U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

80–368 2013

S. HRG. 113–11 

FLIRTING WITH DISASTER: SOLVING THE FEDERAL 

DEBT CRISIS 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MARCH 14, 2013 

Printed for the use of the Joint Economic Committee 

( 
(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

KEVIN BRADY, Texas, Chairman 

JOHN CAMPBELL, California 

SEAN P. DUFFY, Wisconsin 

JUSTIN AMASH, Michigan 

ERIK PAULSEN, Minnesota 

RICHARD L. HANNA, New York 

CAROLYN B. MALONEY, New York 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

JOHN DELANEY, Maryland 

SENATE 

AMY KLOBUCHAR, Minnesota, Vice Chair 

ROBERT P. CASEY, JR., Pennsylvania 

MARK R. WARNER, Virginia 

BERNARD SANDERS, Vermont 

CHRISTOPHER MURPHY, Connecticut 

MARTIN HEINRICH, New Mexico 

DAN COATS, Indiana 

MIKE LEE, Utah 

ROGER F. WICKER, Mississippi 

PAT TOOMEY, Pennsylvania 

ROBERT P. O’QUINN, Executive Director 

GAIL COHEN, Acting Democratic Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Kevin Brady, Chairman, a U.S. Representative from Texas ...................... 1 

Hon. Dan Coats, a U.S. Senator from Indiana ...................................................... 1 

Hon. Amy Klobuchar, Vice Chair, a U.S. Senator from Minnesota ..................... 2 

WITNESSES

Hon. Judd Gregg, former Chairman of the U.S. Senate Budget Committee, 

Rye Beach, NH ..................................................................................................... 5 

Hon. Alice Rivlin, Senior Fellow, Brookings Institution, Washington, DC ......... 8 

Hon. Doug Holtz-Eakin, President, Action Forum, Washington, DC .................. 9 

Dr. Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Sloan 

School of Management, Massachusetts Institute of Technology, Senior Fellow, Peterson Institute for International Economics, Cambridge, MA and 

Washington, DC ................................................................................................... 11 

SUBMISSIONS FOR THE RECORD

Prepared statement of Senator Coats .................................................................... 36 

Chart titled ‘‘Total Federal Revenues and Outlays’’ ............................................. 38 

Chart titled ‘‘Long-Term Spending vs. Revenue Outlook’’ ................................... 39 

Chart titled ‘‘Fiscal Consolidations’’ ....................................................................... 40 

Prepared statement of Hon. Judd Gregg ............................................................... 41 

Prepared statement of Hon. Alice Rivlin ............................................................... 47 

Prepared statement of Hon. Doug Holtz-Eakin .................................................... 65 

Prepared statement of Dr. Simon Johnson ............................................................ 76 

Article titled ‘‘Windows of Opportunity Closing’’ by Judd Gregg submitted 

by Representative Erik Paulsen ......................................................................... 83 

(1) 

FLIRTING WITH DISASTER: SOLVING THE 

FEDERAL DEBT CRISIS 

THURSDAY, MARCH 14, 2013 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met, pursuant to call, at 9:59 a.m. in Room G– 

50 of the Dirksen Senate Office Building, the Honorable Kevin 

Brady, Chairman, presiding. 

Representatives present: Brady, Campbell, Amash, Paulsen, 

Cummings, and Delaney. 

Senators present: Klobuchar, Murphy, and Coats. 

Staff present: Corey Astill, Gail Cohen, Connie Foster, Colleen 

Healy, Mike Lee, Patrick Miller, and Robert O’Quinn. 

OPENING STATEMENT OF HON. KEVIN BRADY, CHAIRMAN, A 

U.S. REPRESENTATIVE FROM TEXAS 

Chairman Brady. Well, good morning everyone. Welcome to the 

Joint Economic Committee’s second hearing of the 113th Session of 

Congress. We have a great panel of witnesses today. 

I would like to yield for the opening statement to the Senior Senator, Republican Senator, Senator Dan Coats. Thank you. 

OPENING STATEMENT OF HON. DAN COATS, A U.S. SENATOR 

FROM INDIANA 

Senator Coats. Mr. Chairman, thank you. I want to thank you 

and Vice Chair Klobuchar for holding this hearing on a subject I 

think of vital importance to the future of our Nation’s economy, 

and in fact our national security: the ever-growing debt deficit. 

Our spending addiction in Washington has led to the point where 

we now face the prospect of record deficits as far as the eye can 

see. The fact is that Congress and the Executive Branch have 

failed to address the debt crisis effectively. Temporary stopgap 

measures solve little, if anything; they simply put off the inevitable 

day of reckoning. 

Eventually we will reach a point where investors either stop buying our debt or insist on higher interest rates to account for the 

greater risk, potentially triggering a crisis of confidence. 

Many experts also believe that our failure to seriously grapple 

with our ballooning national debt is already having a significant 

detrimental impact on economic growth. 

We all know, or at least we ought to know, that our current path 

is unsustainable. Academics, economists, business leaders, the various bipartisan committees that have been formed, Republicans 
2 

and Democrats, all basically repeat the same thing: Unless we 

make the tough spending choices that we have been avoiding for 

years, we are going to face a debt-induced meltdown. It is only a 

matter of time, and the clock is ticking. 

The plain fact is, in order to make a real impact on the deficit 

and the federal debt, we need to go big and we need to go bold. 

And the time to do that is now. We need to incorporate a combination of spending discipline with mandatory structural reform of our 

mandatory programs, and growth-oriented comprehensive tax reform. 

Those three elements, in my opinion, are absolutely necessary for 

us to achieve what we need to achieve. 

Today’s hearing presents us with an opportunity to find common 

ground in tackling these difficult issues. I look forward to the testimony of our witnesses. I want to welcome my former colleague and 

friend, Senator Judd Gregg, who has had a distinguished career as 

Chairman of the Budget Committee, as someone looked to in the 

Congress as an expert on these issues. We are pleased to have him 

with us. 

Dr. Rivlin, I have learned about your Hoosier roots this morning 

to go with your many other great credentials in terms of service to 

this country and being such an outstanding voice currently dealing 

with this issue. 

Doug Holtz-Eakin, Dr. Holtz-Eakin, thank you very much for 

your continued work. 

And Simon, Dr. Johnson, we thank you also and we look forward 

to your testimony this morning, and your guidance and support 

and help in terms of how we can address this critical issue, because 

I think the time is now to do it. 

Mr. Chairman, thank you. 

[The prepared statement of Senator Coats appears in the Submissions for the Record on page 36.] 

Chairman Brady. Thank you, Senator. 

Vice Chair Klobuchar. 

OPENING STATEMENT OF HON. AMY KLOBUCHAR, VICE 

CHAIR, A U.S. SENATOR FROM MINNESOTA 

Vice Chair Klobuchar. Thank you very much, Mr. Chairman. 

And I wanted to also thank you for our last hearing. I think it had 

a very good tone and a very good start to our year with the Joint 

Economic Committee, which really can be a sounding board and a 

place where we can come together and talk about in a very timely 

way the proposals that are before the Congress. 

I did want to mention that Rachel and her family from Minnesota are the only ones from my Minnesota Breakfast that took 

me up on my invitation to come to this hearing. I see them back 

there this morning, and they are a reminder that we are talking 

about real families and real jobs and the future of our country here 

as we listen to these four great experts that appear before us. 

I see this as a time of great opportunity. Our economy has stabilized. The unemployment rate was the best it’s been in years. 

Just this past month, the housing market is coming back. In my 

state, the unemployment rate is down to 5.6 percent, and we are 

seeing great expansion in exports in many of our industries. 
3 

But what I see as holding us back right now is the inconsistency 

that we have seen in tax policy. It is the fact that companies are 

not able to know what is going to happen next with their investments, and the fact that we have not gotten a clear path to bring 

this debt down. 

We have made some progress, as we all know, with, first of all, 

the bipartisan Simpson-Bowles Commission, which I think did 

some very good work. I was one of 14 Democratic Senators that 

made very clear that we were not going to vote for a debt ceiling 

increase until we got that Debt Commission in place. 

I would have liked to see it statutory, something Senator Gregg 

and Senator Conrad worked so hard to do, but it is what it is. And 

it was not just a report that collected dust on a shelf; it actually 

gave us some ideas as to the Rivlin-Domenici work and a lot of the 

other work done by people right before us on this panel. 

But what has happened since the report has been released? We have achieved nearly $2.7 trillion in deficit reduction over a 10- 

year window. The goal of many is to at least get to $4 trillion reduction in 10 years. 

The Senate proposal right now that is being marked up in the Budget Committee proposed by Senator Murray is another $2 trillion in reductions, and I think it is something worth looking at. 

And I know the House also has its own proposal. 

Again, I see this as an opportunity. There is a sense of urgency— 

Senator Coats and I were together last night at a meeting—a sense 

of urgency that we have not had for awhile. Some of it is caused 

by the effects of sequestration, which I think most people would 

agree is not the exact way we want to handle this. 

Although we want to see some spending cuts, I also think that 

we can do this in a balanced way with a combination of revenue 

and spending cuts. We simply cannot afford to have a repeat of 

what happened last December with the brinkmanship. As much as 

I loved spending a very romantic New Year’s Eve with Harry Reid 

on my left and Mitch McConnell on my right, every woman’s 

dream, at the stroke of midnight, I believe there is a much better 

way that we can go forward here. And I hope it is going to start 

next week with keeping the government running with the Continuing Resolution, as it looks like it is, and hopefully putting some 

flexibility in with the sequestration, and then moving on to a major 

deal which the President has made clear that he wants, and I 

think you are hearing a lot of noise from Democrats and Republicans that they would like to see a balanced approach. 

So far, what we have seen of the debt reduction, which I just 

mentioned, the $2.7 trillion, 80 percent has come from spending 

cuts. And it comes out to a ratio of about 4-to-1 spending cuts to 

revenue. That is actually a different ratio and higher on the spending cut end than that proposed by both the Simpson-Bowles and 

the Domenici-Rivlin proposal. 

So I think there is room to continue to look at revenue, whether 

it is closing loopholes, whether it is looking at things like, I will 

mention as being from a state that produces a lot of biofuels, that 

the ethanol tax credit expired. That saved billions and billions of 

dollars. The oil company subsidies are still in place, that’s $38 billion, over the next 10 years. 
4 

Some of the tax breaks that are in place that incentivize companies to ship jobs overseas, that’s $200 million. The home mortgage 

deduction, very important to me and to middle-class families, if you 

cap it at $500,000 in value on a home—so if you buy a $1 million 

home, you still get it up to $500,000, that saves $41 billion. Buffett 

rule, $53 billion. 

I think there are ways that we could add revenue into this mix 

without setting the recovery on its back and still get the spending 

cuts in place, and do them at a level that is different than the sequestration level. 

There are also proposals for Medicare. One I would throw out 

there is negotiation of prescription drug prices. That saves $240 

billion in savings right there, as well as some of the additional delivery system reform that can be made. 

So I am looking forward to what our experts have to say. But 

overall, I feel a sense of urgency. I also feel a sense of incredible 

opportunity as I see that America is making things again and exporting to the world, and we have to do our jobs in Washington to 

allow our workers and our companies to move forward. And that 

means reducing our debt in a reasonable way. 

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

Chairman Brady. Thank you, Vice Chair. 

The title of today’s hearing is ‘‘Flirting with Disaster: Solving 

The Federal Debt Crisis.’’ And we have a distinguished panel who 

took time from their busy lives as national leaders to be with us 

today. 

I am honored to introduce former Senator Judd Gregg to our 

hearing today. Senator Gregg has served in his home State of New 

Hampshire as a Governor, as a U.S. Representative, and most recently a three-term U.S. Senator, thus making him the first elected 

official in the history of New Hampshire to achieve all three offices. 

During his tenure at the Senate, Senator Gregg was the Chairman of the Budget Committee and is a respected leader on fiscal 

policy, budgetary reform, and financial regulation. He was the 

original author of the Conrad-Gregg legislation, which was the impetus for Simpson-Bowles; a leader of the Wyden-Gregg Legislation 

for Bipartisan Tax Reform; and participated in several bipartisan 

efforts to reform entitlements in health care. 

Senator Gregg served on the National Commission on Fiscal Responsibility and Reform, along with another of today’s witnesses, 

Dr. Alice Rivlin, where they worked toward finding a bipartisan solution to our Nation’s debt crisis. 

I am honored to introduce Dr. Alice Rivlin. She is currently a 

Senior Fellow in the Economic Studies Program at the Brookings 

Institution, and a Visiting Professor at the Public Policy Institute 

at Georgetown. 

She has previously served as Vice Chair of the Board of Governors of the Federal Reserve System and Director of the Office of 

Management and Budget during the first Clinton Administration. 

Dr. Rivlin was also the first Director of the Congressional Budget 

Office after its establishment in 1975. 

In 2010, President Obama named Dr. Rivlin to the National 

Commission on Fiscal Responsibility and Reform, and there she 
5 

worked alongside Senator Gregg to develop what is known as the 

Simpson-Bowles Plan. 

I would like to welcome Douglas Holtz-Eakin to our hearing 

today. Dr. Holtz-Eakin is currently the President of the American 

Action Forum in Washington, D.C. He has developed a distinguished record as an academic and policy advisor. Most recently he 

served as Commissioner on the Financial Crisis Inquiry Commission, the Director of Domestic and Economic Policy for the McCain 

Presidential Campaign. He served as Director of the Congressional 

Budget Office, assisting Congress in tax cuts and Social Security 

reform. 

He also worked to bring economic stability as the Chief Economist at the Council of Economic Advisers during the aftermath of 

the September 11th terrorist attacks. He has also taught economics 

at Columbia University, and became the Chair of the Department 

of Economics at Syracuse before being called to serve as Director 

of the CBO. 

Welcome. 

I would like to welcome also Dr. Simon Johnson to our hearing. 

He is currently Professor at the Sloan School of Management at 

MIT, and a Senior Fellow at the Peterson Institute for International Economics. He is also a member of the Congressional 

Budget Office’s Panel of Economic Advisers, a research associate at 

the National Bureau of Economic Research, and a Research Fellow 

at the Center for Economic Policy Research. 

He is the founder of the Economics Blog, ‘‘The Baseline Scenario’’ 

and is a contributor to Project Syndicate. Prior to his current positions, he was Chief Economist at the International Monetary Fund 

and taught economics at Duke University’s School of Business. 

Dr. Johnson brings a unique international perspective to our Nation’s debt crisis. 

With that, I would like to introduce Senator Gregg for your testimony. Senator. 

STATEMENT OF HON. JUDD GREGG, FORMER CHAIRMAN OF 

THE U.S. SENATE BUDGET COMMITTEE, RYE BEACH, NH 

Senator Gregg. [inaudible, microphone off.] 

Chairman Brady. If you could hit that microphone? And I know 

you said that before. 

Senator Gregg. I did it. And this is an entirely new experience. 

[Laughter.] 

Chairman Brady. It’s good to see how the other side lives. 

Senator Gregg. A pleasurable one. Thank you for inviting me, 

and it is great to be here with this wonderful panel with my close 

friend, Dan Coats, who I served with for I’ve forgotten how many 

years but it’s been quite a few. 

It is a pleasure to address the panel, and thank you for having 

me participate on this critical issue, which is critical to our Nation’s future and prosperity. 

I think it was defined in some ways, and probably best by the 

Foreign Minister of Australia. He was speaking to Bob Zoellick, 

who was former head of the World Bank, and Bob is fond of telling 

the story about how he said to him just a few months ago, the Foreign Minister of Australia, he said to him: You know, the United 
6 

States is one debt deal away from leading the entire world out of 

economic doldrums. 

And that is absolutely true. When you look at our country, so 

much is going right in this Nation right now, we are in my opinion 

on the verge of a massive economic expansion due to our shift in 

energy primarily, but also because we are still the place where 

great ideas come from, whether a Facebook or Apple, or in my region of the country health care. 

We have got huge amounts of liquidity, and we still have an extraordinarily entrepreneurial people ready to go out and take risks 

and create jobs. And the one thing that is holding us back is our 

fiscal policy, and the fact that we have this very serious and legitimate concern about the sustainability of our debt. 

The Simpson-Bowles Commission, which Dr. Rivlin and I served 

on, came to the conclusion that on our present path this Nation 

goes bankrupt. That is essentially the fact. Senator Coats referred 

to that fact. And we have to figure out how to straighten this out. 

We have to figure out how to do the deal that straightens this out. 

And I congratulate the Congress and the President for having 

made some progress—not as much as needs to be made, but there 

has been progress. And there is a long way to go. And the question 

is: How do we get to the next step? And what should the goal be? 

Well under Simpson-Bowles we suggested that the goal should be 

to stabilize the debt at 70 percent of GDP or less. That is a very 

high number. Historically, our debt since the end of World War II 

has averaged about 35 percent of GDP. To stabilize it at 70 percent 

of GDP probably does not put us on a health path, but it keeps us 

going. 

However, if we do not stabilize it at 70 percent of GDP, we are 

obviously going to go to regions which are now being tested by 

countries like Greece, and Spain, and Italy of over 100 percent, 

which means inevitably, as Senator Coats referred to, the markets 

will lose confidence in our currency and our cost of debt will jump 

dramatically and we will have a fiscal crisis. 

Because think of it. If you look at the budget today, we spend 

about $250 billion on interest, $250 to $300 billion. If we were paying historic interest rates, we would be paying about $600 billion. 

$600 billion. We could not handle that. But we will pay much more 

than historic interest rates, we will pay a lot more if the markets 

lose confidence in our currency. 

So we have got to get this problem under control. We are now— 

you now are struggling with the sequester issue, which is an attempt to address the question. And the issue becomes how should 

we address the question? 

Well, clearly the sequester should be replaced by targeted action 

in the area of entitlement reform—and I know members of this 

panel are going to talk about ways you can do that, and I am a 

hundred percent for that. And the important thing about entitlement reform is that that is where the money is, so to say. You 

know, Willy Sutton used to say he robbed banks because that’s 

where the money is. Well, if you are looking at the deficit and the 

debt, the thing that is driving it is our massive cost of entitlements. 
7 

So we have to reform them. And another important thing about 

entitlement reform is it is not tomorrow that it has to occur. We 

have got 5 years, 10 years, 15 years that we can work our way into 

policies which change and bend the cost curve over the long run. 

And, which do it in a way which does not impact the recipients of 

entitlements in any significant way, but rather makes those programs like Medicare, Medicaid, and Social Security solvent. 

So that is one step we have to take. We also need tax reform, 

which has been referred to here. The Wyden-Coats proposal is an 

approach to that. But how do you structure this action? I’ve been 

thinking about this, and this is where I want to end, how do you 

get this done? 

Well, I think actually how do you get the deal done? Well, I think 

actually the Speaker of the House has laid out a pathway. He said: 

Let the Senate do it. 

[Laughter.] 

Well that is an interesting idea, and it is not a bad idea, by the 

way, with Presidential leadership. And I congratulate the President 

for in the last few weeks stepping forward and saying I’m going to 

get into the room on this issue. 

So I believe you can set up a structure here where you use the 

Senate as a sounding board, because there is a working center in 

the Senate, with Presidential leadership, where you develop a 

package which can actually address this issue substantively. And 

then take that package to the House as the Speaker has suggested, 

rather than have the House initiate it and take it to the Senate. 

I would caution this: The budget process is probably not going to 

be that process, because the budget process is inherently partisan. 

That is the nature of the budget process. It may set the goalposts 

at both ends of the field, but when budgets reach the Floor, especially in the Senate, they end up with a lot of votes being cast to 

lock in opinions and positions which are not very flexible. 

And to get this done, you are going to have to have compromise— 

compromise on both sides of the aisle. 

Two other points, structural points, which have to be part of any 

major deal: 

One is that you have to target the size of the government. Simpson-Bowles set it at 21 percent, or 21.3 percent. That sets everything in motion, spending restraint and revenues. And secondly, 

any changes in entitlement must be subject to a 67-vote point of 

order before they can be reversed. Otherwise, you cannot lock them 

down for future Congresses. 

Thank you, very much. 

[The prepared statement of Hon. Judd Gregg appears in the Submissions for the Record on page 41.] 

Chairman Brady. Thank you, Senator. And to be clear, letting 

the Senate go first was not our first option. 

[Laughter.] 

But we are where we are. So we understand. Dr. Rivlin, you are 

recognized. 
8 

STATEMENT OF HON. ALICE RIVLIN, PH.D., SENIOR FELLOW, 

BROOKINGS INSTITUTION, WASHINGTON, DC 

Dr. Rivlin. Thank you, Mr. Chairman, and Vice Chair 

Klobuchar. I agree with everything my colleague, Senator Gregg, 

has said. 

Let me begin by saying, this hearing is entitled ‘‘Flirting with 

Disaster: Solving the Debt Crisis.’’ Let me respectfully suggest an 

alternative title: ‘‘Growing the Economy and Stabilizing the Debt.’’ 

I make that suggestion because I think prosperity requires bipartisan cooperation to achieve two goals at once. 

One is faster economic growth and lower unemployment; and the 

other is a sustainable long-run budget plan that will halt the projected rise in the debt-to-GDP ratio and put it on a downward trajectory. 

It is not a choice. These two goals reinforce each other. Stabilizing and reducing future debt does not require immediate austerity. On the contrary, excessive budgetary austerity in a still 

slowly recovering economy undermines both goals, but it does require a firm plan enacted soon to halt the rising debt/GDP ratio 

and reduce it over coming decades. 

And putting the budget on a sustainable path and reducing the 

debt will require bipartisan agreement on entitlement reform that 

slows the growth of health care spending and puts Social Security 

on a firm foundation for future retirees, and does that soon. 

It will also require raising additional revenue through comprehensive tax reform. I believe that enough discretionary spending 

restraint has already been accomplished—more than we suggested 

in Simpson-Bowles and Domenici-Rivlin. And that is why I think 

the sequester is really bad policy and should be replaced with entitlement reform and tax reform. 

I think we all know the reasons why entitlement reform is imperative. The combination of the demographics and health care 

spending growth makes Medicare and Medicaid and Social Security 

the drivers of unsustainable federal spending in future years. 

Social Security should be the easiest to reform, because it involves only money without the complexity of health care delivery, 

and it requires fairly minor, well-understood tweaks in benefits and 

revenues to regain fully funded status. 

Enactment of a bipartisan Social Security reform now would reassure current workers, demonstrate that our democracy works to 

solve problems before they reach crisis proportions, and contribute 

to stabilizing the debt. 

We cannot afford to wait on Social Security, whether we do it 

separately, as Senator Durbin is suggesting, or as part of the budget reform. Workers who will be retiring in 2033 are already in their 

mid-40s. We owe it to them to ensure that they can plan for Social 

Security as they reach retirement age. 

Medicare raises more complex issues, but even there a bipartisan 

compromise to slow Medicare growth without depriving seniors of 

needed health care is surely possible. 

American health care is expensive compared to that of other developed nations, and its quality is uneven. And part of the reason 

is our fee-for-service reimbursement system, which encourages pro-
9 

viders to deliver more services but does not reward efficiency or 

quality. 

We can convert Medicare by changing the incentives to a more 

efficient system. There are two possible approaches to improving 

the performance of health providers along those lines, and one is 

to change the incentives in traditional Medicare toward rewarding 

quality and not quantity. And I’m for that. 

The other is to foster competition among health plans on a regulated exchange or market. We need to try both. And we do not need 

to do it by replacing Medicare with a premium-support model. We 

could introduce the competitive element more smoothly by ensuring 

that Medicare Advantage Plans compete in a more transparent 

marketplace, and improve incentives to lower costs. 

Finally, there is the question of tax reform. Both the Commissions that I served on had base-broadening and rate-lowering 

plans, and we must do something like that. But let me reiterate, 

in closing, that both growth and debt stabilization are important, 

and they should be done simultaneously. 

Thank you. 

[The prepared statement of Hon. Alice Rivlin appears in the Submissions for the Record on page 47.] 

Chairman Brady. Thank you, Dr. Rivlin. Dr. Holtz-Eakin. 

STATEMENT OF HON. DOUGLAS HOLTZ-EAKIN, PH.D., PRESIDENT OF THE AMERICAN ACTION FORUM, WASHINGTON, DC 

Dr. Holtz-Eakin. Mr. Chairman, Vice Chair Klobuchar, and 

Members of the Committee: 

Thank you for the privilege of being here today. Let me just say 

at the outset, it is an honor to be on this panel with my former 

boss, Senator Gregg; and the founding Director of the CBO; and a 

gentleman who teaches at an institution where I couldn’t get into 

graduate school. 

[Laughter.] 

So I am honored. No hearing is complete without a chart from 

CBO, so why don’t we just start with the facts and remind ourselves that the most recent projections from CBO are actually quite 

daunting, in my view. 

They say that on auto-pilot, we accumulate $7 trillion in additional deficits over the next 10 years. And even more troubling, the 

trajectory is one where any illusory near-term improvement reverses about 2015 or 2016 and we see the sharp spiral upwards in 

the deficit and, importantly, in the debt in the hands of the public. 

That is part one of the bad news that comes out of the CBO this 

February. 

The second part is that underneath that is an economic projection which shows slow growth in 2013, about 1.4 percent, and a 

marked writedown in the long-term growth potential of the U.S. 

economy of about 2.2 percent over the long term. And I at least believe that those are not unrelated phenomenon, the debt and the 

growth. 

There is literature largely attributed to the scholars Ken Rogoff 

and Carmen Reinhart that suggests that countries that have gross 

debt, a slightly different measure of debt, over 90 percent of GDP 

pay a penalty in the form of slower growth. 
10 

The CBO projection says that the United States, which currently 

has federal debt in excess of the size of GDP, over 100 percent of 

GDP, will remain at that level over the next 10 years and thus will 

continuously pay a penalty in the form of slower economic growth 

of about 1 percentage point a year as the estimate. That translates 

into all sorts of things that are very close to home: a million jobs, 

slower income growth for American families, and a recipe for stagnation that the United States has the great opportunity to avoid, 

and should. 

And I concur with what Senator Gregg said at the outset. We 

have the capacity to do much better, and this is the break on our 

growth. Now what would it take to fix that? 

To get us out of the danger zone, to get us below 90 percent of GDP requires something north of $4 trillion. And while I applaud 

the efforts of the Congress and the Administration in past years, 

I think it is not time to rest on our laurels. Our problems are significant and remain large. 

And smaller measures, those which merely stabilize the debt/ 

GDP ratio in my view are in fact flirting with disaster. They say 

that should interest rates spike, as the Senator mentioned, or if 

economic growth does not turn out to be as robust as we might 

hope, the debt is not stabilized. It moves north, and it moves north 

quickly and runs the risk of generating a loss of confidence in the 

United States in world capital markets. 

And so I think that we cannot merely stop at trying to stabilize 

something which will at the end of the 10 years of stabilization go 

north again anyway. It is time to be aggressive. I think that is not 

inconsistent with more rapid economic growth. I think it is a foundation for more rapid economic growth. 

Now how do you do that? We can have a longer discussion, but 

sadly we are not the first country with the dual problems of bad 

growth and big debt. It has happened before. And if you look 

around the globe, there is no perfect solution. But to the extent 

that a playbook emerges, it contains some components that have 

come up today. One should undertake a comprehensive tax reform 

and use that as the foundation for better economic growth and financing the government. And one should use the spending side to 

control the growth of debt. But not all spending is created equal. 

The core functions of government—national security, infrastructure, basic research, education—need to be preserved in this process. And instead the focus should be on cutting transfer programs, 

which in the United States means dealing with the entitlement 

programs, the Social Securities, Medicares, Medicaids that Dr. 

Rivlin mentioned. 

I will point out—and I say this lovingly and gently—that the current strategy, which is to sharply raise taxes at the beginning of 

the year without reform, and to slash discretionary spending as far 

as the eye can see, is 180 degrees opposite from what we should 

be doing. Other than that, we’re doing fine. 

But this is an opportunity. I agree with that. We do have the 

ability to reform especially Social Security, which you can reform 

any of a number of ways and send the signal that we know how 

to deal with our problems, take some red ink out of our future and 

deal with the debt, and that would be a great first step toward ad-
11 

dressing what I think is the paramount issue of our time. Thank 

you. 

[The prepared statement of Hon. Douglas Holtz-Eakin appears in 

the Submissions for the Record on page 65.] 

Chairman Brady. Thank you, Doctor. Dr. Johnson. 

STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ 

PROFESSOR OF ENTREPRENEURSHIP, SLOAN SCHOOL OF 

MANAGEMENT, MIT AND SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, CAMBRIDGE, MA, 

AND WASHINGTON, DC 

Dr. Johnson. Thank you, Mr. Chairman, and thank you, Members of the Committee, for the invitation. 

I agree with some of the points that have been made by my distinguished colleagues. I think this is an opportunity. I would recommend drawing on the international experience to which you 

mentioned at the beginning, Mr. Brady, my work with the International Monetary Fund, my work on economic crises over 25 years 

around the world. I think you should aim for more debt reduction 

over the next two decades than even Senator Gregg suggested. I 

think a target debt/GDP by 2030 in the range of 40 to 50 percent 

makes sense because you do not know what is going to happen in 

a country like the United States with opposition in the world and 

needs to have what the IMF likes to call fiscal space; the ability 

to take on challenges both domestic, for example, in the case of another financial crisis, or international. We do not know what is 

going to come our way. 

So I think you should seize this moment. I agree also with my 

colleagues, there are some things on the table, including Social Security reform, that are achievable. 

I think unfortunately we are perhaps inadvertently already in a 

fiscal disaster. Senator Coats is of course correct, there is one kind 

of fiscal disaster that involves people not being willing to buy your 

debt, interest rates go up, the currency collapses, and you go handin-cap to the International Monetary Fund. 

That is not our reality today, obviously. I doubt that is what we 

face over the next decade or two. I think we are much more likely 

to get what Dr. Holtz-Eakin referred to, which is a confused combination of policies that emerge from our distinguished and wonderful Constitutional system—don’t get me wrong—but the way it 

is playing out is a big unfortunate. And particularly undermining 

again what Dr. Holtz-Eakin said, which is the essential public 

goods that the government provides, research and development, for 

example, defense, the readiness of our military forces also an essential part of maintaining prosperity. 

I think what we should do, and what I hope you will do, is assess 

the programs that we have, both in terms of their pro-growth impact—which is the returns on much of that; I read the CBO literature carefully; returns are impressive; and not just Social Security but also the social insurance we provide through the health 

care system. 

I think we would all agree is the big sticking point. I do not 

think the issue there, by the way, is Medicare per se, although obviously the numbers Dr. Holtz-Eakin showed are correct, if you 
12 

want to look out 50, 70 years, it is all about health care—but it is 

health care spending. Not just the government-provided part of 

health care; it is the entire health care spending, the drivers of 

health care spending. 

If you take those out of the budget and shift them onto firms, or 

onto families, that is a big competitive disadvantage to the American companies. I talk a lot to CFOs and CEOs about tax reform, 

corporate tax reform, and I think there are some sensible ideas out 

there, but I always impress on them that in 20 years the big driver 

of loss of competitiveness in the United States is going to be our 

health care system. 

I think I have recommended to many of you and to your staff before, but I will recommend again, Statistical Table 12–A in the 

IMF’s Fiscal Monetary publication—all the good stuff in the IMF 

papers is at the back in the statistical tables—12–A compares projections of health care spending and the impacts on budget looking 

out 20, 30, 40 years across the countries we are going to be competing with. 

This is where we really look bad. We have to get a handle on 

that. And you have to decide, with an aging population, with improvements in medical technology, with an inability or a great difficulty of running private insurance schemes for people who are in 

their 80s and 90s—that was the experience before Medicare; that 

will be the experience if Medicare ends—how much social insurance did you want to provide? 

As Senator Gregg said, what is the size of government as a percent of GDP that is consistent with that? I am afraid, in the numbers that I look at—again drawing on the CBO—21 percent of GDP 

is low, looking out over 3, 4 decades, because of what is happening 

to the nature of our population. 

This of course brings us to the most difficult issue, which is revenue. I do not see how you could balance the budget in 10 years 

without increasing revenue; I read Mr. Ryan’s budget proposal; I 

don’t think that is a good idea. I don’t think that is conducive with 

continued growth, let alone accelerating growth for the kind of 

prosperity we are hoping for. 

I think the specifics that Senator Klobuchar put on the table, the 

specifics that are in the Senate budget proposal that Senator Murray presented yesterday, should absolutely be part of the agenda. 

And I hope they are part of the conversation. And I hope that they 

are part of the compromise. 

As Senator Gregg said, we are one good debt deal away from a 

great period—another great period of American prosperity. 

Thank you, very much. 

[The prepared statement of Simon Johnson appears in the Submissions for the Record on page 76.] 

Chairman Brady. Thank you, Dr. Johnson. 

I have to confess, I hope to live my entire life without ever reading the IMF’s Statistical Table 12–A—— 

[Laughter.] 

Just let me be clear there. 

The testimony was excellent. I had a chance to read it earlier 

this week. It was very insightful, and I think that Dr. HoltzEakin’s point on the growth gap of the current recovery, and the 
13 

prospect—not reality—the prospect of potential GDP falling permanently over the long haul is a concern of the Joint Economic Committee. And together in a bipartisan way we are going to look at 

ways we can close that, both on the fiscal and monetary side as we 

go forward. 

I have a couple of questions that I would like to run through 

quickly. None of them are ‘‘got’cha’’ questions. We rarely have this 

opportunity with you four experts here. 

So on making Social Security and Medicare solvent over the long 

term what is critical to all of this is timing. How soon should Congress and the President act to assure investors, to avoid a potential 

downgrade, to really address our financial situation. 

Senator? Each of you? How soon should we act on reaching the 

solution? 

Senator Gregg. I think you have to act to show seriousness of 

purpose as soon as possible. And when you do that, I think some 

of the growth issue is going to be addressed, because I think the 

markets will respond, as well the investment community to that 

sort of action. 

Chairman Brady. I agree. 

Senator Gregg. That means setting up a definable process for 

getting to closure on an agreement on entitlement spending and on 

revenues. 

Chairman Brady. You’re thinking this year, or next? 

Senator Gregg. Oh, this year. Before June, hopefully. 

Chairman Brady. This year. Thank you. Dr. Rivlin. 

Dr. Rivlin. For Social Security, I would say 10 years ago. But 

this year will do. 

[Laughter.] 

We have known about this problem for a long time and have not 

fixed it. 

On Medicare, I would say right now. We are still learning about 

how to improve the efficiency of health care, but I think the accumulating knowledge gives us enough to go on right now. 

Chairman Brady. Got it. Dr. Holtz-Eakin. 

Dr. Holtz-Eakin. I do not have a clever way to impart a greater 

sense of urgency. I mean, the sooner the better. Let’s face it. And 

there are some demographic mechanics that make this an imperative. 

If you think about changing Social Security for example, and 

there has been the convention of grandfathering those who are of 

a certain age or younger, 55 or younger, I am now 55. I am the 

trailing edge of the Baby Boomer generation. If you grandfather 

me, you grandfather the problem. And so the bumper sticker 

should be: Get Doug Holtz-Eakin, and get him this year. 

[Laughter.] 

Chairman Brady. We’ll get that printed up. And you’re talking 

about timing of this year, act now, Federal Government, ten years. 

Got it. Dr. Johnson. 

Dr. Johnson. Well for the record, I would like to note that Dr. 

Rivlin has actually been warning us all about this since the 1980s. 

So it is 30 years ago. And I think you should act immediately. 

Why not establish a bipartisan commission along the lines of 

that established by President Reagan and Congress in the 1980s? 
14 

Specifically I would suggest to deal with Social Security. That is 

surely not an easy problem, but a problem where the two sides 

seem better able to come together. 

On health care and on Medicare, that seems more difficult. And 

I agree with showing purpose would be very helpful, and if there 

are ways to take that away from the intensity of the partisan discussion that would be extremely constructive, but I am not sure I 

have seen that on the table yet. 

Chairman Brady. And I agree. We ought to be—we could save 

Social Security this afternoon. The truth is, we all know what 

needs to be done. 

Along those lines, there is talk about changing CPI and Social 

Security and some means-testings for Medicare. Are those two reforms alone enough to make those programs solvent over the long 

term? Or do we need to do more? 

Senator. 

Senator Gregg. Those would go an inordinate amount of the 

way, but you should also adjust the BIN points, obviously, which 

is means-testing, and probably the age. Interestingly, in SimpsonBowles we decided to take Social Security out of the deficit debate 

and the debt debate and deal with it separately. I understand Senator Durbin is suggesting that also. 

There are only four or five moving parts and they can be adjusted so quickly, if you can get the politics to agree to do it, and 

that is why doing it independent of the debt issue is I think so important to take the politics out of the issue. 

In my view, if the Durbin approach was followed, it should be— 

that Commission should report by Easter and vote on it before the 

summer recession. 

Chairman Brady. Dr. Rivlin. 

Dr. Rivlin. You need to do more. The chained CPI is a technical 

change which would improve the estimate of inflation in the benefits. But it need not be done in a way that hurts low-income or especially old people. 

In the Domenici-Rivlin plan, we did go for chained CPI but we 

also bumped up the minimum benefit, and the benefit at age 85, 

so that you don’t disadvantage people who live a long time. I am 

increasingly for that (laughing). 

And on Medicare, yes, you need to do both. And I am not a fan 

of raising the age at this point, actually. 

Chairman Brady. Got it. Dr. Holtz-Eakin. 

Dr. Holtz-Eakin. I would concur. I think you need to do more, 

no question. 

On Social Security, I think it is very important to remember that 

you are really not doing more. The current plan is that the program will remain actuarially solvent. And the way we are going to 

do it is we will have essentially a Social Security sequester, an 

across-the-board cut at 25 percent. 

That is a disgraceful way to run a pension program. And so it 

is not about doing more to Social Security; it is about doing something more intelligent, and doing it now so that people can plan. 

On Medicare, I think the number one priority should be to put 

it on a budget. Right now the gap between payroll taxes and premiums going in and spending going out is $300 billion a year. It 
15 

is a third of our trillion dollar deficit. It’s got 10,000 new beneficiaries every day. 

So you have to send the signal to the provider in the beneficiary 

community that there is a certain amount of money. Go do something smart with it. 

Chairman Brady. Thank you. Dr. Johnson. 

Dr. Johnson. Congressman, as you know on Social Security we 

did not index the maximum wage subject to Social Security. I 

would go back to what worked for Ronald Reagan. If it worked for 

Ronald Reagan, it should work for us today. 

I think you should look at pension age. But you have to be very 

careful that, while longevity on average has increased substantially 

in American males aged 65 who are expected to live 3 years longer 

than was the case in 1970, that is not true across the entire wage 

distribution. Manual workers, lower income people, have not— 

lower income males have not had an increase in longevity. And I 

think you want to be very careful about balancing those adjustments in that framework. 

And just changing the CPI does not do that for you. And on 

Medicare—— 

Chairman Brady. If I may, Doctor, I apologize. We are going 

to let you step forward in just a second. I want to turn this over 

to Vice Chair Klobuchar. But a quick question: A lot of talk about 

tax increases again. We have had a first round, about $1 trillion 

in the President’s new health care law, a half a dozen of which 

have kicked in this year. 

Republicans and Democrats agreed on $600 billion plus at the 

beginning of this year’s fiscal agreement. Absent fundamental tax 

reform, does anyone on the panel want to argue that another round 

of tax increases will be helpful to the struggling economy? 

[No response.] 

Vice Chair. 

Vice Chair Klobuchar. Did you want them to answer? 

Chairman Brady. I got the answer I wanted, so—— 

[Laughter.] 

It’s like Moneyball. Hang up. Vice Chair. 

Vice Chair Klobuchar. Okay. We can go back and answer some 

of those later. I just wanted to get some common ground here. It 

appears as though all of our witnesses agree that sequestration is 

not the best solution right now. Is that correct? 

And that—— 

Senator Gregg. If I could just annotate that, it is a better solution than doing nothing. 

Vice Chair Klobuchar. Okay. Thank you. But we could do this 

in a more nuanced way in terms of where the spending cuts hit. 

All right. 

And then also that we should be doing something to keep Social 

Security solvent, and that there are many ways to do that. I am 

not going to get into those details. I thought that the Chairman did 

a good job of getting some of those answers, but that that could be 

done in a way that the savings would go back into Social Security 

as Senator Durbin has suggested. And there are many ways that 

we could do that. 
16 

I guess my question is: As we go forward here—two. One is the 

substance of how we should do this balance with the spending cuts 

and revenue. And the second is something Senator Gregg raised 

about how we get this done procedurally. Because I completely 

share in this view that we are one debt deal away from being able 

to not only expand but to also tackle some of these other issues 

that we have to work on in Congress, whether it is immigration reform, or whether it is some of the workforce training issues that 

we are confronting right now. 

I mentioned about how with the spending cuts when you include 

sequester about 80 percent enacted since 2011 has been spending 

cuts for the debt reduction. And that is not consistent with where 

the Rivlin-Domenici or Simpson-Bowles were. What balance do you 

think would be best? 

I think I’ll just ask you two that question, first, starting with Dr. 

Rivlin and then Senator Gregg. With the remaining amount to get 

to at least the $4 trillion. 

Dr. Rivlin. I think it works out to roughly half and half. I am 

not sure how we add up the numbers exactly, but we need substantial increases in revenue from tax reform. 

I would not give a positive answer to the Chairman’s previous 

question. We have lots of room to reduce spending in the Tax Code. 

And we need to do that. And it will produce more revenue in a progressive way over time, and we need to do that. 

Vice Chair Klobuchar. And you see that as, if we do it in the 

right way—and I threw a few ideas out there, and obviously you 

have some as well—that we could do that, in addition to making 

some spending cuts, and then some of the entitlement reforms that 

you suggested, that we could do that in a way that would not set 

us back, which I think is important to everyone up here. 

Dr. Rivlin. I think we have done enough cutting in discretionary 

spending as a total. You can reallocate it toward more growth-producing things, and perhaps over time away from defense and toward domestic, but I would not say more discretionary cuts were 

the priority at all. 

I think the stabilization of the debt depends on reforming the entitlements. 

Vice Chair Klobuchar. Senator Gregg. 

Senator Gregg. I think in order to get Republican buy-in on further revenues you are going to have to do policy changes in entitlement accounts that bend the curves in the outyear in a very substantial way, and make it clear that those accounts are sustainable. 

And once you do that, you can get a buy-in I believe from many 

Republicans on the issue of taxes through tax reform. And affixing 

a number to that, well Simpson-Bowles was 3-to-1 theoretically; the 

President has been 2-to-1. My view is that it is the policy that 

should drive this, and the key policy is entitlement reform that 

bends the outyear curve. 

Vice Chair Klobuchar. And I know, coming from New Hampshire you have seen some of the Dartmouth studies on the delivery 

system reform, and the Mayo Model, and those things that I hope 

would be a part of this. 
17 

Senator Gregg. Absolutely. I don’t think you can get there without doing what Dr. Rivlin referred to, which is you shift from a utilization system to a qualities and outcome system. You start to 

capitate the costs so that your people are—the system is reimbursed on the individual, as versus on the procedure. 

And that is going to get you where you want to go. And interestingly enough, there is a massive amount of activity occurring in the 

marketplace right now. It is occurring in your state at the Mayo 

Clinic. It is occurring in Utah. It is occurring in Pittsburgh. It is 

occurring at Baylor. To try to accomplish that. 

Vice Chair Klobuchar. And then on this process issue, which 

we talked about some when I saw you yesterday, when you talked 

about the Senate going first—and I appreciated the Chairman’s not 

being even snarky about the Senate—— 

[Laughter.] 

One of my favorite former House Members, Congressman Oberstar, always used to joke that all they ever do in the Senate is confirm judges and ratify treaties. And I said we haven’t even been 

confirming enough judges lately. 

But I think things have greatly improved in the last year in 

terms of getting some of the mid-sized bills through the Senate, 

whether it’s the Farm bill, the Patent Reform bill, the Transportation bill. And as you noted, I see a lot of hope with this group 

in the middle that is working on the debt. 

And I wondered if you could talk about, if we pass a budget in 

the House and Senate, as I think is happening as we speak, then 

how we procedurally get to this place where we are in a conference 

committee, but then we allow the Senate to work with the President, who clearly is now very engaged in this issue to come up with 

some kind of deal that could be the true compromise you are talking about. 

Senator Gregg. Well, Dr. Holtz-Eakin would probably have a 

view on this, but I think that the budget process is probably the 

wrong vehicle. Because when it hits the floor, you are going to see 

all sorts of hot-button amendments which are going to put people 

in positions of voting and formalizing their position in a way which 

is not constructive to compromise. 

And then, assuming you could even get a conference, the vehicle 

for getting something significant done would be reconciliation. And 

you cannot do significant health care reform through reconciliation, 

in my opinion, even though Obamacare was allegedly done that 

way, but you really can’t do it. Because your reconciliation inherently produces, instead of getting a horse you get a camel. In fact, 

a multi-backed camel, because of the Byrd Rule, which goes 

through and makes public policy—just eviscerates good public policy, the Byrd Rule does. 

So I think you are going to need a new vehicle. You are going 

to need the President leading the group. The President has got to 

be in the room, and he’s got to bring everybody together and people 

have to agree on what they need to do, and then you develop the 

vehicle to accomplish the goal. 

Vice Chair Klobuchar. And I know a lot of this was just what 

we saw in the papers, but I have seen numbers on this. It seemed 

to me at the end of the year that the President and Speaker 
18 

Boehner in their proposals were not that far apart in terms of optimism for trying to get this done. Has anyone looked at those? 

Dr. Rivlin. 

Dr. Rivlin. Yes, I think they were very close. And the importance of having the President help broker the deal I think is very 

high. 

Vice Chair Klobuchar. Okay. Do you want to add something 

here, Dr. Holtz-Eakin, Dr. Johnson, generally to my questions? 

Dr. Holtz-Eakin. ‘‘Close’’ does not count until you get a signature, so there is a lot of work to be done. And I think this discussion underestimates the importance of getting the White House involved. And the White House needs to exercise a degree of leadership that has been missing. Only the White House can put out a 

proposal that says this is a national issue. Only the President is 

elected by all the people. And his missing in action on this over the 

past years has stopped the Super Committee from being successful. 

That was a lot of good work. It was done with great intention. It 

did not get across the finish line. 

Things only get across the finish line with White House leadership, and that is an imperative at this moment. 

Vice Chair Klobuchar. Dr. Johnson. 

Dr. Johnson. Senator, we spend about 17, 18 percent of GDP 

on health care. The British spend 8 percent. Our government 

spends 8 percent. We get about the same outcomes as the British. 

I am not recommending their system, but I think using the pricing, 

using the power to negotiate the cost of prescription medicines in 

this context, and other assertions of the market power to the government when you are buying that much health care, is essential 

if you want to control the costs. 

Vice Chair Klobuchar. Okay. Very good. Well I appreciate all 

your comments. Senator Murphy is going to fill in for me, I believe, 

for awhile. I am going to be over at Judiciary, but I thank you for 

what you have done. And I do see some common ground here, and 

I see some common ground up here, especially in our really strong 

belief that we have to get this done and get moving on this, and 

the time for games is over. 

So thank you very much. 

Chairman Brady. Thank you, Vice Chair. 

Senator Coats. 

Senator Coats. Thank you, Mr. Chairman. 

This is a fascinating discussion. I really appreciate the comments 

from all of you, particularly from Senator Gregg and supported by 

others, in not just the ‘‘what.’’ We have been debating what should 

we do for a long time now, and we have had numerous commissions and committees and so forth and so on. But also the ‘‘how.’’ 

Because if time is of the essence—and I think there is unanimous agreement that we need to do this now; we run into political 

difficulties really once we get past July and people start focusing 

on the next election in 2014 and Members are looking to what do 

I need to do to protect myself from the onslaught of why did you 

do this? In primaries and so forth. And then you’re into a Presidential cycle. 

And so that pushes real opportunities like this one into about 

2017, which I think most of you would conclude is way too late. So 
19 

this is the time. This is the time to do it. And so focusing on the 

how do we get it done, I appreciate Senator Gregg’s contributions 

in that regard. 

The question, Dr. Rivlin you said in your testimony, you said 

that comprehensive tax reform and the other reforms that needed 

to be made to stabilize the debt need to be simultaneous. How do 

we make these simultaneous? 

And I guess I would ask that question of Senator Gregg because 

you were talking about the how. If we all agree that they need to 

be simultaneous, there is a lot of talk about comprehensive tax reform. That takes a year at least, or it is going to take more than 

a year and so forth. And right now they are separated in terms of 

what we need to do now. 

So it is discretionary spending and mandatory now, tax reform 

later. So, Senator Gregg, do you have a suggestion as to how we 

push tax reform as simultaneously with this other effort? 

Senator Gregg. I think you need an agreement that is a hybrid 

reconciliation bill—it probably shouldn’t even be called ‘‘reconciliation’’—but that essentially outlines in very specific language as to 

what the committees of jurisdiction must do, and the time frame 

they must do it, so that they are reporting back on comprehensive 

tax reform and entitlement reforms essentially on a time track that 

is very visible, very transparent, and everybody knows it has to be 

done. 

And failure to do that needs, in my opinion, a fallback position 

which forces action. Maybe you just take Simpson-Bowles and use 

it as your fallback position, but something like that so that you end 

up with—or Wyden-Coats would actually be an excellent fallback 

position on the tax side—so that you get something done, and you 

have a clear pathway, and it is subject to certain rule requirements 

which force it to be done. 

Senator Coats. Appreciate the plug for Wyden-Coats. Anybody 

else want to comment on that? I think the question pretty much 

has been answered. 

Let me go to a second. Michael Boskin and Austan Goolsbee testified before us just a few weeks ago. We were talking about balance, and that question has come up. 

Dr. Boskin said, well, there are two different types of balance. 

The President basically defines balance in more of a socioeconomic 

way. That is, fairness requires 50 percent taxes/50 percent spending. He said, but economic balance doesn’t fit that model at all. 

The ratio, if you want to achieve the kind of growth that is necessary and put us on the right path and deal with this debt/deficit 

issue, that balance needs to be, he said, a 5-to-1 or 6-to-1 ratio. 

Austan Goolsbee said, well, at least it ought to be a 3-to-1 ratio, 

and not lower than that. 

Well currently we are either at a 2-to-1 with the political system 

essentially right now saying, no, no, it needs to be 1-to-1. What are 

your thoughts on that? Let me start at the other end with Dr. 

Johnson 

Dr. Johnson. Well on this point I think, Senator, I disagree 

with Dr. Boskin. I think that—again, you have to go program by 

program. And I understand this format, we do not have a lot of 
20 

time to do this. I did write a book on this topic—I understand Mr. 

Brady might not want to read that, either—— 

[Laughter.] 

But if you go through what does the government do, and I think 

to the point, to your point which is a very good point, what gets 

in the way of growth? What is good for growth? What gets in the 

way of growth? And what is part of a reasonable, fairly basic compared to other countries, but reasonable system of social insurance 

that we have developed over the decades? 

When I look at it that way from the bottom up, I come to the 

position that, while there are important changes to be made on the 

spending side, some of which you have already done, some of which 

Senator Klobuchar talked about, I lean much more towards overall 

revenue side. The Bush tax cuts took about $4 trillion—looking 

over the decade, the basis that we usually do—about $4 trillion in 

revenue out of the system. 

I would seek—and I was trying to dissent on your earlier question, Chairman Brady—I would seek to replace that—not immediately; not with immediate austerity, so don’t please misquote me 

on that—but over two decades I would like us to get back to the 

kind of revenue trajectory we were on prior to the Bush tax cuts. 

And then we have to look, going beyond the two decades, at Dr. 

Holtz-Eakin’s chart and say, okay, what is happening to the demographics of our population, to the income-earning capabilities, to 

the kind of health care that people want and hope to get when they 

are 95 in 2050. 

Senator Coats. Thank you. Dr. Holtz-Eakin, did you want to 

comment on that? 

Dr. Holtz-Eakin. Economic balance says revenues match expenditures. And that is the only balance that has any sort of substantive foundation. The rest is politics. And all these ratios are 

politics. 

Everyone in this town loves to talk about taxes. You know, I 

used to have hair and they were still talking about taxes back 

then. All we talk about is taxes. The fundamental decisions the 

government makes is to spend the money. 

So I would go back to what Senator Gregg said. Design the programs. Decide how large the government is going to be. Do a tax 

reform to finance it so that the budget balances, which is something we have—a discipline we have lost in the Federal Government that needs to be restored. 

Senator Coats. Dr. Rivlin. 

Dr. Rivlin. I do not see any magic in Mike Boskin’s assertion 

that there is a specific ratio of taxes that is most conducive to 

growth. I think we can make our tax system a lot more conducive 

to growth by getting rid of the spending in the Tax Code, or reducing it, and still raise considerably more revenue in a more progrowth way. 

And I do not think it is realistic that a country with our values 

can absorb half-again as many seniors over the next 10 years by 

reducing their benefits in order to get to balance that way. It is 

just not realistic. 

Senator Coats. My time has expired. But a quick comment, 

Senator Gregg. 
21 

Senator Gregg. Well I think the appropriate way to approach 

this is to set the size of the government as a percent of GDP. Once 

you have done that, everything else falls from that. Historically it 

has been 19.8 percent. We have had a massive expansion of retirees. Simpson-Bowles agreed to go to 211⁄2. Somewhere between 

those two numbers is probably the right number. 

Senator Coats. Thank you. Thank you, Mr. Chairman. 

Chairman Brady. Thank you. Representative Cummings. 

Representative Cummings. Thank you very much. 

First of all, Dr. Johnson, thank you for referring to entitlements 

as ‘‘social insurance’’ because that is exactly what it is. Sometimes 

I think we forget that. 

And one of my concerns, Dr. Rivlin and Senator Gregg, is that 

when we are dealing with entitlements, changing CPI, raising the 

age, things of that nature, at what point do we get where people 

simply are placed in a position, say, for example, where they have 

got to take a voucher out to get insurance, and they are not able 

to afford it, at what point does it become counterproductive? 

In other words, folks are not able to get the health care that they 

need. Or they are falling into a situation where, like many African 

American males, they die before they even get Social Security. 

They die. They’re dead. 

Or say if you change the age with regard to Medicare, needing 

Medicare when you cannot get it, or whatever. And I am just wondering. You know, Mark Zandy came here awhile back, and one of 

the things he said was the thing that drives Medicare costs of 

course is the cost of medicine. 

And he said that he felt that there was some sign that the cost 

of medicine in Medicare, the inflation in Medicare costs, was at 

least beginning to stabilize. And he said that he believed that it 

was in part due to the Affordable Care Act. 

And I am just wondering, you know, how do you all see that? I 

am really concerned, because a lot of my constituents, all they have 

is Social Security and Medicare. That’s it. They don’t have any pensions. They don’t have any savings. Many of them have been victims of the Recession, lost their homes, lost all their equity. 

And there are a lot of people like that. It sounds like you all took 

it into consideration with the Domenici-Rivlin report where you 

looked at older folks and you needed to have different formulas and 

that kind of thing, but I am just curious. I know there is a lot 

there, but I would like for you to address that. 

And finally, how important is it, Senator Gregg—and I agree 

that we need to separate Social Security from all of the other 

things, the other social insurance type matters that we are dealing 

with. 

Dr. Rivlin. I think you are raising absolutely the right considerations. When you do either Social Security reform or Medicare reform, you have to look at who is impacted by it. 

But I believe you can put Social Security back on a firm foundation without making it harder for low-income, low earners. As I 

said, in Domenici-Rivlin we actually increased the benefits, made 

them better off in the reforms that we put in place. 

And then you have to do some compensatory things at the high 

end, a little less generous benefits for people with higher income. 
22 

In Medicare, I believe that we can make our system more efficient by rewarding quality and outcomes across the board in getting away from fee-for-service in a way that does not hurt anybody 

in the near-term. 

Now maybe in a few decades we will have to worry about rationing care, but we have such an inefficient health system that we can 

squeeze out some of this duplication and excess spending on health 

without hurting patients. I truly believe that. 

Representative Cummings. Senator Gregg. 

Senator Gregg. I think Dr. Rivlin is absolutely correct on both 

points, and Simpson-Bowles did the same thing that DomeniciRivlin did, which was to actually increase benefits to single women 

over 85, and low-income individuals. 

And I actually believe if you do Medicare reform correctly, you 

actually get a better system at a lower cost, which is exactly what 

we need, which is what Dr. Johnson’s point is. You can’t have our 

health care system absorbing so much of the economy. 

Do you separate out Social Security from the others? I think you 

should. My concern about doing it too quickly, although it should 

be done immediately, without moving the other part of the equation is it is going to take a lot of air out of the balloon once you 

fix Social Security to do the rest of the problems. Even though substantively it does not impact our long-term debt dramatically to fix 

Social Security, it psychologically would. And I am not sure how 

much energy would remain to do the Medicare fixes and the tax 

reform if you did Social Security unilaterally and on a separate 

track. 

But it can be done and should be done because it is doable. 

Representative Cummings. Dr. Johnson. 

Dr. Johnson. Just one point on the age of Medicare, which has 

not really come up yet but obviously it is in the mix. I think that 

is one you should worry about a great deal, Congressman. If you 

move that from 65 to 67, that is going to impact exactly the groups 

that you are worried about. 

This is a very hard risk to insure. It is going to be expensive if 

they do it by themselves. The companies are not going to want to 

take on that risk. That is an additional hit to American competitiveness, by the way. 

So moving the age of Medicare—I agree of course with making 

the system run better with controlling the price of prescription 

drugs. It is going to be essential. I would not advise increasing the 

age at which people qualify for Medicare. 

Dr. Holtz-Eakin. Could I just add a footnote to that? I mean in 

the aftermath of the Affordable Care Act we have exchanges which 

have subsidies for low-income Americans of any age. And presumably they would provide quality insurance. 

And so the notion that somehow changing Medicare is going to 

leave people outside the safety net is just not true. 

Representative Cummings. Well unfortunately, and as I close, 

there’s a proposal to get rid of the Affordable Care Act. So we have 

to take that into consideration, too—I don’t think it’s going anywhere, but thank you very much. 

Chairman Brady. Thank you, sir. Representative Paulsen. 
23 

Representative Paulsen. Thank you, Mr. Chairman. A great 

hearing and some similar, common themes actually from all of you 

that have taken the time to testify today. 

There is a question right now, knowing that debt is an issue and 

it is a drag on our economy, I want to dive into this a little bit 

deeper with Dr. Holtz-Eakin. But it absolutely is an issue. 

The question is sort of how urgent is it of an issue right now? 

I know that Senator Gregg had a column recently in The Hill from 

February 25th how the window of opportunity is closing. Mr. 

Chairman, if I could just submit that for the record, that would be 

great. 

[The article titled ‘‘Windows of Opportunity Closing’’ appears in 

the Submissions for the Record on page 83.] 

Representative Paulsen. And also, mention the President just 

yesterday in an interview, he actually said that we don’t have an 

immediate crisis in terms of debt. He said for the next 10 years we 

are in a sustainable place. 

That is kind of an interesting comment to me. I think CBO kind 

of backs up, we’ve got a serious growth gap now. There’s a drag on 

the economy in terms of having a report that says debt held by the 

public is projected to remain historically high relative to the size 

of the economy for the next decade. 

And already such a debt would increase the risk of fiscal crisis 

during which investors would lose so much confidence in the government’s ability to manage its budget that the government would 

be unable to borrow at affordable rates. 

And what is clear, there is this correlation between high levels 

of government debt and slower growth. And, Dr. Holtz-Eakin, you 

did not touch on it in your oral testimony but in the written testimony you did talk about this one percentage point penalty. 

Can you just talk a little bit real quick on that based on your 

testimony regarding that one percentage point penalty, when 

you’re at a certain level above 90 percent of debt, and the drag on 

the economy. And I should ask you this, too. Do CBO’s projections 

of employment and income growth, do they fully account for the 

loss imposed by slower economic growth, in your view? 

Dr. Holtz-Eakin. Well the empirical finding—this is not my 

finding, but this is out of the literature—is that highly indebted 

countries over 90 percent of GDP gross debt, is the measure of debt 

used here, pay about a one percentage point—that’s the median estimate—penalty in growth per year. 

And often the question is sort of how does this happen miraculously that we grow more slowly? But if you think about where we 

are with dramatic levels of debt, over 100 percent of GDP, the projections that show an unsustainable trajectory, if you do not make 

a commitment to control spending, then what have you said to the 

world? 

You have said, well, if you want to locate here, or hire here, expand here, then you face two futures. Future number one is where 

we do not do anything. We do not fix the spending. We do not fix 

anything. And we hit a financial crisis—it is not exactly a progrowth policy. 

Or future number two is one where we try to tax our way out 

of this problem. And that is utterly detrimental to growth, particu-
24 

larly given where we are. And so it is not surprising to me that 

heavily indebted countries, particularly when you get out in the 

tail where we’re headed, have bad growth problems. It is a terrible 

signal to send. 

And so that, I think, merits some fixing. Now I just want to say, 

there is this counter-argument that says, no, no, no, we want to 

spend now, stimulus. You know, I’m not a big fan of that, but there 

is not as big a conflict as you might think, because if we do the 

right reforms that everyone here has talked about, go where the 

money is in the mandatory spending, you can take the pressure off 

the discretionary side. You do not have to have discretionary austerity, and we can do a lot better. 

Representative Paulsen. Yes, I would concur. That would be 

the right direction. But let me just ask this question for everyone 

on the panel real quick, because it seems to be almost universal, 

almost universal in the testimony that in these bipartisan plans we 

need part of the focus to be on fixing the Tax Code. Right? And 

economists call for lowering rates, especially the corporate rate, 

broadening the base, eliminating loopholes. 

However, at times around the Capitol, most of the discussion has 

been centered around on boosting revenue as a part of the existing 

Code from reforms. Should the discussion about higher revenues 

focus on reforming the Tax Code to spur higher economic growth 

levels? Or should it be more focused on getting more revenues out 

of the existing Tax Code? 

Senator Gregg, and we will just go right down. 

Senator Gregg. I think Simpson-Bowles got it right on this 

point. We reduced deductions and exemptions so that we generated 

$1.1 trillion of revenue every year. We took $1 trillion of that and 

reduced rates. So the rates under Simpson-Bowles were 9, 15, and 

23 percent on the individual side. We took $100 billion and reduced 

debt. 

So over the 10 years of the Simpson-Bowles $4 trillion number, $1 trillion came out of revenue and $4 trillion came out of—was 

represented as being savings. But the purpose of the tax reform in 

Simpson-Bowles was to create a Tax Code which would energize 

massive growth where people would invest for the purposes of return rather than for the purposes of avoiding taxes. And as a result, you would not only get the static number of $100 billion of 

more revenue coming into the Treasury, but you would get an actual dynamic number of much more than that. 

Representative Paulsen. Dr. Rivlin. 

Dr. Rivlin. I think fortunately it is not a choice. If we do the 

right thing on reforming the Tax Code, we will have more revenues 

and we need them. 

Dr. Holtz-Eakin. I agree with that. I think one of the lessons 

here is something the Senator said earlier, and I want to emphasize it. If you lose sight of good policy in the effort to get the right 

numbers, this is a bad exercise. 

A tax reform is good policy. It will cause growth. It will also generate revenues. 

Dr. Johnson. Congressman, I think you should be bolder on 

taxes: Value Added Tax. Shift from taxing income to taxing spending. Actually, there is a lot of agreement across the political spec-
25 

trum that that is the right general idea. But there is very little 

agreement that you want to go anywhere near VAT. 

And just, if I could add to what Dr. Holtz-Eakin said about the 

debt and how much time do we have, which is a great question, we 

have no idea. It depends not just on us, it depends on the world. 

We are the world’s number one reserve currency. 

If the world shifts its portfolio preferences away from the dollar 

towards, I don’t know, the Euro, the Renminbi, some other currency, other countries would like that role, then the time frame is 

much shorter. If we stay number one in this specific reserve currency sense indefinitely because the Chinese blow up their financial system, or the Europeans fail to turn around their sovereign 

debt, then we have a lot more time. 

Nobody knows the answer to that question. We should start now. 

We should not act precipitously or in a way that damages ourselves. We should set ourselves on a course where people say, yes, 

the Americans have got their fiscal affairs in order looking out two, 

three decades. 

Thank you. 

Representative Paulsen. Thank you. 

Chairman Brady. Great. Thank you. Representative Delaney. 

Representative Delaney. Thank you, Mr. Chairman. And 

thank you for organizing such a terrific panel. I thought the comments really have been exceptional, and I think, Senator Gregg, 

you started us off in almost a pitch perfect tone. So I appreciate 

that very much. 

I have—and Dr. Holtz-Eakin, I think that you framed the urgency of dealing with this appropriately. And it seems to me we almost have some room to over-correct for the problem. Because if we 

act now, as we know we don’t have to affect current beneficiaries, 

or even people who are close to being current beneficiaries, and if 

we almost can over-correct for the problem, if we have more economic growth than we expect, if we can actually bend the cost 

curve in health care, or these other demographic shifts, it gives us 

tremendous flexibility. 

And it kind of tees up a question, or two questions I would like 

to ask each member of the panel. 

The first is: It seems to me our debt issue should be broken into 

almost two categories. The debt that we have in years, call it 1 to 

10, which we tend to talk a lot about because our budget framing 

is in 10 years; and then the debt crisis that occurs in years 11 

through 20, or post-11, if you will. And it seems to me, at least in 

my own opinion, it is the second component that is of most concern 

and will lead to all the negative consequences everyone has talked 

about. 

It will also crowd out every other priority in our budget. There 

will be an interest rate crisis, as Dr. Johnson referenced. We do not 

know when it will happen. The only thing we know for sure is we 

will not be able to predict when it happens. 

So my question is: If we were able to successfully deal with the 

future debt concerns that are depicted on the graph so well, do we 

have more flexibility to deal with years 1 through 10? In other 

words, is really the problem here the debt in the out-years, as opposed to the debt in the short years? Because it seems to me we 
26 

do need to be making investments in our economy not so much for 

the purposes of pure economic stimulus, but for the purposes of 

preparing a broader number of Americans for a new world that is 

fundamentally changed because of globalization and technology. 

And a broad number of Americans have been left behind because 

of that, and a narrow number of Americans have benefitted because of that. Not because they did anything wrong, it is just the 

way the cards have been dealt. 

So it feels to me like we do need to make investments. And if 

we could deal with the long-tail risk on our debt, our ability to 

manage, it seems to me, the debt in the next 10 years is dramatically enhanced and we are in a much better position to do the 

things we need to do. 

So my first question is: Does the panel agree with that? 

And then the second question—and I will lay them both out and 

this way you can deal with them at the same time—is: Dr. Johnson, you said something very interesting about thinking about revenue and spending levels in the future. And I agree with what Dr. 

Holtz-Eakin said which is this is a mathematical formula. 

We should figure out what we spend, and then we should develop 

revenue-gathering methodologies to match what we spend. And historically we have thought about these things in kind of the 18 to 

19 to perhaps the 20 percent range, and that has been based on 

a looking-back approach. And whenever we have gotten outside of 

those bounds, either on the revenue side or on the spending side, 

we end up in very significant issues like we have now. 

And we did both of those things. We went way outside it on the 

revenue and we went way outside it on the expenditures, and now 

we have a significant debt. It is pretty obvious. 

In the future—and the world has changed. We are in a global 

economy. Technology has changed everything. We are likely to 

have a sustained period of income inequality because people with 

educations and access to capital do really well in this world. And 

then you have the demographic changes. 

Should we think about that number differently? Is it 18 to 19? 

Or in the future is it 21 to 22? So is debt in the next 10 years the 

problem, is the first question. And what should that range be when 

we are thinking about years 11 through 20 in the future. 

We’ll start with Senator Gregg. 

Senator Gregg. Well I do not think you can ignore the next few 

years. But there is no question that if you are going to address this 

issue in a way that has substantive impact on the future of our Nation, the prosperity of our children, and our standard of living, it 

is the second 10 years, and the third 10 years that are the important years, in my opinion, relative to policy changes you can make 

today that impact those years. 

That is actually why I was so encouraged by the President putting ‘‘change CPI’’ on the table. Because in the first 10 years, it is 

not a big number relative to Washington terms. It’s $200 to $300 

billion. But in the second 10 years, it is probably close to $1 trillion. In the third 10 years, it is multiple trillions. It is a 

compounding event. 

It is also why I suggested that any agreement that be reached 

has to be subject in the Senate to a 67-vote point of order. Because 
27 

otherwise nobody is going to believe the changes which really start 

to grab in the second and third 10 years. 

I do believe the size of the government is going to have to grow 

simply because of the demographic shift. That is why, as probably 

one of the more fiscally conservative members of the Senate, if not 

the most at the time, although Coburn was on the Commission too, 

I voted for going to 21 percent as the size of the government under 

Simpson-Bowles because of the huge shift in demographics. 

Representative Delaney. Dr. Rivlin. 

Dr. Rivlin. The second 10 years or the third 10 years are obviously the most important, and most of the sensible reforms in entitlements do not cut in until then. And that is why we need them. 

But I would not ignore the first 10 years, either. I think we can 

raise more revenue by reforming the Tax Code, and that would 

help our growth sooner than the end of 10 years. 

And I do not think we know how long it might be before we had 

some kind of a debt crisis. And the cost of servicing the debt will 

rise quite quickly, even if interest rates only go back to normal. 

On the size of government, we are going to have to go up, and 

I would think actually a little higher, to 22, 221⁄2, is likely to be 

necessary to absorb this number of seniors. 

Dr. Holtz-Eakin. Great questions. I feel like it’s an oral exam. 

[Laughter.] 

Let me be brief. Again, I would share the urgency about not 

waiting for the second 10 years. I understand we will get bigger 

changes from those. And there are a couple of reasons for that. 

One is, you do not want to rely on the projections. The precision 

of these projections has enormous amounts of uncertainty. You cannot count on getting to the second 10 years in ways that the charts 

might appear. And that is a risk I do not want to run. 

Second is, you have to somehow commit to fixing the second 10 

years and do nothing in the first. It is hard to sell that, that, really, 

we’re going to be serious in 10 years. So moving now I think is very 

important. 

And I do not think that investing is at odds with fixing. As I said 

before, these are both imperatives. And lastly, I think there is a big 

difference between the size of government and the composition and 

what it does. And I think there is a very real competitiveness issue 

and educational reforms that we need that are not at odds with 

picking the size of government that is within the traditional norms. 

Dr. Johnson. I agree completely with the way you framed the 

question. I think we need to think about human capital, investing 

in human capital, in a global world where we have a lot of people 

breathing down our necks one way or another are the only people 

who want to trade with us on a reasonable basis. The shift in inequality since the tax reform in 1986 is stunning, and I think was 

quite unexpected by anyone who was involved in designing the tax 

system at that point. 

And I think we need to consider that and think about the opportunities for younger Americans’ education and health care that is 

available to people who do not have a lot of resources right now but 

who are the foundation of productivity and competitiveness as you 

look out through the rest of the century. 
28 

I think we are having a very good discussion about the size of 

government. I think that is exactly—as Senator Gregg said, that is 

where you should start. What does it take to provide a reasonable 

level of public goods, both the productivity kind and the redistribution kind. 

My math comes out with a different number, and we should look 

at those details. We may be talking about different end dates. But 

I see something more like 23, 24 percent for the medium term. I 

am looking out decades here. But I think that is the right conversation to have. What does it take, given your demographics, and 

given the public good you want to provide, and then how are you 

going to finance that? 

I am absolutely on board with the idea that you do not say, yes, 

we are going to fix this in 15 years. Or, I think Senator Gregg hit 

the nail on the head when he said: Put in legislation that is easy 

to repeal when things get tough—absolutely you don’t do that. Act 

now, but do not act for immediate austerity. You do not need that. 

You do not want that. 

Act in a way that is consistent with investing for the future 

while demonstrating you have made credible commitments to fiscal 

responsibility. And I am here I think representing the view that 

you need to move much more on the revenue side than even my 

distinguished colleagues want to move. 

Representative Delaney. Thank you. 

Chairman Brady. Thank you. Representative Campbell. 

Representative Campbell. Thank you, Mr. Chairman, and 

thank you three doctors and a senator. Could be a movie. 

[Laughter.] 

There is the old saying that the first step to recovery is admitting you have a problem. I first came to Congress in 2005, and I 

would argue then that there was a minority in both Parties that 

thought that the debt and deficit were a significant, or certainly 

‘‘the’’ significant problem. 

I thought we had gotten over that. I thought that by now maybe 

people would see that this is a serious problem, if not the most serious problem. 

Yesterday, the President came and spoke to us, the House Republican Conference. Frankly, I was discouraged—not that he came 

and spoke; that is always good. But I was discouraged by some of 

what he said, which was that he made it clear that he didn’t believe that balancing the budget was something that we ever needed 

to do. 

Now I am a CPA so, you know, balancing the budget has a symmetry to it which I sort of like as an accountant. But from my view, 

balancing the budget is much more than that; that it is something 

that creates the kind of conditions, or frankly to be on the trajectory that will balance the budget will create the kind of conditions 

to unleash the growth that we have before us that Senator Gregg 

has discussed. 

I believe what the President said, as I recall, yesterday was that 

he wanted to stabilize the deficit at 3 to 4 percent of GDP. That 

to me does not solve the problem. And I was discouraged by the 

idea that that was what his main objective was, and that any other 

objective beyond that he felt was unnecessary. 
29 

Your thoughts? 

Dr. Rivlin. Let me start. I think the important thing now, and 

we have all stressed it, is not to have your debt growing faster than 

your GDP. And get it on a downward trajectory. 

It is not necessary, in my opinion, to balance the budget exactly 

but we should have deficits that are well below our growth of GDP 

on the average. That is what we did at the end of World War II. 

We had a huge debt then, over 100 percent of GDP. We did not run 

surpluses. We ran small deficits and grew the economy faster than 

the debt. 

We got to a more comfortable state where we were down around 

a debt of about 30 percent of GDP. I would like to get there eventually, but not so fast that we wreck the economy. 

Dr. Johnson. What Dr. Rivlin said is exactly in line with what 

the International Monetary Fund says to countries around the 

world, and what your government through the Treasury Department urges the IMF to say to countries: Stabilize, bring down debtto-GDP so you want to have growth. And you need to consider how 

much growth you can achieve when you are thinking about reasonable, responsible deficit targets. 

But stabilizing, talking about, thinking about is the right debtto-GDP for the country, that is the right conversation. 

Dr. Holtz-Eakin. So I think the problem with stabilizing debt 

is we already have too much. So you are stabilizing at a high and 

dangerous level with unknown risks, like higher interest rates, 

which would further tie the hands of future democracies. I mean, 

that does not make sense for the United States. 

I will speak out on behalf of balancing the budget. I mean, I am 

a Ph.D. economist and I was indoctrinated that balancing the budget is stupid, and primeval, and represents a neanderthal way to 

think, and I have come around to the point of view that we need 

fiscal discipline in the United States. 

And a commitment to something like a balanced budget is something that will be important; that you can design balanced budget 

goals with sufficient flexibility for economic and national security 

emergencies; that they are not dangerous to growth; and that we 

ought to think very hard about a commitment to balanced budgets 

in one form or another. 

Senator Gregg. If our goal is to reach a deal, we should not get 

engaged in this fight. I am 100 percent for balancing the budget. 

I did it governor, and it was my goal here in the Congress for 

years. 

But our goal should be to stabilize the policies which are driving 

our debt. And that means we have got to get everybody in the room 

around those policies and address them. And in accomplishing that, 

we will make—the outcome will be, the result will be that we will 

move close enough to a balanced budget so that those of us who 

want to balance the budget will have a reasonable shot at it; and 

those who want to maintain a debt, a deficit of 2 to 3 percent will 

have their ability to make that argument, too. 

But the goal—we should not get sidetracked. In my opinion, we 

should not get sidetracked on this debate because it really is not 

going to move the process forward. Our process needs to be to 

reach a comprehensive, bipartisan agreement—it has to be bipar-
30 

tisan because this is a divided government—and so this debate I 

think sidetracks us. Even though it is very important, as a Republican, that we balance the budget, I know that that is not the position of the President and I do not want to hold him to my position 

in order to get a deal. 

Representative Campbell. Thank you. 

Chairman Brady. Thank you. I would like to welcome Senator 

Murphy to the Committee. And as a former House Member just 

out, I hope you remember some of the little people you met along 

the way. 

[Laughter.] 

We are glad you are here at the Joint Economic Committee. 

Senator Murphy. That is why I asked for this Committee, to remind me of all my friends in the House. 

This is a fantastic panel, Mr. Chairman. Thank you for putting 

it together. I have learned a lot already, and I have two questions 

and maybe I will only have time to fit one of them in. 

But one of the things I am fascinated by is the relative unanimity of this concept that you decide what you need to spend 

money on, what you absolutely need, get a government no bigger 

than what is necessary, and then you fashion revenues around it 

in a way that makes sense so that you have got a revenue structure that promotes growth. 

And so I think it might be worthwhile, at least for me, to spend 

just a little bit of time talking about from an economic perspective 

what we actually need to spend money on. You know, it worries me 

that we are spending 3 percent of our GDP on infrastructure, when 

Europe is spending twice that, China is spending four times that. 

It worries me that it is three times as expensive today to get an 

advanced degree in this country in real dollars than it was in 1980; 

that we are spending less money today on worker training than we 

ever have before. 

And so I guess my question is: What does the data tell us are 

the greatest chances to get real economic multipliers out of investment and spending? What are the accounts that you would recommend that we be protecting or advocating for increases to try to 

generate real economic growth? 

For instance, in this last round of negotiations over the CR we 

seemed to protect defense spending, and very little else; when, well 

you certainly have an argument, aside from economic multipliers, 

as to why you should spend on defense, it doesn’t necessarily add, 

as does education investment or job training investment, or infrastructure investment. 

So can you guys just talk a little bit about what portions of the 

discretionary budget you think are most important to be held 

harmless in order to kind of generate economic growth down the 

line in this new framework? 

Senator Gregg. Well that is an ‘‘eye of the beholder’’ issue. But 

the first obligation of a national government is national defense, in 

my opinion. That does not mean you hold it harmless, because I 

happen to believe the Defense Department can be subject to fairly 

stringent review and probably save a heck of a lot of money. And 

I actually think that that is one of the pluses of the Budget Act 
31 

Agreement of 2011, and the sequester, is it is going to force the Defense Department to face up to some of this. 

I am a great believer in investing in infrastructure. I believe that 

that does give you a very significant return, and it is hard dollars 

on hard projects. I think the biggest failure of the stimulus package, besides the fact it was not paid for and it was too much— 

which were two fairly big failures—was that only 16 percent of it 

went into infrastructure, which was foolish. 

I think R&D is important. I think education is important. But I 

think Dr. Rivlin has made the point: Discretionary is not where the 

problem is. These are all discretionary issues. The problem is not 

in the discretionary accounts. The problem is in the entitlement accounts when it comes to spending. 

And so the focus should be entirely on entitlement accounts and 

how you make those deliver quality outcomes at a better price. 

Dr. Rivlin. I would favor spending on smart infrastructure investment and smart education and science investment, a shifting 

toward those priorities. But I think it is really a question of how 

well you spend the money, rather than the quantity, and we have 

not done a terribly good job in spending on our infrastructure in 

the best way. 

So it is not just a question of more. But the real point is the one 

Senator Gregg made. That unless we curb the rates of growth of 

spending on older people, primarily, that spending is going to 

squeeze out investments in young people and eventual higher 

growth. 

Dr. Holtz-Eakin. I can only echo the comments. It is very important to spend this money well. And I spent two years on a bipartisan Transportation Policy Project looking at reforms. We have 

100 transportation programs that do not unify to serve any federal 

purpose, and do not deliver anything in the way of economic benefits to a Nation that needs better infrastructure. 

And so getting these programs to actually produce value for their 

dollars is step number one. That goes in other areas, as well. 

I mean, I think education and health we both know are delivering products of highly uncertain quality for enormous amounts of 

money. They go up a lot. And we need to clean that out. And that 

I think is one of the hidden pieces of the defense spending. 

That is not all planes, and tanks, there are big pension problems 

and big health problems in the defense budget, as well. We need 

to fix those, and that will help us focus on the core things which 

are national security and basic research and infrastructure, things 

our Founders would recognize as government. 

Dr. Johnson. I would agree with much of what has been said, 

but want to add and reinforce the importance of children, and children’s health, and children’s education. I am very worried about 

the cuts to Medicaid. 

About half of Medicaid goes to children. These are the future of 

the country. The way the economy has played out over the past 

three decades, completely unanticipated, has skewed the income 

distribution massively in an almost unprecedented way in this 

country. And it means that many people at the bottom end of the 

income distribution cannot invest, do not have the money to invest, 

in the kind of education they want for their children. And they can-
32 

not afford decent food in some cases, or there is a tradeoff between 

food and health care. 

This is a terrible situation. 

In terms of holding people harmless, Senator, I would try to hold 

harmless, really try very hard to hold harmless the children who 

are right now in the line of fire for a lot of the austerity that is 

being discussed. 

Senator Murphy. Thank you, Mr. Chairman. 

Chairman Brady. All right. Thanks, Senator. For the final 

question, Representative Amash. 

Representative Amash. Thanks, Mr. Chairman, and thanks to 

the panel for being here and sharing your insights. 

I want to discuss a Constitutional balance-the-budget amendment for a little bit. About a year-and-a-half ago there were votes 

in the House and the Senate on balanced-budget amendments, or 

BBAs. There were two versions in the Senate. 

The Senate had 67 Senators vote ‘‘yes’’ on at least one version. 

In the House we came up with about 23 votes short of the twothirds necessary. States have balanced-budget amendments in 

their constitution, and they follow different fiscal rules. 

So I want to ask Dr. Johnson. You have had concerns about capping spending as a percentage of GDP. Could you elaborate on 

those concerns? 

Dr. Johnson. Well actually I was expressing support for what 

Senator Gregg said, which is you should first decide what is the 

right level of spending as you look out over some decades, given the 

nature of your society, how you think the world is going to change, 

what threats you will face militarily and non-military threats, and 

what role you want government to play. 

And obviously there is a very wide range of views about the role 

of government in this room, but that is the right place to start the 

discussion. If you can agree on that, and we have heard 19 percent, 

21 percent, 22 percent, and I think I am at 23, 24 percent, that is 

about the right spectrum for views, once you have decided on that, 

then figure out how to fund that in a responsible way. 

And aiming for balancing the budget I think is fine. I also agree 

with Senator Gregg, it gets in the way now. And the right way to 

operationalize the goal is to think about debt relative to GDP. 

Representative Amash. But you would object to putting into a 

balanced budget amendment a cap? 

Dr. Johnson. I have never—I have never and will never describe the idea of balancing the budget as neanderthal or primitive. 

That is not my view. The United States was run for the first 150 

years on the principle that we should aim to balance the budget at 

least in good times. 

However, there come times which are not so good, and there are 

times like this in the 19th Century, also, where it is advisable to 

have the ability to slip out of balance towards a deficit, assuming 

that you share the goal of coming back towards, more closely towards a balanced budget, and bringing down the debt-to-GDP. 

My goal for debt/GDP is far below where it is today, and far 

below where it is in those charts. I want 40 to 50 percent, based 

on experience. But that is the heuristic I would propose for the 

modern world, not the heuristic that served them well in the 1830s. 
33 

Representative Amash. Dr. Rivlin, would you oppose the idea 

of putting a cap, a percentage of—spending as a percentage of GDP 

in a balanced-budget amendment? 

Dr. Rivlin. I think it is a diversion from the real problem, which 

is thinking about how do we control the cost of the entitlements so 

they are not rising faster than the economy is growing. 

That is hard. And we have got to do it. And how do we set up 

a tax system that is more pro-growth? Putting algebra in the Constitution, as my former colleague, Charlie Schultz, used to say, does 

not solve anything. If you are to put a balanced-budget amendment 

in, you have to put in so many exceptions that it is gobbledegook. 

I would not do it through the Constitution. I would do it through 

action of the Congress and the President. 

Representative Amash. How about the idea of just balancing 

the budget every year, with the exception of emergencies? Would 

you support that idea? 

Dr. Rivlin. No, I would not support it as a general idea because 

there are emergencies. We have just lived through an emergency. 

Representative Amash. But with the exception of an emergency. I think any balanced-budget proposal is going to have an escape clause for emergencies. 

Dr. Rivlin. Well it would depend on what an ‘‘emergency’’ is. If 

the economy is in deep recession, balancing the budget is a crazy 

and counter-productive thing to do. 

Representative Amash. Would you be more likely to support a 

policy, say a Constitutional amendment, that was countercyclical? 

Dr. Rivlin. Then you get into the writing algebra into the Constitution. I am opposed to doing this through the Constitution. Do 

it through policy. 

Representative Amash. Senator Gregg, in June 2011 you wrote 

that conservatives must not let advocacy for a balanced-budget 

amendment be an excuse for avoiding votes on difficult but crucial 

reforms. And you have echoed that here. And I agree with that. 

Do you have any intrinsic objections, though, to a well-crafted bipartisan and broad balanced-budget amendment? 

Senator Gregg. No. I supported it numerous times. My point 

there was that there were—a balanced-budget amendment is going 

to take years to ratify. Years. And it gives some people political 

cover to say, well, I am for the balanced-budget amendment therefore I do not have to make this tough vote because I have already 

voted for the balanced-budget amendment. 

There are very tough votes that are going to have to be made 

here that have nothing to do with whether or not you are for or 

against a balanced-budget amendment, and you should not—and 

people should not use the balanced-budget debate as a way to get 

off the point of making those tough votes. That was my point. 

Representative Amash. Mr. Chairman, may I ask one more 

question? 

Chairman Brady. We are out of time, Representative. I apologize about that. If you would like to submit it in writing to the witnesses, would you mind responding promptly to the Representative? 

[Panel Members nod affirmatively.] 

Representative Amash. Thank you, Mr. Chairman. 
34 

Chairman Brady. Thank you, so much. This is such a great discussion, I frankly hate to end that way since this has been one of 

the most thoughtful and insightful panels we have had an opportunity to hear from. This is the right issue at the right time. 

One theme we hear is the easy votes are over. If we are going 

to tackle our biggest challenges, the easy votes are decades behind 

us. And so on behalf of Vice Chair Klobuchar and myself, I want 

to thank you all for being here. Thanks to the Members for their 

questions. 

The hearing is adjourned. 

[Whereupon, at 11:09 a.m., Thursday, March 14, 2013, the hearing was adjourned.] 
(35) 

SUBMISSIONS FOR THE RECORD 
36 

PREPARED STATEMENT OF SENATOR DAN COATS

• I would like to thank Chairman Brady and Vice Chair Klobuchar for holding 

this hearing on a subject of the most vital importance for our nation’s economy 

and, indeed, our national security: the ever-growing federal debt. • Our spending addiction in Washington has, at long last, led us to the point 

where we now face the prospect of record deficits as far as the eye can see, a 

spiraling federal debt that now exceeds $16 trillion, and the possible further 

downgrading of the credit rating of the United States. Were interest rates not 

artificially held down by the Fed at historically low levels, we might already be 

facing our day of reckoning. According to the Congressional Budget Office, even 

a one percentage point increase in interest rates would add $1.1 trillion to the 

United States’ debt over ten years. And that new debt would occur without any 

changes in spending or taxes, so individuals would have no more money in their 

pockets and the government would not be spending any more—interest rates 

would simply drive our debt out of control. 

• The fact is that Congress and the Executive branch have utterly failed to address the debt crisis effectively. Temporary stopgap measures, such as the recent suspension of the debt limit for four months, don’t solve anything—they 

simply put off the inevitable day of reckoning. Despite the hype, the supposedly 

‘‘massive’’ sequester cuts will do little to improve the long-term fiscal condition 

of our nation. According to the Bipartisan Policy Center, these arbitrary, poorly 

designed budget cuts will merely delay our national debt reaching 100 percent 

of GDP by two years. 

• Eventually, we will reach a point where investors either stop buying our debt 

or insist on higher interest rates to account for their greater risk, potentially 

triggering a crisis of confidence. We do not know when that tipping point will 

be, but if you look at our total government debt as a percentage of GDP compared with some nations that have already reached that tipping point and gone 

into full-fledged fiscal crisis, it is cause for serious concern. We all know that 

we are going to have to make the tough spending choices that we’ve been avoiding for years, or we are going to face a debt-induced catastrophe that will make 

the economic downturn we experienced a few years ago look minor by comparison. 

• Many experts believe that our failure to seriously grapple with our ballooning 

national debt is already having a significant detrimental impact on economic 

growth. They understand that a mounting debt will one day need to be paid 

for with either higher taxes or reduced benefits. Our failure to deal with our 

spending addiction and long-term debt has created a cloud of economic uncertainty that suppresses consumer confidence. It’s causing investors to remain on 

the sidelines and preventing business owners from hiring new employees. Our 

refusal to address out-of-control deficit spending is like a foot on the neck of 

the economy. 

• We all know—or we ought to know—that our current path is unsustainable. 

Academics, economists, business leaders, and even the bi-partisan SimpsonBowles Commission established by the President all repeat the same thing: unless we make the tough spending choices that we’ve been avoiding for years, we 

are going to face a debt-induced catastrophe. It is only a matter of time, and 

the clock is running down. 

• There is widespread agreement that the only way to get our long-term debt 

under control is to tackle the difficult problem of soaring mandatory spending. 

According to the Simpson-Bowles Commission Report: 

By 2025, revenue will be able to finance only interest payments, Medicare, 

Medicaid, and Social Security. Every other federal government activity— 

from national defense and homeland security to transportation and energy—will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 

percent of GDP by 2035. Interest on the debt could rise to nearly $1 trillion 

by 2020. These mandatory payments—which buy absolutely no goods or 

services—will squeeze out funding for all other priorities. 

• The plain fact is, in order to make a real impact on the deficit and the federal 

debt, we need to go big and go bold. In addition to discretionary spending reforms, we need real action on reforming our mandatory spending. Medicare, 

Medicaid, Social Security, and ObamaCare are projected to outstrip all tax revenue. There simply won’t be enough money to spend on anything else. 

• We won’t have enough to cover our commitments to seniors either. In America, 

we have always prided ourselves on fulfilling our commitments to future gen-
37 

erations, but our failure to act now all but ensures drastic cuts to Medicare and 

Social Security beneficiaries in the future. 

• Today’s hearing presents us with an opportunity to find common ground in 

tackling these difficult issues. We will hear about a number of different approaches to tackling our long-term debt problem and explore where there is 

agreement and where there is disagreement. I look forward to the testimony of 

the expert witnesses we have assembled here today to address the question of 

how we go about solving our federal debt crisis. 
38 
39 
40 
41 

PREPARED STATEMENT OF SENATOR JUDD GREGG

Chairman Brady, Vice Chair Klobuchar, Senator Coats, Representative Maloney 

and other members of the Committee, I appreciate this opportunity to discuss the 

state of the national debt. 

Robert Zoellick, the past head of the World Bank, is fond of telling the story of 

how the Foreign Minister of Australia said to him a few months ago that: ‘‘America 

is one debt deal away from leading the world out of its economic doldrums.’’ 

He is right. 

Dangerously, some observers believe the country has completed its work on deficit 

reduction. Despite some improvements, however, the debt will continue to rise as 

a share of our economy over the long-term. This fact continues to present a serious 

economic danger for the United States. 

We are now engaged in the struggle to obtain a debt deal large enough to stabilize 

the debt and put it on a downward path, at a time when Washington and the media 

are energized on the issue of dealing with the sequester. 

We know the problem. It is that our present rate of accumulating debt due to our 

historically large deficits will inevitably lead to a fiscal crisis. 

THE DRIVERS OF OUR NATION’S LONG-TERM DEBT LOAD

Any debt reduction plan needs to primarily focus on changes to those programs 

that are driving the problem. These of course are the major entitlement accounts, 

Medicare, Medicaid and Social Security, along with comprehensive tax reform. 

While it is has been good to see progress made over the last two years on enacting 

some savings, unfortunately all of the measures put in place have ignored smart entitlement reforms to control spending over the long-term and comprehensive tax reforms to make the tax code more efficient. These are the primary fiscal challenges 

facing us, and we can no longer avoid them. We’ve done the easy work of deficit 

reduction—enacting discretionary limits and raising taxes on wealthy Americans. 

We must renew our focus on the remaining elements of fiscal reform. 

Rising health care costs and an aging population are the central drivers to our 

rising debt trajectory. We cannot continue to let health care costs rise faster than 

our National income. We must find ways to adopt sensible reforms to address population aging and rising health care costs this decade before costs reach untenable 

levels. 

Smart entitlement reforms need to involve adjustments which grab hold in five 

years, ten years, and fifteen years so that they make these programs sustainable 

and affordable not only in the next few years, but in the long term. 

HOW DEFICITS AND DEBT INHIBIT ECONOMIC GROWTH

Professors Reinhart and Rogoff have done exceptional work on documenting the 

inevitability of a reduction in economic well-being if our debt to GDP ratio passes 

certain benchmarks, which we are quickly closing in on. A large number of other 

studies from universities, the Congressional Budget Office, the International Monetary Fund, and other organizations worldwide show us that the conclusion is clear: 

rising debt will hold back strong economic growth down the road. This occurs as rising debt pushes up interest rates, ‘‘crowding out’’ private investment. 

Equally important is the fact that it is a distinct likelihood that the financial markets themselves will at some point, sooner rather than later, look at our massive 

accumulation of debt and conclude that we will be unable to pay it back. The markets will react to this by assuming that the currency will have to be devalued 

through inflation and the cost of servicing our nation’s debt will jump radically. This 

will significantly compound what will be a dire fiscal situation. 

Debt reduction done right can actually strengthen the economy down the road. A 

recent analysis from the Congressional Budget Office found that a $2 trillion reduction in primary deficits could boost the size of GNP by nearly 1% over ten years. 

And in the short-term, there is evidence that just the announcement of a long-term 

deficit reduction plan could bolster the recovery by improving confidence and certainty about United States fiscal policy. 

WHAT AMOUNT OF DEFICIT REDUCTION IS NEEDED

The ‘‘deal’’ that can avoid this crisis is apparent and very doable. 

The goal of deficit reduction must be to put the debt on a clear downward path 

as a share of the economy, this decade and over the long-term. Achieving that goal 

will require reducing the debt to below 70% of the size of the economy by 2023. 

The good news is that the President and Congress has tried over the last several 

years to grapple with how to come to terms with our debt problems and have accom-
42 

plished a hard $2.5+ trillion dollars of debt reduction out of the total needed. The 

Budget Control Act of 2011 cut $917 billion dollars in mostly discretionary spending, 

prior continuing resolutions enacted hundreds of billions in discretionary spending 

savings over ten years, and the fiscal cliff agreement, formally known as the American Taxpayer Relief Act, generated over $600 billion dollars in new revenues. These 

were serious steps down the road of putting our fiscal house in order, but we are 

not there yet. 

In the wake of these efforts, getting control over our debt will require additional 

deficit reduction. 

Our fiscal problems will self-correct if our government reduces our deficits and 

debt over the next ten years by at least an additional $2.4 trillion dollars in reforms, 

reforms that should also increase in their effectiveness beyond this ten-year window. 

In total, this would produce over $5 trillion in savings when including the policies 

we have already put in place. This represents the minimum amount of savings 

needed to put the debt on a downward path as a share of the economy to below 

70%. 

Ideally, lawmakers would aim for an even larger amount of savings. In today’s 

terms, the President’s own National Commission on Fiscal Responsibility and Reform would produce a total of between $6.5 and $7 trillion in savings over ten 

years—an even more aggressive target. 

Some observers have said we only need an additional $1.5 trillion in savings over 

the next ten years in order to stabilize the debt as a share of the economy. While 

it is true that $1.5 trillion would likely stabilize our debt this decade, it would likely 

be insufficient to control the debt over the long-term, leaving the country open to 

serious risks, including: 

• No Room for Error for future deficit-increasing policies or if economic projections are too rosy; 

• No Long-Term Stability in the face of rising health care and retirement costs 

that become harder to contain later this decade and beyond, requiring a ‘‘running start’’ to control the debt and interest payments later on; 

• Slower Economic Growth due to higher interest rates ‘‘crowding out’’ investment; and 

• No Fiscal Flexibility in the case of natural disasters, security needs, or an economic downturn. 

Putting debt on a downward path with another $2.4 trillion in new deficit reduction would address the risks. This may seem like a great deal of money, but when 

one considers that it is off a base of approximately $40 trillion dollars of spending 

over the next ten years, it is definitely manageable. 

WHAT POLICIES CAN CONGRESS PURSUE TO REDUCE THE DEBT AND ENCOURAGE

ECONOMIC GROWTH

Most of the changes that are needed now, unlike the practical effect of continuing 

to reduce spending through the sequester, are changes to entitlement programs and 

tax policy which can and should compound in their effectiveness as we move beyond 

this initial ten year window. 

What is the deal we need? It should obviously start by an agreement to replace 

the sequester with targeted and effective changes to federal fiscal policy that gets 

a reduction in the deficit over the next ten years of at least $2.4 trillion dollars and 

that can be presumed to do significantly more than that in the following decades. 

It should be an agreement that at a minimum has a goal of stabilizing our debt 

to GDP ratio at 70 percent or less. Why wait for another fiscal speed bump to address these issues? 

The President proposed a specific change, which would be a significant contributor 

to this type of responsible action, when he proposed changing the manner in which 

the Federal cost of living adjustment (COLA) is calculated to make it more accurate. 

In their latest framework, Sen. Simpson and Erskine Bowles have put forward 

$600 billion as a credible and bipartisan target for health savings over ten years, 

which could be achieved through various options, including many outlined by the 

Committee for a Responsible Federal Budget, which I have attached to my testimony. It is a specific and doable list. Much of it is directed at making Medicare and 

Medicaid better programs by focusing on outcomes and value rather than utilization 

and repetition. 

Of course, there is also the proposal for approximately $200 to $300 billion in entitlement savings that was reportedly agreed to between the President and the 

Speaker in the summer of 2011 and which was further discussed during the fiscal 
43 

cliff negotiations. These are presumably well-vetted ideas that are essentially off the 

shelf ready for a ‘‘deal.’’ 

Take any permutation of these proposals and add in the CPI change proposed by 

the President, known as ‘‘chained CPI’’ and throw in a long-term adjustment in the 

eligibility age for Medicare and Social Security (which reflects the large increase in 

life expectancy that we have seen and will continue to see) and you have the spending side of a very strong package. 

Comprehensive tax reform is also necessary. Although a significant majority of 

the reduction in our deficit must come from the spending side of the ledger, reforming the tax code to lower rates and broadening the tax base will be good both for 

the economy and our fiscal health. Ironically, Senator Coats, the lead Senate Republican of this Committee has, along with Senator Wyden, proposed such an approach 

and it would be a good guide to developing a bipartisan, strong bill to fundamentally 

improve and reform our tax policy as a nation making us more competitive. 

There are at least two other crucial points that the ‘‘deal’’ must include. First, it 

must be based off an agreement that fixes the size of the government as a percent 

of GDP. The federal government since the end of World War II through 2007 has 

been approximately 19.8 percent of GDP. In the last few years it has grown to over 

23.5 percent and is still headed up. Some of this growth is inevitable due to the retirement of the baby boom generation, which is doubling the number of retirees in 

our society. Agreeing to fix the size of the government to a percent of the GDP that 

is closer to its historical range is essential to driving long-term solutions to our debt 

problem. The National Committee on Fiscal Responsibility and Reform used the 

metric of 21.3 percent, which is realistic in light of the demographic shift. This metric also sets an appropriate relationship between spending restraint and revenues 

of about three to one in the out years. 

Secondly, all entitlement changes that reduce projected spending need to be 

locked in with a procedural provision that keeps later Congresses from arbitrarily 

rescinding them. This can be done by making attempts to reverse such changes subject to a 67 vote point of order in the Senate. 

The opportunity for the ‘‘deal’’ is sitting there. It is not rocket science or, for that 

matter, even model rocket science. It is very doable and all the policy options are 

well debated, vetted, and known. It should be simply done so that a predictable fiscal crisis can be muted and our nation can move on as a better and stronger place 

for ourselves and our children. 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 
61 
62 
63 
64 
65 
66 
67 
68 
69 
70 
71 
72 
73 
74 
75 
76 
77 
78 
79 
80 
81 
82 
83 

OPINION: WINDOWS OF OPPORTUNITY CLOSING

(By Judd Gregg) 

Two events are starting to close the windows of opportunity for this president to 

govern and for this Congress to contribute to governance. 

The first became clear with the release of the minutes from the most recent meeting of the Fed. The days of expansive monetary policy and low interest rates are 

numbered. 

It is obvious that, even among some members of the Fed’s board, there is a growing restiveness about the policy of pumping near-limitless amounts of new dollars 

into the economy in the name of pushing full employment. 

Yes, seeking full employment had always been one of the Federal Reserve’s two 

core responsibilities. But the other one—the imperative to protect the value of the 

currency—has historically and appropriately taken precedence. 

No one can look at the Fed’s actions over the last few years and not conclude that 

the risk created by the constant and massive printing of money is real. Its potential 

to destabilize the dollar is significant. 

This reality is beginning to cause the Fed membership, if not its leadership, to 

question whether staying the course of this extraordinary balance sheet expansion 

in pursuit of full employment is a good trade-off. It is inevitable that the Fed is 

going to have to take action to contract this expansion. Interest rates will rise. The 

adjustment will probably come sooner rather than later. The implications for the 

president, the Congress and federal fiscal policy are dramatic. 

The Fed has been busily laying down a thick smoke screen that has allowed the 

president and the Congress to obfuscate the real cost of the incredible deficits and 

resulting debt that they have been running up over the last four years. 

This cover is going to be pulled away as the Fed adjusts its policies. It will lead 

to a rather stark awakening. The unconscionable and profligate fiscal policies will 

be called to account for their true costs with a massive spike in the cost of federal 

interest payments. 

If interest costs for the federal government simply return to their historic levels, 

it will add $400 or $500 billion of new expenses to the annual federal balance sheet. 

This will overwhelm any tax increase even this President can contemplate and any 

spending cuts that even the most ardent House Republican could pursue. It will 

mean billions and billions of dollars of unanticipated obligations. 

If the federal government had a budget, which due to the Senate Democratic leadership it does not, it would blow a hole the size of Alaska in it. 

All this for interest payments that do virtually nothing to help deliver a bettergoverned nation or a stronger economy. It is money thrown out the window. It will 

compound dramatically the difficulties involved in addressing our deficits and long 

term insolvency issue. 

There is now a window of opportunity to correct the county’s debt problem amid 

this artificial environment of exceptionally low interest rates created by the Fed. 

But the window is closing and it will not reopen. 

The failure to get our fiscal situation in order during this unique period will go 

down as a major act of misfeasance by the President and the Congress. Neither history nor our children will view their actions kindly. 

The second event that is going to limit the ability to govern by those charged with 

governing is the return to the election cycle. Some would say in observing the President’s performance that he has never stopped electioneering. 

But the fact remains that there is a period—albeit one which is fast moving toward its close—when, in theory at least, the two sides should be able to mute the 

politics and come together to govern. By the end of the summer, this window will 

also close. The chance will most l ikely be lost. 

Both sides have an obligation to take at least one more serious run at getting 

something done to right the unsustainable course of our federal fiscal ship. 

If first lady Michelle Obama allows her husband to play golf with Tiger Woods, 

it should not be too much of a reach to tell her husband to go play golf with the 

Speaker. 

Tell them to hit the restart button. Tell them to do something good together for 

the county and our kids. Just the two of them in a golf cart for four hours working 

out America’s, and for that matter the world’s, problems. How refreshing that would 

be. 

Judd Gregg is a former governor and three-term senator from New Hampshire who 

served as chairman and ranking member of the Senate Budget Committee and as 

ranking member of the Senate Appropriations subcommittee on Foreign Operations. 

He also is an international adviser to Goldman Sachs. 
84 

Source: http://thehill.com/opinion/columnists/judd-gregg/284575-opinion-windows-of-opportunity-closing 

Æ