent increase in education spending, discretionary spending, but you note that that does not include increases in discretionary Pell grants. Well, that is not fact budgeting. That is beltway budgeting. When you consider Pell grants— 

and we should—it is an 11-percent increase. 

What we need is leadership that focuses on why our education 

system is not meeting our expectations. This funding crisis I think 

is an opportunity to challenge our educational establishment, to 

thoroughly and honestly review the plain facts, what works, what 

does not work. We owe that to our children today for their education. And we owe our children a country that is not burdened by 

crippling debt. The President says his budget is a plan for winning 

the future, but you cannot win the future for our children with borrowed money. 

As Secretary Geithner acknowledged last week, our surging debt 

threatens our economic growth, jobs for young graduates, and even 

economic turmoil. It would be wrong to leave our country weaker 

and diminished because we lack the courage to confront the fiscal 

crisis we are in. 

So we need a dramatic course correction. We need to get the message. We need to get in sync with reality of what is happening in 

the world today. We need to trim bloated Government. We need to 

start now, and it goes without saying that the Education Depart-
733 

ment is not exempt. We will vote this week on a continuing resolution to fund the Government for some period of time. No continuing 

resolution to fund the Government that fails to reduce spending 

will pass. It will not pass the House or the Senate. We are going 

to fight for spending cuts this week, next week, next month, next 

year. We are going to fight for spending cuts in this Budget Committee and the Appropriations Committee and on the Senate floor. 

We are going to keep fighting for a leaner, more productive Government until we have restored confidence in our economy and put our 

country back on the right path—the path to prosperity. 

So this battle over the budget is just beginning. I respect your 

leadership. I think you have some great ideas. But we cannot approve, and I do not think will approve, an 11-percent increase in 

education funding. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. It sounds to me like you have a 

bit of a cold there. 

Senator SESSIONS. I do. 

Chairman CONRAD. So we hope you will recover. 

Senator SESSIONS. Thank you. 

Chairman CONRAD. We want to welcome the Secretary. Please 

proceed with your testimony, and then we will go to the rounds. 

Let me just say that I initially said 5-minutes rounds. If the turnout is the same as the turnout that we see here, we will go to 7- 

minute rounds. We have indicated from Senators ten more Senators would be here. If that were the case, we would need 5-minute 

rounds, but we will just wait and see. 

Secretary Duncan, welcome. 

STATEMENT OF THE HONORABLE ARNE DUNCAN, SECRETARY, U.S. DEPARTMENT OF EDUCATION; ACCOMPANIED 

BY THOMAS SKELLY, ACTING CHIEF FINANCIAL OFFICER, 

U.S. DEPARTMENT OF EDUCATION 

Secretary DUNCAN. Thank you, Chairman Conrad, Ranking 

Member Sessions, and members of the Committee. Thank you so 

much for this opportunity to come before the Committee and to 

talk to you about President Obama’s fiscal year 2012 education 

budget. 

This proposed budget reflects our administration’s dual commitments to reduce spending and to be more efficient while investing 

to secure our future, and at the very top of that list of investments 

we must make is education. Education is the foundation for a free 

and a democratic society. It is the blanket of security for the middle class and the only path out of poverty for millions of Americans 

who have been left behind by a changing economy. 

Education gives immigrants and their children the chance to be 

productive citizens and contribute to our collective wealth. Education enables us as a country to compete in a global economy with 

other countries that are heavily investing to prepare the next generation of innovators and leaders in business. 

Education is not just an economic security issue. It is a national 

security issue, which is why retired General Colin Powell devotes 

so much of his energy today to education. Last year, military leaders stood with me and called for more education funding because 
734 

only one in four, only 25 percent of young high school graduates 

today, is educationally or physically equipped to serve in the military. 

Today all across America people are meeting the challenge of improving education in many different ways, from creating high-quality early learning programs to raising standards, strengthening the 

field of teaching, and aggressively attacking and closing achievement gaps. 

While the Federal Government contributes less than 10 percent 

of K–12 funding nationally, our dollars play a critical role in promoting equity, protecting children at risk, and more recently supporting reform activities at the State and at the local level. 

In terms of reform, the last administration focused on charter 

schools and performance pay, two programs that benefited our students when I was a CEO of the Chicago public schools. Our administration has used competitive dollars to get State and local educators to think and to act differently. Our administration’s Race to 

the Top program has prompted Governors and educators to jointly 

embrace bold and courageous reform programs. With our support, 

41 States adopted higher college and career-ready standards, and 

several States passed new laws and policies around teacher evaluation. Several States altered charter laws and policies to foster creation of new learning models. 

Race to the Top also prompted us to rethink the Federal role. As 

I said, the Department was established to promote equity in education and to protect students most at risk. To that end, we have 

steadily boosted our commitment to formula programs like Title I 

and IDEA. 

The Federal Government also has a long history of supporting 

higher education from the land grant colleges in the 19th century 

to the GI bill and the Pell Grant Program in the 20th. This budget 

further increases our investments in higher education through both 

student lending programs and grants. 

But today our most critical role is in supporting reform at the 

State and local level by providing increased flexibility and incentives, while holding States and district accountable in a fair, honest, and transparent way. In fulfilling this role, we must strike the 

right balance, providing as much freedom and flexibility as possible 

to schools and districts, while ensuring that children are learning 

what they need. 

I have spent 2 years traveling the country, visiting many of your 

States and districts and talking with your teachers and your parents. I have visited schools in rural, urban, and suburban communities, and there is a lot of dissatisfaction I hear across the country 

with the current Federal law around public education. 

Many people feel the Federal Government went too far with 

sanctions, mislabeling schools as failures, and issuing one-size-fitsall mandates. That’s why we’re asking Congress to rewrite and to 

fix No Child Left Behind, and I look forward to working with you 

on that in the next couple months as we move forward. 

But there is also a deep appreciation for the Federal commitment 

to children and to learning. They are grateful for our support of the 

STEM subjects. Americans know that even in challenging times, 

particularly in challenge fiscal times like these, we must prepare 
735 

our young people to compete in tomorrow’s economy. They know 

that even as States face greater financial pressure than at any 

time in recent history, we cannot put our children and our country’s future at risk. So our budget proposal reflects these aspirations and commitments. 

Overall, we are seeking a $2 billion increase in non- Pell spending. That includes a modest increase in formula programs like Title 

I and IDEA, while maintaining programs for English language 

learners and other at-risk populations, such as rural, migrant, and 

homeless students. 

We are calling for a new round of Race to the Top funds, though 

we would change the program in two significant ways: targeting 

school districts rather than States, and including a carveout for 

rural communities. 

We will continue to invest in innovation and research. We want 

to support a well-rounded education that includes the arts and foreign languages, literacy, STEM, and physical education. We want 

to strengthen the teaching profession in a number of ways and 

work harder to attract the top students to pursue teaching degrees. 

We proposed a new competition to strengthen early learning program, and we are challenging every single State to boost college 

completion rates. Today more than half of our young people who go 

to college fail to earn a degree. As a Nation, we cannot sustain that 

any longer. 

There is a lot more in our budget outlined in the written testimony, but before I take questions, I just want to highlight how we 

have been and continue to be more efficient. In the 2010 budget enacted by Congress, we eliminated four programs, saving $360 million. In our proposed 2012 budget, we propose eliminating 13 additional programs, saving another $147 million. Together these savings total more than $500 million annually, which is helping fund 

our other priorities. Mindful of the significant paperwork burdens 

we placed on local school districts, we are proposing to consolidate 

38 separate elementary and secondary education programs into 11 

simpler funding streams. These common-sense reforms will make 

it easier for school districts to focus on educating their community’s 

children rather than dealing with bureaucrats here in st. 

We are also proposing to reduce our investment in career and 

technical education, not because we do not believe in CTE but because we feel the current program is not getting the results we 

need. Even with the reduction, we are still seeking $1 billion for 

CTE, and we are committed to working with States to reform these 

programs for the new economy. 

This year, we have also identified efficiencies in the student aid 

program that, coupled with a change in Pell grant policy, will help 

close a $20 billion shortfall in the Pell grant program and save 

$100 billion over the next decade. Those savings mean we can protect the $5,550 maximum Pell grant award and help millions of 

young people meet rising tuition costs. 

Those savings also mean that we can meet the skyrocketing demand for Pell grants, which has risen from less than 4 million 

grants in 2000 to a projected 9.6 million grants next year. In the 

last 2 years alone, an additional 3 million students received Pell 

grants. In my view, this is a good problem—this is actually a great 
736 

problem for our country to have. We desperately need more young 

people going to college, and in this economy they desperately need 

our help. But we must do more to make sure they finish college 

and earn their degrees. 

Let me close by saying that we share with you the responsibility 

for being efficient and smart in how we invest. But we also share 

an even greater responsibility, which is to prepare the next generation to lead. We share the responsibility for the 20 million disadvantaged students served by Title I, the nearly 7 million students served by IDEA, the 5 million English language learners, 

and the 16 million college students who benefit from student aid 

programs. 

In his recent speech to Congress, the President talked about winning the future. To emphasize the point, he announced his budget 

at a STEM-focused elementary school in Baltimore. He believes, as 

I do, that winning the future starts in the classroom. He also believes the Government spends too much, and he has outlined more 

than $1 trillion in deficit reduction over the next decade. 

This is an important national conversation that will take a great 

deal of time, energy, thought, and courage. It will take real courage 

on the part of Congress and the administration. We have to be 

truthful with each other and truthful with the American people 

about what is and is not working. We have to take the heat together for the cuts that we are making. To win the future while 

cutting spending, we must be absolutely vigilant about how we invest and how we support reform at the State and local level. We 

must be responsible in what we say and do, and we must show results. 

Responsibility, reform, and results are the hallmarks of our 

budget and our administration and our guiding principles as we 

move forward. And this applies at the State level as well. I spoke 

with Governors this weekend, and we are now sharing ideas with 

them for more flexibility and productivity in spending. 

I just want to close by thanking Congress for supporting education over the last 2 years. Because of you, we helped protect millions of children in classrooms all across America, from the greatest 

economic crisis since the Depression. 

Because of your leadership, we helped States and districts all 

across America advance their reform agendas, raise standards, and 

challenge the status quo in significant ways. 

Because of you, almost 1,000 underperforming schools have 

launched radical restructuring plans to improve the lives of children and many more in the process. 

Because of you, there is a greater determination than ever before 

to ensuring that our children can compete and win in our globally 

competitive economy. 

And because of you, we face a brighter future and a greater prospect that the world we leave behind will be better than the one we 

inherited. 

Soon behalf of 80 million students of all ages, their parents, our 

hard-working teachers, principals, and administrators, and all the 

people of America who value education and recognize its importance, I thank you for your leadership. 
737 

I will stop now, and I am happy to take any questions you might 

have. 

[The prepared statement of Secretary Duncan follows:] 
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741 
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Chairman CONRAD. Thank you, Mr. Secretary. 

You know, this really is a difficult time. Looking back, I believe 

that history will record that we averted a fiscal collapse. I think 

we can very, very close to a global financial collapse. I will never 

forget being called to a meeting in the Majority Leader’s office with 

the then Secretary of the Treasury, Hank Paulson, and the Chairman of the Federal Reserve, who told us they were taking over AIG 

the next morning, and they told us that if they did not do it, they 

believed there would be a financial collapse within days. Those 

were the exact words they used, and they gave us plenty of evidence to support that conclusion. 

So I believe that the steps that were taken, as unpopular as they 

have proven to be—TARP, stimulus—taken together averted a financial collapse. I believe the work of Mr. Zandi and Alan Blinder 

that concludes that if we had not done those things, unemployment 

today would be at 15 percent, there would be 8 million fewer jobs. 

But with all that said, we are now left with the residue, and the 

residue is not just the recovery effort. It is also what came before 

in the previous administration, a doubling of the debt, a tripling of 

foreign holding of U.S. debt. And now we face a circumstance in 

which we are borrowing 40 cents of every dollar that we spend. 

Let me repeat that. We are borrowing 40 cents of every dollar 

that we spend. Spending as a share of our national income is the 

highest it has been in 60 years. Revenue as a share of our national 

income is the lowest it has been in 60 years. Those are facts, and 

that means we have to take action. 

There have been three bipartisan commissions who have come 

back with recommendations on what we do going forward. All three 

of them said make modest changes now, this year, as things are 

still weak, but make big changes over the next 10 years—big 

changes in spending, big changes on our revenue side of the equation, big changes to entitlement programs, reform them. 

I supported the President’s Fiscal Commission recommendations, 

the Commission on which I served, and I believe—though there are 

a lot of things I do not like about that set of recommendations, I 

think in terms of size they got it about right. They have talked 

about $4 trillion of debt reduction debt reduction over the next decade. 

So I say this as an opening frame, Mr. Secretary. When we are 

borrowing 40 cents of every dollar we spend, all of us—all of us— 

have to be in on the solution, and that includes education. Even 

though I personally would put education at the top of the list for 

prioritization, our problem is so big, every part of the budget has 

to be in on the solution. 

Here is the thing that is so striking to me. As I have gone to my 

State dozens of times and asked students, How many of you do 2 

hours of homework a night?, almost no hands go up. When I go to 

Asia, Russia, Europe, I ask that question. Almost all the hands go 

up. 

When I asked back home, I asked the principal and the teachers, 

Why are almost no hands going up when I ask who is doing 2 

hours of homework a night?, they say, well, it is not assigned. Why 

isn’t it assigned? It is not assigned because if they assign homework, the parents complain. What’s the nature of their complaint? 
745 

They say, well, the kids do not have time to do homework. I said, 

Why not? Because they got a job. And, of course, why do they have 

a job? Because they have to pay for the car. 

I mean, frankly, we have something that goes beyond money 

here going on, and it is a very, very serious problem, I believe, to 

America’s future competitive position. As I say, I have been in Asia 

number of times. I have asked the question there in every school 

I went to, How many of you do 2 hours of homework? The hands 

shoot up, virtually every hand. In Europe, the hands shoot up. In 

Russia, the hands shoot up. 

So, you know, if our kids are not doing homework—guess 

what?—and these other kids are, it is no wonder than when we 

stack it up, our kids are falling behind in math, they are falling 

behind in science in terms of global competition. What do we do 

about it? 

Secretary DUNCAN. Let me give you a couple other facts that add 

to your compelling sense of urgency, almost crisis. Our dropout rate 

in this country is 25 percent. That is about a million young people 

leaving our schools for the streets each year, and in many of our 

minority communities—African American, Latino—it is often closer 

to 40 to 50 percent. As everyone in this room knows, there are no 

good jobs out there today—none—for high school dropouts. There 

are basically no good jobs with a high school diploma. Some form 

of higher education—4-year universities, 2-year community colleges, trade, technical, vocational training—has to be the goal for 

every single child. 

You talked about the PISA results internationally. The fact of 

the matter is our 15-year-olds on average are a year behind our 

counterparts in Canada. Other folks are out-working us, they are 

out-educating, they are out-investing. One generation ago, we led 

the world in college graduates. It is interesting. It is not that we 

have dropped. We have stagnated. We have flatlined. And nine 

other countries have passed us by. We are now tied with four other 

countries for ninth. And then we wonder why we have a tough 

economy. 

The final thing I will say is at a time of desperately high unemployment, we have about 4 million good jobs in this country that 

are unfilled because we are not producing the talent to fill those 

jobs. When the President and I met with a number of CEOs from 

around the country last week, it was staggering how many said: 

We would love to hire tomorrow; we have jobs we simply cannot 

fill because the talent is not there. 

So we have to address those brutal facts openly and honestly. 

The President has talked about this being our Sputnik moment. 

We are simply being out-educated, and we are going to be out-competed if we do not change pretty significantly. 

On the cultural side of this equation, the President often tells the 

story of when he visited the President of South Korea. He always 

asks about education. He says: What is your biggest educational 

challenge? And immediately the South Korean President said: My 

biggest challenge is my parents are too demanding. Even my poorest parents demand a world-class education. He said: I am spending millions and millions of dollars to import teachers to teach 

English to our students because our parents refuse to wait until 
746 

second grade for their children to learn English. They have to start 

learning in first grade. 

So this is about investing very differently, but it is also a cultural 

component that we have to address very openly and honestly that 

other folks revere education. In South Korea, teachers are known 

as nation builders. I think our teachers are and should be known 

as nation builders. 

Our teacher work force has been beaten down. We have to work 

harder. Your success in what you do, so many of you are successful 

at what you do because you work hard. And if someone else is 

working two or 3 hours harder than you every single day, week 

after week, month after month, year after year, guess what? They 

are going to be in a very different place than we are. And so we 

have to invest differently. We have to invest wisely. We have to address the lack of competitiveness of where we are relative to our 

international peers. Jobs are not confined to a district or to a State 

or to the country. Jobs are going to follow where the good workers 

are, where the knowledge workers are. And we have to think very 

differently about how we invest, and w have to challenge parents 

and challenge the community to put a much larger priority on education. 

The final thing I would say is I wish we had more parents beating down our doors demanding better education. I would love that 

problem. What I often get is we are moving too fast, we are being 

too radical. And when we have a 25-percent dropout rate that is 

unsustainable, I think we have to be radical. We have gone from 

first in the world to ninth in college graduates. We have to be radical. But we need to encourage parents and the community to challenge us to do more and to improve faster than we ever have in 

the history of this country. 

Chairman CONRAD. Let me just say that my time has expired, 

but, you know, it does not cost money to do homework. That is a 

matter of the homework being assigned and the kids doing the 

homework and that the parents insist that the schools are demanding something from their kids. 

Secretary DUNCAN. Let me add—— 

Chairman CONRAD. I cannot go further on this because it is unfair to my colleagues. We will go to 7-minute rounds. Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman. That was a very 

important question. We blame teachers, I think, too much for problems in education, and like you said, Mr. Secretary, in the cultural 

situations in which students refuse to do homework or parents will 

not insist that they do and efforts by teachers to insist on excellence are not affirmed, it is a deep thing. 

I would note that your praise for Canada is good, but Canada 

spent $8,500 per student last year on education, and we spent 

$11,500 on students. So we are spending much more and need to 

get more for what we spend as we are. The President says—you 

said he believes that the Government spends too much, and you 

are taking heat for cuts. But we are not cutting. You are increasing 

spending across the entire board, and that is the problem. 
747 

I know Admiral Mullen of the Joint Chiefs said our debt is the 

greatest threat to national security. Secretary of State Hillary Clinton said the same thing. Do you agree with that? 

Secretary Geithner said that the debt we are leaving could leave 

us with a very large interest burden and unsustainable obligations. 

Do you share those concerns? 

Secretary DUNCAN. I think those are valid, absolutely valid concerns. As I said in my statement, the President is committed to $1 

trillion in deficit reduction over the next decade. As the Chairman 

said, as we move forward, I think there are lots of sacred cows that 

collectively the administration and Congress have to look at very 

seriously. 

Senator SESSIONS. Well, over the next decade, the deficit will 

double from $13 trillion to $26 trillion, and you can say that cuts 

and saves $1 trillion, but it does not seem like it to me. That is 

plain fact, and that is the budget fact. 

For example, under the programs here of interest, Pell grants, 

under the President’s budget total Pell grant aid available for 2012 

would be $36 billion, double the amount available in just 2008. Is 

that correct? 

Secretary DUNCAN. We can go through the numbers. We are 

going to save—we have a way of closing the Pell shortfall $20 billion. But let me be very, very clear. What our country desperately 

needs is many more young people going to college and graduating. 

Again, we have 4 million unfilled jobs today in a tough economy. 

They are unfilled because we are not producing the skilled workers 

that our country needs at a time when going to college has never 

been more important, has never been more expensive, and our Nation’s families have not been under this kind of financial duress in 
748 

a long, long time. So the fact that we have a 50-percent increase 

over the past couple years of students accessing Pell grants I think 

is hugely important. 

Senator SESSIONS. Well, I think we can all agree that funding 

and money does not necessarily improve education. We have seen 

that dramatically. We are going to be—in 2008, we provided Pell 

grants for 6 million. Now we are providing Pell grants under your 

proposal for 9.6 million, increasing that, doubling the entire budget, and we do not have the money. 

Now, with regard to student loans, we have now taken over the 

student loans; 100 percent of it is Federal. But according to our calculations, the total student loan, total in billions of dollars will go 

from $98 billion in 2008 to $167 billion in 2012, a 68-percent increase. Is that correct? 

Secretary DUNCAN. I do not know that exact number. What I will 

say is when we took over the direct lending, we did that for one 

very simple reason—— 

Senator SESSIONS. Well, I know we took it over. We had a fight 

over that. 

Secretary DUNCAN. Well, let me just—— 

Senator SESSIONS. But I am talking about the total direct—com- paring guaranteed and direct loans have increased from $98 billion 

in 2008 to $167 billion. 

Secretary DUNCAN. We have many more people accessing higher 

education, which as a country we desperately need. The only way 

we strengthen our economy long term is to produce the innovators, 

the entrepreneurs, the knowledge workers, the—— 

Senator SESSIONS. Well, why don’t we just spend three times as 

much? 

Secretary DUNCAN. On Pell grant? 

Senator SESSIONS. On Pell grant. Won’t that just help us fix it 

all? 

Secretary DUNCAN. Well, actually we made some very tough cuts in Pell grants, and so we asked for a $5 billion increase but we are 

reducing costs by $15 million. 

Senator SESSIONS. Well, this is Washington math. You have not 

cut Pell grants. Pell grants are increasing dramatically, Mr. Secretary. The numbers are plain. 

Secretary DUNCAN. That is correct, and they would have increased even more substantially, more significantly, had we not 

made the tough and painful decision to eliminate—— 

Senator SESSIONS. You are proposing to increase that much. 

They are not going to be increased that much because we do not 

have the money. 

Secretary DUNCAN. So what we have proposed is to eliminate two 

Pell grants each year. That is a tough cut. That is a painful cut. 

That is not one that I wanted to do, but we think it is a responsible 

way to close the Pell shortfall. 

Senator SESSIONS. You talked about program consolidation, consolidate 38 K–12 programs into 11 programs as part of the ESEA 

reauthorization. I think consolidation and program efficiency is a 

worthy goal. I believe you are a strong administrator. I think you 

have the ability to do that. You note that some of this program 

structure is fragmented and ineffective and there is little evidence 
749 

of success. But the total budget that you submit for the consolidated activities is $900 million more. Instead of saving money, you 

are spending more money. That is not what we have to have today. 

Since we are so short of funds, we need to see some real efficiencies 

that actually enhance education without driving up costs. Don’t you 

agree? 

Secretary DUNCAN. Well, I hear your concerns, and we have tried 

to do a couple things. Our goal in consolidation—these are tough 

cuts and tough consolidations, and not everyone supports them, but 

we think it is the right thing to do. We think, again, particularly 

in small communities, rural communities, when it is very difficult 

to deal with the Federal bureaucracy, the easier we can make that 

relationship, that makes a lot of sense. It will enable folks to spend 

their time working with students rather than dealing with us. So 

we consolidated a number of programs. We eliminate a number of 

programs that we do not think are as effective as they can be. But 

at the end of the day, I believe we have to invest in education, that 

when as a country we have gone from first to ninth in college graduates with a 25-percent dropout rate, our students and our country 

deserve better than what they are getting today. 

Senator SESSIONS. Well, we need to figure out what is happening 

out there. A recent report indicated that colleges are demanding 

less and students are learning less. We are sending more students, 

we are spending more money, and we are getting less for it. And 

I really am worried, as the Chairman expressed, that our global 

competitiveness is at stake. Education is important. Thank you for 

promoting some of the reforms you have been working on. 

Secretary DUNCAN. One final comment, if I could say that I think 

what is so important to both your questions is one of the big things 

we have tried to do is encourage States to raise standards. Part of 

the reason there is not homework, part of the reason students are 

less prepared for college is because standards have been dummied 

down in far too many places. We have 41 States that have raised 

standards, colleges have raised standards, and my goal is to get 

universities out of the remediation business. Those who do graduate from high school, often 30, 40, 50 percent have to take remedial classes in college. They are not ready. With States raising 

standards, I think that is a game changer. That is a huge step in 

the right direction. 

Chairman CONRAD. Senator Coons. 

Senator COONS. Thank you, Mr. Chairman. 

Thank you, Secretary Duncan, for your presentation today. I am 

extremely pleased to see that this budget continues on the President’s public commitment to invest in world-class education for all 

our students, and I look forward to working with you on the Elementary and Secondary Education Act reauthorization. 

I think there are some very tough choices in this budget, and I 

was pleased to see some reductions, some trimming, some realignment. In your opening statement, you reasserted that your goal, 

given that Federal spending is just 10 percent of all education 

spending, is to promote reform, reward success, and support innovation at the State and local levels. 

In my view, Race to the Top has succeeded significantly in doing 

that. There are 11 States and the District of Columbia that are di-
750 

rectly benefiting from Race to the Top, but as you mentioned, dozens of other States that may not have been selected made significant changes. 

If Race to the Top has, in my view catalyzed education reforms 

in both those States that won and lost the competition, what do 

you think would be the impact if funds were not appropriated to 

continue Race to the Top in this year’s budget? 

Secretary DUNCAN. Well, what you have seen around the country 

over the past 2 years I think is reform at a level of unprecedented 

speed. As you said, you have 41 States that adopted college and career standards, raised the bar for children, and for the first time 

in this country, a child in Massachusetts and a child in Mississippi 

will be held to the same standard. 

You have 44 States today working together on the next generation of assessments to be much more thoughtful in how we do that. 

We had almost three dozen States eliminate barriers to innovative 

schools and create more room for flexibility. You have seen every 

single State that had laws on the books that prohibited the linking 

of student performance, student achievement, and teacher evaluation, all those laws have been eliminated. And you now have almost 1,000 schools around the country, dropout factories were historically 50, 60, 70 percent of students were dropping out, finally 

were challenging the status quo. 

So there has been a huge amount of movement at the State level. 

That has to continue. That has to be sustained. In our budget request for a third round of Race to the Top, $900 million, we want 

to see that same pace of change at the district level, and we also 

want to have particular focus with a set-side in rural communities. 

And so we have to play at the State level, at the district level, 

at the community level, Promise Neighborhoods, and, again, we 

have to get better faster than we ever have in this country. Race 

to the Top has been a huge catalyst for raising the bar. 

Senator COONS. How do you see the competition being different 

this year with a district-level focus? And how through the Effective 

Teachers and Leaders State Grants Program, as you begin to implement local teacher and principal evaluations systems, how do 

you see us working together to ensure that teacher collaboration is 

sustained in the development of these valuable systems? 

Secretary DUNCAN. I think it is so important in this work that 

all of us move outside our comfort zones. We had a wonderful conference 2 weeks ago in Denver where we had 150 districts, and 100 

districts who wanted to come but could not get in, where the superintendent, the board chair, and the union leader came together to 

figure out how we work differently and how we use collective bargaining to drive student achievement. We had a number of districts 

presenting how they have done this in extraordinarily creative 

ways. So our themes at the district level would echo those at the 

State level, but with a real focus for closing the achievement gaps, 

raising the bar, and all of us moving outside our comfort zones. 

And what we want to do is simply reward courage. There are so 

many folks around the country who are doing this hard work, who, 

you know, want to be creative, that have never been rewarded for 

success. 
751 

One of my biggest problems with the current law, No Child Left 

Behind, is that there are about 50 ways to fail, and your only reward for success is you are not labeled a failure. And so we want 

to shine a huge spotlight through reauthorization, through Race to 

the Top, through the Investment Innovation Fund, through Promise Neighborhoods, on folks that are willing to challenge the status 

quo, raise the bar for all students, and close those insidious 

achievement gaps. 

Senator COONS. I do think you are making significant progress 

through all those different vectors in strengthening the focus, 

strengthening the reform. 

One area of the budget that did concern me was the change to 

a direct loan program, so the incentive to convert so-called split 

loans to direct lending. Are you concerned about the additional 

debt that the Department will be taking on? And are you confident 

that the budget scoring of these savings is real? Or do you think 

it may possibly reflect a lack of an accurate assessment of the risk 

associated with direct lending? 

Secretary DUNCAN. Well, the folk that do the budget scoring are 

a lot smarter than I am, so I can only assume and think they are 

doing good work. The goal here is to simply make things simpler 

for the borrowers and to have, you know, one servicer rather than 

multiple servicers. This is an optional program. It is not mandatory. But we think it is the right thing for the students who are 

dealing with multiple relationships, and that is difficult and complicated. At the end of the day, we think this could save us $2.1 

billion. 

Senator COONS. I have some concerns about that and will followup with outcome on that in more detail. But if I could as a last 

question, as you know, we have both worked over many years on 

improving postsecondary outcomes, particularly for minority or 

low-income students who are the first in their family to attend college. And I am very interested in the First in the World Initiative, 

which strikes me as sort of a venture capital fund approach to trying to really deal with these critical problems and the college completion incentive grants. 

Please, if you would, as my last question, just talk for a minute 

about what is different about these. How are these going to make 

it different going forward? And how is this going to make it possible for us to close those critical gaps the Chairman spoke about 

at the outset in terms of college completion in the United States? 

Secretary DUNCAN. So first let me just quickly say how lucky we 

are to have you in the Senate and to have you on this Committee, 

and almost no one brings your deep passion and knowledge of what 

it takes to help children who have not had these opportunities and 

families and communities that have not had these opportunities for 

decades, to give them the chance to break through. And so your 

leadership and insight and expertise I think is going to be extraordinarily valuable to this Committee and to me personally, and I 

look forward to our continued work together. 

At the end of the day, it is interesting, universities are not too 

dissimilar to high schools, and you see some that have, you know, 

first-generation college goes and many EL students who do a wonderful job of building cultures around completion. You see others 
752 

where completion rates are very, very low. And just at the high 

school level, you see some high schools that are 95 percent minority 

and 95 percent poverty, with 98 percent graduation rates and 95 

percent going on to college. You see others with similar demographics with 60-percent dropout rates, wildly different outcomes. 

What we want to do is almost a mini Race to the Top at the 

higher education level to put significant resources behind those 

States and those universities that want to build a culture not just 

around access—and access is huge—but it has to be around attainment, around completion. And some places do an amazing job with 

that. Some do not. When I was the CEO of the Chicago Public 

Schools, we tracked this data very carefully, and, quite frankly, I 

started to steer my students toward certain universities and away 

from others because students with identical GPAs, identical ACT 

scores were getting radically different outcomes at different universities. And the more we can build cultures around completion, that 

is what our children need, that is what their communities and families need, but ultimately that is what our economy needs. That 50- 

percent dropout rate from college has to go down. 

Senator COONS. Thank you. 

Chairman CONRAD. Senator Cornyn. 

Senator CORNYN. Thank you, Mr. Secretary. It is good to have 

you here today, and I want to tell you at the outset that some of 

the things I have heard you say during your tenure as Secretary 

of Education give me some hope that we can work together on a 

bipartisan basis to improve public education in America, recognizing the Federal Government does have a relatively small role, 

10 percent of spending, in K–12 education. So I look forward to 

working with you on the reauthorization of No Child Left Behind. 

And I hope that we can do some good there. 

But part of the problem that States that do fund 90 percent of 

public education in the country are experiencing is that the Federal 

Government has basically commandeered State budgets in a number of ways. There is a recent report that just came out, today as 

a matter of fact, demonstrating the Medicaid expansion that was 

part of the health care bill has essentially crowded out the ability 

of States to spend money on K–12 and higher education. In my 

State alone, it is $27 billion of an unfunded mandate over the next 

10 years, and we have to get that under control. 

I appreciate what the Ranking Member Senator Sessions, his 

questions relating to money equaling quality education. We know 

that is not true, and there are a lot of good examples of charter 

schools, for example, the KIPP program, featured prominently 

among other charter school programs in the documentary ‘‘Waiting 

for ‘Superman,’ ’’ where we know that there are a number of innovative and more cost-effective means of delivering education taking 

place across the country. And just pouring more money into the 

same broken system is not going to improve outcomes in my view. 

But I want to ask you specifically about a Texas issue that you 

are well acquainted with. Congress, of course, appropriated $10 billion for the Education Jobs Fund, and my understanding is that 

roughly $975 million remain unobligated. Is that your understanding? 

Secretary DUNCAN. Yes, sir. 
753 

Senator CORNYN. Of course, my State had submitted an application, and my understanding is that its share of funds would be 

roughly $830 million if indeed that application had been accepted 

and granted. But because of a provision that was put into the bill 

by Congressman Doggett in the House basically requiring the Governor to do something that he is barred from doing under the 

Texas Constitution—that is, guaranteeing certain levels of education expenditures in future legislative sessions—Texas was in a 

Catch–22 and could not qualify for that funding. 

As you know, there are provisions in the law for alternative 

methods of allocating that money, and I would like to know what 

you intend to do to work with us to try to make sure that Texas 

is not discriminated against when it comes to the allocation of 

these education funds. 

Secretary DUNCAN. Let me try and address the first part of your 

statement first, and then I will come to that specific question. 

I share your concern about where the Federal Government has 

been inflexible or commandeered local budgets. I spoke before the 

NGA this weekend, talked a lot about us trying to provide much 

greater flexibility at the State level, trying to help them become 

more productive in very tough budgetary times, and, again, I put 

some pretty non-traditional ideas out there for what folks can do 

in tough times, and actually this week we will be sending documents to every Governor of our best ideas about how we can be 

more flexible, challenging States to take advantage of that flexibility, which they often do not do, and really trying to be a much 

better partner. 

I just want to assure you that I have no interest in pouring more 

money into the status quo. We have a very different vision of where 

we are going. We are trying to push a very strong reform agenda, 

and I would agree with you: If we perpetuate the status quo with 

more money, that does not get our country where we need to go. 

I do think we need to invest but in a very different vision of what 

education can be and should be and to continue to work in a bipartisan way through ESEA. A big goal there for me, frankly, is to 

provide much more flexibility than exists today under the current 

law. The current law—— 

Senator CORNYN. Well, I look forward to working with you on 

that, but obviously we only have 7-minutes rounds and—— 

Secretary DUNCAN. Sorry. 

Senator CORNYN. What I am really interested in is how you intend to work with me and the Texas congressional delegation and 

Congress to make sure that the State of Texas is not penalized to 

the tune of $830 million for a requirement in the law that under 

the Texas Constitution the Governor does not have the power to do. 

Secretary DUNCAN. I am intimately familiar with the details. We 

obviously have to follow the law and congressional intent. I was 

having, I thought, good, productive conversations both with the 

Governor and the State superintendent, and then, frankly, they decided to sue the Department of Education in this matter. 

Senator CORNYN. So all discussions have ended? 

Secretary DUNCAN. Well, it is in litigation now, so—— 

Senator CORNYN. So all discussions have ended? 
754 

Secretary DUNCAN. I do not know if all discussions have ended, 

but it makes it more difficult now that we are being sued to—— 

Senator CORNYN. Well, what is a State with 25 million people 

supposed to do when the Federal Government discriminates 

against it in the distribution of tax dollars to help public education? 

Your Department would not accept the application. What is the 

State official supposed to do other than to go to court to try to force 

you to do it because of the unconstitutional requirement? Now you 

are telling me because they have resorted to litigation that you are 

not going to continue negotiations with them to try to resolve this 

impasse. 

Secretary DUNCAN. No, I did not say either one of those. And to 

be clear, we did not reject their application, and so there is ongoing—— 

Senator CORNYN. Well, you said it was not in acceptable form because it—— 

Secretary DUNCAN. No, I—— 

Senator CORNYN [continuing]. Because it did not meet the requirements of the Doggett amendment, which required an unconstitutional condition for State officials. 

Secretary DUNCAN. So we are not going to solve it this morning. 

What I will say is the children of Texas desperately need these resources, and our intent from day one was to make sure children 

around the country had access to it. Texas schools in many places 

are having huge budget cuts. We have seen skyrocketing class 

sizes. The dropout rate in Texas is pretty staggering. And if you 

have thoughts or creative ways that this could be resolved, I am 

all ears. But at this point, because they chose to sue, it makes it 

a little bit tougher to—— 

Senator CORNYN. Well, Mr. Secretary, I am deadly serious about 

this issue, and it is not going to go away, and we are going to have 

to work it out. And I would invite you to engage with me and other 

Texas representatives to try to find a solution, because this is unacceptable—unacceptable—for a State, one of the largest States in 

the country with 25 million people, with the kinds of needs that 

you just described, that you and I both understand, for the Federal 

Government to basically thumb its nose at my State. It is just unacceptable, and we are going to have continuing problems unless 

you and I can work out some solution. 

Secretary DUNCAN. We have until September to do that, and 48 

States have received their money and put it to great use and saved 

a couple 100,000 educator jobs around the country and driven reform, and I would love to see the children of Texas get their fair 

share. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. Thank you, 

Secretary Duncan. 

One of the areas that I have taken an interest in over the years, 

I come at this from a point of view of somebody who was a prosecutor. And when I moved from being the United States Attorney 

for Rhode Island to be Attorney General for Rhode Island, I began 

to oversee the prosecution of hundreds and hundreds and hundreds 

of children. And as I inquired as to what the best way to prevent 

this would be, over and over again I was steered toward middle 
755 

school. Over and over again I was steered not only toward middle 

school but toward attendance and truancy and performance in middle school, particular emphasis on truancy. 

Over and over again I was shown cases where kids had become 

truant, completely fallen off the radar screen, engaged in the kind 

of really unhealthy behaviors that historically people never associated with middle school—gang membership, pregnancy, drug addiction—and that we really needed to bear down on our middle 

schools, and that it was an area, kind of a fulcrum period between 

the younger years where, as long as people are getting, you know, 

sort of basic needs met and getting their literacy needs met, both 

reading and mathematics, they are in pretty good shape; and then 

in high school they get to be much tougher kids, and it gets to be 

much more challenging to pull them back into the mainstream if 

they have fallen out of it. And it is usually just a 3-year program. 

The President supported it energetically, his success in the middle bill I was a cosponsor of when he was a Senator here. My senior Senator, Jack Reed, has picked that bill up, and yet I do not 

see much in the way of focus here on middle schools. 

Based on that experience, I adopted a middle school and started 

to work with the middle school in Providence. And as I have talked 

to teachers, this has been a continuing issue, and nobody has ever 

pushed back, ever. Teachers, law enforcement, administrators, no 

matter where you go, everybody says, oh, yeah, we get it, middle 

school is really a fulcrum period and investment there can make 

a particularly big difference because if you turn a kid around to a 

high-performing student in middle school, you are in a far better 

position than having to chase them through high school trying to 

pick them up if they are failing that. 

So I would love to hear from you where your focus is on middle 

school in this area, what specific programs you propose to help in 

that area, and then I would like to ask briefly about after-school 

as well. 

Secretary DUNCAN. So a couple thoughts. I think your sense of 

the challenge, and you have lived it, is real and painful and is too 

often the norm rather than the exception. Both Senator Coons and 

I got our start in education, starting with middle school students 

and trying to work with them for 6 years through college, and so 

I have lived this. 

Senator WHITEHOUSE. A special breed. 

Secretary DUNCAN. So this one is very personal. A couple 

thoughts there. 

One of the biggest things that matters for children who are 

struggling is getting an adult in their lives who can be with them 

through thick and thin, so through the middle school years, a 

teacher, a social worker, a counselor, through high school, some 

adult that when things go wrong at home or it is tough in the community helps them to persevere. So school districts, some are doing 

some really innovative things, but I honestly think school districts 

cannot do this alone. Nonprofits, social service agencies, the faithbased community are stepping up. We know what—— 

Senator WHITEHOUSE. I get the big picture. My narrow focus is 

what is the Department of Education doing in this area. 
756 

Secretary DUNCAN. So a couple different things. One is a huge 

focus on the STEM area, STEM fields to try and keep great math 

and science teachers in there when often those teachers do not 

have the content knowledge they need. It ties to your question for 

after-school. We are asking for additional after-school money. I 

think when students are engaged in extracurriculars—art, dance, 

drama, music, band—that helps them stay engaged in very different ways. We are supporting programs like—— 

Senator WHITEHOUSE. Those are all general programs, so they do 

not relate to middle schools specifically. They may apply to a middle school, but they are—— 

Secretary DUNCAN. They are part of an overall spectrum, but 

gear up—— 

Senator WHITEHOUSE. Let me roll, in the time that I have left, 

to the after-school question because one of the things that we hear 

from the education community enormously, regularly, is how important it is for a school to have community support; that the more 

the school is engaged in the larger community and the more the 

larger community is engaged in the school, the better off everybody 

is, the better off the kids perform and so forth. 

So in Providence, Rhode Island, in particular, we have a really 

exceptional after-school program. That has involved the community 

for a long time. It has been in many ways sort of the incubator for 

a lot of the education reform activity that has taken place in Rhode 

Island. And I worry that your emphasis in after-school in giving 

priority to more expensive extended school day, extended learning 

time programs over these community-supported and community-developed after-school programs risks crowding them out. It risks 

crowding them out because of the priority. It risks crowding them 

out because it is more expensive to extend the learning day than 

to work through the community. And I think it fails to take into 

account the added value that comes when the community is that 

engaged. 

So I hope that as you go forward with your program you will 

take into account concerns like mine that in some places—it is not 

the solution for everybody, but where it is a proven solution, you 

should be protecting and defending and growing and helping these 

very, very successful after-school programs rather than putting 

them at a competitive disadvantage with extended learning programs. I am not quite sure how this prioritization is going to work 

out in practice, but it really worries me that one of the best things 

going on in education in Rhode Island is going to be on the losing 

end of this priority shift of yours. 

Secretary DUNCAN. I would love to continue the conversation. It 

is a very fair, you know, concern and critique. What I ultimately 

believe is we just have to do more in this after-school space. It is 

not an either/or. It is a both/and. We are asking for about $100 million—— 

Senator WHITEHOUSE. It is not both/and in the way you have designed it. There is a priority that—you put a thumb down on the 

side of the extended day and against the after-school program, so 

it is not quite both/and. It is both/and with a bias, and it is the 

bias that concerns me. 
757 

Secretary DUNCAN. And additional resources. But your point is 

well taken. I do think school days are too short, school weeks are 

too short, school years are too short. But the idea of schools being 

open 12, 13, 14 hours a day, wrap-around services—it is one of the 

things I was proudest of in Chicago. I had 150 schools that were 

open very extended hours. What happens in Providence I think is 

fantastic. We do not want to hurt that. We will actually look at 

that—— 

Senator WHITEHOUSE. My time just expired, so I will leave on 

that, because that is a great note to leave on, and we will continue 

the discussion. 

Secretary DUNCAN. To be continued. 

Chairman CONRAD. Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman, and, Mr. Secretary, I want to start off thanking you for your service. I try to 

make that same comment to school board members when I meet 

them. I realize this is not exactly a thank-filled position, so I want 

to thank you at least. 

Seeing as this is the Budget Committee, I would like to kind of 

zero in a little bit on costs. I did here a recent interview with Joel 

Klein, the chancellor of New York City’s—former chancellor of their 

Department of Education, where he commented that our spending 

in real terms has doubled since 1983, and we have not seen the results, but in particular I would like to hone in on college tuition. 

I have seen a number of studies—and what I will quote is from 

the Heritage Foundation—that States’ college tuition since 1982 

has increased 439 percent. To put that relative to things like 

health care and general inflation, health care has risen 250 percent; just general inflation has gone up about 105 percent. So let 

us talk dollars. 

Just general prices, something that cost $10,000, today would 

cost a little over $20,000. College tuition, though, has gone from 

about $10,000 to over $50,000. 

I would kind of like to hear your comment on what has caused 

that. 

Secretary DUNCAN. It is a huge concern of mine, and I do not 

have a good answer as to what has caused it. We see college costs, 

college tuition escalating far ahead of the rate of inflation in many 

places, and so it is a real challenge. As I have said repeatedly, you 

know, going to college now is desperately, desperately important 

for all of our young people, and when tuition makes it untenable 

or too difficult, that is not good for families or the country. 

So I think colleges historically, frankly, have not always been as 

efficient as they need to be, have not made some of the tough cuts 

that families are having to make every single day, and tough priorities, and that we are trying to make in our budget, that you guys 

are trying to do in your work. So it is a real challenge. 

We have had very tough, candid conversations internally. You 

know, is there a legislative play? Is there anything to do there? I 

will tell you what my current thinking is, but I am not satisfied 

with it. I think our system of higher education is the best in the 

world. I think we have a couple thousand great options around the 

country. Parents today, they are smart, they are savvy. Students, 

they have more choices, more options than ever before. They want 
758 

a great education, but they want value for their money. And so 

when colleges are escalating, you know, expenses way ahead of 

where they need to be, I think folks are going to start voting with 

their feet and going other places. 

Senator JOHNSON. Do you think Federal infusion of dollars has 

played anything—into that? Why else would we see such a dramatic difference in general prices versus the cost of college tuition? 

Secretary DUNCAN. I mean, I guess that is a possibility. That is 

not my first thought because—well, what I was going to say is you 

see actually huge variation. You are actually seeing movement the 

other direction. You have a university 2 weeks ago that reduced 

tuition 10 percent. You have other universities going to 3-year programs. You have other universities going to no-frills campuses. And 

what you are seeing is the marketplace starting to play, and parents are starting to vote with their feet, and they are starting to 

go to places to get a good education for less money. 

So I think, again, by transparency and good information, the bad 

actors will not get rewarded and the good actors will get a greater 

market share, and that is a good thing for the country. 

Senator JOHNSON. I will agree. Information is powerful as the 

free market enterprise system is pretty powerful as well. 

You may have noticed a few news reports within my State, the 

State of Wisconsin, that there are a few issues there. 

Secretary DUNCAN. I have. 

Senator JOHNSON. And I guess I would like to just ask you, What 

role—or how helpful have public sector unions been to education? 

And what would be the evidence of that? 

Secretary DUNCAN. So just in the midst of the Wisconsin situation—I have a good relationship with the Governor, talked to him 

several times, worked well with him, have a good relationship with 

the union, talked well—you know, talked with them. 

In the midst of the Wisconsin situation—this was coincidence, it 

was not planning—we had a conference in Denver with 150 districts from around the country and a waiting list of 100 on this 

very issue. And we talked about how historically in too many 

places collective bargaining had not worked for anybody, had not 

worked for the adults, had not worked for the children, had not 

driven student achievement, that we needed a third way, we needed to do things very, very differently. And, again, this is not just 

unions, to be clear. This is management. Often management has 

not been strong here. School boards have not been as effective as 

they need to be. So it is not about pointing fingers, about all of us 

doing things differently. But what we had is we had over a dozen 

districts present to the 150—we did not lead the conference. They 

did—present how they had used the vehicle of collective bargaining 

to drive student achievement and to close achievement gaps. 

The goal there was to say if this works, why not make this the 

norm? And can we go from 15 creative, innovative districts, doing 

some radically different things through collective bargaining to 

drive much better student outcomes? Can we go from 15 to 150 to 

1,500 to 15,000? 

So in many places, collective bargaining has not led to better student achievement, has not led to more satisfied workers, has not 

helped move the country where we need to go. But we have a num-
759 

ber of places that are starting to break through, and we need to 

replicate those successes. 

Senator JOHNSON. Earlier in your testimony, you said that we 

need 4 million more college graduates. A lot of my volunteer work 

over the last 10 years has been in education in Oshkosh, primarily 

the K–12 level. What we were seeing as employers is just a mismatch, you know, whether it is colleges, whether it is our schools 

simply not providing the types of degrees, the types of educational 

opportunities to match the employment opportunities, as opposed 

to just cranking our more college graduates. Can you speak to that? 

Secretary DUNCAN. You are seeing reality, and I hear that complaint from CEOs all around the country. And one of the things we 

are doing actually in partnership with the Department of Labor is 

trying to put resources out there to community colleges and communities in the private sector where they come together to provide 

real training that leads to real jobs. A and where you have these 

mismatches, you know, students come out with greater debt, they 

are not employable. The employer ultimately moves overseas if 

they can get more workers there. There is no upside there. So there 

is an absolute mismatch at lots of different levels, and we want to 

put resources behind places—there are also some fantastic publicprivate partnerships that are leading to real jobs every single day. 

I visited one yesterday in Philadelphia around the health care industry where workers—some were just coming to the country to 

learn English, and then ultimately, because of great partnerships, 

are getting real jobs in the health care field around there. We have 

to do a lot more of that. So that is a real concern. 

Senator JOHNSON. One final question. I am a manufacturer, so 

I generally try and look at the root cause of a problem. To me a 

lot of what we talked about in terms of the problems of education 

really relates back to just the social pathologies, the fact that our 

out-of-wedlock birth rates have gone from 7.5 percent to 40 percent 

from the 1960s. Can you just comment on that a little bit? 

Secretary DUNCAN. So I think our children are coming to school 

today with probably more challenges than ever before, and whether 

it is, you know, families that are not intact or whether it is the 

video games and all the distractions we talk about, the lack of time 

spent on homework. So those are absolutely real challenges. I think 

we are asking more of our teachers and administrators than we 

ever have. 

Having said that, in these very tough times with high poverty 

and high crime and, you know, single-parent families, we have 

never had more high-performing schools who are beating the odds 

every single day. We are trying to turn around these chronically 

underperforming schools, and so those challenges are real. They 

take long hours. They take after school. They take mentoring. But 

we have never, I do not, ever had so many high-performing, highpoverty schools in some of our neighborhoods—some of our country’s most distressed communities, and we have to learn from those 

successes and take them to scale. 

Chairman CONRAD. Senator Begich. 

Senator BEGICH. Thank you, Mr. Chairman. And thank you, Mr. 

Secretary, for being here, and thank you for your visit to Alaska, 

to Hooper Bay. And I know—— 
760 

Secretary DUNCAN. I will never forget it. 

Senator BEGICH. I know you will not. We had a great conversation on the way back on the plane as we sat there and talked about 

education. There is a clearly a much different view in rural Alaska 

than it is in Chicago. You have to, I guess, admit that. 

Secretary DUNCAN. Absolutely. 

Senator BEGICH. Let me also, again, just so you know, I come 

from a family of educators. My parents were educators. My two sisters are educators. My sister-in-law is an educator. I chaired the 

Student Loan Corporation for 7 years, the Postsecondary Education 

Commission for 7 years. But saying all that, when I campaigned 

for this office, I actually ran an ad because I think in Alaska, especially in Alaska, No Child Left Behind was a disaster. It had no 

understanding of really rural America, and when I say rural America, rural Alaska. And it had basically a system that penalized 

communities that were trying, as you saw firsthand out there, and 

it really worked in the wrong direction. So I want to followup to 

some degree on a couple comments I heard you say. 

First, on Race to the Top, can you describe what you meant 

when—I heard you say rural set-asides, so it caught my attention, 

because every time I have heard rural set—— aside, usually it 

means it is a Washington, D.C., description of rural set-aside, 

which is nothing—nothing—like Alaska. So define what you see as 

rural set-aside, and it would be great if you started with Hooper 

Bay as an example. 

[Laughter.] 

Secretary DUNCAN. So if I start on Hooper Bay, this is a conversation obviously to continue with you and with the Chairman, 

but let me be very, very clear. We have seen significant change in 

Race to the Top, in the Investment Innovation Fund. We want to 

make sure we are having an impact everywhere around the country. We think we can do more and do a better job in rural communities. I would be happy to work through the technical definition 

with you guys and get your thoughts there. 

But let me be very clear. In both a third round of Race to the 

Top and a second round of the Investment Innovation Fund—and 

you have been so supportive of that effort. I appreciate it. In both 

of those we want to make sure that we are playing in a significant 

way in the rural community. So we are learning there, and the 

technical definition you guys can probably shed some light on it for 

me. 

Senator BEGICH. I have a feeling the Chairman and I will be 

happy to assist you in that effort, because I think in a lot of ways— 

and I mean it in respect to my colleagues here in the lower 48— 

that rural here is so much different. You can drive everywhere. 

You can drive down the street. Maybe the street is 50 miles away 

to the grocery store. In Alaska you cannot. If you are in Adak, it 

is 1,200 to the hub by air. There is no road. And so we have a different ability to deliver education, and our competition is not—I 

mean, if we are competing against the L.A.s and the Chicagos and 

the Seattles, we will not win that battle for dollars, because you 

will look at it from a cost per pupil, and you will see that you can 

hit Chicago with so many thousands of students that will hit. And 

yet in a village of maybe 50 kids, this is their lifeline to the future. 
761 

Secretary DUNCAN. Yes. So to me it is not—we were trying to 

make very significant strides and improvements in, you know, Race 

to the Top and Investment Innovation Fund, but you hit it earlier. 

I think so much of No Child Left Behind was broken for the country, but particularly broken in rural and remote communities, and 

I think we can fix the law this sessions. We want to fix it before 

we go back to school this fall. We could fix it in a bipartisan way, 

and a huge part of our goal is, frankly, to shrink the Federal footprint, to give much more flexibility, hold folks accountable for results, but to give them room to move. 

One of the biggest complaints I’ve heard in rural America is that 

you have a teacher teaching multiple subjects. 

Senator BEGICH. That is right. 

Secretary DUNCAN. And they are basically labeled not highly 

qualified, and they are often extraordinary. 

Senator BEGICH. Which is amazing, because in Alaska these 

teachers are doing amazing things in multiple disciplines, and yet 

because of the technical language, they are not highly qualified. 

And we would consider them the best of the highly qualified. 

Secretary DUNCAN. It makes no sense, and we are desperately 

trying to keep great teachers in underserved communities, be they 

rural, remote, or inner city. And so we have to remove that, moving 

from a paper-based definition of qualifications to effectiveness as 

the way to go. And so there are a number of common-sense fixes 

that we can put in place that will remove the perverse incentives 

and put in place the right incentives. 

Senator BEGICH. And, again, on Race to the Top as well as—and 

I heard you say, and I want to make sure we are clear—on I3 also, 

programming to figure out how we do a rural set-aside that clearly 

recognizes the value and how we educate within those communities. 

Secretary DUNCAN. Absolutely. 

Senator BEGICH. OK. The other piece in rural communities—and 

especially, again, I will use Alaska, obviously, as an example— 

some of the requirements require matches by local communities. In 

some of these communities, they have no property tax base. We are 

in some cases subsistence hunters, and their food and their belongings are caught off the land. 

Will you be flexible to help us address those kind of communities 

that just do not have—it is hard to believe in this country that 

there are cashless in some cases or limited cash communities, and 

they are basically in Alaska. 

Secretary DUNCAN. We will absolutely be flexible. So the short 

answer is yes. But I would also say one of the things we found as 

we got into this work—and you guys know this intimately—is we 

did not have enough foundations playing in the rural community. 

And so, frankly, one thing I am really proud of is we have encouraged a number of foundations to step up and be much more generous and targeted in rural areas. So we are helping to drive that 

market and increase investment in rural communities. We are 

going to continue to drive it. But will we be flexible and thoughtful 

on how we do this? Yes. 

Senator BEGICH. OK. 
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Secretary DUNCAN. My fallback is just not to do nothing. My primary focus is to get many more of these foundations to play and 

create and reward great work in rural communities. 

Senator BEGICH. Right, we would love it. We do not have a 

Microsoft in Hooper Bay, but we would love an opportunity—— 

Secretary DUNCAN. We can talk about it. We have a number of 

foundations that have increased their commitments, thanks, frankly, to us working with them. 

Senator BEGICH. Let me go to one other quick one here, and that is the $350 million to the Early Learning Challenge Fund. You and 

I actually had a conversation on the plane—you may remember 

this—about Head Start and how that plays a significant role in 

rural Alaska. It is truly—an educator in rural Alaska can point out 

a kid who has had Head Start in the third grade and say they had 

it. They do not even have to have their paperwork to show it. They 

can tell. 

So how will you ensure that the Head Start program that is in 

Health and Human Services and your Early Learning Challenge 

Fund will not create a conflict and run very seamlessly, especially, 

again, in rural communities that are critical for Head Start programs to be successful? 

Secretary DUNCAN. So hold us absolutely accountable for that, 

but, frankly, I am absolutely confident we can do that. Kathleen 

Sebelius has been an amazing partner. We have done a lot of work 

together on a lot of issues. We want to do two things. HHS is, you 

know, the big player here. We think we need to be an investor. We 

think we do not need another study, that if we can get our babies 

off to a great start in live, lots of these problems we talk about disappear. And—— 

Senator BEGICH. Very good. My time is up. If I can just ask a 

yes or no question. When you say college, do you mean college/career education, voc. ed. technical schools? 

Secretary DUNCAN. Yes. 

Senator BEGICH. Yes. I just want to make sure. 

Secretary DUNCAN. And community colleges. 

Senator BEGICH. Community colleges. The broad array of higher 

education. 

Secretary DUNCAN. I always say 4-year, 2-year, trade, technical, 

vocational. 

Senator BEGICH. OK. Thank you. 

Chairman CONRAD. Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for being with us today, and I, too, appreciate your service. It is a tough job, and most of us, there are 

lots of things where I do not agree with the current administration 

and some of the things that you are doing, and education is actually one of the areas that I do support some of the things that are 

being done. 

I do want to raise a concern that I have about some of the things 

that are happening with regard to the budget, and one has to do 

with this move toward competitive grant programs, which I know 

are probably good for urban areas, but formula funding is something that traditionally has benefited the more rural areas of the 

country. And it seems to me at least—and I am somebody who 
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comes from an education family as well. My dad was the school 

teacher, he was the athletic director, he was the coach, and he was 

the bus driver. And so most cases I know that these are not people 

who have a lot of time to write grant proposals and grant requests. 

And that is a concern I hear repeatedly from school districts in 

rural places like South Dakota, that this process of distribution of 

funds, which traditionally was done through formulas, is now shifting more toward competitive grants. And these smallest school districts just cannot do that. They do not have the resources to write 

grant requests and proposals and that sort of thing. 

So I am wondering how you suggest that we deal with the issue 

of making sure that rural school districts do not get left out of this. 

Secretary DUNCAN. That is a great question. It is one we have 

spent a lot of time wrestling and debating, so let me just give you 

the facts: 84 percent of our proposed budget continues to be formula-based, so there is a perception out there that we are moving 

everything to competitive. It is actually 16 percent tops. So 84 percent, again, we are asking for increased formula funding, IDEA, 

Title I. We are maintaining the REAP funding, which is really important. So a couple other things. So that is just the facts. There 

is not some massive shift there. We do think it is important to reward excellence in the competitions that we talked about. We are 

going to do a rural set-aside to make sure those districts can play. 

A couple other areas. We think by consolidating 38 programs into 

11 we make it much easier for rural communities to focus on their 

children and not focus on us here in Washington and trying to 

make, you know, ourselves a much better partner, much more flexibility. 

The Pell grant increases that we are asking for, about 38 percent 

of our young people go to community colleges from rural areas. 

North Dakota specifically, recipients are up 58 percent, so we are 

really trying to create access in communities that have not had 

that historically. We think it is very important. 

Turning Around Schools, it is interesting, people think Turning 

Around Schools is an urban issue. About half are urban, about 20 

percent are suburban, about 30 percent of these dropout factories 

are rural. So we are trying to invest in some very different ways 

in the rural community. We are trying to create more access 

through the competitions. Please be assured that the vast majority 

of our money always has been and always will continue to be formula-based. But where we have competitions, we are now putting 

a rural set-aside, a carveout. And so we think folks can play. And 

we are not looking for the fancy PowerPoint presentation. We are 

looking for folks for a vision of how we drive student achievement 

and get better, and that is what we want to reward. 

Senator THUNE. The other question I have—and this pertains not 

just to rural school districts, but obviously federally impacted 

lands, which we have a lot of as well. Since 1950, the Federal Government has provided financial assistance to school districts that 

are impacted by Federal land or federally connected students within their district. And my State has 38 such districts that rely heavily upon impact aid payments. 

In the past few years, there has been an increased number of impact aid school districts that have contacted me for assistance in 
764 

reaching out to the Department of Education to ask for the Department to finalize payments for the previous fiscal years. For example, in May of 2010, a school district still had not received any payments from the Department of Education going back to June of 

2008. So I am wondering what you can do to help ensure that the 

Department provides payments to school districts in a more timely 

way. There ought to be a better audit process. 

Secretary DUNCAN. No question. And it is one that our staff, 

frankly, has worked very hard on. Just to give you—it goes back 

even further. Six months ago, there were 4,000 outstanding final 

payments for fiscal years 2006, 2007, and 2008—sorry. Six months 

there were 4,000 outstanding final payments; all of those have been 

made, every single one. And so we are working very hard to fix the 

backlog from the previous administration and expedite these 

things. But that is 4,000 off the books in the past 6 months. 

Senator THUNE. All right. As you know, much of Indian country 

is faced with unacceptable levels of suicide and, unfortunately, tribal youth are especially affected, making up 64 percent of those suicides. So I guess my question has to do with the Native American 

students attend primarily BIE, and BIE and tribally run schools, 

and 93 percent of all Native American youth nationwide do attend 

public schools. So I am wondering what steps, if any, the Department is taking to work with the IHS and/or the BIE to help coordinate an effective response to what is really a terrible crisis, and 

particularly in Indian country. 

Secretary DUNCAN. It is staggering. In a couple days, you know, 

you visit lots of places. The day in Hooper Bay is one I will never 

forget, and in Montana, Northern Cheyenne country. You know, I 

thought I knew poverty in the south and west sides of Chicago, and 

in that community there is a 70-percent unemployment rate. The 

high school I went to had had one child in 6 years go to college. 

So it was a level of challenges that I had never seen before in my 

life. And it was a pretty profound experience. 

So we are working very, very closely with the BIE. There is a 

new leader there who we have a lot of confidence in. Our team has 

done—we have all been, you know, affected personally, quite frankly, by this. We have had many of our team members, including our 

general counsel, spend a lot of time on tribal consultations and trying to get out in the community and listen and hear and figure out 

how we can be a better partner. 

One of our winners in the Promise Neighborhoods Initiative, 

which is rallying around entire communities, was a Native American community, and as you know much better than I, there are 

no easy answers here. But please know we are trying to be the best 

partner we can. We are trying to invest. We are trying to travel 

the country and get out there and do everything we can to get 

much better outcomes for children who desperately need those opportunities. 

Senator THUNE. One final quick question. My time is running out 

here. The Department had a series of proposed changes with regard to the way that Christian colleges—you probably heard this, 

a concern about some regulations that were moving forward that 

might affect the accreditation process, and particularly impacting 

Christian religious universities. And I am wondering if that is 
765 

something that you are continuing to move forward with or what 

accommodation you are making for some of those institutions. 

Secretary DUNCAN. I do not know the details on that one, so I 

will have to get back to you on that. 

Senator THUNE. Good. I would be interested in following up with 

you on that, because we had some correspondence with your Department on that. 

Secretary DUNCAN. Yes, sir. 

Senator THUNE. Thanks. 

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Chairman CONRAD. Senator Sanders. 

Senator SANDERS. Thank you very much, Mr. Chairman, and 

thank you, Mr. Secretary, for being with us. 

Let me begin, Mr. Secretary, picking up on a point that Senator 

Johnson raised, because I was not quite sure about your answer. 

As I understand it, the Governor of Wisconsin now is trying to end 

collective bargaining for State employees in that State, including 

teachers. Do you believe unequivocally that teachers have a right 

to engage in collective bargaining? 

Secretary DUNCAN. Not only do I believe it, I believe that collective bargaining can be a tool for improving student achievement 

and is a tool for improving achievement in a number of districts. 

Senator SANDERS. And I agree with you, but I want to just be 

very clear, because I was not sure about your answer to the Senator. You would disagree, then, with what the Governor of Wisconsin is trying to do? 

Secretary DUNCAN. I have been very clear on that. I have had 

great conversations with him, and I have been very public on it, 

so yes. 

Senator SANDERS. Could you be public with it right now? You 

disagree with what the Governor of Wisconsin is trying to do. 

Secretary DUNCAN. Yes. 

Senator SANDERS. Yes? 

Secretary DUNCAN. Yes. Let me just take a moment, if you want 

to, on it. 

Senator SANDERS. Are you going to be very clear by being unclear? 

Secretary DUNCAN. No, sir. What he asked from the teachers 

union was to have them help on the pension costs and the health 

care costs. 

Senator SANDERS. Yes. Collective bargaining is the issue I want 

to focus on. 

Secretary DUNCAN. They agreed to that, and I thought he had 

his chance to fix the budget hole there. So there is a different agenda there. 

Senator SANDERS. So you believe that teachers and public employees have the right to engage in collective bargaining. 

Secretary DUNCAN. Absolutely. 

Senator SANDERS. OK. Let me ask you this: We support the protection in the President’s budget to protect the maximum Pell 

grant award at $5,500. However, I am deeply concerned that the 

proposed budget eliminates the availability of a second Pell grant 

in the same award year. 

Now, you know and I know, because I get letters to this effect 

every week, that there are millions of students today who are graduating college or graduate school very deeply in debt, and they are 

working at low-wage jobs because of the nature of the economy, 

trying to pay off their debt, and they are falling further and further 

behind. 

Why did you propose the elimination of that second Pell grant 

when it would do so much harm to so many students? 

Secretary DUNCAN. So I really appreciate your concern, and these 

are very tough and hard and painful cuts. We did that. We had a 

$20 billion Pell shortfall to fill. We had to make some hard deci-
804 

sions. Our highest priority was maintaining the $5,550 a year for 

every single student, and to close that $20 billion hole, by eliminating the second Pell that saves about $7.5 billion. So that is not 

something we do easily or lightly or enjoy doing, but given the 

magnitude of the Pell shortfall, we felt we—— 

Senator SANDERS. Well, let me ask you this question. I know this 

is a little bit beyond your pay grade, but do you think it makes 

more sense to give tax breaks to billionaires or to make sure that 

our young people can afford to go to college? 

Secretary DUNCAN. Well, I am not the economist in the room 

here, but I will say that the most important investment we can 

make in this country is to make sure children have a great pre-K– 

12 education so they can graduate from college and be competitive 

in a globally based economy. The most important investment our 

country can make. 

Senator SANDERS. Earlier on, I think both Senator Conrad and 

Senator Sessions and you yourself raised some interesting questions making the point that in a sense education goes beyond education. These are cultural issues. It is more than what takes place 

in the classroom. 

One of the concerns that I have had for a long time is that the 

United States has by far the highest rate of childhood poverty in 

the industrialized world. Many countries in Europe and Scandinavia have 3, 4, 5 percent. We have 20 percent. So when you appropriately talk about so many young people dropping out of high 

school and ending up with nowhere to go, do you think that that 

relates to the fact that so many of our children start off in poverty, 

A; and, B, comment, if you would like, about how our early childhood education system, our child care system, compares with other 

countries. Do you think that if a kid starts off in poverty, if there 

is no decent quality child care available, how does that impact the 

likelihood of that kid to drop out? 

Third, our Republican friends are proposing massive cutbacks in 

Head Start. How do you think that will impact dropout rates? 

Secretary DUNCAN. So I do not think we need another study to 

tell us how critically important early childhood programs are for 

closing achievement gaps, leveling the playing field, and giving 

children from poverty, children from disadvantaged communities, a 

chance to be successful academically. We do not need another 

study. We just had another one, though, from Vanderbilt University in the past week where the data was absolutely compelling on 

the huge impact that high-quality early childhood programs have. 

When children enter kindergarten, some of whom are reading 

fluently, some of whom do not know the front of a book from the 

back of a book, some of whom do not know their names, they have 

been called a nickname all their life. That is an extraordinarily 

challenging task for the best of kindergarten teachers in the world 

to teach that wide disparity. So—— 

Senator SANDERS. Would you agree—again, and there are a 

dozen studies to make the point. 

Secretary DUNCAN. Hundreds. 

Senator SANDERS. I am asking a question that I am sure that 

you agree with, that if kids enter the school system unprepared, 

their likelihood of dropping out is going to be much, much greater? 
805 

Secretary DUNCAN. Unquestionably. When I met with the NGA 

this weekend, we are all facing tough budget decisions, and I challenged every single Governor in tough budget times not to scale 

back on early childhood education. 

Senator SANDERS. But yet as a Nation—I am sorry that Senator 

Cornyn is not here. But I read things. My understanding is that 

in the State of Texas, for example, which generally has scores not 

among the highest in the country, they are looking at laying off 

something like 100,000 educators. And that is just one State. In my 

State there has been pressure as well. 

You have described that our system is in a crisis. I think that 

is the word that you used. What do you think will happen if all 

over this country, in order to balance budgets while, again, we are 

providing huge tax breaks to billionaires, while we lose $100 billion 

every single year because corporations and the wealthy stash their 

money in tax havens in the Cayman Islands and in Bermuda, an 

issue that the Chairman of this Committee has talked about on 

many occasions, and yet we find ourselves in a difficult budget situation so that States collectively will be laying off hundreds and 

hundreds of thousands of teachers. 

Now, you just said—and everybody seems to agree—we have an 

educational crisis. Do you think the laying off of hundreds of thousands of educators is going to help us address the educational crisis? 

Secretary DUNCAN. Of course not. 

Senator SANDERS. Is it adding to the crisis? 

Secretary DUNCAN. Anytime we do not—again, I am not saying 

investment status quo. Anytime we cut back investments in this 

new vision of education, that hurts our country. I would just go 

right to the chart that the chairman began with. The cost of the 

dropout crisis, the cost of the achievement gap, is the economic cost 

of a permanent economic recession on this country. That is the cost 

that if we had the will and the courage, we could solve and put our 

country in a much, much better spot than we are today. 

Senator SANDERS. I am running out of time. Let me ask you my 

last question. In Burlington, Vermont, where I live, we have a 

school which has a whole lot of immigrant kids. It is in the lowestincome neighborhood in the city. The teacher, because of rules, as 

you well know, related to No Child Left Behind, was fired because 

the kids did not perform particularly well on some of the tests. And 

yet most of the people in that community see this as an outstanding school where the teachers and principal did an extraordinary job. 

Do you think it makes sense to judge kids who are from immigrant families, some of whose families do not even speak English, 

the same way as you would judge an upper-middle-class family 

who were obviously fluent in English? Does that make sense to 

you? 

Secretary DUNCAN. No, and whether it is a child who does not 

speak English or a child with severe special needs who cannot comprehend a test, to have them take the same evaluation, the same, 

you know, rules as a child who has been in the country all their 

life and—no, it does not make sense. 

Senator SANDERS. But why do we do it? 
806 

Secretary DUNCAN. Well, we want to fix the No Child Left Behind law and do it together this year. 

Senator SANDERS. All right. Well, I just want you to know that 

in a school in Burlington, Vermont, which many people see as an 

outstanding success because of the work of the principal, that principal was fired. 

Senator SANDERS. Thank you, Mr. Chairman. 

Secretary DUNCAN. A big problem is the lack of focus on growth 

and gain. We need to be looking at improvements for every single 

child, every child. 

Chairman CONRAD. Let me just say, there was a screw-up on the 

clock, so I gave you some additional time to make up for the screwup on the clock, for other colleagues who are wondering. We want 

to be fair when we make a mistake and that it is not coming out 

of your time. 

Senator MERKLEY. 

Senator MERKLEY. Thank you, Mr. Chairman, and thank you, 

Mr. Secretary, for your testimony. 

I wanted to echo Senator Thune’s concerns about the increase in 

competitive grants. I can tell you, we have 200 school districts in 

Oregon. Most of them are very small. They do not have grant writers. There is a systemic disadvantage to small rural school districts 

that I do not think the administration has taken fully into account. 

I just want to share with you that, as I do my every county townhalls, it comes up time and time again that these school districts, 

they cannot even track the opportunities available let alone apply 

for them. And so we have to consider that in the formulation of 

fairness to school children all over this country. 

Secretary DUNCAN. Yes, sir. 

Senator MERKLEY. Second, I wanted to have you talk a little bit 

more about Pell grants. I thought college was extraordinarily expensive when I went off to college in 1974. Now as a parent with 

a freshman in high school and an eighth-grader, and I am looking 

at the cost of college as it compares to the average income of working Americans, what has essentially happened since 1974 is that, 

inflation adjusted, the wages of working Americans have stayed 

flat for 35 years. Inflation adjusted, the cost of college has not 

stayed flat for 5 years. This is a huge, huge challenge, and the result of that challenge is that we are becoming the first generation 

of parents whose children are getting less education than we got. 

Extraordinary community failure as a Nation, especially as you 

noted in a world economy, a world education-based economy, 

knowledge economy. Even the Pell grants we have in this budget 

I do not think quite level out the playing field when one compares 

where we were two decades ago or three decades ago. Just your 

thoughts about that growing gap and the ability of working families to afford college. 

Secretary DUNCAN. So it is real. Again, that is why I am proud 

that we have had the greatest increase in Pell grants or, you know, 

college funding and grants since the BI bill. But is there more 

unmet need out there? Yes. There are studies that show that of 

those who drop out of college, 52 percent, the majority drop out due 

to financial reasons. Again, if we think we have to educate our way 

to a better economy, we have to continue to invest there. And I 
807 

think we have to continue to find those universities that are holding down costs and being thoughtful about how they provide value 

for the cost, for the expense, and shine a spotlight there, and continue to use the marketplace to drive students and families to 

those places who get this and get the stress that families are under 

today. 

Senator MERKLEY. When I look at the modest amount we are investing in our domestic infrastructure, physical infrastructure, and 

then I look at the failure to keep college affordable, do we have a 

major challenge as a Nation in which we are spending too much 

money on foreign wars and foreign bases rather than on domestic 

infrastructure and domestic education? 

Secretary DUNCAN. Well, obviously, again, I just think we have 

to educate our way to a better economy. We have to continue to invest in education. And whether it is the Pell grants, whether it is 

investments in community colleges—which have been, I think, an 

unpolished gem along the education continuum. We are trying to 

put a huge amount of resources there. The only way our country 

is going to have a strong and vibrant economy long term is if we 

have many more folks successful postsecondary. 

And to Senator Begich’s point, that does not mean just 4—it is 

4 years, but it is 2 years, it is trade, technical, vocational training. 

That has to be the goal for every single young person in our country. 

Senator MERKLEY. All points that I agree with, but it does not 

answer the question. We all keep talking about these same goals, 

the importance of education, yet we seem to be slipping further behind. Are we as a Nation spending too much on foreign wars and 

foreign bases rather than on education and infrastructure? 

Secretary DUNCAN. Well, again, I am not the Secretary of State, 

but would I love to see us continue to invest more in education 

going forward? I think as a country we have to, and the President 

passionately believes it. 

Senator MERKLEY. OK. I will just note that I think until we are 

ready to have a serious conversation, we are all just repeating the 

same things, which is education matters, but we are not really getting to the heart of the problem. One example of that would be the 

President’s proposed investment in training STEM teachers, 

100,000 over the next 10 years. Do you have any concept of how 

many math, engineering, technology science teachers are being let 

go in the current State shortfalls across this Nation over the next 

2 years? 

Secretary DUNCAN. I do not know the breakdown for math and 

science teachers specifically. I do not know that number. 

Senator MERKLEY. I would be very interested in that because it 

is very frustrating right now. We have a $3 billion shortfall in Oregon. It is not unlike many other States. We are in better shape 

than some and in worse shape than others. But while we are talking as a Nation about the importance of education, the reality on 

the ground is that there are going to be massive cuts in our public 

education system. It so happens my children are in the same school 

district that I went to from third grade through twelfth, and, therefore, it is a 40-year gap in between, but it gives me a chance to 

kind of compare apples to apples over the duration. The classrooms 
808 

are much larger. The fees for kids to participate in extracurricular 

activities that keep them in the school are much higher. The range 

and diversity of activities smaller. In other words, we are not providing the same education to our children that our parents provided to us. 

And so it is fabulous to note that we need a lot more teachers 

in education—a lot more teachers in science and technology and engineering and mathematics. But if we do not provide enough resources to actually be funding K–12 schools across this country, 

then we are failing, and that is my concern. And I think right now 

we are losing the teachers. We are not gaining teachers. We are increasing classroom size, not shrinking it. We are losing school days. 

It is becoming routine for school districts to think about doing a 4- 

day week than a 5-day week. Isn’t that kind of a sign of something 

massively wrong in our national education system? 

Secretary DUNCAN. No question. So obviously these are horrendously tough budget times, but, you know, reducing instructional 

time might be the worst choice you could make in tough budget 

times. And so, you know, how Governors and school boards and superintendents make these tough choices in tough budget times says 

a lot about leadership, and where folks are eliminating time or 

eliminating days of the week, I cannot think of a worse decision to 

make in that tough budget time. 

Senator MERKLEY. My time is up, so I will followup on Perkins 

grants. Thank you. 

Chairman CONRAD. Thank you, Senator. 

I want to go back to something Senator Johnson mentioned because as I evaluate what is happening, one of the things that really 

jumps out at you is this matter of college tuition, and I have not 

seen the exact number that Senator Johnson used. I think we are 

talking about a 400-percent increase in college tuition. Maybe, Senator Johnson, you would want to repeat what that number was. 

Senator JOHNSON. This is a Heritage Foundation study, and 

since 1982, college tuition has increased 439 percent. 

Chairman CONRAD. And then you had some comparables for 

health care, which was 250 percent or—— 

Senator JOHNSON. Right. I will give you the study. It is 250 percent for health care and 105 percent for just general inflation. 

Chairman CONRAD. You know, I tell you, my grandson is about 

to go to college, so he has been going to schools around the country, 

and it is stunning. My daughter went to an outstanding university. 

I did. I look at what has happened to college tuition, and I am not 

certain how it all works, because the stated college tuition is very 

high, and then they have financial aid packages, and people get 

dramatic reductions based on the package that they might qualify 

for. 

Now, obviously, a high-income family is not going to qualify for 

anything, and that is fine. I do not argue with that. 

Has the Department done an analysis of college tuition over this 

last 20 years? This study is from 1982, as I understand it, so that— 

so it is comparing—so it is going back to the 1980s. I am just interested, has the Department done an analysis of college tuition? And 

what are the real increases when financial aid packages are taken 
809 

into account? What are the real increases that we are seeing? Has 

the Department done that kind of analysis? 

Secretary DUNCAN. I am sure we have. If we have not, it would 

not be hard to do. So you are looking for the net number. I do not 

know that off the top of my head. 

Chairman CONRAD. Yes, because one thing I have seen as we go 

through this with our grandson is the stated tuition number, and 

then you have these financial packages, I would be interested in 

piercing the veil here and trying to understand what has really 

happened. 

Secretary DUNCAN. I think the Senator’s basic premise that these 

costs have gone up far faster than inflation, I think he is absolutely 

correct. 

Chairman CONRAD. I agree with that as well. That is what my 

observation would be. But I really want to understand the full effect, not just the stated tuition, but when you take into account the 

financial packages, what has happened? And then why? Why has 

this—you know, it is not unusual now to see tuition $40,000, 

$50,000 a year. 

Secretary DUNCAN. We can do some work on that for you and get 

you what we do—— 

Chairman CONRAD. I think it would be very helpful to the Committee if the Department were able to do that. 

Chairman CONRAD. Now I want to turn just very quickly-because 

I have to be out of here a few minutes before noon, and I want to 

give Senator Sessions another chance as well. I want to go back to 

this question which I did not raise in my time, but you and I have 

had an exchange. I have written you an extensive letter that I 

went over in great detail the education community back home: dissatisfaction with No Child Left Behind, which in my State is intense; a very strong feeling that No Child Left Behind—this is not 

your responsibility. This came in a previous administration, a previous Congress. But what do we do going forward to correct it? Because the education community in my State—and I mean on every 

level; I am talking teachers, administrators, school board members—tell me the thing just does not relate to rural areas like the 

one I represent. 

Secretary DUNCAN. Rural, urban, suburban—I have heard that 

everywhere I go. We want to fix the law. Again, we want to fix it 

before the August recess so we go back in the school year with a 

better law. We can only fix and only want to work in a bipartisan 

way to do that. We want a law that is fair, that is flexible and 

much more focused. 

Let me just tell you quickly a couple things I think are wrong 

with the current law that with a common-sense approach we can 

fix. 

As I said earlier, the current law is far too punitive. There are 

many, many ways to fail. The only reward for success is you are 

not labeled a failure. 

It is very prescriptive, very top-down from Washington. I always 

tell the story that I almost had to sue our Department of Education 

when I ran the Chicago Public Schools for the right to tutor my 

children after school. I had tens of thousands of disadvantaged children who wanted to work harder, wanted to go to school, and we 
810 

got in a pitch battle. I won. But why did I have to go to war with 

the Federal Government to tutor my children after school? 

It led—I think this is unintentional, but it absolutely led to a 

dumbing down of standards, which has huge ramifications, and it 

led to a narrowing of the curriculum. 

So how do we fix all those things? We have to reward success, 

reward excellence, great teachers, great principals, great schools, 

districts, States, beating the odds. I went to school in your State, 

George Hall in Mobile, Alabama, historically struggling school. 

Amazing job. It shows what is possible. Where we see excellence, 

we have to shine a spotlight, learn from it, encourage it, incentivize 

it, let folks know what is possible out there. 

We have to look at growth and gain rather than absolute test 

scores. How much are we improving? How much are we getting 

better? We need every child, you know, students with disabilities, 

English language learners, held to the same high standards. We 

want to know how much are they growing each year. 

Chairman CONRAD. Let me stop you on that point because it is 

one of the things that has been the most—to me it is utterly bizarre. I do not understand why a measure of success is comparing 

one third grade to another third grade. I always say my brother’s 

third grade was not nearly as bright as mine, so how you can compare the two—that is not quite true. The reverse is true. 

But let me just say this: I can understand if we are measuring 

a student’s progress, if we are measuring the progress of an individual class. That makes sense to me. But comparing one third 

grade against another third grade to judge whether or not the 

school is performing to me is bizarre. 

Secretary DUNCAN. I have not met a teacher or a principal—and 

I have been to hundreds and hundreds of schools—who are afraid 

of accountability. They just want it to be fair. They want a level 

playing field. If we are measuring growth and gain, how much a 

student is improving each year, you know, holding teachers, 

schools, districts, States accountable, look at who is raising the bar 

and who is not, universal support. Raising standards, 41 States are 

leading the charge, so this is a game changer. I cannot tell you how 

important this is to have college and career standards for every 

single child. Huge movement there. And then, finally—this is so 

important to me—a well-rounded education. 

So, yes, reading and math are important, are fundamental, 

foundational. Science, social studies, dance, drama, art, music, foreign languages, physical education—— 

Chairman CONRAD. Physical education. 

Secretary DUNCAN. Hugely important. I was one of those young 

boys, I had to run around. I could not still all day. And so we can 

fix these things in a common-sense approach, fix it together, and 

I think help lead the country where we need to go. But if we do 

not, shame on us this year. 

Chairman CONRAD. Thank you. Senator Sessions. 

Senator SESSIONS. Thank you. 

I was on the Education Committee when No Child Left Behind 

came up. I guess I was one of the last to agree to support it. I had 

some doubts about it, but I remember reporting at one of the Committee hearings that in Mobile, where George Hall is—it is prob-
811 

ably one of those schools that the reporting requirements made 

them report that some of their schools were remarkably behind 

others. Some of the inner-city schools were just really not performing well. 

They met, they assigned new principals and new teachers, and 

those schools showed dramatic improvement. I told that story; Senator Kennedy just beamed because that was what he believed and 

that is what President Bush meant when he said there is a soft 

bigotry of low expectations. So I do not know what the answer is. 

It is a tough question to deal with. 

I talked to a very fine college president recently, and this is what 

he expressed to me, and I would ask you to think about this as you 

develop Pell grant policy. He said, you know, I think it is a mistake 

to eliminate summer school. He said, I think the problem is we 

have too many students taking 12 hours and taking 5 and 6 years 

to graduate. They are running up debt. They are running up burdens on their families when they could graduate in 4 years, and 

they should be graduating in 4 years. And if they need to do a summer school to get out sooner, they are out working, making money, 

and costing their family and themselves less debt. He said, So I 

would limit Pell grants to students who take 16 to 18 hours minimum and allow them to take summer school if that works. 

Have you thought about that? And would that be something you 

would consider? 

Secretary DUNCAN. It is a great question. This goes back to your 

basic premise of we just cannot keep spending. I would have loved 

to have kept the second Pell grant. That goes, again, from $5,500 

a year to $11,000 for each student. With the second Pell grant, we 

honestly did not see a big jump in the number of students participating in summer school. It was like a 1-percent increase. So in an 

ideal world, Senator, I would loved to have maintained that. We 

just—— 

Senator SESSIONS. Well, let us think about—that is probably correct. I do not want to focus on the summer school. I guess what 

I would focus on is, Should we emphasize getting students to finish 

their career in 4 years? Wouldn’t it save the Government a lot of 

money and save them debt? And wouldn’t it be better for America? 

Secretary DUNCAN. It is a really thoughtful question, and we 

need to work on that. So in an ideal world, absolutely we would 

have students graduating in 3 and 4 years. The reality, as you 

know, Senator, is that we have many folks who are not 18 years 

old going to college but 28, 29, and they are working a full-time job 

and they are supporting a family. As much as I would desperately 

love them to finish in 4 years, 6 or 7 years might be more realistic. 

And so we want to speed up completion rates. We want to encourage that. I think your basic point, how do we encourage completion, is one we are focused on and we want to do more on. But 

the average age for a college student has gone up pretty significantly, and they are dealing with challenges going to college that— 

you know, I just had to go to school. I did not have children. I was 

18. You have, you know, single moms, 28, working 40, 50 hours a 

week and taking classes at night. And we need—— 

Senator SESSIONS. Well, that is certainly a mix of students. 

Could I ask you one more thing? 
812 

Secretary DUNCAN. Yes, sir. 

Senator SESSIONS. My time is up. Do you agree with the recent 

report that indicates that our graduates who are graduating with 

4-year degrees are less educated and proficient than they were I 

think 20 years ago, they said; that we are spending the money, and 

they are going through and getting their degrees, but they have not 

really accomplished as much learning, and is that a concern? 

Secretary DUNCAN. Yes. I have not seen that report, but that is 

an issue or a concern that has absolutely been raised to me. So I 

am not informed enough to know that. 

If I could add one final thing, Mr. Chairman, this question about 

college tuition. One thing we are coming out soon with—and just 

stay tuned and we will get it to you—is a watchlist, and we will 

be reporting net tuition and ranking schools by sector. So, again, 

we are trying to use the bully pulpit to drive transparency, and we 

will get that to you shortly. 

Chairman CONRAD. I would be very interested in that because 

there is something going on here. It is very evident to me that they 

have these tuitions, but then they have these financial packages, 

and so really, I would just like to know what is real. 

Senator SESSIONS. Could I offer one real explanation for that? I 

was on the board of trustees in my little liberal arts college. We 

had an outside speaker who said one of the factors in a college or 

university being rated by the evaluating is how much the tuition 

is. I was stunned at that. But it apparently is a very real fact. 

Chairman CONRAD. We thank the Secretary. We thank all the 

colleagues who have participated today. 

The Committee will stand in adjournment. We have another 

hearing tomorrow with another Cabinet Secretary. I thank this 

Secretary for your first appearance here. 

Secretary DUNCAN. Thanks for the thoughtful questions. 

[Whereupon, at 12 p.m., the Committee was adjourned.] 
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(831) 

THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

REQUEST FOR THE DEPARTMENT OF ENERGY 

WEDNESDAY, MARCH 2, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Nelson, Stabenow, Cardin, 

Whitehouse, Merkley, Begich, Sessions, Enzi, Cornyn, Thune, 

Portman, and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The Committee will come to order. 

I would like to welcome everyone to the Senate Budget Committee this morning. Our witness today is Secretary of Energy Steven Chu, and our focus will be on the energy budget. 

Secretary Chu has done, in my judgment, an excellent job leading the Energy Department. We are very lucky to have someone of 

his capability and character leading that agency at this time, and 

we are pleased that he could join us and look forward to his testimony. 

I believe the two biggest challenges facing the country right now 

are the rising Federal debt and our dependence on foreign sources 

of energy. We simply will not be able to remain globally competitive if we fail to address both of these challenges. Our competitors 

in Asia and Europe are moving quickly to develop and adopt alternative and clean energy technologies. These technologies will be 

among the biggest industries in the world in the years ahead. We 

cannot afford to fall behind. The United States should be a leader, 

not a follower on energy issues. 

So even as we look to cut spending to bring down the deficit, 

something that we must do, we also need to ensure that energy remains a priority. We need to focus resources on energy programs 

that promote clean energy and energy efficiency and that encourage private sector innovation and the adoption of new technologies. 

And we need to ensure that every dollar we spend on energy is 

spent wisely. 
832 

The fact is we are dangerously dependent on foreign oil. In 1985, 

we imported only 27 percent of our petroleum. We now import over 

60 percent. As a result, we are increasingly vulnerable to oil supply 

disruptions and instability in other parts of the world. 

The events of recent weeks have demonstrated just how much 

this dependence can impact our economy as turmoil in North Africa 

and the Middle East has led to a spike in gas prices and fluctuations in other markets. 

This addiction to foreign oil is also a threat to our national security. Many of the countries from which we import petroleum are 

unstable or in unfriendly regions, and many are becoming more un-
833 

stable by the day or risk being affected by unrest in neighboring 

countries. 

Here is a list of the top ten countries exporting petroleum to the 

United States in 2010 and the number of barrels we import from 

those countries in a single day. You can see that we have large 

quantities of oil from countries like Saudi Arabia, Nigeria, Venezuela, Algeria, Iraq, Angola, and Colombia. 
834 

At the same time we are losing ground in the race to develop the 

clean energy resources of the future. We are being left behind by 

countries like China and India. Here is a New York Times article 

from earlier this year about how the third largest manufacturer of 

solar panels in the United States has packed up, moved its operations, and hundreds of skilled jobs to China. According to the article, the company moved because China provided ‘‘much higher government support.’’ That is troubling. We need to keep those jobs 

here in America. 
835 

This next chart helps put our energy funding in some perspective. It shows that funding for the Department of Energy represents a small fraction of Federal spending, only 2.4 percent of the 

discretionary budget. Let me repeat that: 2.4 percent. And roughly 

two-thirds of that is dedicated to nuclear weapons-related activities. So funding to promote and support new energy technologies 

represents a tiny fraction of the Federal budget. 
836 

But we also spend between $8 and $10 billion a year on energy 

through the Tax Code by providing certain energy tax incentives 

and credits. The largest of these include oil and gas tax incentives, 

coal tax incentives, a renewable energy production tax credit, and 

an energy-efficient home improvements tax credit. Those are the 

four big expenditure items in the Tax Code. 
837 

This is what the Obama administration has proposed in its budget for energy. Overall, the budget requests $29.5 billion in discretionary funding for the Department of Energy for 2012. This represents a $2.5 billion increase over the 2011 continuing resolution 

level. Among other things, the President’s budget would increase 

support for clean energy alternatives, such as solar, biomass, wind, 

and geothermal, advance development of low-carbon coal technologies, invest in the Nation’s transmission infrastructure to improve energy efficiency and reliability—something that we clearly 

need—and increase support for basic research and science. 
838 

The President’s budget supports many of the same initiatives 

that I would like to see in the next energy bill. I believe the next 

energy bill needs to invest in clean sources of electricity, boost energy efficiency in homes and buildings, help reduce our dependence 

on foreign oil by develop advanced vehicles and promoting alternative fuels, and by increasing domestic oil and gas production. 

I believe we have to have a balanced plan. I was part of the 

group of ten—five Democrats, five Republicans—that proposed a 

far-reaching, balanced plan to reduce our dependence on foreign energy, including increasing domestic production of oil and gas, clean 

coal technology, advanced battery technology, a move to use natural gas in our bus and truck fleets, incentives for nuclear plants. 

We already have over a hundred nuclear plants in this country. We 

are going to have to have more if we are going to dramatically reduce our dependence on foreign energy. At least that is my belief. 

I look forward to working with my colleagues on both sides of the 

aisle on energy legislation this year. I believe it is absolutely a critical priority. It cannot be allowed to slip another year. 

With that, I will turn to Senator Sessions for his opening remarks, and then we look forward to hearing from Secretary Chu. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Mr. Chairman, for your leadership 

and for this series of hearings. I think it has been very helpful to 

us. 

Secretary Chu, thank you for appearing as we continue to discuss the President’s budget, and that is the fundamental question 

here. We all have views on energy policy, and I share many of your 
839 

views and have supported a number of energy bills that Senator 

Conrad has referred to. 

You are a man of great accomplishment, and I have appreciated 

getting to know you. But you now hold the job of Secretary of Energy, and energy at an affordable price is essential to our economic 

future. It is not a theoretical or academic matter. 

Right now we are in the midst of a growing fiscal crisis, and it 

is crucially important that we have an honest conversation about 

the challenges we face. The President and his Budget Director tell 

us their budget plan does not add to the debt, that we are living 

within our means. But the plain fact is the budget doubles our 

gross national debt, never once produces an annual deficit of less 

than $600 billion in its 10 years. 

The President’s Education Secretary told us that the administration was making tough cuts and difficult choices to make our programs leaner and more productive, but the budget called for another 11-percent spike in education funding following a 68-percent 

increase over the last 3 years. 

Perhaps the most consistent spin is the repeated claim that every 

cent of new Government spending is an investment in our future. 

Just because you call something an investment does not make it 

so, certainly not a good investment. If the administration’s argument held true, then even our Nation would be thoroughly enriched 

by this year’s spending spree and the $1.65 trillion deficit. 

In reality, the most obvious result of what we have done is this 

massive surge in Federal spending is a crushing debt burden that 

has grown the Government at the expense of the private sector. 

So while your energy budget increases spending substantially, I 

reject the idea that you have made an investment necessarily in a 

better future. To the contrary, instead of wisely investing the taxpayers’ money, the plan often would waste it. We have magnificent 

energy resources in this country from which we can create thousands of jobs without adding to the deficit. And yet these resources 

remain under lock and key. The American people expect fact- based 

budgeting that produces more energy, not locking it up. The simple 

fact is that the nearly 10 percent spending increase you have requested in your budget is not being used to produce larger sources 

of energy that would actually impact the American economy and 

reduce costs to the American taxpayer, but to chase after the vision 

of higher-cost sources of energy in the hopes that somehow we can 

bring those down, which has not been successful to date. 

As we contend with a sluggish economy and high unemployment, 

the plain truth is the actions of this administration are making 

things worse. The gas prices are rising rapidly, some say to that 

dangerous level of $4 a gallon. Yet the Interior Secretary issued 

only one single deepwater drilling permit this year, and only after 

being found in contempt of court for keeping the moratorium on. 

High gas prices exact a painful toll on American families and 

have historically done significant damage to the economy. The refusal to drill domestically has cost tens of thousands of high-paying 

jobs and billions of dollars in lost revenue to the Government, to 

the U.S. Treasury. Offshore drilling rigs are leaving for foreign 

shores and taking jobs with them. This administration has in the 

past 2 years revoked oil and gas leases in Utah, Colorado, and Wy-
840 

oming, and shuttered the Gulf of Mexico. One of the major producers there just declared bankruptcy because they could not get 

permits to drill in the shallow waters where we have never had a 

serious problem. 

Permits to mine for coal in West Virginia have been withdrawn, 

and permitting delays have occurred elsewhere with little or no explanation. 

The failure of your Department to advance clean, reasonably 

priced nuclear power has hurt our Nation. We have talked about 

it. I believe we could have done more. We have to do more. 

An estimated 40 percent of our Nation’s uranium deposits in Arizona were unilaterally locked up just 2 years ago, leaving us to import 90 percent of the uranium we use. 

And the Green Jobs Program, subsidized by the overburdened 

taxpayers, has never lived up to those promises that have been 

made about it. Indeed, the much ballyhooed state-subsidized solar 

panel plan in Massachusetts, I believe the one you referred to, 

failed in January, costing 800 jobs. It got $58 million from the 

State. 

The experience in Spain cannot be ignored, and the Solyndra, the 

$535 million loan that the U.S. Government made, seems to be failing already. 

A recent study by Bjorn Lomborg’s Copenhagen Consensus Center demonstrates that the higher prices and job losses that are the 

result of green energy policies significantly outweigh the jobs created. The reason is that costs of renewable energy are higher than 

standard forms of energy so that when they are mandated on the 

economy, it means more economic inefficiency, higher manufacturing costs, and less disposable income for the American citizens. 

So, in summary, Dr. Chu, the President’s plan I think worsens 

a desperate fiscal circumstance and fails to invest by any honest 

measure in our Nation’s real energy future, the challenges we 

have. America’s vast proven energy reserves that we have are not 

being unlocked, and they are not being acted on apparently in the 

pursuit of a failed green jobs stimulus plan that has produced neither energy nor jobs. Instead, the President’s plan will produce increased spending, increased taxes, increased regulation, increased 

reliance on foreign oil, and increased debt. 

So this plan is a non-starter, and the budget is a non- starter. 

We do not have the money. So we need to replace it with a plan 

that actually does invest in our future by producing more low-cost 

energy that makes it easier on American families, unlocking the 

vast energy sources that belong to the American people and keeping dollars and jobs in America, making us stronger and not weaker. 

So I look forward to working with you on this. I know you are 

a good man. I know you want to achieve some of these things, and 

maybe we will have some breakthroughs. I would support some research and development, but I do not support mandated energy 

programs that drive up the costs that are not yet competitive economically. We have gone too far in that direction. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 
841 

Again, Mr. Secretary, welcome to the Budget Committee. We look 

forward to your testimony. Please proceed. 

STATEMENT OF THE HONORABLE STEVEN CHU, PH.D., 

SECRETARY, U.S. DEPARTMENT ENERGY 

Secretary CHU. Thank you, Chairman Conrad, Ranking Member 

Sessions, and members of the Committee. Thank you for the opportunity to appear before you today to discuss the President’s fiscal 

year 2012 budget request for the Department of Energy. 

Before I begin my remarks, I want to take a moment to thank 

Chairman Conrad for his decades of public service and for his tireless efforts to address the big challenges facing our Nation, especially fiscal and energy issues. 

Chairman Conrad, I look forward to working with you over the 

next 2 years and wish you the best as you start a new chapter in 

your career. 

President Obama has laid out a plan for the United States to win 

the future by outinnovating, outeducating, outbuilding the rest of 

the world, while at the same addressing the deficit. Many countries 

are moving aggressively to lead in clean energy, and we must rev 

up the great American innovation machine to create jobs, win the 

clean energy race, and secure our future prosperity. 

To that end, President Obama has called for increased investments in clean energy research, development, and deployment. In 

addition, he has proposed a bold but achievable goal of generating 

80 percent of America’s electricity from clean sources by 2035. 

A clean energy standard will provide a clear, long-term signal to 

industry to bring capital off the sidelines. It will grow the domestic 

market for clean energy, creating jobs, driving innovation, and enhancing national security. The most competitive clean energy 

sources will win in the marketplace. The Government does not 

need to pick favorites. 

The Department of Energy’s fiscal year 2012 budget request of $29.5 billion supports the President’s goals and strengthens the 

Nation’s economy and security. Through programs to make homes 

and buildings more energy efficient, we will save money for families and businesses by saving energy. In addition, the budget supports the research, development, and deployment of renewable 

sources of energy; the modernization of the electric grid and the advancement of carbon capture and sequestration technologies; and it 

helps reduce our dependence on oil by developing the next generation of biofuels and accelerating electric vehicle research and deployment. 

We are also requesting a new credit subsidy which will support 

approximately $1 billion to $2 billion in loan guarantees for renewable energy and energy efficiency technologies, And we are requesting a credit subsidy for a Better Buildings Pilot Loan Guarantee 

Initiative. 

To jump-start the nuclear industry, the budget requests up to 

$36 billion in loan guarantee authority, while also investing in advanced nuclear technologies, including small modular reactors. To 

spur innovation, the President’s budget invests in basic and applied 

research and keeps us on a path to doubling funding for key scientific agencies, including the Department’s Office of Science. 
842 

The budget invests $550 million in the Advanced Research 

Projects Agency for Energy, known as ARPA-E. The administration 

also seeks an additional $100 million for ARPA-E as part of the 

President’s Wireless Innovation and Infrastructure Initiative. This 

investment will allow ARPA-E to continue promising early stage 

research projects that aim to deliver game-changing clean energy 

technologies. ARPA-E’s projects are generating excitement both in 

the Department and in the private sector. 

For example, through a combined total of $24 million from 

ARPA-E, six companies in their first year have been able to advance their research efforts and go back to the private sector and 

show the potential viability of their cutting-edge research. This extremely valuable early support enabled these companies to achieve 

R&D milestones that in turn have attracted more than $100 million in private sector funds to the projects. This is precisely the innovation leverage that is needed to win the future. 

Another key piece of our research effort is the energy innovation 

hubs. Through the hubs, we are bringing together our Nation’s top 

scientists and engineers to achieve similar game-changing energy 

goals, but where a concentrated effort over a longer time horizon 

is needed to establish innovation leadership. The budget requests 

$146 million to support the three existing hubs and to establish 

three new hubs in areas of batteries, energy storage, smart grid 

technologies, systems, and critical materials. The energy innovation 

hubs were modeled after the Department’s Bioenergy Institutes 

which have established an outstanding 3-year track record. 

Finally, the budget continues to support the Energy Frontier Research Centers, which are mostly university-led teams working to 

solve specific scientific problems that are blocking clean energy deployment and development. When you think of the EFRCs, think 

about a collaborative team of scientists, such as Watson and Crick 

unlocking the secrets of DNA. When you think of ARPA-E, think 

of the visionary risk takers launching new technologies and startup 

companies out of their garages. When you think of the hubs, think 

of large mission-oriented research efforts, such as the Manhattan 

Project, the development of radar at MIT’s radiational laboratory 

during World War II, and the research in America’s great industrial laboratories in their heyday. 

To reach our energy goals, we must take a portfolio approach to 

R&D, pursuing several research strategies that have proven to be 

successful in the past. But I want to be clear. This is not a kitchensink approach. This work is being coordinated and prioritized with 

a 360-degree view of how the pieces fit together. Taken together, 

these initiatives will help America lead in innovation. 

In addition to strengthening our economy, the budget request 

also strengthens our security by providing $11.8 billion for the Department’s National Nuclear Security Administration. The request 

of $7.6 billion for weapons activities provides a strong basis for 

transition to a smaller yet still safe, secure, and effective nuclear 

stockpile without additional nuclear testing. It also provides much 

needed resources to strengthen science, technology, and engineering capabilities, and to modernize the physical infrastructure of our 

nuclear security enterprise. 
843 

To support the President’s goal of securing all vulnerable nuclear 

materials around the world in 4 years, the budget invests $2.5 billion in the defense nuclear nonproliferation program. Through our 

investments we are laying the groundwork for the Nation’s future 

prosperity and security. At the same time we are mindful of our 

responsibilities to the taxpayer. 

We are cutting back in multiple areas, including eliminating unnecessary fossil fuel subsidies. We are streamlining operations. We 

are making some tough choices, including freezing salaries and bonuses for hard-working national laboratory site and facilities management contractor employees. 

The United States faces a tough choice today. Will we lead in innovation and outcompete the rest of the world? Or will we fall behind? To lead the world in clean energy, we must act now. We cannot afford not to. 

Thank you, and I am now pleased to answer any questions you 

might have. 

[The prepared statement of Secretary Chu follows:] 
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Chairman CONRAD. Thank you for that testimony, Dr. Chu, and 

thank you for your taking on this assignment. You are a distinguished scientist with a remarkable record of accomplishment of 

your own. 

I would be most interested in what your vision is of what is most 

exciting on the technological front. As you look across the broad 

array of initiatives that are underway, both in your agency and in 

the private sector, what are the emerging technologies that you are 

most excited about in terms of an opportunity to dramatically reduce our dependence on foreign energy? 

Secretary CHU. Well, regarding foreign energy, I would say that 

in the recent 5 years especially, and even in the recent 2 years, I 

have seen a quality of ideas and a passion for developing electric 

vehicles. We are beginning to market the first electric vehicles in 

the United States that have a 100-mile range, but I see on the very 

close horizon, perhaps as short as 4 years from today, the testing 

of automobile batteries where people can drive perhaps 300 or 400 

miles on a single charge, where the cost of those batteries can be 

reduced by as much as 70 percent, 60 percent. And the companies 

and countries that achieve those type of batteries—and this is close 

enough that you can really feel. It is not a pie-in-the-sky dream of 

the future. Those companies and countries that can achieve those 

type of batteries will have a multi-multi-billion-dollar market. And 

we really want the United States to be that country. 

We have invested in advanced battery manufacturing to deliver 

by 2014 half a million batteries. This is the first tangible thing that 

we can do to get us off our dependency on foreign oil. 

Chairman CONRAD. And who is our toughest competition? 

Secretary CHU. I would say it is the Japanese, the Koreans, and 

soon the Chinese. This is actually a worldwide race to develop 

these batteries because it is not like it was 20 years ago where we 

would say, well, maybe we can do this. You know, as I said, the 

ideas that we are now investing in in the research labs and in 

agencies like ARPA–E and in the Department of Energy renewable 

energy and energy efficiency, they are really where we can bank on 

50- percent improvement, a factor of two improvement in the next 

couple years. But to get to the next steps where it just becomes 

ubiquitous is very exciting to me. That is one of the things. I think 

that is going to come to pass very quickly. 

I think another thing that is not directly related to our dependence on foreign oil but is also very exciting is we see very rapid developments now in photovoltaics. For a long photovoltaics have 

been making good progress, but there is still—the energy created 

by photovoltaics is still too expensive, and there is no doubt about 

it. 

The industry game plan says certainly within the decade they 

think they can reduce those costs, the full costs, not only of the 

module but the insulation and everything, by 50 percent. 

We started to engage in industry and said, OK, that is good, but 

if you reduce the costs by 75 percent, then you do not even think 

anymore. You put it up everywhere. And, again, you have, you 

know, a tens of billions of dollars world market, because at that 

point it becomes competitive with the lowest-cost fossil fuel generation today. 
870 

So if we can pull this off in 10 years, that would be amazing, and 

that would be something that would help the United States lead 

for decades and create prosperity at both home and abroad. 

So this is not energy for the sake of clean energy that would last 

forever on subsidy. We see a pathway now in some of these areas 

where within a short period of time it could be competitive without 

any subsidy, and that is very exciting. 

Chairman CONRAD. Let me ask you, we have had a major effort 

underway by Boone Pickens to encourage the country to move toward the use of natural gas for bus and truck fleets, and I think 

that his advocacy has had a significant impact here in Congress. 

What is your assessment of the opportunity to encourage the use 

of natural gas in our large fleets? 

Secretary CHU. I think it is very promising, and we are looking— 

in fact, we are indeed supporting some of the pilot demonstrations 

of that. Boone Pickens was thinking that for long-haul trucks that 

would be very good. 

There is an infrastructure issue. We are looking into that. But 

on the near term, the short term, the medium term, we think that 

delivery vans in a centralized location where there is a centralized 

refueling is a no-brainer, and we have supported those demonstrations. UPS is looking very much at that as a way of fueling its delivery trucks. But, again, while UPS looks at natural gas delivery 

vans, which is, you know, very clean, and natural gas, because of 

the fracking technologies which, I might add, were first invested in 

at the Department of Energy in the early 1980s. As soon as industry picked it up by 1992, we got out of the game because 

Schlumberger picked it up by 1991, and we handed it off to the private sector. That is exactly what we wanted to do. You do the initial research. You prove it. It gets commercial interest, and then 

you step back and let industry take over. 

So that is a very good story. We do not know whether it is going 

to be electric vehicles. FedEx is going to electric delivery vehicles. 

They are going to electric delivery vehicles because—it was a hard 

business decision. I had lunch with Fred Smith, the CEO of FedEx, 

and he said if you look just a few years into the future, we see only 

electric vehicles, a total life cycle cost of electric vehicles less than 

the cost of a diesel. 

So, again, nobody was saying that 5 or 10 years ago, and all of 

a sudden we are in this tipping point. Those are the things that 

really excite me. So we can really decrease our dependence on imported oil. 

Chairman CONRAD. Let me ask you two other quick questions. 

First of all, clean coal technology. Look, coal is the basis for 50 percent of the electricity in the United States, or thereabouts. What 

do you see as encouraging developments on clean coal technology? 

Secretary CHU. Well, first, one of the most amazing encouraging 

developments is that countries all around the world have recognized this, most recently China. And although it is not widely 

known, two major utility companies in the United States, AEP and 

Duke, are now in agreements with two Chinese companies, 

Huaneng and ENN in China, to develop clean coal technologies. 

And, amazingly those pilot projects, co-supported by those four 

companies, are being done in China. 
871 

Now, right now I would say that the clean coal technologies we 

now have are too expensive for large-scale deployment. And so we 

have put together a game plan. We co-chaired a clean coal commission that said that it is reasonable to expect by 2020, in 10 years’ 

time, now 9 years’ time, that one can begin to get the costs down 

so you can begin to have significant deployment. But to be fair, it 

now costs too much money. 

Now, we have looked very hard at all the research areas, both 

in proving in multiple sites that you can sequester safely and economically, but also the technologies for capturing the clean coal, 

lots of ideas that we think have great promise, but they have to 

be tested. This is research and development, and it is not ready for 

prime time where the American public could say, OK, we can deploy this. 

There is significant hope, I might say, that now we see countries 

all around the world realizing that this is a technological hurdle 

that you have to solve, and then also realizing the country or companies that first solve these technological things can sell worldwide. And I think that is, you know, why China is doing this. 

Chairman CONRAD. OK. I have another question, but my time 

has expired. But I would really like to talk about nuclear power as 

well before we conclude this hearing. 

Senator SESSIONS. Senator SESSIONS. Thank you. Thank you. 

Secretary Chu, Admiral Mullen says our debt is the greatest 

threat to our national security. Do you agree with that? 

Secretary CHU. Whether it is the greatest or not, it is certainly 

up there. I think the debt, the national debt is something that we 

have to work hard to bring down. 

Senator SESSIONS. Well, you are asking for an additional 9 percent increase for the Department of Energy, and this is the Budget 

Committee. Do you think that energy should be exempt from the 

tough choices that everyone says, including the President, that this 

nation must face on spending? 

Secretary CHU. I think the President has made some tough 

choices. As you know, this budget has put a freeze on non-security 

discretionary spending and made a commitment to do this for the 

next 5 years. This stopping the increase is the beginning, and I 

think—but having done that, the President has said that if you 

look at what is going to drive, what is going to really be the engine 

of not only the far term, but the near-term future prosperity in the 

United States and get Americans back to work and really guarantee that we will be as prosperous in the 21st century as we were 

in the 20th century, energy was seen as central to that. 

Senator SESSIONS. Well, Education was in yesterday with an 11 

percent increase. They think they are central. We will have Transportation in tomorrow and they are asking for a bigger increase 

than you are getting. The State Department has a huge increase. 

So at some point, we have to ask how we can keep this country on 

a sound fiscal path, and I believe we are going to have to ask you 

to do more with less, at least not the kind of increases that are 

being asked for. 

You know, this past week, I was in Winfield, Jemison, Sulligent, 

Parrish, Haleyville, Glen Allen, and Cullman. I would talk about 
872 

the budget and great issues of war and peace and the question 

would go up almost every place, gas prices. This impacts people. It 

is real to people. I know you have great hopes about these alternative sources. I called you about ethanol, an idea in Alabama I 

thought was going to work, and now it collapsed. I see this one in 

Boston, the Solyndra plant, are not successful. We have to understand, I think, that just promising, promising does not mean it is 

going to necessarily happen. 

I know a lot of the focus on solar and wind is for electricity, but 

I do believe the biggest threat to our economy is the liquid fuel we 

are using to power our cars, 61 percent of which we are importing. 

I am willing to support and have supported spending on batteries 

and research, but I begin to wonder how much we can demand of 

the economy through forcing technologies that are not yet available, are not yet proven or effective. You have noticed that coal sequestration or carbon sequestration is just not feasible. 

What we know is that we are going to be importing a substantial 

amount of oil for some period of time. I know, Senator Conrad, in 

North Dakota, I think they have the lowest unemployment in the 

nation. They are producing a lot of oil and gas. He told me they 

needed more workers in the oil and gas field. Yet we have laid off 

people along the Gulf Coast. We are not producing in other areas. 

We are importing this oil now. People are even discussing selling 

off some of our Strategic Reserve because of the surge in prices. 

Do you not think, as a matter of national energy policy, we need 

to take more immediate actions to actually produce the oil and gas 

that we have? 

Secretary CHU. I agree with you that we, as part of a national 

plan to get off of foreign oil dependency, developing further sources 

of oil and gas in the United States as part of a plan, but it will 

take five, perhaps even 10 years from now to actually be producing 

this amount. But it is part of a coherent plan. And I agree with 

you that the $300 to $400 billion we spend, where money is 

offshored to bring in oil, is a huge, a huge burden on the American 

people. 

Senator SESSIONS. Well, Reuters just had this article, ‘‘Deepwater Rigs Moved Out of the Gulf of Mexico.’’ Diamond would move 

to Egypt. They would also move another rig to the Republic of 

Congo. Transocean was moving one to Nigeria. Another, 

Transocean said, is leaving for Egypt. INSCO said it would work 

off French Guyana. Pride International was removed to the Mediterranean Sea. Noble Corporation said that the Clyde Boudreaux 

rig would move to Brazil. 

Presumably, we are importing from Nigeria, Saudi Arabia, 

Brazil, Venezuela. We will be, instead of producing this in our own 

country, receiving royalties of billions of dollars from the production of that oil that goes to the Treasury, we will be importing that 

oil. Do you not feel like, that as Energy Secretary, you need to 

maybe call Secretary Salazar, our friend, and say, watch out what 

you are doing. We are not ready to produce batteries yet that are 

going to take over America. 

Secretary CHU. Well, at least you have the right Secretary. I 

think Secretary Salazar—— 

Senator SESSIONS. You have his phone number, I am sure. 
873 

Secretary CHU. Yes. I think Secretary Salazar wants to resume 

Gulf drilling and deep Gulf drilling. He feels compelled he needs 

to do it safely, and I, as during the oil spill, I will certainly avail 

myself and the Department in any way we can. 

But going back to the fundamental question, I think today’s 

spike in oil prices is causing great concern, great hardship. The 

American people, we have a very delicate recovery going on and an 

increase in prices will make that vulnerable. And so we need both 

short-term and long-term plans going forward. And as I said, right 

now, advanced biofuels, I will tell you, is not quite ready for prime 

time, but I also—— 

Senator SESSIONS. I had hoped that we would be further 

along—— 

Secretary CHU. Yes. 

Senator SESSIONS [continuing]. And I shared that with you, but 

it just has not happened. 

Secretary CHU. That is true, but again, what is different in—you 

know, if you look back in the early 1980s versus now, it is a transformative difference in what is going on. In the last couple of years, 

again, the proof is going to be in the pudding, but already, people 

are beginning to pilot advanced biofuels where they think they can 

sell, for example, diesel at $4 a gallon. Now, that is still higher, but 

sell at a profit at $4 a gallon. You want to sell at a profit at $3 

a gallon. But again, it is a little bit further off, perhaps, in batteries, but it is within grasp. Increased fuel economy, electrification, gas vehicles, gas-powered vehicles, all those things are part 

of the thing. A single—one single technology will not solve the 

problem, but also bearing in mind that we do have gas and oil reserves that we can simultaneously develop. All these things are 

needed. 

Senator SESSIONS. Well, we just need more energy at a reasonable cost, and I am afraid our policies seem to be focusing more on 

higher-cost energy and locking up the energy we have. We have to 

get away from that direction. 

Chairman CONRAD. I thank the Senator. 

Senator Stabenow is next. 

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

Thank you very much for your leadership and vision about the future. 

Mr. Chairman, I think this is such an important debate and discussion, frankly, that we need to be having, I think, in a more extended way about what our energy policy is and how we get there. 

At the risk of plugging somebody’s book, which I am going to do, 

Andrew Liveris, who wrote Make It In America, I would strongly 

encourage everyone to read this, my colleagues. He is the CEO of 

Dow Chemical Company and has many things I know colleagues on 

both sides of the aisle would agree with. What I think is most powerful about what he talks about, though, is the fact that energy 

drives the world, and in this, from his vantage point as someone 

who is in every country around the world, watching what Germany 

is doing—not exactly a low-wage country or low-tax country—and 

China and other places talked about, he is extremely concerned 

about the lack of focus in this country from an innovation and 

manufacturing standpoint. 
874 

One of the things he says—I would just quote one thing he 

says—‘‘It is ironic, energy independence is closer at hand than it 

could ever be in the age of oil, but America’s policy inertia suggests 

that it seems willing to trade one form of dependency for another, 

to let other countries build the clean energy technologies that we 

will then buy. It is still within America’s means to be a world leader in clean energy, but only if we wake up to what the rest of the 

world is doing and to what we must do.’’ 

I raise that because in the book, he really is talking about, and 

in conversations, many conversations I have had with him, about 

how we partner with American businesses like every other country 

is doing. Right now, our companies are competing with countries. 

When Germany or China or Japan or someone else says, come 

here, we will build the plant for you or provide you financing or 

pay for your R&D, we are at a significant disadvantage. 

And so I am reminded of what Japan did to help Toyota get a 

jump on us on batteries, by funding most of the R&D. We are now 

in a situation where by putting $2 billion into advanced battery innovation and manufacturing—$2 billion in this country—we have 

unleashed billions of dollars. Over 12 companies in my State now, 

including Dow, are doing advanced batteries, and we are going— 

as I understand it, last year, the number was we manufactured 2 

billion—or, excuse me, 2 percent of the world’s batteries, and within 4 years, it is going to be 40 percent. 

And so to our distinguished Ranking Member, I would say part 

of the way we get off of these high costs and so on in terms of oil 

going up is to really create some competition with other alternatives that are not pie in the sky. They are really happening now. 

We have the Chevy Volt and close to, what, 300 miles on a gallon 

of gas because of extended range, and the Ford Focus, and, of 

course, Toyota has been there with the Prius, and we could go on 

and on. I mean, these are not technologies that are fringe anymore. 

They are technologies that are here. 

And Mr. Chairman, when you said that—we put up your chart 

about oil and gas subsidies, you know, we started oil and gas subsidies in 1916 and it made sense, industrial revolution, investing 

in energy policy. But that is 19th century tax policy and energy 

policy at a time when we need to focus on the 21st. 

So my question would be this. First of all, I want to thank you 

for your support and the President’s support of an idea I put out 

last year to take up to $7,500 tax credit for consumers to buy these 

new vehicles, which is already paid for, and front-loading that at 

the time of sale so more people can purchase them and get the 

marketplace going. 

But one of the other areas that we have been very involved with 

is doing what other countries are doing in terms of financing, lowcost loans. You and I have talked many times about Section 136, 

which Senator Bingaman and I authored in the Recovery Act, and 

I am wondering, as we go forward, we are looking at about 35,000 

jobs nationally, thousands in my State that have come from 

partnering. We actually have Ford bringing back jobs from Mexico 

to Michigan because of the loan that they received to retool a plant. 

But I am concerned continually, Mr. Secretary, about the process 

taking too long. That is what I hear from the companies and I won-
875 

der if you could speak about the process, the hurdles in receiving 

this financing, which has been so critical to many companies to actually be rebuilding, retooling, and keeping manufacturing here in 

America. 

Secretary CHU. Thank you, Senator. First, I concur. I have read 

that book, also, and I agree with much of what it says. Its fundamental tenet is that America should not be willing to cede manufacturing to the world. Manufacturing jobs are particularly highly 

leveraged jobs because they institute supply chains and all the support services for the manufacturing, and finally the services for the 

workers who are in manufacturing jobs. 

Senator STABENOW. Right. 

Secretary CHU. So it is an extremely highly leveraged job and we 

should not even think of ceding manufacturing. We should—you 

know, I think our slogan should be, invented in America and made 

in America. 

Senator STABENOW. That is right. 

Secretary CHU. Now, regarding the foreign competition, I, too, 

agree with you. If you look at what China and other countries are 

doing, and the subsidies, tax holidays, very inexpensive money for 

loans, that they are luring American industries abroad to manufacture in their country. They are also developing a whole market for 

those products. 

China thinks it is mandated by 2020 to be 15 percent renewables 

and will probably get to 18, perhaps even 20 percent renewables. 

They are growing their nuclear industry. The reason they are doing 

this is, in part, because they want to go to a greener economy, but 

also in part because they see a world market for all these products, 

whether it is wind or solar or nuclear, you name it, or high-voltage 

transmission lines. So in that sense, the loan guarantee program 

is a very important part of how we can help industry get going. 

Now, if you consider the history of the loan guarantee program, 

it was authorized in 2005. I think the first appropriations were at 

the end of 2006, beginning of 2007. And when this administration 

came into office, not a single loan—— 

Senator STABENOW. Right. 

Secretary CHU [continuing]. Had been given. And if you consider 

right now, we have now closed or given conditional commitments 

to 23 companies, but we are still working to up that rate. We want 

to more than double it. The OMB and we are working very hard, 

and Treasury are working very hard to make it smoother. I will be 

honest, it can be done faster, better. It is an important part of what 

we need to do. 

And this is why we are asking in the 2012 budget for more authorization, particularly in the nuclear industry, in which I think 

it is very important we start the nuclear industry again, something 

where we were the leader. But in all the other, the clean, renewable energy sources and fossil energy, all those things could help 

with that, and we are working very hard with the other agencies. 

Chairman CONRAD. Thanks, Senator. 

Senator Cornyn. 

Senator CORNYN. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for being here and thank you for your 

service. You have had a distinguished career—continue to have a 
876 

distinguished career. But I want to ask you about the transition to 

this green energy future that you have described, which all of us, 

I believe, support from the standpoint of alternative sources of energy and reducing our dependence on imported energy and, hopefully, increasing our dependence on cleaner energy. 

How is it—well, let me just ask this question. Currently, the U.S. 

energy supply is about 83 percent fossil fuels, and the figure I have 

is that about 51 percent of the oil and gas that we consume in 

America, we are importing from foreign sources. How long will it 

take us to get from a situation where 83 percent of our energy supply is fossil fuels to a situation where, let us just say, half of our 

energy supply will come from fossil fuels, whether domestic or imported? Are we talking about a 1-year, 5-year, 10-year, 20-year, 

what time table are we looking at? 

Secretary CHU. Well, it is not going to be 1 year. I do not—— 

Senator CORNYN. It is not going to be 5 years, either. 

Secretary CHU. It is probably not going to be 5 years. But then 

beyond that, I think a lot of things will kick in. I think in four or 

5 years, I think there is a reasonably good shot a million cars, electric vehicles, but that is just scratching the surface because there 

are about eight million vehicles being sold now in the United 

States a year. It would really depend on what happens in battery 

development, and as mentioned before, for the first time in my career—I have been looking at this for a while, and when I was at 

Lawrence Berkeley Lab, I was on the scientific board of a new, innovative battery company, so I know a little bit about this—but the 

first time in the last 3 years, I am seeing things that are saying, 

you know, this is going to happen. 

Senator CORNYN. I hope you are right, but, of course, a lot of our 

electricity is generated by—— 

Secretary CHU. Right. 

Senator CORNYN [continuing]. Fossil fuels, either coal or natural 

gas, and we have to—so we cannot say that—we cannot imagine 

a fantasy world where all of a sudden, we are all going to be driving plug-in cars and we will not need fossil fuels from some source, 

correct? 

Secretary CHU. I absolutely agree with you. For the coming decades, fossil fuel has to be a very important part of—for the next 

half-century and perhaps beyond, it is going to have to be a very 

important part of what we do. 

Senator CORNYN. So here is my question. How is it, recognizing 

that we will continue to be dependent on fossil fuels for the near 

term and mid-term, how does it reduce our dependency on imported energy to raise taxes to the tune of $46 billion on our domestic energy producers, which the President’s budget proposes, 

which this budget proposes? 

Secretary CHU. Well, I think the President was calling for an 

ending of certain tax subsidies on fossil fuels that had its origination in the beginning part of the 20th century and—— 

Senator CORNYN. But you agree with me, however you want to 

characterize it, it will increase costs of production for domestic producers, correct? 

Secretary CHU. It will be, I believe, a very small part of the total 

cost of producing oil in the United States. 
877 

Senator CORNYN. Well, I think in conjunction with the policies of 

the administration with regard to the Gulf of Mexico, which has 

been a job-killer in our part of the world, in Texas and Alabama, 

the Gulf of Mexico, and reduced revenue to the Federal Government, the royalties from that production, and has made us more 

dependent on imported energy from abroad. 

I worry that, along with the additional tax burden, that an industry which employs 9.2 million people in America right now, by 

adding $46 billion in additional taxes over the next 10 years by the 

permitorium we have seen in the Gulf of Mexico—now the moratorium has gone away, but the difficulty of getting permits—and this 

vision of a green energy future that may occur ten, 20 years out, 

but it will not occur next year, what does that do to the average 

consumer that is now paying $3.38 for a gallon of gasoline, and 

with the geopolitical unrest that we are seeing in the Middle East 

and elsewhere, if the Suez Canal is blockaded, if the imports from 

the countries the Chairman mentioned were to occur because of 

disruption there? Is there not a very real danger of gasoline prices 

skyrocketing for the average consumer, and what would that do to 

our fragile economic recovery? 

Secretary CHU. Well, we are certainly very concerned about what 

will be happening to the gasoline prices in the near term, but we 

also have to keep in perspective the fact that, currently, the United 

States consumes about 25 percent of the oil produced in the world 

and we have about two or 3 percent of the known reserves in the 

world. And if you further consider the fact that within our territories we have scoured that much more than the rest of the world, 

you know, going to the future, those newer reserves, that fraction 

will be less. 

So while I do support an integrated plan which includes production of oil and gas, we cannot simply say, we can end our dependency on foreign oil by simply drilling our way out of the problem, 

given those numbers, 25 percent and 3 percent. 

Senator CORNYN. Well, and nobody is suggesting that we drill 

our way out of the problem. I think we all agree we need a 

plan—— 

Secretary CHU. Right. 

Senator CORNYN [continuing]. Really, what I would love to see is 

a plan that deals with every element of our energy sources here, 

and particularly domestic. But you have expressed great hope and 

optimism about research and development in electric batteries and 

other alternative sources of clean energy and I share that hope and 

I really do hope that we develop alternative sources because I think 

it is going to take all of the above to get us there. 

But you also would acknowledge that we have seen a tremendous 

14fold increase in the amount of natural gas reserves here in the 

United States because of the development of new drilling technology and the fracking techniques that you alluded to earlier. So 

is that not an area that we also ought to continue research and development to see if there are ways we can gain access to domestic 

energy sources rather than just ignore that altogether and put all 

of our hope, all our eggs in the basket of something being deployed 

ten or 20 years in the future? 
878 

Secretary CHU. No, we are certainly not ignoring that, and it is 

a wonderful thing that the development of the technologies that 

allow us to frac the shale rock to release natural gas. I am certainly looking at what the projected increase in reserves are. I hear 

estimates all over the map. The EI estimate is much less than that. 

But that is neither here nor there. I think as we go forward in 

time, as the extraction methods get better and safer and all those 

things, I think those estimates will grow. I am not sure it is going 

to be 14 times. 

But it is a good thing that is happening because this is energy 

produced in our borders and it is a cleaner form of energy and gas 

will be a transition fuel that we will need in the coming decades, 

and—— 

Senator CORNYN. Mr. Chairman, thank you for your indulgence. 

I would just add that this is jobs here in America, too, right? 

Secretary CHU. Right. Absolutely. And that is one of the reasons—all of the electrification, actually, is using energy produced 

in America to power our vehicles. 

Chairman CONRAD. Let me say this to my colleagues. The vote 

is scheduled for 11. Senator Whitehouse is next on our side, then 

it comes over to Senator Portman. My intention is to leave now, 

have Senator Whitehouse proceed, and I think, Senator Portman, 

if you would leave now, there would be a prospect that you could 

be back after this vote and have your chance, and then we will just 

keep going back and forth. 

So if, for whatever reason, we are getting on the second sevenand-a-half minutes, Senator Whitehouse, and you are done with 

your questioning and nobody is here on the other side to proceed 

with their questioning, you just put the committee in adjournment 

so that you do not miss the vote, OK? 

Senator WHITEHOUSE. Very good. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE [presiding]. Thank you, Chairman, and 

thank you, Secretary Chu, for being here. 

There is an image that I recall of a lineman who has climbed up 

a telephone pole and he is installing on the top of the telephone 

pole an array of solar cells. It is a picture that I recall because it 

was taken the year that I was born, back in 1955, and it is a reminder that America invented solar cell technology. 

And yet as you look around, as a country, we are fifth in solar 

component manufacture now. Only one of the top ten companies in 

the world that is engaged in solar component manufacturing is an 

American company. And we seem to have slipped in terms of our 

competitive advantage in this market—and it is not just in this 

market, it is true, as well, in wind turbines. 

I am from Rhode Island. We have the potential of a very significant wind turbine farm going in offshore. It has considerable prospects for our energy portfolio, for clean energy, for ultimately lower 

costs, but mostly for the assembly and installation and construction 

jobs in Rhode Island, which we now desperately need. 

So in that context, I would love to get you to talk a little bit more 

about when it makes sense for the government to take a role in encouraging investment, and in particular, I think you have already 

described in your testimony that this new clean energy market is 
879 

a rapidly emerging market and it is also a potentially enormous 

market. I do not know if you heard John Doerr’s testimony. He was 

one of the most successful investors in the entire tech revolution 

and he now observes that the energy revolution is going to be six 

times bigger than the tech revolution in terms of the money at 

stake. 

Is there a particular role where it makes sense for a government 

to encourage early investment at the beginning stages of what can 

foreseeably be described as a rapidly emerging technology to protect against foreign competition or protect against being overwhelmed, really, by foreign competition in those markets? 

Secretary CHU. Yes, there is a government role, but before I answer that, I might also add, at the institution I used to work at 

for 9 years, Bell Laboratories, invented that silicon photo cell. To 

have the leadership slip and the production exports slip from the 

United States is—even in the mid-1990s, we were the leader in the 

world—— 

Senator WHITEHOUSE. Yes. 

Secretary CHU [continuing]. And now it is clearly over in Asia 

and China is clearly—really wants to dominate this market today. 

Senator WHITEHOUSE. And how does that work? Is there an economic theory by which the bare investment is justified to try to 

capture an early emerging market and take a technological lead? 

Secretary CHU. Yes. What they and—but it not only China, it is 

Japan, it is Korea, the EU countries. What they are saying is, OK, 

we have certain mature technologies, but there are some rapidly 

growing technologies and their crystal ball says it is highly likely 

that these technologies will become a dominant growth industry in 

this next decade, from now until 2020. And they think that this is 

going to be the place of major economic growth, and they made no 

bones about it. 

And for that reason, you have these, you know, no corporate 

taxes in Asia type of policies. You have inexpensive money in Asia 

type of policies. And you have a bevy of engineers being trained in 

those countries that can work on these things and to drive the 

processes down. The myth of cheap labor is simply a myth. Most 

of the cost of these things is in the capital expenditures and in the 

engineering to drive the quality up, the production costs down. So 

these are highly roboticized factories. 

Senator WHITEHOUSE. So if you had to make a choice, if you were 

a government and you had to make a choice between subsidizing 

a mature extractive industry and an emerging clean energy industry, which is more or less the facts that we have before us, justify 

for me the investment in the clean energy rather than the mature 

extractive industry. 

Secretary CHU. Well, the United States has a history of having 

government support in emerging industries which it thinks is going 

to be important. 

Senator WHITEHOUSE. Has it worked in the past? 

Secretary CHU. It has worked in the past. As mentioned, actually, the oil industry was subsidized in the early 20th century until 

today. 

The airplane industry, even though we invented the airplane, the 

leadership went very quickly to Europe, and by the end of World 
880 

War I, it was noticed that we could not compare in the technology 

and the United States, beginning with Woodrow Wilson, started an 

Aeronautics Board and said, we need to support this industry. How 

can you support this? You get airmail delivery, that the government would sponsor airmail delivery so there was a market to encourage people to build better planes that would solve that need. 

The military played a huge role in that. 

So we rebuilt an air industry that was important for our national 

defense, important for commercial things. It did not spring out of 

the private sector alone. There was help from the government. And 

so—— 

Senator WHITEHOUSE. So investing in emerging new technologies 

has a long and successful American pedigree—— 

Secretary CHU. Right. 

Senator WHITEHOUSE [continuing]. Across Republican and Democratic administrations alike. 

Secretary CHU. Right. The semiconductor industry, the transistor 

was invented at Bell Labs. It was a monopoly. It had the wherewithal to invest in this long-term research. It took more than 10 

years to develop that technology. But the first transistors were not 

competitive with tube technology, and for the first two decades, 

guess what was the first buyer of all the semiconductor material. 

It was the U.S. military, because they knew full well that they had 

to nurse this along and nurture it and it became a dominant force 

in wealth creation in the United States. 

So again and again and again, the government said, these are 

the things—and it was fundamentally a nonpartisan issue, Republican Presidents, Democratic Presidents, Republican Congresses, 

Democratic Congresses, said that this is what you do in order to 

nurture a beginning industry which we think will be a dominant 

force of wealth creation in the future. 

The United States did it. Other countries have taken from our 

playbook and are now doing it. And for us to say, well, we do not 

want to do this anymore, simply does not make that much sense 

to me. 

Senator WHITEHOUSE. If you compare extractive industries in 

which demand competes for a diminishing supply with technological industries in which technological advancements and increased demand have a history of lowering cost—I have my BlackBerry right here. I see behind you, you have a staff person with 

his iPad up. I can remember the days when a simple calculator was 

a very expensive thing to buy. Now they are so cheap, people give 

them away. The price of technology, I believe, tends to have a 

downward curve, whereas the price of extractive industries tends 

to have an upward curve, inevitable from supply and demand in 

that case. Is that an additional argument for getting on the side 

of technology and not just extraction? 

Secretary CHU. Yes, I would say that technologies in all areas, 

including actually oil and gas, actually improved. But with an extractive technology there is something else you are fighting. As the 

technology improves, as we see ourselves—the multinationals have 

to go harder-to-access oil, deeper offshore, Arctic regions, much 

more expensive. A deep offshore rig now costs $2 to $4 billion for 

a major platform. 
881 

So even though their technology is getting better, they are fighting this other thing, that you have to go to more inaccessible oil, 

and it gets more expensive. And you can compare that to looking 

around and saying, well, you know, one-hundredth of 1 percent of 

the energy hitting the sun for a day can power the world for a year, 

so can we figure out a way to capture a small fraction of that energy, store it when needed? Because if we do, and if we can do this 

in a decade or two, then we would not be. 

Senator WHITEHOUSE. Another potential win big seems to me to 

be turning what is presently nuclear waste into nuclear power. And 

I know that there are a few emerging technologies that promise or 

suggest an ability to take what is now an expensive-to-dispose-of, 

poisonous, dangerous, potentially proliferation and, you know, dirty 

bomb, national security-related problem, and through the use of 

that technology be able to turn that into clean nuclear power. How 

are you investing in that? Do you see those technologies as credible? And is there an added value to investing in them because it 

helps solve the problem of the nuclear waste that is now scattered 

at various power sites around the country? 

Secretary CHU. Sure. First, as you know, I am a big supporter 

of the nuclear industry getting restarted. I think it should be and 

has to be part of our energy diversity in this century. 

What you speak of, the fact that in our standard nuclear power 

plants we put in the fuel, lightly enriched uranium, and we have 

right now a once-through cycling, about 1 percent of the energy 

content of that material is used. 

After that, you have a used fuel rod, and just imagine—now, we 

will naturally evolve, and we are doing short-term research to help 

the industry double that, which doubling is great, but it is only 2 

percent. And so if you can say let us not go from 1 percent to 2 

percent, but what do we need to do in order to go from 1 percent 

to 20, 30, 40, 50 percent? That means for the same amount of nuclear material you get 20, 30, 50 times more electricity. 

Senator WHITEHOUSE. Yes. 

Secretary CHU. Which means for the same amount, that much 

less waste. And so we think that it is very important—but this is 

a tough long-term thing in order to invest in that technology. 

I can tell you that right now today we do not have the technologies that we think are cost effective and cost competitive, but 

there is time to figure it out. 

Senator WHITEHOUSE. When you say cost competitive, are you 

taking into consideration the proliferation hazard that these rods 

lying around with no purpose and the disposal problems, if they 

are left with no other use other than to be poisonous, hazardous 

waste? 

Secretary CHU. Yes, but there is also—with today’s technology 

that is being used by France and Japan, notably, the recycling 

technology they are using, which was invented in the United 

States, actually presents a proliferation problem, and it is not cost 

effective either. You know, Japan unfortunately has discovered this 

because their costs of their current recycling have more than tripled. 
882 

Senator WHITEHOUSE. Let me hold a moment because I am getting a different instruction than I had before about the management of this hearing and the vote. 

Senator THUNE IS HERE. He is waiting to ask questions. Has the 

Senator been over and voted? 

Senator THUNE. No. 

Senator WHITEHOUSE. No. Well, the two choices we have here are 

either to go to you, and you are going to have a very close run at 

making the vote, or to wait a few moments longer for somebody to 

return, and then we can both go vote. 

Senator THUNE. I am fine with proceeding. I am happy to make 

the run to the vote. 

Senator WHITEHOUSE. So you would care to proceed now? 

Senator THUNE. Yes. 

Senator WHITEHOUSE. We will do so, and you can make your 

dash. 

Senator THUNE. Thank you, Mr. Chairman. 

Mr. Secretary, thank you so much for being here and, again, for 

your service and for the work that you do in what is one of the 

most important areas that we deal with in this country, and that 

is our energy sector. It has enormous potential to create jobs to 

grow the economy and reduce the Federal deficit. Unfortunately, if 

you do not have the right policies in place, you can get the exact 

opposite outcome, and I fear that sometimes our energy and environmental policies act to destroy jobs and economic growth and are 

not a good service to our taxpayers at the same time. 

I know as we look at your budget for this year, there is a significant proposal in there for an increase, and some of that I know is 

attributable to the additional demands on account of the new 

START treaty, but we obviously have to, at a time when everybody 

else in this country is tightening their belts and trying to do with 

less spending, make sure that our budgets are following that basically same approach. 

But I wanted to raise a couple of issues with you, if I could, and 

one has to do with—and I know this is not directly under your jurisdiction, but they say that there is as much as $2 trillion in capital sitting on the sidelines right now because of the economic uncertainty that exists today, some of which is being driven by policies coming out of Washington. Much of that is—at least folks that 

I deal with, small businesses and others, suggest that a lot of that 

has to do with policies coming out of EPA. 

I guess my question has to do with whether or not you believe 

that the Clean Air Act is the best approach to limiting greenhouse 

gas emissions. 

Secretary CHU. Let me respond by saying that I think the President has—I think in terms of going forward and transitioning to 

a clean energy economy, which will actually put us on the forefront 

of being able to export abroad those technologies we develop at 

home, one would much prefer to have it through the legislative 

process. 

One of the things that has been proposed—I am a very big fan 

of this—is a clean energy standard that includes, you know, half 

credit for gas if it is combined cycle gas, again, a very efficient gen-
883 

eration of electricity by gas, but it also includes nuclear, it includes 

wind, solar, new hydro. 

If you do that and you give it a long enough leash—and the 

President proposed 2035—that clean energy standard will allow 

the development of technologies so that you can be sure that you 

can build nuclear reactors in a cost-effective way, on budget, on 

time; that you can further develop the technologies for clean coal 

and other carbon capture sequestration methods; that just simply 

saying that this is going to be the goal of what we need, we have 

seen this in States. When States do this it provides market certainty to that $2 trillion, because then all of a sudden a company 

says, OK, if I build it—and the Federal Government is not going 

to pick winners. They could say, you know, if you can do it by wind 

or if you can do it by solar or if you can do it by nuclear or combined cycle gas, you do this and you get credit for it, that means 

that the financial institutions can say, OK, we will loan you the 

money because if you do this, you will have a market. 

So the investors will have that certainty. I think the long-term 

planning—and we have seen this in States that have done this, 

that all of a sudden there is a much longer-term planning, the electricity transmission and distribution lines, it creates market certainty. And you say if you do the right thing and it is cost competitive, you will have a market. 

So we think that that will relieve a lot of the uncertainty that 

is now—and I agree with you. There is—I do not know whether it 

is $1 trillion or $2 trillion—a tremendous amount of capital sitting 

on the sidelines, which means not driving the engine of the United 

States and jobs. 

It is a very light touch. We established this goal; industry, you 

figure out what is the best solution. And each State and each region can figure out what is the best solution. 

Senator THUNE. But the way to accomplish that—I have come 

back to my original point, and you suggested this—would be some 

direction from Congress. What EPA is doing today I think is making it very, very difficult for businesses out there to create jobs, and 

it strikes me at least that if you are concerned about private investment, getting that capital off the sidelines, getting jobs created, 

and growing the economy, the approach that they are taking right 

now is completely contrary to that. 

You mentioned a clean energy standard. How would you treat 

gas, clean coal technologies? You mentioned increased hydro. We 

have a lot of hydro in my State, as does the Chairman. How would 

those be treated under a clean energy standard in your estimation? 

Secretary CHU. Sure. Hydro is clean energy. I think gas, if you 

look at combined cycle gas, it is more efficient than the most efficient coal plants. It is 55, going to 60 percent efficient in terms of 

the amount of energy you get out, and it has, by its very nature, 

less carbon emissions. So as you take the combined cycle gas plant 

and compare it to a new high-efficiency coal plant, roughly speaking you get twice as much electricity for carbon emission, so we 

count that as half. 

Now, if you come along and develop a technology that grabs 80 

percent of the carbon from coal or 90 percent, you just pro rate it 

that way. 
884 

So what that means is if—that is another incentive for the utility 

companies to begin to invest in pilot demonstrations of clean coal 

technologies, because they can say, OK, there is going to be a market, and if you are a coal State and there is a lot of abundant coal, 

you can say we can develop those technologies. Now, the development of those technologies, I firmly feel that the Federal Government has to do a lot of the research to help the companies to develop those technologies. But having said that, if you have those 

technologies, again, 2035 is a long enough lead time where we are 

pretty confident they will be developed by then or even—because 

they have to be actually developed 10 years before then in order 

to get a business plan going. And so 2025 we think is a long 

enough lead time where we can dramatically bring down the costs 

so it looks like a good business investment. 

Senator THUNE. Well, and I hope that you consult with Administrator Jackson about that approach and having Congress come to 

some solution as opposed to having these regulations coming out of 

EPA, because I talk to groups all the time, and I hear that over 

and over and over, that what they are doing over there is making 

it incredibly difficult. 

I have to go vote, and thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator MERKLEY. Senator MERKLEY. Thank you, Mr. Chair, and thank you, Mr. 

Secretary, for your testimony and your leadership. 

Senator Cornyn was talking about the importance of a plan to 

end our dependence on imported oil, and indeed certainly that 

echoes a sentiment of mine. We have so many technologies that we 

are talking about at this point, including electric vehicles, plug-in 

hybrids, the use of more natural gas for trucks, many technologies 

that increase the fuel efficiency of trucks, the shift of trucking to 

rail, et cetera, et cetera, et cetera. 

What has been missing, in my thinking, is for the Department 

of Energy to lay out a plan for how we are going to over a period 

of some time—because it does take time to, say, shift fleets—end 

our dependence on foreign oil? Is there any prospect we might see 

a plan like that from the Department in the course of the coming 

year? 

Secretary CHU. Well, we are beginning—I am so glad you asked 

that question because this is something where I think in the past 

we would say, OK, this looks good, we will fund this; that looks 

good, we will fund that. But we are now going about it in a slightly 

different way. It is a very hard look. Without Department of Energy help, where is business going? And what is its timeline? What 

can we do in the Department of Energy to accelerate it? And what 

price point can we get to at any given time? And it is those price 

points—because energy, you know, fundamentally the investments 

in energy and how it is, it is about money, and you have to bring 

prices down in the new technologies. And what is the timeline you 

say? You know, can it be done in 5 years, 10 years? Or is this so 

far—you know, 20 years means, well, we are not really sure. 

And so we are developing this. We are looking at this in every 

sector, and it now cuts across all of the Department. For example, 

in photovoltaics, we are able to attract a very talented individual— 
885 

who happens to be a personal friend of mine, Arun Majumdar, a 

professor at Berkeley—to say, OK, we have had our Sputnik moment on energy; the equivalent of the moon shot is not a sun shot. 

What do we need to do in order to bring the price of electricity generation down to—the full cost, what is called the levelized cost 

down to be competitive with gas or coal? And how far will that be? 

And so now all of a sudden this program is going to cut across 

all the lines within the Department to say what is it we can do. 

And so we are doing this for every technology—biofuels, coal, transmission and distribution, battery storage, battery storage for vehicles, but also for utility scale. And so we will be developing this 

plan. 

In addition to that, we are working—there was a PCAS report, 

Presidential Science Commission, that suggested—in fact, it was 

spurred by requests I made of them, to say what can we do in the 

Department of Energy to help the country’s goals in energy. They 

made a recommendation that said, Why don’t you develop a longerterm plan, what they call a Quadrennial Review, which has been 

done in the Department of Defense and now in State, and they 

made that recommendation to the President and we are enthusiastic about it and intend to go forward with that. We are now 

working with OMB and then soon with relevant agencies within 

Congress going forward. And we would like to actually do in a very 

short time scale the first version of that. It is a technology review 

to address precisely what you want to do. 

Senator MERKLEY. Well, thank you. I am very glad to hear that, 

and it is certainly appropriate to incorporate the vision for how 

costs will play into this. 

Quite frankly, most of our estimates about cost are always a bit 

of because the world changes in ways we do not anticipate. Certainly the drop in natural gas and the increase in the supply are 

a good example of that. But, crudely, the projections are that 20 

years from now we will be importing between 8 and 9 million barrels per day without our changes in technology. 

Four Senators have put out a plan as a bill that lays out a pathway to reducing our consumption of oil by over 8 million barrels 

per day, which more than exceeds our non-North American imports 

20 years out. This is without the sophistication that the expertise 

of your Department can bring to bear. But I think when you complete this vision of wrestling with the cost lines, I think you will 

have all the data to do a much more sophisticated version of a 20- 

year plan or less to end our dependence on foreign oil. 

Now, clearly, that does not end our dependence upon or our concern about price shocks because it is a global oil market. 

Secretary CHU. Right. 

Senator MERKLEY. But it does play a lot into our understanding 

of our national security challenges from being dependent on overseas oil. So I would really encourage you with considerable enthusiasm to translate all that data into a road map, recognizing the 

road map will change, because the world will change and we cannot envision accurately all the ups and downs. But I think it would 

give us a pathway to seize hold of. 

We have proposed, the Senators who have put this forward have 

proposed having a Department of Energy Security that is an ongo-
886 

ing—not a full department but actually a council like the National 

Security Council—to keep pushing so that between administrations 

or the transition of administrations we can fulfill a 20-year plan. 

That, too, I think is part of a plan I would love to see the administration come forward with. Lay out a 20-year vision but then a 

structure for how we make that vision happen, knowing that we 

will have to adjust the changing dynamics over time. I just think 

that sort of understanding—it is like a business positioning itself 

in a smart way strategically. And we need to position ourselves as 

a Nation not to be dependent on overseas oil. And in the process 

it creates a lot of jobs at home and does a lot of good for the environment. So obviously I am spending a lot of time on this just to 

try to root for it as much as possible. 

Secretary CHU. I could not agree with you more. And, in fact, 

when you said do it like a business, that is exactly the way we are 

trying to do it. If we think more as, you know, green eyeshades, 

what are we going to do, you know, it is a competitive world out 

there. There is going to be a race as to who is going to develop 

these technologies first, and we want to get them and we want to 

win this race. So treat it like a business. 

So that is why we are saying, OK, the traditional boundary and 

traditional way of thinking cannot go forward, and it has to be a 

business plan that looks out into the future, knowing that a technological breakthrough can be totally upended, and that is what we 

really want. But you also make plans. You know, you do not want 

to make—sail on on what we are doing hoping out of the blue some 

miracle might happen. You know, you do not make plans hoping 

for a miracle. But you make miracles much more likely with a better plan. 

Senator MERKLEY. Great. Thank you. My time is up. On your 

way out, I will give you the copy of the plan that the four Senators 

put forward, ‘‘America Over a Barrel: Solving Our Oil Vulnerability,’’ and I will look forward to when you can hand me back a 

plan from the administration of a more sophisticated strategy. 

Thank you. 

Chairman CONRAD. Thank you, Senator. 

Senator PORTMAN. Thank you, Mr. Chairman. 

Dr. Chu, good to see you again and have you before the Committee. I am going to followup on Senator Merkley’s comments 

about a plan and also focus, I hope, on two issues: one is nuclear 

and natural gas. You just said we are living in a more competitive 

world, and you are right. Senator Sessions has also reminded us 

that we are living in a time period of not just more competition but 

more budget constraints. And to me this means that we need to determine ways to unleash the American potential to create sources 

of energy right here. And I would associate myself with some of the 

comments earlier of some of the members on both sides on clean 

coal and other technologies, but let me focus on nuclear, if I could, 

because I think that may be one we have not gotten into as deeply. 

As you know, I am very concerned about the slow pace on the 

loan guarantees. I think it is fair to say that nuclear is the only 

baseload emissions-free option that we have. It is U.S. based. It 

will create a lot of jobs, and it is critical in terms of our dependency 

on foreign sources, but also in terms of having cleaner energy. And 
887 

the infrastructure is aging, as you know. Plants are getting older. 

They are less efficient. We should certainly be encouraging upgrading our energy infrastructure generally. As you know, I have been 

specifically involved in the front end of that on the enrichment 

side. And when you look at the track record since the beginning of 

this administration, I think there has only been two loan guarantees on the nuclear side. The last one was about a year ago, one 

of which is conditional. And that, of course, goes to a French-owned 

company on the front end, which is nuclear, but it is really uranium enrichment. 

So I guess my question to you would be—you said earlier your 

goal was to double renewable loan guarantees. What is your goal 

on nuclear? And what can we do here in the Congress to get these 

loan guarantees moving? And then I want to followup with some 

specific questions about enrichment. 

Secretary CHU. Sure. First, in the President’s fiscal year 2012 

budget, we are asking for an additional $36 billion in loan guarantees. We have made one conditional commitment to the Vogtle 

plant for two new reactors. We have another three projects before 

us, and then after that, another four. And so we are actively working on the first three. 

I think it requires additional loan guarantees, and it requires 

other things. A great stimulant to nuclear energy would be a clean 

energy standard, quite frankly, because that says if you build a nuclear power plant, you get credit for this. And many regions in the 

United States say this is part of it. So it is a market draw. The 

loan guarantees will help industry get started, provide the assurance that you can build these reactors on budget, on time. 

Then in addition to that, we are helping—we think there is a 

great opportunity in the United States for the development of small 

modular reactors, and so instead of reactors that are 1,000, 1,500 

megawatts of power, these would be more of the scale of 100 

megawatts of power, maybe 200 megawatts, maybe 50 megawatts. 

The advantage of that is—well, first, the reason we built these 

very large reactors is you get an economy of scale. There was a 

very long licensing period, approval period, things like that, so you 

built one big one. The only trouble is when you build one 

humongous one that the full costs could be $8 billion plus, this is 

a huge asset and so, you know, this is a large fraction of the cap 

ex of a utility company. So if you build a small or large reactor that 

can be built in a single factory, the economy of numbers can then 

compensate for the economy of a single one. 

The electricity infrastructure in many parts of the United States 

could not even accommodate a 1.5 gigawatt reactor. And it is something where we think we can begin to retake back the lead in nuclear technology. We made the first nuclear reactor in the world in 

the United States. But that lead has gone to France, it has gone 

to Japan, it has gone to Korea, and now China want to take that 

lead. So we are no longer major players. GE and Westinghouse are 

majority owned by Japanese companies. But to be sure, these companies, GE and Westinghouse, many U.S. engineers are still part 

of this. 

So we want to restart the nuclear industry. We also want to 

start—— 
888 

Senator PORTMAN. Let us not forget Babcock and Wilcox. 

Secretary CHU. Oh, Babcock and Wilcox. 

Senator PORTMAN. Modular units like mPower. 

Secretary CHU. Right. 

Senator PORTMAN. But let me just back up for a second, if I 

could. It is fine that you are asking for more money for loan guarantees. The question is: You have loan guarantee money in the 

pipeline; how do we get it out? 

I agree with you on modular. It seems to me—you are the expert, 

literally the scientist on this, but it seems to me it makes sense for 

a lot of reasons, including commercial reasons. But there has to be 

a demand for it, and there has to be a clear pathway through the 

regulatory process. So what can we do to get utilities to move forward and get you to get these loan guarantees out so we can actually begin this nuclear renaissance? 

Secretary CHU. Well, I think if you look at the dynamic of what 

is happening, there is uncertainty. For example, there will not be 

a price on carbon in the next couple years. The cap and trade is 

not going to be revived for the next couple of years. And so that 

is why the clean energy standard is a market draw that allows that 

to go. 

The low price of natural gas also has an influence on economic 

decisions of investment, and so—but when you build a nuclear reactor, this is a 70-year horizon, and we do not really know what 

is going to happen to the price of natural gas in 70 years. We know 

in the next 10 or 20 years it is probably going to be a lot lower 

than it has been in the past. But it is still a very volatile commodity. 

And so that is why we need to diversify our energy supply, and 

that is why I think nuclear is very important in that. But there are 

all these other factors, and to the extent that the Federal Government can say, OK, there is a market for clean energy and nuclear 

counts full, whereas natural gas might count half, we think that 

that would be a stimulant. But as these companies go through this, 

we still see a lot of interest in trying to get it going, and we are 

looking at those companies. 

Senator PORTMAN. I would love, if it is all right, to do some followup with you on this, maybe just look on paper at what is exactly 

your goal on the nuclear side. You mentioned doubling on the renewable loan guarantees. How would you measure your success or 

failure to get there over the next couple years? And what do we 

need to do specifically to get some of these loans going? 

On enrichment just for a second, do you think we need a U.S. 

source of enriched uranium? 

Secretary CHU. Yes. 

Senator PORTMAN. Do you think we need a U.S. sort of tritium, 

which is so critical to your nuclear arsenal? 

Secretary CHU. Yes. 

Senator PORTMAN. And any update on the loan guarantee for the 

Piketon plant? We are, as you know, very concerned about that and 

particularly concerned that this may be a pivotal time over the 

next few months in order to keep the project going? 

Secretary CHU. Right. I think, you know, we are—specific loan 

guarantees, as you know, I really cannot talk to you about that, but 
889 

I do believe that we do need a domestic enrichment technology. It 

is important for our national security, let alone our energy security, 

which are now so intertwined I do not really draw a distinction between our national security and our energy security. And so I do 

believe it is important that we develop technology, a leading technology in the United States. 

Senator PORTMAN. Thank you, Dr. Chu. 

Chairman CONRAD. Thank you, Senator. 

Senator BEGICH. Thank you, Mr. Chairman. 

Thank you, Secretary Chu, and thank you for coming up to Alaska and especially to rural Alaska, and Hooper Bay was one of the 

locations you went to, and I thank you for that. 

I have a couple questions, and just by circumstances and timing, 

I just finished meeting with Mayor Hopkins of Fairbanks North 

Slope Borough, and in Alaska, as you saw, the cost of energy is 

high. In some cases, you can be as low as $4—and I say ‘‘low‘‘— 

for heating fuel to as much as $11 or $12 a gallon for heating fuel. 

So the economics for some of the projects are important. 

I am going to give you a little frustration, but it is really an ask 

to have you review, and that is, Fairbanks, which is a cold climate 

area—today I think they are 20 below. The last 60 days they have 

failed their PM2 air quality 50 times, so EPA, of course, is going 

to tell them, you know, shame on you, we are going to take highway money away and everything else. 

But one of the things they are doing is starting to truck in gas, 

truck it in, because there is no pipeline access there. In order to 

do that, they have to have an LNG plant, they have to have storage 

and so forth. So they are going to be meeting with your folks tomorrow to try to see if there are opportunities for loan guarantees 

in doing that project. 

This is the frustrating part. On the one hand, EPA says clean up 

your air. So they say, OK, let us use clean-burning gas, but there 

is no one to help in figuring out this problem. But it is a Federal 

rule that is telling them they have to do it. So I am hoping that 

there is some coordination between these kind of activities. They 

are going to be in your office or with your folks tomorrow. I am just 

putting the bug in your ear now because it is very frustrating to 

me when the climate conditions themselves are—we cannot change 

30 below. It is what it is. But can we move down the path? Yes, 

we can with some gas issues, which is a better fuel than some of 

the stuff they use now. So I would hope at least you would consider 

that when there is a Federal agency putting the requirement on. 

The second part of this is we have strategic military bases there; 

4,500 Striker Brigade members are leaving in the next 2 months 

to go to Afghanistan to fight the war there. But they are stationed 

right there in Fairbanks. And one of the big issues the military 

keeps bringing up is air quality. And yet we have a solution, but 

we cannot get DOD, EPA, Energy Department, who all have—it is 

all the same pot of money—to figure this out in order to protect our 

energy resources up there, make it economical to clean the air and 

make sure we have a very strategic air base and army base continuing to operate. 

So this is just kind of a statement. It is a little frustration, I got 

to tell you, after hearing what I just heard about an hour ago in 
890 

this meeting. So I would hope you would at least have your folks 

look at that. 

The second piece is—and you talk about gas, and I appreciate it, 

and this is one I am just going to ask you if you could come back. 

In the 2012 budget, there is an amount of money, $17 million, that 

goes into the North Slope. It is a partnership that the Department 

of Energy has had for many years in developing gas resources and 

understanding the research, and it is called the Barrow Gas Field. 

It has been very successful in having that whole community on gas, 

for example, but also looking at new technologies. But it has been 

totally eliminated out of your budget, and this is how it reads: ‘‘The 

detailed justification’’—that is what it is listed under. It ‘‘reads: 

‘Consistent with the administration policy to phaseout inefficient 

fossil fuel subsidies.’ ’’ That is it. That is the detailed justification. 

I would say that gas, which you have mentioned more than once 

here, as well as others, Secretary of Interior, EPA, the President, 

is a very important part of the equation in dealing with our longterm energy policy. So if I could get a little more justification, because honestly this is an incredible project that has brought great 

technology to the field when it comes to gas, oil and gas exploration. It is why in a lot of places—and the Chairman’s State is 

very successful, it is because some of the gas exploration technology, fracking as well other things, were developed in Alaska. 

So just help me understand it and why you have cut that from 

your budget totally, not even lowered it but totally eliminated it. 

Secretary CHU. Well, I am not sure which one. I know of one 

item of gas in Alaska that was shifted from fossil energy to the Office of Science. This is a—it is a cooperative research with, I think, 

Conoco—— 

Senator BEGICH. It is Conoco. 

Secretary CHU. Yes, OK. So that is the one. So that one is one 

that is looking at research into whether one can extract gas from 

methane hydrate formations under the ground. I actually support 

that, and it has been transferred over into the Office of Science, but 

we hope to continue—and it is a research thing. It is not a subsidy 

of oil and gas, and—— 

Senator BEGICH. Well, I agree with you. The justification 

seemed—— 

Secretary CHU. Right. And so—but it has not been killed. That 

program has been moved over to the Office of Science and what we 

want to do is we want to do research. Again, if you look back in 

the fracking, long before, the major oil and gas companies were not 

interested in that. 

Senator BEGICH. That is right. 

Secretary CHU. They did not think it would—— 

Senator BEGICH. Would produce anything. 

Secretary CHU. Right. And so in terms of research, we think that 

there—you know, it is difficult. Methane hydrates, as you may 

know, they were found because they plugged up oil and gas 

lines—— 

Senator BEGICH. That is right. 

Secretary CHU [continuing]. Because as you release the pressure, 

it freezes—— 

Senator BEGICH. Right. 
891 

Secretary CHU [continuing]. As we saw, actually, in the Gulf of 

Mexico, in the deep Gulf. And so—but there is a tremendous 

amount of natural gas in methane hydrates, both underground and 

off the continental shelf. If you think that fracking of natural gas 

can perhaps double our natural gas supplies, if you can safely, environmentally, responsibly extra methane hydrates—— 

Senator BEGICH. It is huge. 

Secretary CHU [continuing]. It is much bigger. 

Senator BEGICH. That is right. 

Secretary CHU. And then you can really think of doing things 

like reforming natural gas to hydrogen and sequestered carbon. 

There are many opportunities. But it is still research, and—— 

Senator BEGICH. Good. So I am going to hold you to that, because 

I have only got about 30 seconds left. 

Secretary CHU. OK. 

Senator BEGICH. But let me just say that what I hear you saying 

is it is transferred. It is still happening on some level of research. 

And the language that was utilized in justification may not have 

been the most accurate in description of what happened to that. 

Secretary CHU. Yes. I have personally known about that program 

for a couple of years—— 

Senator BEGICH. Right. 

Secretary CHU [continuing]. And I am very positively disposed to 

it because it is research. It is not—again, it is not underwriting of 

commercial interests, because right now, the gas companies are 

staying away from it, quite frankly, the oil and gas companies, because—— 

Senator BEGICH. But in this case, we have a partner, which 

is—— 

Secretary CHU. Well, it is not only a partner. We need this partner because they actually have the equipment that we could not— 

so they are actually, in a certain sense, loaning us—they are 

using—ConocoPhillips–BP is loaning us this equipment, if you will, 

working with us. The program is dictated by the Department of 

Energy research scientists-—— 

Senator BEGICH. Right. 

Secretary CHU. And they are willing to say, OK, we will partner 

with you. You can—because we could not afford—— 

Senator BEGICH. I hear you. Let me end there and just ask one 

question. Does the President have an energy team that is developing an energy policy for this country, and who are they? And I 

will leave it at that. 

Secretary CHU. Yes, and this was actually in an earlier question, 

asked before. We have not in the past had a coherent—I would 

start with, more modestly, first, where we are in energy technology 

and where the most probable outcomes will be in the coming years 

and what the cost will be. And so we are embarking—I talked yesterday to the OMB about this and it is set in plans, and my next 

step would be to Senator Bingaman and Murkowski’s committee to 

talk to them about it, but to be able to start a review of the technologies that would then form a basis for the energy policies. You 

need sort of a knowledge of the technologies, where they are going, 

and how might they be accelerated, and then from that you formulate policies, and that is our intent. 
892 

Chairman CONRAD. Senator Cardin. 

Senator CARDIN. Thank you, Mr. Chairman. Secretary Chu, it is 

always a pleasure to have you before our committee. 

Just following up a little bit on Senator Begich’s point, it seems 

to me, though, that to have an energy policy that is going to be 

right for America, that three goals must be met, and that is one 

of energy independence so that we are not held hostage to countries who disagree with our way of life or circumstances that happen globally that disrupt our economy and our security. 

And second, we have to do it in a way that is smart for job 

growth. Clean energy is a way that we can create more jobs here 

and keep more jobs in America. 

And then, of course, third is the environment. This is a serious 

risk we have on the environment. In your exchange with Senator 

Portman, you sort of gave up, and I think it is right, that we will 

not be able to pass a comprehensive bill. We tried that. I think that 

is regrettable because I think until we have a proper price for pollution, it is going to be very difficult to put in place an energy policy that is right for America. 

So I do not want to give up on the pricing of carbon. I do not 

want to give up on the way of energizing our economy to solve 

these problems. But I do think we have to look at steps now that 

are politically realistic, and I think the way that you have presented it is what we will need to do. But do not ever give up where 

we need to be as a nation, not only for America’s security, but for 

international leadership on a lot of these issues. 

I want to ask a specific question, following up on Senator 

Portman’s comments about nuclear energy. As you can tell by my 

previous comments, I am a strong believer that to solve our energy 

problems in America, we have to use less energy, we have to develop alternative and renewable energy sources, we have to continue with technology growth, all of the above. 

But part of it is obviously, to me, is nuclear power, that we need 

to move forward with nuclear power, which leads me to the concern 

that we now have the appetite and need for more loan guarantees 

than the budget will allow us to move forward with at the current 

time. Part of it is the fact that we do not have enough money up 

for loan, enough capacity for loan guarantees, and the second is the 

manner in which OMB scores these loan guarantees, which at 

times discriminates against a State based upon its regulatory 

structure. 

I represent Maryland. Maryland is prepared to move forward 

with a nuclear power plant at Calvert Cliffs and we are in the process, and it is not really aimed at that specific application, because 

I think that process is moving forward and we thank you for your 

help in that regard. But if we are going to accomplish the need for 

nuclear power in America, then we have to sort of get a handle on 

the realistic cost of this. It is my understanding that the risk factor 

of these loan guarantees are very minimal, so it actually will be 

beneficial to our budget and our economy. So it is going to be a 

plus, not a negative. 

So I just urge you as we go through this process of trying to 

move forward with loan guarantees for nuclear power plant expansions or construction, that we work together as a team here and 
893 

figure out the problems that OMB might have so that we can get 

more action for the dollars that are available. 

Secretary CHU. Yes, Senator. So what you are—for others in the 

room, I know you will understand this, but what you are referring 

to is what is called the credit subsidy in a loan guarantee, that the 

$36 billion we are asking for is scored by CBO as 1 percent cost, 

even though we have to prove to OMB that it is zero cost to the 

taxpayer. 

So the credit subsidy is, loosely speaking, what we would call a 

loan, mortgage insurance, should the project be delayed, something 

of that nature, and the payment of the loan be delayed, that the 

government could still recover its investment. And so it is essentially insurance that is then paid to Treasury. And in that amount 

of money, that comes from the company. It does not come from the 

Federal Government. And if that amount is too high, then it is prohibitively costly. If, let us say, you want to mortgage, but the mortgage insurance is half the cost of the mortgage, that is pretty high 

and the mortgage might not be so desirable. 

So we are working with OMB. Now, by statute, OMB has the 

final authority ruling on what that credit subsidy should be. They 

make a determination of the likelihood that the loan might default 

and the U.S. Government cannot get its resources back. Therefore, 

that company has to pay that insurance to the Treasury. It is that 

probability that that will happen. 

And so we certainly are willing to work with OMB to try to figure out what is the best way of assessing the most accurate probability that these loans will not be paid back. I think the nuclear 

industry—the highest risk is that there would be delay in construction. It is not as though this thing will not work. That, we know. 

We have done 107 nuclear commercial reactors in the United 

States. We know they will work. And so the risk is a delay, and 

then to what extent. So we are working with OMB to try to see if 

we can have a good assessment of what that risk is. 

Senator CARDIN. I appreciate that, and let me just underscore 

the point. You have to set it at a rate where it will not cost the 

taxpayers any money, and yet it still gets scored as an issue because of the OMB formula. 

Secretary CHU. It is actually a little more—for these type of 

loans, the nuclear loans, we have to convince the OMB, and it has 

to be scored as no cost, and then it is a probability of default, so 

you will not get paid back, or at least the pay-back would be a long 

period of time. So we have to convince OMB that it costs the taxpayers zero, but then the CBO says, no matter what you do, we 

will still charge you 1 percent, and that is just the way it is. 

Senator CARDIN. Well, I—— 

Secretary CHU. And so that is beyond my comprehension as a 

physicist—— 

[Laughter.] 

Senator CARDIN. You know, it is beyond our comprehension, also. 

But I think what we need to do is to work closely together between 

Congress, OMB, and DOE, because I think there is a real commitment here to make sure the capacity is there to move forward on 

approved nuclear reactors, where it has gone through the process 
894 

and where it is reasonable to expect that the loan guarantee is part 

of the overall equation. 

So I think there is a number that we all should be able to come 

together with and I very much appreciate the way that you explained it, not only to those who were unfamiliar with this issue, 

but even those of us who are familiar, because I think you laid it 

out in the best way. Thank you very much. 

Chairman CONRAD. I want to thank the Secretary for your appearance before the Budget Committee today. I also want to thank 

you for your service. It is so important to the country that people 

of your quality and your character are willing to serve in these positions, and we very much appreciate it. And we appreciate the 

time that you have spent with the committee this morning. I think 

it has been very valuable for the members. It has certainly been 

valuable for me. 

The committee will stand adjourned. 

Secretary CHU. Thank you. 

[Whereupon, at 11:51 a.m., the committee was adjourned.] 
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(949) 

THE PRESIDENT’S FISCAL YEAR 2012 BUDGET 

REQUEST FOR THE U.S. DEPARTMENT OF 

TRANSPORTATION 

THURSDAY, MARCH 3, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Wyden, Nelson, Cardin, Sanders, 

Whitehouse, Warner, Merkley, Coons, Sessions, and Thune. 

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

Marcus Peacock, Minority Staff Director. 

Chairman CONRAD. The hearing will come to order. 

First of all, I want to welcome everyone to the Senate Budget 

Committee. I especially want to welcome the Secretary and say 

right at the top that I personally think you are doing an outstanding job. I have had this responsibility for more than 24 years 

now, and you have done the best job I have ever seen of communicating with members, and that is to your credit. 

Before I give my full opening statement, I want to recognize Senator Nelson because he has another commitment and would like a 

few moments. Then I will give my opening statement, Senator Sessions will give his, then we will go to you, Mr. Secretary, for your 

statement. 

I will recognize a very valuable member of this Committee, my 

very good friend Senator Nelson. 

Senator NELSON. Mr. Chairman, thank you for this courtesy. Mr. 

Ranking Member, my favorite Republican from Alabama, thank 

you for your courtesy. Do not tell Senator Shelby that, please. 

[Laughter.] 

Senator NELSON. I just wanted to say publicly, Mr. Chairman, 

that I have seen the Secretary on a daily basis perform his duties 

in the last several weeks as we have been going through the turmoil of, after an awful lot of hard work by a lot of people, including 

the Secretary, one of the best high-speed rail projects in the country because it is ready to go—the environmental studies, it is the 

right of way right down the middle of Interstate 4 from Tampa to 

Orlando, eventually to Miami. The recognition that Interstate 4 

and Interstate 95 in 20 to 30 years you can imagine what it is 

going to be like in that period of time. And here we have an opportunity of an alternate form of transportation where the United 
950 

States is 30 years behind Europe, and now high-speed rail is all 

over Asia. 

I just want to sing the praises of the Secretary. He has worked 

with the State of Florida, despite the Governor of Florida trying to 

reject the funds, and over and over has worked with us in order 

to give us time to try to work it out, to show the Governor that his 

conditions are met, that the State of Florida will have no financial 

responsibility, that it will all be a privatized matter. And if it were 

not for the Secretary, this thing would have long been passed. And 

we now are at the 11th hour with a petition filed by a Republican 

State senator and a Democratic State senator to the Florida Supreme Court asking for a writ of mandamus to compel the Governor to follow the law of the State of Florida. Oral arguments are 

this afternoon, and we are expecting—because the Supreme Court 

took this quickly yesterday, we are expecting an imminent decision. 

And I just want to thank the Secretary again for his being willing 

to work with us, to extend the deadline, to try everything possible 

that we can to make this happen. And so, too, depending on what 

the decision is of the court, we may come back to him and ask him 

again for another extension, depending on what the Supreme Court 

says. 

So I wanted to put that on the record to corroborate your kind 

comments about Secretary LaHood. 

Chairman CONRAD. Thank you, Senator Nelson. Let me—— 

Secretary LAHOOD. Mr. Chairman, can I just offer my thanks to 

Senator Nelson? 

Chairman CONRAD. Certainly. 

Secretary LAHOOD. And to you for your very kind comments. 

Thank you. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. Let me say that the hearing today will focus 

on the President’s transportation budget request. Our witness is 

the Secretary of Transportation. This is Secretary LaHood’s second 

appearance before the Budget Committee. He reminds me the last 

time he was here I was the only one here, and I had my little dog, 

Dakota, with me because, as I recall, we were in the middle of a 

blizzard, I think. No one else could make it. So it was a very good 

hearing. I know I got all of my questions answered. 

[Laughter.] 

Chairman CONRAD. Probably for the first time ever. 

So we are pleased that he could be back and look forward to his 

testimony. I believe personally that the strength of the Nation’s 

transportation infrastructure is one of the most important factors 

that will determine our future economic success. 

Transportation infrastructure is really the foundation for our economic growth, and I recognize absolutely jobs are created in the 

private sector, but I also recognize that transportation infrastructure is absolutely critical for the economic competitive position of 

the United States. So even as we look to cut spending to bring 

down the deficit, which we absolutely must do, we need to ensure 

that transportation funding remains a priority. 
951 

Yes, we have to cut spending, but we have to be smart about 

where we cut. We cannot afford to cut areas that are critical to future growth. That would be counterproductive. 

Investment in transportation can play a critical role in strengthening the economy in the near term because it is clear that transportation funding in the 2009 Recovery Act did help to create jobs 

and created jobs here in America and jobs that helped strengthen 

the Nation’s economic recovery. 

It is also clear that there is a tremendous need for further infrastructure investment. According to the World Economic Forum’s 

Global Competitiveness Report, the United States ranks 23rd in 

the world in the quality of its overall infrastructure. We even rank 

behind countries like Barbados and Oman. 
952 

The American Society of Civil Engineers has created a report 

card on America’s infrastructure. They give our infrastructure an 

overall grade of D. Aviation they give a D; bridges they give a C; 

rail, a C-minus; roads, a D-minus; transit, a D. An overall grade 

of a D from the American Society of Civil Engineers. 
953 

The next graph, which was made with data from the President’s 

budget, shows that our combined investment in infrastructure, research and development, and education has fallen as a share of 

GDP from 6.1 percent in 1962 to 3.6 percent in 2012. So as a share 

of the economy we are spending a smaller amount on infrastructure and these other critical areas than we did in the 1960s. 
954 

There is widespread agreement on the need for further infrastructure investment. I think it is notable that just last month 

Thomas Donohue, the head of the U.S. Chamber of Commerce, 

which represents many of the country’s largest businesses, joined 

Richard Trumka, the head of the AFL–CIO, America’s largest 

union, in testifying before the Senate Environment and Public 

Works Committee on the need for more infrastructure funding. 

Here is what Mr. Donohue said: ‘‘If we don’t change course, over 

the next 5 years the economy could forgo as much as $336 billion 

in lost economic growth as transportation networks continue to deteriorate. I am well aware of the fiscal constraints facing this Con-
955 

gress and the Nation,’’ he went on to say, ‘‘but we must avoid cutting off our nose to spite our face. Without proper investment and 

attention to our infrastructure, the United States’ economic stability, potential for job growth, global competitiveness, and quality 

of life are all at risk.’’ 

I think Mr. Donohue has it about right. 

Here is what the Obama Administration has proposed in its 

budget for transportation. It proposes $556 billion in a 6-year surface transportation reauthorization. This includes $468 billion to 

rebuild roads, bridges, and transit systems and improve safety, 

which represents a 60-percent increase over the previous 6-year authorization bill. It also increases funding for high-speed rail and incorporates rail funding in the Highway Trust Fund, and it creates 

a National Infrastructure Bank within the trust fund to leverage 

Federal funds for transportation projects. 

The budget proposes front-loading $50 billion in transportation 

funding in 2012 to help boost economic growth. It reclassifies transportation spending as mandatory spending, subjecting it to PAYGO 

rules. And it includes a place holder for a bipartisan financing solution to be developed between the President and Congress. I will be 

interested in hearing more from Secretary LaHood on the Administration’s ideas in that regard. 
956 

The reality is that even before we factor in the Administration’s 

new transportation request, we already have a very serious shortfall at existing funding levels. 

Let me repeat that. At existing funding levels we have a very significant shortfall. 

This chart shows that Highway Trust Fund receipts are projected 

to be far lower than Highway Trust Fund outlays in the years 

ahead, and under the Administration’s request, the funding gap 

would be far larger. 

Now, let me just point out here: The red line is the outlays, the 

expenditures. The green line is the anticipated Highway Trust 

Fund receipts. And you can see the gap by the time we get to 2021 

is over $18 billion a year. Now, that is at the existing levels. 
957 

We have a very big problem here to deal with, and we know that 

the reality of the trust fund financing is based on the gasoline tax. 

The gasoline tax is more and more disconnected from the reality 

of modern transportation. With electric cars, with hybrids, with renewable fuels, with all the rest that is happening to change the 

way we transit, we have a big problem here between the need and 

the funding mechanism. 

With that, I will turn to Senator Sessions for his opening remarks. I want to thank Senator Sessions for the cooperation of him 
958 

and his staff as we have scheduled these hearings. We have had 

a lot of hearings. 

Senator SESSIONS. Yes, we have. 

Chairman CONRAD. And we have more to go. I just want to thank 

him for his courtesy and the professionalism of his staff. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you. I appreciate your tough leadership. We have a lot to do. I agree with you. We have to contain 

spending in this country. We are heading off a cliff with 40 cents 

out of every dollar being borrowed and our debt surging, on pace 

under the President’s budget to double from $13 trillion to $26 trillion in 10 years, and we know we have a difficulty with transportation. 

Secretary LaHood, I share my colleague’s comments that you are 

accessible, and I appreciate you coming by and visiting in my office. 

That does not often happen, and I think that is very helpful. 

I do believe that transportation is a major issue for us. We have 

to be sure that we maintain the required infrastructure this Nation 

has to maintain its productivity. But we have problems. We know 

that our gas tax revenue has been falling below our projected budget for a number of years now. I think we were at 36 billion income 

and 43 billion spending last year. So that money is filled with 

Treasury money, and Treasury money is borrowed money. 

And so we know we are in this difficult time, and I was looking 

with great interest on what kind of budget projections we would 

see. We have seen a Department of Education request on Tuesday 

for an 11-percent increase. We had the Department of Energy yesterday with a 9.5-percent increase. But I have to say I was flabbergasted to see that the Department of Transportation is asking 

for a 62-percent increase in spending—at a time when all of us 

know we have to contain spending and do something about the 

surging debt we have. 

And why is this? Well, because we have crumbling infrastructure. But I remember very well, because I made a number of 

speeches on the floor about it, that I was disappointed deeply that 

the stimulus package, which was projected repeatedly as a plan to 

increase spending for our crumbling infrastructure, only had about 

3 percent of the budget for roads and bridges, maybe 5 percent for 

transportation total out of the $800 billion or so. That was a tragedy. That was an opportunity lost of monumental proportions. We 

did not do enough to fix the crumbling infrastructure we have, so 

now we are reduced—having not produced many jobs out of this 

stimulus package, every penny of that money being borrowed, now 

we are reduced, I suppose, to coming up with a new plan. And this 

plan says that we are going to have a tax that is not a gas tax, 

‘‘a not-gas-tax tax,’’ I guess we will call it. And it is going to raise 

$435 billion. Well, we have a $300 billion plus hole in our Medicare 

physician payment that we cannot find the money to fill in that 

critical area. We have a 200 or so plus hole on the alternative minimum tax that we cannot fill. But now the Administration proposes 

some tax that we are supposed to assume will arrive in a bipartisan fashion to produce $435 billion so that we can have a massive 

increase in highway spending. And I just have to say that is unre-
959 

alistic, Mr. Secretary. I am sure that when you were in the room— 

I have no idea directly, but I am confident over the stimulus bill 

that you were advocating for as much for highway infrastructure 

as you could get. But the final decision was not enough, and we are 

placing this country at risk. In all honesty, I do not think—if you 

cannot tell us what kind of tax you think would fund this and prepare to defend it, I think there is zero chance of us passing such 

a tax as this. And so we are dealing with the question, will we just 

borrow it again or not have enough? Or what will we do? 

Mr. Chairman, I think that is a fairly honest statement of where 

we are from my perspective, and it leaves us in an unhappy place 

with regard to transportation infrastructure. I look forward to 

questions as we go forward. 

Chairman CONRAD. Thank you, Senator Sessions. 

We will turn now to the Secretary for his opening statement testimony, and then we will go to colleagues for questions. 

STATEMENT OF THE HONORABLE RAY LAHOOD, SECRETARY, 

U.S. DEPARTMENT OF TRANSPORTATION 

Secretary LAHOOD. Thank you, Mr. Chairman. Chairman 

Conrad, Ranking Member Sessions, Senator Wyden, I appreciate 

the opportunity to discuss President Obama’s fiscal year 2012 

budget request for the U.S. Department of Transportation. Joining 

me today is our Chief Financial Officer Chris Bertram, who is an 

alum of this side of the Capitol. 

Just a few weeks ago, President Obama delivered a powerful 

message in his State of the Union address. He said that for America to win the future, our citizens and companies need the safest, 

fastest, most reliable ways to move goods and information. He reminded us that if we build it, they will come. If we want businesses 

to open shop and hire our family and friends and neighbors, we 

have to invest in our roadways, railways, and runways. We have 

to invest in 21st century buses, street cars, and transit systems, 

and we have to invest in next-generation technology for our skies 

and sidewalks and bike paths that make our streets more livable. 

And all of this is included in the President’s $129 billion 2012 

budget for the U.S. Department of Transportation. Designed as the 

first installment of a bold 6-year, $556 billion reauthorization proposal. 

Now, to make room for these essential investments, President 

Obama’s 2012 budget proposes the lowest relative level of domestic 

spending since President Eisenhower was in office six decades ago. 

That was ten administrations ago, if you are counting. The simple 

fact is that we have to cut and consolidate things that are not 

growing the economy, creating jobs, or making it easier to do business in order to pay for the things that are. 

So at the Department of Transportation, President Obama’s 

budget slashes red tape. It consolidates more than 50 programs, 

and it includes reforms that will accelerate project delivery and empower local communities. 

Of course, our major objective is to make investments in tomorrow that expand economic opportunity today, to dream big and to 

build big. And to illustrate that, if you look at the cover of our 

budget, you see a picture of a bridge over the Hoover Dam, which 
960 

several months ago some of us had the privilege of cutting the ribbon on and dedicating. This is thinking big. This is a bold vision. 

This is a vision that the people who came before us had about 

transportation. This put thousands of people to work building this 

bridge. And it is a 21st century opportunity for infrastructure to 

connect two States and a magnificent structure, and I think it really reflects the big, bold vision that the President has. 

Our major objective is to make investments in tomorrow that expand economic opportunity for today, to dream big and build big. 

That is why the budget keeps us on track toward a national highspeed rail system with an $8 billion investment in 2012 and a $53 

billion investment during the next 6 years. It increases resources 

for highway and bridge improvements by 48 percent and increases 

funding for affordable, efficient, and sustainable bus, street car, 

and transit systems by 126 percent. It includes a $50 billion upfront boost to keep our economy moving in the short term and a 

$30 billion annual infrastructure bank that will finance major 

projects of national and regional significance over the long run. It 

also unleashes innovation and competition with a new $32 billion 

grant program called the Transportation Leadership Awards. 

At the same time, safety is and always will be our No. 1 priority. 

President Obama’s budget renews our commitment to prevent traffic crashes with resources for ongoing campaigns against distracted 

driving, drunk driving, and to promote seat belt use. The President’s proposal requests new authority for the Federal Transit Administration to ensure the safety of rail transit riders across America, and it gives the Federal Motor Carrier Safety Administration 

stronger capacity to keep commercial traffic safe. 

Finally, we are dedicated to doing all of this without passing on 

another dime of debt to our children or grandchildren. For the first 

time, transportation spending will be subject to PAYGO provisions 

that ensure that the dollars we give out do not exceed the dollars 

coming in. 

So these are just a few components of the President’s plan. They 

reflect a much larger point. America’s transportation system is at 

a crossroad. Our choice is not between policies on the left or policies on the right. Our choice is whether our economic recovery rolls 

forward or falls backward. It is up to us whether we lay a new 

foundation for economic growth, competitiveness, and opportunity, 

or whether we settle for a status quo that leaves America’s next 

generation of entrepreneurs, our children and grandchildren, with 

clogged arteries of commerce. 

It is up to us whether we do big things or we do nothing. And 

if we choose wisely, our legacy can be an economy on the move and 

a future that America is prepared to win. 

With that, Mr. Chairman, I will be happy to answer your questions. Thank you very much. 

[The prepared statement of Secretary LaHood follows:] 
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964 
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966 

Chairman CONRAD. Thank you, Mr. Secretary. 

Let me begin where I ended, and that is with this chart. Matt, 

if you can put that up? 

This is kind of the harsh reality that we all confront. It is not 

anybody’s fault. It is because of a changing of transportation financing in this country. 

The green line is the revenue of the trust fund, and basically it 

goes from $36 billion a year to $40 billion a year, basically flat for 

the entire 6 years. And we have a gap before we ever enter this 

6-year period, as can be seen in 2011 where the expenditures were 

$43 billion, which Senator Sessions mentioned, and the income was 

$36 billion. So we start with a gap of $7 billion, and that gap grows 

dramatically as we go toward 2021, 10 years out. So a $7 billion 

gap per year turns into a gap of $18 billion. That is under the baseline. That just takes the current program and extends it. That does 

not capture what the President is proposing, which is an actual increase. 

So the question that we have before us is: What are the options 

for closing this gap? And what is your assessment of how realistic 

those various options are? That is really my first question to you. 

What do you see as the options for closing this gap? And what is 

your assessment of how realistic those various options are? 

Secretary LAHOOD. Well, look, the Highway Trust Fund is deficient. There is no question about it. People are driving less. They 

are driving more fuel-efficient automobiles. We know that. And as 

things continue to stay stirred up in the Middle East and countries 

that produce crude oil, we know that gasoline prices are going to 

continue to go up, and probably as a result people will be driving 

maybe even less frequently than they are today. It is probably not 

going to help us in our collection of the gas tax. 

The Highway Trust Fund helped us build a state-of-the-art interstate system. There is no debate about that. We have one of the 

best interstate systems anywhere in the world, and we want to 

work with Congress on our way forward. 

I think the one thing that people ought to recognize is that our 

budget is a budget that will put people to work. For the $48 billion 

that we received in the economic recovery plan, we created 15,000 

projects and 65,000 jobs. Our money actually helped people build 

roads in your States. 

We know that the work that we do and that our budget will reflect will increase jobs, increase opportunities to get economies 

going in the States. And, Mr. Chairman, we want to work with 

Congress on the way forward. There can be no dispute about the 

fact this is a big, bold plan. This is a big vision, thanks to the 

President, because the President recognizes this is a jobs bill. 

When you all pass a transportation bill or pass our budget, you are 

going to create jobs. That is the one thing that everybody recognizes. There is no debate about that. 

So we want to work with you on trying to find the resources that 

we know will put our friends and neighbors to work building our 

infrastructure and creating a 21st century transportation system 

that really reflects the values for the next generation the way that, 

you know, others did for our generation. 
967 

Chairman CONRAD. Well, I agree with your basic statement here. 

I mean, there is no question in my mind that these highway funding initiatives, bridge funding initiatives, transit funding initiatives 

create jobs, create jobs in the United States, and they are also critically important to our competitive position. 

Do we have an assessment of what the lost productivity is because of a deficient infrastructure system in terms of transportation? 

Secretary LAHOOD. You know, I do not have that figure, but we 

will see if some of our smart people can get that for you. I have 

never really heard that articulated in the Department, but I am 

sure we can find it. 

Chairman CONRAD. You know, I would be very interested. I ask 

the question because any day after 4 o’clock, if you leave here and 

you go out on the major arteries—395, 295, 95—often as not they 

are stopped dead. And I see trucks delivering goods across the 

country. They are idle. They are stopped dead in their tracks. 

There has to be an economic cost to that. And I believe the economic cost must be substantial because on the east coast and the 

west coast, these arteries are clogged. 

Let me go back to the first question I asked because you answered about the importance of doing what has been proposed. The 

question we have on this Committee is: how do we pay for it? And, 

of course, we cannot direct the funding committees on how to raise 

the money. We can tell them how much money to raise. We cannot 

tell them how to do it. But we have to give them—to be credible, 

we have to give them some options. Do we do a gas tax? Do we 

move to some kind of an assessment that is based on how many 

miles vehicles go so that we capture revenue from those who are 

going to be using the roads who are not going to be paying any gas 

tax or very little with hybrids and electric cars? Do we go to more 

tolling? I have just had, as I told you, the head of my transportation department back home, Francis Ziegler, in to see me yesterday. He said, ‘‘Kent, in North Dakota, tolling does not work at all.’’ 

It does not make any sense in a big, wide open State like ours, 

sparsely populated. 

What options do you see—are there options that I have not listed 

there that we should be thinking about? 

Secretary LAHOOD. Mr. Chairman, tolling is an option—not in 

every State. I just met with the two Governors of Oregon and 

Washington. They are proposing to build a bridge across the Columbia River. It is a great project. It is about as multimodal as you 

can get. And there is going to be a transit system that runs across 

that bridge. There is going to be availability if somebody wants to 

ride their bike across the bridge, and there is going to be availability for people to drive across that bridge. And they are going 

to pay for part of it with tolling. They are going to pay for part of 

it with State resources. They are going to pay for part of it with 

Federal resources. But tolling is a good way for those two States 

to, you know, think big and dream big for this Columbia River 

crossing. 

Chairman CONRAD. But you would acknowledge that in some 

States tolling is really not a very viable option. 
968 

Secretary LAHOOD. I do not think it probably works in your 

State, Mr. Chairman, but there are a lot of States where it does 

work. And you know what? A lot of States are thinking about adding capacity, taking an interstate that was built with taxpayer 

money, putting a couple additional lanes on it, and tolling that. 

They have done that in Miami where they call it a ‘‘hot lane.’’ They 

built a lane, and they toll it. And you can raise a lot of money and 

actually pay for a project like that. 

We support that kind of opportunity where you can add capacity 

and use tolling to help pay for it. And then, you know, leverage 

that with maybe some money from our Department, leverage it 

against maybe some private dollars. 

Look, our idea is this. The Highway Trust Fund is going to be 

around. It is deficient. We know that. Tolling, couple it with tolling. 

We have a TIFIA loan program that people—the President has 

talked about in his budget the Infrastructure Bank with significant, billions of dollars. You leverage all those together, you can 

begin to do big things in America. People can then think about 

dreaming big again. 

Does that get us to everything we want or everything that we 

think is necessary? No. That is why we need your help on this. 

Look, I agree with what Senator Sessions said. If some of us had 

been writing the stimulus bill, there would have been more than 

$40 billion. We spent every one of those dollars the way that you 

all directed us. No boondoggles, no earmarks, no sweetheart deals. 

You have not seen any bad stories written about the $48 billion. 

And what it did, it created 15,000 projects that put 65,000 people 

to work over 2 years that would not have had a job if you all had 

not given us that authority and given us that money. The stimulus 

worked. 

Chairman CONRAD. I can say—and then we will turn to Senator 

Sessions because my time is over—I remember very well the battle. 

A group of us proposed a $200 billion transportation package as 

part of the overall stimulus plan, and we lost that fight. But we 

did not lose it because you opposed it. You did not oppose it. You 

were an ally. So I think that should be stated publicly. There were 

others who did oppose it, and I remember them well. 

Senator SESSIONS. Well, we lost. The President and the leadership kept the highway transportation money at a minimum and it 

was a tragic, tragic thing, because one thing about a road, as you 

know, Mr. Secretary, once it is built, it can be used for generations. 

It is an asset that continues to help us be more productive and 

happier as a society and I think that is important. 

So I know you are passionate about roads, but we have a problem now. We had our opportunity and it lost, passed, and now we 

have a budget that says how we are going to fix this with a $435 

billion new phantom tax, the ‘‘not gas tax’’ tax, and I do not believe 

that is going to be successful and we have to wrestle with how we 

are going to proceed there. 

Another thing I think is important for us to acknowledge, Mr. 

Chairman, since we are a Budget Committee and we received a 

budget as required by law from the White House, that this is another huge gimmick in the budget. Since it does not suggest how 

and where this tax is going to come from, CBO is not going to score 
969 

it as income as the Administration scores income. They are proposing a spending plan for roads and they are proposing to pay for 

it with a tax increase they will not even explain what is, and the 

money is not going to come in. It is just kind of Washington budgeting, this kind of Washington logic that has put us in this financial crisis we are in, and we cannot continue it. 

We cannot go forward on the bald assumption that, somehow, we 

can appropriate and authorize spending based on a tax that is not 

going to be collected, probably. We have a lot of things in this country we have to raise money for, and I will tell you, the doctors so 

they take care of our Medicare patients is one of them, and there 

is a lot of money there. 

Well, you have said, Mr. Secretary, that the budget would collect 

more revenue. It is definitely not a gas tax. So where will the 

money come from? 

Secretary LAHOOD. Well, Senator, as I said earlier, we want to 

work with Congress on that, and we are happy to work with you. 

We are happy to be a part of the debate and happy to work with 

you. I think the President has made it clear that he is not in favor 

of raising the gas tax when we have 9 percent unemployment in 

this country and a lousy economy in many places in the country, 

but look, we are—— 

Senator SESSIONS. Well, do you have any suggestions? 

Secretary LAHOOD. You know, Senator, I think what we need to 

do is to sit down together and figure this out and we are willing 

to do that. 

Senator SESSIONS. Well, sitting and figuring out is a little late 

when you have a budget that assumes it is going to be done when 

it is not going to be done. We just are not going to be able to raise 

that much tax to meet this need when we have a lot of other departments that have needs, too, particularly when you are talking 

about a 62 percent increase in spending next year—62 percent, on 

top of the $48 billion total that went to roads and transportation— 

$27 billion only actually went to roads, about 3 percent of that total 

stimulus package. And so I do not think we are going to get there 

and I think we are fooling ourselves and I think we are putting 

ourselves, from a budget perspective, do you not, on a dangerous 

course that could lead to increased spending without any revenue 

to pay for it. 

Secretary LAHOOD. Look, Senator, here is what I think. I think 

this. I think that what we do in transportation will put our friends 

and neighbors to work. This is a jobs bill. This is a jobs budget. 

That is what this will do. And we have—in America, what we have 

never done is been dissuaded by the fact that we do not have—we 

are not smart enough to figure out how we get there. If we really 

want to get the economy going, if we want to build roads and 

bridges, if we want to really improve infrastructure, there are a lot 

of smart people previously, other leaders, that have done it. And 

we can do it, too, and we are willing to do it. We are willing to sit 

at the table—— 

Senator SESSIONS. Well, Mr. Secretary, we have been—— 

Secretary LAHOOD [continuing]. With you and figure it out. 

Senator SESSIONS. We have tried this and we have had, I have 

no doubt, some jobs created with the stimulus package. It is impos-
970 

sible to spend that much money and not create some jobs. I think, 

percentage-wise, we probably did more jobs per dollar on the highway side than we did on all the other 95 percent that was spent. 

I am totally confident of that. 

But we do not have the money. We are borrowing 40 cents out 

of every dollar we spend. We do not have the money to go a massive new program. So if we do not have a tax increase, do you propose borrowing the money? 

Secretary LAHOOD. Here is what I propose. What I propose is 

that a budget is a reflection of the Congress’s values, and this 

President’s budget on transportation is a realization that if you 

pass a very strong transportation program, you recognize that it 

will put people to work. It will get our economy going. It will set 

priorities. The President has a pretty big view about this. 

Senator SESSIONS. Well, we have some priorities and views and 

one of them is to get the country’s fiscal house in order before we 

go bankrupt and have a debt crisis—— 

Secretary LAHOOD. Well, look at—— 

Senator SESSIONS. —Geithner sitting right there a few days ago 

indicated that not only is this debt that we are increasing dramatically reducing economic growth, and he agreed with the studies 

that show that, he said it places us at risk of a debt crisis, another 

fallback, perhaps, to another recession, and this would be a tragic 

thing for us. So we just—obviously, we cannot unlimitedly borrow 

money. 

Now, the proposal is to double spending on highways over the 10- 

year period, basically. In this time of financial crisis, are you asserting that education gets a 10-percent a year, I suppose, energy 

gets an increase, and you all get to double the transportation budget? 

Secretary LAHOOD. I think this is a reflection of the President’s 

values. That is what I think. This is a—our budget is a reflection 

of the idea that if you put people to work, what are they going to 

do? They are going to pay taxes. Some of those taxes are going to 

come to the United States. What is that going to do? That is going 

to improve our fiscal situation here. 

Look, you can pay down some debt and the President wants to 

do that. You can also have transportation priorities that puts 

Americans to work building American roads and bridges. You can 

do both, Senator. 

Senator SESSIONS. We are not going to pay down a dime of debt. 

I cannot believe that the President continues to insist that we are 

going to be paying down debt on this budget. The lowest annual 

deficit is $600 billion added to the debt. All of this borrowed. This 

money is going to be borrowed if it is spent because we are not 

going to have this kind of tax increase, so we have a problem. 

I really respect your passion and interest, but I do believe that 

this Congress has a high priority to have fiscal sanity in this Congress in spending and we have to work at it and it is not going to 

be easy. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE. Mr. Secretary, thanks for being with us. 

Secretary LAHOOD. Good morning. 
971 

Senator WHITEHOUSE. Good morning. You have been to Rhode Island to visit Senator Reed and myself and you are aware of our circumstances, how difficult the State budget is there, how difficult 

our unemployment situation is there. We are still at 11.5 percent 

unemployment and it has been that way a long time. We have the 

so-called 99-ers who have run out their 2 years, 99 weeks of unemployment and are stranded now. It is a tough situation. 

We have a couple of potential bright spots on the horizon. I want 

to make sure that they do not get snuffed out. One of them is our 

TIGER II grant that goes to the Port of Providence to buy new 

cranes because our cranes are so decrepit, and that will, it has 

been estimated, add 550 jobs just in Rhode Island, another nearly 

1,000 jobs around the country because of the activity that having 

those cranes in place as infrastructure will generate. 

Our predicament is that that is being held up right now, as I understand it, while we get a ‘‘Made in America’’ waiver for the 

cranes, and my worry is with all the sweeps that are being threatened here, I do not want to be in a situation in which this account 

gets swept while this money is unobligated because we have not 

sorted through the waiver when it should be an easy call. We got 

the waiver already on the TIGER I grant, which was also for a 

crane down at Quonset, and the reason we got the waiver is because no matter how you slice and dice the information, nobody 

makes a crane in America any longer. It just cannot be done. That 

should be a 2-minute discussion, already decided on TIGER I. 

There ain’t no crane out there to buy. Please, if you can do anything you can to expedite this so we can move it through, obligate 

it, and make sure that we do not lose that funding. 

Secretary LAHOOD. Senator, I told our Deputy Secretary to sign 

the waiver today. It is already—it was signed this morning. 

Senator WHITEHOUSE. I am delighted. 

Secretary LAHOOD. I knew you were going to bring this up, and 

I am sorry that we have delayed and caused so much heartburn 

about this, but it is signed. 

Senator WHITEHOUSE. Perfect. Perfect. 

The second thing up there is high-speed rail. We have common 

cause here on high-speed rail. I think we all recognize that when, 

in the Eisenhower administration, we took a national move to highspeed road and built a national highway system, it was one of the 

best things ever done for our economy. It exploded growth in shipping, lowered costs, created enormous industry that uses that infrastructure to this day. 

So now that we had our high-speed road moment, it would be 

great to have also a high-speed rail moment, and there is no place 

that is more important than in the Northeast where that rail corridor gets used so much, creates so much value, is such an important core, spine of transportation infrastructure. What can you tell 

us about where you are on Northeast corridor high-speed rail? 

Secretary LAHOOD. Well, we believe that the Northeast corridor 

is—not only exists currently as a very viable rail connection for 

many, many people and takes a lot of cars off the road in the 

Northeast corridor, we like the plans that take us well beyond, all 

the way to the Canadian border and further south through the 
972 

Carolinas, all the way to Florida. That is our dream. That is our 

vision. If you look at the President’s budget, 50—— 

Senator WHITEHOUSE. We particularly like that Boston to New 

York corridor. 

Secretary LAHOOD. I have it. We like Boston to New York, also. 

But if you look at the President’s—look, nobody has a bigger, bolder vision of this than President Obama does. We would not be 

where we are at. We have invested $11 billion already. That is 

more than has ever been invested in high-speed rail, ever in the 

history of the country, thanks to the President and the Vice President. 

Senator WHITEHOUSE. I appreciate it. I think it is a great thing. 

Secretary LAHOOD. And there is $50 billion in the President’s 

budget over the next 6 years for high-speed rail. That is more than 

has ever been invested. We are with you. We are on the track with 

you on this. 

Senator WHITEHOUSE. Good. And as we have seen some of the 

newly elected Governors decide that they do not want money from 

the Federal Government on this, even though it has been allocated 

to them, when Governors turn back this money, I hope that you 

will quickly reallocate it to places like the Northeast corridor that 

do want it and it will have—— 

Secretary LAHOOD. What we intend to do, Senator, is when 

States decide they do not want the money, we are going to make 

it available throughout the country so everybody has a fair shot at 

it. We think that is the only fair way to do it. 

Senator WHITEHOUSE. Good. I appreciate it. And obviously, the 

quicker that can be turned around and the quicker other States 

can get access to that, the better, and I am confident that in the 

Northeast, we will be able to make a compelling presentation as to 

why—— 

Secretary LAHOOD. I have no doubt of it. 

Senator WHITEHOUSE [continuing]. The Northeast corridor is critical. Thank you very much. 

Secretary LAHOOD. Thank you. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman. Mr. Secretary, great 

to have you with us. 

Secretary LAHOOD. Thank you. 

Senator THUNE. Thank you for your service and your spirited answers to these questions today. 

I want to—and I do not want to beat a dead horse, because I 

know it has been talked about already at some length, but I, like 

my colleagues who have spoken before, am concerned and somewhat mystified at why we did not do more in the area of infrastructure out of the amount of money that the stimulus provided. I 

mean, you look at just over 5 percent was spent on transportation 

and what could have been done in terms of addressing these shortfalls that we have and this year over year shortfall that we are 

now experiencing in the Highway Trust Fund, which is a problem. 

We are transferring now out of the general fund to the Highway 

Trust Fund. 
973 

And the budget, as I understand it, suggests that significant increases in spending and a highway reauthorization bill, which I 

hope we can get to this year, but increases 2012 spending on surface transportation by 86 percent over 2010 levels. It also includes 

a $50 billion front-loaded transportation infrastructure plan for 

2012, which, I think, as again is mentioned, sounds more like another stimulus program. 

But I guess the question I come back to is the issue that has already been raised. There has not been any—there is not anything 

in this proposal, and you have said several times your proposal 

does not include any more revenue raised from the gas tax and 

that that is not an option the Administration is open to, so where 

does the increased revenue come from? How do you pay for all this 

stuff? If you do not tax gasoline, how do we do it? 

Secretary LAHOOD. Well, we have to think creatively and we 

have to figure out ways to pay for this. We think that it can be 

done the way that things are done around here, when people sit 

around a table together and put creative ideas on the table, and 

I think that will be done when the Congress gets around to writing 

a transportation bill. We hope we are in the room and we hope we 

can be part of finding the revenue to do it. We think that is the 

way we get there. 

Senator THUNE. Do you have any more specific ideas? Does the 

Administration have any suggestions that they would like to offer 

up, because historically, this has always been a—this is a gas tax 

issue. It is a user fee, basically. And obviously it is not keeping up 

with the demands. You saw what the Chairman put up in his chart 

and how big that thing gets to at the end of the decade. It is a $28 

billion shortfall. Clearly, that is going to take a significant amount 

of revenue, and although we all appreciate, I think, the budget and 

its recognition of the needs that are out there, not having a way 

of funding it seems like many of the aspects that we have seen in 

this budget, and that is these proposals just do not have funding 

sources. 

I mean, it seems to me, at least, that the Administration has 

kicked the can down the road on a lot of the big issues that we are 

facing. This is one of many. But do you have any ideas? Has there 

been any discussion on your end of this about how we might—what 

kind of a funding mechanism or source we might come up with? 

Secretary LAHOOD. Well, we have had lots of discussions privately with Members of Congress about this, particularly members 

who believe that the investments the President is proposing are absolutely critical to continuing the progress. And as the Congress 

gets serious and really begins to sit down and write a bill, you 

know, we want to be there. We want to be a part of the discussions 

and we want to be a part of finding ways to continue to make these 

investments, to put friends and neighbors around the country to 

work building roads and building bridges. 

Senator THUNE. Let me ask you, and I appreciate the answer, although there is a complete lack of specificity or any hard solutions, 

in my view, about how we deal with this. The suggestion that we 

have to be creative is great, but—— 

Secretary LAHOOD. We like your Build America Bonds program, 

Senator. I know you and Senator Wyden have promoted that. It 
974 

has been a good program. It has worked very well. Lots of States 

have taken advantage of it. I mean, look, that is one way to get 

some additional money. I talked about tolling. I talked about the 

fact the President has put the Infrastructure Bank on the table. 

And so it is not as if you all have not come up—you and Senator 

Wyden have come up with this very creative way of—and it has 

worked, and we think the Infrastructure Bank is also another creative way of thinking about funding some of these things. The specific pay-for, we are willing to be in the room and have these discussions and debates. 

Senator THUNE. I am not a big fan of the Infrastructure Bank, 

as you might expect. I think that we are going to see that probably 

is going to benefit primarily largely metropolitan areas. 

But the other thing I wanted to express a concern about is the $53 billion plan on passenger rail investment over the next 6 years. 

As someone who represents a rural State, the budget proposal is 

concerning when you look at the much faster growth in proposed 

spending for transit and passenger rail investment. I, frankly, do 

not think that if you get west of Boston or east of San Francisco 

that you are going to see much transit investment, and at the same 

time, the transit programs within the DOT do not contribute to the 

Highway Trust Fund when it comes to user fees. And as I understand your proposal, it allows transit systems to use funding for 

O&M. That, to me, is very concerning, given the fact that transit 

does not contribute to the Highway Trust Fund. 

Secretary LAHOOD. Well—— 

Senator THUNE. In rural areas of the country, we are not anticipating we are going to see any high-speed rail anytime soon. 

Secretary LAHOOD. Well, I hope you also looked at the idea that 

we increased the spending on highways by 48 percent. In over 6 

years, it is $330 billion. We get it. Look, at DOT, we know how to 

work with our partners in the States to build roads and bridges 

and the President has asked—requested huge investments and a 

huge increase to build roads and bridges for States like yours, Senator. We get it. We know that there is crumbling infrastructure. 

We want to be helpful on that. We have great partners in the 

States. We worked with those great partners on spending $48 billion, of which $28 billion was for roads and bridges, and we did it 

the right way because of our friends in the State that have 

partnered with us on these things. We believe in roads and bridges, 

and if you look at the increase, it is significant. 

Senator THUNE. OK. Well, thank you, and my time is expiring, 

but again, I just come back to the proposed increases are great, but 

at some point, the Administration is going to have to lead in figuring out how we pay for this stuff. Thank you. 

Chairman CONRAD. I thank the Senator for respecting the time. 

Let me just indicate, Senator Wyden is next, then Senator 

Cardin, Senator Coons, Senator Sanders, Senator Warner. 

Senator WYDEN. Thank you, Mr. Chairman, and welcome, Mr. 

Secretary. I just want to followup on that last point with respect 

to Build America Bonds, because as you know, they just went out 

the door like hotcakes. We estimated that, given the fact that we 

never tried anything like this in our history—Senator Conrad will 

remember this—in the Finance Committee, I was asked to give an 
975 

estimate of what we might do in the Build America Bonds area, 

and I said, oh, maybe $8 or $10 billion, and as you know, it was 

$181 billion, I mean, something like 18 percent—exceeding an 18- 

fold increase in terms of expectations. 

Now, the question is, where do we go from here, and Senator 

Thune asked the right question and that is where are we going to 

look to try to get additional funds. And I think it would be possible 

to again build a bipartisan coalition for Build America Bonds if we 

get them to focus only on transportation. And I have talked with 

a number of my colleagues on both sides of the aisle about this. We 

are looking at the numbers that have come in so far and it looks 

like Build America Bonds just for transportation purposes over this 

experimental period of time exceeded the amount that went out 

under the Recovery Act. So the Recovery Act was $48 billion and 

we think—the numbers are still coming in—that it was well over 

$50 billion just for transportation alone, Build America Bonds. 

And for colleagues that are interested in this, in our State, where 

they really kept track of the numbers, they estimated there was a 

10-percent savings associated with this compared to the traditional 

level of bonds. So a chance to do more work, A, get additional revenue, and save money at the same time. 

My question to you, Mr. Secretary, because Senator Thune has 

been a wonderful partner in it, and, as you know, many Republicans have been involved in this going back to Senator Talent and 

Senator Dole and Senator Vitter, we have had a whole lot of Republicans involved in this, and I think we could get this again to 

be a bipartisan program if the Administration would say, look, it 

has been wildly successful as it related to transportation. New 

money, savings. We will, for purposes of bringing the Congress together, put it solely to transportation, and I have mentioned to 

Senator Thune, perhaps we could rebrand this. We could call them 

TRIPS bonds, Transportation and Regional Infrastructure bonds, so 

that everybody would walk away and see that we are trying to get 

a good concept which has been successful confined to transportation and have a chance to answer the question asked by Senator 

Sessions, asked by Senator Thune, where we have had bipartisan 

support. What is your take on that in terms of trying to bring folks 

together once again as we were able to do over the years? 

Secretary LAHOOD. Well, as I said, Senator, I congratulate both 

you and Senator Thune for your leadership on this. I know there 

are other Senators involved in this. This is a very good stream of 

funding and we will work with you in any way we possibly can because we think this is one of the options that needs to be out there 

to pay for all the things we want to do. 

Senator WYDEN. What is going to be our challenge in the Administration? Part of it—I discussed this with some of my colleagues 

on the other side of the aisle—this was so attractive to the private 

sector that people automatically said, well, let us see if we can look 

at it for other kinds of approaches, and that is when some of the 

bipartisan support seemed to drift away, is people just saw it being 

used in a variety of other kinds of areas. Do you think within the 

Administration you can get people to say that the transportation 

need is so great, No. 1, and getting this back to having bipartisan 

support is just as important, that you can get the Administration 
976 

to help us as we build a bipartisan coalition, say we will go just 

with transportation given the fact that the need is so acute? 

Secretary LAHOOD. Well, I will commit to say this, Senator. I will 

work very hard within the Administration to make the strongest 

case that I possibly can that this ought to be dedicated to transportation. Now, whether I can get there or not, I do not know, but I 

know this. There is a shortfall. The President has a big vision. We 

need to find the resources to pay for it. Your Buy America Bonds 

have been wildly popular, as you knew they would be and Senator 

Thune knew they would be, and they have provided a great resource to get some significant things done. 

Senator WYDEN. I appreciate your willingness to do this because 

I think Senator Thune and a number of Republicans are very interested in working in a bipartisan way on this issue. We worked 

through some of the kinks early on. There were questions about 

fees early on. Now we have seen no one raise concerns about that. 

The one concern has been, is this going to be used as an openended approach to fund all kinds of other services in government, 

and I hope we can get back to what essentially Senator Talent and 

a big group of Democrats and Republicans started dreaming about 

six, 7 years ago. 

I think it is clear it has worked, No. 1. I think the other approaches are going to be a huge lift in terms of getting bipartisan 

support. Colleagues are asking for details about Infrastructure 

Banks and the like. This is something we know works. We know 

there are not a lot of rallies outside our offices to raise the gas tax 

in this kind of economy. We know that to have big league economic 

growth, you have to do something about little league transportation 

systems. And my hope is that as you go forward, you can convince 

the cabinet and the Administration to say that this is the area that 

will produce the most jobs most quickly. 

You have been to Oregon. You can go around our State and see 

all kinds of folks across the political spectrum, some of our most 

conservative business leaders working with labor leaders around 

Build America Bonds because, they say, this is something that has 

actually made a difference. And if we can get it back to its original 

focus, I think we will have an answer to Jeff Sessions’s questions, 

the point that Senator Thune was making. I think they were raising logical concerns and we can come together in a bipartisan way 

and I am grateful for what you have said today. 

Secretary LAHOOD. Thank you for your leadership, and to Senator Thune, also. 

Senator WYDEN. Mr. Chairman, thank you. 

Chairman CONRAD. Senator Cardin. 

Senator CARDIN. Well, thank you, Mr. Chairman. Secretary 

LaHood, it is nice to have you before the Committee. 

Secretary LAHOOD. Good morning. 

Senator CARDIN. I am going to give you a little different view 

than Senator Thune on the transit issues, but first let me say that 

I support the budget, the more robust budget that you come in with 

for transportation infrastructure. I think that it is critically important for our Nation to be as competitive as we need to be. It is 

about jobs. It is about outbuilding our competitors. And I think 

that we need to find a way to make sure we can finance that. 
977 

I also want to applaud you on the multimodal approach that you 

have. Look, we cannot do it by roads alone. We cannot do it by 

transit alone. We need to invest in smart transportation that allows us to recognize the different needs in rural America and in 

urban America. 

But I just really want to urge you to continue aggressively on the 

transit funding, and I really want to respond to Senator Thune’s 

point. 

You know, it is interesting. In the prospectus that GSA puts out 

for Government space in this area, a high priority is given to locate 

a space on a transit line because the Federal Government understands that we do not have the resources to build all the parking 

lots that we would need in order to take care of people using the 

highways. If we had all of our Federal workers on the highways, 

they would never get there because we do not have enough roads. 

If you take a look at the dollars—and maybe you should do this 

for us—as to how much more you would have to spend in highway 

maintenance if we did not have a transit system to deal with people getting to and from work. You know, we are building a new 

road in Maryland, the ICC. That is going to cost close to $3 billion. 

So transit saves us highways and highway maintenance dollars 

and allows us to have a way that we can bring our communities 

together. 

I would last point out on this argument of rural versus urban, 

in our State, on the eastern shore and in western Maryland, transit 

is critically important. They understand that. Now, maybe we could 

be more effective in rural communities on transit, and we should 

look at that. But it is important in Salisbury, it is important in 

Cumberland, Maryland, to have transit to get people to and from 

work. 

So I just want to urge you to keep focused on it, and I have not 

even gotten to the other issues of our national security, of using 

less energy and a cleaner environment. So this is an important 

issue for our Nation, and I just want the Chairman to understand 

that this Senator is going to continue to fight for adequate infrastructure financing for all the modes of transportation because I 

think we need—it includes also our bill we just passed for the airports, the port modernization, and rail. 

In rail, we need to get to the next generation. Thank you for 

what you are doing on high-speed rail—I think that is important— 

for inner city rail. All of the above we are going to need if we are 

going to be able to have a sensible transit project. 

With Senator Warner here, we live in the second most congested 

area in the country, and we all, I think, have a responsibility because the Federal Government is mainly responsible for the transportation challenges we have in this community. And it is important that the Federal Government maintain its responsible share 

in dealing with the transit costs. We are going to be talking about 

that because the House-passed budget did not. And we are going 

to fight for the Federal Government doing what it is responsible 

for. We do not want to see newly created unfunded mandates to 

local governments as a result of what is coming out of the House 

of Representatives. 
978 

Now, I had one question which was dealing with groundwater, 

storm runoff. I have asked you about this before. I have the honor 

of chairing the Water and Wildlife Subcommittee on the Environment and Public Works Committee, and we need partner wherever 

we can. And high construction—and I really do applaud you because we are using the best practices. It can make a major difference on the amount of storm water that runs off in a very inefficient way, or in an efficient way, and the way we do our highways 

can be critically important. 

So I just really want to get your reply as to how you see the priorities in your agency helping us deal with the proper management 

of storm water. 

Mr. LAHOOD. Well, as you know, Senator, we stole away from 

your State your Secretary of Transportation, John Porcari, and he 

is our Deputy Secretary now, and he knows these issues intimately, 

having worked on a number of road projects in your State. We are 

committed to work with the EPA and work through the environmental impact statements to make sure that whatever responsibilities we have to take in terms of providing the resources to make 

sure that when the construction takes place there is the right, you 

know, avenues for water and runoff and all of those things. 

You know, our commitment is to work with the other agencies 

to make sure that it is done correctly and properly and that we provide the resources to do that. 

Senator CARDIN. I thank you, because the private sector really 

looks to what we do in Government, and if we do not set the example—we have done that on our energy standards. We need to do it 

on our environmental commitments on storm water. It can make 

a huge difference in getting the type of cooperation we need from 

the private sector as they develop their buildings and construction 

to also do the right thing. 

Secretary LAHOOD. Right. 

Senator CARDIN. We have rules, but if the Federal Government 

does not set the example, it makes it difficult to get the type of 

compliance—— 

Secretary LAHOOD. Right. We are committed to that. 

Senator CARDIN. Thank you. 

Thank you, Mr. Chairman. 

Secretary LAHOOD. Mr. Chairman, could I just respond to Senator Cardin about transit? 

Chairman CONRAD. Oh, please do. Certainly. 

Secretary LAHOOD. He and Senator Warner have the privilege of 

representing what I believe is, if not the best, one of the best transit systems in America. And I will tell you why I say that. I was 

struck when I was on the platform at President Obama’s inauguration and saw a couple million people out on The Mall. Almost every 

one of those persons was delivered there by the Metro system in 

Washington. It is a magnificent system. It was well designed. It is 

not without its problems, but it is a great system. And if you think 

of all the people that it delivers here to Capitol Hill every day and 

around this region every day, it really is a good system, and we 

support their efforts to improve. We are going to provide $150 million to, you know, do the fix-up on the infrastructure and help 

them buy new cars, help them buy safer cars. But this is America’s 
979 

Metro system, and it is a model for the rest of the country. And 

we have worked closely with your Metro system because we think 

it is one of the best, and we want to keep it that way, and we want 

to make sure it is the safest. 

And that is why, if I can put a plug in, Mr. Chairman, last year 

last year the Banking Committee passed by unanimous consent a 

transit safety bill that gives to the Department of Transportation 

some responsibility that we are currently prohibited from doing 

now, which is looking after safety in transit systems around America. And I hope there will be some Senators this year that will reintroduce that bill, give us that responsibility, because there is nobody in the Government looking after transit safety, and we need 

that. We need that responsibility. We need the Congress to give us 

that responsibility. And those of you who represent one of the 

greatest transit systems in America, I hope you will consider doing 

that. 

Senator CARDIN. Let me just very quickly, Mr. Chairman, agree 

completely, and that bill, of course, was strongly supported by our 

delegation here, and we want to see you have that authority. We 

have had difficulties with safety issues in regards to the Washington Metro system. 

Let me also just underscore the point that the $150 million that 

you have put in the budget, there was a 10-year commitment of 

$1.5 billion. You have carried out that commitment. Now it is our 

responsibility to make sure that stays in the budget. It was not in 

the House-passed budget. We are going to do everything we can to 

make sure it stays in the budget. 

And the last point, I also got to the inaugural through rail coming in from Baltimore, so rail is very important to get into the city. 

Thank you. 

Chairman CONRAD. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman, and, Mr. Secretary, 

it is great to see you. 

Secretary LAHOOD. Good morning. 

Senator WARNER. There are so many places to hit in 6 minutes 

and 54 seconds. Let me, first of all, thank you for all of your work, 

but let me start with associating, affiliating, and whatever other 

terms we use my comments and questions with my good friend 

Senator Cardin’s. And as a member of that Banking Committee 

that passed that bill out unanimously, I look forward to working 

with your office to make sure it gets reintroduced and gets again 

that kind of support from the Banking Committee. 

Secretary LAHOOD. Thank you. 

Senator WARNER. Because it is terribly important. The Washington Metro is a great system, but it has had its issues, particularly around safety. As a former Governor, this notion of where the 

ball lands in terms of safety was something we had never really 

fully thought through. 

But let emphasize again what Senator Cardin has said, is that 

it has taken—it took a long time for all of the State partners to 

pony up their share, but we got there. And as we build out some 

of these extensions and upgrade the facilities on Metro, it is, I 

think, both for the region irresponsible but from plain business 

planning purposes to kind of have the rug pulled out the way the 
980 

House budget proposes is something that we should not allow to 

happen. And I look forward to working with Senator Cardin and 

I hope a united bipartisan Senate on that issue. 

Secretary LAHOOD. Senator, let me just say, you are very modest 

about this, but when you were Governor, you were one of the leaders that made this system what it is today, and you should be congratulated for all of your leadership on making Metro what it is 

today. 

Senator WARNER. Well, thank you. When we first tried to convince our folks in Northern Virginia how we would help pay for 

that share, I got my tail whipped. I wish you had been Secretary 

then to give that support. 

Let me also echo my good friend the Senator from Rhode Island’s 

comments with one slight amendment. 

Senator WHITEHOUSE. Is that the southward amendment? 

[Laughter.] 

Senator WARNER. One slight amendment. As we have discussed, 

we were concerned in Virginia—I think it is great that we are moving forward on high-speed rail, but building out pieces in Florida 

or elsewhere, or to my good friends in North Carolina, building out 

these segments without a connection, without a connection to the 

Northeast corridor that starts from Washington up through Boston, 

to me, you know, did not make necessarily all that much sense. 

And when we think about a corridor where we do not have the 

amount of congestion and other issues and more of a straight shot, 

our Nation’s capital, down the 95 corridor through Richmond, connecting with Hampton Roads and down into North Carolina, I cannot think of a better place with higher potential usage and a more 

willing bipartisan support at this point than the Commonwealth of 

Virginia. 

I know you were able to move very quickly on some of those others dollars that came back from the Midwest, but if those Florida 

dollars—and I say this with trepidation and Senator Nelson is not 

here. If those Florida dollars get back in the pot—I love my friends 

in the Northeast, but if we wanted a great demonstration example 

of how to do high-speed rail, we look forward to Virginia’s application being perhaps more competitive than it was in the first round. 

Now let me come to, in my 3 minutes left, something that Senator Sessions and I have talked a lot about, and Senator 

Whitehouse as well. We have to figure out how we are going to 

fund transportation, but we have also got to make sure that, within 

our limited dollars of how we fund, we have better performance 

metrics. And I want to commend you and your Department for recognizing, I think for the first time in a long time, that we have to 

have performance metrics in our allocations; that some of the current formulas and some of the current approaches just do not get 

it. 

I am glad that your proposal includes the establishment of performance measures for highway investments and repair investments at the FHA. I do think we need more. As you know, I have 

been working with the Bipartisan Policy Center about how we 

make sure that these metrics and data are out there so we do not 

just have these kinds of arguments back and forth, but we have actually some ability to evaluate. 
981 

One of the things I think we have to do, though, is make sure 

that these metrics go outside of highway but that they are kind of 

mode neutral. And I would like for you to comment for a moment 

about the whole sense of metrics, how we make sure that we have 

some mode neutrality in this, that we really look at moving people 

and goods as the goal, not simply highway miles traveled, vehicle 

miles traveled, that we look at—— 

Secretary LAHOOD. Well, on both of your points, the reason that 

Virginia is going to be significant in high-speed rail is because of 

your leadership, meetings that you have called that we have attended. You are really persuading us that there is a lot of leadership in Virginia thanks to you and other members of your delegation. 

Senator WARNER. Bipartisan support. Let us make sure we get 

that on the record again. 

Secretary LAHOOD. Absolutely. But, again, you are being a little 

modest here. 

Senator WARNER. That is not something I have often been accused of, Mr. Secretary. 

Secretary LAHOOD. I think you have pressed on this, and the 

reason we have really gone to these performance standards is because of what you have said to us over the last couple of years. We 

get it. We think it is important. We think it is a way to show the 

Congress and the country that we are just not spending their 

money willy nilly, that we are just not spending money because the 

Congress gave it, but there are performance standards, and it will 

be multimodal and it will be an opportunity for us to really measure and judge using good metrics to make sure that taxpayer 

money is being spent in a way that reflects the values of the Congress. And we took our cues from you on that. 

Senator WARNER. You are more generous with your comments 

than the actual record is, but I will take them. 

Let me on the last comment just say I am very intrigued with 

the infrastructure investment bank that you have talked about. I 

do have some of the concerns that Senator Thune has, that, you 

know, we have to make the financing work the right way. It is not 

free money. But some of the existing programs, the TIFIA program 

and others, they do have a tendency to bias toward highway. How 

do we make sure we get that mode neutral right in the infrastructure investment bank? My time has expired. 

Secretary LAHOOD. We want to work with Congress on this infrastructure bank and make sure we do get it right. And we want to 

make sure that it is money that can be leveraged with TIFIA, with 

tolling, with other opportunities from the private sector that want 

to make investments. 

It would not be the sole source of funding. What it would leverage is tolling, TIFIA, private sector money, maybe some State 

money, maybe some additional Federal money out of highways or 

something. So it really is—we think it is an opportunity to leverage 

some additional money and really get some other players involved. 

And that is the way we see it. 

Senator WARNER. My time is up, but do you see this bank being 

transportation only, or do you see it ultimately migrating to include 

smart grid and other kinds of infrastructure-related projects? 
982 

Secretary LAHOOD. Well, we see it in our proposal for transportation. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Sanders. 

Senator SANDERS. Thank you, Mr. Chairman. 

Mr. Secretary, thank you very much for the very important work 

you are doing. Sometimes what gets lost in the shuffle is the disastrous condition of America’s infrastructure, the fact that we are 

falling further and further behind many other countries, and the 

point that you have made, and made repeatedly, is that if we are 

serious about pulling ourselves out of this recession and creating 

decent-paying jobs, investing in the infrastructure—our roads, our 

bridges, public transportation—is perhaps the fastest way we can 

do that. So count me in as somebody who supports the thrust of 

your argument. I think it is exactly right. And to my mind, investing in infrastructure, creating decent-paying jobs frankly is a lot 

more important than giving tax breaks to millionaires and billionaires for the future of this country. So when our friends ask where 

the money is coming from, I think some of us know where the 

money could come from. 

Let me just get to a question. In Vermont, we are concerned. We 

have a new Governor, and I would like the opportunity to chat with 

you, maybe bring the Governor into that, to talk about transportation needs in Vermont. Is that something that we could do? 

Secretary LAHOOD. Absolutely, and I met your Governor at the 

White House when he was here for the Governors’ meeting, and I 

think he is going to be very progressive on transportation issues. 

Senator SANDERS. I think he will, and the problem in our State, 

as in many rural States, is that people often have no option other 

than the automobile to get to work. So how we can address some 

of those needs is important. 

Second of all, you received and responded to a letter that the 

Vermont delegation sent to you requesting that you extend the designation of the Northern New England High-Speed Rail Corridor to 

include a 120-mile segment between Springfield, Massachusetts, 

and White River Junction, Vermont. I know it is an issue you are 

looking at. 

Secretary LAHOOD. Yes. 

Senator SANDERS. It is an issue we would like your support on, 

and let us continue talking about that as well. 

So I will just end with that and to say that as a Nation, Mr. 

Chairman, we should be deeply concerned that in China they are 

building high-speed rail all over the place, and that we—Mr. Secretary, you correct me if I am wrong. Are we the only major nation 

on Earth that is lacking in real high-speed rail at this point? 

Secretary LAHOOD. Well, we are one of a few, that is for sure. 

Senator SANDERS. And would you agree with me that if we want 

to take cars off the road, if we want to lessen the heavy traffic at 

our airports, high-speed rail is one way to go? 

Secretary LAHOOD. High-speed rail will provide thousands of 

jobs. It will help the economy. It will provide lots of green jobs, and 

it will provide alternative transportation that does not exist in 

America today. And this is what Americans want. It is not just 

President Obama or Vice President Biden or Ray LaHood. This is 
983 

what Americans want. You have people all over the country that 

have worked on high-speed rail for over two decades, and 33 States 

and the District of Columbia have accepted the $11 billion that we 

have put out so far because they want to connect America with 

high-speed rail. 

Senator SANDERS. And I think others have raised this point. If 

there are States that choose not to take the Federal money, please 

put Vermont at the top of the list. 

Secretary LAHOOD. Yes, sir. Your Governor made that very clear. 

Senator SANDERS. We will take that money. If other States do 

not want it, that is fine. 

Go back to a point you made earlier. In terms of job creation, if 

we are investing in roads, bridges, tunnels, how many jobs do you 

see being created in that type of investment? 

Secretary LAHOOD. Well, I would just say this. The $48 billion 

that was in the stimulus program created 15,000 projects and 

65,000 jobs. We did that in 24 months, and we did it by the way 

Congress said to do it. You have not seen any bad stories written 

about our stimulus—none—because we did it the right way. We did 

it the way you all told us to do it, and we put 65,000 people to work 

in 2 years with 15,000 projects. 

Senator SANDERS. But you would not deny—and, by the way, I 

happen to believe that the stimulus package did pretty much what 

it was supposed to do. It created 2 or 3 million jobs. I agree with 

those people who say we should have put more money into infrastructure. But let us not ignore the other very good things, and my 

State opened up a whole lot of other areas. But I will tell you that 

the stimulus package in Vermont put more money into our roads 

and bridges than we have ever seen in the history of the State. But 

you would agree, I think, that that is just the tip of the iceberg. 

Secretary LAHOOD. Tip of the iceberg, absolutely. 

Senator SANDERS. Give me an idea, give us an idea—and I understand the funding issue. We cannot create money out of our ears 

here. But if you had your druthers, what would we be investing in 

infrastructure in America? 

Secretary LAHOOD. Over the next 6 years, the President put out 

a plan for $550 billion. That is as bold as any President—no other 

President has been that bold. No other President has stepped up 

with that kind of a plan, $50 billion for high-speed rail. Never that 

kind of investment. We have increased funding for roads and 

bridges. It is now over—it will be over $300. 

Senator SANDERS. All right. Let me ask you again a question 

whose answer is obvious, and I speak as a former mayor. If we 

have a crumbling infrastructure, which I think many people recognize that we do, and you do not invest in that infrastructure, if 

States all over this country are facing enormously serious fiscal 

problems and are unable to do that, if you do not invest in infrastructure, does the infrastructure, our roads and bridges, magically 

get better? 

Secretary LAHOOD. They actually become unsafe, Senator. 

Senator SANDERS. Not only do they become unsafe, will it cost 

more money to improve them as they deteriorate—— 

Secretary LAHOOD. Costs go up every year for infrastructure. 
984 

Senator SANDERS. So we are in a situation where, if you do not 

invest now, you are simply going to have to invest more later. We 

are in a situation now where we have a horrendously high unemployment rate. Now is the time to invest to create the jobs. The 

Federal Government has that responsibility. Where do we get the 

money? Well, I would say to my good friend from Alabama that investing in infrastructure is a lot more important than giving tax 

breaks to billionaires. He may disagree with that. That is my view. 

Mr. Chairman, thanks very much. 

Chairman CONRAD. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you, Mr. Secretary. 

Secretary LAHOOD. Good morning. 

Senator MERKLEY. Good morning, and I know that you will be 

out in Oregon soon to visit Oregon—— 

Secretary LAHOOD. Yes, sir. 

Senator MERKLEY. —Iron Works and attend a gathering of the 

Bicycle Transportation Alliance. I am sorry I will not be able to be 

there with you, but I know you will get a firsthand view of the 

street cars under construction at Oregon Iron Works and some 

other good projects. And thank you so much for your support of 

smart transportation modes. 

Secretary LAHOOD. Thank you. 

Senator MERKLEY. In the budget from the Department, it notes 

that the Administration will bolster metropolitan planning, award 

funds to high-performing communities, and empower most capable 

communities and planning organizations to determine which 

projects deserve funding. 

When I read those words, they sounded a little bit akin to a concept I have been promoting, and I am not sure they are the same, 

but I will use this as a chance to ask you if they are. But essentially I have been working on legislation that would encourage communities and States to use performance-based planning where the 

local community would set goals for how they want to grow on a 

range of factors from economic development to congestion reduction 

to a reduction in oil dependence. They would then develop several 

scenarios to weigh or to compare how they perform against those 

standards, and this sort of scenario-based planning captures the 

interaction of different modes of transportation. So that concept, is 

that akin to what you are talking about in your planning document? 

Secretary LAHOOD. One of the things that we learned during the 

six town meetings or listening sessions, or whatever we were calling them—transportation authorization listening sessions that we 

held around the country—is that there needed to be some change 

to incorporate more ideas. And as I said to Senator Warner, we believe these performance standards are critical so that taxpayers 

know and that you can go back to taxpayers and say, hey, they are 

using metrics to make sure this money is being spent correctly, and 

they are basing it on some performance standards. 

So I think what you have said is where we are at and what we 

would like to incorporate in a transportation bill so that we can say 

to taxpayers this money is being spent according to these metrics 

and really have some good performance standards. 
985 

Senator MERKLEY. Well, thank you. I appreciate that a lot. 

Another concept that we have been talking about is practical 

project design that would empower local communities to plan 

projects that are more tailored to their local needs, most cost effective. We hear from a number of communities that they get frustrated that the State Departments of Transportation have very 

rigid design guidelines that increase the project costs, maybe the 

same large lanes or the same large ramps, regardless of the community context. Is this concept of additional flexibility in design 

something that fits in with the way you are approaching the transportation—— 

Secretary LAHOOD. Well, look, we have great partners at the 

State level. We work with them day in and day out. And we will 

continue to work with them. We know that sometimes it can be 

frustrating for local folks to get their projects through the State. 

We know that the TIGER program was very successful because 

people with creative ideas brought them forward, and we looked at 

them and we thought they could be creative and do some creative 

things. We awarded the money to them, and certainly your State 

benefited from that program. 

We are going to continue to work with our State partners to 

make sure they understand that we want to get projects done, we 

want performance standards, and we want to make sure that all 

the stakeholders are involved in the process. 

Senator MERKLEY. Great. Thank you. 

One of the other changes that is in your budget is consolidating 

55 highway programs into five streamlined ones. How do you see 

that in terms of the application process for the communities that 

are seeking funds, any—let me put it this way. A lot of our smaller 

communities do not have a lot of grant writers, and when I saw 

this, I thought this is going to make it a little easier for them to 

track opportunities to apply and find the funds that match their 

community and easier for us as a congressional office to help them 

find funds that they can apply for. 

Is that part of the thinking that went into this or—— 

Secretary LAHOOD. Part of the thinking is that we want to follow 

the President’s lead on trying to reform agencies and make sure 

that the Department of Transportation comes into the 21st century, 

continue to work with our partners, but really squeeze a lot of programs together. Almost everything now is multimodal. It might involve—you know, the bridge that they are going to build across the 

Columbia River is certainly multimodal. It involves transit, it involves cars. It involves, you know, the ability of people to bike and 

walk across the bridge. It involves tolling, and it involves a number 

of things. And so we want to make sure that we have an organization that is lean but also takes the best talent we have so that we 

can give people access so they do not have to go through 50 layers 

of bureaucracy to get done what they want to get done. And we 

know a lot of things are going to be multimodal, and we have really 

tried to take the best and the brightest, put it together, and make 

it certainly more accessible to States around the country. 

Senator MERKLEY. Well, I want to applaud the work you are 

doing on that because I do think that it is exactly the right direction for the reasons that many things are multimodal, and also 
986 

that in terms of communities being able to understand how and 

where to apply, it greatly simplifies it. 

You mentioned the Columbia River Crossing, and that is a huge 

regional challenge, including the extension of light rail across the 

river, pedestrian and bike paths, but having an effective passenger 

and freight corridor as well. It is just such a huge choke point. I 

appreciate that you are familiar with it, and we are doing all we 

can to get all of the community leaders to come together behind a 

common design, and I will certainly be working with you all on 

that project. 

We have others—the extension of our light rail into the 

Milwaukie area—and your Department has been extremely helpful 

in that. And I just in general want to applaud your—you have been 

a breath of fresh air since you came in in terms of thinking about 

transportation and making it cost effective and functional. I guess 

I echo Senator Warner’s comments about it is not about how many 

miles you pave or how many miles you build, but how do you make 

the transportation system overall work better, and that has been 

a concept that Oregon has been pursuing for a long time and that 

I think you have really come to take forward to the benefit of 

transportation across this country. 

Secretary LAHOOD. Well, thank you, Senator. You have some 

great leadership in your State. I just met with the Governor of your 

State, and also Washington, and we talked about the multimodal 

nature of the bridge, the Columbia River Bridge Crossing, and the 

multiple ways that we are going to fund it. It is very creative. It 

is going to happen. It is needed, and you have some great leadership in your State. 

Senator MERKLEY. Thank you. I look forward to continuing to 

work with you. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. Thank you, Senator. 

Mr. Secretary, I would like to now just take a few more minutes 

and Senator Sessions will take a few more minutes. 

Secretary LAHOOD. Sure. 

Chairman CONRAD. If Senator Coons has returned by the time 

we are done, we will have him have time. If not, we will shut it 

down. 

I want to raise the issue that you are very well aware of, Devils 

Lake, North Dakota. Devils Lake is a lake that has risen more 

than 30 feet in the last 15 or 16 years. Devils Lake is now three 

times the size of the District of Columbia. Devils Lake is now forecast—we just have in the last week a most recent forecast from the 

National Weather Service that the lake is going to go up another 

three feet this year. That puts it perilously close to an uncontrolled 

release of water out of the east end of the lake, where the water 

quality is many times worse than the water quality in the west end 

of the lake. 

As you know, the entire transportation system is compromised in that part of our State. We have already spent $850 million—that 

is Federal money alone—$850 million dealing with the flood threat 

in the Devils Lake basin. We have had hundreds of thousands of 

acres that have been flooded and inundated. People have lost access to their land. We have spent hundreds of millions of dollars 
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raising the road network and building a massive dike—it has been 

raised three times—protecting the city of Devils Lake. We have a 

town that is about to be flooded on the west end of the lake, the 

little town of Minnewaukan. The school is directly threatened. We 

have $6 million than has just been secured to move that school. We 

need to move much of that community. 

The road and bridge network in the area, as you know, has been 

raised repeatedly and we require additional work or parts of the 

road network are going to go under this year, and maybe you could 

give us an idea of what the plans are in the Department of Transportation to continue to help us with this crisis. 

Secretary LAHOOD. Well, Senator, thanks to your leadership and 

others in your delegation, we will be committed to working with 

you and others in the State to do whatever is necessary to make 

sure that the roads and bridges are not compromised, that communities are not compromised. We are committed to doing whatever 

we can to make sure that we take care of continuing to fix the 

problem. 

Whoever named this Devils Lake named it aptly. I think that 

this—the devil is responsible for this. I mean, I do not know how 

else to explain it. It is something that belies belief or belies nature. 

So I do not know who else to blame but the devil, so that is why 

his name is on it, I guess. Somebody was prophetic in putting that 

name on it. This is a natural disaster and we are committed to 

working with you to do whatever it takes to make sure that roads 

and bridges and communities are not compromised. 

Chairman CONRAD. I appreciate that, and you have been great. 

You know, I think so many people in the Federal bureaucracy have 

hoped that this lake was going to just stop going up. We know in 

4,000 years of history, this lake has gone through this cycle before, 

and it is now on its fourth time. And when it has gone through this 

cycle, it has led to an uncontrolled release of water out of the east 

end. If it happens this time, now that that part of our State is populated—in the previous times it has happened, there was very little 

population—this will be a disaster of staggering proportions, absolutely staggering proportions. 

And so I wanted to again alert you to this latest forecast that 

predicts that the lake is going to rise much more than the previous 

forecast, and so we have an ongoing crisis. And I thank you for the 

help you have already given and I thank you for the attention that 

you, I am sure, will give to it in the weeks ahead. 

Secretary LAHOOD. Yes, sir. 

Chairman CONRAD. Senator Sessions. 

Senator SESSIONS. Mr. Secretary, just to push back a little bit on 

this high-speed rail, the President wants it available to 80 percent 

of the population. You talk about $53 billion, but there is going to 

be hundreds of billions if anything like that were to occur. And I 

would just note that in Tampa, to Florida, the Governor there has 

rejected that after careful review. I do not think he did that because he wanted to. I think he did it because he felt it was not a 

defensible matter economically. Governor Kasich has rejected $385 million for a passenger rail 

line, Cleveland to Cincinnati through Columbus, Dayton. I am sure 

they have given great thought to that. It is their State. I am sure 
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there are people there that want to see the free money from Washington. You have Wisconsin, Governor Walker rejecting an $810 million 

connection. You have California with a high-speed rail line to nowhere out in the desert, some $5.5 billion on that project. In Minnesota, that plan has controversy, cost concerns, and without the 

Wisconsin connection, it is probably indefensible. 

So I just want to say, what I am hearing about and what I think 

most of us are hearing about is how to get across the 14th Street 

Bridge. I mean, there are traffic intersections and problems and 

headaches all over cities and I just think we have to be realistic. 

And we will have a tough debate about it, and where it can be defended, I will acknowledge that. In some areas of the Northeast, I 

think it probably can be. In some other areas, it cannot be. 

No. 2, would you look at a situation that I think is systemic dealing with a two-lane intersection improvement in Alabama. Two 

roads cross, two-lane roads, and they want to fix the intersection 

and are told they have to have a NEPA review, environmental review, for 30 miles on either side of that intersection. And apparently, this is a systemic problem and I was advised of it by my people yesterday and they asked me if we could seek relief and I will 

followup in writing with you. 

Secretary LAHOOD. Yes, sir. We will look at that. 

Mr. Chairman, could I just respond to the high-speed rail? 

Chairman CONRAD. Sure. 

Secretary LAHOOD. What we are pleased about, Senator Sessions, is that 33 States and the District of Columbia have accepted 

more than $11 billion because they believe in high-speed inner-city 

rail. They believe in the President’s vision. I have talked to Governor Brown twice about high-speed rail, Governor Jerry Brown of 

California. They are going to move ahead with their project. Eventually, there will be a connection to the so-called rail line that you 

claim is going to dead-end somewhere. 

I met with Governor Dayton of Minnesota when he was here for 

the Governors’ meeting. He came to my office. I spent an hour with 

him. He is a very strong advocate of high-speed rail. He asked for 

our cooperation and we are going to work with him on that. 

There are some Governors who, for whatever reasons, believe 

that, at least in Ohio and Wisconsin, and we are going to hear from 

the Governor of Florida tomorrow who is going to give us a final 

decision on high-speed rail, but you are correct about Ohio and 

Wisconsin. They have decided to go a different direction. But that 

will not dissuade the other 33 States and the District of Columbia 

from moving ahead with the investments that we have provided 

and matched with a lot of local resources. High-speed inner-city 

rail is coming to America because that is what the people want. 

Senator SESSIONS. Well, it may show in polling data, but when 

the numbers become reality, the support is not so strong. And I 

just would say we are going to have to look at that closely and I 

have doubts, as these Governors have indicated. It is hard to turn 

down free money from Washington, though. A lot of States may 

find themselves lured into projects that end up costing far more 

than they expected and doing far less than they expected, so it is 

a matter of good debate. Thank you, sir. 
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Secretary LAHOOD. Thank you. 

Chairman CONRAD. I thank the Senator. 

Senator Coons. 

Senator COONS. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary, for your passionate defense today of the important infrastructure investments that are projected in this year’s budget. I 

think you have been a vital part of the Administration. I think 

your vision for modernizing and streamlining and investing in infrastructure around transportation is critical. 

I just want to ratify some comments that were made earlier. My 

previous role was as a county executive. We made great use of the 

Build America Bonds. They were well received by our private sector community. We were able to create jobs with them. I have already spoken with Senator Wyden and hope to speak with Senator 

Thune. I will join them in whatever way they can to try and move 

them forward. I think we need creative financing mechanisms like 

an Infrastructure Bank. Some would say that Delaware is the case 

study for tolling. We toll everything. We probably collect more per 

mile of highway tolls than any State in America. 

On to high-speed rail, if I might. As our Vice President did for 

so many years, as my senior Senator Carper does every day, I commute almost every day by rail from my home in Wilmington to 

Washington and am sold, and have been for years, on the value of 

inner-city passenger rail, and in particular the promise of highspeed rail. I think it will put people to work. I think it will make 

us more competitive. I will join Senator Whitehouse in saying, 

should the Governor of Florida be so foolish as to turn back funds, 

please reprogram it as swiftly as possible, and it is our hope that 

the Northeast corridor will be highly competitive in that. 

I understand that the FRA is leading a region-wide Environmental Impact Study, and that EIS, the Environmental Impact 

Statement, for high-speed rail in the Northeast corridor has hit 

some snags, some delays, there are some challenges, and that that 

may be part of why we are not seeing as much coming to our region 

and to the Northeast corridor in funding as could be. 

Can you help me understand what I might be able to do, what 

barriers you see in terms of moving that forward? What do we need 

to do to get more investment in high-speed rail in the one part of 

the country where there is already a corridor that benefits from it 

daily? 

Secretary LAHOOD. I think more than anything else, one of the 

things that we are going to do is include Amtrak as a potential applicant for high-speed rail money. I think we were not able to do 

that earlier on and we think we can. I think once that happens, 

I think there will be a lot more opportunities on the Northeast corridor, frankly. 

You know, one of the criticisms was that Amtrak was not able 

to utilize this money and we feel there is a way now for us to include them and we are going to do that, and I think that will enhance the Northeast corridor’s ability to really step up and do some 

of the things that you and others have provided leadership on. So 

I see that happening in the near term. 

Senator COONS. Thank you. If there is anything I can do to be 

supportive of that move—— 
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Secretary LAHOOD. Thank you. 

Senator COONS [continuing]. I would welcome a chance to do so. 

I am also very concerned about the potential impact that the 

House-passed Continuing Resolution would have on Amtrak employment in my home State. I have been to the Bear and the Wilmington shops repeatedly. They have high-quality employees. I 

think they are critical to the mission of sustaining the train sets 

that you have in service in Amtrak today and could play a key role 

in high-speed rail in the future. My understanding is the Housepassed CR would cut 215 jobs in Delaware. What is your sense of 

the impact on transportation were we to, on the Senate side, pass 

the same level of cuts that the House side has already—— 

Secretary LAHOOD. Well, I would recommend that the Senate not 

do what the House did. I would say that. Amtrak is doing as well 

as it has ever done in the history of Amtrak. They made money last 

year. 

Senator COONS. Yes. 

Secretary LAHOOD. People like their service. They are providing 

on-time service. They are providing good food. They are providing 

a great form of transportation for people that people can afford to 

use, and ridership on Amtrak is through the roof. I know I am telling you everything you already know, but—so this idea that you 

should cut something that is successful is just, to me, not realistic. 

This is one form of transportation that takes cars off the road, 

provides clean, green transportation along a corridor that is one of 

the most congested corridors in the country, and to a company that 

now is making money, providing a good service, and should be rewarded by having as many passengers as they possibly can. Cutting their funding will not be helpful. It will be hurtful. 

Senator COONS. Can you tell me anything, Mr. Secretary, about 

the status of Amtrak’s application? They applied for an RIF loan 

for their electric locomotives that would also help them expand 

their fleet. 

Secretary LAHOOD. Mm-hmm. 

Senator COONS. What is the status of that? 

Secretary LAHOOD. Well, we are working on that and we are reviewing it and, you know, it is sort of in process. 

Senator COONS. What I would like to do is work with you as 

much as I could to make sure that Amtrak achieves the level of 

service that I think they are capable of delivering, both with the 

current train sets and with the next generation. 

Secretary LAHOOD. Yes, sir. We will do that. 

Senator COONS. Also, there are some substantial State of Good 

Repair needs in the Northeast corridor, as you are well aware. 

Some of them could fall under the System Preservation account, 

some under Network Development. How do you see the Northeast 

corridor fitting into this budget proposal and what sorts of benefits 

or investments might there be in the—— 

Secretary LAHOOD. I am going to ask Chris Bertram, our Budget 

Director, to give you the figures, but look, this Department of 

Transportation is very high on Amtrak. We think they have good 

management. We think they have a board that is paying attention. 

We think they are providing a valuable service. We think that the 
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fact that ridership is up, that they made money last year, is an indication, if you will pardon the pun, they are on the right track. 

Senator COONS. They are. They are. I am grateful to hear that 

from you, Mr. Secretary. 

Secretary LAHOOD. Could we just have Chris respond? 

Senator COONS. Please. Absolutely. 

Mr. BERTRAM. On the Northeast corridor for the State of Good 

Repair projects, most of those would probably be eligible under the 

new proposed System Preservation account, and then if there were 

sort of capacity additions or extensions that Amtrak would be interested in doing, they would be available under the Network Development account. 

Senator COONS. And do you think this budget provides adequate 

capital financing for those sorts of improvements in the corridor? 

Mr. BERTRAM. Yes. There will be almost $4 billion available for 

State of Good Repair, System Preservation type. Most of those 

probably would be for Amtrak, which would be quite a bit of an increase over 2010. 

Senator COONS. One last concern I have. There is a critical, oh, 

I think it is an eight-mile gap between Delaware and Maryland 

where there are two rails rather than three and there is a capital 

investment project that has already been design engineered, applied for, and there is funding, but it is not yet under construction. 

One of my concerns is that should there be some agreement that 

leads to recisions of financing or funding for projects like that, that 

there be particular attention given to that. 

The rail line congestion that exists between sort of Baltimore and 

Philadelphia could be critically advanced by finishing that rail that 

would allow then SEPTA and MARC to connect. It would make a 

significant advancement in the sort of variety of passenger rail systems that are accessible to our general community so that Amtrak 

can do what it does best, be a regional rail carrier, and then MARC 

and SEPTA can connect right at the Newark train station. 

I just want to say how grateful I am—— 

Secretary LAHOOD. Thank you. 

Senator COONS [continuing]. For the energy, the focus, the vigor 

you bring to this. It is difficult in other parts of the country, I 

think, for folks to assess effectively just how much high-speed rail 

can bring to them. I think we have a great work force working for 

Amtrak, and literally every day, I can tell you, you are right. They 

have better food, better service, more on-time delivery of a great resource for America. So anything I can do to work with you on rail, 

I would be grateful for a chance to do so. 

And Mr. Chairman, thank you for keeping the hearing open to 

accommodate my floor speech on patent reform. 

Secretary LAHOOD. Thank you for your leadership on this, Senator. We appreciate it and we will work with you. 

Senator COONS. Great. Thank you very much, Mr. Secretary. 

Chairman CONRAD. Thank you, and thanks, Senator Coons, for 

coming back quickly so that we could not have a break in the hearing. 

Let me just conclude, if I could, on some of what I heard from 

the committee on high-speed rail, because I hope colleagues will 
992 

think very carefully about the appropriate test for whether or not 

high-speed rail should be supported in our country. 

If the test is, is it going to be in my State, I do not think that 

is the right test. High-speed rail is probably not going to be in my 

State. But I support high-speed rail because I believe it is good for 

America. Look, I have things in my State that are not in other 

States that get Federal support. I have two of the largest Air Force 

bases in the country in my State. They are not in other States. But 

my colleagues know that those bases have value for America and 

so they support them. 

High-speed rail, it is very clear to me, has value for America, and 

we are all part of Team America. When I look at what Team Japan 

is doing, they have high-speed rail. I have ridden on it. I think it 

goes nearly 200 miles an hour. I have been on high-speed rail in 

Russia, a train that went almost 200 miles an hour. We see what 

is happening all across Europe with high-speed rail. If America is 

not to fall behind, if we are going to be competitive, we are going 

to have to have high-speed rail, and I believe it is one of those investments that actually will pay dividends in terms of the competitiveness of our country, in terms of attracting tourists to America. 

And by the way, I have thousands of people from my State, my 

little State of North Dakota, who come and ride the rail that is outside of my State. I have people who ride the Metro system here in 

Washington. Thousands of people from North Dakota have come 

here every year and ride Metro and ride the Northeast corridor 

rail. 

So we are not the individual States of America. We are the 

United States of America, and if we are going to be strong, I do 

not think the best can be, it has to be in my State or I am not 

going to support its funding. I think the test has to be, is it good 

for the country. I think we have to apply the additional test now, 

is it being paid for, because we cannot just add to the charge card 

when we are borrowing 40 cents of every dollar we spend. 

And the hard reality is when we look at the spending of the 

country today as a share of the GDP, it is the highest it has been 

in 60 years. The revenue as a share of GDP is the lowest it has 

been in 60 years. So both sides of that equation are going to have 

to be worked, but we cannot forget the fundamentals of economic 

strength and growth. And if we are not investing in infrastructure 

in America, we are making a big, big mistake. 

Mr. Secretary, I want to end as I began. I think you are exceptional. 

Secretary LAHOOD. Thank you. 

Chairman CONRAD. I have rarely seen a witness who is better 

prepared or does a better job of defending his position than you do, 

and I just want to thank you for the leadership you have provided. 

Secretary LAHOOD. Thank you, sir. Thank you for your leadership. 

Chairman CONRAD. We will stand adjourned. 

[Whereupon, at 11:52 a.m., the committee was adjourned.] 
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(1005) 

THE REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM 

TUESDAY, MARCH 8, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:03 a.m., in room 

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

Present: Senators Conrad, Wyden, Nelson, Cardin, Sanders, 

Whitehouse, Warner, Merkley, Coons, Sessions, Enzi, Crapo, 

Graham, Thune, Portman, Toomey, and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. I particularly want to welcome our two distinguished witnesses today: Erskine Bowles and Senator Alan Simpson, the CoChairs of the President’s National Commission on Fiscal Responsibility and Reform. Our hearing today will focus on the Commission’s plan and how it would address the Nation’s long-term debt 

crisis. 

I want to begin by thanking Erskine and Alan for the really outstanding job they did leading the Fiscal Commission. We never 

would have accomplished as much if it would not have been for 

their extraordinarily gifted and determined efforts. They made a 

significant personal sacrifice to come back to Washington to lead 

this Commission, and we owe them deep gratitude. I believe when 

the history of this period is written, their names will ring out as 

being leaders at getting the country back on track. 

I also want to thank them for starting the Moment of Truth 

Project, which they are launching today to continue pushing for a 

bipartisan solution to the debt threat that we confront. The Fiscal 

Commission succeeded in putting this issue in the national spotlight. There is now a growing consensus on the need to act, and the 

Commission provided a bipartisan road map for moving forward. 

Now, I believe we need to seize this opportunity. I believe we 

need to act this year. And that is why I have been part of a bipartisan group of Senators who are trying to turn the essence of the 

Fiscal Commission’s plan into legislation. If we can reach some 
1006 

kind of bipartisan agreement in the Senate, we hope it will provide 

more momentum to move toward a broad agreement this year. 

Here is what Admiral Mullen, the Chairman of the Joint Chiefs, 

said about the debt threat: ‘‘Our national debt is our biggest national security threat.’’ That is coming from the Chairman of the 

Joint Chiefs of Staff. 

Make no mistake. We are at a critical juncture. We are borrowing about 40 cents of every dollar that we spend. Spending as 

a share of our national income is the highest it has been in 60 

years. The revenue as a share of our national income is the lowest 

it has been in 60 years. No wonder we have record deficits. 
1007 

If we look at the gross debt as a share of the economy, we see 

that it will reach 100 percent this year, well above the 90-percent 

threshold that many economists regard as the danger zone. Two of 

our Nation’s leading economists, Carmen Reinhart and Kenneth 

Rogoff, studied the impact of debt on economies. They looked over 

a 200-year span at 44 countries, and this is their conclusion: ‘‘We 

examined the experience of 44 countries spanning up to two centuries of data on central government debt, inflation, and growth. 

Our main finding is that across both advanced countries and 

emerging markets, high debt/GDP levels’’—above 90 percent gross 

debt to GDP—those levels ‘‘are associated with notably lower 

growth outcomes.’’ So if people wonder what this is about, this is 

about our economic future. This is about opportunity, this is about 

jobs, this is about the economic strength of the Nation. 
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This is not just about numbers on a page. This is not just about 

bar charts showing deficits and debt. This is about the economic future of America. And the conclusion of the Reinhart-Rogoff study 

is that when you get a gross debt above 90 percent of GDP, your 

future economic prospects are compromised, are reduced, and reduced substantially. That is why this matters. 

I believe the only way we are going to solve the Nation’s longterm fiscal imbalance is by enacting a comprehensive debt reduction plan. We need a plan of the size and scope of what was proposed by the President’s Fiscal Commission. The proposal would reduce the debt by $4 trillion over the next decade. It would put us 

on a course to get the debt stabilized and then brought down as 

a share of GDP so that we would be in a position to handle future 

shocks that none of us can anticipate. 

I believe a plan like the Commission plan must include spending 

cuts, entitlement changes, and fundamental tax reform that simplifies the Tax Code, lowers rates, and raises more revenue. The 

Commission plan provided such a balanced approach. Its savings 

come roughly equally from non-defense discretionary, defense discretionary, mandatory spending, and revenue. It is worth emphasizing that savings from Social Security reforms in the Commission 

plan are used only—and I emphasize ‘‘only’’—to extend the program’s solvency, not for debt reduction. 

If there is one message I would like to get out there as clearly 

as I can, the savings in Social Security were redirected to Social 

Security to extend its solvency, not for debt reduction. 
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This chart highlights the key elements of the tax reform included 

in the plan. The plan eliminates or scales back tax expenditures 

and lowers tax rates. And, by the way, tax expenditures are now 

running over $1.1 trillion a year. Tax expenditures are as big as 

all of regular—that is, non-war related—discretionary spending. 

And it makes the Tax Code more progressive. It promotes economic 

growth and improve America’s global competitiveness. If we are 

going to reform the Tax Code, one thing we have to have in mind 

is the competitive position of the United States. We are no longer 

so dominant that we do not have to worry about the effect of our 

Tax Code on the competitive position of the United States. 
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Notably, the Commission’s report included an illustrative tax reform plan that demonstrates how eliminating or scaling back tax 

expenditures can actually lower rates and produce more revenue. 

Instead of six tax brackets for individuals, the illustrative plan included just three brackets of 12, 22, and 28 percent. The corporate 

rate would be reduced from 35 to 28. Capital gains and dividends 

would be taxed as ordinary income. The mortgage interest and 

charitable deductions would be reformed, better targeting their 

benefits. The child tax credit and earned income tax credit would 

be retained to help working families. And the alternative minimum 

tax would be repealed. 

The Commission’s plan also increases revenue to 21 percent of 

GDP by 2022 and over time actually balances the budget. That is 

the kind of tax reform we will need to adopt. That along with the 

spending reductions and the entitlement reforms are what is required to actually succeed. 

Let me just conclude by showing the different paths forward of 

the various plans. You can see the course that we are on is going 

to take us to a debt-to-GDP—and this is publicly held debt now, 

not gross debt; publicly held debt of 233 percent of GDP on the current course. The Ryan road map takes us to a place I do not think 

we want to go because that is over 90 percent of GDP for publicly 

held debt. On a gross debt basis, that would be higher. 

The plan by the Commission takes us to publicly held debt of 30 

percent of GDP. On a gross debt basis, that would be even higher. 

That is to me a responsible target, one which would allow us to 

handle any future shocks that we might experience as a Nation. 
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So that is why we went a little further than just stabilizing the 

debt. We actually brought it down markedly as a share of the economy so that we could handle future shocks. 

With that, I am going to turn to my excellent colleague Senator 

Sessions for any opening statement that he wants to make, and 

then we will go to the witnesses. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Mr. Chairman, for those wise remarks and our challenge to us all. 
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Senator SIMPSON AND MR. Bowles, thank you for appearing before us and for your very successful report that in a mature, wise, 

and indisputable fashion affirmed the growing consensus that our 

Nation is on an unsustainable path of surging debt. 

We live in an ordered universe, and the laws of finance are as 

immutable as the laws of gravity. Nothing comes from nothing. 

Government debts have the same kind of consequences that individual family debt does. Deficits do matter. They always have and 

always will. Too much debt has always brought destruction, and it 

always will. 

But some of our great minds have thought they knew better. 

They mock the green eyeshade folks who worry about debt until, 

of course, the wolf is at the door, and then they say, well, we did 

not mean that much debt. Now our financial masters say it is all 

Congress’ fault, and it is a lot of Congress’ fault; but you have to 

clean it up, Congress. And we do. But do not be too quick, be careful, do not go too far, do it just right. For sure do not take any action that might affect my investments or my program or my interests that are there. It is the other programs that are wasteful, not 

mine. 

Your Commission rose above that. For the most part, it was not 

without compromise. Your recommendations I think should have 

gone even further. But it was a bipartisan effort, and it left no 

doubt that our debt problem is not imaginary but very real, even 

immediate. 

When former Chairman of the Federal Reserve Alan Greenspan 

told the Wall Street Journal a few weeks ago that our Nation has 

a little better than a 50/50 chance to avoid a debt crisis in 2 to 3 

years, surely we can take the hint that something serious must be 

done. And Moody’s said in December that—warning us that they 

could downgrade our debt in less than 2 years if we do not take 

action. So the Nation and much of the world is in a serious financial fix. 

If you read the comments of Wall Street, the fear there is real. 

Anger is real among the Wall Street people. Their words combine 

concern for our Nation’s future and short-term self-interest. But 

our best path I think calls on us to—some of our best people, I 

would say, are producing contradictory ideas for action, and it is 

causing some confusion. You have helped us cut through that confusion, in my view. 

So the House proposes meaningful spending reductions. Meanwhile, the President continues to advance his investment agenda, 

declaring against plain fact that his budget calls for us to live within our means and to begin paying down our debt. What world are 

they living in? Are we now through the looking glass, a post-modern world where words have lost all meaning? If so, our beloved 

Nation is in greater danger than many think. But I do not think 

so. 

The American people get it. We can do this. This is not impossible. Leadership at this time is most precious and in short supply. 

It seems to me that when confusion, uncertainty, hard times, even 

fear abound that good leadership like your report should call us to 

return to the tried and true—first principles, the old verities. We 

are vigorous, healthy people. We can accept the truth and get on 
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with fixing problems. The people know, if not the intelligentsia, the 

bubblized folks in Washington, that the right road will be difficult 

for a while, but that it will lead to prosperity and progress and preserve our great heritage of freedom and limited Government. The 

current road just leads to debt and decline. 

The first old verity is to start telling the truth, and the truth is 

this budget we have been presented does not live within our 

means, but instead doubles the entire gross debt of the United 

States from $13 trillion to $26 trillion by the end of the decade. It 

assumes no recession, low interest rates, and no new war or military conflict. It cannot stand. It will not stand. 

For the time and effort you have given this cause, we are much 

obliged. You have worked hard, given us clear picture of the danger 

we face and the methods available to overcome that danger. Your 

Nation is once again grateful for your service. 

Thank you. 

Chairman CONRAD. Thank you so much, Senator Sessions. 

We will now turn to our witnesses: Erskine Bowles, Alan Simpson, two people of real courage and character. And I would say to 

other members, including Senator Crapo who served on the Commission, as did I. The leadership of these two was really textbook. 

It could not have been done better. And at the end of the day 11 

of the 18 members endorsed the findings—five Democrats, five Republicans, and one Independent. That is about as bipartisan as it 

can be. And so welcome to the Budget Committee. Thank you for 

your leadership. I do not know who wants to go first. 

Senator Simpson, welcome. 

STATEMENT OF THE HONORABLE ALAN SIMPSON, CO-CHAIR, 

NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND 

REFORM 

Mr. SIMPSON. Thank you very much, old friend, and Senator 

Conrad and Senator Sessions. Thank you for your remarks. Thank 

you for, again, explaining it through those wonderful charts that 

we have been watching for many months. You have been very helpful, and you are very informative. And it is a great honor and privilege to be here, to be in this chamber, in these offices, this Capitol, 

and not be always inspired by the democratic experience. If that 

feeling ever leaves any of you, you want to leave. And it is a great 

forum. 

Erskine and I have left our witness protection program. We 

make sporadic appearances in various locations, as is today, and 

the people are waiting for us to go back into sequester when we 

leave. 

Let me just say this: It is a treat to look around this room and 

see friends of both parties that I thoroughly enjoyed when I was 

here. And over there is Mike Enzi. He replaced me, and people 

said, ‘‘Thank God’’ that he did that. 

[Laughter.] 

Mr. SIMPSON. It was a selfless effort. And he is an old and dear 

friend, and he and Diana are very dear friends. And this cat over 

here, Portman, was a staffer when I was on the Select Commission 

on Immigration and Refugee Policy. Now look at him: suave, a 
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piece of work. Rob Portman, as I say, Ron over there, Bill, I worked 

with all of them. 

But on with the business. I know that it is 5 minutes or something like that. 

This forum is where the most frustrating and irritating and cumbersome and sometimes sloppy work of legislating is performed. As 

an old cowboy said, ‘‘It ain’t pretty.’’ But as another Western rustic 

said, ‘‘If you hire on to be a cowboy and you draw a bucking bronco, 

you cannot complain.’’ And Erskine and I drew that critter. And he 

is a splendid man. He is a remarkable man, a creative and positive 

fellow with great integrity and an absolute joy to work with. And 

we have thoroughly enjoyed our time together, and work is what 

we do. We do work together. 

Folks say to us, ‘‘Why are you doing this?’’ And we say, ‘‘We have 

14 reasons.’’ He has eight grandchildren and I have six. It cannot 

be simplified any more than that. That is where this is. It is about 

my grandchildren and yours. It is not about us. 

It all started for me when I got this cheerful call from Joe Biden 

in January. He said, ‘‘Al, I got a real deal for you.’’ I said, ‘‘Thank 

you, Joe. Let me get Ann on the phone so she can laugh along with 

me so that we can get out of this.’’ He said, ‘‘No, no. Listen.’’ Joe 

and I worked together on many, many things when we were here 

together. 

And so I said, ‘‘Well, who is the Co-Chair?’’ And they said, ‘‘Erskine Bowles.’’ The first call I get is from Elizabeth Dole and Bob, 

my Leader. I was the Assistant Majority and Minority Leader. You 

need to serve in both of those capacities. It is very helpful in legislating if you are in the minority for a while and you are in the majority for a while. It kind of sobers you up. 

Anyway, the Doles called and said, ‘‘This is one of the finest men 

we have ever worked with.’’ And so it is, and so it came to pass. 

But let me tell you, it took us 3 months on this Commission to establish trust. Just plain trust. Trust used to be the coin of the 

realm around here. Let me tell you, the coin of trust is severely 

tarnished in this place, which is very sad. I worked with so many 

on the other side of the aisle, Kennedy and Pryor and Bradley and 

Bumpers, and Levin, who is still here. Dear Carl and I came here 

together. And we trusted each other, and I hope that that can come 

back. It came back in our Commission, and once we got through 

the initial hammering, which was who was the biggest spending 

President in the history of the world: George W. Bush, 6–12 years, 

never vetoed a single spending bill. Then this other side would say, 

yes, but your guy has outdone him 3:1. Finally, Erskine and I said, 

‘‘Look, we will just do a two-man report. It will just be the two of 

us, and it will not be mush.’’ Too much stuff comes out of here 

which is much. 

So off we went, and as they came around, a remarkable group 

of five Democrats, five Republicans, one Independent—Mike there 

was on it and, of course, the Chairman. But 60 percent of the Commission bought this. That is pretty good; 60 percent is kind of the 

big number around this place. It fits well with the filibuster activities, the magic number. 

When we go around the country, we just tell people—I do not use 

charts. This is the numbers guy. You are going to hear from him. 
1017 

And if you have any numbers or percentages that you wish to 

probe, this is your man. I do the color, he does the numbers. And 

it works so far. We still do things together if we can. 

Now, I have one more minute. I yield to myself one other, whatever we did there. 

What I tell people is very simple, and people in America are way 

ahead of all of you. They know what is going on because when you 

say, ‘‘Why don’t you go back and think what people are doing at 

their kitchen table?’’ I will tell you what they are doing at their 

kitchen table. They know that if you spend more than you earn, 

you lose your butt, and they know that if you spend a buck and 

borrow 40 cents of it, you must be stupid. And they have it figured 

out that this Government is stupid, to borrow 40 cents for every 

buck you spend. Forget the charts, forget the GDP and all the rest 

of it. That is where we are. 

The tipping point—I do not know where the tipping point is. Erskine and I would take questions on that. But Durbin kept asking. 

Give Senator Durbin the Medal of Honor. He stepped right in here, 

and at the end of his vote, he said his son called him and said, 

‘‘Thanks, Pop,’’ because that is what this is about. 

So, anyway, the tipping point, I do not know where it is, but at 

some point it comes when those people that hold our paper say, 

‘‘We thought these guys had the guts to attack Medicare, Medicaid, 

the solvency of Social Security.’’ Do not swallow this business that 

we are balancing the budget on the backs of poor old Social Security people. That is a fake. It is a phony. It is wrong. It is untrue. 

We are doing it so it will have its own solvency, and your chart 

showed it. 

So I just want to give you a couple of quotes—and let me just 

say about Social Security. Do not throw anything. There are people 

out here. I get that. I have a lot of e-mails that are choice and that 

I will hope never get into the public venue. Social Security is not 

a retirement. It was never intended as a retirement. It was an income supplement after the Depression. The average age of life was 

63, and that is why they set the retirement age at 65—the beginning of the greatest Ponzi of all time. 

Now the life expectancy is 77. There were 16 people paying into 

this system when I was at the University of Wyoming and one taking out. Then there were 10 paying in. Today there are three people paying in and one taking out. And in 10 years, there will be 

two people paying in and one taking out. How long do you think 

that kind of thing can be sustained? And the money has not been 

stolen by you greedy people. It is all choice stuff, highly—lots of 

frills and prints on the side, paper. It is paper. They were not going 

to leave that kind of cash, nor did President Roosevelt want it. 

That is why the statute said you could get in there and give full 

faith and credit to take it out. 

So, anyway, if you have to go through the myth and the anguish, 

just remember everything in this place, it was my experience, 

sadly, that you have to use facts, because you are going to have to 

beat back emotion, fear, guilt, and racism. Everything I touched 

was filled with emotion, fear, guilt, or racism, used a death blend 

either way to get it done or kill it. 

Two quotes, and then I will turn it over to the numbers guy. 
1018 

Cicero—boy, here is a crazy guy—said in 55 B.C.: ‘‘The budget 

should be balanced, the treasury should be refilled, public debt 

should be reduced, the arrogance of officialdom should be tempered 

and controlled, and assistance to foreign lands should be curtailed 

lest Rome become bankrupt.’’ 

Here is what Abe Lincoln said as a young man: ‘‘At what point 

then is the approach of danger to be expected? I answer, if it ever 

reach us, it must spring up amongst us....If destruction be our lot, 

we must ourselves be its author and finisher. As a nation of 

freemen, we must live through all time, or die by suicide.’’ 

And, finally, I do not know where this little baby came up, so I 

do not want any copyright infringement on it. ‘‘Gold is the money 

of kings; silver is the money of gentlemen; barter is the money of 

peasants; but debt is the money of slaves.’’ Go look at Alexander 

Hamilton. Go look at his statue. Look at what it says on there. Everything this country has meant had to do with getting rid of its 

debt. And, boy, here is your handful. 

So God bless you. 

[The prepared statement of Mr. Simpson and Erskine Bowles follows:] 
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Chairman CONRAD. Thank you, Senator Simpson. 

Erskine Bowles, good to have you here. 

STATEMENT OF THE HONORABLE ERSKINE BOWLES, COCHAIR, NATIONAL COMMISSION ON FISCAL RESPONSIBILITY 

AND REFORM 

Mr. BOWLES. Thank you, sir. I spent a long time trying to get 

here. I sometimes thank God for unanswered prayers. 

[Laughter.] 

Mr. BOWLES. I want to thank Senator Conrad, and he is not here 

but Senator Gregg. Without their leadership none of us would be 

here today to talk about this, so I thank you for having the courage, you and the group that stood up some years ago and said we 

are not going forward unless we have some Commission to deal 

with this. It simply would not have happened without you. 

Senator Sessions, thank you for meeting with us this morning 

and thank you for your kind words. 

I also want to thank Senator Crapo, Senator Coburn, and Senator Durbin for having the courage to support what is a politically 

very, very difficult plan to support. And I want to thank Senators 

Warner and Chambliss for your yeoman’s work in trying to turn 

what is a 67-page plan in plain English into legislative language 

and bring together a bipartisan group to make this happen. 

I am not going to use any notes today. I am just going to talk 

to you. And I am really concerned. I think we face the most predictable economic crisis in history. A lot of us sitting in this room did 

not see this last crisis as it came upon us, but this one is really 

easy to see. The fiscal path we are on today is simply not sustainable. This debt and these deficits that we are incurring on an annual basis are like a cancer, and they are truly going to destroy 

this country from within unless we have the common sense to do 

something about it. 

I was with former Senator Kerrey, Bob Kerrey, about a year ago 

exactly, and he said, ‘‘Erskine, look at the Nation’s current income 

statement, and let me tell you what you will see. You will see that 

100 percent of the revenues that this Nation produces today are 

being consumed by our mandatory spending and the interest on the 

debt.’’ That means that every single dollar that we spend today on 

these two wars, on our military, on national security, on homeland 

security, on education, on infrastructure, on high-value-added research is borrowed, and half of that is borrowed from foreign countries. That is a formula for failure. And if we do nothing, if we just 

take the ostrich theory in this room, then we will be spending $1 

trillion a year in interest costs alone by the year 2020. 

Think about that. That is $1 trillion that will not educate our 

children. It is $1 trillion that will not build a highway or will not 

bring broadband infrastructure to rural South Carolina. That is $1 

trillion that will not create the next new thing in this country. It 

is $1 trillion that is going to create the next new thing somewhere 

over there from the people we are borrowing money from. It is 

crazy. 

And this is not a problem we can grow our way out of. You could 

have double-digit growth for the next two decades and not solve 

this problem. So do not think we can grow our way out of it. 
1038 

And this is not a problem we can tax our way out of. Raising 

taxes does not do a darn thing to slow the rate of growth of health 

care or to change the demographics of the country. And, in fact, if 

you want to try to solve this with just taxes, you will have to raise 

the highest marginal rate to around 70 percent, the corporate rate 

to 80 percent, the capital gains and dividends rate to 50 percent. 

And what kind of country will we have? You are not going to have 

any businesses started or businesses growing with that kind of tax 

structure. So we cannot simply tax our way out. 

And we cannot simply cut our way out of this problem. You 

know, when I see people go on the Sunday shows and they say, 

‘‘Oh, look, we are going to cut our way out of this problem, but we 

are not going to touch Medicare and we are not going to deal with 

Medicaid and we are not going to mess with Social Security, and 

for sure we have to stay safe and secure so we are not taking a 

dollar out of difference, and, oh, by the way, we have to pay the 

interest on the debt—well, you know, if we exclude all those things, 

you have to cut everything else by 65 to 75 percent. That is not 

going to happen. That is not a realistic world. 

So what Al and I tried to do was to present a realistic plan, a 

balanced plan, a plan that turned out to be a bipartisan plan. And 

it is based on six basic principles. 

The first is we did not want to do anything that would disrupt 

a very fragile economic recovery, and the economy is in a recovery. 

This growth is real today. But, boy, we can lose it and lose it quickly. 

So when we looked at cutting spending, as Senator Crapo knows, 

most of our spending cuts come in 2013. That is where we get back 

to 2008 levels in real terms to the pre-crisis level, which I believe 

we can do. 

Now, I expect that the Republicans will be for getting back to 

2008 levels in 2012. We simply were afraid to do that because we 

did not want to disrupt what is a very fragile economic recovery. 

We have real cuts in 2012, but we get back to 2008 levels in real 

terms in 2013. 

Second principle, we did not want to do anything that would 

harm the truly disadvantaged, and that is why if you look at the 

cuts we made in mandatory spending, we did not touch things like 

food stamps or unemployment or SSI. We left that off the table, the 

income supplement plans. And when you look at Medicare, we did 

a couple of things that made our job more difficult. We increased 

the minimum payment up to 125 percent of poverty to protect the 

truly disadvantaged, and we gave that 1-percent bump-up a year 

to what is called the ‘‘older old,’’ people between 81 and 86. Both 

of those cost money, and in our plan we paid for that. But we wanted to do the right thing. And when we, yes, raised the retirement 

age, we did put in a hardship provision to protect those people that 

had those back- breaking jobs, those manual labor jobs, that really 

cannot work as long as we raised the retirement age. So we really 

did—our second principle, we tried to protect the truly disadvantaged. 

Third, we do want to keep this country safe and secure. Now, I 

am not personally one that believes we can afford to be the world’s 

policeman. But I will put it in more basic terms. I do not think this 
1039 

country can afford to spend more on national defense than the next 

14 largest countries combined—and have enough money to invest 

in education, infrastructure, and high-value research, which we 

have to do in order to be competitive in a knowledge-based global 

economy that we all compete in today. 

Fourthly, I do think we have to make these investments in education, infrastructure, and high-value-added research. It does not 

mean we have to spend money willy nilly. I just finished 5 years 

as president of the University of North Carolina. It is a 17-university system, and so I saw where some of your research dollars go. 

Today we have 375,000 research projects that you all are funding 

on 3,000 separate university campuses. Now, all of that is not great 

research. Some of it keeps us from going down a lane and, you 

know, it ends up dying, but it is good research because it keeps you 

from making a bad decision. And some of it actually ends up in 

something that is great. But some of it is not high-value research. 

In a time of limited resources, we have to spend our money more 

wisely. 

Fifth, for God’s sake, let us reform the Tax Code. The Tax Code 

is archaic. It was created when America dominated the world. We 

live in a global economy today. You saw it every day when you 

were at USTR. It is a fact. What we proposed was broadening the 

base, simplifying the Code, eliminating or greatly reducing these 

tax expenditures, bringing down rates, and using some money to 

reduce the deficit. 

We went to what is called a ‘‘zero-based plan,’’ and if you elimi- nate all of these $1.1 trillion worth of tax expenditures—I call them 

‘‘tax earmarks.’’ You all have been so bold to get rid of the $16 billion of earmarks in the spending part of the budget. But we have 

$1.1 trillion that we are spending in the Tax Code, and it is just 

spending by another name. But if you eliminate those, you could 

actually take rates to 8 percent up to $70,000, 14 percent up to 

$210,000, and a maximum rate of 23 percent, you could take the 

corporate rate to 26 percent, and you could go to a territorial system which will bring all of those trillions of dollars or billions of 

dollars back to the country that are captured overseas and create 

jobs over here. So I hope we will reform the Tax Code. 

Last, we, too, have to cut spending, and we have to cut spending 

wherever we find it. We cannot just deal with domestic discretionary spending. You know, the Democrats, as near as I can tell 

from reading the paper or talking about cuts of $10.5 billion in discretionary spending and the Republicans are basically talking 

about $61 billion worth of cuts. Well, let me tell you something. 

Sixty-one billion dollars out of a $3.7 trillion budget is 1.6 percent. 

I can cut my budget 1.6 percent tonight, by tomorrow morning. I 

took $625 million out of a $3 billion budget at the University of 

North Carolina. The 1.6 percent is nothing. The problem is that 

you all are focusing on taking 1.6 percent out of a very narrow part 

of a budget, out of 12 percent of a budget, so some of the cuts are 

having a disproportionately adverse effect on certain groups of people. But if you are talking about the gross amount of $61 billion, 

hey, it is nothing. You know, we take $1.7 trillion out of discretionary spending, we take $430 billion out of health care spending, 

we take $215 billion out of other mandatory spending, and we get 
1040 

Social Security solvent for 75 years. Our plan reduces the deficit 

by $4 trillion. It takes the debt-to-GDP ratio to 65 percent by 2020 

and to 60 percent by 2023. It cuts the deficit in half by 2015 to 2.3 

percent of GDP. The President asked us to get to 3 percent of GDP. 

And it takes us to 1.2 percent of GDP by 2020 and eventually to 

balance. 

I came here today simply to ask you to act. I know these cuts 

are politically difficult, but this is not a decision we can postpone. 

We have to act and we have to act now. And if we do, the future 

of this country has never been brighter. We can compete with anybody. But we have to get our fiscal house in order. 

Thank you, Mr. Chairman, for allowing me to come. 

Chairman CONRAD. Thank you. I think you have made the case 

about as clearly and persuasively as it can be made. And I want 

to thank you both for, again, the leadership that you have provided. 

Let me ask you this: What happens if this does not get done? In 

other words, Erskine—and I did not give all the bona fides of Erskine Bowles when I introduced him, but this is a man who was 

Chief of Staff to the President of the United States, headed the 

Small Business Administration, has been the administrator for the 

college system, the university system in the State of North Carolina. A pretty good set of bona fides. And at every place he has 

served, he has produced results. 

Let me ask it again. So what happens in your judgment to the 

United States if we fail to get an agreement in the range of what 

the Commission concluded was necessary? 

Mr. BOWLES. Hearing what he said about me reminds me of 

when my Uncle Sam died in North Carolina, and the obituary editor of the Greensboro Daily News called up to ask about him. And 

my aunt kind of went on and on about all the things he had done, 

and finally he said, ‘‘Now, Mrs. Bowles, you do know we now 

charge $5 a word for every word we put in the paper.’’ She said, 

‘‘Oh, no, no. I did not know that.’’ She said, ‘‘In that case just put 

in there ‘Sam died.’ ’’ 

[Laughter.] 

Mr. SIMPSON. I thought you were going to say the one about look 

in the casket and see if that really is your old man. 

[Laughter.] 

Mr. BOWLES. You know, Al said and I used to say that I got into 

this thing for my grandchildren. I have eight grandchildren under 

5 years old. I will have one more in a week. And my life is wonderful and it is wild. But this problem is going to happen long before 

my grandchildren grow up. This problem is going to happen like 

the former Chairman of the Fed said or Moody’s said, this is a 

problem we are going to have to face up to. It may be 2 years, you 

know, it may be a little less, it may be a little more. But if our 

bankers over there in Asia begin to believe that we are not going 

to be solid on our debt, that we are not going to be able to meet 

our obligations, just stop and think for a minute what happens if 

they just stop buying our debt. What happens to interest rates? 

And what happens to the U.S. economy? 
1041 

The markets will absolutely devastate us if we do not step up to 

this problem. The problem is real, the solutions are painful, and we 

have to act. 

Chairman CONRAD. Alan, do you want to add to that? 

Mr. SIMPSON. I would just say—and I know it is repetitive—if 

you can understand here what the people of America—as we travel 

around and we do stuff, we go to the business councils, we go to 

the conservative group in Dallas, the policy institutes, the Panetta 

Institute, the Economic Club of New York, and wherever we go 

people get it. And then we tell them that if they just draw, pick, 

go to the Internet and go www.fiscalcommission.gov, it is 67 pages. 

If we leave that out, they will never read it, you see, because they 

will say, oh, my God, they worked for a year, must be as high as 

this box. It is not. And it was not written for pedants or politicians 

or panderers. It was written for the American people, and I uses 

terms like ‘‘going broke’’ and ‘‘shared sacrifice.’’ 

Let me tell you what was stunning for us. There has never been 

any sacrifice required of the American people since World War II— 

except for our military, God bless them, and that is the sacrifice. 

And they chose to do it. They are volunteers. 

And so when someone says, well, you cannot use that word, well, 

the American people are using that word. It is called ‘‘shared sacrifice.’’ And it is a puzzling thing. It is the right and the left. They 

are not involved in social issues deeply. Now this has risen to No. 

1: jobs, very important, and this No. 1 or No. 2 is the debt. They 

understand debt, because in their own home they have been wiped 

out by debt. 

The first thing that anyone did during this crash that had any 

brains at all was to gather their loved ones around and say, ‘‘We 

have to get out of debt.’’ That is first. And you know my wife, Ann, 

and Lucy has saved you many times. She said, ‘‘Pay it off, Al. You 

guys from Cody are on credit cards. In Grable, we paid cash.’’ So 

I said, ‘‘OK, it is a deal.’’ 

I think it will come before 2 years. I think that when the people 

that hold this paper look around and all you have done is cut 

waste, fraud, and abuse, foreign aid, Air Force One, Pelosi’s aircraft, and all this and Congress pay, that they know that you did 

not get anywhere. You got to 5 or 6 percent of the whole, and they 

are going to say, ‘‘You did not do it.’’ And then, of course, when the 

debt limit extension comes up, you have about 85 guys over there 

saying, ‘‘Hey, I am never voting for that under any circumstances.’’ 

And they say, ‘‘Wait a minute,’’ and then you will hear the cracking 

of knuckles and elbows as they say, ‘‘If you do not do this, you are 

going to impair the full faith and credit of the U.S. and might even 

have to shut the Government.’’ And some of them are going to say, 

‘‘That is why I came here.’’ And at that point, there will be a sound 

of bone against flesh. But at that point, too, if they—I cannot imagine shutting the Government. Our party tried that once. It was just 

about the biggest disaster that I have ever seen. 

So I am just saying that at some point, I think within a year, 

at the end of the year if they just thought we were playing with 

fluff, 5, 6, 7 percent of this whole, they are going to say, ‘‘I want 

some money for my paper.’’ And if there is anything money guys 

love, it is money. And the money guys, when they start losing 
1042 

money, panic. And let me tell you, they will and it will not matter 

what the Government does. They will say, ‘‘I want my money. I 

have a better place for it.’’ Who knows? Stabilize the euro, do this, 

do that, whatever. I am just saying, to me it will not be a year. 

Mr. BOWLES. You know, I do not see how we cannot face up to 

it. You showed a chart, Senator Conrad, from Admiral Mullen. Admiral Mullen says it is our greatest national security problem. 

Think about that. You know, if you believe in investing in education and infrastructure and high-value research to be competitive 

in today’s global marketplace, if you do not want those people creating that next new thing over there but creating it over here, 

there is not going to be any money for it. And if you are a business 

guy like me, you know, small businesses cannot grow and cannot 

create jobs without money. And, you know, they will be starved for 

capital if this budget continues to grow as it is today. 

Chairman CONRAD. Thank you. My time has expired. 

Let me just say we are going to go to 5-minute rounds, make an 

exception for Senator Sessions, but 5-minute rounds because of the 

number of people we have. 

Senator SESSIONS. Well, the remarks you have just made are 

very sobering. It goes beyond the academic or theoretical to a warning of an immediate and dangerous threat that is before us. The 

language you used in your written statement, I noticed that it was 

pretty stark, and you used it, Mr. Bowles: ‘‘We believe that if we 

do not take decisive action, our Nation faces the most predictable 

crisis in history.’’ 

And I really, I cannot dispute that. The more I read about it, the 

more I believe that is true, and, therefore, I believe we need to take 

action. 

Let me ask you to just share with us your thoughts about the 

President’s budget, if you have had a chance to see it and if you 

think that is sufficiently decisive to alter the trajectory we are on. 

Mr. BOWLES. I guess you want me to do that. 

Mr. SIMPSON. I do, I do. 

Mr. BOWLES. The president’s budget, I think, on the domestic 

discretionary spending does a pretty good job if you look at it over 

an 8-year period. It has some gaps in it, like they talk about investing in transportation, but they do not tell you how they are going 

to pay for it. We said you have even got to cut transportation 

spending back to the level of income coming in, or if you are going 

to spend to the level you are today, then we proposed a 15-cent gas 

tax to pay for it. Your choice. 

The total deficit reduction in the President’s plan is somewhere 

between $1 and $2 billion. It is hard to tell. We propose $4 billion 

worth of cuts, so it was much less than what we proposed. 

Chairman CONRAD. Trillion. 

Mr. BOWLES. Trillion, excuse me. And I think that is about the 

minimum amount that should be done. 

If you look at health care, we cut health care spending by $430 

billion. His budget cuts it by $310 billion, but only $50 billion of 

that is specifics; the other is $250 billion worth of unnamed cuts. 

But I do not know where it is coming from. We did say how we 

would pay for all $430 billion of our cuts. 
1043 

On other mandatory spending, we had about a $215 billion cut or 11.2 percent over that time period. In his cuts, he has about $60 

billion for waste, fraud, and abuse, and we could not find anybody 

who could support more than $20 billion for that. So I do not know 

where that other $40 billion is going to come from. 

On Social Security, we have a real plan that leads to 75-year solvency, and they talk about us doing something for solvency and 

also making sure that we up the minimum payment and we protect 

the basic payment and we get it solvent in the long run. And, of 

course, our plan does exactly that. 

And on revenue, they, too, eliminate some tax expenditures, but 

they spend the money that they create by eliminating those tax expenditures. We take those tax expenditures, and the vast majority 

of it we use to reduce rates and to lower the deficit. So the overall 

effect of the President’s plan I think falls short of what the country 

needs to do right now. 

Now, I think the President has done a lot of good things. I think 

appointing this Commission was a bold step. I think in the State 

of the Union he showed us a little leg of some of the things he 

would cut. I think in the budget he went a little bit further. My 

hope is that he will show strong support to what Senators 

Chambliss and Warner are now trying to do. But we have to do 

more, and it is going to take the leadership of both Houses of Congress; it is going to take it from both parties; and it is going to take 

it from the President. 

Senator SESSIONS. Well, the way we calculate it, it is not a $4 

trillion reduction as you propose, but one basically as the President 

declares, and then we think that is incorrect scoring, and CBO will 

probably score the budget as not having reduced spending at all. 

So I really think it is insignificant there. 

With regard to discretionary, I just want to push back a little bit. The $61 billion, we have calculated this out over—reducing the 

baseline $61 billion over 10 years plus the interest saved, assuming 

some steady growth or no growth or however you calculate it, but 

taking that baseline down 60 would result in a save of $850 billion, 

pushing $1 trillion. You proposed $1.7 trillion. I notice you shared 

with me the rather significant reductions you had to undertake at 

the University of North Carolina, 30 percent or some figure such 

as that. The $61 billion would amount to, as you noticed, 1.6 percent of the overall budget. And if you take it only on discretionary, 

it is about 6 percent. So I do not think that is harsh or extreme, 

especially in light of the fact that the administration has achieved 

a 23-percent increase in discretionary spending baseline in the last 

2 years. 

So I believe you are on the right track. I believe you are sharing 

with us the fundamental truth of the financial condition we are in. 

I do believe that the American people who benefit from Social Security and Medicare want to see us bring the wasteful Washington 

spending under control, too, that it should not be off the table. It 

should be on the table, and it results in real trillions of dollars in 

savings if we work at it. And if you combine that with the entitlement reforms that could take place, we would do pretty well, I 

think, in altering the trajectory. 

Thank you, Mr. Chairman. 
1044 

Chairman CONRAD. Thank you, 

Senator WYDEN. Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Bowles, you correctly say that you cannot do serious deficit 

reduction just by cutting, and you cannot do serious deficit reduction just by taxing. What I want to do is make sure that as part 

of this debate we see that to really drive the deficit down, you have 

to do some serious growing. And to me, that is what the tax reform 

debate is all about. 

In the 2 years after the 1986 tax reform bill was passed, we created 6.3 million non-farm jobs, twice as many as were created between 2001 and 2008. So we are clear—and you all have done an 

excellent job—isn’t the heart of your interest in tax reform, that it 

will help us create more good-paying jobs and it is key to growth? 

Mr. BOWLES. Unequivocally, yes. As you know, our plan has been 

called ‘‘Reagan on steroids.’’ It was modeled after the Wyden-Gregg 

bill. And I believe that if we take such steps and we get rid of some 

of the inefficiencies in the Tax Code and bring down rates and reduce the corporate rate and get rid of this—get to a territorial system, then I think we have a chance to really create a lot of jobs 

in this country. 

Senator WYDEN. Let me ask the two of you a technical question, 

and I am very appreciative of all the work that you have done with 

Senator Gregg and myself. You all propose an important budget enforcement mechanism—this is something I have talked about with 

the Chairman and colleagues in the past—but you did not include 

a mechanism that would keep us from backsliding on tax reform. 

And what concerns me is when you go back and look at the history 

of 1986, practically as soon as the ink was dry, as soon as Democrats and Ronald Reagan came to this historic kind of compromise, 

what you saw is the lobbyists went back to work and they kept 

packing in break after break after break, and pretty soon it added 

up to 15,000 new breaks added to the Tax Code between 1986 and 

2005. 

Do the two of you agree that this time as part of tax reform it 

is going to be important to have a mechanism in place to no longer 

have this easy backsliding so that a few years after you have put 

in place major historic tax reform you are not back in the same 

boat? I will let either one of you take a crack at that. 

Mr. SIMPSON. Well, I agree with that totally, Senator Wyden. It 

has been so interesting to talk to people about the Tax Code, and 

we have people who—one person came and testified that Ronald 

Reagan was his hero, and I said, ‘‘Well, that is good because he is 

kind of my hero, too.’’ And I knew him very well. This man was 

Grover Norquist. He has a job to do, and he does it beautifully. 

I said, ‘‘Well, Ronald Reagan raised taxes 11 times in his 8 

years.’’ He said, ‘‘I did not like that at all.’’ I said, ‘‘It is not whether you liked it or not. Why do you think he did it?’’ ‘‘Well, I do not 

know, but I am very disappointed.’’ I said, ‘‘He did it to make the 

country run.’’ 

Now, we have to put triggers in there. We have to do things. But 

let me tell you what happened. People were talking about a VAT 

tax. I cannot understand how distorted things can get as if we were 

going to put a VAT tax on top of the present Tax Code, and that 
1045 

is the word. That was the word, the Bible said. They are talking 

about a VAT tax on top of this atrocity. If you did a VAT tax, you 

have to scrub everything off the board. 

It was very difficult to deal with a VAT tax when the U.S. Senate, by a vote of 84–15 or something, said there will never be a 

VAT tax in the history of the world. The Rivlin-Domenici group 

talked about a VAT tax, and they probably get hammered a lot on 

that. But at some point these—we found that only 2 percent of the 

American people, the wealthiest in America, the connected, are 

using these 180 tax expenditures. That is who is using them. The 

little guy does not even know what they are. If he does a standard 

deduction, he has no concept of—well, I will mention this. I mean, 

bombs will fall: oil depletion allowance, mine land reclamation. I 

am from Wyoming. You know, if we were a country, we would be 

the largest coal-producing country in the world. 

So we all took a terrible bite out of our ankles, and we are here. 

But unless you do something, these things are like the zombies 

that rise from the graves because this city is lined with people who 

make big bucks to go get it back. But this time they will not be 

bringing home the bacon. The pig is dead. 

Senator WYDEN. Thank you. 

Mr. Bowles, a mechanism to make sure that we have essentially 

tax enforcement from backsliding like we are going to do on budgets. 

Mr. BOWLES. Absolutely. If you do not, you will end up right back 

where we are today. The top 400 taxpayers in the country pay a 

marginal rate of 16 percent. You know, Warren Buffett talks about 

he pays a lower rate than his secretary does. That is what will happen. The people that benefit from these tax expenditures are, by 

and large, people in the upper-income brackets. 

Senator WYDEN. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator ENZI. Thank you, Mr. Chairman. It was about 37 years 

ago that Senator Simpson told me that I needed to put my money 

where my mouth was on this leadership stuff and get into politics, 

and I ran for mayor as a result of that. And God has winked a 

number of times, and I wind up here. He has been a tremendous 

mentor to me over the years, and I appreciate that both he and Mr. 

Bowles were willing to take on this task. And I appreciate the results that they haveten and the way that they have promoted it 

across the country. It needed to be done. 

I was one of the cosponsors of the Conrad-Gregg bill and thought 

that that was essential and was disappointed when that did not 

pass and was elated when the President decided to do it anyway, 

and I thought that was a good step. 

I have to say I was a little disappointed when the President 

missed the opportunity in the State of the Union speech to say exactly what you have been saying here today, to inform the people 

of this country of just how desperate the situation is so that we 

could take some positive action on it. And I was disappointed when 

the budget proposal came out because I think that was another opportunity for him to show exactly what you have been saying and 

to put some of those things into effect. And the biggest thing he 
1046 

did in there was take the tax expenditures and use them for new 

programs instead of reducing the corporate debt. 

The American people have figured it out with your help, and 

they are getting it clearer and clearer every day. We have to get 

Congress to catch up. But, yes, there is a question in there somewhere. 

[Laughter.] 

Senator ENZI. My question is: You broke your recommendations 

into six areas: discretionary, taxation, health care, mandatory 

spending, process reforms, and Social Security. Now, I know that 

your task was to have a single vote on all of that, but given the 

fact that Congress has trouble doing comprehensive legislation, 

well, would it make sense for us to break that into six areas separately? Or do you think we have to do it in one big piece of legislation? 

Mr. BOWLES. Alan can probably speak to that better than I can. 

What I can tell you is based on what our experience was. Before 

I do that, I want to address one of the things you said, that we had 

shown how desperate the situation is. It is only desperate if we do 

not act. If we do act, the future of this country is so bright, I cannot 

believe it. So if we just have the guts and the courage to stand up 

and do something that is real today in all six of those areas, then 

the future could not be brighter. 

We originally started out thinking that one of the easiest things 

to do, since it was part of the President’s request, was Social Security because you can kind of figure out how to get it to 75-year solvency and make it safe over the next 75 years. And we thought 

that was morally important. 

Second, we thought we could do some of the discretionary stuff 

and thought we could make some progress there. 

But as we went on through this process, we found that the bipartisan group really did coalesce around doing something that was 

comprehensive, and we got more support rather than less support 

when we were bolder and did something more comprehensive rather than trying to break it up into individual pieces. 

Mr. SIMPSON. I think that we also felt that—you know, it is 

tough to keep anything together here. I remember that so well. But 

if we could just stabilize the situation, just stabilize things so that 

they know that it is just not on automatic pilot, that alone would 

be worth everything. I know that is—you would not challenge that, 

would you? No, I do not think. Of course you would not. You would 

try. But you would not. 

Let me just say this: If you cannot get Social Security solvent for 

75 years and this Congress cannot do that, you can forget everything. You will never get to Medicare, Medicaid, and defense. You 

will have failed what we see is the easiest thing to do, which is to 

restore solvency of Social Security for 75 years. Very clear what we 

do. We do not privatize it. We are not stealing from the old people. 

We are not putting people—throwing bedpans out of hospitals. 

That is not what we are doing. And people who use that are involved in massive fakery, at worst. And I do not use those words. 

I have many, many other words. Just as salty as Bernie can be. 

I have always respected him. I hope he comes back and asks some 

questions. We want to answer his questions about Social Security. 
1047 

But if you cannot solve that, you are gone. Forget the rest of it. 

It will not work. It just will not work. It will not touch it with a 

stick. 

Senator ENZI. I did appreciate your comments in the report about 

when we were doing the tax reform to have transition rules in 

there. I think that will make it possible to get it done. I am anxious 

to work on all of the ideas that you put forward and see a way to 

get them done. 

Mr. BOWLES. But if we only do Social Security, we have not come 

close to solving the problem. It is just like if we only do domestic 

discretionary spending, you can get rid of all domestic discretionary 

spending, and you have still got a $1 trillion deficit this year. You 

really do have to do a comprehensive look at it. And I think you 

have to look at both revenue and spending in order to really solve 

the problem we face. 

Senator ENZI. I think we do have to do all of them, but I still 

think we will have to do them kind of one at a time with agreement to do all of them so that we can get the trust of the American 

people. They do not think we are going to do anything. 

My time has expired. 

Mr. SIMPSON. But, Mike, with your skills at bipartisan work— 

and I saw how you worked with Ted Kennedy. You two did about 

35 or 40 pieces of legislation. Nobody realized that. You always 

worked with the other side. Your gifts will be heavily called upon. 

Senator ENZI. Thank you. 

Chairman CONRAD. I thank the Senator. I first thank Senator 

Enzi because he has been a key ally in trying to advance a Commission approach. So, too, has Senator Nelson. In fact, after Judd 

and I lost the vote on our proposal—we got 53 votes, but we needed 

60, and I was called to the Vice President’s residence to negotiate 

the Executive Order Commission. Bill, Senator Nelson, volunteered 

to go with me, and I readily accepted. And I just want to say we 

would not haveten the Executive Order Commission without Bill 

Nelson’s hanging in there and being tough. Also, I will forever be 

grateful for his assistance in negotiating the Executive Order Commission because that was a pretty tough negotiation as well. 

Senator NELSON. 

Senator NELSON. Well, thank you, Mr. Chairman. 

Senator Enzi, the problem is that if we try to do these things one 

at a time, we will not get it done. You have to take that comprehensive approach. And I do not know how bad it has to get before we can get everybody to the point of being all willing to pull 

up and hitch up their belts to do a comprehensive approach. 

Now, let me give you an example. You mentioned the six things, 

the six major components. Well, you know, one of them was health 

care cost containment. Well, you know, why should Medicare be 

paying the premium price for drugs instead of the discounts that 

the U.S. Government gets in the drugs for Medicaid? Well, we 

know why. 

Why are there royalty payments that are not being paid for the 

extraction of oil from the Gulf of Mexico? That is a tax expenditure. 

Well, we know why. 
1048 

So if you try to take individually items on, you are not going to 

be able to get—you are going to get beat because the powerful interests are there that can always beat you on an individual basis. 

Now I want to ask a question. You all have put Social Security 

as part of this overall reform, and I agree that it has to be. But 

you also are quick to point out that nothing in the way of Social 

Security savings here goes to help the deficit. So other than the 

symbolic value of tackling Social Security for the long term, which 

is a notable goal—and which, by the way, was one of the finest 

achievements of the U.S. Government back in 1983 when Social Security was down to about 6 months before going into cardiac arrest. 

Everybody came together in a bipartisan way, and two old Irishmen, one named Reagan and one named O’Neill, got it done. 

My question is: Other than Social Security, why does that have 

to be so much a part of it since it is not actually helping the deficit—which is what we are trying to get to right here—other than 

the symbolic value? 

Mr. BOWLES. I think it is a lot more than symbolic. First of all, 

we had no choice. If you look at the President’s two-part mandate, 

the second part of that mandate required us to look at the longterm entitlements and the effects they have on the country. 

In addition, we really felt like we had a moral obligation to face 

up to Social Security. You know, we are not making this up. Social 

Security really does—the trust fund is exhausted—all of the interest earned on the trust fund for the funds that are lent to the general fund are exhausted in 2037—probably before that now because 

of what we did at the end of last year. And benefits will have to 

be cut by 22 percent. That is under current law. That is not something that we made up. It happens. 

In addition, it is a fact that—I think I will just leave it at that. 

You know, we have made promises as a country that we cannot 

meet, and what we tried to do was to restore the solvency of Social 

Security for 75 years while protecting the most disadvantaged and, 

in fact, giving them a higher benefit so they could have some kind 

of quality of life. 

Mr. SIMPSON. I think, too, that we have seen—at least I saw in 

my 18 years here—sometimes for budgetary purposes or, you know, 

gimmick figures, they will use the $2.5 trillion of Social Security 

as not counting it against the budget. And then sometimes they 

will count it. And when you have a figure of $2.5 trillion in surplus 

and people are saying that you stole it and all the drama that goes 

with that, it just seemed to us to let people know that if you do 

nothing and the howling and shrieking by these interest groups— 

and do not think we did not believe we would be savaged—savaged—in this country by what we propose by groups, and I will 

name only one. I was not the only living person that ever had a 

hearing on the AARP. They are still looking for me. But you cannot 

play games with it unless you just want to go up to all these toughies on the other side who are saying, ‘‘You rotten finks, you are 

going to touch my precious Social Security.’’ Great, pal. Waddle up 

to the window. Your relatives in the year 2037 get 22 percent less 

and downhill the rest of the way. And there is no way to avoid 

that—you can appeal, you can pull out the Constitution—because 

it pays only payable benefits. It will not pay scheduled benefits. 
1049 

And if everybody can wake up and figure that the thing they get 

from the Social Security, when you are 65, here is your scheduled 

benefit, it will not be there because you did nothing. 

Chairman CONRAD. I thank the Senator. 

Senator GRAHAM. 

Senator GRAHAM. Thank you both. I really do appreciate what 

you have done for the country, and if we are wise, we will take 

some parts of what you have done, add it with some of our wisdom, 

if we can muster any, and do something. And if we are politicians 

who are not wise, we will all get beat. I think America really, really wants us to do something. 

Can you imagine a budget being generated by a Republican or 

Democrat that does not have meaningful entitlement reform and 

that would be a serious effort to solve our financial difficulties? 

Mr. BOWLES. No. 

Senator GRAHAM. Can you imagine any scenario where we can 

save Social Security from impending massive cuts, 30 percent in 

2037 or maybe more, or any entitlement program without adjusting 

the age for eligibility? Is there any sensible way to do it without 

adjusting the age? 

Mr. BOWLES. You can do it without adjusting the age mathematically, so yes. But we thought you should adjust the age. 

As you know, you are not eligible for Social Security at 65 today. 

You are eligible at 66. And under current law it goes to 67 in 2027. 

Senator GRAHAM. Senator Simpson, can you imagine any scenario of saving Social Security and Medicare or getting our debt 

situation in better standing without adjusting the age of eligibility? 

Mr. SIMPSON. Well, I think it is impossible. The average age is 

77. It is going to go to 80. As I say, 63 was the life expectancy and 

65 was the retirement. Now you can retire at—you used to be able 

to retire on Social Security and you might live 3 or 4 years. Now 

you retire on Social Security and you may live 20. So how is that 

supposed to be when there were 16 people paying in and now there 

are only two people paying in, in 10 years. 

I tell people, read the trustees’ report on Social Security. It has 

been done by Democrats and Republicans for years. 

Senator GRAHAM. Now let us build on this. Can you imagine a 

scenario of saving Social Security from bankruptcy or major cuts 

without some forms of means-testing of benefits? 

Mr. BOWLES. Again, arithmetically, you can do it, but it is not 

what we would recommend. 

Senator GRAHAM. Now, both of you talk about sacrifice. The one 

thing we like around here is patting ourselves on the back, how 

brave we all are. I would argue that nobody in this room, including 

both of you all, is doing anything near like going to Afghanistan. 

So let us put this in perspective. 

All we are asking people to do is to do things that make sense. 

The sooner you do it, the better off we all are, because if you do 

it sooner, that means the solutions are not as draconian. So let us 

talk about means-testing and sacrifice. 

If you took an idea that said that if you make $50,000 or less 

in income, including Social Security, you would not have your benefits adjusted, what would that mean for the people that make over 
1050 

$50,000? You would have to have your benefits reduce somewhat. 

Is that correct, Mr. Bowles? 

Mr. BOWLES. You would probably have to slow the rate of growth 

win the benefit. 

Senator GRAHAM. Right. For a guy like me—— 

Mr. BOWLES. You really would not have to have the benefits reduced. 

Senator GRAHAM. You know, when I was 21 my mom died, when 

I was 22 my dad died. My sister was 13. Social Security Survivor 

benefits came to my sister. It made the world of difference. I am 

55. I do not have any kids. I am making 170,000 bucks a year. I 

am going to have a military retirement, hopefully a congressional 

retirement. What would it mean for someone in my income level in 

actual—the difference between what is being promised and what 

would be paid? Do you have any idea how much it would affect my 

benefits if we did a means test for people in my income level? 

Mr. BOWLES. I do not know exactly. 

Senator GRAHAM. Would it be $100 a month, $200 a month? 

Mr. BOWLES. I cannot tell you exactly. 

Senator GRAHAM. Could you get me that number? 

Mr. BOWLES. Sure. 

Senator GRAHAM. Because I believe it is going to be very small. 

Mr. BOWLES. And one of the things I can tell you is that your 

benefit actually would not be cut. The rate of growth in your benefit would be at a slower rate. 

Senator GRAHAM. So means-testing is not cutting anything. It is 

paying people what you actually can afford. 

Mr. BOWLES. Yes. What it does, it grows it at the rate of inflation 

rather than at a higher rate. 

Senator GRAHAM. So you have a progressive price indexing. 

Mr. BOWLES. Yes. 

Senator GRAHAM. Senator Simpson, do you think that is a smart 

idea for us to embrace? 

Mr. SIMPSON. Well, I think anything—what I tell people is this: 

I am 79, and so I see these people in the room, you know, with 

their signs and all sorts of activity. I say, ‘‘Wait a minute, pal.’’ I 

put $5 bucks in it when I was 15 and worked at the Cody Bakery. 

I was in the army, and you did put it in when you were in the 

army. Not now. And for the most productive years of my life practicing law in Cody, I never put in over 874 bucks a year and neither did any other guy in the United States. This is fakery. Then 

I got stuck for $1,200, $1,400, $2,000, $4,000, $5,000, finally on up. 

But let me tell you, you are going to get it all back. In 1983, we 

found that the guy who got out got everything back plus 6 percent 

interest in 3–1/2 years. 

Senator GRAHAM. Would both of you urge the Congress to take 

up Social Security reform as part of this effort to bring about fiscal 

sanity? 

Mr. SIMPSON. Without question. 

Mr. BOWLES. Absolutely, unequivocally, yes. 

Mr. SIMPSON. Got to. 

Senator GRAHAM. Thank you. 

Chairman CONRAD. I thank the Senator. I thank him for respecting the time as well. I appreciate that very much. 
1051 

Senator CARDIN. 

Senator CARDIN. Well, thank you, Mr. Chairman, and let me 

thank both of you for your work. 

I think you have the right formula, and each element will be controversial. We understand that. So let me deal, in the limited time 

that I have, with the one dealing with the revenues. And I know 

that you have already had some discussion in regards to consumption taxes, but I want to carry it to—make a point here. 

We get around to tax reform, if we are lucky, about every 25 

years, so it is important we get this right and that we have a goal 

in your report to have revenues equal to about 21 percent of our 

economy. That is a revenue goal that could be achieved through the 

reforms in the income tax that you have outlined, or it could be by 

using some consumption taxes as well as using our income tax. But 

the revenues would be the same. 

Now, I mention that because since we passed the last major tax 

reform in 1986, our Chairman frequently points out that there are 

now 140 provisions in the Tax Code that have been added, that 

have been added temporarily and need to be reviewed for extensions on a regular basis. 

My concern is that if we were to pass the recommendations of 

the Commission, it is unlikely that that would stand for very long 

before Congress would once again, for reasons of political expediency, us the Tax Code rather than the revenue code in order to 

carry out some policy. I think we are safer if we use less income 

tax revenues and we have more consumption revenues to equal the 

dollars that we want to bring in. 

And I also point out the realities of competitiveness and the fact 

that during the best of times this Nation did not save enough, and 

our policies need to reward savings. Senator Portman and I worked 

together in the House to try to encourage more savings for Americans, and our Tax Code certainly has not been terribly helpful in 

rewarding savings. 

And, last, we know that the income taxes, the corporate income 

taxes are not border-adjusted, whereas the consumption taxes are 

border-adjusted in international trade, which puts American manufacturers and producers at a disadvantage. 

The argument I hear the most against consumption taxes is progressivity, but we can make a consumption tax progressive, and we 

have ways of doing it. One of my goals is to make sure that at the 

end of the day we bring in revenues in a more progressive way, not 

a less progressive way, than we currently bring in the revenues of 

this Nation. 

So having said all that and knowing full well that you all really 

did your best to put forward the policy objectives that this Nation 

needs, we are certainly realistic to know that your proposals are 

going to be politically controversial wherever you went. 

Could you just share with me why we should not be considering 

as a matter of policy less reliance on income and more on consumption, knowing full well the history of Congress in changing the Tax 

Code? 

Mr. BOWLES. I will be glad to do that. Let me tell you why it is 

not in our plan. It is pretty simple. About a week before we started, 
1052 

the U.S. Senate voted I think 85–14 and it did not look to me like 

the odds were too great we were going to have a consumption tax. 

Second—— 

Senator CARDIN. Well, you know, I am going to stop you on that 

because a lot of us were tempted to put in similar resolutions on 

Social Security, similar resolutions on every one of your proposals, 

and I daresay we could haveten 85 votes on the floor of the Senate 

on each one of those individual recommendations. I think it was 

terribly irresponsible for the Senate to take up that resolution. 

Mr. BOWLES. I am just telling you why we did not do it. 

Senator CARDIN. I understand. 

Mr. BOWLES. There was no opposition on the Commission, as 

near as I could tell, to a VAT tax or a consumption tax in theory. 

In theory. Most people believe that it is much better to tax consumption if you can do it on a progressive basis than it is to tax 

wages or investments or savings. You have to make it progressive, 

but there was not a lot of opposition in theory on either side of the 

aisle. 

Where there was enormous concern was that we would end up 

with two engines of revenue. We would end up with an income tax 

that would be escalated, and we would end up with a consumption 

tax, and you would have two engines out there fueling revenue and 

fueling the tax rate. And that is why there was not support for it 

in our Commission. It was not the theory that it is better to take 

consumption. 

Senator CARDIN. Well, I feel better getting that explanation because—and I would just conclude on this point. We want the best 

policy objectives. Future Congresses are going to act regardless of 

what we do in this Congress on these recommendations. I just 

think we are safer having a Tax Code that is less likely to be 

changed in the future for social reasons than we currently do under 

the income tax. 

Mr. SIMPSON. I think take a good look at the Domenici-Rivlin report because they had the courage to put that out there. And we 

talked together, we visited with them, but we felt because of that 

resolution in the Senate we were just ramming our heads into the 

wall. 

Chairman CONRAD. Let me just say on this point, exercise the 

privilege of the Chair for a minute. I argued strenuously for a VAT 

tax or a consumption tax in whatever form to be part of the package. And I do so in part based on the recommendations the Commission received. We brought in the best tax experts in the country, Republicans and Democrats, progressives and conservatives. 

Their recommendation to us was to go to a hybrid system—part income tax, part consumption tax—not layer one on top of the other 

in the sense of adding additional revenue as a result, but displacing part of the income tax system so that we could lower rates, 

especially corporate rates, to help America be more competitive. 

And we had the proposal from Mr. Graetz to adopt a hybrid system 

with part of it being consumption tax and to take 100 million 

Americans off of income tax rolls completely. A hundred million 

people no longer would have to file income tax returns at all, and 

you would achieve the same amount of revenue that is in the Commission plan, but you would do it with a hybrid system. 
1053 

So, look, we understand the politics of it, but I did want to take 

this moment to explain the position that at least I took. 

Senator Portman. 

Senator PORTMAN. Thank you, Mr. Chairman, and I want to 

thank both of you for your service on behalf of the people I represent in Ohio and on behalf of our country. You know, most Commission reports end up collecting dust on a shelf somewhere, and 

there is an opportunity here for this to be a seminal report, to really change the direction of our country. It depends on what Congress does. And you have given us the opportunity to make these 

necessary changes. 

To Alan Simpson, he mentioned that I worked for him at one 

point. He inspired me to take a shot at elected office, which means 

you are going to be blamed for even something additional now. 

Mr. SIMPSON. Both of you now. 

Senator PORTMAN. That witness protection program will have to 

be even better. And, Erskine, thank you for your service. When you 

were Chief of Staff at the White House, we worked closely together. 

Ben Cardin and I did some work on increasing savings and helping 

in retirement, and I do not think it ever would have been enacted 

into law without your intervention. I recall that and your willingness to step out of the partisanship and into solutions. And that 

is what you have done in this report, so thank you. 

Because you always spent so much time on this, I have three 

quick questions for you, just to get your thinking on it. Two we 

have already discussed briefly—tax reform and Social Security— 

but just on tax reform quickly, do you think from all the testimony 

you heard that the proposals that you have will not just have the 

impact that CBO and the Joint Committee on Taxation would indicate from the scoring but also will make our economy competitive? 

Mr. BOWLES. Yes, no question. 

Senator PORTMAN. So that is an intangible that is really not represented in the numbers that you are providing which can help to 

grow the economy and, therefore, to grow revenues. 

On Social Security, we will hear later today, I am sure, and we 

have heard all along that Social Security is not adding a dime to 

the deficit and it is in good financial condition. Do you agree with 

that? 

Mr. BOWLES. Well, it is $45 billion cash negative today, and it 

is expected to stay cash negative for the foreseeable future. 

Senator PORTMAN. That is based on the Congressional Budget 

Office report recently? 

Mr. BOWLES. Yes, sir. What people sometimes forget is that when 

somebody my age goes to collect on their Social Security, I want 

money, cash. And I go to present that obligation to the Social Security Trust Fund, and it does not have cash. What it has is the Government IOUs there, which are as good as gold. But the Government has to go out into the marketplace and borrow the money. 

Senator PORTMAN. Borrow the money. 

Mr. BOWLES. And so it increases the national debt. So, in essence, what we are doing, since half the money is borrowed from 

foreign countries, at least half the money I am getting is coming 

from some foreign country to pay my Social Security. 
1054 

Senator PORTMAN. That is a very good way to put it. I think that 

is the reality. I am glad you addressed the issue in the report and 

also talked about it today because it is adding to our debt. 

The final one is the toughest one of all, which is: What is the economic impact of all this? There are some folks out there, as you 

know, who study this who have said recently that if we reduce discretionary spending it will result in job loss. It is called a Keynesian model where Government spending being reduced equals a certain amount of less economic activity, therefore job losses. These 

are the same folks, you will recall, who looked at the stimulus 

package and said that roughly $800 billion—over $1 trillion when 

you add interest on the debt that had to be paid for because we 

had to borrow money for it. But those folks said that our unemployment would be 8 percent last year and would be 7 percent this 

year. Now, that has not happened, but now they are saying that 

if we reduce spending by the 1.6 percent that you mentioned earlier, Erskine, there would be a great loss of jobs. 

You have looked at this carefully, and earlier you talked about 

the potential of financial crisis. You talked about small businesses 

being starved for capital if we do not do something. What do you 

think the economic impact would be of reducing spending along the 

lines that you have recommended? 

Mr. BOWLES. I am not an economist and do not want to pretend 

that I am. What I am is a pretty decent business guy, and what 

I can tell you from a career as a business person and from heading 

the Small Business Administration, small businesses cannot grow 

and cannot create jobs without money. And if we do not tackle this 

fiscal mess that we have today, then small businesses will be 

crowded out of the marketplace, and there will be fewer jobs, not 

more jobs. 

If you are really concerned about jobs, then we have to tackle 

this fiscal problem at home. 

Mr. SIMPSON. And we did realize throughout the fragile nature 

of an emerging economy which seems to be happening, except, of 

course, the jobs do not meet the expectations. But people, I do not 

think, when you are all through with what we have done, will say 

that this was a failed Commission like all Commissions, because 

you, Senator Portman, were involved deeply with the Select Commission on Immigration and Refugee Policy, and we did two major 

pieces of legislation—legal immigration and illegal immigration— 

and with that bill brought 2.9 million people out of the dark to obtain legal status in America. 

I was on the Iraq Study Group. That was not a failure. This last 

administration did not accept maybe four or five but 50-some of 

those 79 recommendations have been adopted. These are not feckless things. And this one ain’t going away. This is a stink bomb in 

the garden party. 

Senator PORTMAN. Thanks for your good work. 

Chairman CONRAD. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you all for your work on the Commission. 

I wanted to ask some questions about an area I do not think anyone has touched on. If they have, I apologize. But addressing really 

the health care provisions and the steady elimination of the deduct-
1055 

ibility for businesses of the costs they spend on health care. I believe the way you have laid it out is that the deductibility be limited to the 75th percentile in 2014, stay steady for 4 years, and 

then be phased out over the following 20 years. 

The first concern I have is that I can imagine immediate response in which employers say, Well, we are going to reduce the 

size of our package down to the area that is tax deductible, and to 

do that we are going to have employees pick up a lot higher copays, a lot higher share of their insurance and so forth, which 

sounds an awful lot like an immediate, very regressive tax on 

working Americans. And so I just wondered if you all could touch 

on that for a moment. 

Mr. BOWLES. I do not think that is the case. What I think you 

will see is, first of all, every business in the world, whether it is 

a small or large business, has raised the deductible, raised the copay, reduce the benefits in order to offset the increased costs. And 

that is a fact of life that we have all had to live with during the 

last—you know, at least as long as I have been in the business 

world. And I do not know any business that has wanted to do it 

but it has been forced to do it. So I think if we do nothing and we 

take the ostrich theory, then I think you will see that continue into 

the future. 

Health care is the biggest single problem that we face from a fiscal viewpoint. If you just look at Medicare and Medicaid and the 

CHIP program, it is about 6 percent of GDP today, and it is going 

to go to 10 percent before you know it. And that does not even 

count the $276 billion it takes to do the doc fix or the $76 billion 

to fix the CLASS Act. 

We think we are going to have to stand up to that, and we have 

proposed some pretty aggressive proposals as it relates to Medicare, Medicaid, to the tax deductibility, as you mentioned, that we 

felt were responsible in order to meet the fiscal challenges that the 

Nation faces. The problem is we have made promises we just cannot deliver on. 

Senator MERKLEY. Well, I am not sure you have really made me 

feel any better about this, because I think what I have described 

is kind of the reaction of a normal business. If you increase the cost 

of providing that particular benefit to their workers, they are likely 

to decrease it. And the way that they have done that is to increase 

the co-pays and the share that is being picked up by the employees. 

But the other reason I am very concerned about this is that, in 

the context of health care reform, there was a premise of companies continuing to provide health care. And if indeed you set up a 

situation where employers say, hey, without the tax deductibility 

of these benefits, we are simply going to shut that down; we will 

provide benefits to our employees in other ways, that results in a 

huge cost shift from the private sector to the public sector, actually 

increasing the size of the deficit. 

So I am wondering if you have modeled this out into the future, 

because it sure looks like something that is going to increase public 

deficits and public debt into the future rather than reducing them. 

Mr. SIMPSON. Senator, let me wade in. This was a monster, and 

we could not even wrap our arms around it. That is where health 

care is. All you have to do is think of things in your own family 
1056 

or in the family down the street where, in the last 10 years of life, 

there is air flight, there is hospice, and maybe in 2 weeks you can 

run up a bill for $400,000. That is just Cody, Wyoming. 

There is a way to do this. You cut providers and you reduce physicians’ fees, you increase co-pays for patients, and you begin to affluence test those. And you get one set of books in a hospital instead of tow, and you do tort reform by the use of health courts. 

And we have recommended all those things. Now, is that tough. 

You will not want any of that. But let me tell you, leave it like it 

is and it will eat a hole through everything you love in the discretionary budget. 

Senator MERKLEY. My time is up, but I will just mention that 

there are a number of concepts, including the House-passed bill, to 

get rid of the exemption from antitrust that health care currently 

employs. There was a lot of discussion of a public option. A public 

option in Oregon in workers’ comp decreased the costs by half, and 

my colleague from Rhode Island said that when they adopted it in 

Rhode Island it had the same impact. The ability to negotiate the 

prices of drugs in Medicare on the same rhythm that we do in veterans would save $60 billion over 10 years. So there are many, 

many approaches other than a short-term transfer onto the working Americans of health care costs. 

Thanks. 

Chairman CONRAD. I thank the Senator. 

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

you, Mr. Bowles, and, Senator Simpson, welcome back. You did a 

terrific service with your work, and although I did not agree with 

every piece of it, the body of work I think was exceptional, and I 

think you gave us, if we want to follow it, at least a pathway to 

start to get this fiscal situation under control. And because you 

were attacked by both the right and the left, I assume you were 

trying to find the spot right there in the middle that might be able 

to attract a level of support that would be necessary to actually 

enact something around here. 

I do want to ask a couple of questions—and I think it has been 

talked about a little bit already, but maybe get you to elaborate a 

little bit on it. If we were to adopt—the President’s budget this 

year did not address what many of us thought it should have, and 

that is, some of these issues of entitlement reform. If we were to 

adopt the President’s budget, how does that address the long-term 

structural issues and problems that you have identified in your 

work and seem to be—some of the recommendations that were included in your work seem to be absent from the President’s proposals? 

Mr. BOWLES. I can answer that pretty straightforwardly. First of 

all, I do not think anybody on our Commission agreed with every 

part of the Commission report. I sure did not; Al did not. I know 

that the Chairman did not. So we all kind of held our nose and 

swallowed some of the things that are in the Commission report for 

the good of the country. 

The President’s budget, again, as I said earlier, I think does a 

relatively good job of dealing with the domestic discretionary 

spending cuts, but it does not step up to, nearly to the extent I be-
1057 

lieve it should, the defense cuts that are necessary or the cuts that 

are needed in health care or reforming Social Security so it is solvent for the next 75 years. 

Mr. SIMPSON. I think, Senator Thune, it is much like the Republican response, which both of them are just light budget efforts. 

Senator THUNE. I do not know if this has been mentioned, but 

former Fed Reserve Chairman Greenspan recently said the U.S. 

could face a bond market crisis if politicians do not act soon to start 

cutting the Nation’s debt. And he remarked that the probability of 

that happening in the U.S. in the next 2 to 3 years is 50 percent. 

Do you agree with that assessment? 

Mr. BOWLES. I do not know what the percent is, but let me just 

tell you how crazy our situation is today. We have this treaty 

where we are supposed to—if China were to attack Taiwan, we are 

supposed to support Taiwan. The only problem is we would have 

to borrow the money from China in order to do it. 

You know, this is a real mess we are in today, and we can either 

take the ostrich theory and put our heads in the sand, or we can 

decide we are going to step up and do something about. But I can 

tell you, bankers are not going to continue to finance something 

that they are not sure they are going to get paid back. And the less 

sure they are, the more they are going to charge you at first, and 

then they are going to cut you off. And we are borrowing half of 

our money from foreign countries. 

Senator THUNE. How do we translate that—and a lot of times 

when we talk about these things here, we talk about it sort of in 

the abstract. How do we translate that, the American people personalize it so that they in their personal lives or family lives understand what the implications and impacts of our not acting are? Because I think in many cases they respond to the attacks that are 

made that this program is going to be cut or this program is going 

to be cut, and it is hard, once you focus on the specifics, to get the 

kind of support that you might get when you are talking in the 

general term about the need to reduce spending and debt. 

How do we translate this into terms? What does this mean to the 

average American family if we do not take steps to fix this mess? 

Mr. SIMPSON. Senator Thune, they have already got it, because 

here on this level we or you or I used to talk and say, How are 

the people handling this at the kitchen table. Well, I will tell you 

how they are handling it. They do not need any charts, nothing. 

They just say if you spend more than you earn, you lose your butt; 

and if you spend a buck and borrow 40 cents of it, you must be stupid. And that is what they know, and that is why they are with 

us. 

When we travel this country, they understand this because that 

is all you have to say. You are borrowing 40 cents for every buck 

you spend. And they know that if they did that in their own home, 

they are out, you know, in the bow wows. It is over. I do not know. 

They get it. 

Senator THUNE. All right. My time has expired, Mr. Chairman. 

Thank you. 

Chairman CONRAD. Thank you, Senator Thune, and thanks for 

respecting the time. 

Senator WHITEHOUSE. 
1058 

Senator WHITEHOUSE. Thank you, Chairman. Thank you, gentlemen. 

Back to health care for a minute, health care consumes about 18 

percent of America’s GDP right now, and the closest country is at 

about 12 percent, the worst. So we are half again as bad as the 

worst country in terms of the efficiency with which we deliver 

health care. We do not get better outcomes for it. The rate of increase is—it is not just going up. The rate is accelerating. So it 

strikes me that we have a real problem on our hands in health 

care, and it is not just an entitlement problem. It is a health care 

system problem, because the cost increases in our health care system are clobbering the private sector just as strenuously as they 

are clobbering the public programs. 

And so I do not think we can entirely fix the health care system 

just by trying to cut benefits in the health care programs that Government supports. There is an underlying cost problem in our 

health care system that I think has a lot to do with our sort of 

Rube Goldberg design of the health care system, although it is 

worse because Rube Goldberg’s was kind of accidental. In this Rube 

Goldberg diagram, every party has a motive. 

So I think there is a lot of work being done to try to correct and 

reform the system as it goes. The areas that are obvious are the 

quality improvement movement that is out there. We spend $2.5 

billion a year treating what should be completely avoidable hospital-acquired infections. You could zero that out if you could get 

rid of those. If we could figure out which prevention methods actually save money, we could invest in those and that would save costs 

overall. A really robust information technology platform can make 

a huge difference and, frankly, generate new private industries. We 

can start paying doctors better for results instead of just for amassing as many procedures as possible. And the overhead can be driven down a lot. There is a great deal of overhead that goes into the 

totally unproductive warfare between insurers and doctors over 

getting paid. They now have armies of consultants and staffers who 

fight with each other over getting paid. That is all on the health 

care system, and it does not provide a nickel’s worth of health care 

value. 

You stack all of those up, there is quite a lot going on. And there 

are some very big outfits that are pursuing this stuff and have a 

lot of confidence in it—Kaiser, Geisinger, Intermountain, 

Gundersen Lutheran, Mayo—and they are seeing real cost reductions, and they are seeing real quality improvements. 

If you look at the President’s Council on Economic Advisers report, they have calculated that the savings available from this is 

about $700 billion a year. New England Health Care Institute puts 

it at $850 billion a year. Secretary O’Neill, working with the Lewin 

Group, has calculated it at $1 trillion a year. Do we know the exact 

number? But it looks like it is a really, really big number. 

So if you agree with that, I would urge you, as you are discussing 

this issue, to really focus on this question of delivery system reform 

and the win-win that is possible from improved care, improved efficiency, and improved experience of care, all lowering costs. It has 

one big flaw, and that is that CBO and OMB cannot predict it because it is a process of learning and experimentation, as Dr. 
1059 

Gawande has said. We know there is good stuff to be done out 

there. We can have confidence in our ability to get there, but we 

cannot predict the dollars. 

So when you get down to a budget discussion, my fear is that 

this incredibly significant opportunity gets shoved off the table because nobody says, ah, I can put this dollar figure at it, and you 

all in generating your reports need to be able to put a dollar figure 

on it. 

So I guess my appeal is do not give up on that just because it 

is not cost-able. It is probably the biggest and the best thing that 

we can do for our worst and most severe long-term budget problem, 

which is the health care piece of the system. And, unfortunately, 

I do not see as much as I would like to about that in your report. 

Even if you put it in as a footnote saying, look, we cannot measure 

this, we understand why we cannot measure this, but it has a huge 

potential, and we should focus on that potential, because it worries 

me we are not getting that. 

Probably one of the best people in the world on this is act Don 

Berwick, and yet he is under constant attack right now because he 

did not come here and get confirmed properly. Well, fine, but we 

have a national emergency in this area. We have the chance for a 

huge win-win by reducing the costs in these big numbers. Let us 

not throw that baby out with the bath water just because we do 

not have a number. And the more you ignore it, the more things 

like attacking Don Berwick begin to seem like an OK idea instead 

of a really suicidal step. So I urge you to consider that as you go 

forward. 

I am sorry to speechify during the question time, but I just think 

it is so important and so frequently overlooked, and it is a constant 

frustration, and I hope, if you agree, you will give it a little bit 

more air time. 

Mr. BOWLES. I actually do agree, and I have actually done it. 

Mr. SIMPSON. I do, too. 

Mr. BOWLES. I was vice chairman of Carolinas Medical Center, 

the seventh largest publicly held hospital company in the country. 

After that, I headed the University of North Carolina’s public 

health care system, the largest provider. What you are saying is exactly right. It is not, unfortunately, scorable, and that is why it is 

not in our report. 

Senator WHITEHOUSE. Thank you. 

Mr. SIMPSON. And when I was here, Senator, we had a bipartisan 

group of John Chafee and John Breaux and Nancy Kassebaum and 

Dave Pryor, and we worked for months, and the problem was—and 

it is a terrible thing to say, but nobody ever understood it. And that 

is why it is like this. You go to the floor, and you do an amendment, and it is something good. Somebody sticks it on and nobody 

understands the impact. But I agree with what you are saying. You 

have gone to the core of it. I think those figures are correct, 4800 

billion. But, wow, we—there are people who use terms hoping that 

you will feel inferior enough not to ask any questions. 

Chairman CONRAD. Senator Johnson. 

Senator JOHNSON. Thank you, Mr. Chairman, and I would like 

to thank both of you for putting forward a serious proposal. I think 

it is absolutely essential that we mobilize the American public so 
1060 

they understand how urgent the problem is. And I think one of the 

ways we do that is—and we hear this term ‘‘debt crisis’’ all the 

time. Can you describe in layman’s terms what a debt crisis is 

going to feel like? How is it going to affect a family, an individual? 

Not just in theory but in layman’s terms, what is that going to do 

to a family? 

Mr. BOWLES. Their interest costs in every single thing they have 

are going to rise and rise relatively rapidly. The quality of education that they can provide their schools is going to erode. Their 

university systems are going to—the research they do is going to 

evaporate, and, therefore, the likelihood of that creativity creating 

the next new thing here rather than somewhere overseas is less, 

so, therefore, less likelihood that there will be a new job, even if 

you are trained for that new job down the road, less likelihood that 

the training funds will be there to train them. Their roads, their 

bridges, their highways will be less. There will be fewer cops on the 

street. It will affect them in every way possible. 

Senator JOHNSON. It is not going to be pretty. 

Mr. SIMPSON. And, excuse me, Senator, the guy who gets hurt 

the worst will be the little guy that everybody always talks about. 

That is who is going to get hammered when that happens. 

Senator JOHNSON. I do not think we can make that point loudly 

enough. 

You touched on one question I wanted to ask in terms of how do 

we redeem these Social Security bonds. I mean, we talk about the 

system is solvent to 2037, but that is by redeeming these bonds. 

In your fix, did you fix that on a cash-flow basis? Or how is the 

$2.5 trillion that we are either going to have to tax the American 

people again for or borrow from China, how is that accounted for? 

Mr. BOWLES. We did a couple of things. On the revenue side, we 

raised the minimum payment that somebody would be taxed upon. 

Today it is capped at $106,800. Naturally it will grow to $168,000 

by 2020. We took it to $190,000 by 2020. So you would pay that 

tax on the differential, on $22,000. And we reduced the rate of 

growth in benefits being paid to people at the higher levels because 

we changed what is called the BIN rate, and we changed the eligibility age, and we also changed the rate of inflation to what is 

called chained CPI, which is a slightly lower rate of inflation than 

the regular CPI. 

Senator JOHNSON. So, again, you did account for the fact that 

$2.5 trillion needs to be raised in some way, shape, or form, and 

you have accounted for that dollar amount? 

Mr. BOWLES. Yes. It has to be. 

Senator JOHNSON. OK. You know, you are projecting or you are 

proposing that we increase revenue to 21 percent of GDP. In the 

President’s 2012 budget, we have only—we have never hit 21 percent of GDP in terms of revenue. We have hit it close three times: 

in 1944, in 1945, and I think the year 2000. I kind of subscribe to 

Hauser’s Law that says no matter what the tax rates are, we are 

going to get about 18.8 percent of GDP in terms of revenue. How 

do you overcome that? Again, I am kind of a reality-based guy. You 

know, I am one who looks at real factors and figure. 

Mr. BOWLES. Me, too. I looked at the forecast. I saw that revenue 

was forecast in 2020, I think, to be approximately 19 percent of 
1061 

GDP. Spending was about 25 percent of GDP. That was 6-percent 

gap. I have had to figure out how in the world are we going to close 

this gap. I wanted to close the vast majority of it on the spending 

side, so we took somewhere between two-thirds and three quarters 

out of spending. Therefore, we had to—I wanted to get to a balanced budget. I had to do some on the revenue side. Historically, 

we have balanced the budget always, you know, as you said, at a 

level below 21 percent of GDP. And so I thought that was the maximum level we could get to, and I also thought it was probably one 

of the lowest levels we could get spending down to. 

Senator JOHNSON. But no matter what the rates we have taxed 

people at, we have never raised on average more than about—well, 

never raised 21 percent. 

Mr. BOWLES. Right. That is why we said that ought to be the 

maximum level, I think is what our report says. 

Senator JOHNSON. OK. I guess one final question. I do not subscribe to the theory that it has to be comprehensive reform. I mean, 

I think the American people want single-issue bills. They want to 

be able to understand what we are trying to do here. So with that 

in mind, did you make any attempt to prioritize the components of 

this in terms—you know, obviously Social Security is No. 1, I think, 

in your book. But did you prioritize the other recommendations if 

we did this in a piecemeal fashion? 

Mr. BOWLES. We did Social Security separately because we 

thought we were doing that not for deficit reduction but for 75-year 

solvency to save Social Security. We did not prioritize the others. 

We looked at it in a comprehensive basis, because I believe you 

have to do all of it, you know, not just one little bit of it, if, in fact, 

you are going to deal with this $1.6 trillion deficit in a fiscally responsible manner. 

Senator JOHNSON. Thank you. 

Chairman CONRAD. Thank you. Senator Coons. 

Senator COONS. Thank you, Mr. Chairman, and I just want to 

start, as has every other member of this panel, by thanking you for 

your service to the country in previous administrations and in the 

Senate and for your willingness to take on this thankless task, but 

one that, as you said at the outset, you took on for your grandchildren, for your communities, for our country. I think all of us 

agree that we are in a debt and deficit crisis and one that I would 

welcome your elucidating a little bit further just what the consequences would be for, as you put it, Senator, the little guy, because I am convinced that if we do not tackle this in the next 2 

years, the consequences for the American economy, for our competitiveness, and for our long-term future are drastic. 

I want to commend you for tackling six different significant areas 

and for your core principles, with which I agree. And Tax Code reform is the piece that I am going to focus on and that I am interested in. It is my hope that part of your assumption is that if we 

made this significant changes, the zero-based budgeting approach 

to sort of scraping clean all the tax expenditures, lower the rates, 

that there would be greater growth and some possibility of higher 

receipts than the 18.8 percent referenced by Senator Johnson. 

Please tell me, if you would, three things. First, give us a picture 

in a little more detail about how it might unfold if we fail to take 
1062 

these steps. How would it unwind that rates would go through the 

roof and the consequences for the average folks of America would 

be felt? And how do we stay on top of a sense of when that is going 

to happen? Because my sense is it may happen very suddenly and 

without a great deal of warning. First. 

Second, we talked earlier about the need for a long-term mechanism to restrict not just growth in spending but to also prevent the 

re-emergence of a lot of tax expenditures, doing all the hard work 

of fixing the Tax Code, some mechanism that would prevent it from 

then being undone. Any suggestions in that field would be welcome. 

And then if we have a minute or two left, something about the 

health reform ideas. You have a significant amount of cuts here, 

more than $430 billion, that have not been touched on in the two 

previous senators who have asked specifically about the health portion of it, if you would. 

Mr. SIMPSON. Well, Senator, let me just address the tipping 

point, because your colleague, our colleague—I think it was a colleague, he was of ours—in the Commission, Senator Durbin—kept 

asking, Where is the tipping point? And we kept saying, We do not 

know. But some say 2 years, some say three. 

I happen to say it all depends on how far the Congress goes in 

getting to the meat of reducing a $14 trillion, which will be $300 

billion, $14 trillion $300 billion debt, and the deficit of $1.6 trillion 

or $1.7 trillion. It depends on that, because the people who hold our 

paper are not going to be patient and they are going to say, You 

did not have the guts to do anything, you romanced the stone 

again, you did not do what you are supposed to do, and we want 

some money for our paper. 

It is my experience that big guys take care of themselves and 

they will take care of themselves. That is how we got in this huge 

slosh of a recession. The fat cats took care of themselves, and the 

little guy will get stung. That is all I know and that is what I keep 

talking about. It does not make any sense to anybody when you 

talk about getting the paper for the money, but that is what it is, 

and the bondholders are not just gentle people. 

Senator COONS. And what kind—— 

Mr. SIMPSON. And he can handle the tough question. 

Senator COONS. What kind of mechanism might we put in place 

to keep tax expenditures from ballooning once again? 

Mr. BOWLES. We did a couple things. We put a fail-safe in there 

on the tax side that said if Congress does not act by 2012, then you 

have an automatic, across-the-board reduction in tax expenditures. 

I think that would get you to move. 

We also had another fail-safe in there that if the deficit to GDP 

was greater than what is called primary balance, which is 3 percent, that the President had to submit a proposal to get it to 3 percent. This was by 2015. That was his date he picked, so that is why 

we went with that. Or if the debt became unstabilized, after that 

it began to grow again, then the President would have to act. 

On health care cuts, we have, in our plan—we did not just willy 

nilly say that there ought to be cuts in health care. We have every 

single cut absolutely spelled out for and paid for. Again, I had to 

gore my own opportunities to do this. I did cut the funds that go 
1063 

to hospital for medical education, but again, I thought it was one 

of the areas we could. 

We took away some of the trickery and gaming that goes on in 

Medicaid. One of the things you can see that some of the states do 

is they will raise the cost of a tax that they have on providers, and 

then the providers will then be allowed by the state to raise their 

fees. 

So it is kind of a wash for the provider. But, oh, by the way, 

when the providers can raise their fees, then the feds have to 

match it, the taxpayers, two to one. It ends up costing us, over that 

same time period, about $44 billion. We cut out that kind of gaming. 

Senator COONS. I see I am over my time. I just want to close by 

thanking you again for your very hard work, and I am hopeful, 

with the leadership of the Chairman and Ranking Minority Member, that this Committee will step up to the task. Thank you. 

Chairman CONRAD. Senator Sanders. 

Senator SANDERS. Thank you very much, Mr. Chairman, and 

thank you, Senator Simpson and Mr. Bowles for being with us. 

Five minutes is not a whole lot of time, so I just want to make a 

few points and then maybe ask a few questions. 

I think one of the problems that we have when we just focus on 

deficit reduction, as significant an issue as it is, we lose the broad 

context of what is happening in this country, which is not just deficit reduction. The other reality that is happening in this country 

is that for many years the middle class has been collapsing. Poverty has been increasing. 

We now have, by far, the most unequal distribution of wealth 

and income of any major country. So while the middle class shrinks 

and poverty increases, the wealthiest people for many years have 

become much wealthier. So that you now have a situation, if you 

can believe it, where the top 400 families in America own more 

wealth than half of the families in America. Where you have the 

top 1 percent earning more income than the bottom 50 percent. 

So when you talk about moving toward deficit reduction, which 

we all appreciate is an important issue, the question is, well, on 

whom should that burden fall? Should we really, as our Republican 

friends have recently suggested, throw 200,000 children off of 

Headstart? Should we cut back on the Social Security Administration? Should we cut back on Pell grants with middle class families 

finding it harder and harder to be able to afford college? How do 

you deal with that? 

So to my mind, the first question that I would ask, and I am 

going to have to request very brief answers because I want to get 

to Social Security, I want to get to health care as well. At a time 

when we have such a grotesquely unequal distribution of income 

and wealth, where over a recent 25-year period, 80 percent of all 

income in this country went to the top 1 percent, why, in your proposal, did you suggest that three-quarters of the movement toward 

deficit reduction come from spending cuts, only 25 percent from 

revenue? 

Why didn’t you ask the wealthiest people in this country to start 

paying—I know you did some of it—but in a much more significant 

way their fair share of taxes? 
1064 

Mr. BOWLES. First of all, I think we have a significant spending 

problem in this country. Second, I think we did exactly what you 

said. In every single case, we tried to protect the truly disadvantaged. If you look at all of our cuts in the other mandatory category, which is about 20 percent of the other mandatory category, 

we did not touch a single one of those. 

Senator SANDERS. I would respectfully disagree with that. 

Mr. BOWLES. It is a fact we did not touch food stamps, we did 

not touch unemployment, we did not touch SSI. We left them all 

alone. If you look at—— 

Senator SANDERS. But answer my question. Answer my question. 

If you are earning—— 

Mr. BOWLES. I am answering your question and I will continue 

to. 

Senator SANDERS. We do not have a lot of time. 

Mr. BOWLES. Well—— 

Senator SANDERS. How 400 people in this—— 

Mr. SIMPSON. We will take some more time. 

Mr. BOWLES. That is because the tax expenditures actually go to 

those people. Those are the people who benefit from this. The top 

400 people pay an average tax of about 16 percent. 

Senator SANDERS. That is correct. 

Mr. BOWLES. Why do they do that? Because they have all these 

tax expenditures. We got rid of tax expenditures. That is why of 

a rate of increase the taxes of the top 1 percent or the top 1/10th 

of 1 percent is about 155 times what it is for somebody at the bottom. That is the right thing to do. 

Senator SANDERS. But Mr. Chairman, at the end of the day, in 

your movement toward deficit reduction, three- quarters of your 

plan talks about cutting spending. And I ticked off, how do you feel 

about throwing 200,000 kids off of Headstart? That is a cut in 

spending. Good idea? 

Mr. BOWLES. I do not think we recommended that, sir, so I do 

not believe—— 

Senator SANDERS. I know, but this is the result. When you talk 

about cuts in spending, Pell grants and so on—all right. Let me go 

on. We do not have a whole lot of time and I apologize. 

Mr. SIMPSON. What about your President offering to cover 

LIHEAP at 50 percent? 

Senator SANDERS. Terrible idea. 

Mr. SIMPSON. I did not do that. 

Senator SANDERS. And it was a terrible idea, no question about 

it. But let me go to Social Security. Social Security, to my mind, 

has been an enormously successful program for the past 75 years, 

taken a whole lot of elderly people out of poverty, people with disabilities, widows and orphans, paid out every nickle owed to every 

eligible American. 

Now, I found it interesting. You just made a point, which I think 

is right, Mr. Bowles. You said, When we dealt with Social Security, 

we did not do it from a deficit reduction perspective. We did it to 

try to strengthen Social Security. 

President Obama, during his campaign, also had an idea. His idea was to raise the taxable income level at $250,000. Remember 

that? People earning more than $250,000, that cap would be re-
1065 

moved. I thought that was a pretty sensible idea. What do you 

think about it? 

Mr. BOWLES. I am on the record. I have said many, many times 

that I did not think that people in my income bracket needed a tax 

cut. 

Mr. SIMPSON. I was part of a group of Dave Pryor and Jack Danforth that met years ago with Paul Simon and agreed to take that 

lid completely off. That is me— 

Senator SANDERS. Is that your view today? 

Mr. SIMPSON. You can do anything you want. I am not—— 

Senator SANDERS. No, not what I could do, but do your recommend to the Congress that we—— 

Mr. SIMPSON. I do not know. You are the guy—— 

Senator SANDERS. Well, I agree with President Obama, that at 

$250,000 or more that cap be removed. Do you agree with that proposal from the President? Any comments? You guys just did a long 

report. 

Mr. BOWLES. I have already said, you know, I did not believe 

that the top 2 percent of taxpayers need a tax cut. 

Senator SANDERS. I asked a fairly simple question. Do you agree 

with President Obama, that above $250,000 we should remove the 

cap? Yes or no? 

Mr. BOWLES. Should remove what cap? 

Senator SANDERS. The cap on taxable income for Social Security. 

Mr. BOWLES. Well, actually—— 

Senator SANDERS. Right now it is at $106,000. 

Mr. BOWLES. $106,800. We actually did raise that. 

Senator SANDERS. I know you did, I know you did. But the President went a lot further than you did. 

Mr. BOWLES. No. I believe what we recommended, we took it to 

90 percent, which was what it originally was. 

Senator SANDERS. But you are not—— 

Mr. BOWLES. Which means when, in 2020, instead of going to 

$168,000, it goes to $190,000. 

Senator SANDERS. The President said—— 

Mr. BOWLES. Or you will pay taxes on an additional 22 percent. 

Senator SANDERS. But the President said we should start very 

shortly by removing the cap for people over $250,000. I am not 

hearing your opinion on that. 

Mr. BOWLES. No, no, I am happy to give you my opinion. My 

opinion is what we would recommend. 

Senator SANDERS. So you do not agree with the President? 

Mr. BOWLES. I do not. 

Senator SANDERS. OK, that is fine, that is fine. In terms of 

health care—— 

Mr. SIMPSON. I do not think you would ever agree with us either, 

so it does not make much difference. 

Senator SANDERS. In terms of health care, at the end of the day, 

the United States spends almost twice as much per capita on 

health care as any other nation. We are the only nation in the industrialized world that allows private insurance companies to play 

a significant role in health care. Other countries have national 

health care programs without private insurance companies. Would 
1066 

you suggest that one way to get below the cost of health care is 

to—— 

Chairman CONRAD. Senator, Senator, in fairness to colleagues, 

you have now gone over—— 

Senator SANDERS. You are right. 

Chairman CONRAD [continuing]. Well over, so I think we have to 

end it there, in fairness to colleagues. 

Senator SANDERS. All right. 

Chairman CONRAD. When there is a flow of a conversation, I 

have permitted both sides to go up to a minute over, but now we 

are at 2 minutes. So honestly, I do not think it is fair. 

Let me go to a point that Senator Johnson raised, because I 

think it is a critically important point and we discussed this in the 

Commission. If we just use the historical average for revenues, at 

no time in the last 40 years would we have balanced the budget, 

not one time. 

So I do not think that is going to work. If we look at the five 

times the budget has been in surplus, what has been the revenue? 

And there you can see, every time we have actually balanced the 

budget, revenue has been nearly 20 percent of GDP. In 1969, 19.7. 

1998, 19.9. 1999, 19.8. 2000, 20.6. 2001, 19.5. 

And we have a different circumstance we are dealing with and 

the different circumstance we are dealing with is the baby boom 

generation, which is going to double the number of people that are 

eligible for these programs. 

So when we looked at that, and we are at 25 percent of GDP on 

spending now, we decided, and I wish Senator Sanders was still 

here, that we had to do more on the spending cuts side of the ledger, substantially more, but that we also had to do something on the 

revenue side if we are going to bell this cat in some kind of fair 

way, because we are borrowing 40 cents of every dollar we spend. 

If we did that all on the spending side, we would have to cut 

every single thing. The Federal Government spends 40 percent 

across the board. Social Security, 40 percent. Medicare, 40 percent. 

Defense, 40 percent. I do not think that is reasonable. There has 

to be some revenue in this equation. 

Now, some will say, Well, revenue is going to return to the norm. 

Right now revenue is about 15 percent of GDP, the lowest it has 

been in 60 years. In fact, very close to being the lowest it has been 

in 80 years. Now, as the economy recovers, we will get back to close 

to the average, because we know that in economics, there is a return to the mean. We see it in the markets all the time, a return 

to the mean. 

We can expect that here, too. But the reality is, a return to the 

mean is not going to balance this budget. It is not going to balance 

this budget. And so, we concluded we have to have some revenue, 

although much more of it has to be done on the spending side of 

the equation. 

I want to just end my questioning without a question, to again 

say thank you. I know that, Alan, you could have been out there 

with Ann in Wyoming, and for those that do not know, Alan married up. His wife is spectacular. Of course, she is tough on him, too. 

She does not cut him a wide swath. You took on a tough assignment and we appreciate it. 
1067 

Erskine, I will tell you, there are very few people I have more 

confidence in to deal with something like this than I have confidence in you. And, boy, you proved it in spades, the two of you 

working together on this Commission, because I think the result— 

look, there are all kinds of things in here I dislike intensely. If I 

were going to do this, I would do this very differently. 

Dick Durbin called me the night before the vote. He said, Kent, 

what are you going to do? I said, I am voting yes. He said, Well, 

why? I said, The only thing worse than being for this is being 

against it, because the country is in deep, deep trouble. I do not 

know what could be more clear. This thing is headed for the cliff. 

And we say, Well, we do not know when we are going to hit the 

cliff. That is true. There is not a single person that can honestly 

tell you they know with certainty when we are going to hit the cliff. 

The one thing we know for sure is we are hurdling toward it. That 

is one thing we know with certainty. 

So I would say to colleagues, please, whatever your ideology, 

whatever your philosophy—I will tell you, I put mine on the back 

burner because I deeply believe we have to do something like this, 

and the only plan out there I see that has bipartisan support is 

this one, as much as I dislike it, and I do dislike it. I would do this 

very differently. 

But hey, what matters to the country is getting a result, because 

failure is not an option. Senator Sessions. 

Senator SESSIONS. Thank you. We appreciate your work and we 

will continue to pursue bringing this Government to fiscal sanity. 

I have no doubt that we need to start cutting this year. I do not 

think $61 billion out of $3.7 billion is going to put us in an economic slowdown. I know politically the Administration is opposing 

any of those kind of cuts, but I think that they can be done and 

can be done wisely and will add up to over $800 billion if we were 

to execute it. 

So I am saying, let’s get busy now. And I do not shut the door 

on entitlement reform because obviously they are unsustainable. 

There are on an actuarially unsound basis and when you have 

that, you have just got to face up to it. It goes without saying, I 

think the world financial markets and our own economy would respond if we put ourselves on a sound course rather than an unsound course. 

You have given us good suggestions. Many of them, I think, are 

within the realm of achievability and let’s see if we can’t make 

some progress, Mr. Chairman. I look forward to working with you 

and thank you for your leadership. 

Chairman CONRAD. Thank you. I thank all of the colleagues who 

participated here today, and special thanks to the witnesses. 

Thanks for your contribution. You have done something very important. I hope the country is paying close attention. I especially 

hope my colleagues are. 

Mr. SIMPSON. Mr. Chairman, let me just say thank you for your 

consistency. You came here when I was here, you stuck right with 

your guns on the budget all the way. I thank Mike Enzi and Senator Sessions, and if we can just remember one thing, one thing. 

We are Americans first, not Republicans or Democrats, and if we 

cannot get out of that rut, we will never get out of the rut. 
1068 

Chairman CONRAD. Amen. Thank you both. 

[Whereupon, the committee was adjourned at 12:20 p.m.] 
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(1075) 

DISTRIBUTION AND EFFICIENCY OF 

SPENDING IN THE TAX CODE 

WEDNESDAY, MARCH 9, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:01 a.m., in room 

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

Present: Senators Conrad, Wyden, Sanders, Whitehouse, Begich, 

Sessions, Thune, Portman and Johnson. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today we are going to focus on spending in the Tax Code, 

or tax expenditures, as they are known. These are the countless 

credits, deductions, and exclusions that riddle and complicate the 

Tax Code. Specifically, we will examine the distribution of benefits 

and the efficiency of tax expenditures. 

Our distinguished witnesses today are: Robert Greenstein, the 

president of the Center on Budget and Policy Priorities; Robert 

McIntyre, the director of Citizens for Tax Justice; and Scott Hodge, 

the president of the Tax Foundation. Thank you all for being here. 

We look forward to your testimony. 

Our Nation is at a critical juncture. We are borrowing about 40 

cents of every dollar that we spend. Spending is at the highest 

level as a share of our economy in more than 60 years. Revenue 

is the lowest it has been in 60 years as a share of the economy. 

Both sides of the ledger are part of the problem, I believe, and both 

have to be part of the solution. 
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Looking at revenues in isolation has led some to argue that revenues should be held to the historical level over the past 40 years, 

about 18 percent of GDP. But revenues at that level would not 

have produced a single balanced budget in 40 years. In fact, on the 

five occasions when the budget has been balanced or in surplus 

since 1969, revenues have ranged between 19.5 percent and 20.6 

percent of GDP. It is this higher level of revenue that provides, I 

believe, a more useful guidepost for what is needed if we hope to 

dig ourselves out of this fiscal hole and set the budget on a sustainable path. 

Unlike in previous years, the country now faces an unprecedented demographic challenge which will put a tremendous added 

strain on the budget going forward. I believe that tax reform has 

to be part of the solution to addressing our fiscal problems coupled 

with spending cuts. The current state of the Tax Code is simply indefensible. Our Tax Code is out of date and hurting U.S. competitiveness. It is hemorrhaging revenue to offshore tax havens and 

abusive tax shelters. The Tax Code is riddled with expiring provisions. This creates enormous uncertainty for citizens and businesses alike, making it very difficult for them to plan ahead. 
1079 

If we took steps to simplify and reform the Tax Code, we could 

reduce tax rates below where they are today, and tax reform would 

also allow us to raise more revenue to help address the very serious debt threat hanging over America. 

Eliminating or scaling back tax expenditures should be at the 

heart of any tax reform we consider. This year, we will spend $1.1 

trillion on tax expenditure. That is as much as all of domestic 

spending, including defense. That is roughly equivalent to the size 

of our deficit. The deficit this year is going to be $1.5 trillion; the 

tax expenditures are $1.1 trillion. It is a staggering sum by any 

measure, and these tax expenditures receive far too little scrutiny. 

I am a member of the Finance Committee, and I can tell you, as 

a member of that Committee, the tax expenditures have not received the attention that they deserve. 
1080 

Here is how well-known conservative economist Martin Feldstein 

described tax expenditures in a recent op-ed in the Wall Street 

Journal. He said, and I quote: ‘‘Cutting tax expenditures is really 

the best way to reduce government spending.’’ 

Let me repeat that: ‘‘Cutting tax expenditures,’’ according to 

Martin Feldstein, ‘‘is really the best way to reduce government 

spending. Eliminating tax expenditures does not increase marginal 

tax rates or reduce the reward for saving, investment, or risk taking. It would also increase overall economic efficiency by removing 

incentives that distort private investing and spending decisions. 

And eliminating or consolidating the large number of overlapping 

tax-based subsidies would also greatly simplify tax filing. In short, 

cutting tax expenditures is not at all like other ways of raising revenue.’’ That is from an economic perspective and from a conservative economist. 
1081 

As we consider ways to reform the Tax Code, it is important to 

keep in mind who is benefiting from the status quo. In recent 

years, the effective tax rate for the wealthiest in this country, the 

rate actually paid after factoring in exclusions, deductions, credits, 

and other preferential treatment, has fallen dramatically. In fact, 

the effective tax rate for the 400 wealthiest taxpayers fell from almost 30 percent in 1995 to 16.6 percent in 2007. 
1082 

This trend was highlighted in a recent article in Tax Notes by 

tax expert Martin Sullivan. The article uses IRS data to compare 

the average effective tax rates for the residents of one Park Avenue 

building in New York City where the average income is more than 

$1.1 million. They compared that to the average effective tax rate 

for a typical New York City janitor, someone who might work in 

that very building, with an average income of $33,000. The data 

show that the average effective tax rate for the building residents 

was 14.7 percent—those are the people with an average income of 

$1.1 million—while the rate for the janitor was 24.9 percent; his 

income, $33,000. 

I do not know how anybody can defend or justify that kind of tax 

burden. It is not right. 

The reason for this disparity, of course, is that almost all of the 

janitor’s income comes from wages, which are taxed at the regular 

income and payroll tax rates. The Park Avenue building residents, 

however, receive almost two-thirds of their income from investments, which are taxed at lower capital gains and dividends rates. 

In addition, the Park Avenue building residents receive a greater 

benefit from tax breaks because they itemize their deductions. 
1083 

Tax expenditures are clearly worsening the disparity between 

how the wealthy are taxed compared to everyone else. If we look 

at the increase in after-tax income from tax expenditures, we can 

see the top 1 percent received more than $142,000 from tax expenditures in 2009. The middle quintile received less than $2,800. 
1084 

The President’s Fiscal Commission included the kind of tax reform I believe will be needed. It demonstrated that by eliminating 

or scaling back tax expenditures, we can simplify the Tax Code, actually lower rates, and still raise more revenue. Here are the key 

elements of tax reform that were included in the Commission’s 

plan: 

One, it eliminates or scales back tax expenditures and lowers tax 

rates. It promotes economic growth and improves America’s competitive position. It makes the Tax Code more progressive. Under 

the Commission’s illustrative tax reform plan, instead of six tax 

brackets there are three: 12 percent, 22 percent, and 28 percent. 

The corporate rate would be reduced from 35 to 28. Capital gains 

and dividends would be taxed as ordinary income. That would raise 

the effective tax rate of those people in the Park Avenue building 

because they are paying an effective tax rate of 16 percent. They 

would go up to 28 percent. 

The mortgage interest and charitable deductions would be reformed, better targeting their benefits. The child tax credit and the 

EITC would be preserved to help working families. And the alternative minimum tax would be repealed. The Commission’s plan 

also increases revenue to 21 percent of GDP by 2022. 

We simply will not be able to solve our Nation’s long-term fiscal 

and economic problems without fundamental tax reform—tax reform that improves our economic efficiency while also bringing in 

more revenue. And addressing tax expenditures has to be the heart 

of that tax reform. 

With that, we will turn to Senator Sessions, my able colleague, 

for his opening comments, and then we will turn to our excellent 

panel, really outstanding panel, for their comments. And then we 

will open it to questions from our colleagues. 

Senator Sessions. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Mr. Chairman, I do think the Commission’s 

report on tax reform is very valuable, and it has a lot of suggestions that are critical that we could make and take and make our 

economy more productive and make the tax system more effective 

in producing a fair source of revenue. I would note that one reason, 

I assume, that the top 400 taxpayers have seen a major drop in 

their income, one reason is—in their taxes that they pay is because 

they are making less money. We have skewed the tax rate to very 

high income taxpayers whose incomes are volatile. They are not 

certain. And when you depend on that for your income, that is how, 

I think, we are down to 14.9 percent of GDP in income, is because 

the profits are not there, and if you do not make profits, you do 

not pay taxes. If you sell your stock or your real estate properties 

for a loss, you take losses instead of show incomes. And I do think 

that is a factor in the problem we have with having a steady source 

of income. 

Mr. McIntyre thinks that is funny. Maybe I am wrong on that. 

Maybe upper-income people are making as much in the last 2 years 

as they were during the boom period. I do not think so. 

I will just note this with regard to the actual share of wealth 

being paid in taxes: The top 20 percent pay 70 percent of the taxes 
1085 

in America, all taxes—payroll, excise, corporate, income taxes. According to CBO, between 1979 and 2007, the average tax rate for 

Federal taxes combined declined for all interest groups. The average rate declined for all. The average income tax rate also declined 

over those years. The largest decrease occurred for the fifth of the 

population with the lowest income. They got the biggest reduction. 

Those taxpayers in the top income quintile, the top 20 percent, in 

2007 paid an average tax rate of 25 percent, a rate 6 times higher 

than those in the bottom quintile. The top 1 percent earned 19 percent of the Nation’s income but paid nearly 30 percent of the Nation’s Federal taxes. 

According to CBO, in 2007 households in the highest quintile 

earned 55 percent before-tax income—they earned 55 percent, the 

top 20 percent, before-tax income and paid almost 70 percent of the 

Federal taxes. For all other quintiles, the share of Federal taxes 

was less than their share of the national income. 

In comparison to the tax rates in effect under President Clinton, 

low-income earners pay a smaller share under the current income 

tax structure while higher-income earners pay a larger share. In 

President Clinton’s last year in office, those in the bottom income 

quintile paid a negative 1.6 percent share of all income tax—a negative share results from their receiving tax credits—while those at 

the top paid 81 percent. In 2007, the last year available, the share 

of income taxes paid by the bottom 20 percent became even more 

negative, while the share paid by the top 10 percent increased to 

86 percent. 

The Tax Code is already highly progressive. An effort to eliminate credits, deductions, and exclusions without corresponding reductions in marginal rates will sacrifice economic growth. An average wealthy person, let us say, making $400,000 a year, they would 

pay under President Obama’s plan to increase taxes 39.6 percent. 

The health care bill added an almost 1.9 percent payroll tax increase to them. We have added another 3.8 percent for our investment income. Alabama has a 5-percent income tax, State tax. 

Other States have lower and many have higher. So you are around 

50 percent of a person’s upper-income people subject to tax, a marginal rate. I mean, how much more do you do without damaging 

the economy? I think it is a dangerous trend to think we can just 

continue to drive up the tax rates and there will be no consequences. There will be consequences for it, and it is not all good. 

With regard to tax expenditures, the way I understand that, your 

charitable deductions count as tax expenditures. Every deduction 

virtually is scored as a tax expenditure. I am not sure every deduction is bad. I am not sure every deduction should be scored in that 

fashion. If you gave a $10,000 contribution to some charitable enterprise and you only pay taxes on—you get to deduct that and you 

do not pay taxes on it. It saves you some of that money. But most 

of it is the contribution that went to the charitable enterprise; 40 

percent or whatever for the upper-income people would be saved, 

but 60 percent is out of their pocket of the charitable contribution. 

So I think we just need to simplify the Tax Code. I look forward 

to hearing these witnesses discuss it. You are exactly right, Mr. 

Chairman. You and the Commission raised this question of taxes. 

Are they serving our national interest? I do not think so. I do not 
1086 

know how to fix it. We need to get our arms around it, and if we— 

because we have to work with the Finance Committee and all. I 

know they are looking at this. But more than the deficit, getting 

your arms around the tax policy in America is exceedingly hard. I 

know there are a lot of suggestions, and I am open to them, and 

I am open to reform, that is for sure. 

Thank you. 

Chairman CONRAD. Thank you, Senator Sessions, and I agree entirely with your last comment. Look, tax reform is essential. We do 

have a circumstance in which if you—what I was referring to in 

terms of the effective top rate dropping for the wealthiest 400 referred to actual income received. Clearly, many of those people 

have had a reduction. Some have not. Some have had huge increases even though there was an economic downturn. But the effective tax rate I was referencing was based on what they pay on 

their actual income, and that effective tax rate has dropped, and 

it has dropped because we have changed the tax law. We have 

made capital gains and dividends preferentially treated in a way 

that Warren Buffett says he pays an effective tax rate of 16 percent. The woman who is his executive assistant pays a much higher effective tax rate. And that is really the disparity that I was referencing, that the difference between the people who live in that 

Park Avenue building that we know exactly what their tax responsibility is because IRS reports it—we do not know who the individuals are; we now what their effective income is; we know what 

their effective tax rate it. They are paying a tax rate of 16 percent, 

and yet the janitor who may work in that same building, a much 

lower income, is paying a much higher effective tax rate. 

So the message from the Commission on tax expenditures was 

much as what Martin Feldstein said, a conservative economist, 

that the tax expenditures are really in many of the elements—not 

all. I would say to the Senator charitable contributions, that is 

something we have to think very carefully about. But what we 

have done in Congress—and I am on the Finance Committee, so, 

you know, I am part of the process. I have a responsibility here, 

too. You know, it is becoming—— 

Senator SESSIONS. You are a real master of the universe. 

[Laughter.] 

Chairman CONRAD. It has become a back-door way of spending 

money, of spending Federal money. 

Senator SESSIONS. Mr. Feldstein made that point in the article, 

and he was critical of some of the Democratic criticisms that ignore 

the fact that one way to spend money is to do it through the Tax 

Code, on certain lower-income groups also through the earned income tax credit, which is one of our largest expenditures. But you 

are correct. Let us look at this. We have a good panel, and I look 

forward to hearing their comments. 

Chairman CONRAD. I appreciate that. 

We will start with Mr. Greenstein, who has testified before this 

Committee on many occasions, has as high level of credibility here 

as president of the Center on Budget and Policy Priorities. Welcome. Please proceed with your testimony. 
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STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE 

DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES 

Mr. GREENSTEIN. Thank you, Mr. Chairman. As you know, bipartisan majorities on all of the major deficit reduction panels have 

agreed that to reduce the deficit, we need a balanced approach that 

consists of both program and tax reforms, both contributing to deficit reduction. Both taxes and programs are implicated in the fiscal 

problems we face, and both need to be part of the solution. 

Tax expenditures offer a particular target of opportunity. I still 

recall the moment in 1994 when Alan Greenspan was testifying before the Kerrey-Danforth Deficit Commission, on which I had the 

honor of serving, and Greenspan told us that we needed to look at 

what he called—these were his words—‘‘tax entitlements.’’ And indeed a number of tax expenditures are essentially spending entitlements delivered through the Tax Code. 

Take child care as an example. If you are a low- or moderate-income person, you may get a subsidy to help cover your child care 

costs through a spending program. But if you are higher on the income scale, you still get a Government subsidy that reduces your 

child care costs, but it is delivered through the Tax Code via a 

credit. Moreover, if you are a low- or moderate-income parent with 

child care costs, you might miss out because the spending programs 

that provide child care subsidies are not open-ended. They are 

capped, and when you reach the cap, people have to go on waiting 

lists. But if you are a higher-income household, your child care subsidy is guaranteed because the tax subsidy operates as an openended entitlement. 

As the Chairman noted, tax expenditures now total nearly $1.1 

trillion a year. This substantially exceeds the cost of Medicare and 

Medicaid combined (a little over $700 billion), Social Security 

(about $70 billion), and non-security discretionary programs, (less 

than $600 billion). 

Both the Bowles-Simpson and Rivlin-Domenici Commissions contained a focus on tax expenditures, and as you noted, Martin Feldstein—I have a different quote from the same article. He said, ‘‘If 

Congress is serious about cutting government spending, it has to 

go after many of these tax expenditures.’’ 

You might also note that in the GAO report that just came out 

on overlap and duplication, there is a whole section in that report 

on tax expenditures where the GAO says improving tax expenditure performance could reduce revenue loss potentially by billions 

of dollars. 

Now, a particular issue here is that tax expenditures are not just 

costly; they are often—not always, but often—economically inefficient. Many tax expenditures are incentives designed to subsidized 

and encourage certain desired activities, but they often do so in inefficient ways. They do so often by distorting investment or other 

economic decisions, as Feldstein has noted, and adding to the inefficiency is the fact that many tax expenditures—principally those 

that are deductions, exemptions, and exclusions—tie the tax subsidies, the tax incentives they provide to the marginal tax rate of 

the beneficiary so that the amount of the tax subsidy increases 

with income and the wealthiest households get the largest subsidies. 
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Now, from an economic perspective, such a structure does make 

sense if but only if higher-income people need a substantially greater monetary incentive to take the desired action and would not 

take it in the absence of the tax incentive. But the reality is often 

the reverse. High-income households would generally send their 

children to college, make sure they have enough assets for retirement, and buy a home with or without the current costly tax incentives, and that is why a number of liberal, conservative, and centrist experts alike have characterized key parts of our tax incentive 

structure as being upside down. We spend money providing the 

largest incentives to people in the top brackets despite the fact that 

the incentives generally have a smaller effect on whether they will 

send their children to college, become homebuyers, and put aside 

money for retirement than those incentives have for people lower 

down on the income scale. 

In fact, in that regard, tax credits differ significantly from deductions and exclusions. They reduce the price of the desired activity 

by an equal percentage for most households. Reformers view them 

in many of these areas as increasing economic efficiency, and both 

Bowles-Simpson and Rivlin-Domenici propose to convert some of 

the tax deductions into credits. 

Now, my point here is that the economic efficiency weaknesses 

in the structure of various tax incentives offer you an opportunity. 

By converting various deductions into flat-percentage tax credits, 

policymakers can improve economic efficiency by increasing the effectiveness of the tax incentives in boosting things like national 

saving, college attendance, and the like, even as you achieve deficit 

reduction and improve the progressivity of the Tax Code. 

Let me talk for a moment about progressivity. There was a fascinating recent article by economist Kenneth Rogoff. In this article, 

Rogoff warned of the consequences of widening a historic levels and 

historic levels of inequality in income, wealth, and opportunity 

throughout a number of countries. He cautioned that the ability of 

countries to address inequality could be the key factor that, and I 

am quoting Rogoff, ‘‘could separate the winners and losers in the 

next round of globalization’’ and could emerge as, his words ‘‘the 

big wildcard in the next decade of global growth.’’ 

And the Bowles-Simpson report sets forth a basic principle here. 

It states, and I am quoting, ‘‘Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who 

are most vulnerable and eliminate tax loopholes favoring those who 

need help least.’’ 

Which brings me to my final point. Bowles and Simpson, as you 

noted, Mr. Chairman, on one of your slides, called for deficit reduction that protects low-income families and indicated it should protect the earned income credit and the child tax credit. These credits 

are vital to the standard of living of low-income working families, 

to ‘‘making work pay,’’ and to promoting work over welfare. 

Furthermore, those credits lower marginal tax rates for many 

low-income workers who otherwise face some of the highest marginal tax rates of any group of Americans, because they receive 

other means-tested benefits that phase down as their income rises. 

This is why, in calling for various tax expenditures to be curbed, 
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Martin Feldstein wrote that he was not including the EITC in this 

list, which, Feldstein explained and I am quoting from Feldstein, 

‘‘acts largely as a tax rate reduction.’’ And numerous academic 

studies have shown that the EITC has a powerful effect in increasing work, reducing welfare use, particularly among single parents 

with children. 

There has been a longstanding bipartisan principle in this town 

that people, parents who work full time should not have to raise 

their children in poverty. The only reason we comply with that 

principle and policy today is because of the earned income credit 

and the child tax credit. 

Finally, all past deficit reduction measures of recent decades— 

1990, 1993, 1997, the Gramm-Rudman-Hollings Act in 1985—all 

reflected a commitment to protecting low-income households in 

general and the EITC in particular. 

Thank you. 

[The prepared statement of Mr. Greenstein follows:] 
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Chairman CONRAD. Thank you. 

Next we will hear from Mr. McIntyre. Robert McIntyre is the director of the Citizens for Tax Justice and has also testified on 

many occasions before this Committee. Welcome back. 

STATEMENT OF ROBERT S. McINTYRE, DIRECTOR, CITIZENS 

FOR TAX JUSTICE 

Mr. MCINTYRE. Thank you, Mr. Chairman. Well, today is the 

first day of Lent. It is an opportunity to take a resolution and 

maybe give up, not just until Easter but maybe even longer, what 

has become a great deal of enthusiasm in the Congress among both 

parties for providing subsidies to American businesses, and foreign 

businesses sometimes, in programs that are administered by 

Congress’s favorite agency, loved beyond any other, the Internal 

Revenue Service. I do not know why you like it so much, but you 

do. 

You know, a quarter of a century ago, President Reagan took on 

these business subsidies that had grown into the tax code—some 

of them he actually had put in there—but he took them on in 1986 

and he passed a big tax reform bill that, among other things, 

raised corporate tax payments by more than a third, and the 

money was used to help fund individual tax reductions. But President Reagan was not afraid to do that, to raise taxes on corporations in the sense of taking away subsidies that they did not deserve. He did not think there was anything wrong with that at all. 

That may not be the current thinking here, but I am going to try 

to talk you out of the current thinking. 

In our view, as you know, the lobbyists have been back. They 

have worked their magic and the corporate and personal business 

side of the tax code is a mess again. We have three complaints. 

One is about what the current system does to hurt us. These subsidies, $365 billion in this fiscal year alone for business income, tax 

subsidies for business income, both corporate and personal, they 

cost that much money. It would make a huge step toward deficit 

reduction if we could recover some or all of that, and we strongly 

disagree with President Obama on his idea that corporate tax reform should be revenue neutral. That would defeat one of the main 

points of reform, and that point is that we need to deal with our 

deficit over the long term. 

And, you know, if there is one thing the public likes in terms of 

deficit reduction, it is asking American corporations to pay their 

taxes again. They do not like Social Security cuts. They do not like 

Medicare cuts. They do not like cuts in any program they have actually ever heard of. But they do like making American companies 

pay at least as much taxes as they are, which is not true now. 

Now, you get bonuses out of corporate tax reform done right because the current subsidies, as any economist will tell you, are designed to make companies do things that do not make any sense 

economically. That is the program. We want them to not invest in 

what is the highest rate of return or what the customers want to 

buy. We want them to do things that you very, very smart Senators 

and the smart people over in the House of Representatives think 

are better, sort of Soviet-style socialism, you could call it if you 

were a mean person. Not me. 
1101 

Well, if you tell companies to do things that are uneconomical, 

mostly, they will not because that is not where the money is. In 

fact, that is not what they lobby for. I mean, think about this for 

a minute. I am a steel company. I come in. Senator Conrad, I 

would like a tax break to make aluminum. No. I am asking for a 

tax break to make steel, because that is what I do. That is what 

I will do. But if you want to pay me to do it, so much the better. 

So that is the good news about the tax breaks, is most of them 

are a complete and utter useless waste. But sometimes they make 

a difference. We have a system where the aerospace industry pays 

1 percent in taxes and the retail industry pays 27 percent, and in 

between the rates are all over the place, too. I mean, that has to 

have some effect in getting investors to move to one place or another and that distorts behavior. Some effect. 

I will tell you where the real effect is, though, the real worst effect, and that is our international system, which right now we pay 

our companies to either artificially shift their profits offshore or, in 

some cases, move things offshore and really do business offshore instead of here in the United States. We have tilted the playing field 

with tax breaks so that you can make more money after tax in 

China than you can in the United States, even if before tax you 

make the same thing, and that seems to me to be nuts. So very 

economically harmful. 

The third point that I worry about is that, as you have pointed 

out, Senator Conrad, the disparity between taxes on capital income 

and taxes on wages has grown larger and larger. And if you look 

at what we could do about that, well, yes, capital gains and dividends breaks are part of it. But most capital gains are not overtaxed and neither are most dividends. 

The one place we could do something about this inequality in 

taxes and lack of progressivity compared to the olden days in the 

tax system is on the corporate side, where the income is earned. 

If we can get some taxes out of the capital income at the source, 

which is what the corporate income tax is supposed to do, because 

we all know most dividends are not taxed, most capital gains are 

not, then we would have a more progressive and a fairer tax system and that would be a good thing, I think. Now, we can argue 

about whether it is good, but I think it is good. 

So in conclusion, you on this committee are going to play a major 

role in trying to design a plan to reduce the long-term budget deficits and you do not want to do it in a way that endangers our very 

fragile economy, so you are going to do it gradually, I hope, and 

you are going to do it well and you are going to make great choices. 

We urge you to make reduction or elimination of business tax 

subsidies your highest priority here, because doing so, you can not 

just cut the deficit and therefore retain some important programs. 

You can make the economy more efficient. You can add jobs. And 

you can make America a better society. 

Thank you. 

[The prepared statement of Mr. McIntyre follows:] 
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Chairman CONRAD. Thank you, Mr. McIntyre. 

Next, we will hear from Mr. Hodge, the President of the Tax 

Foundation. Welcome. Good to have you before the committee. 

Please proceed with your testimony. 

STATEMENT OF SCOTT HODGE, PRESIDENT, TAX FOUNDATION 

Mr. HODGE. Thank you, Mr. Chairman and members of the committee. The immutable principles of economically sound tax policy 

tell us that taxes should be neutral to economic decisionmaking, 

they should be simple, transparent, stable, and they should promote economic growth. In other words, an ideal tax system should 

only do one thing and do it well, and that is just raise a sufficient 

amount of money for the government activities while doing the 

least amount of harm to the economy, and I think everyone on this 

committee will agree that the U.S. tax system is far from that 

ideal. 

Over the past two decades, we have asked the tax code to direct 

all manner of social and economic behavior, such as buying hybrid 

vehicles, turning corn into gasoline, encouraging people to save 

more for retirement, purchase health care, buy a home, replace the 

windows in that home, adopt children, put them in day care, take 

care of grandma, buy bonds, spend more on research, purchase 

school supplies, go to college, invest in historic buildings, and on 

and on and on. In too many respects, the IRS has become a substitute for every other cabinet agency, from Energy to Education to 

HHS and HUD. 

And thanks to the generosity of the credits and deductions in the 

tax code, a record 52 million taxpayers, or 36 percent of all filers, 

pay no income taxes at all and are now off the tax rolls. In other 

words, they have no skin in the game. And indeed, many of these 

people now look to the IRS as a source of income, thanks to more 

than $100 billion worth of refundable tax credits paid out to people 

who have no income tax liability at all. 

You know, the OECD reports that the U.S. has the most progressive income tax system of any industrialized country. Indeed, the 

top 1 percent of U.S. taxpayers now pays a greater share of the income tax burden than the bottom 90 percent combined. 

But the entire Federal fiscal system is progressive, not just the 

tax code. Tax Foundation economists have estimated that the majority of American families now receive more in government spending benefits than they pay in taxes. And overall, the Federal fiscal 

system, between taxes and spending, combine to redistribute more 

than $824 billion from the top 40 percent of families to the bottom 

60 percent. 

Unfortunately, many companies and industries, as Bob has mentioned, are now looking to the IRS as a source of income, too. In 

fact, a recent case, one-third of the profits of a major appliance 

company came from the Energy Production Credits, and I doubt 

that when Members of Congress enacted that program that they 

thought that it would be to this appliance company what the EITC 

is to poor people, an income subsidy. 

And today, the biggest crises facing working families and the 

economy are health care, housing, and local government finances. 

And ironically, these are the areas in which the government and 
1111 

the tax code are most involved. So the cure to what ails these industries is that we wean them off the tax code, not give them more 

subsidies. 

The tax preference for employer-provided health insurance has 

undermined in health care the market forces that deliver quality 

goods and services to everything from bread to computers. Housing 

suffers a similar problem because of the plethora of tax and spending subsidies intended to promote home ownership. One study determined that the MID is an ineffective policy to promote home 

ownership and to improve social welfare. And it should be 

noted—— 

Chairman CONRAD. Can I just stop you on that? 

Mr. HODGE. Yes. 

Chairman CONRAD. You were referencing there the Mortgage Interest Deduction? 

Mr. HODGE. I apologize for using the acronym. 

Chairman CONRAD. Yes. You know, any time, because we have 

people watching this—— 

Mr. HODGE. Geek-speak. 

Chairman CONRAD. Yes. So I know in the Washington community and Congress, everybody knows what that is, but if you will 

use the words so that people listening know what it means, as well. 

Mr. HODGE. My apologies. It should be no surprise that State and local debt has soared from $1.5 trillion in 2000 to $2.4 trillion 

today because local governments can pass off some of that cost to 

Uncle Sam through State and local tax deductions and subsidized 

municipal bonds. 

And we have, because, I think, in part, the rising local taxes, 

more and more Americans are finding themselves trapped by the 

AMT. 

But Washington can actually do more for the American people by 

doing less. The solution lies in fundamental tax reform, which 

means lowering tax rates while eliminating many of the preferences in the tax code. And a good starting point could be the Zero 

Plan by Erskine Bowles and Alan Simpson. And it is certainly not 

a perfect plan, but it does demonstrate that Americans could enjoy 

lower tax rates and the government could raise as much money if 

some, if not all, of the tax expenditures were eliminated. 

That said, with $1.5 trillion deficits, it is tempting to look at closing loopholes as a honey pot for deficit reduction, but I believe that 

would be a mistake. The primary goal of fundamental tax reform 

should not be raising more money for the government. It should be 

to improve the nation’s long-term economic growth and lift the living standards of every American. 

Economists at the OECD in Paris, the Organization for Economic 

Cooperation and Development, have determined that high corporate and high personal income tax rates are the most harmful 

taxes for long-term economic growth. Unfortunately, of course, as 

many of you know, the U.S. has one of the highest corporate tax 

rates in the industrialized world, and as I mentioned, we have one 

of the most progressive personal income tax systems in the industrialized world. 

Fundamental tax reform can restore the nation’s competitiveness 

and put us on a growth path for the future. And not only will this 
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improve the living standards of all Americans, but it will improve 

the nation’s fiscal health, as well, and that is a win-win for everyone. 

Thank you very much, Mr. Chairman. I welcome any questions 

that you may have. 

[The prepared statement of Mr. Hodge follows:] 
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Chairman CONRAD. Yes. Very good testimony, all three. Thank 

you very much. You made a real contribution to the committee. I 

appreciate your taking the time to be here and share your thoughts 

with the committee. 

I would like to go to something that has been a pet peeve of mine 

for many years. I used to be a tax administrator. I used to be 

Chairman of the Multi-State Tax Commission. And one of the 

things that jumped out at me in those years was the rise of offshore tax havens and the, what I think is the extraordinary ripoff that is occurring to average taxpayers and, frankly, to other 

businesses that do not avail themselves of the opportunity to use 

these offshore tax havens. 

Many times, I have shown the picture of Ugland House down in 

the Cayman Islands that claims to be the home to 18,000 companies, a little five-story building, and all of them claim to be doing 

business out of little Ugland House down in the Cayman Islands. 

I would say it is the most efficient building in the world to be the 

home of 18,000 companies. Of course, there is no business being 

conducted out of there. The only thing that is being conducted is 

monkey business, because what they are doing is they are avoiding 

taxes in the United States and other jurisdictions. 

The estimate by the Subcommittee on Investigations is we are losing $100 billion a year to offshore tax havens. If anybody doubts 

that this is a big problem, I would invite you to go Google ‘‘offshore 

tax havens.’’ See what you get. I think you will be amazed at what 

you get. I certainly was. 

No. 2, abusive tax shelters. We now have the spectacle in this 

country of some companies buying European sewer systems and 

writing them off on their U.S. books to reduce their tax obligation 

here, not because they are in the sewer business. It would be legitimate if they are in the sewer business. But these are companies 

that are simply looking for a tax cover and buying European sewer 

systems, deducting them on their books for U.S. tax purposes, leasing them back to the European cities that built them in the first 

place. 

And it does not only apply to European sewer systems. They are 

doing the same thing with European transit systems. They have 

even gone so far as to buy European city halls and then deduct 

them on their books for U.S. tax purposes, lease them back to the 

European cities that built them in the first place. I mean, really, 

how can anybody justify this? That, the Subcommittee on Investigations, say is costing us $50 billion a year. 

Mr. Greenstein, have you looked into the abuses of offshore tax 

havens, abuse of tax shelters, and if so, what have you found? 

Mr. GREENSTEIN. I think this is probably more an issue for Bob 

McIntyre. We have not looked at offshore tax havens ourselves, but 

I think he has probably done a lot of that. 

Chairman CONRAD. Mr. McIntyre? 

Mr. MCINTYRE. Well, I think you put your finger on probably the 

most serious problem in our tax code today and our subsidy system 

today, on the corporate side in particular, because there are individual issues of hiding income and there are corporate issues of artificially shifting profits, and I think the second is your major focus 

there. 
1134 

The reason that happens, that we let it happen, is two. First, we 

have this extraordinarily complicated system of how companies allocate their expenses and their revenues. They have to pretend 

when they are dealing with their wholly owned subsidiaries offshore that they are dealing with an unrelated third party and they 

just make stuff up and the IRS cannot police it. 

Chairman CONRAD. Let me just—— 

Mr. MCINTYRE. But that problem, by the way, would be trivial, 

absolutely trivial. This arm’s length of pretending you are negotiating with yourself would be a trivial and almost nonexistent problem were it not for the fact that if they can shift that profit to the 

Cayman Islands or wherever, then the tax that ought to be paid 

on the income is indefinitely deferred. If we got rid of that deferral, 

then it would not do them any good to move it to the Cayman Islands and the problem would be solved. 

Now, there are some people in the Congress, I know many business lobbyists, I am sure, who are calling for Congress to make this 

problem worse by saying that not only can you defer what you shift 

to the Cayman Islands, you can be exempt forever on it. It is called 

the territorial system, or as one of my assistants called it, a territorialism system, because it would make—it is like a terroristic attack on the Internal Revenue Code. 

So as you go on on this, and it will come up for you in the Finance Committee, there is going to be a lot of talk. What should 

we do with our current system? Should we try to do what John 

Kennedy wanted to do back in the early 1960s and get rid of deferral, or should we go to what the Europeans have done, which is go 

to this territorial system which has turned out to be a disaster for 

them and would be a disaster for us and would make your building 

down in the Cayman Islands have to add a very large annex. 

Chairman CONRAD. Let me ask you this question. Have you done 

any analysis on how big the revenue hemorrhage is from offshore 

tax havens? 

Mr. MCINTYRE. Well, on the corporate side, the Treasury Department has been doing a somewhat better job of putting a number 

out. A lot of the estimates have been bootstrapped. You know, some 

reporter will ask me how much, and I say, I do not know, $70 billion. Then somebody reads that and says, well, I am going to raise 

you. 

But Treasury has made a serious effort. They peg it right now 

at about $50 billion, but I think they are leaving something out. 

So the numbers you gave, could it be 75, could it be 100 a year, 

I think it could. But they are at least getting it up there, because— 

and if you look in their latest tax expenditure book, you will see 

it, and that is a big piece of that $365 billion in corporate subsidies. 

Chairman CONRAD. Let me just say, when I was a tax commissioner, I one time found a company that was doing business in the 

United States and I found out through involvement with the IRS, 

this company just kept—they had a series of transactions within 

the United States between wholly owned subsidiaries here showing 

no profits at any point in the United States. They got to the Cayman Islands. They showed $20 million in profit with one employee 

working half-time. I always said that was the most efficient guy in 

the world, to produce $20 million in profit half-time. And, you 
1135 

know, the Cayman Islands gave them the opportunity to defer it 

indefinitely. 

So, you know, this is the kind of thing that is really going on in 

the real world and it is, I think, patently unfair to people who have 

all of their income exposed to taxation at whatever level of income, 

to have some who are avoiding everything that they owe through 

these kinds of tax dodges. 

My time has expired. Senator Sessions. 

Senator SESSIONS. Well, it is very complex. I am aware of a businessman who sold a profitable asset in another country and his 

comment to me was, well, I will tell you, the United States Treasury is going to receive a lot less money because this is a foreign 

company and they probably will not even incorporate in their country. They will probably incorporate in the Islands and not going to 

have any income. But the income tax he was paying was a significant factor in his decision to cease to sell the business. 

I guess, Mr. Hodge, we have had a good bit of talk about the corporate tax rate, simplification, and the rest of the world is going 

to the territorial system. None of them are going back from it, I do 

not think, Mr. McIntyre. They must be reasonably happy with it. 

And we are ending up with the highest rate in the world. When 

Japan reduces theirs, I believe we will be the highest developed 

corporate tax rate in the world. And within that structure, as the 

Commission said and the Chairman has noted, we have great disparities between health care—industry is paying 5 percent, the 

trucking company is paying 30 percent, and it is a hodgepodge— 

no pun intended—of a tax situation. 

Is there any way we could—what are the principles here that we 

ought to consider as we seek to do something about the difficult 

challenge of corporate tax rates that is making the United States 

less competitive, costing jobs in America. There is no doubt about 

that. 

Mr. HODGE. Well, Senator, I think we first have to understand 

that the United States has a Neiman Marcus corporate income tax 

system where the rest of the world is moving toward Walmart tax 

prices. We have everyday high taxes every day while the rest of the 

world has everyday low taxes every day. Every other country on 

earth looks like a tax haven compared to the United States. As you 

mentioned, the United States has a combined corporate tax rate of 

nearly 40 percent. Only Japan has a higher rate. And in 3 weeks, 

they are about to lower their rate to below 35 percent, which will 

make the U.S. the highest in the nation. 

But we cannot also forget that Canada has already cut their corporate tax rate again as of January 1, from 18 percent to 16.5 percent at the Federal level, and they are on their way to reduce their 

rate to 15 percent in a few years. The U.K. in 3 weeks, as of April 

1, will reduce their corporate rate from 28 percent to 27 percent on 

a long-term path to reduce their overall corporate rate to 24 percent. And they, along with Japan, were the two most recent countries to move to a territorial system and for very different reasons. 

Japan did it because Japanese companies were not repatriating 

profits from largely U.S. income back to Japan because their tax 

rate was so high and they had a worldwide system. So they had 

to move to more of an exemption-based system to encourage those 
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companies to repatriate those profits back to Japan, which has 

been in about a 20-year recession. 

Great Britain moved toward a territorial system because it was 

losing companies to other countries who were redomiciling in Ireland or Switzerland or the Netherlands, and so they had to move 

toward a territorial system in order to prevent those companies or 

discourage companies from leaving the country. And so they have 

had to make corrective actions to make themselves more competitive in a global environment. 

Let us not forget, when we talk about companies that are—— 

Senator SESSIONS. I would just say, in this time when jobs are 

just a critical factor for us, what would you say to a working individual in the country who thinks that corporations ought to pay 

more, that they are having a hard time getting by. They read about 

corporate assets, their wealth they are sitting on and not spending. 

How do you explain in simple language your view that tax increases can be damaging? 

Mr. HODGE. Well, first of all, understand that every multinational company in the United States has IRS agents permanently staffed in their offices auditing their books. Imagine if you 

had to give up your guest bedroom to an IRS agent and they were 

constantly looking over your shoulder—— 

Senator SESSIONS. One company said, I had to provide free coffee. I am still irritable about that. 

[Laughter.] 

Mr. HODGE. But to get to your point, what the economic research 

is telling us is that the real economic burden of the corporate tax 

is now falling more and more on workers and labor, and that is because in a global environment where capital is very mobile but 

workers are not, the real economic burden of the corporate tax falls 

on workers through lower wages and productivity. And so if we 

want to encourage higher wage growth, higher productivity, we 

need to cut that corporate income tax and those benefits will eventually fall onto workers or benefit workers. 

And I think that if we really care about the long-term living 

standards of Americans and workers, we need to cut our corporate 

tax to be more competitive and to reduce the incentives for other 

countries—— 

Senator SESSIONS. And that will create jobs—— 

Mr. HODGE. It will create jobs—— 

Senator SESSIONS [continuing]. Make the companies healthier 

and be able to probably drive up wage rates—— 

Mr. HODGE. Exactly. 

Senator SESSIONS [continuing]. Which I would like to see happen. 

Well, so on the Canadian border, and a company is deciding where 

to locate a plant, would this corporate tax rate induce them—I am 

sure that is Canada’s goal, to induce corporations to expand in 

Canada rather than expand in the United States. Is that realistic? 

Mr. HODGE. The Canadian government has an explicit policy, 

and it is on their website if you go there, that they want to become—they want to have the lowest corporate tax of all of the G– 

7 nations, the major G–7 nations, and to make themselves as competitive as possible and as attractive as possible, not only to U.S. 

companies, but to all inbound investment. 
1137 

So I think that there—we often look at Ireland as being sort of 

the model for low corporate taxes, but we ought to be most concerned about Canada. As they are driving to be more and more 

competitive, it is going to become a much more attractive place for 

U.S. businesses to grow and expand and we risk falling behind the 

longer we delay doing something about our high corporate tax. 

Senator SESSIONS. And the haven problem is exacerbated by 

higher rates, would you agree? 

Mr. HODGE. Absolutely. I think, and as the Chairman understands, being former Revenue Director, when you have States such 

as South Dakota and Wyoming or Nevada that do not have personal and corporate income taxes, those look like pretty attractive 

places for high net worth individuals or businesses to expand and 

grow. So tax competition is real, not only in the States, but also 

globally, and the more we understand that we need to bring down 

our tax rates to be more competitive, the shorter time we will risk 

falling behind. 

Senator SESSIONS. Well, we face a lot of challenges. We do have 

a revenue shortfall and we cannot tax ourselves out of competitive 

world markets. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman. I appreciate you 

having this hearing. 

As I think both the Chairman and the Ranking Member are 

aware, it has been calculated that we spend, as Americans, about 

six billion hours every year in tax compliance. So clearly—— 

Senator SESSIONS. Does that include looking for lost documents? 

Senator WHITEHOUSE. Six billion hours. Think what you could 

build and design and invent and create with six billion hours of 

human economic activity. 

Anyway, one of the things that interests me is to sort of look 

back and try to put some historical perspective on where we are 

right now. And if you go back to 1935, there was essentially parity 

between what individuals in America contributed in the revenues 

of the country and what corporations contributed in the revenues 

of the country. It was one-to-one. 

And then in 1948, we broke through to two-to-one, with individuals contributing two dollars to the revenue of the country for 

every one dollar that corporations contributed. In 1971, we broke 

through three-to-one, three individual dollars to our national revenues for every one dollar that corporations contributed. In 1981, we 

broke through four-to-one. And in 2009, we hit close to a highwater mark at six-to-one, six dollars out of America’s individual 

pockets into our revenues for every one dollar that corporations 

contributed to our national revenues. 

I understand the competitive advantage from lower corporate tax 

rates, but are we condemned to a race to the bottom in which corporations end up paying essentially no share of our national revenues and the entire burden is on individuals? That is a big change 

from a history during which America was a pretty strong power 

and that has lasted 75 years. 

Mr. McIntyre? 
1138 

Mr. MCINTYRE. Well, you are absolutely right that the race to the 

bottom is what is going on in the world today, and if it is going 

to be stopped, it is going to take some leadership from the United 

States. 

The other countries are not happy about it either. They are losing revenues that they could use to pay for the public programs 

that they are cutting instead that would help their economies a lot 

more. But we have been the instigator of this for a long time. They 

blame us for the race. And if we were to lower our corporate rate, 

they will just lower theirs more. It is one of those things that we 

have to get together, just like the States need to do, get together 

to stop profits moving into the low-tax States. And you worked on 

that for years, Senator Conrad. 

But, yet, it is absolutely a critical problem, and the answer is not 

to give up, which I think is Scott’s advice, but rather to take the 

steps that we need to do to get with our trading partners and work 

out a way that we can all collect some money from the owners of 

capital. 

Senator WHITEHOUSE. Mr. Greenstein, I was struck by the Chairman’s remarks about the top 400. I have seen that as well, and I 

did a comparison between the rate that the top 400 paid, on an average $344 million each in annual income, with what that would 

connect to in Rhode Island. And the Bureau of Labor Statistics 

says that a hospital orderly on average makes about $29,100, and 

at that point they are paying about 16.7 percent. That is about 

where the crossover is as you climb the ordinary income wage scale 

if you a single person. 

So you have this sort of peculiar effect of the hospital orderly, 

you know, pushing his cart down the halls of a Rhode Island hospital at 2 in the morning paying the same share in total Federal 

tax, combining the income with payroll taxes, as the person who is 

making more than a third of a billion dollars a year, and that just 

does not seem right. The Chairman’s Park Avenue example, you 

know, similar effect. 

If you take a look at H.R. 1, clearly there are going to be substantial burdens for people, and we often hear how we all have to 

share in this. For the hypothetical person making more than a 

third of a billion dollars in income and paying that 16.7 percent tax 

rate, how does H.R. 1 affect their lives compared to, say, a family 

that needs Head Start to take care of the kids because both parents 

are working in the morning or a family that has kids in public 

school? What is in there that would change anything for that person? 

Mr. GREENSTEIN. Well, I think there are fundamental things the 

Government does that benefit people at all income levels from making sure that the food supply is safe or funding research into diseases that affect you wherever you are on the income scale. 

Senator WHITEHOUSE. But those would apply equally to all people, in theory. 

Mr. GREENSTEIN. Yes. 

Senator WHITEHOUSE. Those are common goods. 

Mr. GREENSTEIN. Those are common goods. 
1139 

Senator WHITEHOUSE. Is there anything that does not qualify as 

a common good that would apply to the person making $344 million in a year? 

Mr. GREENSTEIN. Well, as a general rule, if we are looking at 

various sorts of services, spending, subsidies, for lower-income people they primarily come—not exclusively—on the spending side of 

the ledger, and for higher-income people they primarily come 

through tax expenditures on the tax side of the ledger. And the example I gave—— 

Senator WHITEHOUSE. H.R. 1 does not do anything in that regard, does it? 

Mr. GREENSTEIN. Well, H.R. 1 by virtue of just focusing on nonsecurity discretionary programs necessarily has a larger adverse 

impact on people lower on the income scale. 

Senator WHITEHOUSE. The last quick question as my time runs 

out. Mr. Hodge, I just want to clarify one thing. I doubt you meant 

to suggest that there was a defense for tax dodges in the Cayman 

Islands that allow people to defer all taxation on their income indefinitely if they have been able to hide it there successfully by justifying the rate—justifying that by virtue of the corporate tax rate 

we have here. If we cut the corporate tax rate in half, you still cannot beat deferring taxes indefinitely by hiding them down in the 

Cayman Islands, can you? I mean, that is a real race to the bottom 

if we have to compete with the Cayman Islands and the tax dodge 

itself as our corporate tax baseline. 

Mr. HODGE. Well, the basic point is that—I am not going to defend tax dodges, obviously. But the fact is that the United States’ 

high corporate tax rate is anticompetitive, and the rest of the world 

looks extremely competitive by comparison. It looks like a tax 

haven, because the average OECD rate is around 26 percent while 

the U.S. rate is nearly 40 percent. And so that—— 

Senator WHITEHOUSE. Nominal rate. 

Mr. HODGE. Nominal rate and the effective rates. There are also 

great disparities between the U.S. effective rate and the effective 

rates of the rest of the world as well. 

Chairman CONRAD. I thank the Senator. 

Senator THUNE. 

Senator THUNE. Thank you, Mr. Chairman. 

Mr. Hodge, you rightly pointed out that the goal of our Tax Code 

is not to raise ever-increasing amounts of revenue but instead to 

spur economic growth. With that in mind, what do you think is the 

most important pro-growth tax reform that we could undertake 

here? 

Mr. HODGE. Well, following the guide and the research of economists as the OECD who have looked at the relationship between 

different types of taxes—— 

Senator SESSIONS. OECD, would you explain that? 

Mr. HODGE. Excuse me, sir. The Organization for Economic Cooperation and Development, and their job is to look at how Government policies affect long-term economic growth, and when they look 

at the relationship between different types of taxes and growth, as 

I mentioned, they find that the corporate income tax is the most 

harmful tax for long-term economic growth followed by high per-
1140 

sonal income taxes, and then consumption and property taxes are 

found to be least harmful. 

So I would address first our high corporate and personal income 

tax systems and try to bring down the rates, and while doing so 

we can certainly broaden the base by eliminating many of the provisions that are currently in the Code. But by doing so we will not 

only make ourselves more competitive, but I think that we will 

super charge the economy, get us back going again, and that will 

be good for everyone in terms of higher wages and living standards, 

which ought to be the primary objective of any tax reform. 

Senator THUNE. You had mentioned that a typical family of four earning $50,000 now does not pay any taxes. Historically, what has 

been that break-even point? Do you know what that sort of historical average would be? 

Mr. HODGE. It has been climbing over time. There was a time 

where perhaps it was around, you know, $20,000, $25,000 a year, 

and over time, as we have included such things as the earned income tax credit, the child credit, and then making those refundable—meaning even if you did not have an income tax liability you 

would still get a refund check—the income threshold for those not 

paying income taxes has grown, as you mentioned, now to around 

$50,000 a year. 

Senator THUNE. You had mentioned in your testimony, I think, 

that 36 percent of the people in the country now do not pay taxes. 

There was some reporting here awhile back that it was like 47 percent. Are you including payroll and income? 

Mr. HODGE. No. The 36 percent refers only to people who file an 

income tax return, and then there is a great group of Americans 

who earn some income but not enough to break the threshold of actually filing a tax return. 

When you add those two groups together, that comes out to close 

to 47 percent of all American households are essentially outside the 

income tax system. 

Senator THUNE. What would be the distributional impact of a 

VAT tax, in your opinion? 

Mr. HODGE. By and large, economists believe that the valueadded tax is regressive, much like sales taxes. It tends to disproportionately harm low-income people over high-income people. 

Senator THUNE. Could you discuss further the exclusion of the 

employer-provided health insurance and its effect on labor markets 

and health care costs? Because that is something that was debated 

during health care. There was a limitation, although a small, modest one, placed on so-called Cadillac plans. Do you believe that 

changes made in the health care bill are going to be effective in addressing these problems of distortions in the labor market and 

health care costs, increased health care costs? 

Mr. HODGE. The tax exemption for employer-provided health care 

really creates what we call a third-party payer problem, and that 

is, the real consumer or patient is disconnected from the real transaction. The real people paying the bills, the real ones that doctors 

pay attention to, are the employers and the insurance companies, 

not the patient. But the patient wants as much health care as possible because they are not paying the bills. So it breaks up the 

market system and creates an imbalance there. And so the closer 
1141 

we can get to really putting consumers and patients in the driver’s 

seat, I think the better off we will be. Moving toward things like 

health savings accounts is an important step. I do not think that 

the health care reform bill that recently passed is going to solve 

this problem. In fact, it could exacerbate it by creating a larger 

third-party payer problem, and people will just simply demand 

more and more health care because they are simply not paying 

enough of the cost. 

Senator THUNE. In his opening statement, the Chairman pointed 

out the discrepancy between the top 400 and someone at the lowerincome level might be paying as a percentage less of their income. 

And one of the suggestions or explanations for that was that they 

had unearned income that was taxable at lower rates, capital gains 

and dividend rates. I am just curious, though, what your thoughts 

are on the impact of raising those rates. One of the reasons, I 

think, that the rates have been lower is that we have tried to encourage investment that is considered to be a pro- growth type policy to not tax investment, cap gains, and dividends at the ordinary 

income rates. 

So what would that do just in terms of economic growth, in your 

opinion? 

Mr. HODGE. Well, first of all, a lot of these individuals get some 

of their income through tax-free municipal bonds, and so essentially the Federal Government is subsidizing that to some degree, 

and so I think we ought to be concerned about that. 

But to get to your point, we do tend to forget that capital gains 

and dividends are really a second layer of taxation on corporate income. And when the OECD looks at the rates on dividend income, 

the U.S. has one of the highest combined rates on dividend income 

among industrialized nations. I think we are fourth of the 30 major 

industrialized countries in terms of our combined corporate and 

personal tax rates on dividend income. 

So I think that the more we can reduce that second layer of tax 

or reduce those dividend rates, I think that we will have more economic growth and we will have a better economy overall. 

Senator THUNE. All right. Thank you. 

Mr. Chairman, just, as a final closing point, I would like to see 

the rates on everybody come down and broaden the base. You 

talked a lot about tax expenditures, which I happen to agree. I 

think we have way too many preferences in the Tax Code today 

and lots of distortions as a result of that. But rather than raising 

rates to the higher level, I would like to see the rate that, you 

know, the lower-income person is paying come down. Let us get everybody down to where we are lowering rates and hopefully broadening the base. So thank you. Thank you, Mr. Chairman. 

Chairman CONRAD. That was really the approach of the Fiscal 

Commission: broaden the base, bring down rates. 

Senator SANDERS. 

Senator SANDERS. Mr. Chairman, thank you very much for assembling this excellent panel. You know, sometimes we wish we 

could have 2 days just to go over this stuff. This is very, very important stuff. It is a little bit complicated, and we have some different perspectives—not only perspectives but different facts coming out. 
1142 

For example, I would say to Mr. Hodge, my understanding is 

that a 2007 study by the Bush Treasury Department concluded 

that the effective—not nominal—U.S. corporate tax rate is lower 

than the average corporate effective tax rate imposed by our major 

competitors. 

But, Mr. Chairman, I think most of us understand that we have 

a serious deficit problem, that we also have major problems in our 

economy, that we want a fair tax system, and we want a tax system that enables us to improve the standard of living of ordinary 

Americans. 

Mr. McIntyre made the point that I would reiterate, that each 

and every year large and profitable corporations all over this country are able to avoid paying billions of dollars in Federal income 

taxes through loopholes in the Tax Code and generous tax breaks. 

In my view, this is simply unacceptable when we have a $14 trillion national debt. 

According to an August 2008 GAO report, two out of every three 

corporations in the United States paid no Federal income taxes between 1998 and 2005. Amazingly, these corporations had a combined $2.5 trillion in sales but paid no income taxes to the IRS. 

That is according to the GAO. 

Further, as Mr. McIntyre mentioned in his statement, a report 

from Citizens for Tax Justice on corporate tax abuses, what I found 

astonishing, is that 82 Fortune 500 companies in America paid 

‘‘zero or less in Federal income taxes in at least 1 year from 2001 

to 2003.’’ And when you have record-breaking deficits and a huge 

national debt, I find that just inexplicable. 

Mr. Chairman, let me also mention that—and you made the 

points—I am sorry. Mr. Sessions made the point that the top 20 

percent pay 70 percent of all Federal taxes. That is what Mr. Sessions said. But that has to be put within the context of the fact 

that the top 20 percent earned 52 percent of all income more than 

the bottom 80 percent. 

So one of the realities when you talk about who is paying taxes, 

you have to also remember that median family income has gone 

down. Most of the new jobs that are being created are, unfortunately, low-wage jobs, and you cannot get blood from a stone. 

So I think all of our panelists have talked about the fact that 

millions of Americans are paying nothing in income taxes. That is 

true. You know why? Because they do not have any money to pay. 

If you are making $25,000 a year and you have a few kids and you 

have a house and you have a car, you have to get some health insurance, you maybe have some child care, there is no money to pay 

income taxes. 

Now, Mr. Hodge mentioned the OECD, the Organization for Economic Cooperation and Development. I will get to you, Mr. Hodge. 

I do not want to leave you out. But, Mr. Greenstein or Mr. McIntyre, of all of the countries in the OECD, is there any that does 

not provide health care to all of their people as a right of citizenship? 

Mr. MCINTYRE. They all do. 

Senator SANDERS. They all do. 

Mr. MCINTYRE. And they give it to them for free. 

Senator SANDERS. Oh, my word. 
1143 

Mr. MCINTYRE. And yet those people, despite the fact that they 

could spend every day of their lives in the doctor’s office should 

they so choose do not. 

Senator SANDERS. I do not want to get into health care right 

now, but the point is when we talk about OECD nations, let us 

look at the whole picture. The United States has 50 million people 

without any health insurance. We are the only country in the industrialized world that does not provide health care to all people. 

To send a kid to Harvard University today costs what, would you 

guess? Fifty, sixty thousand a year? How much does it cost to send 

to the best universities in Europe? Mr. Greenstein, Mr. McIntyre, 

Mr. Hodge, do you have any guess on that? Not much. In fact, I 

think in Germany tuition there is probably free. Not a magical 

thing. That government there believes it is important to invest in 

education for the well-being of their country. We charge very high 

prices, and a lot of our kids cannot afford to go to college or they 

come out deeply in debt. When we talk about OECD countries, how 

do we compare, Mr. Greenstein and Mr. McIntyre, in terms of child 

care? I have a daughter in Burlington having a hard time paying 

for child care. What do you think? Do the governments in Europe 

do a little bit better job? Of course they do. 

Mr. GREENSTEIN. Yes. 

Senator SANDERS. All right, et cetera, et cetera. So, Mr. Chairman, my first point is you have to look at the entire picture. 

In terms of income inequality, Mr. Hodge, which major country 

on Earth has the most unequal distribution of income and wealth? 

Mr. HODGE. According to the latest OECD countries, the United 

States was, I think, fourth on the list. 

Senator SANDERS. Compared to what? What countries were 

ahead of us? Major countries. 

Mr. HODGE. On the list, I think it was Portugal, Turkey, and 

Italy or something. 

Senator SANDERS. Mexico, I suspect. 

Mr. HODGE. Mexico. 

Senator SANDERS. Turkey. Well, there it is. We have a more progressive distribution of income than Turkey does. But of any major 

countries on Earth, what would be the answer? Major economy. 

Mr. HODGE. Well, I think I just answered that—— 

Senator SANDERS. The United States of America, right. 

Mr. HODGE. We also have the highest overall average per capita 

income, ironically. 

Senator SANDERS. Average. 

Mr. HODGE. Yes. 

Senator SANDERS. Meaning that if you have somebody who is 

making a billion dollars and somebody who is broke, average income is half a billion a year. We understand that. But you are 

also—I do not want to get into the average. We have dealt with the 

average issue here a whole lot. It does not mean a whole lot when 

the median family income of the average American has gone down 

by $2,500 in the last 10 years. 

My point, Mr. Chairman, is this is a fascinating discussion, and 

we need a lot more of this. Clearly we want tax policies which generate good-paying jobs. We want to deal with the huge trade deficit 

of some $500 billion a year where company after company is shut-
1144 

ting down here and going to China. I would argue that taxes are 

not the only factor. I think wages, the incentives offered by the 

Chinese Government are also important. 

But my main point is that when we talk about who is paying 

taxes in this country, we also have to talk about the kinds of incomes that our people are experiencing. And the sad reality is that 

for millions and millions of Americans, their real incomes are going 

down. So it should not be shocking that they pay less in taxes. 

I would also add, when Senator Sessions talked about the top 20 

percent pay 70 percent of all Federal taxes, while that is true, if 

you add to that, Senator Sessions, State taxes and you add local 

taxes, which are, by and large, regressive—right? A billionaire and 

a working person fill up a gallon—fill up their gas tank in a car, 

right? So if you are making $25,000 a year, that is a heavier burden on you than if you have a whole lot of money. Property taxes, 

by and large, are regressive. So when you add the Federal income 

tax and State taxes and local taxes, you probably end up with a 

situation where, for millions of people, working people, their effective total tax rate is a hell of a lot higher than it is for some of 

the richest people in this country. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator JOHNSON. Senator JOHNSON. Thank you, Chairman. Thank you for appearing. 

I would like to start out with Mr. McIntyre. I really like looking 

at the reality of the situation. Who in effect pays the corporate income tax? When corporations view the tax as a cost, just like in my 

business I view resin prices as a cost, who in effect pays that corporate tax? 

Mr. MCINTYRE. The shareholders, in my view. 

Senator JOHNSON. You do not think it is the consumers of the 

product? 

Mr. MCINTYRE. Absolutely not. 

Senator JOHNSON. Mr. Hodge, what would you say—— 

Mr. MCINTYRE. I can prove that to you, if you want. There are 

many, many companies in this country that argue for replacing the 

corporate income tax with a tax on consumers. It would seem to me 

a waste of time if it was already a tax on consumers. So why 

wouldn’t—I cannot understand why they would make the effort. 

Senator JOHNSON. Mr. Hodge, I would like your thoughts on 

that. 

Mr. HODGE. Economists are pretty well agreed that there are 

three parties that pay the corporate income tax. It is either consumers through higher prices, shareholders through lower share 

returns and lower share prices, and workers through lower wages. 

But what we are finding in a global economy is that workers are 

paying the lion’s share of the corporate income tax through lower 

wages and productivity. And so we need to really understand this 

in a global context where capital is extremely mobile but workers 

are not, that it is workers that are bearing that lion’s share of the 

corporate tax. 

Senator JOHNSON. You know, oftentimes when I listen to these 

discussions, it is like we have an option not to compete. The U.S. 
1145 

as a country has to compete for global capital, correct? We do not 

have that option. We have to compete. So how do we compete when 

the CEO from Intel says in his decisionmaking factor, in order to 

produce—or build a semiconductor plant, it costs $4 billion in Asia 

and $5 billion in the U.S., and he largely attributes that to the tax 

regimen. I am sure regulations play a part in that. 

If you are a corporation manager, let us say, from a different 

country, if you are looking at investment decisions, why would you 

spend an extra billion to invest in the U.S.? 

Mr. MCINTYRE. Well, there is no doubt that some companies have 

advantages in low wages or that they provide other benefits that 

make it cheaper to do things abroad, and there is not too much we 

can do about that. 

My point is that we probably should not be paying our companies 

to go there. So if there is a tax advantage in China—I will take 

your word for it—we could solve that problem by getting rid of deferral so that the Chinese profits would be taxed at the same rate 

as if those profits were earned in the United States. So, yes, if that 

is a problem, my solution solves it. 

Senator JOHNSON. Mr. Hodge? 

Mr. HODGE. The corporate tax rate in China is 25 percent, which 

is just slightly below the average of the major industrialized countries. It is 15 percentage points lower than the Federal corporate 

tax rate. So, by definition, it is a much more competitive place, a 

cheaper, at least from a tax perspective, place to do business. And 

by ending deferral, as Bob has suggested, you would instantly 

make U.S. companies less competitive while doing business there 

and give a distinct advantage to German firms, Swiss firms, 

French firms, all the other firms that are doing business there. We 

want U.S. companies to do business in China. We want them to 

succeed in the global marketplace. And by hamstringing them by 

eliminating deferral or keeping the U.S. tax rate where it is, we are 

making the U.S. less competitive, we are making U.S. companies 

less competitive, and ultimately we are making U.S. workers less 

competitive. And that is a recipe for slow economic growth. 

Senator JOHNSON. Isn’t it also true that when a U.S. company invests overseas, that also provides an awful lot of jobs in the U.S. 

supplying and servicing those overseas operations? 

Mr. HODGE. Yes, the research of Matt Slaughter from Dartmouth 

University has shown that it is what they call in the military the 

‘‘tooth-to-tail ratio,’’ and that is, you need a certain number of people back home to service those people who are on the front lines. 

And it is that way in corporate America, too. So if we are doing 

business in China, we need researchers and designers and computer experts and financial people and all these people back here 

who do a lot of the brain work to support that work that is going 

on overseas. And so as we are growing abroad, U.S. companies are 

also growing domestically, and Mr. Slaughter has shown that pretty convincingly in his economic research. 

Senator JOHNSON. Overall, the U.S. economy has never really 

generated much more than about 18.8 percent of GDP in terms of 

revenue. Professor Hauser calls that ‘‘Hauser’s Law.’’ I would like 

you to speak to that basic fact. As much as we would like to believe 
1146 

we could raise 21 percent of GDP in revenue by a different tax regimen, how realistic is that to actually occur? 

Mr. MCINTYRE. Well, we have done it before. In fact, the only 

time we have ever balanced the budget in the last 50 years is when 

we did it. 

Senator JOHNSON. In the 2012 budget, President Obama’s budget, there are only 3 years where we actually collect revenue greater 

than 20 percent of GDP. 

Mr. MCINTYRE. Right. I am saying the last time we balanced the 

budget was in the Clinton administration when revenues went up 

to almost 21 percent of the GDP. Back in the 1960s, we balanced 

the budget briefly when it was about 20 percent of the GDP. All 

the other years in between those balanced budgets in Clinton and 

Johnson—a different Johnson—were places where we had lower 

revenues and unbalanced budgets. 

Senator JOHNSON. But don’t you acknowledge the fact that taxpayers simply cannot reorganize their affairs quickly enough when 

you increase tax rates? It just takes a little while. You are able to 

snare a higher percentage of GDP when you increase taxes, but 

eventually that benefit falls off. 

Mr. MCINTYRE. No, I do not think that is true. I think what happened—and it is very clear what happened to the corporate income 

tax—is that Members of Congress are either cajoled or threatened 

by the corporate lobbyists to give them back their loopholes, and 

then every once in a while, we have to clean up the Tax Code 

again. It used to be on a 15-year cycle. We missed out on the 2001 

one due to a difficult election decision, but we are overdue to clean 

it up again. Yes, it is kind of like the Medicare rules with the doctors. If you do not change them often enough, they will understand 

them. 

Senator JOHNSON. Well, first, I am totally supportive of slim-lining this Tax Code. It is absurd, 70,000 pages—— 

Mr. MCINTYRE. Yes, and I am not talking about raising tax rates, 

you know. I am talking about probably cutting tax rates a bit to 

make it more palatable. But all these subsidies we have in the 

Code, don’t we believe in free markets at all anymore? And, gee 

willikers, the companies come in with the same story, and you guys 

fall for it every time. The 2004 American Jobs Creation Act, they 

came in and said look what is going to happen when you give us 

this thing. General Electric said give us all this stuff—they wrote 

half the bill—and we will create jobs in the United States. What 

did they do? Since then, 32,000 fewer jobs at GE in America, and 

jobs are up overseas. 

So, yes, I mean, you can fall for it or not, but—— 

Senator JOHNSON. You have no argument with me on the special 

tax rates. 

Mr. MCINTYRE. Good. I appreciate that, Senator. We are friends 

now. 

Chairman CONRAD. I would like to go back to one thing I heard, 

that 47 percent of the people in this country pay no taxes. I do not 

think that is an accurate statement. They may not pay income 

taxes, but they pay payroll taxes. In fact, I think two-thirds of the 

people in this country pay more in payroll taxes than they pay in 

income taxes. But I would just like the panel to respond to that. 
1147 

Mr. GREENSTEIN. Well, actually the 47-percent figure is incorrect 

for the percentage of people that do not pay income taxes as well. 

It was a correct figure for 2009 and 2010 for two reasons. We were 

in a deep recession, and a lot of people lost their jobs and did not 

have income. And Congress passed a temporary making-work-pay 

tax credit that took more people off of the income tax roll. So, for 

starters, we want to look at the underlying figure without the 

make-work-pay tax credit and without 9 or 10 percent unemployment. 

So the figure before the recession was 37 percent. However, that 

is just income tax. When you take into account payroll tax and to 

a minor degree excise tax, the best estimates are that about 10 percent of families do not pay any Federal tax; about 90 percent do. 

But that is a 1-year figure. Income is very volatile. People lose 

their jobs, they gain their jobs. 

If you said over a 5- or a 10-year period what percentage of people do not pay any tax year after year after year, any Federal tax, 

it would be very, very tiny. 

The other thing that—you know, we have a figure from CBO that 

if we take the bottom quintile, the whole bottom 20 percent of 

Americans, for 2007—the last year we have—yes, their income tax 

was negative because of things like the earned income credit, but 

their total average Federal tax rates was 4 percent. They paid 4 

percent of their total income in Federal taxes of one sort or another, even though the income alone was negative. 

I guess the last point I would make on this is that you made a 

conscious and I think the right decision here in Congress on a bipartisan basis over the years that if you wanted to make sure that 

parents working full time did not raise their children in poverty, 

you could have not had an earned income credit or had a much 

smaller credit and had a dramatically higher minimum wage. Now, 

business would have complained mightily about the job and employment effects of having a much higher minimum wage. So you 

ended up doing somewhat less on the minimum wage and putting 

place a robust earned income credit, and my recollection—I remember in 1989 or 1990 there was a debate over how much to raise the 

minimum wage, and the single biggest EITC expansion bill introduced that year was by Mr. Armey, now active with the Tea Party, 

because he felt it would be bad for business to raise the minimum 

wage a lot and that the alternative was to do a very large increase 

in the earned income credit. 

So we really need to take all these factors into account. But the 

idea that nearly half of Americans have no skin in the game is 

really not borne out by the facts. 

Chairman CONRAD. Isn’t it true that the vast majority of people 

in the country pay more in payroll tax than they pay in income 

tax? 

Mr. GREENSTEIN. Yes, they do, and also nearly everyone pays 

State and local taxes because a very large share of State taxation 

is the sales tax. And regardless of how low your income is, you pay 

that. So most people at the bottom, Federal and State together, 

they pay tax liability, often a fairly significant amount, because in 

many States—and Bob McIntyre’s group has done the key work on 

this—in many States the percentage of income you pay in tax at 
1148 

the State and local level is higher for people in the bottom quintile 

than people in the top quintile because of the regressivity of sales 

taxes. 

Chairman CONRAD. Mr. Hodge, were you seeking recognition? 

Mr. HODGE. Yes, Mr. Chairman. In my written testimony, I point 

out a Joint Committee on Taxation report looking at refundable 

credits against—and how that not only eliminates people’s income 

tax burden but also how much it erases of their payroll tax burden. 

And for 2009, these refundable credits exceeded the employee’s 

share of payroll taxes for 23 million tax filers and exceeded the employer’s share of payroll taxes for 15.5 million filers. 

So in addition to erasing their personal income tax burden, these 

refundable credits have become so generous they are now erasing 

their payroll tax burden as well. But we often forget we are just 

looking at the tax side of things, and we have to look into what 

also is being given to these people in various Government benefits. 

And when we look at both sides of the equation, we find that lowincome people get as much as $10 in Government benefits overall 

for every dollar that they pay in taxes. And so we have to look at 

both sides of the equation, not just the tax side. 

Chairman CONRAD. OK. I want to just in my remaining time go 

off the subject of this hearing because Mr. Greenstein is here. We 

had Mr. Bowles and Mr. Simpson here yesterday. I wanted to just 

have a moment to talk about Social Security with you, Mr. Greenstein. In the Bowles-Simpson Commission, as we looked at Social 

Security, we saw that in 2037 Social Security faces a 22-percent 

cut, or thereabouts. It depends on a lot of factors. But in 2037, 

there is an across-the-board cut because Social Security cannot 

make all the payments that are scheduled. 

And so the question is: What does one do about that? The Commission concluded that it is important to address that sooner rather than later, made a series of changes, and one of the things that 

was done was to try to have a set-aside for people who need to retire early because they are in hard physical labor positions. 

On restring solvency, there were a series of other steps taken, 

going to chained CPI, which economists tell us is a more accurate 

measure of inflation; changing the bend points; and also raising the 

income level which Social Security taxes apply to because the traditional 90 percent of income being subjected to Social Security has 

fallen away. 

There is a technical problem with what the Commission reported, 

which I have been repeatedly assured will be fixed—it has not yet 

been fixed—so that the lowest quintile would be protected. As it 

turns out, because of a technical flaw in what the Commission did, 

the lowest quintile have not been fully protected, but it is clearly 

the intention that they be. 

What would be your assessment of the Social Security provisions? 

Mr. GREENSTEIN. I do think there are some serious problems 

with the Social Security provisions in the Bowles-Simpson plan. I 

fully agree with sooner rather than later and the chained CPI applied to everything, tax code, other benefit programs. 

Chairman CONRAD. Which the Commission did. 
1149 

Mr. GREENSTEIN. But the problem, for starters, the problem at 

the bottom really is not just a technical problem. So the Commission did—it intended, no question, fully intended to protect people 

in the bottom quintile through a hardship exemption. But now that 

the actuaries have looked at it more closely, only 20 percent of people with very low lifetime earnings would qualify for the hardship 

exemption. 

There is not an easy technical fix. If you redesign the hardship 

exemption to make sure you get all or nearly all of the bottom 

quintile, it is hard to do it without sweeping in large numbers of 

people in higher quintiles, as well, and costing a lot of money. 

I am also concerned about the next—— 

Chairman CONRAD. Can I stop you just on that? So is it your 

view that there is not a way to protect that lower quintile? 

Mr. GREENSTEIN. There is a—here is where I am heading. I see 

two problems, and they sound like they are in conflict. They did not 

do an adequate job for the bottom or the next-to-the-bottom, you 

know, elderly widows at $15,000 a year. Under the plan, they both 

have higher Medicare copays and lower Social Security benefits. 

The second problem is while I fully agree that we should be hitting people at the top more than the bottom, I worry about how far 

Bowles-Simpson went. Today, the higher earner pays 5.6 times as 

much in payroll tax over a career, gets 2.5 times as large a benefit. 

Under Bowles-Simpson, ultimately, you pay eight times as much in 

payroll tax and maybe get less than twice as much benefit. 

To me, the bottom line is it is very hard to solve all these problems if you have two-thirds of the solvency coming on the benefits 

side. I think Rivlin-Domenici, which is about 50–50, really—you 

know, you can quibble with it, but it largely addresses these problems. Changes could be made to ease the problem on the bottom 

quintile. It is going to be very hard to fully solve it unless there 

are some larger changes in the mix. 

Chairman CONRAD. Can I just ask, outside of this, for your recommendations on what we would do—— 

Mr. GREENSTEIN. Yes. 

Chairman CONRAD [continuing]. In your view, to fix, that at least 

is partially a technical issue, not intended effect, and in a larger 

view, what you think needs to be done. 

Mr. GREENSTEIN. I would be happy to do it, and without going 

into details now, I would note that I think in order to do this in 

a cost efficient way, one needs to bring the SSI program, which is 

highly targeted on the bottom, into the mix. There is more one can 

do in a cost effective way if we look at Social Security and SSI—— 

Chairman CONRAD. Well, I would very much—you know, we are 

at a critical moment here, and as soon as you could provide recommendations—I should have called you before this, but I think as 

we haveten into it, we have understood better, and frankly, the 

thought piece that you put out, I think it was last week—— 

Mr. GREENSTEIN. Yes. 

Chairman CONRAD [continuing]. That I saw, helped us understand better that there are problems here and we certainly want 

to address them. 

Senator Portman. 
1150 

Senator PORTMAN. Thank you, Mr. Chairman, and I really appreciate the panel being here. I have so many questions and so little 

time, but I just have to touch on a couple of things quickly. 

One is on the issue of tax reform and as it relates to the EITC. 

I came in when you were discussing some of the history of this and 

the fact that some people view this as an alternative to minimum 

wage. My point on the EITC is really a very simple one, which is 

there are better ways to do it. If you look at what the IRS is asked 

to do today, it is really kind of the opposite of what the IRS is good 

at. I mean, they are asked to find out how much income we all 

have and question whether we are showing all of our income, and 

then for EITC, it is the opposite. 

And it is also, frankly, not their expertise to be able to deal with 

these kinds of issues, which are better sometimes dealt with by social service agencies, and the IRS is not the most gentle organization sometimes. So I think it is tough for them to do it and that 

is why you see 23 to 28 percent improper payments, according to 

the IRS Inspector General. You know, that is $11 to $13 billion a 

year in improper payments. 

One way to deal with it, obviously, is to use the payroll tax system. Offset payroll taxes. Now, as Mr. Hodge has said, because our 

system is increasingly progressive, it is difficult to cover everybody 

with payroll tax, but most people would be covered and then you 

would not have the IRS asking people, again, to do something that 

the IRS is not good at and you would not have the IRS in a position, again, more like social service agencies would be, looking at 

people’s incomes at that level. 

So I think it is a call for reform, and part of the tax reform ought 

to include looking at EITC. These kinds of improper payments in 

the context of our budget crisis just cannot continue, just as we 

have talked about today. 

I would say, Bob, to your point on Social Security, it is a whole 

different environment on that, too. I mean, I understand what you 

are saying on looking at the benefit side versus more taxes, but we 

are looking at a very different scenario than we were in 1983 and 

certainly than we were even 5 years ago. 

On tax reform generally, I would love to get the views of the panelists. I know there are some differences of opinion that I heard expressed earlier. But let me quote Bob Greenstein before the Fiscal 

Commission. ‘‘With sensible base broadening, we can reduce the inequities and inefficiencies in the corporate income tax, lower the 

top corporate rate, boost competitiveness, and raise somewhat more 

revenue.’’ 

Mr. McIntyre today says, ‘‘We want corporations to do things 

that are not economical in the tax code. It distorts markets.’’ I 

agree with him. I agree with you. 

Mr. Hodge, of course, has talked about the fact that our corporate rate is not competitive, and we may wish that the world 

were different, but the world is increasingly competitive and other 

countries have lowered their rates precisely because they want jobs 

in their economies and it is working. 

So I guess I would just throw out to the group, do we at least 

have a consensus here, although differences in terms of how to do 

it, that we do need, at a minimum, to lower the rate, reduce the 
1151 

number of preferences, and therefore have a more competitive tax 

system on the individual and the corporate side? I throw it out. 

Bob? 

Mr. MCINTYRE. Well, I think we should reduce the rate a little 

just so we can get some political support from the high-tax companies to pass it. But if we get back into the race to the bottom with 

Europe rather than moving to a system where we protect jobs in 

the United States by getting rid of deferral, this will not stop. It 

started a number of years ago and it is a problem for everyone in 

the world and we need to stand up and say to the other countries, 

let us talk about this. It is not working for us. Get a system where 

we can get some tax on income from capital, and we are not getting 

it now and that is bad for the fairness of our society. 

Senator PORTMAN. Well, it would surprise a lot of folks to hear 

we are not getting any. It is not a race just with Europe, as you 

know. It is a race with Asia, certainly Canada, as Mr. Hodge has 

pointed out. They are all very aggressive on this notion of taxing 

capital or capital taxes. There is pretty much a consensus among 

economists, most of that cost is borne by labor and a lot of it is 

passed along to us as consumers, obviously. So it is a different sort 

of tax. 

But, Bob, go ahead. Sorry. 

Mr. GREENSTEIN. The concept of broadening the base and lowering rates has very broad support, but I think there are a couple 

of key things that have to go with it. No. 1, given our fiscal situation, unlike 1986, it cannot be revenue neutral—— 

Mr. MCINTYRE. It was not revenue neutral in 1986, Bob. It raised 

corporate taxes by one-third. 

Mr. GREENSTEIN. No, no, I am talking about—— 

Senator PORTMAN. Overall. 

Mr. GREENSTEIN [continuing]. Corporate and individual combined, overall. It cannot be revenue neutral. 

Second, on the individual as opposed to the corporate side, 1986 

lowered rates, but it eliminated lower rates for capital gains and 

dividends. I think one should not be talking about lowering top 

rates in the income tax unless one is going to tax capital gains and 

dividends as ordinary income. 

Last key point, I just want to say quickly on the Earned Income 

Credit, the research literature is now overwhelming on the degree 

to which the credit has been successful in promoting work, reducing welfare. It has very low administrative costs. I do not think 

doing it through the social service side would be anywhere near 

as—— 

Senator PORTMAN. Well, remember, I talked about offsetting payroll taxes, because most of these people have payroll tax liability—— 

Mr. GREENSTEIN. If you offset it through payroll tax—— 

Senator PORTMAN [continuing]. And you would avoid a lot of the 

improper payments through that. 

Mr. GREENSTEIN. Let me suggest an alternative route. If you try 

to offset it through the payroll tax and you want to do as much to 

promote work and reduce poverty at the bottom, you will have to 

spend a lot more money, because in the payroll tax, you do not 
1152 

know families’ total income. You do not know who is a one-earner 

family or a two-earner family. 

I think the alternative route is, No. 1, to simplify the EITC, 

which has more pages of instructions than the Alternative Minimum Tax. And No. 2, gets to the question of IRS enforcement. We 

are now getting to the point where we have more data bases that 

could be used to, both in the EITC and the general code, find more 

questionable claims and followup on them. The problem is that we 

have not invested enough money in either updating IRS computer 

systems or, frankly, in enough IRS staff. So when the IRS looks, 

they can do more EITC examinations and save, I forget, four dollars for every dollar they spend. But if they use that money on 

small business or corporate noncompliance, the ROI is higher. 

Senator PORTMAN. Yes. Listen, I—— 

Mr. GREENSTEIN. They just do not have enough resources to do 

it. 

Senator PORTMAN. I agree with you on the data base, of course, 

and simplification, you are absolutely right on the EITC. But my 

point is, this is all about reform, and Mr. Hodge, do you have any 

comments on reform quickly? I have just got 1 second left, literally. 

Mr. HODGE. Well, very quickly, the National Taxpayer Advocate 

says that while 63 percent of Americans pay someone else to do 

their taxes, for EITC recipients, it is around 75 percent. I think it 

is a shame that poor people have to pay an expert in order to be 

able to get the EITC benefit. 

But more broadly, I think we need fundamental tax reform 

across the board to remain competitive and to—it sort of sounds 

like shouting into wind to say that, well, we can only lower our 

rates a little bit, but we are not going to go as far as the Europeans 

or the Asians. The world is changing and we have to change with 

it, and if we do not, we are going to continue to fall further and 

further behind in this very, very competitive global economy. 

Senator PORTMAN. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. I want to thank all 

three of your organizations. We have worked with you on these 

issues for quite some time. 

And I want to start by talking to you a little bit about the urgency of all of this. My concern is that if a fire is not put together 

for significant bipartisan comprehensive tax reform, in all probability, the lame duck session of Congress in 2012 will look much 

like the lame duck session of Congress in 2010. There will be a debate once again about how damaging it would be to raise taxes on 

middle-class folks, something I happen to agree with and I think 

all of you do. And once again, people will go into this kind of automatic kind of pilot routine where you say, let us just extend this 

extraordinarily broken system for a while longer, something that is 

not creating jobs, is just riddled with all of these loopholes and exemptions and the Swiss cheese nature of the system. And, of 

course, by that time, we will probably have a bunch more loopholes. 

So I would like to get a sense from all of you about your judgment, whether you agree with me that it is urgent that Congress 

move. I think it is urgent just from the jobs standpoint. As all of 
1153 

you know, I just saw a debate between Bob McIntyre and Bob 

Greenstein, two Bobs I admire very much. The one thing that is 

not in dispute about 1986 is in the 2-years after that bill was 

signed, our country created 6.3 million non-farm jobs, according to 

the Bureau of Labor Statistics. That is enormous in its implications, and boy, it sure looks good compared to 2001 and 2008, when 

we created three million new jobs. In 2 years after tax reform was 

enacted, we created 6.3 million new jobs. 

So your judgment, before I get into some of the details, that this 

is really urgent, both from the standpoint of job creation, most important, and second, so we are not staring down the road here in 

the lame duck session of 2012 at repeating exactly what I think all 

three of your organizations are against. So this is just a question 

about whether this is urgent. Mr. Greenstein? 

Mr. GREENSTEIN. Let me first say, Bob McIntyre are in agreement, not disagreement. He was saying 1986 raised revenue on the 

corporate side and I was saying it was neutral overall. I think we 

are—— 

Mr. MCINTYRE. Right. It was just a dangling antecedent, not a 

disagreement. 

Mr. GREENSTEIN. So do I think this is urgent? Yes, but. What I 

think would be a step, unfortunately would not be the wise thing 

to do, and you and I may have a disagreement on this, I worry that 

if we do tax reform, comprehensive tax reform in a way that is deficit neutral, that that will be a long-term negative because it will 

make it almost impossible to get a comprehensive deficit reduction 

agreement. The low-hanging fruit on the tax expenditure side will 

be gone, and in the absence of having revenues on the table, we 

will not get a big agreement. 

Senator WYDEN. Fair, fair—— 

Mr. GREENSTEIN. However, I do think it would be urgent to do 

comprehensive changes that give us long-term deficit reduction, do 

not take effect on the deficit reduction side until the economy is 

back, and include as part of them tax reform that both makes the 

system more competitive and raises significant revenue at the 

same time. 

Senator WYDEN. Well, fair enough. As you know, Mr. Greenstein, 

there are definitions about revenue neutrality. The legislation I 

had with Senator Gregg, the Joint Tax Commission said it was 

more than revenue neutral and all the analyses that were done 

said it would produce revenue because of the extra benefits from 

job creation. 

I just think, having read a lot of the excellent work you have 

done, you share my view that not repeating in the lame duck session of 2012 what we had in 2010—— 

Mr. GREENSTEIN. That is correct. 

Senator WYDEN. Thank you. 

Mr. McIntyre, same point, not repeating the lame duck drill of 

2010. 

Mr. MCINTYRE. Oh, well I hate lame ducks, but you asked the 

question whether it is urgent to do tax reform as soon as possible. 

I would worry about that, because I cannot imagine a bill that 

could pass the House of Representatives that you and I would not 
1154 

hate. If you can persuade me that you can persuade them, then my 

urgency level goes way up. But right now, it is not there. 

Senator WYDEN. Fair enough. Chairman Tiberi, who has done 

some very good work on this, put out a statement with me early 

on that could have been written by you because it talked about the 

benefits of 1986. So I tell you, I think there are a lot of Democrats 

and Republicans, who if we can just coalesce here fairly quickly 

and not write this thing off for another couple of years, which is 

what concerns me, I think a lot of what thoughtful people like our 

witnesses have been doing is still quite, quite doable, and take a 

look at Chairman Tiberi’s statement about 1986. And he, of course, 

is the Chairman of a Ways and Means subcommittee who is very 

involved with the House leadership, and that was an extremely encouraging statement. 

Let us ask for your colleague from the Tax Foundation, Mr. 

Hodge, who we have worked with, too, how important it is to move 

on this. 

Mr. HODGE. It is critically important, Senator, to move as quickly 

as possible. Uncertainty in the tax code is one of the enemies of 

economic growth, and we have great uncertainty in the tax code 

through all of these temporary measures, short-term, 2-year or 1- 

year, or in some cases with certain things, like the R&D tax credit, 

companies never know whether they can use it up until December 

31. That is an enemy of economic growth, and the quicker we can 

move to fundamental long-term tax reform that broadens the base 

and brings down rates and adds certainty to the tax system, I 

think the better off we are going to be, and more importantly, the 

better off the economy will be over the long term. 

We are losing ground globally, as I have mentioned repeatedly, 

and I worry that the longer we wait to solve this problem and be 

more competitive, the more we are going to lose basically jobs and 

growth to other, more competitive countries. 

Senator WYDEN. Mr. Chairman, I had one other area, deferral, 

that I wanted to get into, but it takes a little time. 

Chairman CONRAD. No, take some extra time, because I think it 

is very important we do get into it. You and Senator Gregg had, 

I think, a very, very important proposal and dealt with that issue 

and I think we should take the time, because we are not going to 

have another opportunity. 

Senator WYDEN. Thank you, Mr. Chairman. 

Let me start with you, Mr. McIntyre, and kind of walk it through 

in terms of how somebody in a supermarket sees it. If you go and 

see somebody in a supermarket and talk about what you are doing 

on the Senate Finance Committee on which I serve, the first thing 

they say is, take away those tax breaks for those guys shipping the 

jobs overseas. That is outrageous. I want red, white, and blue jobs. 

And then, of course, you go to the companies and the companies 

say, yes, you know, we want jobs in the United States, too, but our 

tax rates are higher than just about anybody in the Western industrialized world. You have heard their position, as well. And they 

will make the case that they have to have tax deferral in order to 

have jobs in the United States because of the relationship between 

jobs offshore and jobs here. 
1155 

So what I have said is, let us see if we can find our way out of 

this and say that we are going to roll back in a substantial way 

some of these breaks that are going overseas—there is deferral and 

there are foreign credits—by dramatically lowering the rate for 

people who manufacture and do business in the United States. I 

call them red, white, and blue jobs, and when I bring it up with 

American businesses and I bring it up with labor folks, who, as we 

know, have not exactly seen eye to eye on it, conceptually, they 

think that this is something that they can proceed with. 

What is your take in terms of how we work our way through this 

question that starts in the supermarket or the coffee shop when 

our citizens are understandably furious about tax laws rewarding 

doing business overseas, and at the same time being competitive in 

a tough global market? What is your sense about how we might— 

because it was a lot of your creativity that brought people together 

in 1986—what might unlock an agreement in the future on this 

issue, starting with the person in the supermarket all the way to 

American business that has been concerned about competitiveness 

and how you might bring a new consensus together. 

Mr. MCINTYRE. Well, I mean, what is important to understand 

is that your proposal to get rid of deferral and tax worldwide income of corporations addresses the problem of subsidizing foreign 

investment, because wherever you move your money, whether you 

artificially shift it to the Cayman Islands or you really build a factory in China, you will still be subject to U.S. tax, and if you pay 

taxes to a foreign country, of course, we will not tax you twice. 

That addresses that problem. 

The companies’ retort is that, well, yes, but you want us to go 

to China. Now, I do not understand why we want them to go to 

China very well. They have this argument that for every 10,000 

jobs they create in China, 300 are created in the United States to 

manage the business in China. But I would much prefer to have 

the whole 10,000 here, personally. And so their idea that they have 

to be competitive with the Germany company in China, eh, trivial 

at most, although that is what they make as the argument. 

So if we are talking to the person in the supermarket who wants 

to know why we are paying companies to go offshore, I would say, 

well, yes, Ron Wyden is going to solve that. Now, he has another 

thing he wants to do, too. He thinks that we should have a lower 

rate if you do business here in the United States, and he and I 

have an argument about that, because I think it is more important 

for American business to get the benefit of the public services that 

they need, the roads and the schools and everything else. That will 

make them more competitive with the rest of the world by doing 

business here in the United States and giving them a few points 

off their corporate rate. 

And you say, well, Mr. McIntyre, why do you not just tax the 

poor people to pay for these things for the businesses and give the 

businesses lower taxes? And I say, well, that makes things unfair, 

plus, I do not think the public would tolerate it. So this is the discussion you and I have had a lot. 

But the No. 1 thing that I admire so much about your plan is 

you take away the incentive to move things offshore, which just 

automatically says, now you have more of an incentive to do it 
1156 

here. And so if you want to provide a little bit bigger one on top 

of that, OK, but remember, that comes at a price. 

Senator WYDEN. I want to hear from Mr. Greenstein and Mr. 

Hodge, and again, just before I leave you, colleagues, when you 

look back at the history of how it came together in 1986, Bob McIntyre did as much as anybody to, in effect, thread that needle, and 

we are going to be calling on you often. And this is, as I have 

talked about with both colleagues, this is an inexact science. 

Mr. Greenstein, you wanted to add something. We are talking 

about how we can find a way in a bipartisan fashion- -I mean, part 

of what the companies have said with respect to deferral, I think, 

is just understandable, because, oh, somebody is talking about 

making an abrupt change in a major economic policy that relates 

to competitiveness and I have said I am interested in working in 

a bipartisan way with good people like here and Chairman Tiberi 

and others so we can have transition rules, which Mr. McIntyre 

knows a lot about and would allow us to start making our way to 

a new system. But in terms of the principles of how we would wrestle with the corporate rate and deferral and going forward in a bipartisan way, your thoughts, Mr. Greenstein. 

Mr. GREENSTEIN. I have not studied your specific proposal here 

to the degree that Bob McIntyre has. His comments make a lot of 

sense to me. 

The point I wanted to add was to contrast your proposal with 

something that I think would be very unwise and might soon come 

before you, which is the idea to, in the absence of reform, simply 

allow a big repatriation at a 5-percent rate. You know, we tried 

that in 2004. It did not create the number of jobs it was supposed 

to. But the more important point is that when it was done in 2004, 

it was said, this is one time only. And if we do it again now, it will 

create a sense, I think, among companies that they should actually 

shift more investment and jobs overseas because all they have to 

do is wait until the next recession or whatever and they will get 

another holiday where they can bring everything back at only a 5- 

percent rate. 

So I think, unlike what you are trying to do, I think if you simply 

do a repatriation, in the long run, you are actually going to lose 

jobs. You are going to have exactly the opposite incentive to what 

you are trying to have. 

Senator WYDEN. One of the opportunities, again, for common 

ground for this table to ponder is that I think that there may be 

an opportunity to look at repatriation if it was part of tax reform. 

In other words, if it was part of a tax reform proposal that adhered—and I saw the little skirmish we had on 1986, but 1986 was 

progressive. It got rid of preferences and it held rates down, something I think all three of you have in common, and I think if repatriation is discussed, as I have heard Senators and House members 

talk about it in the context of tax reform, we may be able to get 

some more common ground. 

Mr. Hodge, and I am just very appreciative of you, Chairman 

Conrad. I just think this is a big issue that does not get talked 

about much. Mr. Hodge, your way out of this conundrum involving 

international tax policy and the person who is our constituent in 

the supermarket. 
1157 

Mr. HODGE. Well, Senator, I agree with your plan to lower the 

rate. I think reducing the rate to at least 24 percent is the absolute 

way to go. Preferably, I would like to see the Federal rate be 

around 20 percent so that when you add back the average of State 

rates, we are at about 25 percent overall, which would equal us to 

China and roughly the OECD average. 

But I disagree with remaining with the worldwide system and I 

would prefer to move toward a territorial-type system. That is the 

trend among our major competitors. The United Kingdom and 

Japan were the two latest countries to move toward more or less 

of a territorial-type system. And to remain with a worldwide system would simply hamstring American companies as they are trying to compete in an incredibly competitive global marketplace. 

I do not think that we want to concede China or Asia or Europe 

or any of these other emerging markets to our foreign competitors, 

and I think to remain with this worldwide system would absolutely 

do that. I think if somebody is going to make tractors in China, I 

want it to be Caterpillar. I want it to be John Deere. I do not want 

it to be a Germany company or a Swiss company or someone else. 

I want U.S. companies to be as competitive as possible in this global economy. 

And the benefit principle of taxation says that taxes should at 

least be linked to the benefits, and U.S. companies are paying 

taxes on those profits earned abroad. They are paying them to the 

host country where those profits were earned. And I think it is unfortunate the U.S. system penalizes U.S. companies for trying to 

bring those profits back and reinvest in the United States. And 

that is why I would like to see a permanent territorial system so 

there is no penalty for reinvesting, not one of these one-off. I agree 

that that was bad tax policy. And any of these holidays tend to 

produce unintended results. Permanence is the way to go. 

Senator WYDEN. My Chairman has his gavel in his hand. Let me 

just kind of close with what our challenge is, and I would welcome 

your ideas, the three of you. 

Senator Gregg and I spent an enormous amount of time debating 

just this, and I will keep my public posture as being open to this 

and a variety of other things you will hear. Mr. McIntyre made 

very good intellectual arguments against it. What I have to tell you 

is we are going to need some proposals quickly on how people at 

this table might come together behind it, because issues like transfer pricing, which are sure to be compounded by anything in this 

area, have to be addressed in order to go forward. 

So I am open. A lot of Senators on both sides are interested in 

this. The Commission was interested in it. But we are going to 

have to have, quickly, some very creative kind of work done by people like the three of you in order to give this a pulse and I am 

going to stay open. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you so much. It was very important 

we have this discussion because we really are at critical moments 

of decisionmaking. 

With that in mind, I would ask both Mr. McIntyre and Mr. 

Hodge if you could provide to me and this committee a summary 

of the arguments that you believe are most important to keep in 
1158 

mind on the question of territorial versus worldwide. It would be 

very important that we get that because we are at a critical moment in discussions and it would be very helpful to have the information that you have and the knowledge that you have brought to 

bear as this decision is made. So could you do that? 

Mr. HODGE. Sure, absolutely. 

Chairman CONRAD. All right. Senator Portman would like an additional moment, as well. 

Senator PORTMAN. Well, just to follow on with the Chairman’s request, this is a critical time because I think when you look at the 

economic growth possibilities as part of looking at our fiscal situation, tax reform is high on the list and it happens to be bipartisan. 

It is something the President is talking about, we are talking about 

on our side of the aisle, and we need to move and move quickly, 

in my view. We cannot wait another 18 months or 2 years, and because the election is coming up, it needs to move particularly 

quickly. 

I have a very different point of view, Mr. McIntyre, on what we 

ought to be encouraging U.S. companies to do, so our policy proposals may not be that different, because I am strongly supportive 

of what my colleague is talking about in terms of lowering the corporate rate, and Ron Wyden has done terrific work on this, because 

it solves a lot of those problems. 

But let me just give you a quick example, because we did this 

analysis in Ohio. There is a study recently done by an economist 

at Kenyon showing 17,000 jobs would be lost in Ohio just by extrapolating from some of the national data on deferral. So if you 

would eliminate deferral, you would lose jobs in Ohio. 

In the case of my hometown of Cincinnati, Proctor and Gamble 

Company, as you know, is a global company. They do a lot of business overseas. They do not export Tide, they make Tide elsewhere. 

You cannot export it and be competitive. Forty percent of the jobs 

in Cincinnati, and they are the largest private sector employer in 

our area, so over 5,000 jobs are there because of their international 

sales. So it is not just a couple hundred jobs for a couple thousand 

because they do all their research in Mason, Ohio, and they do 

their back office accounting and legal and marketing and so on. It 

is a U.S. company. We want them to stay in the United States. 

Their incentive right now, not speaking for them but speaking 

for international companies generally, if you are to keep the relatively high corporate rate relative to other countries and keep this 

notion in place that we should not allow them to defer prior to 

them bringing their profits back, would make it advantageous for 

them either not to be a U.S. company, first, and we have seen some 

companies make that decision. 

I remember when Daimler Chrysler testified before the Ways 

and Means Committee and told us why it was Daimler Chrysler 

and not Chrysler Daimler, but also, it obviously incentivizes them 

to sell their foreign subsidiaries and to allow those companies to be 

purchased by companies from other countries that have better tax 

advantages. They can pay a premium, the Italians, the Germans, 

the Japanese, the Chinese. That is what is going on in the real 

world right now. 
1159 

So I would say we need to be very careful. Ninety-five percent 

of the consumers live outside of our borders. We want to access 

those consumers. We want to create jobs here in America by accessing those consumers. If we do not, our standard of living will go 

down in this country. We will lose employment. And if we keep the 

corporate rate relatively high, and even 25 percent is relatively 

high if these other countries, as Japan, continue to lower their 

rates, and if we are the only country of our major competitors that 

has a territorial, or a worldwide tax system rather than a territorial system. 

So we, I think, are right on the edge here. If the rate is low 

enough, some of this can be looked at. But if it is not low enough, 

then we will continue to lose jobs here in this country. So I wanted 

to get that on the record and again appreciate all three of you 

today. I have enjoyed working with you in the past and look forward to your help on trying to come up with a bipartisan approach 

to tax reform that does create jobs and opportunity. Thank you. 

Chairman CONRAD. Thank you, and I would like to turn to one 

other matter just quickly, because this really is a critical time, and 

that is the question of consumption tax as an increased part of the 

tax base of the United States. 

Virtually every expert from every philosophical background who 

came before the Commission, the tax group of the Commission— 

Congressman Camp and I were given the responsibility to lead the 

discussion in that area—told us we should have more of a hybrid 

system, that consumption should be more of a part of the tax base 

of the United States, that it should be done progressively, which 

is challenging, but there are ideas for how you do that. Professor 

Graetz, as many of you know, has a proposal to take 100 million 

people off the income tax rolls and have a consumption tax. The 

man has some ideas for how it be made progressive. Others who 

came before the Commission from a more progressive viewpoint 

had other ideas for how it could be made progressive. 

What are your thoughts with respect to having a system that has 

a consumption tax component as part of the base? 

Mr. MCINTYRE. Well, we already have one, of course. The States 

have sales taxes, which these days run around almost 7 percent. 

So we have consumption tax as part of our mix. It is, in some ways, 

unfortunate because those taxes are so regressive, and every plan 

I have ever seen to try to deal with that regressivity is a failure 

because it is so hard to do. 

Mike Graetz’s plan—he does not take 100 million people off the 

tax rolls. He just has 100 million people filing for tax rebates 

against their consumption tax. But they have to file their same income tax return they do now, pretty much. 

But anyway, no, I think people say, well, you know—I do not understand. Let us suppose that we are talking about a value-added 

tax, and some people say that would be a great idea, and I say, I 

look at them and I say, why? If you want to make the income tax 

less progressive, you could do it if that is your goal, to have a more 

regressive tax system. But why would you set up a new bureaucracy that estimates say would have to double the size of the IRS 

to collect this tax just to get a more regressive system? 
1160 

Now, they may have other arguments besides the fact that they 

may want more regressivity, but the ones I have heard do not hold 

water. So I am strongly and probably irrevocably opposed to adding 

a Federal consumption tax. 

Chairman CONRAD. All right. 

Mr. GREENSTEIN. Well, on this one, it may be the only thing we 

have discussed today I am in a different place than Bob McIntyre. 

I think over the coming decades, we are going to have no alternative but to get revenue to a somewhat higher share of GDP, 

given the aging of the population, increases in health care costs, 

and whatever other international challenges we may face. And 

whether it would be my preference or not, I do not see politically 

that happening on the income tax side alone. 

I think we will need a supplementary consumption tax. Were we 

able to do it, my first choice would not be a VAT but a carbon tax 

because of the growing concerns of the impact not only on wellbeing, but on the world economy of global warming. But I am not 

sure that a carbon tax is not even politically more difficult than a 

value-added tax. Interestingly, the last conversation I had on this 

with Michael Graetz, I think Michael privately probably would prefer a carbon tax, as well. 

Now, having said that, particularly for a VAT, there are two 

huge challenges. One you noted, progressivity/regressivity, easier 

on paper to make it progressive than in the real world. You can 

offset the adverse effect on the bottom. As you may know, we 

helped design a provision that would have done that in the cap and 

trade bill that passed the House, and we were working with Senators Kerry, Graham, and Lieberman when they were moving forward on an energy-type bill before it collapsed. But the farther you 

want to go up the income scale into the middle class with the kind 

of mechanism we developed, it gets harder. 

The other big challenge, particularly for a VAT, is—and it is really complicated—is figuring out how to design it so it does not interfere with State and local tax collection, and the local is actually 

harder, because a lot of localities have sales taxes than the State. 

One last point. I am not sure, you will have to ask Michael, but 

I think in my last conversation with him on this, he had me actually do a session for this VAT group that he has on how to offset 

the impacts on the bottom in December. I thought by the end of 

it, he was kind of convinced that his idea of taking 100,000 people 

off and having no income tax, that he was moving away from that, 

and there were two problems with that. 

Michael fully agrees that we need to make people whole with regard to the Earned Income Credit and the Child Credit and the 

like, but neither he nor anybody else has really figured out a good 

way to do that that works in the real world in the absence of any 

income tax at all. 

The second is health care. Whether you favor the Affordable Care 

Act, as I do, or you favor the kinds of approaches that Republicans 

offered when George Bush was President, in both cases, they rely 

on marketplaces where people get subsidies—people who are low 

and modest income get subsidies to make coverage affordable and 

the subsidies are delivered as tax credits through the tax system. 

And the people that get the subsidies are all in the income group 
1161 

that under the Graetz plan no longer files a tax return. And when 

I mentioned this to Michael, he said, oh, that is a really good point. 

I designed my plan before we went in that direction in health care. 

Chairman CONRAD. All right. Mr. Hodge, any comment? 

Mr. HODGE. Very quickly, Mr. Chairman. I once had a very senior British tax official tell me that if you want a perfect tool for 

funding big government, the value-added tax is the perfect tool. It 

is hidden from view and you can always dial up the rate if you 

want more revenues, and that is exactly what the British government has done recently to solve their problems. 

I do not believe that we need an imperfect tax on top of a tax 

system that we already have. The value-added tax has many of the 

same problems in Europe and elsewhere that we see with sales 

taxes here in the United States. They have various carve-outs for 

groceries and medicines and children’s clothing and other things 

and that creates as many problems as you have seen at the State 

level. 

I do believe we can move toward more of a consumption base by 

moving toward what you might call the traditional flat tax, as advocated by Professors Hall and Rabushka at Stanford or Steve 

Forbes or even a plan like what Congressman Paul Ryan has put 

forward, where you have a flat tax for individuals, a flat tax for 

corporations, you do not tax savings on the individual side, you 

allow full expensing at the corporate side, and you essentially have 

more of a consumption base, but you do it within kind of an existing system as we have, rather than adding something on top of 

what we already have. I would prefer that. 

Chairman CONRAD. Let me just say, my reaction to that is what 

you do is you would either raise a lot less revenue- -every flat tax 

proposal I have seen does—or you would dramatically make more 

regressive the tax system, because our system now is progressive. 

If you have a flat tax that generates the same amount of revenue, 

it is a mathematical certainty that people at the top pay less and 

people at the bottom are going to pay more. 

Let me just thank you. We have really gone well past what we 

intended and what we had asked you to prepare for. I deeply appreciate the contributions you have made. This is a very timely 

hearing and important to the work of the committee and the work 

of other groups who are having discussions right now. I thank you 

all. 

The committee will be adjourned. 

[Whereupon, at 12:18 p.m., the committee was adjourned.] 
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(1173) 

THE PRESIDENT’S FISCAL YEAR 2012 DEFENSE AND INTERNATIONAL AFFAIRS 

BUDGET 

THURSDAY, MARCH 10, 2011 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:01 a.m., in room 

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

Present: Senators Conrad, Wyden, Cardin, Warner, Begich, Sessions, and Thune. 

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

Marcus Peacock, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to welcome everyone to the Senate Budget Committee 

today. Today’s hearing will examine the President’s budget request 

for defense and international affairs. Our witnesses today are the 

Deputy Secretary of Defense Bill Lynn and Deputy Secretary of 

State Tom Nides. We appreciate them being here and look forward 

to their testimony. 

For a number of years, many people have stressed that our national security relies not just on the Defense Department but also 

on the State Department through its diplomatic missions. So I am 

glad this hearing will provide a chance to look at our national security with both agencies represented. 

Our country is at a critical juncture. We are borrowing about 40 cents of every dollar that we spend. Deficits have exceed $1 trillion 

for 3 years in a row. Federal debt is soaring. The long-term outlook 

is even more sobering. We are clearly on an unsustainable course. 

Our budget situation is not just a fiscal and economic threat. It 

is also a threat to our national security. We simply will not be able 

to remain a global superpower if we fail to stop the explosion of 

Federal debt. And I would note the story this morning that the 

PIMCO Total Return Fund has indicated they have dumped all 

U.S. debt. 

Now, let me repeat that. The PIMCO Total Return Fund has 

made public today they have dumped all U.S. debt. 

Here is what Admiral Mullen said about the debt threat: ‘‘Our 

national debt is our biggest national security threat.’’ That is coming from the Chairman of the Joint Chiefs of Staff. 
1174 

This year, for the first time since World War II, gross Federal 

debt will exceed 100 percent of GDP, well above the 90-percent 

threshold that many economists regard as the danger zone. That 

has to be a wake-up call for all of us. 
1175 

I have always been a strong supporter of defense spending because I believe providing for the national defense is the Government’s single most important responsibility. And make no mistake, 

Congress will continue to provide our troops what they need for 

their mission and to keep them safe. But given the fiscal crisis, 

every area of the budget is going to have to come under scrutiny, 

is going to have to find savings, including defense. That was the 

conclusion of every bipartisan Commission that has examined the 

long-term fiscal imbalances, including the President’s own Fiscal 

Commission and the Domenici-Rivlin group that we will hear from 

next week. 
1176 

The examples of inefficiencies in the Defense Department that 

have come to light are particularly troubling. We need to root out 

wasteful spending everywhere we find it, including defense. The reality is that defense spending has grown dramatically in recent 

years and has contributed to the climb in deficits. In 1997, we 

spent $258 billion on the Department of Defense. This year, when 

we include war costs, we will spend about $685 billion on the Department. To put that in a historical perspective, this will be the 

fifth year in a row we will be spending more on defense than we 

did at the height of the Korean War in real terms. 
1177 

The President’s budget proposes to continue to increase the defense budget. In 2012, the administration requests $553 billion for 

the regular defense budget, representing a $27 billion increase over 

the 2011 continuing resolution level. The administration has said 

its defense request would save $78 billion over 5 years by implementing savings proposed by the Secretary of Defense, Mr. Gates. 

While I welcome those savings proposals, that estimate compares 

the President’s current budget request with the President’s request 

last year, which was never implemented or agreed to. Compared to 

CBO’s baseline for defense spending, the administration’s current 

request actually represents a $128 billion increase over the 5 years. 

That is over the baseline, $128 billion. 
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This chart shows a similar rise in our international affairs funding, although on a considerably smaller scale. In 2001, we spent 

$24 billion on international affairs; in 2004, we saw a notable spike 

in war-related international affairs funding from Iraq reconstruction. This year, we are spending a total of $58 billion on international affairs when war-related funding is factored in. 

For 2012, the administration proposes to keep the base international affairs budget at $53 billion, the same level as in the 2011 

continuing resolution. However, when war-related international affairs funding is added in, the administration is requesting a total 

of $61 billion for international affairs, representing a $3 billion in-
1181 

crease over the total for 2011. I would be the first to acknowledge 

that is modest. 

The requested increase in international affairs war-related funding is explained in part by the transition in Iraq where the State 

Department is scheduled to take over responsibility for U.S. operations there. 

For overall war funding, including both defense and international affairs, the administration is requesting $127 billion in 2012. That 

is $40 billion less than the average war funding provided from 

2007 through 2011. In those previous years, this administration 

and the previous administration made two or three war funding re-
1182 

quests each year. Although I give this administration substantial 

credit for being much more accurate and realistic with its initial request each year, I do hope our witnesses will be able to comment 

on whether this $127 billion war funding request will be it for the 

year or whether we should anticipate another request later on. 

Again, I want to emphasize we will provide our troops with whatever they need to complete their missions and to be safe. But the 

days of an open checkbook here are ending for everyone. I want to 

make that very clear. This Committee—I think I can speak for both 

sides—recognizes the debt threat hanging over this country. It 
1183 

must be addressed. There is not an option. And, again, I would go 

back to the story this morning—the PIMCO Total Return Fund advising us they have dumped all U.S. Government debt. If that is 

not a wake-up call for where we are headed, I do not know what 

would be. 

With that, we will turn to Senator Sessions for his opening remarks. Senator Sessions. 

OPENING STATEMENT OF SENATOR SESSIONS 

Senator SESSIONS. Thank you, Mr. Chairman, and I want to welcome our guests. They represent two of the great historic Departments of the U.S. Government, and we value your insight and your 

testimony. 

The Chairman of the Joint Chiefs of Staff, Admiral Mullen, spoke 

the plain truth when he declared that our national debt was our 

greatest long-term national security threat. I believe that Secretary 

Clinton has said the same thing, that it represents the greatest 

threat to American security. 

The DOD’s annual budget compared to the projected growth of 

the Nation’s interest payment on our surging debt turns out to be 

in the years to come less spent on defense than we spend on interest on our debt. Right now we are spending about 3 times as much 

on defense as we spend on interest. It just shows, I think, the perspective that we are facing. 

Mr. Chairman, I share with you the urgency that we have with 

regard to spending. I do not believe there is an opportunity for us 

to delay any longer. Moody’s told the Government in December that 

if things do not change, they could downgrade our debt in less than 

2 years. Alan Greenspan said in January that, in his view, there 

is a 50–50 chance, a little better than 50–50 chance, but not much 

better, that we would have a debt crisis in 2 to 3 years. This is the 

former Federal Reserve Chairman. And Mr. Geithner told this 

Committee last week that he agreed with the Rogoff study showing 

that debt at the levels we are now, 90-plus percent of GDP, pulls 

down economic growth and puts us in danger of a crisis. He volunteered that. And he agreed with the Rogoff studies. 

Then we have Mr. Simpson, Alan Simpson, and Mr. Bowles, who 

chaired the Debt Commission, appointed by President Obama, and 

they said to us the day before yesterday that a debt crisis could actually happen. In fact, Mr. Bowles suggested 2 years. He said it 

could be a little sooner, it could be a little later. And Mr. Simpson 

said in his view it would be a year or less. 

So I suggest that the message is clear. We need to do some 

things now, and the Defense Department cannot be absolved from 

those challenges. 

I so much admire and love the men and women who serve our 

country. We have the finest military, Mr. Lynn, the world has ever 

known, the finest I believe this Nation has ever fielded in terms 

of being trained, being disciplined, being courageous, willing to go 

into combat, and also being equipped and trained on how to use 

their equipment, and the coordination among the branches and 

services is at a level never before achieved, and it is critical, Mr. 

Chairman, as we ask the Defense Department to constrain spend-
1184 

ing, that we do so in a way that does not damage what we have 

been blessed to have created over the last number of years. 

When the cold war ended, we had too much reduction in forces. 

Army divisions were cut from 18 to 10. The 600-ship navy went to 

300. The Air Force fighter wing equivalent fell by half. We ended 

up with a high proportion of muscle and fat, I am afraid, during 

that situation. So we will have to watch it. We have to be careful. 

I am concerned about some of the surging increases requested by 

the State Department. We are going to have to look at that carefully. I also, frankly, am concerned that the role we are calling on 

the State Department to fill in Iraq may be beyond the capabilities 

of any State Department to fulfill, and I worry about that both as 

to cost and to the capability of achieving that mission. 

So, Mr. Chairman, thank you for the hearing. This represents a 

huge, substantial portion of the discretionary budget. We have to 

ask our Defense Department to do more with less. But at the same 

time, we want to do it in a way that does not call for bad decisionmaking. Driving up the cost of procurement per item, that would 

be unnecessary. We need to do it in the right way. 

Thank you for your leadership. 

Chairman CONRAD. Thank you, and thank you for your partnership, Senator. I think we have had a series of hearings here that 

have been very important. My staff tells me we have now done 

more hearings on this budget cycle than have been done in previous budget cycles for a very long time. And I think we have done 

a pretty good job of outlining for those who are paying attention 

the dimensions of the problem, the challenge that we confront, the 

need to take action now. And we have had a chance to hear from 

the President’s Fiscal Commission. Next week we will hear from 

the other bipartisan Commission, the Domenici-Rivlin Commission. 

And then we will go to work on the budget resolution, and I hope 

to be able to work closely with you on that because, frankly, I do 

not think there is time to waste. 

Reading this story about PIMCO making the decision to dump all 

of their U.S. Government debt, this is a long article from 

Bloomberg this morning, five pages, six pages. Anybody that reads 

this, pretty sobering stuff in here about people—Jim Rogers of Rogers Holdings deciding to short U.S. Government debt because of the 

debt overhang in this country. You know, it is what we have been 

talking about for a number of years on this Committee, that no one 

can predict when this day comes. The one thing we can say with 

certainty is we are moving very rapidly toward the fiscal cliff. We 

do not know when we will get there, if we get there this year or 

next year or the year thereafter. What we know with certainty is 

when we are adding $1 trillion of debt every year, gross debt every 

year, we are putting this country in an extremely vulnerable position. It cannot continue. 

With that, Mr. Lynn, Mr. Nides, thank you for being here. Who 

would like to go first? Tom, if you would like to go first. 

Let me just say that Mr. Nides, of course, helped run Morgan 

Stanley before being convinced to come into the Government. We 

very much appreciate the sacrifice that you have made, the personal sacrifice that you have made and that your family has made 
1185 

to serve the Nation at this difficult time. Welcome to the Budget 

Committee. 

STATEMENT OF THE HONORABLE THOMAS R. NIDES, DEPUTY 

SECRETARY OF STATE FOR MANAGEMENT AND RESOURCES, 

U.S. DEPARTMENT OF STATE 

Mr. NIDES. Thank you very much, Chairman Conrad and Ranking Member Sessions. I began my career on Capitol Hill as Assistant to Majority Whip Tony Coelho and then to Speaker Tom Foley, 

so I very much appreciate the pressure you all are under to justify 

every dollar that is spent. 

Today I want to explain how with just 1 percent of the Federal 

budget, the State Department and USAID prevents conflicts 

abroad, promotes prosperity at home, and, most importantly, protects the American people. From countering extremism in Yemen 

to serving alongside our troops in Iraq and Afghanistan, to train 

Mexico’s police force to help ensure our southern border, we do 

every day—what we do is for our national security. 

I appreciate you inviting me to speak alongside Deputy Secretary 

of Defense Bill Lynn. The fact that we are presenting our budgets 

together is a very important first. It speaks to the sense of shared 

mission that begins with the President, the Secretary of Defense, 

and the Secretary of State, and extends all the way to the civilians 

and troops working shoulder to shoulder in Iraq, Afghanistan, and 

Pakistan. Cooperation between State and the Department of Defense has never been better. 

Today I want to walk you through the investments that allow us 

to combine diplomacy, development, and defense to advance our national security. 

This year, for the first time, our request is divided into two parts. 

The first part is our core budget, our foreign assistance and operations in just about every Nation in the world. Our 2012 request 

is $47 billion, essentially flat from the 2010 levels. 

The second part is our extraordinary temporary war costs in 

Iraq, Afghanistan, and Pakistan. This year, for the first time, the 

President’s budget presents our war funding in the same way it 

funds the Pentagon’s—in a separate account called the Overseas 

Contingency Operation Account, or OCO for short. This more transparent approach distinguishes between the temporary war costs 

and our enduring budget and reflects a shared effort on the ground. 

The State Department and USAID’s share of the President’s OCO 

account of $126 billion in 2012 is $8.7 billion, which I will come 

back to in a moment. 

Let me start with our core 2012 budget request of $47 billion. It 

represents a 1-percent increase over the comparable levels in 2010, 

less than the rate of inflation. And make no mistake, even without 

the extraordinary war costs, the core budget should be considered 

part of the U.S. Government’s national security budget. It stabilizes conflict zones and reduces the threat of nuclear weapons; it 

restores old alliances; it supports democratic transitions; it 

counters extremism; it opens global markets; and it protects American citizens abroad. And where we are not actively working with 

the military today, State and USAID are deploying diplomats and 
1186 

development specialists so that the Department of Defense does not 

have to deploy our troops tomorrow. 

We are investing in four principal areas: 

First, we devote $11 billion of our $47 billion core budget to prevent conflict and support fragile states. For example, this budget 

supports humanitarian and security assistance for the likes of 

Yemen, crisis diplomacy in Sudan, and rebuilding Haiti. 

Second, we invest $7.4 billion of our $47 billion core budget to 

support key allies and partners. This includes over $3 billion for 

Israel and strong support for our partners on every continent. It 

also includes military-to-military partnerships in 130 countries 

across the world, administered by State and implemented by DOD. 

Third, we invest $14.6 billion of our core budget to advance 

human security. We have targeted drivers of future conflict: disease, hunger, and climate change. Our largest single investment is 

$8.7 billion in global health programs, including the continued support for PEPFAR, the program to treat and prevent HIV and AIDS 

started under George W. Bush. 

We are also investing $1 billion in food security, $650 million to 

address climate change, and over $4 billion in emergency humanitarian assistance for victims of war, survivors of natural disasters, 

and refugees, like the hundreds of thousands who have fled Libya 

in the last few weeks. 

Fourth, we invest $14 billion to strengthen and sustain our presence across the world. This is an investment of a remarkable group 

of public servants, and it delivers significant returns to the American people. Our political officers build relationships and promote 

democracy. Our economic officers fight every day for American companies and jobs. Our development officers spread opportunity and 

stabilize societies, while our public diplomacy officers tell our story 

across the world. And our consular officers help average Americans 

every day. 

Finally, we have our temporary extraordinary war costs in the 

front-line states. I am glad to have Deputy Secretary Lynn here 

with me because when you consider our two OCO requests together, you come away with a much clearer picture. The Pentagon 

is saving $45 billion this year on its overall OCO request from the 

2010 levels, largely due to the transition from military to civilian 

leadership in Iraq. 

Chairman CONRAD. Tom, if I can just stop you on that point, because we have people listening and sometimes we use terms here 

that are not familiar to the viewing audience. If you would describe 

what OCO stands for, because it is going to be continually referenced during this hearing, I think it would help who might be 

listening. If you could describe what OCO stands for. 

Mr. NIDES. Certainly, sir. OCO is basically an ability for us to 

be able to show the costs of our war funding, which is defined as 

temporary and extraordinary. As you know certainly from the State 

Department and somewhat from DOD, much of our war funding in 

Afghanistan, Iraq, and Pakistan has been funded by 

supplementals. And so this year in 2012, we want to have a fuller 

picture of what we believe we need to fund the front-line states. So 

we are separating our core budget from our war costs budget for 
1187 

you all to be able to understand exactly what we define as temporary and extraordinary. 

Chairman CONRAD. And OCO stands for Overseas Contingency 

Operations. 

Mr. NIDES. Yes, sir. 

Chairman CONRAD. So when people hear this reference, OCO, 

that stands for Overseas Contingency Operations. It relates to war 

funding and conflict funding globally. 

Mr. NIDES. Yes, sir. So as I was saying, as the Pentagon is saving $45 billion this year on its overall OCO request for 2010, largely due to the transition from military to civilian leadership in Iraq, 

ours—that being the State Department—is increasing by $4 billion. 

And as Secretary Clinton likes to say, every business owner she 

knows would gladly invest $4 to save $41. 

In Afghanistan and Pakistan, alongside our military offensive, 

we are engaged in a major civilian effort to strengthen our partners, undercut the Taliban, and take on al Qaeda. We are also 

working to deepen our partnership with the Pakistani people and 

empower the governments who act on our shared interest in taking 

on violent extremists. Our OCO request for Afghanistan and Pakistan is $3.5 billion. 

A few weeks ago I visited Iraq, and as soldiers pass on the responsibility to civilians, the State Department is ready to lead. But 

we need the support and the resources to do the job. We have lost 

too many lives and spent too much money not to see this through. 

The Iraq portion of our OCO request for State and USAID totals 

$5.2 billion. 

Finally, sir, I would like to address our funding for the rest of 

2011. The 16-percent cut for State and USAID that passed the 

House last month would put our missions severely at risk. In the 

front-line states, our efforts would be hollowed out. In the Middle 

East, we would be forced to scale back exactly at the wrong moment. And, finally, we would turn our backs on millions of HIV/ 

AIDS patients, mothers, and children. 

The American people are right to be concerned about our national debt, and so are we. But they still expect us to make smart 

investments in the future. And when a crisis erupts—and they always do—they expect us to be ready. This is a moment when 

America needs to lean forward and not pull back. I look forward 

to working with you to do what is necessary to keep America safe, 

strong, and competitive in a changing and dangerous world. 

Thank you. 

[The prepared statement of Mr. Nides follows:] 
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Chairman CONRAD. Thank you, Mr. Nides. 

Now we will go to Deputy Secretary Lynn. Let me just indicate 

that Secretary Lynn enjoys credibility on both sides of the aisle 

here because he has a reputation as a very strong manager and 

somebody who has been dedicated to public service for a long time 

and somebody that we respect. 

Welcome, and please proceed with your testimony. And before 

you do that, I should also indicate this hearing, which is for the 

first time a joint appearance by Defense Department and State Department, was actually requested of us by the Secretary of Defense, 

Mr. Gates, and the Secretary of State, Ms. Clinton. They made this 

request of us, and we have accommodated that request because 

they felt it was important given how their operations are closely 

linked. 

Secretary Lynn. 

STATEMENT OF THE HONORABLE WILLIAM J. LYNN, III, DEPUTY SECRETARY OF DEFENSE, U.S. DEPARTMENT OF DEFENSE 

Mr. LYNN. Thank you. Thank you very much, Mr. Chairman. If 

it pleases the Committee, I would like to have my full written 

statement included in the record, and what I would like to do is 

just summarize the main points for you. 

Chairman CONRAD. That will be done. 

Mr. LYNN. As you indicated and as Secretary Nides indicated, 

this is, I think, the first time or at least the first time in recent 

memory that the two Departments have been before this Committee together, and it does represent, as you said, the desire of 

Secretary Gates and Secretary Clinton to represent the strong partnership that they have established and the two Departments have 

established to jointly address our national security challenges. It is 

really two sides of the same coin. We at the Department of Defense 

strongly believe that a full and robust funding of our foreign policy 

operations is a very effective means of meeting our national security and that, indeed, if we promote stability and responsible governance as crises are brewing, we will be able to avoid later in the 

crisis deployment of armed forces, of U.S. military forces. And so 

we fully want to support that partnership. We believe that the mix 

of competencies between the State Department, the Department of 

Defense, as well as USAID is what is needed to address the kinds 

of security crises, the kinds of instabilities, the kinds of regional 

conflicts that spark up around the world and to do those at the earliest possible point. 

We think that the budgets that we are putting forward today, 

both the State Department and Defense Department budgets for 

fiscal year 2012, well represents that partnership. In Afghanistan, 

State, DOD, and USAID are working together on counternarcotics 

programs, on the training of Afghanistan law enforcement. We 

have proposed with congressional concurrence an Afghan infrastructure program that will meld the DOD responsibilities for 

counterinsurgency and the AID and State responsibilities for development in a way that is, I think, more integrated than in the past, 

integrated with both the long-term development plans in Afghani-
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stan as well as the more immediate needs of the military campaign 

plans. 

At the same time, we are working together with the State Department to ensure the joint delivery of security assistance wherever U.S. interests are at stake. We have developed over the past 

several years some joint authorities, some dual key cooperative authorities, such as the Pakistan Counterinsurgency Capability Fund, 

the Section 1206 authority to train and equip partner nations in 

the counterterrorism fight. Similarly, this year we are requesting 

funding for an Office of Security Cooperation in Iraq. This would 

be a remaining DOD presence as we transition to a State Department lead in Iraq. We think there is still some need for a DOD 

presence in terms of security assistance. We think that is yet another key joint mission. 

In Mexico, we have jointly addressed surveillance, interdiction, 

air and maritime operations and planning through a variety of initiatives. 

We continue to work together to train partner militaries in over 

100 countries through programs such as the International Military 

Education and Training program, as well as the newly proposed 

Global Peace Operations Initiative. 

For fiscal year 2012, we are also requesting a new and I think 

path-breaking program which would involve pooled funding where 

State and DOD would both contribute to a fund in which we would 

seek to anticipate security issues, whether they are in Africa or 

Latin America or Asia, and to jointly target assistance for development funding, for economic assistance, and for security assistance 

in an integrated way in an effort to anticipate brewing crises and 

reduce them before they get started. 

I also want to endorse what you and Secretary Nides were talking about that the State Department is proposing, that its funding 

for the conflicts that we are in, particularly Afghanistan and Pakistan, be funded through the Overseas Contingency Operations 

fund, to identify those funds which are essentially the marginal 

costs above the base budget of addressing those contingencies, that 

that is appropriately done in a separate fund that Congress can 

consider fully and transparently in that manner. 

As the partnership between State and DOD indicates, concepts 

of security assistance are changing. We at DOD view the security 

assistance activity as a vital instrument that can prevent or attenuate instabilities that might otherwise draw the United States 

into armed conflicts. If properly applied in a timely manner, security assistance is likely to be more decisive and less costly than direct military intervention after a problem has become a crisis. 

Our cooperation with the State Department is, therefore, an important component of our national defense, and so I would urge, as 

Secretary Gates has, that you fully fund the State Department request. 

With regard to our request for fiscal year 2012, we are seeking 

a total of $671 billion. That is divided between a base budget of approximately $553 billion and an OCO, or Overseas Contingency Operations, budget of nearly $118 billion. In our judgment, this budget is both reasonable in that it meets our national security needs 

and prudent in that it supports the administration’s plan to hold 
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down the deficit. The proposed budget will take care of our people. 

It will continue to rebalance the U.S. defense posture. It will provide deployed forces with what they need to carry out their very 

important missions, and it continues the reform agenda that Secretary Gates has been embarked on for the past 2 years in terms 

of streamlining our business operations. 

As we built this budget, the military departments found approximately $100 billion in savings from business operations and lowerpriority programs. They reinvested that $100 billion into higherpriority programs: intelligence surveillance and reconnaissance, unmanned aerial vehicles, cyber defense, and other programs. 

At the same time, outside the military departments, the Secretary and his staff were able to identify an additional $78 billion 

in defense-wide efficiencies. That money was reduced from the Department’s top line over 5 years to support the administration’s efforts to reduce the deficit. 

Finally, Mr. Chairman, I would close my opening remarks by 

mentioning the unfinished business that confronts both the executive and the legislative branch. We are still operating 5 months 

into the fiscal year under a continuing resolution. If Congress is 

unable to enact an appropriations bill for DOD, DOD would presumably have to continue to operate under a CR, continuing resolution, for the entire year. This would have three very negative effects on the Department’s operations. 

First, it would not provide in our view enough money to meet all 

of our national security needs. It would represent a $23 billion reduction from the request the President made for fiscal year 2011. 

Second, a year-long CR would leave the dollars that we do have 

in the wrong places. For example, it would not provide enough 

funding in the personnel accounts to support the military pay 

raises that have been approved, and it would not provide enough 

funding in the operations accounts, in the medical accounts to meet 

medical inflation. 

Third, a year-long CR would not provide us with sufficient management flexibility to address the needs of the Department. We 

would not be able to start new weapons, we would not be able to 

increase production of existing weapons systems, and we would be 

unable to start new military construction projects. We are already 

dealing with those problems 5 months now into the year. If the CR 

continues for the full year, those problems will get far more severe. 

So, Mr. Chairman, it is our hope that working with the Committee and the Congress we will be able to find a way to get approved and signed a full year appropriations bill for the Department of Defense. 

Mr. Chairman, that concludes my prepared remarks, and Secretary Nides and I, I am sure, would be happy to take your questions. 

[The prepared statement of Mr. Lynn follows:] 
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Mr. LYNN. Mr. Chairman, that concludes my prepared remarks 

and Secretary Nides and I, I am sure, will be happy to take your 

questions. 

Chairman CONRAD. We appreciate that. Thank you both for your 

testimony. Let me start by saying, I have supported, in my 24 
1207 

years on this Committee, every penny that has been requested by 

every President for our national defense and our national security. 

For 24 years, I have supported every penny requested. 

But I have to say to you, we are going to have to change course. 

It is as clear as anything can be to me. We have the Chairman of 

the Joint Chiefs saying, as I indicated in my opening statement, 

the biggest threat to our national security is our national debt. I 

believe that to be the case. 

I served on the President’s Fiscal Commission, 18 of us did. Eleven of the 18 agreed to a plan that would reduce both defense and 

non-defense discretionary spending over the next decade by $1.7 

trillion. We did so not because it was attractive to do or politically 

popular to do, but because we saw a fundamental threat to the economic and national security interests of the United States if we 

failed to act. 

We also called for an additional trillion dollars of revenue over 

that period by reforming the Tax Code, broadening the base, actually reducing tax rates to help America be more competitive so we 

could generate more jobs. And those savings on spending, and we 

also save money, some $600 billion in so-called mandatory accounts 

over that period, and because of those savings through spending 

cuts and additional revenue, we saved hundreds of billions of dollars in interest, for a total package of some $4 trillion. 

And defense was not exempt. Defense was asked to shoulder its 

fair share of savings. I was delighted to see Secretary Gates propose a package of reductions of some $78 billion in the defense 

budget, but he took those savings and put them elsewhere in the 

defense budget. So that is not a change in overall spending. 

I just want to share with you things I heard during the Commission considerations of the defense budget going forward. Testimony 

before the Commission by some of the top defense analysts in the 

country were that 51 percent of all Federal employees are at the 

Department of Defense. 51 percent of all Federal employees are at 

the Department of Defense. And that does not count contractors. 

When we asked the contractors—we asked the analysts, How 

many contractors does the department have, they said, We cannot 

tell you. I pressed the analysts and asked them, Well, can you give 

us a range? Yes, we can give you a range, 1 to 9 million. That was 

the range provided the Commission, 1 to 9 million contractors. 

That is a pretty big range. 

When we asked the General Accounting Office for an auditable 

record of the Department of Defense, they told us the books are not 

auditable. You know, we have a big problem here and I have concluded, we simply cannot stay this course. And it is not just the 

Defense Department, it is every part of government operations. 

We are going to run a deficit this year of $1.5 trillion. I mean, 

that is a number so stunning, if 5 years ago anybody would have 

told me we were going to ever run a deficit in this country of $1.5 

trillion in 1 year, I would have thought, it is not possible. But it 

is not just this year. We are going to add to the gross debt of this 

country every year for the next 10 years over a trillion dollars. 

We have a gross debt now of 100 percent of our gross domestic 

product. At the end of this year, we are going to have a gross debt 

of 100 percent of our GDP. We have just had a study that was done 
1208 

by Carmen Reinhart at the University of Maryland, Ken Rogoff at 

Harvard, studied 200 years of fiscal crises in 44 countries. Their 

conclusion: When you have a gross debt of more than 90 percent 

of GDP, your future economic growth is sharply reduced. That was 

the testimony before the Commission. 

When gross debt is 90 percent of your gross domestic product, 

your future economic growth is sharply reduced. Our gross debt, at 

the end of this year, will not be 90 percent. It will be 100 percent. 

So I just say to you, and my question would be, Secretary Lynn, 

can’t the Defense Department come up with savings that are net 

savings? Not just savings that are redirected so that the overall 

spending remains the same? Aren’t there savings that you can find 

there? 

Mr. LYNN. Yes, and I think we have. Let me first say, I agree 

with you and your citation of Admiral Mullen that we should indeed treat the deficit problem, the national debt, as a national security problem and we need to address it with that type of urgency. 

I think, though, as we look at defense reductions, as every department, you need to approach it in a balanced way. We need to 

ensure that we retain what Senator Sessions talked about, is that 

we have the best trained, best equipped, best led military that the 

world has ever seen and we do not want to lose that by taking precipitous or unwise cuts. 

In that context, I think we can learn from prior draw downs, 

ones that may not have gone as well as we would have hoped. 

When we take reductions, we need to take them in a balanced way. 

We need to take them not just in one account, but we need to take 

them across all accounts. We need to reduce force structure, investment and operations in a seamless way so as not to unbalance and 

hollow out the force. 

We need to take tough decisions early. We have tried to do that 

with some of the weapons’ decisions in the past couple of budgets, 

not always popular, but I think important decisions that we need 

to take. And we need to be sure that we do not over-reach, that 

we do not cut into the true bone of that high quality military that 

we have. 

Now, with that as a preamble, let me go to your specific numbers 

question, Mr. Chairman. The savings that we were able to identify 

as we built this budget were actually $178 billion. You are correct, 

we reinvested $100 billion of that $178 billion. $78 billion was removed from the top line, and it was done in a way, I think, that 

reflects the lessons that I just said. 

It was done in a balanced way in that there are force reductions, 

but we tried to do it in a prudent way in that those force reductions 

do not occur until 2015 and 2016 when we hope we will have completed the draw-down in Iraq and that we will have been able to 

transfer the bulk of the security function in Afghanistan to indigenous forces. 

That will then allow us to get to the kind of reductions that you 

are talking about. But I think we have to step through this in the 

process that I have just described. 

Chairman CONRAD. Let me just say, I think I have great respect 

for you, Mr. Lynn. I do not know if we have ever met except in 

passing, but I have read about you and I know the kind of record 
1209 

you have brought to this position. So I want to say, I have great 

respect for you. 

But, you know, words, I think, that we use in this town can be very misleading. When we talk about there being $78 billion in 

savings here on a net basis, you know, it is from an inflated baseline that comes off of years where the budget was just going 

straight up. 

So, if one looks at the year over year spending levels in this 

budget, every year the spending goes up. It goes up. It goes up. It 

goes up. And honestly, as the Chairman of this Committee, I am 

talking to colleagues and there are so many people who are giving 

the speeches they gave 20 years ago. The world has changed. 

I salute the Secretary for saying, Hey, we have to take money 

out of the baseline plan. I am just saying to you, Then to take a 

big chunk of it and put it right back in, it is not going to work. 

It might work this year. It might work next year. These budgets, 

all of them in all of the Federal Government, this is not going to 

work. 

Our spending, as a share of the national income, is the highest 

it has been in 60 years. Our income, as a share of the national 

economy, is the lowest it has been in 60 years. So the reality is 

going to come crushing in on us here. It is going to come crushing 

in on us. Those who are financing this debt, half of it now abroad, 

much of it from the Chinese, if you read the reactions today of this 

announcement that Pimco has dumped U.S. debt, I just urge you, 

read what the Chinese are saying. 

Former Chinese Finance Minister saying, They have to re-evaluate whether they are going to continue buying U.S. debt. I will tell 

you, we are on a crash—we are on a collision course for a financial 

crash. It is as clear as it can be. And doing things the way we have 

been doing them is not going to cut it. 

Senator Sessions. 

Senator SESSIONS. I think that is a bipartisan consensus, gentlemen, and it is very scary. The reality is upon us and it is critical 

that we take some steps to show that we get it and we are putting 

the country on the right path. I would just note that I have to be 

critical of this Administration, both of which you are a part. 

The Education Secretary was in here the week before last, last 

week, and testified in favor of an 11 percent increase next year in 

his budget. And the Energy Secretary was here, testified in favor 

of a 9.5 percent increase. And the Transportation Secretary was 

here and proposed a 62 percent increase. And the Defense Department, if we do real numbers based on what the CR is and where 

you want to go next to, is a 5 percent increase. That puts you in 

better company, Mr. Lynn, a little bit. 

Mr. LYNN. It is pretty reasonable. 

Senator SESSIONS. Well, it may sound that way, but it is not in 

light of the debt we have and the crisis that is happening in the 

country. I think we are in a bubble in Washington. I think people 

are talking about investments. I think they are talking about business as usual. We are in denial about the reality of the threat. I 

am just saying, I agree with Senator Conrad, change is upon us 

and we are going to have to make it. I do not think our institutions 

have yet grasped that. 
1210 

Some in the Congress have not yet grasped it. The ones who just 

ran for election did. They talked to the American people who, I 

think, get it. The State Department is proposing a 10.5 percent increase in the State Department total increase in spending. 

So these are not acceptable increases, I do not believe, and I do 

not think they are going to be approved, so we have to work on it. 

I agree with our Chairman, that language is important. I mean, I 

love the Defense Department. I know how big it is and how hard 

it is to move this monumental ship of defense, but DoD has portrayed the 2012 request that you made, not as an increase, but as 

a $13 billion cut from last year’s projection of $566 billion. 

So one of the things we have to do in Washington is we have to 

get our language straight. We have to abandon this idea that somebody’s projection increases are the fact and that a reduction of increase is a cut in spending. We have to talk about, what is our current level, the CR level, and how much up you plan to go from that. 

As I calculate it, Mr. Lynn, you are talking about going from this 

year a 5 percent increase over the CR level, which would be a real 

increase, but not—I think that would be an accurate way of saying 

it based on my articulation of an accurate way of saying it. Would 

you agree? Is that where you say you are, about 5 percent? 

Mr. LYNN. I think that would be an accurate reflection of the 

base budget. Of course, it does not include OCO budget which represents a $40 billion reduction. 

Senator SESSIONS. You are talking about $158 billion on the war 

funding to $118 billion, a saving of $40 billion, which is very significant. 

Mr. LYNN. And that will actually get you a net reduction. I cannot do the math in my head, but it would be a few percent net reduction. 

Senator SESSIONS. Well, but we are not going to go down that 

road either, because that is the military conflict and one of the 

things we hope to achieve by this rapid draw-down—I hope it is not 

too rapid—is a financial savings and that to be separate. We are 

looking at the base defense budget. So I know you have done some 

things. 

But let’s talk about, when you focus on procurement and reductions there, you have stretched out, as I see it, the Joint Strike 

Fighter. You call that a restructuring, but basically it just moves 

the requirement from this 5-year window out further. Does that 

have an increased cost for a copy if our contractor now is making 

few planes in his assembly line, is less? Are there any kind of cost 

increases that occur from that in addition to the fact you d not get 

the planes as soon as you would like them? 

Mr. LYNN. There is a modest—I think it is in the 1 or 2 percent 

range—increase in the unit cost from that move, but we thought 

it was prudent. As you are well-aware, Senator, we have had challenges with this program and we thought it was prudent to slow 

that production line down until we were further along in the development; that we thought that that was, frankly, the best use of the 

taxpayer dollars. 

You are correct. There is some modest unit costs, but they are, 

as I say, relatively modest like 1 or 2 percent. 
1211 

Senator SESSIONS. But in general, when you take a procurement 

plan and you stretch it out, it tends to drive up costs as well as 

delaying you obtaining the system. 

Mr. LYNN. It does do that. However, if you buy the planes too 

early and then the development is not complete and then you have 

to go back and retrofit the planes with the fixes that you develop 

later in the development process, that is actually even more expensive. 

Senator SESSIONS. I got you. I think that may well be justified 

in this case. I am just raising the point that as you make tough 

choices about trying to save money, sometimes your savings can actually drive up costs, and we need to be careful we do not unnecessarily do that. 

With regard to the State Department, Mr. Nides, over the last 

10 years, the State Department has more than doubled. It has gone 

up about 7.7 percent annually. The rule of 7, your money doubles 

in 10 years. And the budget for the State Department from 1908 

to 1910, I guess that period of time, is a 33 percent increase. 

So what I want to say is, that is an unsustainable rate. That is 

over 10 percent, 11 percent rate, I guess it is on—well, actually, 

those 2 years. 1909 and 1910 is a 33 percent increase, so that is 

about a 16 percent increase each year. So I have to tell you, we do 

not have—we cannot sustain that. My time is up and I will let you 

comment on it and we will just say one more thing. 

I am very worried that the State Department, by its nature, is 

going to be in a situation where it is asking its State Department 

personnel to go in dangerous areas of Iraq and Afghanistan that 

the military goes every day. They salute and they go and they take 

the risk, as they have sworn to do. 

But our State Department people have not taken the same kind 

of oath and do not see themselves as combat personnel. I am really 

worried as to whether or not we will be able to handle this massive 

challenge you seem to be undertaking in Iraq. But basically, on 

your budget, I will give you a chance to respond to my comments. 

Mr. NIDES. Well, thank you, Senator, and I agree with Secretary 

Lynn. We all are quite concerned and certainly very much focused 

on making sure each dime we can justify, and certainly understand 

the focus that taxpayers have on how we are spending our money. 

I should say, in our 2012 request, as I think you noted, our base 

budget, which is base budget over 10, is basically flat from base to 

base. The growth in our 2012 budget is principally and solely in the 

OCO account, which is principally the transition, which I will get 

into in a minute—for military—— 

Senator SESSIONS. It is a 3.6 percent increase on the regular 

budget, which is above the inflation rate. 

Mr. NIDES. Yes, I—— 

Senator SESSIONS. It is not flat, to my way of thinking. 

Mr. NIDES. Well, our budget of—again, this is from where—the 

State Department/USAID’s perspective and the way we look at our 

budget, our budget is $47 billion for our base budget in the 2012 

request, versus basically that same number was in 2010. There is 

a $6.7 billion OCO request, which then adds to the total number 

of our request for the budget. 
1212 

So between our OCO request and our base budget, we felt that, 

at least from our base budget perspective, there was a substantial 

justification for the moneys that we were spending since, obviously, 

we were basically flat from the 2012 to 2010. Obviously, the OCO 

account, as I spoke about earlier, as you have seen the OCO account being reduced by DoD, ours has gone up $4 billion and theirs 

has come down $45 billion. 

But again, I think it is, from our perspective, we are trying to 

be, and I think Secretary Clinton has spoken not only to the appropriating committees, but to the public, a very clear understanding 

of how we are focused on every dollar that we are spending for this 

department. 

As it relates to Iraq, if you would like me to comment on that? 

Senator SESSIONS. According to the numbers I have, the regular 

budget is up 3.6. If you break it down to State operations, that is 

2.9; foreign operations, 4.0; war is about a double increase. Total 

budget authority goes up 10.5 percent. 

Mr. NIDES. Senator, I would be more than happy—— 

Senator SESSIONS. It is not flat. I do not believe it is flat. 

Mr. NIDES. The 150 account, which includes outside of the State 

and USAID, and that is the only account I am speaking to, the 150 

account is up 3 percent, the 150 account. But state operations are 

base budget, and I would be more than happy to come back to your 

Committee and walk through the numbers. Our base budget of $47 

billion for state and USAID, which we include a variety of items 

in that, the base of that is flat, but the increase—and you are 

right—the increase is our OCO account for 2012. 

Chairman CONRAD. Let me just thank the Senator for his questions and we will go now to Senator Wyden. 

Senator WYDEN. Thank you very much, Mr. Chairman. I want to 

thank two very dedicated and long-time public servants, Secretary 

Nides and Secretary Lynn, and we welcome you both. 

I want to start with Libya. And last week, Secretary Lynn, Secretary Gates said, and I am pretty much quoting directly here, ‘‘We 

have to think frankly about the military in another country in the 

Middle East.’’ That was Secretary Gates. Now, I am of the view 

that part of the frank thinking is considering the financial cost to 

American taxpayers, especially in light of the trillion dollars plus 

that has been spent in Iraq and Afghanistan. 

So my first question is, can you provide me with an estimate of 

the costs weekly, per day, to taxpayers of establishing a no-fly zone 

in Libya? 

Mr. LYNN. I cannot at this hearing. I could provide something for 

the record, but it would depend on what the dimensions of that nofly zone were. 

Senator WYDEN. Well, walk us through the various options that 

I know the Department would be looking at. For example, the Center for Strategic and Budget Assessments went through three scenarios that seemed to be getting a wide amount of debate. They 

called them the full and the limited and the standoff approach. So 

walk us through the analysis that you have done to date of the various options. 

Mr. LYNN. That, Senator, that analysis is still ongoing and I am 

not in a position to provide that yet to the Committee, but I would 
1213 

be happy to come back at an appropriate time and in an appropriate forum and do that. 

Senator WYDEN. You feel you need to do it in a classified manner? 

Mr. LYNN. Yes. Yes, I do. 

Senator WYDEN. Well, I am on the Intelligence Committee as 

well. When could you have that at the Committee to the Chair, 

Senator Feinstein, Ranking Minority Member, Senator Chambliss, 

and myself? When could I have that in the Intelligence Committee 

in a classified way? 

Mr. LYNN. I am going to have to come back to you because we 

are in the middle of the planning and I am not sure when the planning will be completed and when the President will want to share 

what—that planning with the Congress. But whenever that is 

ready, we would be prepared to do that. 

Senator WYDEN. Would it be possible? I mean, as you know, 

there is a statute that says Intelligence Committee members have 

to be kept informed. Would it be possible to have, within the next 

72 hours, what you have to date, at the Intelligence Committee? 

Mr. LYNN. Again, I have to defer and come back to you with a 

specific response on both timing and content. 

Senator WYDEN. I will ask Secretary Gates this same question. 

Part of what I am concerned about is that we are looking at a 

double standard with respect to inefficiency. As Chairman Conrad 

correctly pointed out, the Department cannot get its arms around 

the number of contractors it has; and yet, we are cracking down 

on contractors in other parts of government. 

What I want to do is look at a number of the issues that concern 

me the most, and I want to start with what seems to be the continuation of a number of cold war-era programs and facilities that 

no longer deal with the most important threats. 

I mean, it is puzzling, for example, that the Pentagon needs five 

nuclear aircraft carriers to fight the Soviet Union, but it needs 11 

to fight current threats, mostly insurgents and terrorists. And 

those 11 carriers cost more than $16 billion a year to operate. As 

the Chairman noted, there is also the question of bases. I am particularly concerned about bases in Europe that were built to deter 

an invasion by the Soviet Union. I think the Europeans ought to 

do more to defend themselves in the future. 

So my question here is, why has the Department rejected so 

many of the Commission’s recommendations for defense cuts? 

Mr. LYNN. Well, let me come back to the two specific ones you 

raised, Senator. With regard to aircraft carriers, the analysis that 

you are looking at for war-fighting with the Soviet Union is a surge 

capability and a discreet engagement with the Soviet Union; and 

indeed, that, as you know, has disappeared. 

The requirement for 11 carriers is not based on that same kind 

of analysis. What it is based on is what kind of engagement around 

the world for crises such as Libya, what kind of carriers do you 

want to have on station and available? That requires a multiplier. 

In other words, to keep two or three carriers forward, you need 

11 carriers. So the judgment there is that we do need those two or 

three carriers forward to deal with crises such as Libya, to deal 

with potential problems in the Gulf, in the Persian Gulf, in the 
1214 

Middle East, to deal with Asian challenges. So the analysis has to 

do with that rotational base as opposed to a war-fighting analysis, 

which I think you have correctly characterized, is not clearly part 

of today’s world. 

With regard to bases in Europe, that happens to be timely. It is 

not just bases, but forces in Europe. Secretary Gates is meeting, as 

we speak, with his colleagues at NATO talking about what kinds 

of reductions in U.S. forces we might be able to take as a consequence of the changing environment. 

And it is not just reductions. We think that in terms of large 

ground units, we can take reductions in terms of some naval units, 

in terms of missile defense, in terms of some other units. There 

may indeed be enhanced capabilities that might be needed to meet 

the new challenges that the alliance faces, and we should have, 

coming out of his ministerial that the Secretary is at, some new 

plans that we would be happy to share with you. 

Senator WYDEN. What is your response to my concern that there 

is going to be a double standard with respect to measuring inefficiency? I mean, to taxpayers, waste is waste wherever it takes 

place across the Government. 

The Chairman issued a very powerful statement in his opening 

statement, who has consistently supported defense, that when the 

Department cannot get its arms around the number of contractors, 

and we are trying to crack down on contractors elsewhere. I am 

trying to crack down on contractors in the intelligence sector. Why 

shouldn’t we ask the Department of Defense to make a crackdown 

on contractors within its own agency? 

Mr. LYNN. You should. The—two things there. 

Senator WYDEN. Well, wait. Well, you prepare—because my time 

is out. Will you prepare a specific response to what the Chairman 

has said with respect to why we shouldn’t, in this Committee, cut 

the number of contractors? We are going to have a budget resolution pretty quickly, and I am going to propose that we make reductions in those kinds of areas, and I would much prefer to do it in 

concert working with you than trying to go forward myself. So can 

you get a plan to us with respect to cutting the number of contractors so we do not have this double standard? 

Mr. LYNN. We have indeed proposed such a plan, particularly for 

the contractors that I think you may be focused on, which are basically augmentees to headquarters’ functions. We have a 10 percent 

per year plan over the next 3 years that we will share with you. 

I know we are over time, but the underlying premise to your question is correct. Our data on contractors is inadequate and we need 

to remedy that and we are taking steps to do that. 

Senator WYDEN. I would like to work with you on it. If I cannot 

work with you so we can come up with an agreed upon plan to cut 

the number of contractors, I am going to work with colleagues here 

on both sides of the aisle to do it. I would much prefer to do it with 

you. Thank you, Mr. Chairman. 

Chairman CONRAD. I just want to followup and rivet this point. 

You know, everybody has to be in on the solution to this debt matter. Everybody has to be in. And if we do not do this, it is going 

to be imposed upon us. 
1215 

I was just sharing with Senator Sessions some of the reaction to 

PIMCO Total Return dumping all U.S. Government debt. And one 

of the reactions was in an interview with Mr. Gross, who says, ‘‘We 

have not lost faith in the U.S. Government. America is still strong 

and the economy is growing, and we have, you know, perhaps $30 

to $40 billion worth of U.S. Treasury bills, but those are shorter 

maturity obligations.’’ The Treasuries from the Total Return Fund, 

they dumped them all as of the end of February. 

And in an interview, he was asked, ‘‘Well, where should you invest?’’ Here is what he said: ‘‘You should probably go outside the 

United States. I mean, the emerging markets, the developing countries are improving credit. They have better balance sheets than 

the United States. You have Brazil, for instance, has half the debt 

relative to GDP that the United States does—as does Mexico.’’ 

You know, you think about this, I think Senator Thune, who 

grew up in South Dakota, I grew up in North Dakota. Had anybody 

said that Mexico when I was growing up was a safer place to invest 

because they have half the debt relative to GDP the United States 

has, it would have been such a stunning concept, nobody could 

haveten their head around it. Now here we are. It is the reality. 

Brazil and Mexico have half the debt to GDP that we do, and I will 

bet you we are giving them money. I will bet you if I asked my 

staff to go find for me what we are doing with Brazil and Mexico, 

I bet we are giving them money. 

Senator Thune. 

Senator THUNE. Thank you, Mr. Chairman. 

Secretary Lynn, Secretary Nides, thanks for appearing before us 

today. As a follow-on to the Chairman’s observations, you know, 

the Chairman of the Joint Chiefs, Admiral Mike Mullen, said a few 

months back that the greatest threat to America’s national security 

is our national debt. And Secretary of State Hillary Clinton called 

the expected $1.3 trillion U.S. deficit, I quote, ‘‘a message of weakness internationally,’’ and went on to say that ‘‘...it poses a national 

security threat in two ways: it undermines our capacity to act in 

our own interests, and it does constrain us where constraint may 

be undesirable.’’ 

I am just curious about your response to those observations and 

whether or not you share the view that—you know, when you talk 

about the threats that we face around the world today—and they 

are many: potentially nuclear Iran, instability in the Middle East, 

nuclear North Korea, China, lots of potential threats out there to 

pinpoint the national debt as being the biggest among those, if that 

is a view that you share and just sort of your general observations 

in response to what both the Chairman of the Joint Chiefs has said 

as well as what Secretary Clinton said. 

Mr. LYNN. Senator Thune, I certainly agree with both Admiral 

Mullen and Secretary Clinton that the national debt, the fiscal crisis we face is a true national security problem. And as we discussed a bit earlier with the Chairman, I think that DOD does 

need to be part of the solution to that fiscal crisis. And Secretary 

Gates has tried to take a strong step in that direction by developing $178 billion worth of savings: $100 billion of that was reinvested in capabilities; $78 billion was removed from the defense top 

line and put toward that deficit reduction. 
1216 

We have tried, though, to do this in a responsible way. We need 

to take reductions in a balanced way, and that ultimately means 

if you are going to reduce the top line, you really need to reduce 

the underlying force structure. If you reduce the top line without 

reducing the force structure, what you will do is hollow out the 

forces by not giving them adequate training, adequate equipment. 

And we have seen that movie. We do not want to repeat that, so 

we want a balanced reduction. 

Our feeling was that given the fights that were in—Iraq as we 

are phasing down, Afghanistan we hope to phase down but not 

yet—we think it would be prudent to have those reductions starting in 2015 but not earlier. And so that is what we have laid in 

to the budget proposal that we have presented to the Committee 

and the Congress, so that the budget does go down. The reductions 

get us to a flat budget by 2015. They do that, though, with those 

force reductions in that timing, and that reflects the conditions we 

see internationally. 

Senator THUNE. Anything to add to that, Secretary Nides. 

Mr. NIDES. As someone who has spent a great deal of his career 

in the finance world, I certainly share both your and Senator 

Conrad’s concern about this debt, and I certainly am very concerned about the issues as it relates to the bond market and the 

reaction to the debt, which is certainly an enormous problem for all 

of us. 

As we sit at the State Department—and I know you would be 

surprised for me to say this—we actually look at our budget as an 

ability to avoid conflict, to avoid the cost of my colleague on the left 

putting boots on the ground. There is a misperception that the 

State Department and foreign assistance is 10, 15, 25 percent of 

our national budget, our Federal budget. It is 1 percent of the Federal budget—1 percent of the Federal budget—and I think even 

within that 1 percent, Secretary Clinton has been very clear that 

every dollar that we are spending on conflict resolution and what 

we are spending in Afghanistan and Pakistan and Iraq or food security or health has to be justified. And that is why, as I spoke 

with Senator Sessions, we have attempted to be very conservative 

in our base budget, and the only increase that you are seeing in 

2012 is those costs in what we refer to as ‘‘the war costs’’ or ‘‘extraordinary/temporary costs.’’ But I, too, agree very much about the 

issues around the debt and the importance of resolving it, obviously 

at least reducing it as soon as humanly possible. 

Senator THUNE. Let me touch on a current issue, and it bears on 

this discussion because, Secretary Lynn, as you know, many of our 

key European allies are seeking to substantially cut their military 

budgets. For example, the U.K. has de-commissioned its aircraft 

carrier, retired its fixed-wing air component because, according to 

the U.K.’s Strategic Defense and Security Review, ‘‘There are few 

circumstances we can envisage where the ability to deploy air 

power from the sea will be essential.’’ 

Now, ironically, the U.K. is telling the world that a no-fly zone 

must be established above Libya and is working to draft a U.N. 

resolution to do so. Obviously, establishing a no-fly zone for Libya 

will at least partly require the ability to deploy fixed-wing air 

power from the sea. 
1217 

It seems that our European friends are seeking to cut their military budgets while at the same time pushing us to intervene in 

world hot spots where only the United States has the ability to 

project power. And so my question is: What effect do these military 

cuts by our European allies have in placing even more of a burden 

on our defense budget? 

Mr. LYNN. We have been watching very closely what our allies, 

particularly NATO, have been doing with their defense budgets. 

Some of the reductions do concern us. We have worked particularly 

closely, though, with the British, and we have tried to work with 

them to ensure that as they adjust their budgets, it is done in the 

way that best protects our collective security. 

They are facing in many ways the same fiscal challenges that we 

are, and so we recognize what is driving this. It is driving us as 

well. But as I indicated to you earlier, I think we need to take reductions that are prudent and wise, although we do need to address the debt problems, as they do they. 

Senator THUNE. Can I just followup on that? From what I have 

seen, the cost of establishing a no-fly zone over northern and southern Iraq during the 1990s was over $1 billion a year, and we flew 

about 34,000 sorties a year. Do you have any notion of how much 

it would cost to establish a no-fly zone over Libya on an annual 

basis? 

Mr. LYNN. I do not because we do not yet know what the dimensions of that no-fly zone would be and how it would compare to the 

Iraqi operations. It would be really premature for me to try and estimate the cost. 

Senator THUNE. My time has expired, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Thune. I thank you for 

really excellent questions. 

Mr. Secretary, both the Ranking Member and I have talked 

about the use of language here. And in your response to Senator 

Thune, you used language, again, that somebody listening that 

does not know how baselines work around here, how budgets are 

inflated over time, might conclude that somehow the spending is 

going down. And I would just like to ask you for the record, the 

base budget for 2011 for defense is $526 billion under the CR. Is 

that correct? 

Mr. LYNN. The fiscal year 2010 budget would be $526 billion if 

you do a nominal extension. That is correct. 

Chairman CONRAD. OK. So for 2012, what is the request without 

war costs? 

Mr. LYNN. The request without war costs is $553 billion. 

Chairman CONRAD. And for the next year? 

Mr. LYNN. I would have to look that up, but—$571 billion. 

Chairman CONRAD. OK. And for the next year? 586 is the number I have, for the next year 598. And the 553—so the point I am 

making every year, people need to understand the spending is 

going up, and we are talking about somehow it is going down. And 

for fiscal year 2012, the $553 billion does not include the war costs. 

With the war costs what would the budget be? 

Mr. LYNN. About $671 billion, which I think is actually, just to 

continue your line, I think that is down about 3 percent from fiscal 

year 2011. So when you do the net with the war costs coming down 
1218 

over $40 billion, the next of the base budget plus the war costs will 

come down from fiscal year 2011 to fiscal year 2012. 

Chairman CONRAD. Can you assure this Committee that there 

will not be an additional request for funds in 2012 for war costs? 

Mr. LYNN. I cannot do that. It is possible, but as you noted at 

the beginning, we have tried to be conservative with our estimates 

of what those war costs would be to prevent exactly that. 

Chairman CONRAD. Well, I would just say the history that we 

have, not in this administration but previous administrations, is 

they were nowhere close in estimating. They would come to this 

Committee and tell us that they were going to be $50 billion, and 

then it would be $120 billion. I understand that you have changed 

course here. You are trying to give us a more accurate reflection, 

which we appreciate. But the point I am making here is the language we use I think kind of misleads us. I am not accusing you 

of intentionally misleading anyone. You are using the language 

that is used with respect to a baseline. The actual dollars are going 

up every year. 

Senator CARDIN. 

Senator CARDIN. Thank you, Mr. Chairman. Let me thank both 

Secretary Nides and Secretary Lynn for your service to our country 

and for you being here. 

I agree with the Chairman that our current deficits are not sustainable, and they are huge national security issue that needs to 

be dealt with on a bipartisan basis by having a credible plan to 

deal with the deficit. We are not going to be able to do it on the 

discretionary budget side. 

We have already agreed that we are going to have at least a 

freeze on discretionary domestic spending, and we have also agreed 

that we are going to be reducing our defense spending. 

I might say on defense spending—and I am sorry, Chairman, we 

do not have charts, but if you look at America versus the rest of 

the industrial developed nations of the world and how much we devote toward national defense issues, we are shouldering a larger 

burden than our allies. And at one point we have to recognize that 

and do something about it because it is not fair to the American 

economy. And I am one who will always support the necessary 

budgets for the defense of the people of this Nation. But we are 

shouldering an unusual burden, and it is part of the problem that 

we have today trying to figure out a sustainable budget for our 

growth and for dealing with the deficit. 

Entitlement spending needs to be contained. I think we took a 

major step in that direction last year by the Affordable Care Act, 

by investing in technology and prevention and managing people’s 

diseases and setting up clinics rather than the use of emergency 

rooms. I think we are going to bring down Medicare and Medicaid 

spending and health care spending in this country. We need to do 

more. There are more entitlement programs. And we have talked 

about revenues. We just had several hearings in the Finance Committee dealing with looking at tax reform so that we can equate 

our revenues with our necessary spending. 

Which brings me back to the issue at hand. We are not going to 

balance the budget on 12 percent of the budget, on 12 cents out of 

every dollar, and that is the discretionary domestic spending, 
1219 

which our international development assistance happens to fall 

under. I happen to think that less than 1 percent of our budget 

being spent on international development assistance is a very modest amount of money. As you point out, both of you point out, these 

types of expenditures are critically important for U.S. objectives 

internationally and developing capacities in other countries to provide more stable regimes, putting less stress on the future needs 

of our military and developing the type of stability that is important to the United States, including markets that will buy U.S. 

products. All that I think is very true. 

And I must tell you, I find the share of the pie that is devoted 

toward international development assistance to be a little bit too 

modest, and I think we should be making greater strides. Having 

said that, we need to have accountability in every dollar that is 

spent. 

So I want to know what you are doing to make sure that the dollars that are being appropriated by Congress are spent for their intended purpose. And what are you doing to make sure that we are 

not financing corruption among different regimes? We are very concerned that dollars that we appropriate may very well be ending 

up in foreign bank accounts of deposed leaders. So what assurances 

can you give us that you are monitoring the moneys that are being 

spent so that we get value for the dollars that we are appropriating? 

Mr. NIDES. Would you like me to take the question first? Thank 

you very much, Senator. I want to emphasize—and you pointed out 

the 1 percent of the Federal budget again. I want to emphasize 

that 1 percent is all of the costs for the State Department and 

USAID. That includes all of our embassies across the world, all of 

our foreign service officers, civil service officers, our locally engaged, all of our foreign aid, all of what we do to fight hunger, all 

we do to fight AIDS and HIV, and all the things that we are doing 

to help us in those individual crisis countries. So as the American 

people—and you and I have spoken about this. The American people hear about how much money is spent on foreign aid, and obviously the views of it is 15 or 20 percent. It is 1 percent, and it includes all of what we are doing around the world. 

No. 2, to answer your question specifically, the Secretary announced for the first time the QDDR. Actually we borrowed the 

idea from DOD. The QDDR was our attempt to do exactly what you 

are looking at. How do we look at ourselves faster, better, smarter? 

How do we find the efficiencies? How do we look at every dollar 

that we are spending, be it on global health, be it on how we organize, how our staff is paid, how we as an organization operate? And 

in our attempt to try to very much focus on what you are getting 

at, as it relates to our issues around how dollars are sent, we have 

a very strong IG within the State Department. We work very closely with them all over the world, particularly in areas we are spending a lot of development dollars. So we are as an organization inherently committed because we know the focus that you have on 

the money spent and we know how rare those dollars are. 

Senator CARDIN. In order to have successful efforts for increasing 

capacity of other countries, there needs to be a priority on gender 

equality. There is a direct relationship between how women are 
1220 

treated in countries as to their economic growth and potential. The 

Millennium Challenge Corporation has integrated gender equality 

into their basic core missions. 

What are you doing in the State Department or Defense to make 

sure that in our efforts to help other countries on their development assistance, priority is placed on gender equity, equality? 

Mr. NIDES. I will quickly answer the question, and then I will 

turn to my colleague. As you probably know, there is probably not 

much more that the Secretary cares more about than this issue. 

You may have seen her on the cover of the recent news magazine 

talking specifically on this topic. It is inherent in everything we do, 

with the way we organize and how we focus, how we put programs 

together, beyond global health, what we are doing for women and 

girls and what we do across the world. But this is something that 

certainly is part of our core, and I assure you that Secretary Gates 

feels the same way, but it is a part of our foundation because we 

believe that conflicts end at the beginning of what we do on gender 

and what we do specifically about women and girls. 

Senator CARDIN. Secretary Lynn? 

Mr. LYNN. Secretary Nides is correct. Secretary Gates shares the 

importance and the attention that is needed for gender equality. It 

goes to the more general question that we started the hearing with, 

that we are trying to create a much strong partnership between 

State and Defense so that we are working together with State and 

Defense on common goals like gender equality and that the overall 

impact for our national security is that we should be able to anticipate and respond to brewing crises, with development and security 

and diplomatic assistance, before we have any need for any kind 

of armed intervention. And we are trying to work a strong partnership toward those ends. 

Senator CARDIN. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

Senator Begich. 

Senator BEGICH. Thank you very much, Mr. Chairman. 

Secretary Lynn, let me followup on what Senator Cardin just 

started with this conversation in regards to where we have to balance the budget and deal with the costs of the Federal Government. 

Do you agree with his statement that it has to be spread among 

all agencies and discretionary cannot take the load that it is taking? Do you agree with that statement? 

Mr. LYNN. Absolutely. 

Senator BEGICH. OK. I know Senator Wyden asked this question, 

and I want to expand on it—he was here earlier—in regards to the 

overseas stationing and the bases and the construction budgets. I 

have only been here 2 years, but one of the things we put in the 

defense authorization bill—and I know it is in process. You have 

indicated, I think, that it is Secretary Gates’ hands or a start process of reviewing our stations overseas, and there will be a report 

coming soon. Can you define—and this is what I have learned in 

my hearings. What does ‘‘soon’’ mean? Define ‘‘soon’’ when that report will come, that we will see some report that tells us our over-
1221 

seas base operations, what we need to do to create more efficiency, 

scale back, or reassign. 

Mr. LYNN. I am not sure which report you are referring to, Senator, but in the earlier discussion what I was referring to is that 

there are ongoing consultations with our NATO allies about what 

the future force structure in Europe ought to look like, and we will 

have the results of that later this spring. 

Senator BEGICH. OK. In expansion of that, I am pretty sure—and 

I will confirm this with my staff and maybe your staff—that is, I 

think an authorization bill, we also wanted the Defense Department to look at the overall overseas operations; in other words, not 

just Europe but where we have bases. And, you know, is it the 

right model for the wars that we are engaged in today and the security that we are engaged in today? And how can we examine that 

and see if there are opportunities for savings there? We will pull 

that language. We will share it with you. It makes me nervous because it is 2-year-old language, but I will work with your office, because we have to look at the whole picture. As you are looking at 

NATO allies, we have operations worldwide, and we have to re-examine what is the right approach. And, honestly, we cannot afford 

what we are doing. It does not matter if it is in education or defense, or you pick the subject matter. Based the President’s own 

conversations, we cannot afford to be on the track we are on financially for this country because at the end of the day we will hit a 

brick wall, and there will be nothing available for us to operate. So 

I will get your staff that language. 

Mr. LYNN. Terrific. 

Senator BEGICH. Let me ask you also, I know GAO has done a 

report that identified issues that are overlap or duplication. There 

are about 30-some of these issues. About 10 relate directly to DOD. 

One, have you started to review that report, those responses of 

that GAO report? 

Two, do you anticipate giving a response to this Committee and/ 

or to Armed Services or what your actions will be? And I only say 

this based on history that I read in 2005 when this effort was approached in a more narrow focus. The military started, then they 

stopped. They did not do anything. 

Mr. LYNN. Started what? I am sorry. 

Senator BEGICH. It was a review of efficiencies. I think it was the 

medical command, if I remember right, unification of the medical 

command, and it just kind of—they started but they never went 

any further even though GAO had reported in 2005, I think it was, 

that there were some inefficiencies, opportunities. So what I am 

worried about—because now we have another report that talks 

about ten other areas that are potential. What is going to be—I 

should preface this with saying I think one of the things I have 

learned here after 2 years, we do not do a good enough job in oversight, to be very frank with you. And so having this meeting, my 

intention would be your response to continue to badger you in this 

Committee and the Armed Services Committee to know what we 

are doing, because what I find is I keep reading report after report 

of stuff that has been done by GAO, and then kind of just brushed 

aside, and new administration, new Congress, new people, out of 
1222 

sight, out of mind. So my objective is to kind of keep my shopping 

list and keep pounding. 

So have you see that report, the latest one? And what are your 

intentions with it? 

Mr. LYNN. I have seen the report. Let me say two things, one 

broad, one a little narrower. 

First, the Secretary developed even before this GAO report his 

Efficiencies Initiative and developed, as we have discussed in the 

rating agencies, $178 billion worth of savings. These are business 

efficiencies, consolidation of headquarters, elimination of lower-priority programs, reduced use of contractors, reduced civilian hiring, 

a whole variety of measures. 

We plan to continue that effort. That was not a one-time deal to 

your point. We are looking for all inputs to the next phase of that 

effort. We are certainly going to look at that GAO report you mentioned, and in response to the specific question on the issue of how 

should we organize our medical operations, we are going to look at 

the issue of should we have a defense health agency, should we 

have a unified military command, should we continue and try and 

improve the process that we have now. We will look at all of those 

options. 

Senator BEGICH. What is your timetable for doing that? 

Mr. LYNN. We are looking at—we just started that review, so I 

do not have a precise timetable, but I think the next iteration of 

this broader efficiencies effort would be we would have something 

to submit with the fiscal year 2013 budget. 

Senator BEGICH. Which I appreciate because I know the GAO re- port had between $280 and $400 million, give or take. You know, 

in this world we live in, a few million here and a few million there. 

But it is significant. And so I appreciate your willingness to take 

a look at that. 

My time is almost up, but I want to followup on one that is— 

actually the conversation started in the Armed Services Committee 

when I was over there. I think it was earlier this week or last 

week. I have kind of lost track of time here a little bit. But it is 

on the MEADS air and missile defense system, and I just want you 

to help me understand the proof of concept and how this works, because for a guy who does not deal with those terms, I see we spend 

almost $1 billion, but then wisely the military says, you know, this 

is not working out, this program is running—you know, it is delayed. It is not cost-effective. The list goes on and on. You made 

a good decision to cancel it. 

The problem is we are going to have to pay $800 million, give 

or take a few there, in regards to the proof-of-concept requirement. 

How does that—I guess, you know, as a former mayor, when I had 

people doing software development for me, for our technology and 

so forth, the risk was on them. We gave them the idea. Their job 

was to give us a bid with cost ranges, and then if they could not 

fulfill that and I canceled the contract, I did not pay one dime. 

That was their risk. 

One, how do we do this? And do we do this in every contract? 

Or I should not say ‘‘every.’’ In other contracts? 

Mr. LYNN. Well, it depends on the program. We have a variety 

of different contracting mechanisms. With this program, the 
1223 

MEADS program, this is complicated not only by contracting mechanisms, but it is an international program. We have two major 

international partners, the Germans and the Italians. So we cannot 

take unilateral decisions. This has to be a joint decision. 

We have, as you correctly cited, decided that we are not going to 

pursue production of this program. Partly it is a narrow need. It 

can be met by other programs. Partly, as you said, the costs have 

grown and the schedule has slipped. 

We have to make that decision, though, in consultation and collaboration with our allies, and what we have decided to do is to finish the development phase, which takes over the next 2 years, and 

then if they choose—they may choose to go forward with production. That is their decision. We will be pulling out at that point. 

You might say, Why not pull out now? 

Senator BEGICH. Right. 

Mr. LYNN. Which I think was the thrust of your question. The 

nature of the way the contract was signed many, many years ago 

is that if one of the three nations pulls out, they pay all of the termination costs. If we pay all of the termination—you can question 

that, but that is the way it is. 

Senator BEGICH. Right. 

Mr. LYNN. Decided long ago. If we pay all of the termination 

costs, we will pay essentially the same amount and get nothing. 

That did not seem to be the wise choice. We decided we will pay 

that amount and get the technology that is developed, which can 

be used in other systems. But that is the central reason for that. 

Senator BEGICH. Thank you very much. 

Mr. Chairman, I know my time is out. I just have one question 

for the record, if I could, and that is, in general—— 

Chairman CONRAD. Senator, we are doing well, so if you want to 

take a little additional time, you can do it. 

Senator BEGICH. OK. Thank you very much, Mr. Chairman. 

I guess on this one, can you prepare—and I know you probably 

cannot do it right now, obviously, but what other—because I would 

consider that a financial risk to the Federal Treasury when we 

have contracts that have these out clauses that cost us money to 

get out of a development. Are there other contracts like this that 

if that can be estimated, what kind of these risk costs could be for 

us if we get out of contracts? I mean, at this point I know the Defense Department operates uniquely in their own way, but, honestly, I got to tell you, I am always surprised—you know, the F– 

35 was another example. I think when I first came here 2 years 

ago, it was, I do not know, $60 million a copy or whatever it was. 

I forget what it is now, 120, 130, whatever. But it almost seems 

like when we work with these defense contractors—who actually, 

we were shown yesterday, paid 1.6 percent taxes, the lowest of all 

corporate entities in this country, but put that aside for a second. 

We are their biggest customer. How is it that, you know, we lay 

out the parameters, but I see on and on again we always have 

these costs that we have to pay the contractor to get out of the contracts that we have, and the reality is, without our contracts, they 

would not be in business? I mean, we are their platinum customers. When they take this technology and we allow them to sell 

it to other countries, our allies—I mean, I am struggling with this. 
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I know there is some long explanation for the military infrastructure, but I just do not get it because—you know, I can talk about 

the personnel system when you are trying to change the system on 

payroll, you spend half a billion dollars. Cancel the contract because it did not work like you had anticipated? I mean, if I was 

in the city as a mayor, we would sue the contractor and get our 

money back because they had sold us a bill of goods, because they 

came in and gave us a razzmatazz in the RFP process and it did 

not really work. I mean, I do not—I do not understand. Or the satellite system where we spent, I do not know, $4 or $5 billion and 

it really did not work out as well as we expected. 

How do we get a handle on these contractors that know they win 

either way? Because they do come back and contract with us later, 

because there is such a limited group. So they know they have us 

because there are only so many we do business with. If they fail 

to perform, we pay them anyway—not all of it, obviously, but they 

build it into the margins. They are smart business people. That is 

why they are very profitable and they pay very little in taxes to 

the United States. How do we get at that? I mean, it is billions. 

I am shocked, just in the 2 years that I am here, how many contracts we have canceled and we are just, like, what is half a billion 

here, what is 5 billion here, and now today it is another $800 million. 

Mr. LYNN. Well, there are a couple of things there, Senator. One 

is whenever you take the tough decisions to eliminate a system— 

and I think we have taken quite a number—you are losing your 

sunk costs. And the judgment there is that even though you are 

losing that sunk cost, the marginal cost going forward is not worth 

the value or benefit to the Government of paying even the additional marginal costs. And we have made that—but you have to acknowledge there is going to be some cost to that prior decision 

probably not recapturable. 

To your broader question of can we do something about how we 

contract, we are trying. In particular, we have focused on using 

fixed-price contracts, which I think is more what you are expecting 

as mayor and whatever. But we have tried that in the past, and 

it has been worked poorly at times, and you have to be careful 

about where you used fixed price. 

Senator BEGICH. Sure, I agree. 

Mr. LYNN. If you are using fixed-price contracts where you a developing cutting-edge technology, that is probably not going to 

work. 

Senator BEGICH. I agree. 

Mr. LYNN. Where you have mature technology, where you have 

an established contract, where you have an established production 

base, we think you can pursue a fixed-price development contract. 

Now, frankly, the Government is probably going to pay a little bit 

additional on that contract up front because you are asking the 

contractor now to take more risk. The benefit to the Government 

is that is the limit of the Government’s risk. At this point now the 

risk migrates to the contractor, and they have every incentive to 

deliver the contract on that amount of money. 

So we have tried—the large example that has been in the papers 

recently that you will know about this is the tanker contract. 
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Senator BEGICH. Right. 

Mr. LYNN. In the prior iterations, the development contract was 

cost-plus. We felt that that met exactly the criteria I just laid out. 

It is well-understood technology. Our requirements are stable, and 

we had two companies that, frankly, had very mature production 

bases. We were able in that case, therefore, to go to a fixed-price 

contract as well as not to exceed contracts for the production. We 

ended up with a very, very strong competition, and the result of 

that is, frankly, versus the 2008 competition, the American taxpayers saved billions. 

Senator BEGICH. Thank you, Mr. Chairman, for allowing me. Can 

I get for the record—because I know I used a number, but I do not 

know if it—you know, it is what I keep hearing is the amount that 

our buyout is or our termination costs in the MEADS contract. Can 

you put that—— 

Mr. LYNN. We will get that to you for the record. 

Senator BEGICH. And do all contracts that we negotiate have subject to appropriation? 

Mr. LYNN. Yes, I believe so. 

Senator BEGICH. OK. Honestly, I would just say we are not going 

to appropriate to MEADS, so what happens? 

Mr. LYNN. Well, there is already—I will get it for the record. I 

believe we have already had enough appropriations. The way we 

would work is there has already been enough money appropriated 

to cover the termination liability. Otherwise—— 

Senator BEGICH. Right, but I guess for the legal department here 

is the question: If we clawed back and said you do not get that 

money, we are not appropriating that money for the purpose that 

you have described, the contract then terminates. I am not a lawyer, but I would be curious what the law department thinks within 

your ag. 

Mr. LYNN. We will get that. 

Senator BEGICH. It is just a different way to skin the cat. 

Senator BEGICH. I will leave it at that. Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Senator. 

I thank both the witnesses. I appreciate very much your appearance here today, Secretary Nides, Secretary Lynn. I would ask you 

to take the message back—and I think you have probably heard it 

loud and clear here. There are more cuts coming. I mean, you can 

write it down. It is going to happen. 

No. 2, those cuts will be more draconian if there is not a comprehensive long-term deal that involves tax reform and the entitlement programs. That is as clear to me as it can be. And I visit with 

colleagues on these issues every day. The votes are not there to 

sustain spending at these levels. There are more cuts coming—the 

cuts will be much more draconian—to all of discretionary spending 

if there is not a comprehensive long-term deal that involves tax reform and the entitlements. And it does not matter whether I am 

here as Chairman or not. As you know, I have announced I am not 

running again. But it is going to happen. It is just as sure as we 

all sit here. And it may happen much sooner than anyone anticipates if we get more news like the news today that PIMCO dumps 

all their U.S. Government debt. 
1226 

I have been here 24 years. I do not know of anything that is 

more clear to me than the cuts that will be imposed on your agencies could be draconian and could come much quicker than anybody 

anticipates if there is not a more comprehensive long-term deal 

that involves tax reform and the entitlements. I know that with 

certainty, so I would ask you to share it. 

Thank you very much, and we stand adjourned. 

Mr. LYNN. Thank you very much, Mr. Chairman. 

Mr. NIDES. Thank you. 

[Whereupon, at 11:47 a.m., the Committee was adjourned.] 
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Questions for the Record from Senator Bill Nelson for Dr. 

Till von Wachter 

‘‘Challenges for the U.S. Economic Recovery,’’ Senate 

Budget Committee 

Thursday, February 3, 2011 

Questions: 

Florida’s economy largely relies on stability in the housing market. The Treasury 

Department and the Department of Housing and Urban Development are expected 

to release a plan for reforming Fanne Mae and Freddie Mac sometime this month. 

Do you believe the housing sector would be significantly encumbered by a quick 

withdrawl of Gannie and Freddie from the secondary mortgage market? How would 

structure Fannie Mae and Freddie Mac given the past distortion of risk within the 

mortgage industry? 

Response: 

Senator, I do not have specific recommendations in response to your question, as 

they fall outside my area of expertise. 

Æ