S. HRG. 110–559 

CONCURRENT RESOLUTION ON THE 

BUDGET FOR FISCAL YEAR 2009 

HEARINGS 

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

January 24, 2008—THE CONGRESSIONAL BUDGET OFFICE BUDGET 

AND ECONOMIC OUTLOOK 

January 29, 2008—THE LONG-TERM BUDGET OUTLOOK 

January 30, 2008—ECONOMIC STIMULUS: BUDGET POLICY FOR A 

STRONG ECONOMY OVER THE SHORT AND LONG TERM 

January 31, 2008—THE LONG-TERM OUTLOOK AND SOURCES OF 

GROWTH IN HEALTH CARE SPENDING 

February 05, 2008—THE PRESIDENT’S FISCAL YEAR 2009 BUDGET 

PROPOSAL 

February 06, 2008—THE PRESIDENT’S FISCAL YEAR 2009 BUDGET 

AND REVENUE PROPOSALS 

February 12, 2008—THE PRESIDENT’S FISCAL YEAR 2009 DEFENSE 

BUDGET AND WAR COSTS 

February 14, 2008—HEALTH CARE AND THE BUDGET: INFORMATION 

TECHNOLOGY AND HEALTH CARE REFORM 

( 

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CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2009 

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42–157pdf 2008

S. HRG. 110–559 

CONCURRENT RESOLUTION ON THE 

BUDGET FOR FISCAL YEAR 2009 

HEARINGS 

BEFORE THE

COMMITTEE ON THE BUDGET 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

January 24, 2008—THE CONGRESSIONAL BUDGET OFFICE BUDGET 

AND ECONOMIC OUTLOOK 

January 29, 2008—THE LONG-TERM BUDGET OUTLOOK 

January 30, 2008—ECONOMIC STIMULUS: BUDGET POLICY FOR A 

STRONG ECONOMY OVER THE SHORT AND LONG TERM 

January 31, 2008—THE LONG-TERM OUTLOOK AND SOURCES OF 

GROWTH IN HEALTH CARE SPENDING 

February 05, 2008—THE PRESIDENT’S FISCAL YEAR 2009 BUDGET 

PROPOSAL 

February 06, 2008—THE PRESIDENT’S FISCAL YEAR 2009 BUDGET 

AND REVENUE PROPOSALS 

February 12, 2008—THE PRESIDENT’S FISCAL YEAR 2009 DEFENSE 

BUDGET AND WAR COSTS 

February 14, 2008—HEALTH CARE AND THE BUDGET: INFORMATION 

TECHNOLOGY AND HEALTH CARE REFORM 

COMMITTEE ON THE BUDGET 

KENT CONRAD, North Dakota, Chairman 

PATTY MURRAY, WASHINGTON 

RON WYDEN, OREGON 

RUSSELL D. FEINGOLD, WISCONSIN 

ROBERT C. BYRD, WEST VIRGINIA 

BILL NELSON, FLORIDA 

DEBBIE STABENOW, MICHIGAN 

ROBERT MENENDEZ, NEW JERSEY 

FRANK R. LAUTENBERG, NEW JERSEY 

BENJAMIN L. CARDIN, MARYLAND 

BERNARD SANDERS, VERMONT 

SHELDON WHITEHOUSE, RHODE ISLAND 

JUDD GREGG, NEW HAMPSHIRE 

PETE V. DOMENICI, NEW MEXICO 

CHARLES E. GRASSLEY, IOWA 

WAYNE ALLARD, COLORADO 

MICHAEL ENZI, WYOMING 

JEFF SESSIONS, ALABAMA 

JIM BUNNING, KENTUCKY 

MIKE CRAPO, IDAHO 

JOHN ENSIGN, NEVEDA 

JOHN CORNYN, TEXAS 

LINDSEY O. GRAHAM, SOUTH CAROLINA 

MARY ANN NAYLOR, Majority Staff Director 

DENZEL MCGUIRE, Minority Staff Director 

(II) 

iii 

C O N T E N T S 

HEARINGS 

Page 

January 24, 2008—The Congressional Budget Office Budget and Economic 

Outlook .................................................................................................................. 1 

January 29, 2008—The Long-Term Budget Outlook ............................................ 53 

January 30, 2008—Economic Stimulus: Budget Policy for a Strong Economy 

Over the Short and Long Term ........................................................................... 123 

January 31, 2008—The Long-Term Outlook and Sources of Growth in Health 

Care Spending ...................................................................................................... 205 

February 5, 2008—The President’s Fiscal Year 2009 Budget Proposal .............. 263 

February 6, 2008—The President’s Fiscal Year 2009 Budget and Revenue 

Proposals ............................................................................................................... 361 

February 12, 2008—The President’s Fiscal Year 2009 Defense Budget and 

War Costs ............................................................................................................. 417 

February 14, 2008—Health Care and the Budget: Information Technology 

and Health Care Reform ..................................................................................... 487 

STATEMENTS BY COMMITTEE MEMBERS 

Chairman Conrad...................................................... 1, 53, 123, 205, 263, 361, 417, 487 

Ranking Member Gregg.................................................. 11, 63, 132, 211, 302, 370, 492 

Senator Allard .......................................................................................................... 425 

Senator Bunning.................................................................................. 122, 200, 273, 415 

Senator Enzi................................................................................................. 246, 328, 588 

Senator Feingold ...................................................................................................... 201 

Senator Menedez.................................................................................................. 310, 404 

WITNESSES 

Laura Adams, President and CEO, Rhode Island Quality Institute ............... 510, 514 

Alan S. Blinder, Gordon S. Rentschler Memorial Professor of Economic and 

Public Affairs, and Co-Director, Center for Economic Policy Studies, Princeton University ................................................................................................... 135, 139 

General James Cartwright (USMC), Vice Chairman, Joint Chiefs of Staff, 

U.S. Department of Defense ................................................................................ 427 

Gordon England, Deputy Secretary, U.S. Department of Defense .................. 427, 430 

Mary Grealy, President, Health Care Leadership Council............................... 516, 519 

Tina Jonas, Under Secretary of Defense (Comptroller), U.S. Department of 

Defense .................................................................................................................. 427 

Valerie C. Melvin, Director, Human Capital and Managment Information 

Systems Issues, U.S. Government Accountability Office .............................. 493, 495 

Daniel Mitchell, Senior Fellow, The CATO Institute........................................ 168, 171 

Hon. Jim Nussle, Director, Office of Management and Budget ....................... 274, 278 

Peter R. Orszag, Director, Congressional Budget Office ...................... 13, 18, 213, 217 

Hon. Henry M. Paulson, Jr., Secretary, U.S. Department of the Treasury...................................................................................................................... 375, 377 

Hon. David M. Walker, Comptroller General of the United States, U.S. Government Accountability Office............................................................................. 65, 73 

Mark Zandi, Chief Economist and Co-founder, Moody’s Economy.com, 

Inc. ..................................................................................................................... 151, 155 

Page

iv 

QUESTIONS AND ANSWERS 

Questions and Answers..................................... 253, 331, 460, 592 

(1) 

THE CONGRESSIONAL BUDGET OFFICE 

BUDGET AND ECONOMIC OUTLOOK 

THURSDAY, JANUARY 24, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Murray, Stabenow, Whitehouse, 

Gregg, Allard, and Crapo. 

Staff present: Mary Ann Naylor, Majority Staff Director and 

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. We will bring the hearing to order. I want 

to welcome very much our distinguished witness, Dr. Orszag, to 

talk about the CBO outlook. We appreciate very much your being 

here and your service as the Director of the Congressional Budget 

Office. I know you have already had a chance to testify over on the 

House side and also in the Finance Committee on the stimulus 

package, so you have been very busy to start the New Year. But 

we welcome you to the Senate Budget Committee as well. 

Let me just go through quickly a couple of slides to put in perspective the circumstances we find ourselves in. We have had a 

substantial deterioration in the budget picture. You can see last 

year we had a deficit of about $163 billion. This year, when we 

take the CBO baseline and we add back war spending that is not 

in the CBO baseline and the effects of the proposed stimulus package, we see a deficit this year approaching $380 billion. 

2 

But that tells just one part of the story. We also see the debt 

going up substantially more than the deficit, and as I travel 

around, I find enormous confusion among the public about the difference between the deficit and the debt. The biggest difference between these figures, of course, is the Social Security Trust Fund 

money that is being used to pay regular operating expenses of the 

Federal Government. That is money that will have to be paid back, 

but it does not show in the deficit calculation. It is nearly $200 billion. But it is all added to the debt. 


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Let’s go to the next slide if we can. We look at the CBO deficit 

estimate, and we put with that the President’s policies—that is, the 

extension of the tax cuts and additional war costs—and we see that 

by 2018 we would face a deficit of nearly $600 billion. 


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We can go to the next slide. All of this leaves us with a picture 

of ever escalating debt. The gross debt of the United States was 

$5.8 trillion at the end of 2001. At the end of 2009, which will be 

the last year that the President’s budget will have been operational, we anticipate now the gross debt of the United States will 

be $10.3 trillion, and we are headed by 2013 for a gross debt of 

over $13 trillion. 


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Let’s go to the next slide, if we can, and if we look at an even 

more extended picture, according to CBO, the Federal debt absolutely soars on the long-term budget scenario going out to 2058. 

This is a result largely of the retirement of the baby-boom generation and the pressure on Medicare and Social Security. And I hope 

that we will have a chance to have some discussion today about the 

absolute need to face up to these long-term imbalances, these 

shortfalls in the entitlements, and the disconnect between revenue 

and expenditure, at least proposed expenditure. 


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I would like also just to put in perspective economic conditions 

that we face, the housing slump. We see that the sales of new family homes has fallen dramatically. We continue to see fallout from 

the subprime crisis and the other credit markets. We have seen 

certainly serious effects in the financial markets. 


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This is a headline from the Financial Times: ‘‘Fears spark global 

plunge.’’ This is what happened—this is from January 22nd. These 

are foreign markets. Obviously, our market yesterday showed a significant increase. I think we were up almost 300 points yesterday 

on the Dow. But this is what has been happening in other markets, 

the U.K., Europe, Asia. 


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We have also seen consumer confidence deteriorate in 2007. The 

index of consumer confidence from the Conference Board has 

slumped dramatically. That is why there is the talk of a stimulus 

package, the need to do something and do it quickly. 


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I just want to reference the Chairman of the Federal Reserve, 

who warned us that any program should be explicitly temporary, 

both to avoid unwanted stimulus beyond the near-term horizon 

and, importantly, to preclude an increase in the Federal Government’s structural budget deficit. 


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Finally, I would like to end on something that is bipartisan, at 

least on this Committee, and that is the question of a device to address these long-term imbalances, the shortfalls in Medicare and 

Social Security. That is the proposal that the Ranking Member 

Senator Gregg and I have made for a task force to address the 

long-term fiscal imbalance. A panel of lawmakers and administration officials with everything on the table, with fast-track consideration so it is not just another commission report that sits on a shelf 

somewhere but actually comes to Congress for a vote, and that is 

structured in a way that assures a bipartisan attention to these 

issues. 


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I just want to alert my colleagues that it is going to be my intention to advance this proposal this year. Senator Gregg and I are 

talking about on what vehicle it would be most appropriate, but I 

want to alert staff of our colleagues who are here. I have been patient. I have listened very carefully to the concerns of colleagues. 

We are prepared to have some change in the timing of the report. 

We are also prepared to consider other constructive suggestions. 

But I just want to alert my colleagues that I am not going to allow 

this year to go by without giving our colleagues an opportunity to 

vote on whether or not we advance this proposal. 

With that, I want to turn to my very able colleague, the Ranking 

Member, the former Chairman of this Committee, Senator Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Senator Conrad, and, Dr. Orszag, it 

is nice to have you here today. Let me pick up where Senator 

Conrad, the Chairman, has left off on the issue of addressing what 

I consider to be—after the issue of fighting Islamic fundamentalism, which is a threat to us from a physical standpoint—the 

issue that I consider to be the biggest issue we face as a Nation, 

which is the potential fiscal meltdown of our country over the fact 

that we have on the books obligations exceeding our net worth, $66 

trillion of obligations for three entitlement programs—Medicare, 

Medicaid, and Social Security. Our net worth as a Nation is about 

$52 trillion. We simply have to address this. 

The Bipartisan Fiscal Task Force proposal that Senator Conrad 

and I have drafted and for which there was considerable input 

from a lot of people as it evolved is a valid way to approach this. 

We have shown over time, unfortunately, that as a political culture 


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we cannot address this issue by simply putting ideas on the table 

because everybody shoots at the ideas, especially people who like 

to make money by doing that shooting. And so the best approach, 

in our humble opinion, is to set up a procedure which drives policy, 

and that is what this proposal does. 

Obviously, any procedure, to be successful in these areas, because they are so sensitive to the American people and because all 

Americans are affected by them, has to be seen by the American 

people as absolutely fair and absolutely bipartisan. And that is why 

this proposal is structured this way. 

Interestingly enough, yesterday Republicans convened, Senate 

Republicans convened for a day-long session of sorting through our 

thoughts as we start this session, and one of the main considerations was a discussion of this proposal, the Conrad-Gregg proposal. And there was, I think, general agreement—although there 

was no formal vote taken, but there was general agreement within 

the conference, the Republican conference, that this was a legitimate and appropriate idea to proceed on and that we should be 

proceeding in a bipartisan way to try to address this. There are two 

of my colleagues here who were at that meeting who maybe can 

hopefully substantiate that as being the sense of the meeting. So 

that is good news, and I congratulate the Chairman for being willing to push this to the front of the agenda. 

We are here today to discuss the recent findings of CBO relative 

to our economic outlook and what is happening. I am interested in 

discussing that. Also, I am most interested, obviously, in the topic 

of the day, which is the stimulus package and how that will be put 

together and what its real impact is. 

On the issue of the actual numbers that we have seen on projecting deficits into the out-years, I just want to put out the caveat 

that the CBO numbers were done under a baseline which is controlled by arcane rules which do not accurately reflect reality in 

many ways. For example, there is in that baseline approximately 

$800 billion of revenue, I believe, from the AMT which is assumed. 

There is also an assumption that we will be doubling the tax on 

dividends—actually, more than doubling the tax on dividends for 

high-income individuals and moderate-income individuals, and that 

we will be doubling the tax on capital gains, and that as a result 

revenues will essentially be increased by trillions of dollars over 

the same period through tax increases. That may occur, but my 

view is that that is probably not an event that should be scored if 

you were looking at it in a realistic way versus subject to the rules 

of the baseline. So I do not say that in terms of in any way trying 

to throw disparagement on CBO. You have done your job the way 

you have to do it—the way we require you to do it, by the way— 

but what we are telling you to do is not realistic to what will actually happen on the ground over the next 10 years. So that would 

concern me. 

The biggest issue that concerns me is how we put this stimulus 

package together. I readily admit—in fact, I have been talking 

about it for a long time—that we are facing an extraordinarily sensitive economic time and potentially a very severe economic event. 

The subprime collapse—which represents this year about $500 billion and next year about another $600 billion of rollovers in mortVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
13 

gages, which, because of the way they were structured, a large percentage of them will not be able to be repaid by the people who borrowed the money because of the jump in the interest rates and the 

collateral underneath them does not support them—creates just a 

massive economic credit crunch. And that is feeding on itself right 

now, and I have been through three of these in my professional 

lifetime, and, regrettably, at one point I was Governor during the 

last major real estate meltdown. And so I think I understand how 

they work, and, unfortunately, what happens is that when you get 

into one of these contractions, you not only see the bad loans get 

called, but the good loans do not get made because the lenders 

have to build up their capital positions and, therefore, it feeds on 

itself and the whole system starts to contract and that causes the 

economy to slow down. And we are, regrettably, on the cusp of that 

occurring in a fairly significant way, I am afraid. 

However, we also have some good news out there. For example, 

today’s unemployment numbers are very strong, extremely strong, 

and we appear to have other sectors of the economy which have not 

yet been overwhelmingly impacted by the housing slowdown. But 

they will be impacted, I suspect, by the credit contraction. 

And so what should we as a Government do to address this is 

the question, and the proposal that has been put forward by both 

the administration and the Democratic leadership of the Congress 

is an attempt to try to address this, and I congratulate them for 

taking that initiative. But I want to make sure that we put the 

money where we get the action, where we get something for it. And 

my concern is every dollar that we are going to put into this economy in stimulus is going to have to be borrowed. That chart that 

the Chairman just put up is going to be aggravated by it. It is 

going to be a compounding event. If we put $150 billion into this 

economy today, we are not going to pay for it. Our children are 

going to pay for it, and our children’s children, and it is going to 

be paid for at a much higher price because they are going to have 

to borrow it. That compounds. 

So let’s get something for it. Let’s just not send helicopters over 

the country throwing cash out the door. Let’s get something for it. 

So what I am going to want to ask you about, Doctor, is what gets 

us the most for those dollars. How do we get the most out of those 

dollars? And I know you have an opinion on that. Some people 

agree with it and some people do not, but I want to get it because 

you are one of our most professional people around here. 

I thank you for coming today, and we look forward to hearing 

from you. 

Chairman CONRAD. Again, Dr. Orszag, welcome and thank you 

very much for your service at the Congressional Budget Office. It 

has been exemplary. 

Dr. ORSZAG. 

STATEMENT OF PETER R. ORSZAG, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ORSZAG. Thank you very much, Mr. Chairman. My testimony 

this morning will discuss the economic and budget outlook. 

First, the economy has been buffeted by several interlinked 

shocks, and the risk of recession is significantly elevated relative 

14 

to normal economic conditions. After a dramatic run-up in housing 

prices during the first half of the decade, as my first chart shows, 

housing prices have started to decline, and many forecasters expect 

further declines this year. The weakening of the housing sector directly affects the economy through reductions in residential investment and indirectly affects it by reducing consumer spending as 

housing wealth declines. Moreover, problems in the housing and 

mortgage markets have spilled over into broader turmoil in financial markets, which poses the risk of impeding the flow of credit 

essential to a modern economy. 

Energy prices have also increased substantially. Although the effect of increases in the price of oil today on the economy are not 

as large as they were in the 1970’s or 1980’s, the rise in oil prices 

is still an economic drag. The combination of these forces has not 

yet fully manifested itself, although the unemployment rate has 

ticked up. Indeed, the 3-month moving average unemployment rate 

is now 0.4 percentage points higher than it was a year ago, and 

any time that has occurred in the past, it has tended to be associated with recessions, as you can see from that graph. The dark 

bars are recessionary periods. An increase of about 0.4 percentage 

points tends to be associated with a recession. 

On the other hand, and as Senator Gregg noted, other labor market indicators that have typically been associated with those kinds 

of increases in the unemployment rate in the past during recessionary periods are not currently occurring. For example, in the 

past, unemployment insurance claims have tended to rise by, say, 

20 percent associated with the kinds of increases in unemployment 

rates that I show there. That has not occurred currently, and, in 

fact, if anything, initial unemployment insurance claims have 

ticked down just a bit. 

Especially with the most recent and notable action by the Federal Reserve earlier this week, many professional forecasters are 

projecting continued, albeit sluggish, economic growth in 2008 rather than an outright recession. And one bright spot which reinforces 

that view has been net exports. The dollar has depreciated gradually, which is part of the necessary adjustment to the Nation’s external imbalances, and that depreciation of the dollar along with 

strong growth abroad has driven rapid growth in net exports, 

which has helped to stabilize, and even improve slightly, the Nation’s current account deficit. 

The bottom line is that although the risk of recession is substantially elevated, CBO expects, along with most professional forecasters, a period of unusually weak growth rather than outright recession. In particular, CBO expects growth for the year as a whole 

of under 2 percent and an increase in the unemployment rate to 

5.1 percent on average for the year. 

A reflection of the overall slowing of economic activity is seen in 

job growth. In 2005, jobs grew by an average of 220,000 per month. 

In 2007, that fell in half to an average of 110,000 a month. We 

project that it will fall in half again to an average of 55,000 per 

month in the first half of 2008. 

Let me now turn to the budget outlook. A reflection of the softening economy is already seen in slowing revenue growth, especially in corporate income taxes. And, in fact, we now have projecVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
15 

tions for January in which we expect corporate income tax receipts 

to be below their level of a year ago for the seventh month in a 

row. For 2008 as a whole, we are projecting a slight decline in corporate income tax revenue relative to the previous year. That is notable because, as CBO highlighted in a letter to Senator Conrad 

last year, a large share of the improvement in the fiscal picture between 2003 and 2006/2007 can be attributed to a very rapid rise 

in corporate income tax revenue over that period. 

Our baseline suggests that after 3 years of reductions in the 

budget deficit, the slowing economy will boost the deficit this year 

to $219 billion, or roughly 1.5 percent of the economy. If policymakers provide the additional funds that the administration has 

requested for the ongoing war in Iraq and Afghanistan, the deficit 

would rise to about $250 billion this year. And if additional measures are undertaken as fiscal stimulus, the deficit could rise significantly above that, although I would note that would be one of the 

purposes of temporary fiscal stimulus. 

Thereafter, under the official baseline, the budget moves toward 

balance in 2012. However, as both Mr. Conrad and Mr. Gregg have 

noted, that baseline is not a prediction of the future but, rather, 

a projection of a certain set of policies that are embodied in current 

law. 

For example, as the next chart shows, the baseline assumes no 

further relief from the alternative minimum tax, and as a result, 

the AMT rises from about—affecting 4 million taxpayers last year 

to 26 million this year, and then continues to rise thereafter. If instead of making that type of current law assumption one instead 

continued the alternative minimum tax relief, extended the 2001 

and 2003 tax legislation past their scheduled expiration in 2010, 

adopted our higher-cost scenario for the global war on terrorism, 

and increased the rest of discretionary spending in line with the 

economy rather than just in line with inflation, the outcome is substantially different than the baseline. As the next chart shows, indeed instead of a cumulative surplus of $274 billion between 2009 

and 2018, the result would be a deficit of roughly $6.5 trillion, 

about 3.5 percent of the economy. 

Even over the next 10 years, furthermore, the Nation’s long-term 

budget pressures begin to manifest themselves. Caseloads on both 

Medicare and Social Security are projected to rise rapidly as the 

first edge of the baby-boom generation becomes eligible for benefits. 

Social Security beneficiaries are projected to rise from about 50 

million currently to 64 million by 2018. Projected increases in beneficiaries account for about 30 percent of the growth in mandatory 

spending over the next decade. A far more important factor is the 

ongoing rise in the cost per beneficiary, especially in our health-related programs, and you can see that the health-related programs 

grow more rapidly than Social Security does. Indeed, Medicare and 

Medicaid are projected to increase from 4.6 percent of the economy 

to 5.9 percent of the economy over the next decade, an increase of 

1.3 percentage points, while Social Security rises from 4.3 to 4.9, 

or about half a percentage point of the economy. And that reflects 

that differential growth rate in health care costs. 

Thereafter, under the long-term budget outlook that we released 

in December, health care costs increasingly dominate the Federal 

16 

budget. You can see the light blue area in that graph, which is 

Medicare and Medicaid, is really the key to our fiscal future. If you 

combine that spending path with a revenue projection that reflects 

the Tax Code as it existed at the end of last year, you can come 

up with a summarized fiscal gap which measures the difference between projected revenue and projected spending. And over the next 

75 years, that gap amounts to 7 percent of the economy. What that 

tells you is that if you want to avoid an explosion of Government 

debt over the next 75 years, you need to reduce spending by 7 percent of GDP or increase revenue by 7 percent of GDP. And given 

that both of those are now about 20 percent of the economy, you 

can see that those are very large adjustments that are necessary, 

and they reflect the scale of the Nation’s long-term fiscal imbalance. 

I would just note quickly that most of that long-term fiscal gap 

is not due to the pure effect of aging and demographics. As this 

chart shows, the dark blue area there—and also there is an interaction effect, the light blue area—reflects the pure effect of aging 

and demographics. Most of the long-term fiscal gap, that lighter 

area, is not due to that factor but, rather, reflects things like the 

ongoing increase in health care costs per beneficiary. 

Finally, the combination of an elevated risk of recession in the 

short term and the Nation’s very serious long-term fiscal imbalances leads me to a short discussion of fiscal stimulus. Last week, 

we submitted a report to this Committee and the House Budget 

Committee on fiscal stimulus options. Let me just briefly say that 

in a period of unusual economic weakness, which is unusual, the 

key constraint on economic growth is the demand for goods and 

services that firms could produce with their existing resources. By 

contrast, in most circumstances, and certainly over the long term, 

the key constraint on economic growth is the rate at which those 

resources or that capacity is expanding through increases in capital 

and labor and improvements in productivity. 

When we face ourselves with the unusual situation in which aggregate demand is the key constraint on economic growth, fiscal 

policy and monetary policy can help by stoking demand. And the 

key question is—we need to remember on the fiscal policy side the 

automatic stabilizers built into the budget will already help to attenuate any economic downturn by cushioning the blow in terms of 

after-tax income. The question is whether additional fiscal action 

is necessary. 

Our analysis suggests that a fiscal stimulus, if it were well designed, of roughly one-half to 1 percent of GDP or roughly $75 to 

$150 billion—and, again, I want to emphasize if it were well designed—could help to reduce the elevated risk of a recession down 

to more normal levels. 

The stimulus need not be targeted at the source of economic 

weakness; that is, even though the weakness started or originated 

in the housing and mortgage markets, the economic stimulus need 

not be targeted there. Instead, the key is that it helps to bolster 

aggregate demand and thereby helps to jump-start a positive cycle 

of increased demand leading to increased production until the constraint once again becomes how much we can produce rather than 

how much we are willing to spend. 

17 

In the report that we provided to you, we analyzed many more 

specific options, and I would be happy to answer questions about 

them. But I did want to emphasize that it is an unusual situation 

in which we find ourselves because more typically the constraint on 

economic growth has to do with the rate at which resources are 

being expanded and what is appropriate to a period of economic 

weakness is, unfortunately, often the opposite of what is appropriate to long-term economic growth. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Orszag follows:] 

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Chairman CONRAD. Thank you for that very excellent description. 

Let’s go right to the question of stimulus and what you see as 

the need for it. You can see already people questioning stimulus, 

the requirement for stimulus. I was doing a series of interviews 

yesterday, some of them on talk radio, and it was very interesting 

the kinds of questions people raised about stimulus. 

First of all, the first question I got was: Gee, do we really need 

stimulus? We saw a market rebound yesterday, some 300 points, 

before any stimulus package has been put in place but after the 

Federal Reserve has taken action. 

Some have said to me, you know, $140 billion of stimulus, which 

is roughly what the President is talking about, is 1 percent of gross 

domestic product. One of the questions I was asked, what is the effect in a comparable way, of what the Federal Reserve has already 

done? Do you have any rule of thumb that could tell us? For example, when they reduced rates by three-quarters of 1 percent in an 

emergency meeting, is there any rule of thumb about what that 

means in terms of share of gross domestic product? 

Mr. ORSZAG. Yes. The typical rule of thumb—and there is an important caveat—is that a reduction of, say, 100 basis points could 

have an effect on economic activity of about 1/2 percent of GDP. 

There is a big ‘‘but.’’ The ‘‘but’’ is that the lag involved is typically 

lengthy, that is, somewhere between four and eight quarters. So 

when you reduce interest rates today, you are disproportionately 

affecting economic activity in early 2009. 

Or it may be a slightly different situation currently. To the extent that part of what the monetary policy interventions are trying 

to do has to do with calming financial market turmoil, we have 

seen, in response to both interest rate changes and the new term 

auction facility that the Federal Reserve introduced, a very significant reduction in the spreads—that is, in basically the interest 

rates that banks charge each other for short-term borrowing. 

Chairman CONRAD. Which had become quite large. 

Mr. ORSZAG. Which had become quite elevated, yes, and they are 

now back to somewhat more normal levels. 

Chairman CONRAD. So let me see if I can translate this. Fifty 

basis points would translate into about 1 percent of GDP, but that 

is with a lag of four to—— 

Mr. ORSZAG. Eight. 

Chairman CONRAD. Eight quarters. 

Mr. ORSZAG. Yes. 

Chairman CONRAD. So we are talking a year to 2 years. 

Mr. ORSZAG. And so the real question is: Is there an air pocket, 

especially in early 2008? And what, if anything, can be done in the 

intervening period? 

Chairman CONRAD. ‘‘Air pocket’’ meaning economic weakness 

that might be somewhat offset by our providing fiscal stimulus in 

addition to the monetary stimulus provided by the Fed? 

Mr. ORSZAG. ‘‘Air pocket’’ meaning that most forecasters project 

very weak growth, if any growth, in early 2008. And I think the 

key question then becomes whether there is any additional fiscal 

stimulus that can be delivered in a timely enough fashion to affect 

34 

economic activity in early 2008. And I think that is a very significant question. 

Chairman CONRAD. Well, that is exactly the next question I 

wanted to go to. Yesterday, I was, as I indicated, doing a series of 

interviews. A talk-radio host asked me, ‘‘Senator, what are the odds 

that this stimulus turns out to be ill-timed, turns out to come too 

late and actually becomes counterproductive?’’ What would you say 

in answer to that question? 

Mr. ORSZAG. The longer you wait and the longer the implementation lag involved, the more risk there is of that. 

Chairman CONRAD. And can you give us some rule of thumb in 

terms of time? For example, if the fiscal stimulus that we put in 

place, Congress working with the President put in place, was not 

felt for 6 or 8 months, is that within the timeframe that is relevant? Or is that on the brink of being too late? 

Mr. ORSZAG. That would be pushing it. And as you move into 

early to mid-2009, I think the risks that you are—especially given 

the impulse from the monetary policy changes that have already 

occurred, the risks that you are then being counterproductive go 

significantly up. 

Chairman CONRAD. All right. Senator Gregg? 

Senator GREGG. When you say counterproductive, do you mean 

you are creating an inflation event? 

Mr. ORSZAG. Yes. You do not want to add demand to an already 

rapidly growing economy because all you do at that point is increase inflationary pressures. 

Senator GREGG. Which is a really severe event. 

Mr. ORSZAG. Which would be an unfortunate circumstance, yes. 

Senator GREGG. Second, as I understand it, you testified yesterday, I think, that the IRS could not get out rebate checks before 

June. That is your understanding. 

Mr. ORSZAG. Yes. Our information suggests that—and let me just 

explain briefly because I think the experience from 2001 may be 

being misapplied. When the rebates were issued in 2001, the IRS 

had already completed, basically, the tax filing season. The computers and people and infrastructure that are used for the tax filing season unfortunately are exactly the same ones that have to be 

used in the process of issuing rebates. So until the IRS has completed the peak filing season for 2007—which traditionally would 

be the end of May but perhaps could be accelerated to mid-May— 

it cannot really turn to processing the rebates. So you are looking 

at the first checks being available mid- to late May, maybe early 

June, and then it takes 6 to 8 weeks to actually mail the checks 

out. And I would also note the evidence suggests that the 2001 rebates were relatively effective, but their maximum kick came after 

two quarters. So if people are receiving checks in June or July and 

then the maximal response is two quarters thereafter, you are affecting Christmas spending in 2008, not economic activity in the 

first half. 

Senator GREGG. Which would be well outside the window you 

just testified about. 

Mr. ORSZAG. That is correct. At least somewhat outside the window, yes. 

35 

Senator GREGG. Now, you made an eloquent argument that the 

counterintuitive position makes sense right now, that you can stimulate the economy through consumption and that that is what you 

should do in the short run, as versus stimulating the economy 

through making it more productive, which is what you would want 

to do, I think, if you want to make the economy stronger. 

Let me make the opposite case, which is more traditional—not 

necessarily more traditional because it is not accepted by economists, I guess, of your expertise, which is extraordinarily high and 

well admired by myself. But if we know the problem was the credit 

contraction caused by the housing bubble, where we know that the 

problem was that too many loans were made to people who did not 

have the wherewithal to pay the loans back under the terms of the 

loans because of the acceleration in the interest rate as a result of 

the ARMs, and that the collateral underneath the loans did not 

support the loans, and then those loans were taken, sold, resold, 

synthesized, and syndicated in a way that you basically had an inverted pyramid so that you had a lot of people creating a bubble 

out of the housing market, wouldn’t it make some sense to say to 

the economy and to the consumer we have a housing problem, we 

are going to give you an incentive to go out and buy a new house, 

and get right to the essence of the issue through a tax credit on 

the purchase of a new house in some form so that basically you are 

picking up the cost of the interest and you are creating an incentive for people to go out and buy a house and get that inventory 

out of the market and get that part of the economy going again? 

Mr. ORSZAG. I guess I would say two things. 

First, many of the proposals aimed specifically at the housing 

market probably would not have that large of an effect even on the 

housing market. It depends exactly what you did, and it depends, 

for example, on your tax credit idea of what the parameters were 

and what have you. But I think more broadly, the point at this 

stage is that the concern has expanded well beyond just the housing market. It is like—I do not know. If you had a wound and your 

body became infected, you need to treat the general infection and 

not just the—— 

Senator GREGG. But isn’t the general infection the contraction in 

credit? 

Mr. ORSZAG. It is not just the contraction—— 

Senator GREGG. And the lack of liquidity in the market. 

Mr. ORSZAG. That is perhaps the most salient and prominent 

concern, but it also includes consumer confidence; it includes the 

elevated energy prices, which have some drag on the economy. It 

is the confluence of those events and the combined impact on aggregate demand at this point. 

Senator GREGG. Well, I appreciate that, but I guess my point is 

if you simply give everybody in America who paid taxes an $800 

or a $600 check for a one-time consumption event, which may occur 

outside the window of the severity of the problem. You are basically adding to the debt, so it is going to have to be paid through 

debt financing, so you are going to create an out-year problem of 

debt. You may be creating an inflationary event. And you are probably not doing a lot to get to the underlying productivity of the 

economy. 

36 

Do you solve the confidence issue by doing that? The confidence 

issue seems to me to be resolved when the markets feel that the 

underlying problem has been made transparent so that they can 

evaluate what it really costs and then they have adjusted to it. 

That is happening now, hopefully, and the Fed is reacting. But I 

am not sure that a stimulus package that simply puts money into 

the economy through consumption which may occur after the 

framework of the problem will do anything other than say that the 

Government reacted. It will not solve the problem. I do not think 

that does a lot for confidence. 

Mr. ORSZAG. Let me try to answer that in two different ways. 

First, on the housing market, we have to realize that part of the 

issue here is that through a confluence of events, including very 

low interest rates, including perhaps lax regulatory standards and 

expectations of ongoing price increases, a series of developments occurred that are difficult to now clean up after the fact. So even a 

tax credit is not going to—or even trying to bolster demand for 

housing temporarily or even over an extended period of time is not 

going to jump-start immediately a housing market that has some 

adjustment that has to happen. And, in fact, you could argue that 

trying to prevent that from happening will just prolong the pain 

that is necessary to work off imbalances that occurred. 

I would also just come back to one should not expect a temporary 

fiscal stimulus to be a panacea. Even with an effective stimulus 

package, it is possible, perhaps even likely, that economic activity 

will be sluggish for some period of time. 

Senator GREGG. But under the structure that is being talked 

about here, where most of this stimulus goes to consumption that 

is most likely going to occur outside the window of the slowdown 

issue, isn’t the real exercise of the stimulus package to show that 

the Government reacted and create confidence? 

Mr. ORSZAG. Well, what I wanted to get to is whether there are— 

I still think there are options that could act more quickly. They 

may not be the ones that are featured in the discussion, but a real 

question—— 

Senator GREGG. Well, give us your top three. I would be interested in your top three. 

Mr. ORSZAG. Fastest spendout would include—from my understanding, unemployment insurance benefits and food stamp benefits would spend out—would start spending out within 2 months. 

Senator GREGG. Unemployment insurance benefits in a time of 

full employment, is that really a good idea? 

Mr. ORSZAG. It depends what your objective is. Again, if the objective is to spur spending, unemployment insurance benefits will 

spur spending because the people who receive them tend to spend 

the vast majority of them. So unemployment insurance benefits 

being extended or expanded are a way of getting money out the 

door fast and having it spent rapidly. But I think they also underscore this tension between this unusual short-term weakness and 

what might be appropriate there and long-term economic performance. 

The evidence does suggest that especially during periods of economic strength, extending unemployment benefits or raising their 

37 

level has some adverse effect in terms of lengthening the spell of 

unemployment. 

Senator GREGG. It reduces productivity. 

Mr. ORSZAG. It increases unemployment levels, at least. That effect, by the way, it is not clear it actually occurs to the same degree 

during these unusual periods of economic weakness. So the question is: Are you trying to, again, do this quick jump-start, or are 

you thinking about longer-term structural—— 

Senator GREGG. I know we have Senator Allard here and he has 

some questions, but I want to come back to that point. I have always thought any unemployment expansion should be tied to a 

trigger. But—— 

Chairman CONRAD. If I can just interrupt, Senator Allard, if you 

would not mind, we have just had breaking news here that would 

go to this question. We have just been told the AP is reporting now 

there is an agreement on a stimulus package, and the elements of 

the stimulus package do not include food stamps or unemployment 

benefits. Those have been left out, according to this AP report, that 

it is a rebate from $300 up to $1,200 for a family of four, would 

apply to people who paid payroll taxes but not income taxes, as 

well as those who pay income taxes, would be limited to individuals 

earning $75,000 or less and couples with incomes of $150,000 or 

less. People would have had to have earned at least $3,000 in 2007 

to receive the rebates. 

The business package is much larger than previously discussed, 

some $70 billion. The business tax portion would give businesses 

incentives to invest in plant and equipment, give small businesses 

more generous expensing rules, and allow businesses suffering 

losses now to reclaim taxes previously paid. 

So that is the outline, according to the Associated Press, of the 

agreement—— 

Senator GREGG. Can I ask you a question? Did you say it was 

coming out of payroll taxes? 

Chairman CONRAD. No. It was—— 

Senator GREGG. Is there a payroll tax holiday here? 

Chairman CONRAD. It is to provide a rebate to people who have 

not only income tax liability but payroll tax liability. That is, again, 

according to the AP’s report. 

Senator Allard? And thank you for your courtesy, Senator Allard. 

Senator ALLARD. You bet. Thank you. 

In 2003 when we actually increased the expensing for small business, I talked to Alan Greenspan, at that time Chairman of the 

Fed, and I made the comment to him, that, I think one of the 

greatest drivers to get our economy going is the increased expensing for small business, because that is where you get your innovation, that is where you get new job creation. And I think I am 

pleased to hear that this proposal has increased or sustained those 

expensing provisions. And he happened to agree, by the way. He 

said nobody has been talking about how increasing the expensing 

provisions has driven the economy in a positive direction. But he 

felt like it had a ‘pro’ kind of impact. 

I would appreciate your comments and feeling on that because 

that is part of what has just been announced by the media. So go 

ahead and comment on that, if you would. 

38 

Mr. ORSZAG. Sure. Let me comment both on the Section 179 

small business expensing and also the bonus depreciation provisions that were included in legislation in 2002 and 2003. 

The theory here, especially for temporary changes in those kinds 

of provisions, is very strong in the sense that you create an incentive for firms to do more investment today, maybe some that they 

were planning on doing in 4 or 5 years, do it today instead to capture a more substantial tax incentive. 

At least with regard to the bonus depreciation provisions that 

were appropriate for many larger businesses, too, the results from 

2002 and 2003 were not as auspicious as we had hoped. So we have 

a really good theory. The most recent experience was not as promising as one would have hoped for, and that led us in our report 

to conclude that this would have a kind of medium effectiveness, 

in part because the most recent experiment or experience was not 

as strong as we would have hoped. 

Senator ALLARD. Well, of the things that we did, what did you 

think did the most to stimulate the economy? 

Mr. ORSZAG. Per dollar, it looks like the rebate that was advanced in 2001 turned out to be the most effective. Per dollar? 

Senator ALLARD. Long term? 

Mr. ORSZAG. No, no. I should back up. This entire discussion— 

or from my end, this entire discussion is in terms of short term. 

Senator ALLARD. Short term. 

Mr. ORSZAG. Aggregate demand, and those are much different 

considerations than long-term growth. 

Senator ALLARD. Were your comments on expensing and the 

other provision, was that long-term or short-term discussion? 

Mr. ORSZAG. It was short term, although the same considerations 

there would apply to long term. The question is how much kick you 

are getting. 

Just briefly, there is some ambiguity, but studies that looked at 

the bonus depreciation provisions before, during, and after, you 

would expect the largest response for long-lived assets because if 

you were under previous law allowed to depreciate something over 

20 years and all of a sudden you are allowed to expense or depreciate a lot more of it up front, that is a much larger change than 

for a 3- or 5- or 10-year property. And there is some ambiguity 

about whether we even got the response in terms of investment 

classes, that is, whether the longer-lived assets disproportionately 

responded. In any case, even the studies that found that that did 

occur suggested that the aggregate impact was small. 

Senator ALLARD. The fact that we sunsetted that in 10 years, you 

know, if it is a long-term benefit, you whack off your long-term 

benefit when you do that. Is that correct? 

Mr. ORSZAG. Again, it depends what your objective is. If you 

want to spur short-term investment—— 

Senator ALLARD. No, I am talking about long term. 

Mr. ORSZAG. Long term. 

Senator ALLARD. Yes. 

Mr. ORSZAG. Long-term investment, you can argue that more 

permanency is beneficial. But if you are trying to accelerate things 

into the short term, actually having it be temporary is beneficial 

39 

because firms then say, oh, something I was going to do in 5 years 

might as well do today to capture this benefit. 

Senator ALLARD. Well, you know, I am of the view with many 

people that there has to be an adjustment in the markets. I mean, 

obviously, there was a lot of willingness to move into buying a 

home with the assumption that the growth in value was always 

going to be there year after year. And, realistically, that does not 

happen where you have a capital market. 

Is there anything other than perhaps a tax credit for buying new 

homes, which would tend to cut down your inventory on homes 

that would be coming on, is there anything that you see where we 

could target the problem where it originated, which is out of the 

housing market and the subprime loan area? 

Mr. ORSZAG. The final section of our report to the Committee on 

stimulus options had to do with options in the housing and mortgage market area. I would just note a lot of them—there is no 

clean, you know, perfect solution here. Again, imbalances built up, 

and trying to come in after the fact and kind of clean up is very 

difficult. So they all have both pros and cons. There is nothing that 

sort of stands out as an elixir. 

Senator ALLARD. It seems to me that we can be thankful that we 

have allowed for the securitization of these loans, which has spread 

risk. If we had not done that, I think we would be in a worse problem today than we are. But with the securitization, we spread the 

risk. In fact, we spread it beyond the borders of the United States. 

But I guess the downside is you do have not only an impact on our 

economy here, but you have a worldwide impact, and other countries do not have the flexibility to adjust, I think, that our economy 

does. 

Go ahead. I know you are anxious to comment. 

Mr. ORSZAG. Oh, no. I was just going to say I agree. 

Securitization is very beneficial in spreading risk, and that is a 

wonderful innovation and very important to our financial markets. 

On the other hand, the securitization process may have played 

some role in the situation that we currently find ourselves, both because originators may not have had adequate incentive to take care 

in originating loans, and also because securitization complicates 

the renegotiation of mortgages. The traditional model where you 

sat down with your banker and said here is what happened and 

you sort of work out a deal to renegotiate the mortgage is difficult 

when there are thousands and thousands and thousands of people 

or investors owning bits of your mortgage. 

Senator ALLARD. Yes. What about the regulatory environment? 

You know, it seems to me that we are getting pretty heavy on the 

regulatory side and making it much more difficult for companies to 

produce and create jobs because of the regulatory environment. Do 

you think the regulatory environment now is at a point where it 

is having a noticeable effect on the economy? 

Mr. ORSZAG. Well, I mean, in general, relative to, say, the 1960’s 

and 1970’s, the regulatory environment has moved toward a more 

flexible and more market-oriented structure. And certainly relative 

to other, especially continental European countries, we have a more 

market-oriented system of regulations. But it really depends on 

what you—— 

40 

Senator ALLARD. In the United States. 

Mr. ORSZAG. It really depends on what you are comparing it to, 

and I think we are learning to apply the insights from market incentives to a broader array of regulatory matters so that you can 

accomplish your public policy purposes as efficiently as possible. 

Senator ALLARD. Well, one of the things I am looking at, when 

you presented your chart there on the accelerated costs of health 

for Medicare and Medicaid, you said a certain portion was demographics. The other portion was the cost of Medicare. The big impact of that is regulation. You know, you use a lot of hazardous 

materials in medicine, and so we have applied a lot of regulations 

and rules on the way we manage our hazardous materials for laboratory tests, in products that we use for medicine. They end up 

in machinery and the stuff that you use in medicine such as X-ray 

machines and all the other machines that we have now. And so I 

do not think a lot of people in implementing those stop to think of 

what the end impact may be on some industry that provides a vital 

service that Americans have considered No. 1 in priority, and that 

is health care. 

And so that is what brings up that question, and you may not 

want to comment on it, but I think it is worth some discussion. 

Mr. ORSZAG. Well, Senator, I understand. I think I may be appearing before this Committee next week to talk about rising 

health care costs, so we can have an extended discussion next week 

on those topics. 

Senator ALLARD. Yes, because there are built-in things that we— 

well, energy is another area, and it is a fundamental area. When 

you have cost growth, it affects everything. And you get an area 

like medicine, you use a lot of energy, too. In the hospitals the 

lights are on 24 hours a day, equipment is on 24 hours for monitoring and everything like that. 

Mr. ORSZAG. I look forward to that. 

Chairman CONRAD. Let me just say I was just in the hospital 

several nights with my daughter who had an appendectomy and 

spent all night in the hospital, and they do keep the lights on 

through the night. 

[Laughter.] 

Chairman CONRAD. I found that out. 

Senator Murray. 

Senator ALLARD. By necessity. 

Senator MURRAY. Well, Mr. Chairman, thank you. Thank you 

very much, and I apologize for being late. I had three hearings at 

the same time this morning. This is obviously a very important 

one. I had a number of questions about the short-term economic 

stimulus. I understand you just announced that there is some kind 

of deal, and many of those questions have been covered so I will 

not dwell on that too much. 

I did want to ask you one question regarding short-term economic stimulus. It is an issue that I have been looking at very 

closely, and that is the issue of what is called the Summer Jobs for 

Youth program that helps bring some money into the economy 

quickly, clearly helps businesses with getting some workers, solid 

workers, but has an additional impact of giving skills to young people when we have a rising number of young people that cannot get 

41 

into the work force. And the unemployment rate for African Americans 16 to 19 years old has increased last month just by 5 percent, 

and the unemployment rate for all teens rose to 17 percent, up 

from 13 percent a year ago. 

So I just wanted to ask you that one small question, do you agree 

that putting some money into a summer youth employment jobs 

program would help bring some stimulus to the economy? 

Mr. ORSZAG. Well, I think two things. First, let me just underscore that there are significant problems and challenges associated 

with unemployment rates and lack of labor force attachment 

among teenagers and the serious long-term consequences that can 

flow from that. But we might want to think about programs like 

that in the camp of sort of long-term economic performance, and 

the question becomes whether you can effectively and efficiently 

dial that program up in a short period of time to deliver stimulus 

in the near term, and I think that is a little less clear. 

Senator MURRAY. Right. And we do already have a WIA, Workforce Investment Act, program that gets those dollars out to the 

communities. It is already there. Beefing it up will, I think, make 

a tremendous impact. I know it is not short term. It is like next 

summer. But even the rebate checks that we are talking about will 

take several months to enforce and get out into the economy. 

Let me go back. You know, one of the reasons we are considering 

this economic stimulus package, the crisis everyone is talking 

about, is the issue of the rising foreclosures, particularly in the 

subprime market, and major writedowns on the subprime-backed 

securities in the financial sector that have sort of led to this crunch 

in the credit market. 

Some people are talking about raising the conforming loan limit 

that is set at $417,000 as sort of a means of providing liquidity into 

the market. Do you believe a temporary increase in that conforming loan limit would be helpful? 

Mr. ORSZAG. It depends what else was done, and it depends in 

what part of the market. We have experienced some difficulty in 

the so-called jumbo market, above those conforming loan limits, as 

a spillover from other problems in the mortgage markets. Raising 

the conforming loan limit would tend to help bring down rates, especially on jumbo, that is, mortgages that are above the conforming 

loan limit. But it also depends on whether you are changing the 

overall limits on the portfolios that the GSEs—Fannie Mae and 

Freddie Mac—are allowed to hold. If you just raise the conforming 

loan limit and do not change the aggregate amount of mortgages 

that they are allowed to either securitize or hold on their own 

books, you are then just merely shifting things around from one 

part of the market to another. If you temporarily raise the limits, 

the issue then becomes whether you are concerned about increased 

risks associated with those entities. 

Senator MURRAY. So do you think it is a good idea or not? 

Mr. ORSZAG. Oh, I am not allowed to say things like that anymore. 

[Laughter.] 

Senator MURRAY. OK. Well, what other actions do you think we 

should consider to help provide liquidity into the markets and 

bring some stability to the housing market? 

42 

Mr. ORSZAG. We go through a whole variety of options in the 

back end of the stimulus report that we provided to the Committee. 

And as I indicated earlier, the problem at this point is there is no 

perfect solution. A set of imbalances arose for a variety of reasons, 

and it is a mess now. And cleaning up a mess is difficult, so—— 

Chairman CONRAD. Messy. 

Mr. ORSZAG. It is messy. And I cannot give you, you know, one 

option that just clearly stands out as having benefits that far surpass potential costs because everything, unfortunately, has both 

costs and benefits in that area. I do not have an elixir here. 

Senator MURRAY. OK. Well, we are talking about a short-term 

boost to the economy. What actions do you think we should be looking at for a longer-term stability and boost to the economy? 

Mr. ORSZAG. Longer term, the key issues facing the economy involve things like our significant fiscal imbalance, and especially 

bending the curve on health care costs so that we are not only 

avoiding a very rapid increase in expenditures, but also getting 

more for our health care dollars. There is a lot more value and efficiency that we can get out of the money that we are putting into 

health care. 

Relatedly, raising our Nation’s national saving rate is essential 

over the long term because we cannot continue saving just 1 or 2 

percent of our income. That is something, again, I want to emphasize long term. We do not want to be doing that right now because 

it would exacerbate the economic downturn. Part of that has to do 

with increasing household saving, and I think there are things that 

have now been shown to really work in terms of boosting both retirement and other saving for households, mostly by making saving 

more automatic and easier for households to do. 

Beyond that, we can keep going down the list, but we have—— 

Senator MURRAY. What about investment in infrastructure? 

Mr. ORSZAG. Investment in infrastructure is part of the physical 

capital that helps to improve productivity, and I think there are 

questions both about the amount of infrastructure investment that 

we are undertaking over the long term, and also how we are allocating and pricing the infrastructure that we currently have. So a 

question not only about how much, but also where and how well 

we are using what exists. 

Senator MURRAY. OK. Well, thank you very much, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Murray. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Mr. Orszag, welcome back. I understand that we will be having 

a health care-specific budget hearing shortly, so although that is 

my favorite and constant subject, let me ask you, since we are in 

the arena now of stimulus packages, you point out in your written 

testimony that the enactment of a stimulus could further increase 

the projected deficit for 2008. The hope of a stimulus package 

would be that it would be helpful to boost consumption and GDP. 

Do you believe that the revenue generated by a carefully crafted 

stimulus could cancel out that cost over the 10-year horizon? 

Mr. ORSZAG. The revenue generated by effective stimulus, because the stimulus would then boost economic activity, could offset 

43 

part but not all of the cost. A rough rule of thumb—and I want to 

again say we are now entering a round that in official scoring CBO 

does not undertake, but a rough rule of thumb is that each additional dollar of economic activity generates roughly 20 cents in revenue. We have said that an effective stimulus could generate 

roughly an extra dollar of economic activity for each dollar of budgetary costs. So if one wanted to go down that path of figuring out 

what the net impact is, you could shave something like 20 percent 

off the budget cost, if it were well designed and you wanted to incorporate that revenue feedback effect. But, again, I want to emphasize in official scoring that is not done. 

Senator WHITEHOUSE. And in terms of the quality of design, in 

terms of the effectiveness that you have described, how would you 

rank income tax rebates, unemployment compensation extensions, 

and food stamp provisions along that, by those two benchmarks? 

Mr. ORSZAG. All of them rank high in terms of their cost-effectiveness; that is, the extra consumption or demand that you get per 

dollar of budgetary cost, especially on the rebate, if it were tilted 

toward liquidity-constrained and lower-income households. 

There is, however, a difference in terms of timing. We indicated 

in our—— 

Senator WHITEHOUSE. Could I interrupt you and ask you to define a liquidity-constrained—— 

Mr. ORSZAG. Sorry. A household that has difficulty borrowing. So 

the evidence, for example, from the 2001 tax rebate suggested that 

households with lower credit limits were those who had exhausted 

a larger share of their credit limit. 

Senator WHITEHOUSE. Would that correlate to family income? 

Mr. ORSZAG. It does not always, but disproportionately lower-income households tended to spend more of their rebate ultimately 

than households that did not face those kinds of borrowing constraints. 

Senator WHITEHOUSE. OK. Sorry to interrupt. 

Mr. ORSZAG. But that is the logic for why tilting a rebate toward 

lower- and moderate-income households tends to get you more kick 

in terms of immediate spending. 

There is, however, a difference between the—the unemployment 

insurance benefits and food stamps benefits similarly will rank 

high because any money that you pump out the door will likely get 

spent, to a large degree, and result in additional consumption. 

There is, however, a difference in terms of timing. The length of 

lag from the enactment to the actual stimulus we said for a tax rebate is medium, and I can define medium more precisely in a second; whereas, for unemployment insurance benefits and food stamp 

benefits, it is short. So there is a difference in timing. We expect 

that after enactment, food stamp benefits and unemployment insurance benefits could start to affect spending within, say, 2 

months; whereas, under a rebate, because of where the IRS is currently—where it currently is in the tax filing season and because 

the response to a rebate seems to lag by a quarter to two quarters, 

you are going to be disproportionately affecting spending basically 

at the end of 2008. And that may well be outside of the window 

of economic weakness that you want to be targeting. 

44 

Senator WHITEHOUSE. In addition to the question of effectiveness 

and in addition to the question of timing, is there also a question 

of multiplier effect depending on what goods are likely purchased 

with the stimulus funds? For instance, since food is fairly likely, 

particularly if the income level is affected by food stamps, to be 

American produced, is there a multiplier effect from that versus 

somebody with a higher income buying a made-in-China television 

that has bounced once in a low-margin, big-box American company 

before it moves into the hands of the consumer? 

Mr. ORSZAG. There could be differences. I would say in general 

the type of spending that is induced probably is less important 

than the aggregate amount that you do. But you are right that to 

the extent the response is disproportionately consumption of imported goods, you do not get as much impact on domestic production as if it were domestically produced goods. 

Just in general, those ratios do not tend to vary so much across 

broad categories of spending that it is a first—of sort of primary 

importance. But you are right that there could be differences. 

Senator WHITEHOUSE. I think my yellow light is on so I will not 

trespass on the red light, and I will yield back my time. Thank you, 

Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Whitehouse. 

I would like to go back to this question of timing because it is 

very, very important, I think, to an analysis of how effective this 

stimulus package might be. What I heard you say was that the 

IRS, given its position in the filing cycle, will not be able to send 

out checks until the May timeframe. Is that correct? 

Mr. ORSZAG. Well, more precisely, and again, I do not—this is 

the information that we are being provided with, and I am under 

the impression that even extraordinary efforts would not change 

the basic facts. The IRS would be able to process the rebate 

amounts by mid-May at the earliest, maybe beginning of June. 

Technically, the checks are then sent out by FMS, the Financial 

Management Service, and that process takes 8 to 10 weeks. So—— 

Chairman CONRAD. Eight to 10 weeks. So now we are talking 

mid-July. 

Mr. ORSZAG. Until all of the checks are out, yes. 

Chairman CONRAD. So we are talking about June-July, the 

checks actually go out. Somewhere in this mid-June timeframe, 

mid-July. Correct? 

Mr. ORSZAG. I think that would be the most reasonable estimate. 

Chairman CONRAD. Then, as I heard you say, the analysis of 

what happened in 2001 indicated that the economic effects of that 

were not felt—or the biggest part of it—for one to two quarters. Is 

that correct? 

Mr. ORSZAG. Yes. And, in fact, just coming back to the discussion 

before about households with credit card debt, it looks like what 

happened initially was people disproportionately brought down—— 

Chairman CONRAD. Paid down debt. 

Mr. ORSZAG. They paid down their credit card debt during the 

first quarter, and then it is like they realized, ‘‘Oh, my credit card 

debt is down, I can go out and spend.’’ And they brought their credit card debt back up, which means they ultimately did spend most 

45 

of the money. But it took some time. They initially responded by 

buying down some of their credit card debt. 

Chairman CONRAD. So we are really talking about the effects of 

these rebates that have been discussed in the Associated Press 

story about the potential agreement, that the economic effect of 

those not being felt until December, January—December of this 

year, January of next year. 

Mr. ORSZAG. If you were worried about Christmas spending this 

year, this would be a particularly effective approach to adopt. 

Chairman CONRAD. Well, that strikes me as kind of missing the 

ball game myself. 

Now, let me ask you this: The 2001 rebates were different than 

these rebates. 

Mr. ORSZAG. Yes. 

Chairman CONRAD. The 2001 rebates only went to those who 

paid income taxes. These rebates are more targeted. They are going 

to people who paid payroll taxes as well as income taxes, and they 

are, as I understand it from the press reports, going to couples 

earning less than $150,000 a year. 

Do we have any picture from 2001 on lower-income people using 

that money more quickly than higher-income people? 

Mr. ORSZAG. Well, what we have is only among those recipients 

of the 2001 rebate, which, again, did not—— 

Chairman CONRAD. But we would have—but those are only income taxpayers. 

Mr. ORSZAG. Right. 

Chairman CONRAD. I understand. 

Mr. ORSZAG. But as you go down the—— 

Chairman CONRAD. This is income taxpayers and payroll taxpayers, but among income taxpayers, did those of lower income 

spend this money more rapidly? 

Mr. ORSZAG. I do not think we can say that, and indeed, again, 

among those who had higher credit card debts, the response tended 

to be to initially buy down credit card—I brought all the studies 

with me. I can check that in a moment. But, in general, I do not 

think you should necessarily expect a much different response in 

terms of timing, just because you are including those who have 

payroll tax liabilities but not income tax liability. 

Chairman CONRAD. Let me say that would be counterintuitive to 

me. I would think somebody that is more hard pressed gets a check 

that they are more likely to do something or that—— 

Senator GREGG. He is saying they are going to pay down their 

credit card. 

Chairman CONRAD. Yes, I understand they are going to pay down 

their credit card initially, but then they are going to spend it in the 

second quarter. 

Mr. ORSZAG. Right, and they tend to spend—let me be clear. 

They tend to spend more of it ultimately, but your question was do 

they—whatever they ultimately do, does more of it happen rapidly? 

And I do not think we have evidence of that, but I will check. 

Chairman CONRAD. Right. 

Senator Stabenow? 

Senator STABENOW. Mr. Chairman, I apologize for being late. I 

was in the Finance Committee. But it was a very interesting testiVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
46 

mony from two economists: Dr. Martin Feldstein, who was President Reagan’s Chairman of the Council of Economic Advisers, and 

Dr. Jason Furman from President Clinton’s administration. And 

what was interesting—and it leads into this discussion right now— 

is how much they were saying the same thing. And it was the same 

thing we have heard from CBO. Both of these economists agreed 

that we should be stimulating the economy by increasing food 

stamps, and they disagreed on unemployment insurance, but on 

food stamps they agreed that the quickest way was to put money 

in the hands of those who will immediately go to the grocery store 

and buy food for their families. 

There was also a very interesting debate among colleagues on 

the other side of the aisle who were arguing for more supply side 

tax cuts, and Dr. Feldstein, again, coming from the Reagan Council 

of Economic Advisers, indicated he felt this was a demand issue, 

not a supply issue. And there was amazing agreement that we 

ought to be focusing on demand, which is, in fact, putting money 

in the pockets of people who have been unemployed or losing their 

income or find themselves—who basically we know to be the people 

squeezed, middle-class people squeezed economically right now. 

So I share that because I think having heard last week from Dr. 

Orszag and then this week from two other economists, it was an 

amazingly uniform message, even though some of the pieces were 

different. And I am very disappointed in what I am reading so far 

of what the agreement is in the House because it does not address 

what—if I remember correctly—and I apologize for not coming in, 

again, for your presentation, Dr. Orszag. But having heard it in Finance, if I remember correctly, food stamps and extending unemployment compensation were the top two ways in which you suggested we could get the most immediate bang for the buck, as it 

were, in terms of the least risk and the most impact. Is that correct, in terms of economic stimulus? 

Mr. ORSZAG. Yes. The impact is similar to a rebate in terms of 

dollars spent, but the effect tends to be quicker because you can get 

money to recipients faster. 

Senator STABENOW. Mr. Chairman, I would just raise one other 

issue that I hope we will have on the table in the Senate as well. 

There is no question there will be pieces focused on business, and 

we can debate, you know, issues of bonus depreciation or what is 

the quickest way to stimulate the economy. But we do know that 

when we look at something like bonus depreciation, the States lose 

revenue as a result of that—in Michigan, it is about $150 million 

lost in tax revenue—at the same time that cash-strapped States 

are finding more people going on Medicaid and needing more social 

services. 

I would hope that we would do what was done in 2003, which 

is include a temporary increase in match for Medicaid. There was 

a $20 billion economic stimulus piece for States in the 2003 package, and I know, Dr. Orszag, you had recommended that just general support for States was not particularly effective as a stimulus. 

But to the extent that we could target it, that would be more effective. Is that correct? 

Mr. ORSZAG. The States are in much different fiscal conditions, 

and the impact from providing relief to the States depends on what 

47 

they do with the money. If it just winds up in a rainy day fund because the States have a decent fiscal position, you are not doing 

much in terms of stimulus. 

Senator STABENOW. Right. But if we can focus it on those—because right now we have a number of States that have announced 

they are going to be cutting Medicaid, so we have people who will 

be losing their insurance. So if we can stop that, that, in fact, 

would assist in what we are trying to do. 

Mr. ORSZAG. Yes. If you can target fiscal relief on the States and 

local governments that are having difficulty and that would otherwise be cutting spending or raising taxes and then by providing 

them relief they do not, that is effective stimulus. The Government 

Accountability Office, I think last year or the year before, came out 

with an analysis of ways of trying to do that through changes in 

local and State unemployment rates. And there are other ways of 

trying to target it more efficiently also. 

Senator STABENOW. Thank you. Well, I would hope as the Senate 

works its will that we will add to the package that appears to be 

coming from the House and focus on the issues that there is broad 

support for in terms of truly stimulating the economy, which is unemployment compensation, food stamps, and hopefully adding support for States directly as it relates to Medicaid as a part of the 

balanced approach that we come up with. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Stabenow. I would just 

say that we have some additional details coming in at the moment 

that indicates there is a housing piece to this, increasing the loan 

limits for FHA and for Fannie Mae and Freddie Mac—for FHA 

from $362,000 to $725,000, and for Fannie Mae and Freddie Mac 

from $417,000 to $625,000. So these are additional details that 

were not included in the previous story. 

Senator Gregg. 

Senator GREGG. Thank you, Mr. Chairman. Obviously, we do not 

have the specifics of this proposal, but as you look at the proposal 

as it has been outlined by the Chairman, what is your reaction relative to its ability to infuse consumption dollars into the economy— 

because you believe that is what we need—into the economy in the 

next two quarters, which is the period where you said there is a 

window of softness? 

Mr. ORSZAG. Again, I do not have the details, but the general 

structure of the proposal seems like it would rank relatively well 

from a perspective of bang for the buck. But the question is when 

the bang occurs, and I think there are issues surrounding the timing involved, especially on the rebate side, which sounds like it 

may be, you know, the biggest single component of the proposal. 

Senator GREGG. I think that was my question. I appreciate that 

your answer was not as precise as I might like, but let me try to 

get a more precise answer. In the next two quarters, including this 

quarter as the first quarter, and the next quarter being the quarter 

that ends in the beginning of the summer, would this proposal give 

you the bang for the buck? 

Mr. ORSZAG. It sounds like you would not—most of the stimulus 

would not be delivered during that period of time. 

Senator GREGG. Actually, if you—OK. 

48 

Mr. ORSZAG. Could I quickly add on the response—because I 

think this is an important question—on the response of low-income 

households, that I was able now to look these up. It depends on 

whether we are looking at households that are credit-constrained 

or low-income households. The credit-constrained households do not 

seem to—the time pattern does not seem to be that different. It is 

just kind of scaled up. The evidence on low-income households does 

seem to suggest that more of the response is up front than medium 

or typical households. 

Chairman CONRAD. I should have been an economist. 

Mr. ORSZAG. There you go. 

[Laughter.] 

Senator GREGG. This idea that you get more for the food stamp 

dollar, I want to get to the point that Senator Whitehouse was 

making. Where does the dollar of consumption go? And you seem 

to feel that it did not matter. If you give somebody $800 or $600, 

or whatever this works out to, and they go out and consume and 

they buy a product which is not made in the United States, what 

is the value that is added to the American economy that causes you 

to say that that energizes economic stimulus here? 

Mr. ORSZAG. To the extent that the additional consumption 

comes in the form of imports, it does not add directly to the demand for domestic production. My point was just that the share of 

imports in general, if you are thinking about providing food stamp 

benefits—well, food stamp benefits—— 

Senator GREGG. Well, I do not want to take food stamps. They 

are an agricultural product, and it just becomes another farm bill. 

But—— 

Mr. ORSZAG. I guess my point was just that—— 

Senator GREGG. Six hundred dollars—— 

[Laughter.] 

Senator STABENOW. And what is wrong with that? 

[Laughter.] 

Senator GREGG. I am talking about a $600, $800 rebate check 

that is not tied to any specific spending program. The person gets 

the check, they pay down their credit card, or they go out and they 

buy a product; and if the product is manufactured outside the 

United States, what is the economic stimulus? 

Mr. ORSZAG. There is none there, and my only point was that 

across broad categories of goods, the variation in the share of imports, while it is there, it is not large enough to think that we 

should be targeting specific categories of spending. It is just—food 

stamps may be a particularly viable—or may work better from that 

perspective than other things. But if the question is should we 

worry about where people spend the money, in general I am not 

sure that that is a productive undertaking, because in general, the 

share of imports in consumption is small enough that most of the 

bang will spill over into domestic production. It does not hold universally across all categories of goods. 

Senator GREGG. That is a statement which I hope is correct, but 

I am not sure that I intuitively think it is, because if you are buying a product or an item that is in that price range, which is not 

going to be a house or something that is fairly large—you are buying basically a durable good. You are buying a television, a dishVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
49 

washer, or something in that range. What percentage of those 

types of items are imported versus domestically produced? Do we 

have any numbers on that? 

Mr. ORSZAG. Yes. But I am not sure that we should accept the 

premise, which is the response to the 2001 rebate suggested it was 

not just that kind of thing, but also increased consumption of, you 

know, going out to restaurants, apparel—I mean, there are a whole 

variety—— 

Senator GREGG. What percentage of apparel is American manufactured? 

Mr. ORSZAG. I do not have an exact percentage, but—— 

Senator GREGG. Low. 

Mr. ORSZAG. Low. ‘‘Low’’ would be a good characterization. 

Senator STABENOW. If I might just interject for my friend there, 

I would be happy if we would target that to American-made automobiles. 

Senator GREGG. I know. 

[Laughter.] 

Senator GREGG. I have no problem with that. That means we 

would be buying more automobiles made in Tennessee or South 

Carolina. 

Mr. ORSZAG. Well, let us pause on apparel for a second because 

it did seem like the response to the 2001 rebates came—I mean, 

you have to be careful because the data are a little slippery here— 

came disproportionately in that category. We do need to remember 

that, you know, part of the price of apparel here is not just the cost 

of the good itself but, rather, also the value-added and the retail—— 

Senator GREGG. Right. I understand that—— 

Chairman CONRAD. Can I just say that the Chairman deems that 

the time of the Senator from New Hampshire has expired. 

Senator GREGG. I am just getting into the agriculture. 

Chairman CONRAD. Even though let me just say it cost him 1 

minute of his time to make this crack about the farm bill. 

[Laughter.] 

Senator GREGG. I do want to go back, though, to this question 

of whether under this stimulus package as presented we are going 

to get it into the two quarters that we presume are going to be the 

most problematic or is it going to be outside those quarters and toward the end of what we can see is the problematic period. 

Shouldn’t the stimulus package therefore take on more of a personality of being a long-term structural improvement of the competitiveness so that the underlying economy is made stronger as versus 

stimulated? 

Mr. ORSZAG. Well, I suppose you could ask whether if the shortterm impact is so delayed, what exactly one’s—what one is doing. 

Senator GREGG. Confidence. This is all about confidence that the 

Government can act. That is what this appears to be about. But 

if the Government is going to act but act in a way that does not 

stimulate the two quarters that we are most concerned about, 

shouldn’t the practical implications of this package be that it improve the underlying structure of the economy by going toward productivity and more efficiency in the economy? 

50 

Mr. ORSZAG. The longer out you go, the more the entire premise 

of undertaking this kind of activity would need to be questioned. 

I mean, there still might be concerns about economic activity in the 

latter half of this year, but as you go out beyond that, certainly, 

again the whole sort of theory behind it changes. 

Senator GREGG. Thank you. 

Chairman CONRAD. Yes, I think this is really not what I was 

hoping for from a package. I would just say that. I was hoping that 

in terms of doing a package, we are going to do one that had a 

more rapid effect. I do not know. Do we have any measure of psychological effect? That is, if people anticipate that they are going 

to get a check, and they are going to get it in June or July, do we 

have anything, any evidence that would suggest that affects their 

consumption now? 

Mr. ORSZAG. There is theory behind that. In practice, especially 

if you are trying to target the households that have difficulty borrowing, it is often difficult to spend it in advance of when you actually receive the money. 

Chairman CONRAD. Those are people that you described as credit-constrained. 

Mr. ORSZAG. They are living paycheck to paycheck. 

Chairman CONRAD. Yes. I do not know, though. People always 

have an ability—it is amazing how innovative, creative people are 

in terms of they want something they need, or at least think they 

need. 

Mr. ORSZAG. I mean, so, for example, one can imagine also there 

have been issues surrounding the terms of various transactions, 

but in traditional income tax refunds, there are loans that are advanced by private sector entities to advance the money to individuals, often at what some people believe are very high interest 

rates. But there are ways of—— 

Chairman CONRAD. Payday loans. 

Mr. ORSZAG. There are ways of, you know, even in advance of 

when the checks arrive, having some of the liquidity provided to 

households that may spend it. 

I think it is also worth pausing on the bonus depreciation or 

business investment incentives component because there may well 

be some response to businesses as soon as that is announced, but 

firms usually take some time to adjust their investments decisions. 

And you also tend to get the peak response toward the end of whatever the period is when you are providing an incentive, because you 

might as well capture it right then. 

Chairman CONRAD. People wait. 

Mr. ORSZAG. So, again, the impact over the next couple months 

presumably will be relatively limited in terms of its direct impact, 

and the confidence effects, coming back to Senator Gregg’s comments, will depend again on how people perceive it in psychology. 

That is difficult for me to evaluate immediately. 

Chairman CONRAD. Well, we are finding out a little more about 

this package now, at least press reports. They are saying that specifically the plan would modify the 10-percent bracket, a change 

worth up to $600 for a single taxpayer, $1,200 for a married couple. 

Tax filers earning too little to pay income taxes could still benefit 

under the plan from a refundable $300 child tax credit. 

51 

So, you know, I do not know—there is no indication in this story whether it is limited to people, couples below $150,000. But assuming the previous report was correct on that, this does appear to be 

targeted to middle-income people, lower-middle-income people. And 

I guess one has to hope that there is some expectation effect, that 

people see that they are going to be getting this money, and then 

move to increase their spending in order to stimulate the economy. 

In terms of the business side of it, they are saying that businesses would be able to write off 50 percent of the cost of capital 

purchases and allow small businesses to write off all of the costs 

of some additional purchases. So that is increased expensing. 

You know, I have been a big supporter of that in the past, but 

I must say the—as a stimulus, I supported that very strongly in 

2001. Isn’t the evidence from 2001 that increased expensing, bonus 

depreciation got us pretty weak bang for the buck? 

Mr. ORSZAG. One study suggested that you, again, did not even 

get the response across different types of investments that you 

would have expected. Another study suggested you did get that but 

the aggregate impact was something like 0.1 or 0.2 percentage 

points of GDP, which is obviously quite modest. 

Chairman CONRAD. Very weak, much weaker than I would have 

anticipated. 

Mr. ORSZAG. We had built into our baseline at the time an expectation of much more rapid growth in investment as a result of 

bonus depreciation that then did not occur. 

Senator GREGG. May I ask a question on that point? 

Chairman CONRAD. Sure. 

Senator GREGG. Doesn’t that depend, though, on where you are 

in the business cycle? 

Mr. ORSZAG. It may, yes. 

Senator GREGG. Because if you basically are pretty much at full 

plant utilization, then an investment tax credit is going to generate 

an immediate reaction. But if you have assets that are not being 

used, people are not going to go out and buy more assets. 

Mr. ORSZAG. It is possible that the reaction now will be different. 

At that time we had built up basically a capital overhang, and 

there was a very steep reduction in investment that occurred post, 

say, 2000 and it may well be that the—— 

Senator GREGG. And where are we now in that cycle? 

Mr. ORSZAG. We are not at the same point. In other words, it is 

possible that the response now will be better than it was then. But 

I think some caution—— 

Chairman CONRAD. Actually, following Senator Gregg’s logic, 

that would tell you it would be weaker. It would be weaker now. 

Mr. ORSZAG. No, no. The point being that at that time I think 

the perception among firms was that they had overinvested especially in particular kinds of physical capital. 

Chairman CONRAD. Y2K effect. 

Mr. ORSZAG. And telecommunications capacity and other things, 

and so were more reluctant to undertake new investment. That 

overhang is not present currently. 

Chairman CONRAD. But if you have a weakening economy—Senator Gregg’s point as I heard it was if you have a weakening economy, if you are in that part of the business cycle, people are not 

52 

going to go out and make more capital investments when they do 

not need it to produce for the demand that they are facing. 

Mr. ORSZAG. Right. I am sorry. I was keeping sort of expectations 

of economic activity constant. It is absolutely—I think one of the 

reasons why the effect may not have been as large as expected is 

the investment decision is being driven much more by expectations 

about what future prospects are like for firms than from any tax 

savings, which can often be quite modest. And I would also point 

out one other factor that may have affected the impact in 2002 and 

2003, which is that many States decoupled from the Federal tax 

change, and as a result, I think some corporations just said I do 

not even want to undertake the complexity of—— 

Chairman CONRAD. Sorting that all out. 

Mr. ORSZAG. Sorting that all out. 

Chairman CONRAD. Senator Whitehouse? 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Two quick questions. Back to the issue of the timing of the stimulus effect—and I do not know if you are the person to even answer 

the first one. But with respect to the IRS and its ability to put the 

rebate through the tax system, is there any chance that this could 

be connected to the 2007 refund process, which would presumably 

be quicker than—— 

Mr. ORSZAG. Yes, my understanding is that there is special programming that would be required for processing a rebate like this 

and that it could not be done in conjunction with the current tax 

filing season. 

Senator WHITEHOUSE. OK. The other question is that we have 

sort of overlooked our senior citizens in this whole stimulus equation in the event that we were to choose a stimulus mechanism 

that involved seniors, and specifically a Social Security mechanism, 

how quickly would money flow through Social Security to seniors? 

Mr. ORSZAG. I am told that after enactment it would involve 

something like perhaps a 3-month lag or so before it would actually 

show up in benefit payments. 

Senator WHITEHOUSE. So quicker than tax rebates, less rapid 

than unemployment insurance extensions and food stamps. 

Mr. ORSZAG. That is probably fair. 

Senator WHITEHOUSE. Thanks, Mr. Chairman. 

Chairman CONRAD. Any others, Senator Gregg? 

Senator GREGG. No. I want to thank the doctor for his excellent 

presentation. He is always so competent, and we very much appreciate it. 

Mr. ORSZAG. If I could take the opportunity to thank my excellent staff for both the stimulus report and the economic and budget 

outlook, both of which were produced under tight time constraints. 

Chairman CONRAD. We appreciate that very much as well. We 

appreciate the professionalism of you, Dr. Orszag, and your staff. 

They are really excellent to deal with, and we appreciate it very, 

very much. 

With that, we will adjourn the hearing. 

[Whereupon, at 11:32 a.m., the Committee was adjourned.] 

(53) 

THE LONG-TERM BUDGET OUTLOOK 

TUESDAY, JANUARY 29, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:01 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Murray, Wyden, Stabenow, Menendez, 

Whitehouse, Gregg, Domenici, Allard, and Bunning. 

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

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. I want to 

welcome our witness, the Comptroller General of the United States, 

David Walker. We want to extend a special welcome to his wife, 

Mary, who is with him this morning. I think we now know why 

General Walker has been so well received in Congress. It is really 

not him. It is all about Mary. But, Mary, we especially thank you 

for what has to have been a challenging time in the Walker household, with General Walker going around the country with the Fiscal Wake-Up Tour, and we thank you very much for your contribution to having that happen. 

I know how challenging it can be for spouses who have to put 

up with our schedules, and I just want to say how much we appreciate the contribution that has been made by the Walker household 

to alerting the American people about the real serious challenges 

facing this country, and your husband has really been a leader and 

somebody that those of us on this Committee admire greatly. 

Let me just kind of give my own review of where we are. When 

we look at the 10-year budget outlook, and when we put back the 

proposals the President has made on both making the tax cuts permanent and war costs, we see that the 10-year deficit situation 

continues to deteriorate. 

54 

When we look at the debt, that also deteriorated even further. It 

was $5.8 trillion at the end of the President’s first year. At the end 

of his 8 years of responsibility, we now see the debt, the gross debt 

of the United States, will be over $10 trillion, and we are headed 

to more than $13 trillion of debt by 2013. 


42157.026
55 

Part of the reason, of course, is the demographic tidal wave that 

is coming at us—roughly 80 million retirees by 2050. 


42157.027
56 

And let’s go to the next slide. Within 4 years—and I think this 

is a very sobering slide. Within 4 years, more than half of the baby 

boomers will be at or near retirement; that is, they will be 55 years 

of age or over. And while many do not retire at 55, increasingly 

people are retiring at 55. And what this tells me is the urgency of 

addressing these long-term problems. We are preparing a chart 

that will show at age 62 what percentage of the population; I hope 

to have that for our next meeting. 


42157.028
57 

Let’s go to the next slide, if we can. Looking at CBO’s long-term 

budget outlook, we now see by 2050 that 12 percent of all Federal 

spending will go just to Medicare and Medicaid—by 2050, according to CBO’s latest estimates. This is actually somewhat better 

than their previous estimates, but, nonetheless, Federal Government spending is about 20 percent of GDP now. To have just two 

items—just two—take up 12 percent of GDP, and this does not include Social Security, nothing for defense, nothing for parks, nothVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00063 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH

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ing for law enforcement, nothing for debt service, nothing for any 

of the other—look, we are on a course that is utterly unsustainable. 

Let’s go to the next slide, if we can. This is Director Orszag’s testimony before this Committee last June, and he said, ‘‘There are 

a variety of health care reform approaches that hold promise. One 

of the challenges we have is that I have not seen a comprehensive 

plan that would credibly bend the cost curve sustainably over the 

long term. So one of the challenges, we need to be trying different 

things, seeing what works and then readjusting as we figure it out. 

And the sooner we start that, the better off we are going to wind 

up being.’’ 


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Let’s go to the next slide, if we can. This is on the question of 

tax cuts. The President called last night for making the tax cuts 

permanent but not paying for them. If we do that, the cost of the 

tax cuts explodes at the very time the trust fund cash surpluses 

turn to deficit. This is looking at the period 2007 to 2026, and we 

can see we just go right over the cliff. So this is not going to work. 


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When we look at the Federal debt, under CBO’s long-term budget 

scenario we see where we are now, but we see where we are headed. The debt absolutely explodes. 


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The former Treasury Secretary told us this. Former Treasury 

Secretary Snow acknowledged the need for a bipartisan approach 

to solving our long-term challenges. He said, ‘‘You cannot do health 

care reform or Social Security reform without a bipartisan consensus. If we made a mistake, it was not approaching it in a more 

bipartisan way.’’ 


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That brings me to the proposal that the Ranking Member Senator Gregg and I have made on a fiscal task force to address the 

long-term fiscal imbalance: 16 members—8 Democrats, 8 Republicans; everything on the table; and an assurance that if 12 of the 

16 could agree, it would come to a vote in the U.S. Congress. That 

would assure a bipartisan outcome because we would require a 

super majority of the committee, 12 of the 16, to report a plan and 

a bipartisan vote in both the House and the Senate. 


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I announced at our last meeting that it will be my intention to 

bring this to a markup this year in this Committee, and I know 

there is controversy surrounding that. We know that we are going 

to have to change the timing of what was in our proposal last year 

because that was really geared to this year. We know that a number of the Presidential candidates have now affirmatively endorsed 

this approach. Governor Romney and Senator Obama have both affirmatively endorsed this approach. Senator Clinton has endorsed 

a commission approach. We welcome that. We would urge the other 

Presidential candidates to come forward and indicate support for 

this kind of approach as well because there is really no alternative. 

Let’s face it. We have to do something, and in the early period 

of the next administration, that is the time to act. This will bedevil 

the next administration, whoever it is, unless they face up to it. 

Can you imagine the squeeze that the next administration will face 

on every domestic priority with—as more and more of the baby 

boomers retire and we get closer and closer to the point of insolvency, this will be the opportunity. And we cannot let it pass. 

With that, I want to call on Senator Gregg, the very able Ranking Member of this Committee. Senator Gregg? 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Senator Conrad, and let me associate myself with especially your final comments relative to the 

need to do something now and the use of this approach of the task 

force as a procedure to force policy in a bipartisan and fair way, 

which are the two operative words here that will allow us to make 

progress. 


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I also want to associate myself with your comments relative to 

the Comptroller General and his great assistance in this effort, 

really being on the point, and I thank his wife, as Senator Conrad 

did, for her forbearance and tolerance in allowing her husband to 

do public service and such important public service. It is very much 

appreciated. 

I want to join in the concern expressed by Senator Conrad that 

the numbers are not sustainable. Most of the numbers have come 

from Mr. Walker, General Walker, and they simply speak for themselves. And I know you are going to go through these numbers 

again for us, which is important, because although we understand 

them, the idea is to communicate them. And so even though it may 

seem a bit repetitious to some in this room, it is not repetitious to 

a lot of people. We are hearing it for the first time. 

We as a generation, the baby-boom generation, have no right to 

pass on to our children less of a Nation than we received. But that 

is exactly what we are going to do if w do not address this issue. 

We will give them a Nation in fiscal meltdown, where their capacity to list as high a quality life as our generation has will simply 

be limited by the fact that they will have to support our generation 

at such levels with taxes or the burden of support that they will 

no longer be able to afford their first home, afford their college tuitions for their children, afford their opportunity to live the quality 

of life that we have lived. And that is not right for one generation 

to do to another generation, so it is our responsibility as the generation that is going to be causing the problem, the baby-boom generation that retires, to step forward with a solution. 

That is why Senator Conrad and I have come up with this idea 

of allowing a process to set policy, to drive policy. We have come 

to the conclusion that everybody who puts policy on the table first 

ends up getting shot at by the different interest groups who want 

to make progress around here, on fundraising usually, but who 

have some axe to grind, and that putting policy on the table first 

simply does not work in our institution. But the only way to do this 

is to create a procedure which is viewed as absolutely fair, absolutely bipartisan; where nobody can game anybody; and where the 

decision of that process, the task force, is viewed by the public as 

fair, open and bipartisan; and that that decision by that task force, 

which will be a decision being made by people who understand the 

issues and who have skin in the game, so to say, will then be voted 

up and down by the Congress, and without amendment, the reason 

being that if you have amendments, everybody can go and hide behind an amendment. And we hopefully will, as a result of that, 

make very significant progress on these big issues and everything 

is on the table. All the entitlements are on the table, all the tax 

policy is on the table, with the idea that we would move significantly down the road toward reducing the burden on the next generation, on our children and our children’s children. This is all 

about that—making sure that we pass on to them a viable Nation 

that they can afford. 

And so I congratulate the Chairman of the Committee for being 

so aggressive in promoting this idea. We may disagree on some 

things, like tax policy, but we do not disagree on the need to have 

65 

a procedure to reach an agreement here. And it has to be done 

sooner rather than later. 

So we look forward to hearing from you, General, again, on your 

thoughts. We know that it is as a result of your efforts and the information that you have been putting out with your tour that the 

public is getting educated, and this is another opportunity to do 

that. Thank you for being here today. 

Chairman CONRAD. I thank the Ranking Member for his statement, and, again, General Walker, we thank you for your contribution. You know, you would not have to do this, you would not have 

to stick your neck out, you would not have to go traveling around 

the country trying to alert the country about the risk of what is out 

there for our Nation. But you have taken on the responsibility, and 

we greatly admire you for it. General Walker? 

STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WALKER. Thank you, Chairman Conrad, Senator Gregg, 

other Senators. It is a pleasure to be back before you here today, 

and it is a privilege to be the sole witness before this important 

hearing. Thank you for your kind comments also about myself and 

my wife. 

I want to thank Chairman Conrad, Senator Gregg, and others for 

their leadership in connection with this issue. As you know, it 

takes patience, persistence, perseverance, and ultimately pain before you prevail in a really important change effort. And this issue 

is no exception, but it is important that we prevail. 

What I would like to do is submit my entire statement for the 

record and then use a quick PowerPoint presentation to make some 

key points and then make myself available for questions. But let 

me, before I begin the PowerPoint presentation, make a few comments. 

First, I was at the State of the Union last night, as I imagine 

most if not all of you were, and it is understandable that the Congress and the President are concerned about the current economic 

slowing of growth, and recent disruptions in the housing market 

and the capital markets. I believe that it is possible to do something with regard to a short-term stimulus while still being fiscally 

responsible. At the same time, I think it is critically important that 

such action be timely, targeted, and temporary. If something is 

done that meets those three criteria, then I think it would be understandable if Congress acted. But we must not be deluded to 

think that our problem is the short term because, quite frankly, we 

will have much, much, much bigger economic challenges in the future if we do not deal with our real problem, and that is our large 

and growing fiscal imbalance, which you will see, only grows with 

the passage of time. 

Third, it is important that we figure out what is a proper way 

forward. I am going to mention two things out of many: 

First, I think it is critically important that a capable, credible, 

and bipartisan task force or commission be formed as soon as possible in order to make recommendations to the next Congress and 

66 

the next President for an up or down vote on this issue. This is 

critically important. 

Second, I also think it is very important that this Congress enact 

legislation to improve transparency and accountability with regard 

to financial and budget matters. We are working with OMB, Treasury, and CBO to present a joint proposal within the next 2 to 3 

months that I hope this Committee and others in Congress will favorably consider. I think it is very important because transparency 

is a powerful force. 

Now, if I can, let me take you through these slides; my understanding is that all of you have a copy. At least I have asked for 

that to happen. 

This is what the longer range looks like as it relates to the deficit 

as a percentage of our economy based upon reasonable assumptions. And, obviously, one can run different scenarios. The assumptions here are that we tax at historical rates of about 18.6 percent 

of the economy, which is roughly what we are taxing at now, and 

that is what we have taxed at on average over the last 40 years; 

that we do not reform Social Security and Medicare, which we need 

to, but we have not made any progress on that other than progress 

that digs the hole deeper, which was passage of Medicare Part D; 

and, third, that the rest of the budget, the so-called discretionary 

spending, grows by the rate of the economy. This is what you get. 

Not a pretty picture. And it is getting worse with the passage of 

time. 

By the way, Mr. Chairman, let me just note for your benefit and 

the benefit of all the members that if you look at the composition 

of the Federal budget, about 38 percent of it is discretionary spending. And that is what is getting squeezed. 


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Now, what is interesting, when you read the Constitution of the 

United States—which I have one on my desk and I carry one with 

me in my briefcase everywhere I go. If you read the Constitution 

of the United States, you will find that every express and enumerated responsibility envisioned by the Founding Fathers for the Federal Government is in discretionary spending: national defense, 

homeland security, Federal judicial system, foreign policy, treasury 

function, Congress of the United States, Executive Office of the 

President. Those are the express and enumerated responsibilities 

envisioned by the Founding Fathers, and yet that is in the 38 percent portion of the budget. Stated differently, 62 percent is different things that are on autopilot, of which some is interest on the 

debt, which is mounting rapidly. 

Next, if we look at the next chart, we will see, that although the 

Federal Government has a challenge, it is not the only challenge 

we face as a Nation. GAO for the first time 6 months ago did a 

long-range simulation for State and local governments in the aggregate. Now, some States are better off than others. We all know 

that. Some States have real balanced budget requirements; some 

have illusionary balanced budget requirements. For example, California, requires the Governor to submit a balanced budget but not 

for the State to actually have a balanced budget. They balance it 

the old-fashioned way, just like the Federal Government: they borrow to make up the gap. And so they have a serious problem going 

out. Other States have more honest balanced budget requirements. 

But what this shows is that within the next 10 years, just as 

with the Federal Government, State and local governments in the 

aggregate will face large and growing structural deficits, primarily 

for four reasons: 


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No. 1, Medicaid costs. And if there is one thing that could bankrupt America, it is health care costs. We are the only industrialized 

nation on Earth that essentially writes a blank check for health 

care. The only industrialized nation on Earth. We write a blank 

check for Medicare and Medicaid. It is imprudent, it is irresponsible, and it must change. 

States also have a challenge with regard to unfunded retiree 

health care, underfunded pension plans, and deferred maintenance 

and other critical infrastructure needs. So for those reasons and 

others, our national challenge is actually greater than our Federal 

challenge. 

Next, please. 

This shows you what is expected to happen on autopilot if we do 

not engage in fundamental reforms. This represents debt as a percentage of our economy. The all-time high in the history of the 

United States was about 109 percent of GDP in the aftermath of 

World War II. And, quite frankly, with World War II we were betting the ranch. We were betting the future of the free world in 

World War II, and so, therefore, we did whatever we had to do in 

order to make sure that we prevailed. 

In today’s situation, it is basically our addiction to debt. We run 

deficits in good times and bad. We are charging the national credit 

card, building up compound interest and expecting our kids and 

grandkids to pay it off—and many of them do not even have the 

right to vote because they are too young. So if you want to talk 

about taxation and representation, that is another way to talk 

about taxation without representation. These are unacceptable and 

unsustainable burdens and, quite frankly, the short-term burdens 


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are really worse than advertised. You know why? Because we do 

not want to count debt held by the trust funds. The real debt-toGDP ratio is about double what we advertise because some want 

to ignore the debt that is held in the trust funds. But guess what? 

That debt is real debt, too. And that debt will be honored by this 

Government. I mean, I have no doubt because, otherwise, that 

would represent a default as well—not only a default on our debt, 

but a default on the promise with regard to the excess revenues we 

have already received from Social Security beneficiaries that the 

government used to pay for other things. 

Now, here is a challenge, a new graphic that I would like you to 

see, which is really important. You know, we have three ways of 

calculating the deficit. I would not say we have three sets of books, 

but we have three ways of calculating the deficit. We have the unified budget deficit, which is cash-based and last year was $163 billion. We have an operating deficit, which means that we ignore the 

Social Security surplus because we spend all of that on other government operating expenses. So the operating deficit last year was 

$344 billion. And then we have the accrual-based net operating 

cost. And you can see that no matter which measure you use, over 

the last 3 years they have come down, and that is good. Lower deficits are better than higher deficits. 

But please look at the red line. The red line is on a march to the 

northeast corner of the graphic. That is our large and growing longterm fiscal exposures, our fiscal gap, the total liabilities and unfunded commitments of the United States, the difference between 

what we have promised for Social Security and Medicare and how 

much in payroll taxes, trust fund assets, and premiums that we are 


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expected to receive for these programs. Namely how much money 

you would have to have today to deliver on those promises. And 

Medicare is short $34 trillion, while Social Security is short about 

$7 trillion. 

Next, please. 

This is similar to the one that the Chairman showed, which 

shows Social Security, Medicare, and Medicaid are on a path to 

take up all of the Federal revenues based upon historical averages. 

This does not count interest on the Federal debt. This does not 

count national defense, homeland security, all those things that the 

Founding Fathers thought the Federal Government was going to 

do, and does do, but are increasingly getting squeezed. 

Next, please. 


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The real problem is health care. It is not demographics. I mean, 

demographics are a challenge. There is no question about that. But 

it is really health care. And if there is one thing that could bankrupt America, it is health care. It is the No. 1 challenge for the 

Federal Government. It is the No. 1 challenge for State governments. It is the No. 1 competitiveness challenge for American business. We spend a lot of money on health care, but we get belowaverage results for an industrialized nation—below-average results 

and yet we spend a lot more money. 

This is how much of our economy we are dedicating to health 

care, and as I said, we spend a lot of money, but we get below-average results. I would say that is not very good value for money. 


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And, last, before I summarize, these are tax preferences. You 

know, there is a lot of time and effort spent discussing how much 

money we spend on direct spending, which is close to $3 trillion a 

year. But there is not enough time spent on the $800 to $900 billion in lost revenues that we incur every year because of tax preferences—deductions, exemptions, exclusions, credits. The No. 1 tax 

preference in the Internal Revenue Code is the fact that a vast majority of Americans do not pay income tax or payroll tax on the 

value of employer-provided and paid health care. It is almost $200 

billion a year, the fastest-growing tax preference. And it disconnects people from the cost of health care, from the rising cost 

of health care. 

Therefore, one of the things that we need to do is to put tax preferences on the radar screen that need to be part of any budget controls, that need to be periodically reviewed and potentially reauthorized, as we do on spending programs, because we cannot afford 

to keep $800 to $900 billion on autopilot either, just like we cannot 

afford to put $3 trillion worth of spending on autopilot. 

So, in summary, in the short term deficits are coming down. Our 

problem is not the short-term deficit or even the current debt. It 

is where we are headed. We are headed for unprecedented rough 

seas that could swamp the ship of state if we do not get serious 

soon. 

It is understandable that Congress and the administration want 

to do something with regard to fiscal stimulus in the short term to 

complement the Fed’s monetary stimulus. But it needs to be temporary, targeted, and it needs to be timely. And, second, we cannot 

lose sight of the ball. I know you are a big baseball fan, Mr. Chairman. We need to keep our eye on the ball so we do not strike out. 


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The real problem is our large and growing structural imbalance 

that grows with the passage of time. If we balance the budget tomorrow, we still have a $53 trillion hole that grows by $2 to $3 trillion a year on autopilot. 

And then, last, we need a task force or a commission. We need 

more transparency and accountability on the financial reporting 

and budgeting side. We at GAO look forward to working with you 

and your colleagues to try to make that a reality this year. 

Thank you. 

[The prepared statement of Mr. Walker follows:] 


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Chairman CONRAD. Thank you, General Walker, for once again 

laying out, I think in a clear and concise way, the challenge that 

we confront. 

Let me ask you this: I have had people say to me: ‘‘You guys are 

a bunch of Chicken Littles down there. ‘The sky is falling, the sky 

is falling.’ Nothing ever happens. Your deficit is only 1.2 percent 

of gross domestic product. That is well within historical norms. 

Aren’t you guys just overstating the problem facing the country?’’ 

What would you say in answer to people who have that view? 


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Mr. WALKER. First what I would say is it is absolutely true that 

our current deficit and debt levels are not a major problem. It is 

absolutely true that we have run larger deficits and have had higher debt levels as a percentage of our economy in the past than we 

do now. But it is also true that when you are trying to help make 

sure that we discharge our fiduciary and stewardship responsibilities to this great Nation, you should not just look in the rearview 

mirror; you should actually look ahead and find out where we are 

headed. And when you look ahead and find out where we are headed, based upon reasonable and realistic assumptions, we have 

never seen anything like what we are heading into. And there is 

absolutely no question that it is imprudent and unsustainable. 

There is absolutely no question we cannot grow our way out of the 

problem. And there is absolutely no question that it is going to take 

budget controls, entitlement reforms, spending reprioritization and 

constraint, and tax reform, and ultimately more revenues than 18.5 

percent of GDP. 

But, you know, we are going to have to do it, and the sooner we 

do it, the better, because in the end the default is probably higher 

taxes. And that is not good for economic growth, that is not good 

for disposable income, and that is not good for our competitive advantage. 

Chairman CONRAD. Well, and really isn’t the default position not 

only dramatically higher taxes, but very dramatic cuts in benefits? 

Because, I mean, if we fail to act, if we just wait—which some are 

suggesting. I hear this, you know, from some of my colleagues. 

Let’s just kick this can down the road. You know, everybody is concerned about the next election, the next election, the next election. 

Let’s just wait. 

What is the risk of just continuing to kick the can down the 

road? 

Mr. WALKER. First, Mr. Chairman, I would say it is fiscally irresponsible to do that, and it is politically less feasible to do that as 

time goes on—I am not an elected official. You are. But let me analyze it from my perspective. 

The longer you wait, the bigger the gap is going to be, the more 

change you have to make, the less transition time you have, the 

more disruptive it is likely to be, and the greater the risk that we 

are going to have a serious economic disruption, not the kind of 

challenge we are seeing right now. Therefore, I think it is prudent 

to act sooner. 

Second, I believe we have a 5- to 10-year window of opportunity 

to demonstrate to our foreign lenders that we are going to get serious about this—5 to 10 years, and it is closing. And I think it is 

closer to 5 than to 10. 

The longer you wait, the more people are enfranchised in the status quo. And the people that are enfranchised in the status quo 

tend to be more politically active—namely, seniors. The people who 

are going to pay the price and bear the burden, younger people, 

tend to not be as informed and involved. Therefore, I think for fiscal reasons, for political reasons, for economic security reasons and 

otherwise, it is prudent to move sooner rather than later. 

Keep in mind, we are the largest debtor nation in the history of 

mankind, and it is getting worse, not better. 

94 

Chairman CONRAD. What is the threat to the economy? You 

know, we talk about a need to act. You have just talked about a 

5- to 10-year window to convince these international markets that 

the United States is going to be fiscally responsible. What is the 

threat to this economy of a failure to act? 

Mr. WALKER. I think one of the most likely threats would be a 

reduction in the willingness of foreign lenders to continue to buy 

our debt at attractive rates that we have been able to finance our 

debt recently. If interest rates go up, that will have a compounding 

effect on the budget, a compounding effect on the economy, a 

compounding effect on American families. And, by the way, the scenarios that I just showed you do not assume a significant rise in 

interest rates. If there is a significant rise in interest rates, then 

we accelerate and compound our challenge. 

Chairman CONRAD. Well, let me ask you this: So what if foreign 

lenders become less willing to extend credit to this country? 

Couldn’t we just finance this internally? Couldn’t we just borrow 

from ourselves? 

Mr. WALKER. No. We are a great country, and Americans are a 

great people, and we are particularly great at spending. But, unfortunately, we are poor at saving. America has the lowest savings 

rate of any major industrialized nation. In the last 2 years, Americans spent almost everything that they made. We had close to a 0 

personal savings rate in the last 2 years. 

Now, why would you be concerned about that? Because with savings comes investment. With investment comes research and development. With that comes innovation and productivity increases. 

And with that comes an additional economic growth and additional 

competitive advantage. With that comes improvement in our standard of living. We are eating our seed corn. And there are a lot of 

American families that are following the bad example of their Federal Government. They are spending more money than they make. 

They are charging their credit cards, taking out home equity loans, 

building up debt and compound interest. You can do that for a little while. You cannot do that over the long run. 

Chairman CONRAD. Well, the Government can do it because we 

can print money. What is the adverse effect of doing that? 

Mr. WALKER. First, we are no longer the single reserve currency 

in the world. We have competitors, and they are likely to grow over 

time. 

Second, some people say, well, don’t worry about it, we will just 

print money and inflate our way out of the problem. As we all 

know, inflation is probably the cruelest tax of all. It affects people 

that are lower- and lower-middle-income worse than it does people 

that are middle- and upper-income. 

Furthermore, we cannot inflate our way out of the problem, and here is why. Of the $53 trillion hole, only $9 trillion relates to current debt. You can inflate and decrease the burden associated with 

that $9 trillion, but the remaining $44 trillion is growing faster 

than inflation. Health care costs have grown about 2.6 faster than 

the economy, which grows faster than inflation. Social Security 

costs are indexed. They are indexed for inflation once you draw the 

benefit, and they are wage-indexed in determining your primary 

initial benefit. 

95 

You cannot grow your way out of this problem, and that is an 

illusion. So people who think that you can do not understand the 

programs and have not run the numbers. 

Chairman CONRAD. The final point I would make, and I will then 

turn to Senator Gregg: These people that talk about 1.2 percent of 

GDP as the deficit, that was last year. This year the deficit is going 

to be 2.5 percent of GDP. But of greater concern, the increase in 

the debt this year will be well over $600 billion, which is well over 

4 percent of GDP. And this is the sweet spot in the fiscal cycle. 

This is the sweet spot. This is before the baby boomers start to retire. This is before we have the additional continuing explosion of 

health care costs. 

Senator Gregg? 

Senator GREGG. Well, I think you have certainly summarized the 

problem, and I think Senator Conrad’s questions, which were intentionally structured so, led through the different options and why 

many of them are not viable, such as inflating your way out of this 

issue and losing investment from abroad as a result of lack of confidence or raising the interest rates as a result of having to attract 

more investment. 

Let me get more into the weeds, if I can. Because this problem 

is so significant, I think there has to be an admission that there 

are going to have to be some tough decisions made. 

For example, we are going to get a budget this year. Shouldn’t 

that budget include reconciliation instructions which address the 

issue of entitlement spending if we are going to start moving on 

this problem? 

Mr. WALKER. I think there needs to be something on that. We 

need to move. I talked before about budget controls, bringing back 

budget controls, and I think part of those budget controls have to 

include something to do with mandatory spending, both direct as 

well as entitlement programs, as well as tax preferences. But on 

the instructions, yes, I think—— 

Senator GREGG. Last year, for example, the President proposed— 

and I thought it was a fairly reasonable proposal—that we should 

require high-income individuals to pay a percentage of the Part D 

premium. Today they are not required to do so. You know, if you 

are Warren Buffett and you get the Part D premium, you do not 

have to pay anything for that. Isn’t that a reasonable movement in 

the direction of trying to get some relationship between the burden 

and the expense? 

Mr. WALKER. In my view, the Congress should seriously consider 

better targeting beneficiary subsidies by the taxpayers—both with 

regard to Medicare as well as with regard to tax preferences for 

employer-provided and -paid health care. 

In other words, it is one thing to say that you are eligible for coverage at group rates under these programs. It is another thing to 

say that irrespective of your wealth and your means, you are going 

to get the same taxpayer subsidy. That is a logical place to start, 

but ultimately, I think we are going to have to reform the entire 

health care system in installments. 

Senator GREGG. But in a world where incremental action is more 

likely than global action, isn’t it reasonable to do reconciliation inVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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structions which actually accomplish incremental action? Wouldn’t 

that be helpful? 

Mr. WALKER. I think it is essential that you act on health care 

incrementally because there is no way that you are going to be able 

to achieve comprehensive health care reform in one proposal. 

Senator GREGG. Now, one of the proposals that has been floated—and it actually, interestingly enough, was again floated by the 

White House because it would be perceived as impacting high-income taxpayers, just like the Part D premium was, basically a requirement that high-income individuals pay more for their premium. Is this idea that your $187 billion of tax preference which 

is tied to the deductibility of insurance plans being—of insurance 

plans being deductible, that that tax preference should be cutoff at 

some point—I think it was $11,000 per employee—so that high-income employees or more expensive plans would not be covered, and 

that we should take that money that is saved so that high-income 

employees or more expensive plans would not be covered, and that 

we should take that money that is saved—and this was the White 

House proposal—take that money that is basically generated from 

revenue and use it to fund insurance plans, private insurance 

plans, for people who are not covered today, that 41 million people 

who potentially—who do not have health insurance. 

First off, do you think it is a good idea to cap the deductibility? 

Which I suspect you do. And, second, though, getting into the more 

substantive—the more geopolitical or geo-economic issue, does that 

really in the long term address the health care question because 

basically money is fungible, and whether it is—I mean, it is going 

to be spent on health care if it is taken as a deduction, or it is 

going to be spent on health care if it is given as a payment to allow 

a person to buy an insurance policy. Other than getting more people covered, which is a social policy, does it really impact the bigger 

issue of the fiscal policy? 

Mr. WALKER. First, I do not believe that you ought to limit the 

deduction. The deduction is what the employer gets. And I think 

if you tried to seriously limit or eliminate the deduction, it would 

be counterproductive because employers are looking for an excuse 

to get out of this business. 

Senator GREGG. Not eliminate. 

Mr. WALKER. Right. 

Senator GREGG. Cap. 

Mr. WALKER. Exclusion. I think what you meant, Senator, which 

I agree with, is the income exclusion. The $187.5 billion is the fact 

that none of us have to pay income tax on what is paid for by our 

employer; by the Federal Government in our case since it is our 

employer. Same thing for payroll taxes. 

I do think that just as it is appropriate to better target direct 

taxpayer subsidies through spending, as we talked about before, it 

is also appropriate to target taxpayer subsidies through tax preferences; and that, intellectually, you should determine at what 

level of health care coverage you might provide a tax incentive, and 

anything beyond that should be included as taxable income. 

Think about the way the system works now—— 

Senator GREGG. But my question is: If you take that revenue 

that you get from there and move it over to funding coverage of unVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00102 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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insured, which is, of course, a legitimate public policy decision and 

social decision, have you really addressed your bigger issue of the 

cost drivers in health care? 

Mr. WALKER. No. I think you—well, yes and no. First, I think to 

the extent that you make individuals more aware of and sensitive 

to the increasing costs of health care, that will have a behavioral 

effect over time that will help to deal with excess utilization. However, if you end up taking the money that you save and spend it 

on something else, then immediately you have really done only 2 

things increased sensitivity to cost and improved coverage. I do 

think the four things you need to try to do in health care are: deal 

with universal access to basic and essential health care; impose a 

cap on what the Federal Government will spend on health care 

every year; implement universal national practice standards for the 

practice of medicine and also use of prescription drugs; and provide 

more personal responsibility and accountability for one’s health and 

wellness. 

And so I think targeting is a logical first step both for tax preferences as well as for taxpayer subsidies through Medicare. 

Senator GREGG. Doesn’t your second idea of capping the amount 

of Federal payments, which may very well be required here, lead 

to some significant adjustments in the delivery of health care? 

Mr. WALKER. Yes, it would. Some people say, Would it result in 

the rationing of health care? The answer is let’s be honest with 

people. We ration health care now. We just do not ration it rationally. We cannot afford to write a blank check for health care. That 

is why I think you have to look at all four things. Just putting a 

cap on how much the Federal Government will spend by no means 

solves the problem. You need to look at universal access to basic 

and essential health care, which I am happy to answer questions 

on that if you want. You need to have national evidence-based 

practice standards that will improve consistency, enhance quality, 

reduce costs, and dramatically reduce litigation risk because it 

would be a safe harbor for the practice of medicine. And you need 

to increase personal responsibility and accountability for one’s own 

health and wellness. 

So one piece by itself will not get the job done. They work in an 

interactive fashion—and, by the way, I might say that on this issue 

and Social Security reform and some other things that I have been 

working on at GAO, along with others, we have run up this in 26 

States, in town hall meetings in 26 States, and it gets a pretty favorable reaction. 

Senator GREGG. Thank you. 

Chairman CONRAD. Senator Murray? 

Senator MURRAY. Thank you very much, Mr. Chairman. And 

thank you for the tremendous amount of work you have done on 

this and your passion on an issue that is very difficult to deal with, 

but one we clearly have to. In your testimony, you are talking 

about as the long-term challenge increases, it is really important 

how we design any stimulus package. And as you know, the House 

and White House came to an agreement on an economic stimulus 

package. I believe they are passing it out today, with tax rebates. 

Do you think that package in its current form meets your criteria 

of timely, targeted, and temporary? 

98 

Mr. WALKER. Senator Murray, I have not studied it in detail. I 

have read press accounts with regard to that package. On the surface, it appears to be timely, targeted, and temporary. Reasonable 

people can and will differ as to whether or not it is the right package. 

Senator MURRAY. Have you looked at how it might affect our 

long-term fiscal challenge at all? 

Mr. WALKER. I think by definition you are going to increase deficits in the short term. All the more reason why it is important that 

it be temporary. If you want to have the impact on economic 

growth, it needs to be timely and targeted to people who are likely 

to use that money and spend that money because 70 percent of our 

GDP is based upon consumer spending. 

Senator MURRAY. So if the caps were lift on the rebate, for example, that would not be very effective? 

Mr. WALKER. On which rebate? 

If your income is less than, I think it is, $150,000, if that 

$150,000 was eliminated and it was for anybody, I assume that 

that would be—— 

Mr. WALKER. One would want to target it to those that are most 

in need and those that are more likely to spend the money, I think 

from an intellectual standpoint. 

Senator MURRAY. OK. You talked a lot about health care, Social 

Security, those kinds of issues. One issue you did not talk about 

was the war in Iraq and the impact on our deficit. We have continued to see supplemental requests for funding this war, and we are 

now almost into the sixth year of this war. I think we have spent 

about $450 billion on the war already in a supplemental. Can you 

tell us what the annual interest is we are now paying on that debt? 

Mr. WALKER. Our effective interest rate now is, about 5 percent. 

One of the fortunate things that we have right now, Senator Murray, is that we have very low interest rates right now, but we will 

not have low interest rates over the longer run if we do not get our 

fiscal house in order. 

Senator MURRAY. I would like to see that and what your projections are for the future on that, too. I would assume that your recommendation would be that we include that—or the President include that within his budget request and not a supplemental because of its impact? 

Mr. WALKER. Well, GAO has already recommended that, to the 

extent that we expect to have recurring costs in the Defense Department budget, that those ought to be put in the regular budget 

request. And it is only the temporary or non-recurring costs that 

are more difficult to estimate that ought to be in a supplemental. 

We have said that for a long time. 

And, by the way, I think it is pretty clear that there are things 

coming through the supplemental that do not relate solely to the 

global war on terrorism. There are ways to try to help make the 

Pentagon whole with regard to some of the effects of the global war 

on terrorism. 

Senator MURRAY. Within the budget? 

Mr. WALKER. Yes. 

Senator MURRAY. OK. You stated in your testimony that CBO’s 

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ening economy, and you talked a little bit about the trust fund 

issue. Can you tell us, as we draw down that remaining surplus in 

Social Security, how that affects our deficit projections in the future? 

Mr. WALKER. Yes. First, the trust funds are not really trust 

funds. I was a trustee of Social Security and Medicare from 1990 

to 1995. And, you know, Washington uses some words that do not 

mean the same thing as Webster’s Dictionary. I used to be a fiduciary in the private sector for real trust funds. Trust funds are separate and distinct legal entities. They come with fiduciary responsibility and liability. And in most cases, when you are dealing with 

other people’s money, they come with very strict prohibitions on 

what you can and cannot do with regard to investments. 

In the case of the trust funds for Social Security and Medicare, 

they are sub-accounts of the general ledger. They do not have fiduciary responsibility and liability. We are investing in our own debt. 

If the private sector did with its pensions the same thing that we 

do with Social Security and Medicare, the fiduciaries would go to 

jail, because employers cannot invest all their pension assets in 

their own debt. 

The other thing that is outrageous is that we do not show the 

bonds in the trust fund as a liability on the financial statements 

of the U.S. Government. We also do not consider it in our debt-toGDP ratio. 

So, we are playing fast and loose here with regard to how we are 

treating this. So, you know, I apologize. You hit a chord here. If 

you noticed. 

Senator MURRAY. I noticed. 

Mr. WALKER. And I apologize. Please let me know when I have 

not answered the—— 

Senator MURRAY. I just wanted to know if you could specifically 

tell us how it affects the debt projections in the future. 

Mr. WALKER. Sure. Thank you very much. 

In 2009, the Social Security surplus will start declining rather 

than increasing, as it has been. That means Congress will start 

going through withdrawal, and the executive branch, because they 

have been used to spending and having the ability to spend, increasing surpluses. It will flip in 2009. And then in 2017, based 

upon the current projections, the cash-flow will be negative. So 

rather than helping the unified budget deficit, it will hurt the unified budget deficit. 

Guess what? I think somebody will probably have an epiphany 

in 2017 to say, Gee, maybe we ought to take this off budget, because then it starts hurting you rather than helping you. 

Senator MURRAY. OK. One other question for you. If we extend 

the 2001 and 2003 tax cuts, can you tell us what happens to the 

deficit projections? 

Mr. WALKER. I think Chairman Conrad showed some graphics on 

that. I would be happy to provide you something for the record. Obviously it hurts. I think you have to keep in mind it adds about 

1 to 2 percent of GDP. Clearly it does not help. At the same point 

in time, the gap that we face over the longer term is multiple times 

that. 

100 

And let me say—and I have said this before—I do not think we 

can solve our long-range problem with Federal revenues at 18.5 

percent of GDP. At the same point in time, I think it is important 

to try to keep taxes as low as possible for several reasons. No. 1, 

on the corporate side, because we compete in a global economy— 

and believe me, corporations do not have duty of loyalty to countries. They have duty of loyalty to their shareholders. They will 

move someplace else. They will move operations offshore if we are 

not competitive on corporate taxes. 

On individual taxes, if we want to maximize economic growth, 

maximize disposable income, and maximize individual choice, you 

want to try to keep it as low as possible. On the other hand, you 

have to have enough revenues to pay your current bills and deliver 

on the promises that you intend to keep. 

Senator MURRAY. And you also need to invest in order to grow 

your economy as well. 

Mr. WALKER. You have to invest selectively, although one has to 

be careful about how you define investment, because one of the 

things I have found over the years is one person’s investment is another person’s waste, and one has to deal with that. 

But you are right, and that comes back to the savings issue I 

talked about before. We are eating our seed corn. We are not investing, which means that we are not doing what it takes to maintain and to improve our competitive advantage, and as a result it 

is diminishing with the passage of time. 

Senator MURRAY. Thank you very much. 

Mr. WALKER. Thank you. 

Chairman CONRAD. Senator Allard? 

Senator ALLARD. Thank you, Mr. Chairman. 

You made a comment in regard to the health care here in the 

United States. You said that we are below average. When you said 

we are below average, you were referring to, I assume, the life expectancy and percentage of uninsured, were you not? 

Mr. WALKER. Several things, Senator Allard. First, for an industrialized nation—and these are based upon OECD statistics, the 

Organization of Economic Cooperation and Development, of which 

the U.S. is one of 30 members. It is based in Paris. We are below 

average on life expectancy. We are below average on preventable 

death rates. We have higher than average infant mortality rates. 

Now, these are not good things. And we are way above average on 

the percentage of our population that is uninsured. We are number 

one on spending though. 

Now, in some areas we do well, but with regard to generally accepted outcomes that deal with broad segments of society, we are 

not getting value for money. 

Senator ALLARD. I think it maybe depends on how you measure 

outcomes. You know, when you talk about infant mortality, some 

countries—and I do not know what percentage of these would be 

considered industrial—really do a poor job of reporting infant mortality. Infant mortality will occur outside a hospital. And so how 

valid would that sort of comparison be? Or if you look at the uninsured percentage, for example, this has been a flat line. If you look 

at the percentage of uninsured in the country, as well as my State 

of Colorado—we have done a lot of things to try to deal with the 

101 

uninsured—the flat line is right at 15, 16 percent uninsured, no 

matter what we do. 

And so there are things in our medical system, I think, that are 

good. People come to this country for medical care. You know, you 

imply somehow or other that there is not quality here. I think 

there are things that we can do to improve physician care, but I 

do think that we have to be careful on a study like this because 

I can see other countries do not do as good a job of gathering their 

statistics as we do in this country. Would you say there is some validity to that? 

Mr. WALKER. Thank you, Senator Allard. First, I am not saying 

that we are below average in everything. We are not. And you are 

correct in saying that with regard to high-end medical procedures, 

many people come to this country because of our proven track 

record of success with regard to high-end medical procedures. 

The OECD countries are major industrialized countries that do 

a pretty good job with their statistics. We are talking about Germany, United Kingdom, France, Italy, the Netherlands. We are 

talking about Japan. We are talking about Australia, Canada, New 

Zealand. So we are not talking about Third World countries when 

we cite the OECD. But you are correct in saying that the statistics 

are only as good as the reliability of the data that underlie them. 

But I think OECD generally is viewed as being a pretty reliable 

source. 

Senator ALLARD. So assuming that they are correct then, what 

could we do to make that better in this country as far as our health 

care so that these look better for us? 

Mr. WALKER. Senator, I think we need to focus as a country on 

something that we have really not done before. In my opinion, we 

have not had a national discussion and debate to differentiate between broad-based societal needs in health care that are affordable 

and sustainable over time versus unlimited individual wants in 

health care which are not affordable and sustainable. 

And so what happens, like so many government programs, 

whether it be on the spending side or the tax side, you end up enacting something into law. You add things to it. You add things to 

it. Things get layered on. Before you know it, you have an amalgamation and combination of things that may not make any sense. 

And I think that is exactly where we are at. 

I think we need to step back and say what is basic and essential 

in terms of health care coverage and services that everybody needs 

and that it is in our broad-based societal interest to do that. And 

you know with your background, things like wellness and preventative care; inoculations against infectious diseases; things like protection against financial ruin due to unexpected catastrophic illness; things like guaranteed insurability at group rates but have 

choice as to whether or not you want more, but you are going to 

have to pay for it if you want more than that. So focusing on the 

basic and essential needs of everybody rather than what we have 

today: broad-based, much more generous coverage to some segments of the population and nothing for other segments of the population. 

Second, a budget, not a blank check. 

102 

Third, national evidence-based practice standards that would be 

determined by physicians and other qualified parties that could 

help serve as a safe harbor for malpractice, among other things. 

And we need to make sure that individuals have incentives and 

accountability for taking care of their own health and wellness. 

Right now, take Medicare as an example. The subsidy is the same. 

The subsidy is the same not only with regard to your income in 

most cases, but also with regard to whether or not you take care 

of yourself or not. That creates very perverse incentives over time. 

And so, I think, you know, in the short term we need to target 

better; in the long term we need to restructure the whole system, 

including the division of responsibilities between employers, Government, and individuals. And I am not talking about socialized 

medicine, Senator, let me make that very clear. But even countries 

that have ‘‘socialized’’ medical systems, they ration and they have 

budgets. And, by the way, they also have private sector systems 

where employers end up buying supplemental policies for many of 

their employees, because they may not want their employees to 

wait or may want them to have access to certain procedures they 

otherwise would not get access to through the government system. 

We have done some work on this, as you know, at GAO, Senator 

Allard. 

Senator ALLARD. Mr. Chairman, thank you. 

Chairman CONRAD. I turn to Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, as usual for a 

very important hearing, and thank you, Mr. Walker, for your service and for being here. 

Just to continue on health care for a moment, I appreciate your 

numbers because it is clear. As I understand it, we spend about 

twice as much of our gross national product on health care as any 

other country, and yet we have almost 50 million people with no 

health insurance so that picture does not seem to jibe. And I am 

wondering if you might speak a little bit more about the notion of 

universal access because, as you have indicated, the Federal Government really is not unique. Every family, every business, every 

State and local government is facing the same kinds of things that 

we are in terms of the costs going up and the fact that we use 

emergency rooms inappropriately. I mean, we have a universal system. It is just extremely expensive because you walk into the emergency room, you receive care, you may be sicker than you otherwise 

would be. The hospital treats you and then shifts the costs to those 

employers that have insurance. So we are paying for a system right 

now that it is pretty crazy to me on how we are paying for the 

overall system for folks. 

But I wonder if you might talk about in a little more detail the 

need to do something more systemwide in order to capture savings 

and to be able to address the broader issues that you talked about. 

Mr. WALKER. Thank you, Senator Stabenow. First, I think we 

spend about 2.5 times more per capita than the median OECD 

country, almost 50 percent more of our economy than the median 

for all OECD nations and we have about 47 million uninsured, 

roughly those numbers which you touched on. 

I think we have to recognize that there is a lot of cost shifting 

going on right now, and I think people have to keep in mind when 

103 

you look at the data, you will find that in the last 40 years, health 

care costs have grown about 2.6 percentage points faster than the 

economy every year. And the point of compounding that over time 

means that is why we are spending so much more of our economy 

on health care than we used to. 

But during that same 40-year period, you will find that a disproportionate amount of the increase in the health care costs has 

been borne by two parties: No. 1, employers; and, No. 2, governments. And while individuals have paid more as a percentage of 

their income on health care than they did 40 years ago, the relative 

burden share has been more for government and for employers. 

But governments face fiscal challenges, and employers face competitiveness challenges. 

And so starting within the last several years, we have seen governments and employers start to shift costs to individuals. So individuals really for the first time within the last several years are 

starting to feel the effect of increased health care costs, and they 

do not like it. 

Something has to give; I think we need to take a systemic approach. We need to focus on all four of those elements, but with 

regard to access, I think we have to be honest with ourselves to say 

let’s focus on what our broad-based societal needs in the form of 

health care are, basic and essential health care services that everybody should have. Let’s focus on trying to deliver that, and when 

we are doing that, we need to make sure that it is affordable and 

sustainable over time. Because right now we have a situation that 

the Federal Government has made a lot of promises it is not going 

to be able to keep, and it ought to be honest with the American 

people and tell them that. It is not going to be able to keep them 

without doubling tax levels, which this country has never supported in the past. Now, maybe they will, but I would not bet on 

it. 

Senator STABENOW. Well, just to followup on your comments, 

when you say individuals do not like having to pay more, they cannot pay more I mean, many—— 

Mr. WALKER. Some can. 

Senator STABENOW. Far more people are finding themselves less 

wages or unemployed, and so obviously the cost shift is increasingly putting pressure on middle-class families, and it certainly is 

a competitiveness issue. I can look in Michigan right across the 

river that literally you can swim across, and the difference between 

Canada and the U.S.—and we could debate the systems, but the 

reality is wages are the same for manufacturing, environmental 

standards are the same. The only difference is health care, and we 

see plants being built there. So it is an issue that is costing us jobs, 

there is no question. 

I wonder, before my time runs out, if I might ask you one other 

issue related to this, and that is talking about comparative effectiveness, which is so important. And because of these issues being 

so important for us from a competitive issue in Michigan, we have 

developed in the medical society something called the Keystone 

Project, which has focused on quality initiatives very, very effectively. I do not know if you have looked at that. But we have also 

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eastern Michigan very aggressively focused on e-prescribing, which 

has made a big difference in quality and dealing with costs and so 

on. 

I wondered if you might speak to what you view as an effective 

comparative effectiveness program and also how technology, information technology and those kinds of things fit into that. 

Mr. WALKER. Sure. First, I do think there is an opportunity to 

leverage technology to improve outcomes and to reduce cost. But it 

has to be leveraged with more information and evidence-based 

practice standards. Right now what is happening is a lot of the 

technology is being used because it is available, and it is actually 

driving health care costs. I am talking about MRIs and a variety 

of other procedures, where everybody wants one and as long as 

somebody else is willing to pay for it, why not? 

Second, there is a very real competitiveness issue here on health 

care. You are right that some families are already feeling the 

squeeze, and it is only going to get worse with the passage of time. 

You are right in knowing that Michigan, in particular, is affected 

by this because you have a number of major employees that have 

huge legacy costs for health care. You are also, in a situation where 

a lot of people do not realize the impact of health care costs being 

out of control. One of the reasons that we have not been able to 

get pension coverage up higher than 50 percent of the full-time 

work force for 40 years is because health care costs are out of control, and, therefore, employers cannot afford to do more because of 

out-of-control health care costs. 

So it is really the big challenge from a variety of perspectives. 

Senator STABENOW. Mr. Chairman, I know my time is up. I 

would be remiss if I did not also indicate I am pleased to join with 

Senator Wyden. I am sure he is going to talk about his health care 

proposal, but we do have, I think, an important proposal on universal coverage that I know we are going to be discussing more. 

Thank you. 

Chairman CONRAD. I thank the Senator. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Mr. Walker, I am interested in your statement to the effect that 

our total debt, including the gap between funded and unfunded future benefits, is approximately $53 trillion. Is that correct? 

Mr. WALKER. That is correct, Senator. 

Senator BUNNING. OK. More than 4 times the current size of our 

economy. 

Mr. WALKER. That is correct. 

Senator BUNNING. Because of this, the major credit rating agencies recently have questioned our Nation’s ability to maintain our 

AAA-rated debt if we do not make changes. I understand that other 

major industrial nations are coming to terms with their own pension and health care liabilities in light of their own aging populations. How does our current situation compare to theirs at the 

present time? 

Mr. WALKER. Thank you, Senator Bunning. First, just to clarify, 

the $9 trillion, roughly—a little bit more than that—is current 

debt. The balance represents the unfunded commitments that will 

105 

be future debt if we do not engage in reforms. But it is a current 

commitment. 

We issued a report on January 18, 2008, at the request of this 

Committee to look at what other countries have done to try to deal 

with their fiscal challenges and to also look at whether and to what 

extent they use task forces or commissions as a way to try to help 

facilitate more expedited action. That has been made available to 

this Committee. 

Some countries are ahead of us. A number of countries, frankly, 

are ahead of us. Australia is ahead of us. New Zealand is ahead 

of us. Canada is ahead of us. The U.K. is ahead of us. Sweden is 

ahead of us. 

Senator CONRAD. Norway. 

Mr. WALKER. Norway is ahead of us. Well, they actually have 

real money in their trust funds. That is a different issue. 

So, you know, we are a great Nation. We are not the only nation 

that faces this challenge. The problem is we are slow off the start. 

We are late to the effort to start dealing with this, and it is important that we start sooner rather than later. 

Senator BUNNING. We talked about the fiscal stimulus package. 

What changes, if any, would you make in the fiscal stimulus package that the House is voting on today? Should we be concerned 

about the long-term consequences of this package if the stimulus 

is poorly timed or ineffective in 2008? 

Mr. WALKER. Senator, unlike you and other members here, I 

have not been elected, so I do not think it is appropriate that I critique it in detail. 

I will tell you this. I will come back to what I said to begin with. 

I think action needs to be timely. I think the Congress needs to act 

by no later than February on something. Second, I think it needs 

to be targeted so that the money is likely to be spent and otherwise 

help our economy. And, third, I think it needs to be temporary so 

that it does not end up increasing our longer-range structural imbalance. And I will leave it to your judgment and your colleagues 

to figure out how best to do that. 

Senator BUNNING. Well, but that is a cop out. 

Mr. WALKER. I am not elected, Senator. 

Senator BUNNING. It is not a question of being elected. You study 

these things constantly. 

Mr. WALKER. Yes, sir. 

Senator BUNNING. What happens if we fail to hit the mark and 

in 2008 the approximately $155 billion is pushed into calendar year 

2009 when the interest rates are low and the jobs are not forthcoming? You know what happens when we do that. We have something that was created in 1980 or so called ‘‘stagflation.’’ We have 

inflation going up this way and we have jobs going the other way, 

and that leads to bad things for our economy. 

Mr. WALKER. Paul Volcker is a friend of mine, and he is very familiar with stagflation, and it is not something that we want to try 

to have to go through again, quite frankly, in the history of this 

country. 

I think it is very important that you, again, try to make sure 

that you target this so that it does good quickly and that it be a 

temporary initiative. If it does not work, then I think you and I 

106 

both know that Congress is going to try to figure out what else it 

might need to do. And I think one of the things that I introduced 

a number of years ago—remember when we had surpluses. Remember when we thought—I know you do, Senator Domenici. Remember when we thought we actually were going to pay off all the 

national debt and people were worried about it? Well, we do not 

need to worry about it anymore. 

One of the concepts we need to think about is triggers. How can 

we identify triggers—— 

Senator BUNNING. That is something that has been discussed in 

this Committee. 

Mr. WALKER. Right. How can we talk about triggers that say 

when something comes off and when something goes on? You know, 

that is really important. 

I also think we have to think about incentives, how can we create 

incentives, you know, so that it would provide discipline on spending and other types of actions through proper design. 

Senator BUNNING. I have one last kicker. 

Mr. WALKER. Yes, sir. 

Senator BUNNING. You talked about entitlements and the uncontrolled escalation in entitlements. And my numbers may be off a 

year or two, but by the year 2030, if we do not cap or change our 

entitlements, take them off automatic pilot, we will spend our entire budget on entitlements and, therefore, the 12 agencies that we 

enact appropriations bills for will have no money. 

Mr. WALKER. In theory. If you tax at historical levels and you 

allow—and you say I am not going to reform entitlement programs, 

they are going to be a first claim on tax revenues, then you squeeze 

out everything else. 

By the way, the numbers do not include interest on the Federal 

debt, so when you include interest on the Federal debt, it is actually worse than that. And, in addition—— 

Senator BUNNING. It comes earlier. 

Mr. WALKER. Correct. And, in addition, they do not assume a significant increase in interest rates, and I can assure you there will 

be before then based upon our—— 

Senator BUNNING. Well, depending on who is running the Federal Reserve. Thank you. 

Chairman CONRAD. Thank you, Senator Bunning. 

Senator Menendez? 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Walker, thanks for your testimony, for being a little bit of 

a Paul Revere about our long-term fiscal challenges. I appreciate 

your service in that respect. I have a series of areas I want to pursue, so if you would work with me in trying to be tight in the answers but nonetheless responsive, I would appreciate it. 

First, on page 14 of your testimony, you talk about this whole 

health care issue being the overriding issue—they are all important, but the overriding issue in terms of the long-term fiscal challenge, and in that respect, the four points that you have there as 

pillars, I just want to—you say provide universal access to basic 

and essential health care. Access is not necessarily coverage, 

though, right? 

Mr. WALKER. No, I think I intended it to be coverage. 

107 

Senator MENENDEZ. You intended it to be coverage. 

Mr. WALKER. I intended it to be coverage, which either could be 

provided through a Federal program, through a State program, 

through an employer, through a union, but basically one way you 

could do it—one way—would be a universal mandate and provide 

alternative ways that it could be delivered, Government being one 

of the ways it could be delivered. But it means coverage, not just 

the option but you will be covered. 

Senator MENENDEZ. All right. Good, because I have heard ‘‘access’’ be used in the past not as covered. 

Mr. WALKER. I understand. 

Senator MENENDEZ. Second, you talk about imposing limits on 

Federal spending for health care. Does that imply necessarily paying more for those who have the health care coverage by virtue of 

the Federal Government, Medicare and Medicaid? 

Mr. WALKER. It means that we—— 

Senator MENENDEZ. The individuals I am talking about. 

Mr. WALKER. It means that we cannot afford to write a blank 

check, and if we end up having a budget, it will force tough choices, 

and it will force tough choices on behalf of the Government to restructure its programs. 

Senator MENENDEZ. There is one of three possibilities: either you 

cut back on services to providers, payments to providers; you cut 

back on the universal services or how those services are delivered; 

or, third, the person who is covered contributes to it or it is a combination of all of those. 

Mr. WALKER. I think that is clearly what the three options would 

be absent fundamental reform. But if you engage in fundamental 

reforms, I think you have other options. We need to recognize that 

the system we have right now is badly broken, and we cannot just 

tinker around the edges because we are betting the ranch. Wand 

esse are betting the future of our economy on health care costs. 

Senator MENENDEZ. Third, you talk about evidence-based practice standards to improve quality, control costs, reduce litigation. Is 

prevention a big part of that? You know, we work on a diseasebased system, largely. 

Mr. WALKER. I think it is a function of three different elements: 

I think that is a function of defining what ‘‘basic and essential’’ is; 

I think that is a function of evidence-based standards; and I think 

it is also a function of increased personal responsibility and accountability for one’s own health and wellness. So I think prevention comes into all three of those elements, those pillars. 

Senator MENENDEZ. Many of us have been saying for quite some 

time, though, that it seems that in a system that is based on disease versus on preventing that disease, which is a lot less costly, 

that it should be a significant part of the equation. 

Mr. WALKER. I agree. 

Senator MENENDEZ. And, last, when you talk about steps for 

Americans to assume more personal responsibility and accountability, do you see incentives in that to move Americans in that direction? 

Mr. WALKER. I do, but it does not necessarily mean tax incentives. For example, to the extent that one does more to try to take 

care of one’s own health and wellness, maybe there would be a difVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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ference as to what your cost sharing would be. Rather than giving 

you an incentive to do something, maybe you would have to bear 

more burden if you do not take care of yourself. So incentives, 

broadly defined. 

Senator MENENDEZ. Let me turn to an answer you gave Senator 

Murray when she was talking about what would happen if we 

made the President’s long-term tax cuts permanent, and you did 

acknowledge that they would increase the deficit over time. Then 

you got onto a discussion of—and correct me if I am wrong—that 

we cannot solve our long-term fiscal challenges by taxing at 18.5 

percent of GDP. And then you went on to say how it is also important to keep taxes as low as possible. It sounds like having it everybody wants it the same way. 

Did I understand that answer to mean that you believe that you 

are going to have to increase taxes as a percent of the gross domestic product, but while increasing them, try to increase them at the 

lowest possible level? 

Mr. WALKER. Right. Let me clarify what I mean. Historically, the 

highest that Americans have allowed themselves to be taxed as a 

percentage of the economy is roughly 20.5 percent of GDP, and that 

is roughly where we were when we had the surpluses, at about 

20.5 percent of GDP. And, by the way, Congress periodically has 

to do tax cuts in order to keep tax burdens from going higher. 

Why? Because with inflation, economic growth and other factors, if 

you do not end up taking steps over time, by definition you will end 

up having a higher percentage of GDP in the form of taxes because 

of inflation and economic growth and other factors. 

So, historically, Americans have only gone to 20.9. Are they willing to go higher than that for things like security and safety and 

a variety of other issues? Maybe. But they are not, I do not think, 

likely to be willing to go to 30. 

So the answer is as follows: We are taxing at about 18.5. You are 

going to have to get the most money, in my opinion, out of entitlement reform. You are going to have to get a considerable amount 

of money out of reprioritizing and constraining spending. But even 

after you do all of that, the gap is so great, you are going to need 

more than 18.5 percent of revenues. 

I will say this: I have been to 25 States for town hall meetings. 

I am going to my 26th one tomorrow. The American people are 

hesitant about sending more money to Washington absent tough 

budget controls that will make sure that that money will not be 

wasted. 

Senator MENENDEZ. And I appreciate that view. Finally, let me 

get to a provincial question but one that has ramifications. I read 

your response to a New Jersey delegation letter about comments 

made by individuals who were suggesting that the GAO and the 

BRAC process was on their side and that they needed the right figures to make it work. And I saw the press accounts of your review 

with this individual. You know, my problem is we have seen BRAC 

go from an allegation that it was going to save X number of billions 

of dollars, $36 billion, to now being reduced to about $15 billion. 

That is 58 percent less. In my home State of New Jersey, Fort 

Monmouth was supposed to be $780 million. Now it is at almost 

$1.5 billion. And I do not think we are finished yet. 

109 

I have a real problem looking at this process which is supposed 

to save us an enormous amount of money, then gets reduced dramatically, does not even take into effect the economic consequences 

of what happens in those communities at the end of the day, which 

ultimately contributes to the tax process. And then I get really concerned when I read comments, e-mails that say that the GAO, 

which I really have faith in, generally speaking, is on the side of 

the BRAC process. And I do not understand—I read the comments 

about what the person supposedly meant that we have supported— 

the GAO supported overall the concept of BRAC. You do not have 

to say I am on your side to say you support the BRAC process. 

That seems to me I am on your side in making the numbers work 

for something that does not work. 

Mr. WALKER. Sure. Well, Senator, first, I have not written that 

letter yet. I told—— 

Senator MENENDEZ. I just read the public comment—— 

Mr. WALKER. I told the press that I intended to. I have met with 

Dr. College, who was the person who sent that e-mail. I think if 

Dr. College had thought about it, he probably would have sent a 

different e-mail rather than that one, because there has been a lot 

of speculation about what he meant. 

I know GAO’s procedures. I know the people who worked on this 

engagement. I stand behind our work. Here is the key point—— 

Senator MENENDEZ. How could we be so far off? 

Mr. WALKER. Well, you make a good point, Senator Menendez, 

and let me be clear. We were asked, GAO was asked—in fact, it 

was statutorily required—to look at the overall process, methodology, the reasonableness of the overall assumptions. We were not 

asked, nor do I think it is appropriate for us to be asked, about a 

decision with regard to an individual base. I testified myself on behalf of GAO and expressed serious concerns with regard to the 

over-optimism by the Department as to how much money they 

were going to save with regard to this BRAC round, both as it relates to military construction costs as well as personnel savings. 

And, furthermore, with regard to Fort Monmouth, I testified myself that we also had concerns that they were being overly optimistic with regard to what percentage of skilled employees were 

going to be willing to move from Fort Monmouth to Aberdeen or 

elsewhere. That is on the record. We stand by that. And I would 

be happy to talk to you separately if you want. 

Senator MENENDEZ. I would look forward to that conversation. 

Mr. WALKER. I would be happy to. 

Senator MENENDEZ. Thank you, Mr. Chairman, for your courtesy. 

Chairman CONRAD. Senator Domenici? 

Senator DOMENICI. Thank you very much. 

Mr. Walker, I do not come to every meeting, but I spent plenty 

of time in the past at meetings of this Committee, so I like to let 

other people come now, like the distinguished Chairman, he and 

this distinguished Republican. They are doing well, and I come 

when I am needed. But there are so many questions to ask of you 

that I am going to tick through a few and just see what you say. 

OK? 

Mr. WALKER. Yes, sir. 

110 

Senator DOMENICI. Is the stimulus package proposed by the 

House and the President, as you look at things, more or less the 

right size and the right kind of stimulus, if we need one now? 

Mr. WALKER. Senator, I will just go back to what I said. Timely, 

targeted, and temporary, it appears to meet those three criteria. I 

have not studied it in detail. 

Senator DOMENICI. All right. But dollar-wise, you know how 

many billion it is. 

Mr. WALKER. It is about $145 to $150 billion. 

Senator DOMENICI. Right. So I guess I am going to just put this 

up there from my standpoint, see if you agree. It is barely of sufficient size for an economy of our size to do the job. 

Mr. WALKER. We have about a $13 trillion economy. 

Senator DOMENICI. And so this is a pretty small kick, but if it 

is done quickly and we do not fool around with it forever, coupled 

with the Chairman of the Federal Reserve and his use of their 

power on interest rates, it would seem like we are sending a strong 

signal that we are going to do something and do it now. Is that correct? 

Mr. WALKER. That is correct, Senator. You know, the Fed is looking at monetary policy. You are looking at fiscal policy. You and I 

both know that there are limits as to how quickly the IRS can act 

in the middle of the tax season. So all the more reason why you 

need to move very quickly because the money may not flow for several months. 

Senator DOMENICI. That is right. Now, my next question, just do 

it as quickly as you can, but it certainly is something we have 

never had in all the years I was Chairman up here, and it is there 

now, and that is what has happened to the American dollar. Would 

you just answer for me, is that a serious problem now, as you see 

it? And if it is, is there anything that can be done in any event by 

the United States or others? 

Mr. WALKER. I think it is a serious problem. We are no longer 

the world’s only reserve currency, the euro being one that people 

are looking to with increasing frequency. 

I think one of the other reasons, Senator Domenici, that it is a 

problem is a lot of people do not realize that crude oil is priced in 

dollars. 

Senator DOMENICI. Right. 

Mr. WALKER. And that one of the reasons that crude oil prices 

go up is not just because of supply and demand, but if those producing countries want to maintain purchasing power, they have to 

charge more dollars because the dollar is in the tank. 

Senator DOMENICI. You are right. Now, there is no question that 

that is a correct statement. There is no question that all the debt 

we have, the world has bought it up, whether it is China that 

bought it up or European countries or India or Indonesia or whomever. And it is precarious when they thought they were buying up 

the best currency in the world, and it turns out that they may not. 

That causes some consternation on the part of those who had 

bought our money, right? 

Mr. WALKER. Correct. When third parties hold more of your national mortgage, it means that they have more influence on you 

and you have less influence on them. It is that simple. 

111 

Senator DOMENICI. And people that would say they do not have 

anything, they hold nothing over us, I think they are mistaken 

when, as a matter of fact, somebody like China owns so much of 

our debt, it is not, as some say, ’’Well, that is good.‘‘ It is not perfect, right? It might be less than good, right? 

Mr. WALKER. In the short term it is good because we are lucky 

that they are willing to lend us their savings. But in the longer 

term, it increases our risk. 

Senator Domenici, you probably recall what happened in 1956 

with regard to the Suez crisis. 

Senator DOMENICI. No. I am old but not that old. 

Mr. WALKER. Well, the bottom line is France and U.K. and Israel 

wanted to challenge President Nasser’s taking over the Suez Canal, 

and at that point in time, the U.S. held a lot of U.K.’s debt and 

a lot of pounds and suggested that they may want to rethink their 

actions if they wanted us to continue to support their currency and 

their debt. That was an ally. 

Senator DOMENICI. Yes. Now, look, I want to go through two or 

three more, and, Chairman, you stop me whenever I am supposed 

to stop, all right? 

One, I want to say to you in terms of health care costs in America, health care costs distort everything. For instance, if you equate 

how much health care cost there is in an automobile, you can kind 

of say, well, you open the trunk and the health care cost is in the 

trunk, and you put a dollar sign on, and it turns out that in some 

instances it makes the automobile that you are talking about noncompetitive in the world market because you have added too many 

hundreds of dollars in health care costs. That is a very serious 

problem, is it not? 

Mr. WALKER. The last numbers I saw is that there is more 

health care cost in the cost of an automobile than steel. 

Senator DOMENICI. Right. That is incredible. You could not even 

fit that in the trunk so you would have to use some other approach, 

as you talk about it. 

Mr. WALKER. That is for U.S. auto makers. 

Senator DOMENICI. Correct. Have you seen the proposal that the 

Chairman and Senator Gregg have with reference to a bipartisan 

approach to the entitlement program, resolution of the entitlement 

program? 

Mr. WALKER. I have. 

Senator DOMENICI. And have you analyzed it sufficiently to tell 

me whether you think it is a good approach or not? 

Mr. WALKER. I think it is a good approach. My personal view is 

that I think if you look at Chairman Conrad’s approach, it is a very 

positive approach. I think if you look at his, if you look at Senator 

Voinovich’s bill, at both the Cooper-Wolf bills in the House, and 

your bill with Senator Feinstein, doing a combination of these actually would even be better, and I would be more than happy to work 

with any of you on that. 

Senator DOMENICI. I would just pass the word to the Chairman. 

No question in my mind because he is Chairman, his takes on a 

little stronger impetus, and I have a good one that I worked hard 

on, but I think his might be better. Mine is Domenici-Feinstein. I 

am more than willing to forget mine and work with him and SenVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00117 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
112 

ator Gregg. It must be done. You know, we sit around figuring 

somebody will be courageous enough to pass a law. It really is not 

courageous or non-courageous. It is almost impossible for a legislator to do this. There has to be a new process invented, and the 

process is what we are speaking of at this point. Normally, processes do not solve big problems. But in this case, it will solve a big 

problem. If you use it and it gets carried out such that the entitlement group does what Congress says and you put smart people on 

there and people who want to work only for the country and not 

for a party, it has a chance of fixing, Social Security could be fixed. 

You could do that first. You could do that in a year with no question. Medicare is harder and more urgent, but people do not believe 

that, but it is. But you have to do both of them. You cannot do just 

one and leave the other one out there. 

Mr. WALKER. And, Senator Domenici, I believe it is totally unrealistic to expect that we are going to make significant progress on 

this $53 trillion imbalance through the regular order. It is policy, 

players, and process, and process matters. 

Senator DOMENICI. You bet. 

Mr. WALKER. In my opinion, you need to address at least four 

things through any task force or commission that you come up 

with: 

No. 1, tough budget controls, if you have not done it before then. 

Second, comprehensive Social Security reform where you are not 

preprogrammed to have to come back. In 1983, we were 

preprogrammed to have to come back. We do not want to do that 

again. 

No. 3, round one of health care reform. 

And No. 4, round one of tax reform. 

If you do those four things as a package, with everything on the 

table, I believe we can achieve at least a $12 trillion downpayment 

on our $53 trillion imbalance. Now, think what that would do for 

the credibility of the Congress. Think what that would do for confidence and trust. Think what that would do for the ability to hopefully make more progress and to sustain momentum over time. 

Chairman CONRAD. I thank the Senator. 

Senator DOMENICI. I want to say to you, sir, I remember when 

you came, we had some rough edges between you and some of us. 

That is natural. We kind of wonder what you are doing fooling 

around in our business. You kind of wonder why we are not accepting your recommendations because you think it is your business. 

Things are getting better. We are listening to you, and you are 

doing a terrific job, and we thank you for it. We need your kind 

of clear-headedness speaking to the people, and thank you for it. 

Mr. WALKER. Thank you, Senator. I like your new international 

look, too. You look very distinguished. 

Senator DOMENICI. Oh, thank you. 

Chairman CONRAD. Senator Whitehouse? 

Senator WHITEHOUSE. Thank you, Mr. Chairman. I would suggest that if we are going to get credit for the $12 trillion downpayment, the first thing we have to do is make the people 

of America understand that they have this $53 trillion liability out 

there. And I applaud you for getting around to 25 States, soon to 

be 26. But I can tell you that in my experience, there is almost no 

113 

American you could stop on the street and ask that number and 

get anything resembling a confident or knowledgeable answer. So 

I think we have a large public relations mission ahead of us to put 

this into the right context. 

With respect to the trust fund, I enjoyed your description of how 

the phrase ’’trust fund‘‘ used in this context does not in the fashion 

meet the legal fiduciary definition of a trust fund. Just to explore 

that a little further, I would suggest that since it has no funds and 

cannot be trusted, you do not even have to get to the fiduciary 

level. You just get to the pure, you know, Webster’s street corner 

definition of those words and it fails. 

I may be oversimplifying this, but it strikes me that this is ultimately really a cash proposition. The people who need Social Security need the money now. It goes out. When we take the Social Security so-called trust fund and when we take the cash out of it and 

spend it on other things and put an IOU back in, there is really 

nothing there, because the IOU, it strikes me, is an IOU to ourselves. And for somebody who is watching this who has a family 

budget, it would be like saying, well, I know we need to pay for my 

daughter’s braces, I know we need to set aside money for college 

for both the kids, I know we have these expenses coming, but I am 

going to spend all the cash that I have, all the money that comes 

in on this other stuff, but then I am going to write myself an IOU 

for some of it. The problem is when the dentist comes and when 

the college bill comes, you do not have the cash, and the IOU does 

not matter. 

Is that a fair parallel to where we are with Social Security? And 

if it is, shouldn’t we just start setting up a proper trust fund and 

just force that issue by putting some money aside? 

Mr. WALKER. First, I think we are masking the size of our deficits and our debt problems by not being more transparent with regard to what we are really doing. Let me clarify. 

The bonds in the trust fund are backed by the full faith and credit of the U.S. Government. They are guaranteed as to principal and 

interest. In my view, they will be honored. They must be honored. 

They should be deemed to be a liability of the United States. But 

you are correct—— 

Senator WHITEHOUSE. Well, from our point of view, we still have 

to go find the cash—— 

Mr. WALKER. You are correct, absolutely, from an economic 

standpoint in recognizing that they are nothing more and nothing 

less than a priority claim on future general revenues, that you 

must do one of three things: either raise taxes, cut spending, or go 

out and borrow more money from Japan, China, OPEC nations or 

somebody else to be able to convert that to cash. Cash is key, and 

we need to be focused on cash-flow more than we are now. 

Senator WHITEHOUSE. So in a perfect world, what would the 

trust fund look like? 

Mr. WALKER. Well, Norway has a pretty good idea, but I do not 

think we probably will ever get there because I think we have waited too long. Norway saw that they had a demographic challenge, 

just like we did, and Norway knew that in order to try to be able 

to meet the bow wave of the tsunami of spending, they needed to 

invest early so that they did not put an undue burden on future 

114 

generations. They actually created a real trust fund, and it actually 

is something you can trust and it actually has real funds in it, real 

investments in it. It is their sovereign wealth fund. It is a very 

large fund to try to help reduce the burdens of the retirement of 

their baby-boom generation. 

Now, we have waited maybe too long to do that. We could consider that as an element, but as you know, the surplus will start 

to go down in 2009. We go negative cash-flow in 2017. So, you 

know, the really good years are behind us, and so we are going to 

have to do more than that. 

Senator WHITEHOUSE. On health care, it strikes me that there 

are a trio of areas where there is huge ground to be gained. One 

is with health information technology, and I think the sooner we 

start looking at our health information technology infrastructure as 

infrastructure and treat it that way, the quicker we will be able to 

resolve the problems of health information technology. The second 

is quality reform, which you have talked about in the best practices 

context. 

I would like to suggest to you that as a Nation we really have 

not developed a very significant skill set yet in quality reform in 

health care. And if you are going to go out and develop these best 

practices, figure out how to apply them, how to enforce them, there 

is a process component to it as well. There is a substantive component on what the best practice is. We are in a very, very baby-step 

stage in that. 

So as you talk about this, I would urge you to consider what the 

best process is, consider trying to make it as broad as possible. I 

worry if people talk about this and the solution that people think 

of is, well, we will set up a best practices, you know, place in Washington, and we will start doing them one by one in Washington. I 

do not think we have that kind of time, and I do not think we can 

limit ourselves that much in terms of experimentation. 

I would like to see a mechanism set up so that every State under 

the authority of its own health department, so that it is kept legitimate and safe, can engage in best practices research and figure out 

a way to enforce and incent that and allow benefits to accrue from 

it. And then you can get 50 teams working on it, and you can learn 

from each other, and the whole thing moves a lot more rapidly. So 

I would just urge you to think about that, that the sort of Federalist doctrine really would make a lot of sense there. 

The last thing, the third piece, is on reimbursement. We send idiotic price signals into the health care system and are surprised 

when we get idiotic responses. It strikes me that there is a correlation between the things that America is good at, as you were discussing with Senator Allard, and the things we pay for. The money 

is there for high-end procedures; we do a great job. The money is 

not there for prevention; we do a horrible job. 

And it strikes me that an underlying problem is that we have 

taken the question of what gets paid for in health care, and we 

have taken that choice, and we have moved it to the private sector, 

specifically to the insurance industry. It strikes me that the insurance industry is colored with massive conflicts of interest in this 

respect, both having to do with their own business strategy and 

having to do with the fact that, for instance, every insurer in this 

115 

country looks at getting rid of all of their customers into Medicare 

at some point, and many of them are looking just from a turnover 

point of view at a 5-, 6-, 7-year customer relationship, so they have 

no financial interest in prevention and welfare except as a means 

to attract big-employer customers who are really driving this. 

I think if we can address these three things together—quality reform, information technology, and solving these reimbursement 

problems—we can set up virtuous cycles that will yield rewards beyond what we are even now forecasting. I would just like your reaction to that. I know I have gone over my time. I apologize. 

Mr. WALKER. Senator Whitehouse, let me just briefly say that 

leveraging technology, focusing on quality, and also looking at our 

reimbursement practices are subsets, in my view, of the four pillars. And I do think they are important, and we will focus them. 

Senator WHITEHOUSE. I would love to work with you. 

Mr. WALKER. Thank you. 

Chairman CONRAD. Let me just followup on the Social Security 

discussion very briefly to say in the private sector, if you were taking the retirement funds of your employees and using them to pay 

operating expenses, which is what we are doing, you would not be 

on your way to the White House or the House of Representatives. 

You would be on your way to the Big House because that is a violation of Federal law. 

I must say, when I first came here from positions in a financial 

arena, I was so amazed and really stunned by the way we operate 

here. I mean, the financial reporting is just a complete fiction 

around here. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. And we want to 

thank you again for all of your good work and especially on health 

care. We are now up to 12 Senators on the Healthy Americans Act 

as cosponsors—6 Democrats and 6 Republicans, the first bipartisan 

effort in the Senate in literally decades. And if you track the legislation, it is sure pretty close to what you have been out talking 

about, and we just thank you for all your leadership. And I think 

when this country fixes health care—and I believe we can get it 

done this time—a big part of it is going to stem from the fact that 

you have been out prosecuting the case around the country, trying 

to lay out the choices for people. 

Let me, if I might, talk about some of the biggest issues that we 

are going to be wrestling with, starting with the development in 

the last 24 hours. It looks like the California proposal is not going 

to be able to go forward. They have done an awful lot of good work 

and tremendous commitment and passion, the Governor and legislators of both political parties. But it just does not look like it is 

going to be able to move at this point. 

My sense is that the message out of California—and I would be 

interested in your assessment—is that the States cannot fix health 

care by themselves. The biggest hurdles have, in effect, been put 

out there by the Federal Government, specifically the Tax Code, 

the ERISA statute, the Employee Retirement Income and Security 

Act,and Medicare. I think this is pretty much consistent with your 

thinking, and I think it would just be helpful to get this on the 

record, because I do not want the country to say, well, it is the 

116 

States’ fault. I think it is quite the opposite. I think the States 

have done some very good work given how little bandwidth within 

which they have to operate. And I think it would be just helpful 

to get your thoughts on the record about how important it is that 

the Federal Government be a better partner in terms of working 

with the States in fixing health care. 

Mr. WALKER. I think the States have their own significant challenge with regard to health care. They have a challenge with regard to their portion of the Medicaid costs. They have a challenge 

with regard to their employees, et cetera, and the uninsured population. I think there is an opportunity for more federalism, but I 

do not think they can solve the problem by themselves, by no 

means. I think the Federal Government has a major responsibility. 

Being a CPA, I am very familiar with the tax provisions. I was 

former Assistant Secretary of Labor for ERISA, and I was a trustee 

of Medicare. So there is no question that those are three major 

challenges that must be addressed by the Federal Government. 

Senator WYDEN. Let us talk about the Tax Code because, of 

course, that involves judgments that were literally made more than 

60 years ago. And I think what is at stake here is modernizing the 

employer-employee relationship. That is how I would characterize 

it. What we have done today does not work particularly well for either employers or workers. The employer spots the global competition, you know, 15, 18 points the day they open their doors, and 

workers, unlike, for example, Members of Congress, usually, if they 

are lucky enough to have coverage—and many of them do not have 

coverage at all—simply get the one offering of their employer and 

do not have the benefits of being able to use their clout in the marketplace. 

So what we try to do in the Healthy Americans Act is to try to 

give some relief to both the employer and the employee in terms 

of modernizing this relationship and, of course, make the changes 

in the Tax Code, redirecting the Tax Code primarily so we do not 

reward inefficiency and subsidize the most affluent. 

What is your sense about the importance of modernizing the relationship between employers and employees which largely governs 

pretty close to 250 million people, if you set aside Medicare and the 

military? 

Mr. WALKER. Just as I do not think the States can solve this 

problem alone, employers are not going to solve this problem. I 

think we need to modernize the relationship between employers 

and employees and also the Government. I think we need to stand 

back and refocus on those four pillars, and that means modernizing 

the relationship for employers, employees, and Government. 

Senator WYDEN. With respect to the individual—and I have really been pleased that you have been constantly bringing back this 

matter to the individual because I think not only is personal responsibility important, but we have pretty much divorced individuals from much of the decisionmaking process. The employer buys 

the health care, and the worker says, ’’I hope my insurance covers 

it,‘‘ and we go off and call it a day. And, of course, we try to change 

that as well in the legislation by, in effect, making sure that the 

employee sees that there are actually rewards in terms of shopping 

efficiently. 

117 

But on the question of quality—and Senator Whitehouse has 

done very good work on this. He and Senator Stabenow have really 

been our leaders. I want to ask you about something that I am 

talking to people at home about and around the country, and that 

is the consequences of buying health care that is not particularly 

cost-effective or is not high quality. 

I get the sense that Americans, if they feel they are getting good 

information—in other words, we are doing the kinds of things Senator Whitehouse is talking about, making sure people get good information—I think they are prepared to say, ‘‘All right, if I want 

to go to so-and-so and it is not the best buy in terms of dollars or 

at the top of the quality list,’’ I think they are prepared to say we 

ought to pay a little bit more for that, as opposed to the offerings 

that might be higher on the chart with respect to quality and costeffectiveness. 

What is your thinking with respect to consequences for individuals of buying quality when, in fact, we have put in place the kinds 

of reforms that Senator Whitehouse is talking about so that people 

can actually get good information? 

Mr. WALKER. It is appalling to me how outdated and how inadequate the information that we have on health care is, given the 

size of health care spending as a percentage of our economy and 

given the importance to a variety of players. Clearly, we need more 

timely, accurate, and useful information on cost and quality in 

health care. And when you use the words, ‘‘are we willing to pay 

for it,’’ I assume you mean the individuals, are they willing to pay 

for it, because I think part of the problem we have right now is 

that the ‘‘we’’ is future generations. 

Senator WYDEN. Individuals, but starting to weave this through 

the system. We say, for example, in the Healthy Americans Act, 

that under Medicare, you know, seniors who do things to lower 

their blood pressure, their cholesterol, stop smoking, they are going 

to be eligible for lower Part B premiums. I am interested in your 

thoughts about making sure that individuals really see that there 

are some actual financial underpinnings for buying smart. 

Mr. WALKER. I strongly support that concept, and it is fully consistent with the four pillars that I talked about. When I talk about, 

personal responsibility and accountability, it means incentives for 

people to behave properly; and if they do behave properly, they 

achieve some benefit. And if they do not behave properly, there is 

some consequence. 

I think for any system to work—a health care system, a tax system, a corporate governance system, whatever—you have to have 

three things that we are touching on: incentives for people to do 

the right thing, and that does not necessarily mean tax incentives, 

by the way; second, transparency to provide reasonable assurance 

they will do the right thing because somebody is looking, and it 

could mean the public, the consumer; and, third, accountability if 

people do the wrong thing. 

So if we build around the four pillars of health care and those 

three universal concepts, I think we can achieve some great things, 

but it is likely to have to be done in installments. 

Senator WYDEN. Well, that is, I think, a topic for another day. 

I hope that we will recognize that health care is like an ecosystem. 

118 

If you move it over here, you are going to have effects over there. 

And the history, of course, of going at this piecemeal is not particularly good. If you look, it is not just after 1993 when, of course, the 

plan went down during, you know, other periods of time, and I actually looked at the history. You know, what we almost always say 

is, well, we have to do it, you know, this piece and that piece. I 

think that is very hard to do. We have now got 12 United States 

Senators who I think are making that judgment that this is an ecosystem. A lot of the people who have coverage are one rate hike 

away, you know, from losing it, and that there are reasons now to 

intertwine the interests of those with coverage and those who do 

not have coverage. In the past, they were often pitted against each 

other. 

I think if you keep doing the outstanding work you are doing to 

make sure that people understand what the choices are in areas 

like we have talked about this morning, that the Federal Government has to be a better partner so that we do not see the Californias and other States that are trying so hard, see their proposals 

go by the boards. I think this time, after 60 years of jawing on this, 

I think this time we are going to be able to thread the needle, and 

a big part of it when we do is going to be the fact that you spent 

so much time and effort educating the public on our choices, and 

I thank you for the good work. 

Mr. WALKER. Senator, I want to thank you for your leadership 

on health care area. I know you have been really dedicated to this 

for a long time. And, again, the two issues we are talking about 

here are directly interrelated. Our fiscal challenge is driven primarily by health care. In many ways, what you are saying is, just 

as Chairman Conrad has said that he believes there is a need to 

have some type of task force or commission in order to be able to 

deal with the multiple elements at once, you are saying you believe 

you need to deal with multiple elements at once in order to try to 

achieve meaningful health care reform that treats it like an ecosystem, which I think is an interesting analogy. 

I am just saying I do not think that you will pass one bill and 

say, ’’We are done.‘‘ 

Senator WYDEN. Fair enough. 

Mr. WALKER. That is all I am saying. But I am all for trying to 

make progress on as many of those pillars as possible. 

Senator WYDEN. Chairman Conrad has given me a lot of extra 

time. I think it is fair to say—and I think the Chairman said it— 

we expect as members of the Budget Committee and the Finance 

Committee to be working on health care throughout our time in 

public service. There is not going to be one shot and it is done. 

Thank you for your outstanding work and for the extra time, Mr. 

Chairman. 

Chairman CONRAD. Yes, sir, Senator Wyden. I very much respect 

the extraordinary effort that you have made in this area and also 

the very substantive contributions of Senator Whitehouse. I really 

appreciate the special dedication that you have given to what really 

is the greatest challenge that we face in all this, which is the 

health care sector. That is the 800-pound gorilla. That is what 

could swamp the boat. 

119 

In that regard, on Thursday we are going to be having a hearing 

especially dedicated to long-term health. I hope both of you will be 

here. We are going to have Dr. Orszag here from the Congressional 

Budget Office who has done a good deal of work. I know the two 

of you have both worked with him closely. 

Tomorrow, we are going to be doing a hearing on the economic 

stimulus package, and with respect to that, I would like to ask one 

more question. You have said the stimulus package ought to meet 

the test of the three T’s: timely, temporary, and targeted. 

With respect to the third, targeted, we now have a proposal before the Senate Finance Committee to take the income caps off of 

the rebates. The White House and the House of Representatives 

leadership had agreed to caps that begin at $150,000 for a couple, 

$75,000 for an individual. Under the Senate proposal, as I understand it, those caps would be completely lifted, which would mean 

we would have the spectacle of the Federal Government sending 

$1,000 checks to Bill Gates, Donald Trump, Barry Bonds, Members 

of Congress. 

What do you think about that? 

Mr. WALKER. Even though it is obviously not to my personal advantage, I do not believe that meets the definition of ’’targeted.‘‘ 

Chairman CONRAD. Nor do I. I think, you know, we have to show 

some discipline around here, and if we are going to start sending 

checks—in fact, I asked the first—I asked about it. ’’You mean, you 

are telling me my wife and I are going to get a check?‘‘ I mean, 

you know, we do not need a check. Wouldn’t spend it if we got it, 

so that does not stimulate the economy. Sending a check for a thousand bucks to Bill Gates is not going to stimulate the economy. 

Sending $1,000 to Donald Trump is not going to stimulate the 

economy. I have high regard for both of them, but that is not going 

to stimulate the economy. I think at some point we would become 

ridiculed if we start just sending checks regardless of whether it 

has any stimulative effect. 

Would it, in your judgment, have any stimulative effect to be 

sending checks to the highest-income individuals in our country? 

Mr. WALKER. I think you should target the action to those that 

are most likely to consume the funds quickly, and the persons you 

talked about have plenty of funds. They do not need $1,000. 

It would be interesting if maybe at the time you sent out the 

$1,000 refund check, if you sent out the $175,000 bill, which is the 

per capita burden for the $53 trillion, that might get people’s attention. ’’Here is the good news and the bad news.‘‘ 

Chairman CONRAD. Yes, ’’Here is your thousand bucks. By the 

way, you owe net $175,000.‘‘ 

Mr. WALKER. We need to think outside the box on how we can 

start communicating some of this information in forms that people 

might read it. And, Senator Whitehouse, one of the things that I 

think we ought to be doing, the national debt clock shouldn’t be 

based on $9.2 trillion. It should be based on $53 trillion. And why 

do I say that? Because if you make a $12 trillion downpayment, 

you get credit if you have a $53 trillion clock. If you have a $9.2 

trillion clock, you do not get any credit because you are not reducing the current debt. You are reducing the future burden. 

120 

So I do think we have to think about how we can end up using 

opportunities to communicate more effectively with the American 

people. And I am only halfway kidding. Maybe we ought to think 

about—you know, you know they are going to open the check. You 

know they will open that, and they will read that. Maybe they will 

read a stuffer. 

Chairman CONRAD. I tell you, it is really sobering, the situation 

that we are in. Every time we hold these hearings, it becomes increasingly apparent that we are on a course here that is utterly 

unsustainable. And it is time to act. The reason it is so important 

we take action sooner rather than later is the longer we wait, the 

more draconian the solutions become. And, you know, I understand 

my colleagues. I cannot tell you—just in the last week I have had 

a number of my colleagues come to me and say, ’’You aren’t really 

going to go to markup on your proposal, are you? You are going to 

insist we actually vote?‘‘ Yes, I am going to insist we actually vote, 

because this is a situation that we simply must address. And so we 

are going to vote. And I am sorry if that causes discomfort to some 

of my colleagues, but, look, this cannot be kicked down the road 

again. Why not? Because the time for action is the early part of the 

next administration, whoever leads it—you know, you think about 

this. They are going to come into office in 2009. At the end of their 

term, the trust funds will have gone cash negative. 

You know, this is it. We have kicked this can down the road 

about as long as it can be, and it will absolutely bedevil the next 

administration. The time to act is the first year. It will not happen 

the second year because we will be right back in an election year. 

And the time to act is next year. And the only way we are going 

to do that is if we have a process established. 

Now, I am open to the thoughts of colleagues about how the proposal that Senator Gregg and I have offered might be changed. We 

have heard three complaints: 

One, timing, because we had called for the report to be done this 

year, in anticipation of the work being done this year. Obviously, 

that is not going to happen, so the timing needs to be changed. 

Second, we have heard criticisms that there ought to be the possibility for amendment. Let me just say we will resist that because 

we have set up a process that requires super majorities to have a 

report, super majorities to pass, and, of course, the President retains the right to veto. That would require a two-thirds vote to 

overcome. If we start having amendments, we know what will happen. There will be amendments offered which will have no revenue. 

There will be amendments offered that have no benefit reductions, 

and people will vote for one of those and say, ’’Gee, we did something.‘‘ You know, one will have revenue as part of a package and 

one will not. One will have benefit reductions. One will have benefit reductions that are insufficient to do the job. And so people will 

vote for one or the other and then have an excuse not to vote for 

the one that would actually do something. We all know how this 

works. 

The other question—we have the question of timing. We have the 

question of amendment. We have the question of whether a supermajority vote is required in the House. That I am open to consideration on because the House does not have a tradition of requiring 

121 

a super-majority vote. They are concerned about setting the precedent. They are concerned about turning the House into the Senate, 

because in the Senate, obviously, there is a right to filibuster, there 

is a requirement for a super majority. So there is going to have to 

be a super-majority vote here. But, look, at the end of the day we 

need to get this resolved. 

The other question is whether there are outside persons involved. 

I personally do not think that is wise with respect to the membership. I do think it is required that we have outside advisers. For 

example, I believe there should be certain ex officio members. Dr. 

Walker, you would be among the most prominent that I think 

ought to be ex officio advisers who would be involved every step of 

the way with respect to providing advice and counsel to the members of this task force. 

With that, I want to conclude this hearing and again thank you 

for your contributions to this Committee and, more importantly, to 

the country. 

Mr. WALKER. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. We adjourn the hearing. 

[Whereupon, at 12:02 p.m., the Committee was adjourned.] 

122 


42157.036
(123) 

ECONOMIC STIMULUS: BUDGET POLICY FOR 

A STRONG ECONOMY OVER THE SHORT 

AND LONG TERM 

WEDNESDAY, JANUARY 30, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:01 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Murray, Nelson, Menendez, Cardin, 

Gregg, Domenici, and Bunning. 

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

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

I want to thank our witnesses for being here today. It turns out 

that this hearing is very timely because the Finance Committee is 

going to mark up the stimulus package this afternoon. So this, 

largely through serendipity, proves to have been held at precisely 

the right time. 

Let me just try to put a frame on this morning’s hearing and 

then go to Senator Gregg for his observations and then turn to our 

witnesses. 

We see, if we go to the first slide, that economic growth is expected to slow sharply in 2008. In fact, we have just received the 

news that gross domestic product grew at an annual rate of only 

six-tenths of 1 percent in the final quarter of last year. Over the 

course of 2007, GDP grew 2.5 percent, down slightly from the 

fourth quarter of 2.6 percent in 2006. We see that CBO is telling 

us they anticipate growth in 2008 at 1.5 percent. 

124 

Let’s go to the next slide. 


42157.057
125 

We all know that the subprime mortgage crisis, as some have described it, has been at the heart of the economic slowdown. It has 

obviously spread from the subprime area to other areas of credit. 

We see new home building falling dramatically through 2006 and 

continuing into 2007. I had a delegation of home builders come to 

see me yesterday, telling me about they see their industry not in 

a recession but in a depression, as they described it. 

Let’s go to the next slide. 


42157.058
126 

In the midst of all this, we also have soaring energy costs affecting people when they go to gas up at the pump, affecting them 

when they pay their utility bills. I certainly noticed it in my utility 

bills this last month. Energy costs, with the real price of oil soaring, oil at one point at $100 a barrel, all of this affecting consumer 

confidence. We see a continuation of declines in consumer confidence: after declining sharply last summer, consumer confidence 

has remained depressed into this year. 


42157.059
127 

Unemployment has jumped. In December of 2006, the unemployment rate was 4.4 percent. In December of 2007, it had jumped to 

5 percent. 


42157.060
128 

As a result of this, the Federal Reserve, as we all know, recently 

took emergency action between meetings to lower its target, Federal funds rate by three-quarters of 1 percent. 


42157.061
129 

Let’s go to the next slide, if we could. 


42157.062
130 

The Chairman of the Federal Reserve has called for an explicitly 

temporary stimulus measure. He said, and I quote, ‘‘Any program 

should be explicitly temporary, both to avoid unwanted stimulus 

beyond the near-term horizon and, importantly, to preclude an increase in the Federal Government’s structural budget deficit.’’ 

Let’s go to the next slide, which is also a quote from the Chairman of the Federal Reserve. He said, in January of this year, before the House Budget Committee, ‘‘There is good evidence that 

cash that goes to low- and moderate-income people is more likely 

to be spent in the near term... Getting money to people quickly is 

good, and getting money to low- and moderate-income people is 

good, in the sense of getting bang for the buck.’’ 


42157.063
131 

Let’s go to the final slide that compares the House package and 

the Senate package. We know in terms of rebates that more people 

would be eligible for the Senate rebate. There is no income limit. 

Seniors are eligible. On the business side, the significant difference 

is that the Senate package provides for net operating loss 

carrybacks. And on unemployment insurance, while the House does 

not have a provision, the Senate does. 


42157.064
132 

And then in terms of cost, the Senate package obviously costs 

somewhat more: $161 billion in 2008 compared to $146 billion for 

the House package. Over 2 years, the Senate package costs $196 

billion compared to $161 billion on the House side. 

I am delighted we are having this hearing with such distinguished witnesses today so that we can discuss the views of the 

members and the views of the witnesses with respect to what a 

stimulus package might include and how we might think about 

those issues. 

With that, I want to turn to my very able colleague, the Ranking 

Member of this Committee, the former Chairman of this Committee, Senator Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Thank you, Senator Conrad, and many of the numbers that you 

have cited are numbers which set the table appropriately relative 

to the issue of the economic slowdown. But the question is, What 

should the Federal Government do? And any stimulus package, in 

my humble opinion, should be a real stimulus package, and that 

means it should be targeted on this quarter, the next quarter, and 

the following quarter—the first three quarters of this year. 

My guess is that most of what the Fed is going to do—and this 

was testimony actually from Dr. Orszag—will have an impact beginning aggressively in the third and fourth quarters of this year. 

And we need to be careful that the stimulus package is well focused as a result of that and does not end up incurring costs and 

stimulus outside of what is the period when we expect the slowdown to occur. 


42157.065
133 

We also have to understand that any stimulus package is going 

to be funded by debt, and I noticed in your numbers—and I presume that this is reasonable—that you did not calculate in the interest, I do not think, on the debt that all this is going to cost, but 

our calculation is that a $150 billion stimulus package today over 

5 years will have about a $36 billion debt cost and over 10 years 

will have about an $80 billion debt cost. I think those are the numbers. Is that right? OK. 

So you are talking packages which are truly going to cost our 

kids around 200 billion bucks. And what are they going to get for 

that? What is the economy going to get for that? Well, I am not 

a great fan of the House package, but it appears to be the high watermark when you compare it to the Senate package, because the 

Senate package, for some unknown reason, is now lifting the cap 

and saying let’s send $500 to everybody. So we will fly across the 

country in a plane and throw money out of the plane to everybody. 

And what are the practical implications of that? 

Well, with high-income people, first off, it is unlikely that that 

rebate is going to get out the door very quickly. If it gets out by 

the middle of June, we would be fortunate, and that means it is 

probably not going to impact us until the third quarter. And with 

high-income people, it is probably going to be saved. It is probably 

not going to go into demand stimulus, which is what usually you 

are looking for. 

Second, as a very practical matter, if you extend the unemployment insurance, as is proposed in the Finance Committee package, 

you end up with a situation where we are at 5-percent unemployment right now in most of this country—in some places well under 

5 percent, like in New Hampshire—and it is very hard to defend 

extending unemployment insurance as an economic stimulus event 

because if you are in what is a relatively full-employment economy, 

it just simply creates more of an incentive for people not to go out 

and find a job. Most of the jobs that are—most people find their 

jobs in the last couple weeks of their insurance running out. If you 

extend it for a year, which is what is proposed in the package, you 

basically end up with a situation where, if that extension occurs in 

States where you have fairly close to full employment, you are not 

going to get much stimulus out of that package. Thus, there should 

definitely—any unemployment extension should, in my humble 

opinion, be tied to a trigger which says it occurs in States where 

the unemployment has reached a historic level which is deemed to 

be not full employment, such as 5.7 or 5.8 percent, which is the historic number we have been looking at. 

There is no trigger, however, in the proposed package here, and 

it is a bigger package as a result of that. Also, I am not sure how 

this NOL in the Senate Finance package works. I have heard different statements that you get the NOL if you do not take advantage of the accelerated depreciation. But if you take advantage of 

the accelerated depreciation, then you cannot take the NOL. I am 

not sure what the economic impact of that is. 

I will say that, from my own personal standpoint, if you are 

going to do something to create long-term efficiencies in the economy, expensing, accelerated depreciation, NOL carryback are probably positive things. But they are not going to have an immediate 

134 

economic stimulus. But they will at least have a long-term effect. 

Whereas, simply giving people a rebate check, in some instances 

giving them a check even though they do not pay taxes, is probably 

not going to have any significant stimulus on the economy other 

than the psychological stimulus, because much of what will be purchased with that stimulus will be manufactured outside the United 

States. And as Dr. Orszag testified yesterday, if it is manufactured 

in China, the $500 is spent on a television manufactured in China, 

the stimulus to our economy is basically nonexistent. 

So this stimulus package is really, in my humble opinion, more 

about building confidence that the Government can act and that a 

divided Government can come together and take action than about 

actually having stimulus effect in the next two to three quarters, 

which is when we need it. In that context, the package which does 

the most good from a standpoint of the ‘‘Kumbaya’’ factor is the 

House package. And the package which does the most harm from 

that standpoint is probably the Senate package because it divides 

an already agreed to understanding. But I have reservations about 

both, obviously. 

However, that being said, I look forward to hearing from the witnesses as to what they think should be done, and that is why they 

are here and they are experts, and they are highly regarded in 

their field, and we appreciate them taking the time to testify. 

Chairman CONRAD. Thank you, Senator Gregg, and thank you 

for your observations. 

I must say when we have identified all along the three T’s as 

what we should be doing with the stimulus package—targeted, 

timely, and temporary—to start taking—— 

Senator GREGG. ‘‘Kumbaya.’’ 

[Laughter.] 

Chairman CONRAD. To start taking the income cap off and send- ing $1,000 checks to Bill Gates and Barry Bonds and Donald 

Trump and Members of Congress, I think we have really lost our 

way. 

Senator GREGG. I agree. 

Chairman CONRAD. I mean, that just cannot be the answer here. 

Senator GREGG. Once again, bipartisan agreement in the Budget 

Committee. 

Chairman CONRAD. OK. We have agreement here. 

Senator GREGG. I do not know. We did not ask Senator Bunning. 

Senator BUNNING. Yes, I agree 100 percent. 

Senator GREGG. Two Finance Committee members agree. 

Chairman CONRAD. We welcome Alan Blinder, the Gordon. 

Rentschler Memorial Professor of Economics and Public Affairs, 

and Co-Director of the Center for Economic Policy Studies at 

Princeton University. Dr. Blinder has testified before this Committee before, and we welcome you back. We also have with us 

Mark Zandi, the Chief Economist and Co-Founder of Moody’s Economy.com. I am very glad to meet you, sir, because I very much 

enjoy reading your work. And Daniel Mitchell, a Senior Fellow at 

the Cato Institute. Welcome all. We are delighted that you are 

here. 

Dr. Blinder, why don’t you proceed, and then we will go to Dr. 

Zandi and then to Dr. Mitchell. 

135 

STATEMENT OF ALAN S. BLINDER, GORDON S. RENTSCHLER 

MEMORIAL PROFESSOR OF ECONOMICS AND PUBLIC AFFAIRS, AND CO-DIRECTOR, CENTER FOR ECONOMIC POLICY 

STUDIES, PRINCETON UNIVERSITY 

Mr. BLINDER. Yes, thank you, Mr. Chairman, members of the 

Committee. I appreciate the opportunity to testify here on this particular day on this particular issue, which is, of course, an important issue for the Budget Committee, by definition, and also something that is on the immediate Senate agenda. But at the end I 

want to raise a couple of things that are not quite on the immediate agenda, but that I think are more important. 

The testimony, which is much too long to deliver in 7 minutes, 

is organized around five questions. I am going to boil them down 

to three for purposes of this morning. 

The first is something that Senator Gregg was just implicitly 

asking, which is: Should we enact a fiscal stimulus package now 

at all? I think the answer to this is probably yes, but, frankly, the 

case is not airtight. The Federal Reserve, as you know, is cutting 

interest rates aggressively. We are normally accustomed to leaving 

these sorts of tasks to the Fed. But the problem is that the Federal 

Reserve’s medicine works slowly, as you mentioned, Mr. Chairman. 

And so that says that, if the economy starts deteriorating very rapidly in front of your eyes, the Fed can act very quickly, but it will 

not actually give the economy a boost in a sufficiently timely way. 

So the question is: Is the economy actually slipping down very rapidly? 

Again, I would say the answer is that there is a reasonable likelihood of that, but we do not know for sure. It is certainly not as 

clear as many people are saying. I would be much more convinced 

if, 2 days from now, when we get the next employment report, it 

looks as bad as the previous one, or worse, rather than much better, which I think is the current guessing. And I would also be 

more convinced if I saw one more month of weak retail sales. We 

have only really seen one so far. The real issue here for the economy is the infection of what I like to call ‘‘the 96 percent’’ by ‘‘the 

4 percent.’’ The 4 percent is the housing sector, which, as the 

Chairman mentioned, quoting someone else, is really in a depression. There is not any question about that. Up to now, the 96 percent is holding up well. But there are fears that it is not going to 

last. 

So I think it is wise to get a stimulus package designed and 

ready to go immediately, basically. I do not imagine—although the 

House and the Senate are moving with incredible speed on this— 

that this is going to be enacted before February 13th, anyway. But 

I could be wrong about that. I cannot remember seeing this body 

move as quickly as it is moving right now. You are all better judges 

of that than I am. 

The second question, which is always of interest to the Budget 

Committee is about this idea of paying for it and how does this 

square with PAYGO. When it comes to stimulus, the answer to the 

question ‘‘should we pay for it?’’ Is a resounding no. Paying for it 

takes away the stimulus with one hand that you are putting in 

with the other hand. That said, this Committee’s longstanding concerns with budget deficits is very, very valid. But what needs to be 

136 

understood is that it pertains to long-run issues. We want to keep 

the budget deficit down in order to spur capital formation, to improve technology, to keep real interest rates low in the long run, 

and so on. These all have to do with the economy’s ability to supply 

goods and services. 

In a short-run emergency, the focus is not on supply but on demand, on getting spending higher—or preventing it from sagging, 

which amounts to the same thing. And it is that thinking that 

leads to the three familiar principles that Senator Conrad just alluded to, the three T’s. And the one that I want to emphasize in 

that context is targeted to produce spending. The other two are 

equally important, and temporariness is especially crucial to the 

question of how much deterioration in the long-run budget picture 

are we causing by a stimulus. The answer is quite little. The numbers that Senator Gregg was just citing on the interest burden 

were suggestive of around $4 billion a year, or something in that 

kind of a range—which, of course, in a budget the size that we 

have is extremely small. 

The third question, which is the one that Congress is wrestling 

with literally right at this minute, I guess, is what elements of a 

stimulus package make sense. I want to answer that two ways— 

first sort of generically, just in the abstract, thinking about stimulus; and then, second, how can we tailor this to the circumstances 

of 2008? 

So, generically, I would give the grade of A, in terms of inclusion 

on a stimulus package, to two things which, unfortunately, were 

left out of the House package: the extension of unemployment benefits and Food Stamps. The reasons, again, have to do with bang for 

the buck. When you give money to people that have lost their jobs, 

you are giving money to people who are trying to maintain their 

previous standards of living. It is hard to imagine anything that 

has greater surety of getting spent right away than that—except 

maybe giving it to Food Stamp recipients who are literally living 

hand-to-mouth. The basic principle is that you want to give the 

money to people who are going to spend it right away, if and when 

your objective is stimulus, which I think is the case now. 

After that, I would give a grade of B to sending out checks, e.g., 

tax rebate checks, especially to low- and moderate-income people— 

as Senator Gregg mentioned, not to high-income people—who are 

less likely to spend it. But it is important not to limit the checks 

to people who have enough income to pay income tax, and it was 

a good idea that the House package was designed that way. And 

I think it was also a good idea that the House package capped the 

payments at certain income levels. There is no magic number 

there, but the principle of capping is very important if you care 

about bang for the buck. And I think we need to care about bang 

for the buck. 

It will not have escaped your attention that this list of recipients 

who would get moneys that were labeled, by me anyway, and other 

people, too, A’s and B’s are the people most in need. We all know 

about Franklin Roosevelt’s famous aphorism about bad morals 

being bad economics. When it comes to stimulus, good morals turn 

out to be good economics as well. That is where the ‘‘Kumbaya’’ factor comes from, and it is perfectly appropriate in this case. 

137 

Moving down the list, and very briefly, I would give the grade 

of C, which is still a passing grade, to transfers to State and local 

governments who otherwise are going to be raising taxes and cutting spending and making the situation worse. 

I would give the grade of D, with charity, to business tax cuts, 

which may or may not have good rationales for long-run reasons, 

but which are not going to provide short-run stimulus. That is all 

in general. 

What about the specifics of 2008? As the Chairman mentioned, 

two things, and mainly one, are contributing to the current economic travails: higher oil prices and housing, which is a multifaceted problem. So what might we do specifically in such circumstances that we might not want to do in more generic circumstances? 

Well, in terms of energy prices, there is a program that you all 

know about called LIHEAP that is specifically designed to send 

money to poor people who are having trouble paying their energy 

bills—which, of course, have mounted substantially. This is by the 

same reasoning as for Food Stamps, likely to lead to checks sent 

by the Government that lead to spending by people extremely rapidly. 

On the housing front, it is quite a bit more difficult, since there 

is no ready-made institution for doling out the money to the particular types of people having difficulties with their houses—for example, forestalling of foreclosure—that would guarantee very rapid 

turnaround of spending. There are some steps in this direction in 

the House bill, and I think they are fine. I think the Congress, both 

Houses, and the executive branch need to keep working on this significantly. As I will say in a moment, I think some new institutions 

are probably necessary. But you do not do that in a stimulus bill. 

You do that after a stimulus bill. 

But what I want to close with is just a minute or two of what 

maybe should happen after the stimulus—as a natural followup because of the specific and longer-term difficulties we are having with 

housing. I will be very brief on this. 

To start, I am very much in the Alan Greenspan school. You may 

have noticed that he told an interviewer—I cannot remember who 

it was—a few days ago that one thing we know the Government 

can do is send cash to help alleviate this problem. So how could you 

send cash? Well, one way is cash transfers to help poor people 

make their mortgage payments and avoid foreclosure. Another is 

giving assistance to State and local governments and community 

organizations who are trying to prevent neighborhoods from being 

blighted by abandonment. And this is happening. A third is to put 

more counselors, and especially workout specialists, into the field 

to help people who can avoid foreclosure to actually avoid foreclosure, perhaps by refinancing their mortgages on more reasonable 

terms than the ones that they now have. 

But, unfortunately, the current financial problems extend well 

beyond subprime mortgages and, indeed, beyond mortgages as a 

whole. As I think you all know, the credit and fixed-income markets are in a tizzy right now, and some of them are barely functional at all. That is what is motivating the Federal Reserve’s actions, I think, more than anything else. But in any case, my perVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00143 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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sonal worry is less about recession—actually showing negative 

GDP growth as opposed to positive 0.6 percent—and much more 

about our economy’s ability to mount a vigorous recovery after the 

period of sag. That is what plagued us in the years 2002, 2003, and 

2004. It was not that we had a terrible recession in 2001. We had 

a minuscule recession. But we just did not climb out of the hole as 

rapidly as we had in the past. 

Now, in terms of fixing these markets, it would be nice to see 

and appropriate to see private capital rushing in to do the job. Unfortunately, this crisis is now about 6 months old, and this does not 

seem to be happening to any great degree. Instead, what you see 

is incredible risk aversion ruling the markets, bid-ask spreads for 

fixed-income securities that are gigantic, amazing. When they are 

that large, that means the market is basically not functioning. And 

a scarcity of bargain hunters coming in to take advantage. 

This is a dangerous situation, and that is what leads me to say 

that Congress ought to start thinking, after the stimulus bill, about 

establishing potentially new Federal agencies. One that I would 

think about would be analogous to but not identical to, because the 

problems are different, the RTC, the Resolution Trust Company 

that Congress started in order to fix up the mess left by the savings and loan debacle. The job here would be to get these fixed-income markets functioning again and then go out of business, as the 

RTC did. 

The other thing I think Congress should be thinking about is 

something analogous to what was done in the Great Depression, 

the last time we had a housing problem this bad. The HOLC, Home 

Owners Loan Corporation, existed for about 3 years and was focused on refinancing homes to prevent foreclosures. This is not 

going to get done in 24 hours. It is probably not going to get done 

in a month. But it is something I think the Congress needs to think 

about for the future. 

Thank you all for listening. 

[The prepared statement of Mr. Blinder follows:] 

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Chairman CONRAD. Thank you, Dr. Blinder. 


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Dr. Zandi? 

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND COFOUNDER, MOODY’S ECONOMY.COM, INC. 

Mr. ZANDI. Thank you, Mr. Chairman. Thank you, members of 

the Committee. My views that I am expressing today are my own, 

not those of the Moody’s Corporation. And let me say none of this 

is my fault. 

[Laughter.] 

Mr. ZANDI. I have a slide show, and I am going to make four 

points with my slides. 

Point No. 1, I do think the economy is on the edge of recession, 

or very close. I think the economy contracted in December. It may 

have very well contracted in October, grew in November, and it 

feels very soft coming into 2008. The most telling statistic is the 

increase in unemployment. As you can see here, this is the percent 

change a year ago in the number of unemployed. You can see the 

recession boars—I think you can see them. Yes. Every time we 

have seen a measurable increase in unemployment, a recession has 

ensued, and it has never falsely predicted a recession. And there 

is logic to it. When unemployment rises, it undermines consumer 

confidence. The consumers pull back on their spending. Businesses 

respond by curtailing their hiring and investment. That causes unemployment to rise further, and you are in the middle of a very 

self-reinforcing negative economic cycle. And it appears, if history 

is any guide—and sometimes it is not, but it is useful to examine— 

this would suggest strongly that we are entering into that very 

strong self-reinforcing negative cycle. 

I do believe there are many parts of the country that are already 

in recession. As you know, the National Bureau of Economic Research determines recessions nationally by looking at a plethora of 

data and determine based on that data whether we are experiencing a persistent, broad-based decline in economic activity. I take 

on that responsibility at a regional level using the same methodology, and you can see I think a handful of States are in recession 

already. California, Nevada, Arizona, Florida, and Michigan are in 

recession. The States that are in orange are very close, and I suspect they will fall into recession in the next couple 3 months. 

The key to whether the national economy actually falls into recession is the Northeast corridor from Boston to D.C. New York 

City is now struggling quite significantly because of the layoffs and 

lost compensation on Wall Street. I do not know if you are shedding any tears over Wall Street, but they are having all kinds of 

problems. So I do think there are significant regional economic 

problems that are developing and that highlight the recession 

risks. 

Point No. 2, the problem is housing. It goes beyond just construction, though. This is the most severe housing downturn literally 

since the Great Depression. To give you a sense of that, as a percentage decline, peak to trough in house prices, nominal house 

prices, home sales, new and existing, and housing starts, this is the 

percentage decline peak to trough in the early 1980’s downturn 

when unemployment was in the double digits. You can see housing 

starts fell 60 percent peak to trough, home sales 50; nominal house 

152 

prices did not fall. That was a period of significant inflation. Real 

prices fell, but nominal prices did not. 

This is the early 1990’s downturn in housing. You can see how 

that stacks up, not quite as bad as the 1980’s downturn. 

This is the current downturn so far. To date, housing starts are 

down 55 percent from their peak. That was your chart. Home sales 

are down 35 percent. New home sales are down measurably more 

than that. It just cratered in December, 600,000 home sales back 

to 1995 levels. 

House prices are down 8 percent nominal. That is unprecedented 

nominal price declines. 

This is where I think things are going to end up. I think the 

downturn will continue throughout 2008. Fundamentally the market is awash in unsold inventory. We got new data yesterday from 

Census. The inventory increased. We have almost a million of excess housing units. It is not getting any better. It is getting worse 

because of the collapse in home sales and the surge in foreclosures. 

So we are going to see continued declines in construction, home 

sales, and housing, particularly housing—most importantly housing 

values. 

Just to give you a sense of the magnitude, an 8-percent decline 

is equal to roughly $1.5 trillion of household net worth. If we decline 15 percent, you can do the math. It is quite significant in 

terms of the impact on household wealth. 

This is where the declines are most serious. These are all 381 

metropolitan areas across the country. The areas that are in red 

are crashes. These are house price declines that are over 10 percent. This understates the decline. These are measured house 

prices. If you can consider non-price discounts that sellers and 

builders are giving to homeowners, the price declines are 5 to 10 

percent more than this in these very distressed markets. 

Two-third of the Nation’s housing markets are experiencing persistent price declines. That is two-thirds of the Nation’s housing 

markets. This is unprecedented in terms of its scale and scope. 

And adding to it, of course, and contributing to the problems is 

the surge in mortgage credit problems that Dr. Blinder talked 

about. They are stunning. We have very high quality data that we 

collect based on consumer credit files maintained by Equifax. We 

take a 5-percent random sample at the end of every month of all 

the credit files across the country and construct very high quality 

data on delinquency and default across all kinds of consumer product lines, including mortgages. 

As you can see, as of the last week of December, which is the 

last data point in this chart, there were 1.8 million first mortgage 

loan defaults at an annualized pace. Nothing ever—we have never 

seen anything close to this, and you can see it is going straight up. 

Thirty-day, 60-day, 90-day, 120-day delinquency are all rising. It 

is everywhere. There are five metropolitan areas out of the 381 

that are not experiencing increasing delinquency and default, and 

they are on the border with Mexico in Texas and in Oklahoma. 

North Dakota is doing OK, by the way. All 500,000 North Dakotans are OK. But outside of that, everyone is experiencing some 

pain, significant pain. 

153 

The third point, all the risks are to the downside. Risk No. 1, the 

problems in the housing, in market economy markets has infected 

the global financial system. The banking system is under severe 

pressure. That will not go away, in my view. To give you a sense 

of the exposure in the banking system, this is data from the Federal Reserve Board. It shows the amount of residential real estate 

assets on the books of the Nation’s large commercial banks. The 

blue bar represents billions of dollars. That is the left-hand scale. 

We are at just under $2 trillion worth of residential real estate 

whole loans and mortgage securities. As a share of their assets, it 

is falling now because their balance sheet is ballooning out because 

of all of the stuff coming up from their exposure to the global financial system, the SIVs and other problems that they have. But you 

can see it is still very high, so the banking system is, in my view, 

going to remain under tremendous pressure. 

This does not include construction and land development loans, 

which we have heard nothing about, which are under—these are 

loans to home builders. They have to be under tremendous pressure. This does not include the consumer loans that are under a 

lot of pressure as delinquencies are rising on auto loans and credit 

card loans and student loans and consumer finance loans. 

Risk No. 2 is the infection in the housing market is bleeding into 

the consumer sector. Consumers are sensitive to what is going on 

in the housing market. You can see that relationship here. The red 

line represents house price growth year over year percent change 

a year ago. That is the left-hand scale. Retail sales, the growth in 

retail sales is the blue line, right-hand scale. The twist here is that 

house prices lead consumer spending 6 months, by 6 months. There 

is a lag between what happens in the housing market and how it 

affects the willingness and ability of consumers to spend. And one 

of the reasons why is because of their ability and willingness to 

take out equity from their home. This shows you the amount of 

cash they are pulling out of their homes. Back at the peak of the 

cash withdrawal in late 2006, early 2007, it was $900 billion 

annualized. It is about 10 percent of disposable income. And you 

can see, as you would expect, it is crashing now because of the decline in housing values and the tightening of borrowing rate standards. So my view is that when we get Dr. Blinder’s read on retail 

sales, it will be a very negative one. Christmas sales are going to 

be weak, and it will be measurably weaker as we make our way 

into 2008. 

My final point is I think fiscal stimulus is absolutely necessary. 

You know, I do not know that it is going to forestall recession. 

Even under the best of circumstances, the checks you write will go 

out in June. But I think it could make a very large difference between a long recession or short recession, a 12-month recession or 

a 9-month recession. It could be the catalyst to push us out of a 

recession. It could make a difference between a weak recovery and 

a reasonably good recovery. So just because you cannot get it out 

there in the next couple three, 4 months and forestall an actual 

economic downturn does not mean that you should not do it. 

Now, I have simulated the economic consequences of two different packages of stimulus programs. The blue bar represents the 

contribution to real GDP growth, and the first bar is in the second 

154 

half of 2008 when the stimulus actually will take effect, and the 

first half of 2009 is the second bar. I say ‘‘likely stimulus.’’ That 

is my forecast of what happens. And this does not mean it is going 

to happen, but I am usually accurate in my forecasting. But who 

knows? 

This package is exactly what the President and the House agreed 

to with the addition of an extension of UI benefits similar to what 

you have proposed—or what the Senate Finance Committee has 

proposed. You can see that it will add about 1.5 percent to 

annualized real GDP growth in the second half of the year. That 

is important. That will make a big difference. That could be the difference between negative numbers and positive numbers and a significant effect on jobs. 

The red bar is my optimal package. In that package, I have a tax 

rebate plan that is very similar to what is proposed by the House 

and the President. But it has no depreciation benefits or other tax 

incentives for businesses, and I use that money to finance extension of UI benefits, food stamps, which are—I will reinforce the 

point that Dr. Blinder made—are extremely important and very efficacious policy. And just listening to some of the folks that operate 

these programs, they can get that out into the world very quickly, 

within 4 to 6 weeks, and that will make a big difference. And aid 

to the State governments, I think if that happens now, that would 

be very, very timely. Half the States are now going to have budget 

shortfalls, and there will be significant cuts in spending, which I 

think will be very pernicious, particularly on things like education 

and Medicaid. So if I were King for the Day and I designed my own 

package, that is the red bar, and you get a sense of the GDP impact. 

And, finally, what it means for jobs. In the likely stimulus, by 

June of 2009 it means 662,000 more jobs than would have otherwise been the case; in the optimal stimulus package, close to a million jobs. 

Finally, one other point just to reinforce something that Dr. 

Blinder said. I do not think monetary and fiscal stimulus is all that 

should be focused on here because he is absolutely right, we may 

get to the other side of this and the economy, you know, struggles 

through a couple 3 years of very weak economic growth. And that 

is very possible because underlying our problems is what is going 

on the housing and mortgage markets, and until we address those 

with more targeted types of policy, I think that is going to be a significant weight on our economic growth prospects. 

Thank you. 

[The prepared statement of Mr. Zandi follows:] 

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Chairman CONRAD. Thank you, Dr. Zandi. 

Dr. Mitchell, welcome. 


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STATEMENT OF DANIEL MITCHELL, SENIOR FELLOW, THE 

CATO INSTITUTE 

Mr. MITCHELL. Well, thank you very much, Mr. Chairman, members of the Committee. My name is Mitchell. I am a Senior Fellow 

at the Cato Institute. I will summarize some of the key points of 

my testimony. 

I feel like this is the Monty Python show from my youth, and I 

am going to say, ‘‘And now for something completely different.’’ 

I do think that Government policy, fiscal policy, does have a 

large impact on the economy. I think the level of taxes and spending matter a lot. I think changes in the level of taxing and spending matter a lot. And I think the actual composition of spending 

and taxes matter a lot. Some programs help the economy, some 

hurt the economy. Some taxes have worse effects on the economy 

than others. So I think all these things matter. But I think they 

matter for the long run. I do not think that Government through 

fiscal policy has a whole lot of influence and ability to affect shortterm economic performance. 

Now, economists do not do a very good job of predicting the economy. If we did, we would all be on the beach in the Cayman Island 

rather than testifying here. So I will not try to add to the profession’s embarrassment by making my own predictions. But let’s assume for the sake of this testimony that we are heading into a recession. The question is: Can fiscal policy—let’s set aside the Fed 

and other issues like that, but can fiscal policy help ward off a 

downturn, or at least alleviate its impact? And I think the most realistic answer is no. Again, this is not because fiscal policy does not 

affect economic performance but because in the short run, you are 

probably not going to have any effect. And what we are really talking about here is a debate over something I thought had sort of 

vanished into history, and that is Keynesian economics, the notion 

that Government can go out, borrow money, give it to people somehow—through tax policy or spending policy—and that this is going 

to stimulate economic growth. 

Specifically, one of the notions of Keynesian economics is borrow 

money, give it to people, they go out and spend it, especially consumer spending, that is supposed to be the key. I think this is 

rather fanciful. Consumer spending tends to be a function of economic growth, a result of economic growth, not a driver of economic 

growth. 

I think the key reason to be skeptical about Keynesian stimulus 

is that it only looks at one-half of the equation. Everyone says we 

are going to go around the country and give everyone $500, $1,000, 

whatever the amount is, and everyone says that is great. If you 

send me a check, I will certainly cash it. But the question is: 

Where does that money come from? And whether you are giving 

money directly to people or whether you are spending it on programs like UI or food stamps, which ultimately, of course, is supposed to go to people, where does the money come from? Obviously, 

Government is borrowing it. And so any money that the Government is putting in the pockets of Person A or any money that the 

Government is putting into Program B necessarily is going to come 

out of the pocket of Person C. Person C is the person who is going 

to buy the Government bonds. 

169 

Now, admittedly, we can start thinking, well, what if it is foreign 

pension funds and sovereign wealth funds and the Chinese? Yes, 

all sorts of people outside the U.S. might borrow the money, and 

so yes, that might complicate the issue a little bit. But, in general, 

what happens when the Government borrows money from Person 

C and gives it to Person A or Program B, you are simply redistributing the use of national income. You are doing nothing to increase 

national income. 

Now, some people say, well, but it is really important that if you 

give the money to people who spend it, that makes a big difference. 

Well, again, let’s assume that the borrowers, the people who would 

go out and buy Government bonds so that you would then have 

this money to give to people around the country, if they do not 

spend the money, what happens to it? Well, through the process of 

financial intermediation, it is going to wind up in somebody’s pockets. Banks do not put money under mattresses. They only earn 

profits and make money for their shareholders by lending the 

money out. And whether that money is being lent to consumers 

who, say, want to buy cars or whether it is being lent to businesses 

that want to build factories, and in that case you are purchasing 

investment goods instead of consumer goods, there is no net increase in the amount of money in the economy through Keynesian 

fiscal stimulus. 

And I think that is borne out by looking at not only a lot of the 

academic evidence that is out there, but I think even more persuasive to people is let’s look at the real world. Whether we are looking at the Keynesian episode back in the 1930’s, whether we are 

looking at the rebates back in the 1970’s, or whether we are looking at what happened in 2001, I think we have a hard time finding 

any evidence that taking money out of Pocket A and putting it into 

Pocket B has any beneficial effect on the economy. 

I think the 2001 episode is particularly instructive. When you 

compare the 2001 Bush tax cuts with the 2003 Bush tax cuts, you 

found much better economic results after the 2003 tax cut. Why is 

that? Well, in 2001, the bulk of the money was in the form of 

Keynesian style policies: rebates, child credits, things that put 

money in people’s pockets but did not change marginal tax rates 

on productive behavior. What happened? We did not have a very 

strong recovery or expansion? In 2003, by contrast, the tax cut focused on marginal tax rate reductions: lower tax rates on dividends 

and capital gains, and an acceleration of the good parts of the 2001 

tax cut that were postponed until 2004 and 2006. 

Again, we do not find evidence that Keynesian policies work, and 

I think that makes perfect sense when you think about the fact 

that all that is happening is a redistribution of existing national income, nothing to give people incentives to increase national income. 

Now, what does work? What works is the policies that are good 

in the long run are also good in the short run. Admittedly, though, 

results tend to be small in the short run. I have an example in my 

testimony that if you did something that increased economic 

growth by four-tenths of 1 percent, in the first year it is not going 

to matter much at all. Even after 10 years, your level of income is 

not going to be that much higher. But over 50 years and over 100 

years, because of compounding, even small changes in economic 

170 

growth matter a lot. Those are things that you actually can control. 

You can make the economy grow faster or slower, depending on 

whether or not you have an environment that is more conducive to 

productive behavior. 

And, finally, I want to close by just making a few comments on 

the amazing turnaround in the thinking in Washington, and the 

thinking is, I think, misguided both where you started and where 

we are heading now. 

A couple years ago, everyone said that deficits were all that matters and, by God, we have to reduce deficits, we have to try to have 

surpluses, because then interest rates will be low and that is the 

magic nirvana for economic growth. 

I never thought that really was as important as what is the size 

of Government, what is Government doing, what is the size of the 

tax burden, and how is that money being created. But everyone 

thought deficits were the most evil thing in the world. And now we 

are being told that deficits are the best thing in the world for the 

economy. 

In reality, deficits are the least important—at least within the 

magnitudes that we are talking about in the U.S., deficits are far 

less important than the overall structure of spending and the overall structure of the tax burden. And if we want to focus on policies 

that increase economic growth, I think we should focus on the big 

picture of spending and taxes. What is the Government doing and 

how is it doing it? What can we do to make the economy grow faster in the long run that will help in the short run? But we do not 

really have any magic wands that will make the economy grow 

faster. 

I will close by just giving the example of Japan. Japan for years, 

beginning in 1990 for over a decade, Japan tried one Keynesian 

stimulus program after another. They dramatically increased their 

deficits. They dramatically increased their debt. It was textbook 

Keynesianism, and Japan wound up mired in a 15-year stagnation. 

Now, I think Japan had problems that were insolvable by fiscal 

policy. They had major problems with overvalued assets, and when 

you run into that problem, which is, I think, where we are with 

housing, there is really not a whole lot you can do about it except 

let it work its way out of the system. Japan tried to avoid that, and 

I think they paid a heavy price with a much, much longer and 

deeper period of economic stagnation. 

Thank you. 

[The prepared statement of Mr. Mitchell follows:] 

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Chairman CONRAD. Thank you, Dr. Mitchell. 

Dr. Blinder, Dr. Zandi, is there anything that you heard from Dr. 

Mitchell that you would especially want to respond to? 

Mr. BLINDER. Everything. 

[Laughter.] 

Mr. BLINDER. First, I think he should go over to the other side 

of town and tell this to the Federal Open Market Committee, which 

even as we speak is thinking about stimulating the economy, as 

they did last week, by what some people with pride and some people derisively call ‘‘Keynesian thinking.’’ I think it is exactly the 

right thing. It does not mean it is right to every detail, but it is 

basically the right thing to do. When you have a dearth of spending, you do something that increases spending. 

Most things that you would do in that context will not have profound effects on long-run economic growth. I mentioned that. That 

is true. But that is not the name of the game right now. This is 

about what is called stabilization policy, not about growth policy. 


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The specific instances that Dr. Mitchell mentioned—leaving aside 

Japan, which is a whole other story and still somewhat mysterious, 

I might add—are all evidence on the other side. I mean, when the 

United States finally got around to actual action instead of talk, 

that would be called in modern parlance ‘‘fiscal policy’’—and this 

was mobilization for the Second World War—it had profound effects on the economy. There have been careful studies of the spending from the 2001 rebate that showed that a substantial amount 

of the money was spent in a relatively small amount of time. And 

most economists—obviously not all—think that that is one reason, 

though not the only reason why the 2001 recession was so shallow. 

Chairman CONRAD. Dr. Zandi? 

Mr. ZANDI. Yes, I think it is appropriate that Dr. Mitchell focused on deficits. I think that is going to be our most significant 

long-term issue for the next President. I think that will be very 

daunting. But I have two points. 

First, I think it will cost the Treasury more if we do nothing and 

the economy slides away into recession. That will mean lost tax 

revenue. That will mean increased spending on transfer programs. 

The automatic stabilizers will be—they will kick in, and they will 

be quite costly. And if we can forestall a more severe recession, 

shorten a recession by some well-timed, targeted stimulus, I think 

it will actually cost the Treasury less in terms of what it means 

for deficits and debts. So I think that is point No. 1. 

Point No. 2, what really matters, I think, for long-term growth 

is long-term deficits. Now, I do not think it really matters if we 

spend $150, $200, $250 billion, and it is temporary and everyone 

knows it is temporary. All the programs you are designing, they 

are not going to be with us a year from now, so that has no impact 

on anyone’s thinking about long-run deficits. But I do think longrun deficits matter, and they matter very much, and we are going 

to see that very clearly, I think, in coming years. 

Chairman CONRAD. I think anybody who was here at our hearing 

yesterday with the Comptroller General of the United States, it is 

about as clear as it can be. We are on a completely unsustainable 

course. Deficits and debt do matter. Of course, the Government can 

borrow money so it can kind of delay the effect. But we are on a 

course now in which virtually all Federal spending will be dedicated to three things: Medicare, Medicaid, and Social Security— 

crowding out everything else unless there is some affirmative action. 

Let me go through, if I could very quickly, stimulus ideas that 

are going to be before the Finance Committee this afternoon. And 

before I do that, let me first ask about the size of the package: the 

package out of the House, basically $146 billion; the package in the 

Senate, $161 billion, roughly 1 percent of GDP. If I could just get 

one sentence from each of you in terms of the size of the package. 

Too big? Too small? About right? 

Mr. ZANDI. I think that is an appropriate size, yes. I do. 

Chairman CONRAD. Dr. Blinder? 

Mr. BLINDER. I agree. You can get to that logic two ways. First, 

look at the forecast relative to trend and ask how much of a boost 

we could use—these numbers are in my testimony. You get a ballpark figure of 1 percent. Another way is to look at how much housVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00181 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
176 

ing has knocked off of GDP growth. In the last seven or eight quarters, it is 1 percent. You come to the same number. 

Chairman CONRAD. Dr. Mitchell? 

Mr. MITCHELL. I do not think the size particularly matters because we are simply taking money out of the left pocket and putting it in the right pocket. 

Chairman CONRAD. All right. Let me go to some very specific 

things, and, again, if I could get short answers, because these are 

going to be things that Senator Bunning and I are going face votes 

on this afternoon. One idea has been to do some infrastructure 

spending, largely highways. There has been a survey of State 

transportation industry—State transportation departments, rather, 

that found 2,700 projects with an estimated cost of $15.6 billion 

that could be—— 

Senator GREGG. Are those earmarks? 

Chairman CONRAD. No.—that could be initiated within 3 months 

of a stimulus package enactment. If you could do those projects in 

3 to 6 months or begin them, is that worthy of consideration as 

part of a stimulus package? 

Mr. ZANDI. My view is that infrastructure spending does have 

significant bang for the buck, if you can cut the checks immediately. I am very skeptical that that happens and that it will occur 

in a timely way. But in theory, if you could cut them, I think it 

would provide a lot of stimulus, yes. 

Chairman CONRAD. Dr. Blinder? 

Mr. BLINDER. My answer would be no. I say that against the 

background that—I have been an advocate of more infrastructure 

spending since the late 1980’s. This is not a new problem. We need 

it. Things are crumbling all over the place. We have Third World 

infrastructure in a lot of places. 

That said, it is not so much the initiation—and I would be a little 

skeptical about that, anyway—but rather the spend-out rates. If 

you look at, say, $100 million spent on an infrastructure project, 

a highway or bridge or whatever, it spends out very slowly. These 

things have a natural rhythm. You have to build these things. And 

we do not want to tell people, oh, because we have a short-run need 

to spend cash, you should try to do in a day what really takes a 

month. If you do, you are not going to get a good bridge. 

Chairman CONRAD. OK. Dr. Mitchell? 

Mr. MITCHELL. I would not want to look at road building as a 

stimulus measure, and I certainly would be more favorable to the 

State and local governments doing it anyhow. But if a road project 

meets a cost/benefit test as a long-run infrastructure project, then 

by all means do it, but not because it is for stimulus. 

Chairman CONRAD. OK. For that same reason that it does not 

get out quickly enough? 

Mr. MITCHELL. Well, again, I am completely skeptical of the notion that we can borrow $100 billion from Person A and spend it 

on Persons or Programs B and C and that it is going to make any 

difference to the economy. So the whole fundamental concept of 

Keynesian economics I think is a fallacy. 

Chairman CONRAD. All right. Energy taxes. There is going to be 

a proposal for a 1-year extension of the energy tax provisions that 

177 

would otherwise expire at the end of the year. It costs $3 billion. 

Dr. Zandi? 

Mr. ZANDI. You know, I do not have a view on that. I do not 

know the explicits—the explicit—— 

Chairman CONRAD. Credits for renewable electricity production, 

building efficiency, clean renewable energy bonds, solar fuel cell investment, wind. 

Mr. ZANDI. I do not know that it adds any significant stimulus, 

no. I would not consider it. 

Mr. BLINDER. I would say the same. I think Congress may want 

to do that for other reasons, but it is not going to provide shortrun stimulus. 

Chairman CONRAD. All right. Dr. Mitchell? 

Mr. MITCHELL. I was just going to say, in a $14 trillion economy, 

I do not think $3 billion of energy tax provisions, whether they are 

good or bad, really matter. 

Chairman CONRAD. Yes, so de minimis, that does not have much 

of an effect. 

The mortgage revenue bond proposal, this goes to the issue of 

what is happening in housing. All of you have pointed to housing 

as a key component of the downturn. This would give States a 1- 

year, $15 billion increase in mortgage revenue bond authority that 

would be expanded to include refinancing of subprime mortgages as 

allowable use for those bonds. 

Mr. ZANDI. I think it is a very laudable policy step. If it mucks 

up the process of getting a stimulus package through, I would not 

spend any time on it. But I think it is a good step, yes, and I think 

it would be helpful in mitigating some of the severe foreclosure 

problems we are having across the country. 

Chairman CONRAD. Dr. Blinder? 

Mr. BLINDER. I do not know the details of the proposal, but it is 

completely consistent with what I was saying before—that you 

have this very short-run need for stimulus, so let’s get some spending, but we also have deeper problems in the mortgage and financial sectors which are going to need a variety of institutions and 

approaches. And that may be a good one. 

Chairman CONRAD. Dr. Mitchell? 

Mr. MITCHELL. The only thing I would say is to keep in mind 

that if you are going to divert more capital into residential housing, 

you are necessarily going to have less capital for other purposes. 

There are tradeoffs. There are cost/benefit analyses that should 

take place. 

Mr. ZANDI. Can I say something? There is no capital going into 

housing now. We need a little bit of capital to go in. 

Chairman CONRAD. All right. Senator Gregg? 

Senator GREGG. Well, picking up on that point, this stimulus 

package has nothing in it which would encourage the drawdown of 

the present housing inventory that you have pointed to, Dr. Zandi. 

And if that is the underlying problem that is generating the economic slowdown, would we not focus on that? And I asked this 

question of Dr. Orszag, and he said, no, you have to focus on the 

large economy through demand, which is the Keynesian approach 

that has been debated here. And I guess my reaction is that we 

have so much policy in place which energizes purchasing of real esVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00183 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
178 

tate, of homes, that is what got us into the problem to begin with. 

I mean, essentially the subprime event was driven in large part by 

tax policy and Federal policy on housing. 

And I listened to you folks, Dr. Blinder specifically, and I have 

followed your comments for years, obviously, because you are someone with significant national influence. But it does appear that you 

sort of reject the idea of the market settling this issue out, that this 

was a classic bubble and that if we do not—and that allowing the 

market to work its will so that we basically clean out the inefficiency which created this initial bubble is the only way you are 

probably ever going to get the market right in the long run. The 

Japanese approach of trying to artificially under—support an economy which is totally overextended in assets which are overvalued 

does not work. I mean, the Japanese have proven that to us incontrovertibly, that you cannot through Federal policy basically try to 

redirect the efficiency of a market, that the market should be setting the efficiency. And we created a bubble. And the question is: 

What is the Federal role in trying to mitigate the harms being created by the bursting of that bubble? And it appears listening to 

you, Dr. Blinder, and to a certain extent Dr. Zandi, you are essentially saying that we should not allow the market to work. Am I 

wrong? 

Mr. BLINDER. The last sentence was wrong. We should allow the 

market to work. The bulk of the cure of this set of difficulties is 

going to come from the markets one way or another, regardless of 

what Government does. The question is whether it is fast enough, 

whether the Government can push it along faster, and maybe even 

change its direction slightly. But I want to focus much more on the 

speed. The context in which I am worried, as I said, is our ability 

to recover nicely from whatever kind of a sag, recession, or whatever we may have. 

If you look out there in the markets right now, you find panic, 

basically. Now, markets sometimes do this. You could call this a 

bubble in the other direction. We are having a bubble in the other 

direction. 

Senator GREGG. Well, that is a classic reaction. 

Mr. BLINDER. Sure. 

Senator GREGG. I mean, I have been through this three times in 

my experience: back in the late 1970’s and back in the late 1980’s— 

when I was Governor, regrettably, it happened in the housing industry in New England and the country—and then in the late 

1990’s when we had the Internet bubble. 

Mr. BLINDER. Yes. 

Senator GREGG. I mean, it is a classic overreaction which occurs, 

which is that when one part of the economy gets overextended, the 

good part of the economy starts to contract because you try to rebuild your capital reserves. 

But I guess my question is this stimulus package which we are 

proposing does not seem to get to any of this. I mean, you are talking about, by my calculation, spending $220,000 to add a job. That 

is the way it works out: 660,000 jobs, which is your high-level job 

number, which is over the President’s estimate—he is saying half 

a million jobs—cost under this stimulus package $220,000 per job. 

I guess my question is do you even get that return, because if you 

179 

give a person $500, are you getting a job in the United States? If 

they buy a TV made in China, you are getting a job in China. You 

cannot control where those dollars flow. What percentage of that 

goes out of the country? 

Mr. ZANDI. Well, actually, if you look at total consumer spending, 

our entire budget, 10 percent is imported, so 90 percent is produced 

here. 

Senator GREGG. So you are saying 90 percent produces activity 

here. 

Mr. ZANDI. Yes, on average. I mean, yes—— 

Senator GREGG. You gave us some really startling figures on the 

housing side, which I suspect are absolutely accurate and I do not 

question that at all. But what percentage of the economy is housing 

versus trade? In other words, we have a dollar situation where 

trade is significantly increasing because the dollar has been weak. 

And the housing market is in—how much is the trade issue offsetting the housing collapse? 

Mr. ZANDI. The contribution to the improvement in the trade deficit over the past year, not accounting for today’s numbers because 

I have not had time to process them, but approximately a point to 

GDP growth. Over the same period, the decline in housing construction, just simply housing construction, has subtracted about a 

percentage point from growth. But housing’s—that is not the end 

of the story. Housing’s tentacles run deep into the economy. It is 

not just construction. 

Senator GREGG. So does trade. I mean—— 

Mr. ZANDI. No. I mean, think about housing values and what 

they imply. When housing values are declining, they affect people’s 

net worth and their willingness and ability to—— 

Senator GREGG. Psychology. 

Mr. ZANDI. Well, no, it is not psychology. It is the ability to pull 

cash, to borrow to finance spending. Moreover, think about the 

property taxes your local governments are going to struggle with 

as their revenues are going to fall, decline. 

Senator GREGG. But there is nothing in the stimulus package 

which addresses the issue of housing value. 

Mr. ZANDI. Yes. Now, let me say something to that point, and it 

is a very good point. I think policymakers have to be working at— 

this is a substantive issue and problem. The economy is under significant pressure. So we cannot tackle it with one thing. There are 

three types of policy that should be brought to bear. The first and 

most obvious is monetary policy, and the Federal Reserve is working very aggressively on that end. But Dr. Blinder is correct. It 

works with a long lag, particularly given that the key conduit between monetary policy and the economy runs through the housing 

market and that has been short-circuited. So it is not going to be 

as efficacious in this current environment. 

Senator GREGG. Well, if it allows loans to be—if it allows these 

ARMs to be refinanced to a level where they can be refinanced. 

Mr. ZANDI. But it is not going to work as well as in the past. 

Two, stimulus. I think that is a very appropriate policy response 

to what is happening. I think that will be very helpful in mitigating—not forestalling a recession but mitigating the severity of 

a recession. 

180 

But the third thing is that housing and mortgage policy should 

be focused on—and all the steps we have taken so far, that you 

have taken so far, are all laudable steps. HOPE Now, the mortgage 

bonds if they get passed, FHA expansion, GSE loan cap expansion 

temporarily, I think are all very useful. But they may not work because if you go into the securities markets and look at what has 

happened, they are literally shut down. The mortgage securities 

market, nonconforming—not the conforming market, not what 

Fannie and Freddie do. They are fine. But that is half the market 

in 2006. The other half is completely, literally, shut down. If you 

look at bond issuance of the nonconforming bonds, subprime, AltA, and jumbo loans, in the last 3 months of 2007 it averaged $10 

billion per month. I mean, that is down from $250 billion a month 

at the peak. So it gives you a sense of the magnitude of the problem. It is not going to be solved easily by just letting the market 

work through. 

Senator GREGG. And a stimulus package is not going to have an 

impact on that. 

Mr. ZANDI. But that is the point. 

Mr. BLINDER. No, Senator. That is why I raised the point, at the 

end of the testimony, that there is more to be done beyond the 

stimulus package—— 

Mr. ZANDI. Beyond the stimulus package. 

Mr. BLINDER [continuing]. To address these market travails. The 

stimulus package is not going to solve that at all. It should contribute a little bit, because everything goes better if the economy 

is going uphill than downhill. But it is certainly not targeted on 

that problem. 

Senator GREGG. What the stimulus package is, it is a feel-good 

event, and maybe that helps the confidence of consumers. But as 

a practical matter, the substantive impact on this underlying problem, which is the failure of the market over the issue of housing 

financing, is not going to be addressed by the stimulus package, in 

my humble opinion. And feel-good events are not bad. This is just 

going to be very expensive for our children, this feel-good event. 

Chairman CONRAD. Well, I would just say, I think it is more than 

a feel-good event. It does give some modest lift to GDP, which may 

help avert a recession or make a recession more shallow. But we 

should not overstate—I agree with the Senator entirely. We should 

not overstate what this does. 

Senator Murray? 

Senator MURRAY. Thank you very much, Mr. Chairman. It is a 

fascinating discussion, and kind of following up on what Senator 

Gregg is talking about, sort of the housing foreclosure, rising defaults sort of brought us to this point where we are looking at economic stimulus. Senator Conrad is right. We should not overstate 

it. We all, I think, agree we need to move forward with some kind 

of short-term economic stimulus. 

But what about the bigger picture? Dr. Zandi, you just listed a 

whole bunch of things we were looking at in terms of the housing 

issue, and you said, well, all that might not work. What do you recommend we do look at doing? 

Mr. ZANDI. Well, my view—and it may sound a little bit out 

there, but I think we should be—so did ARM freezes 8 weeks ago 

181 

sound kind of out there. And it goes to a suggestion that Dr. Blinder made. 

I think that it would be appropriate to consider and start thinking about some type of Treasury-backed fund that would buy up 

mortgage loans and mortgage securities. This fund would operate 

under an auction process. As soon as it was operational, it would 

establish a price in the market. The reason the market is not working—— 

Senator MURRAY. Stabilizing house prices? 

Mr. ZANDI. Well, not immediately. What it does is stabilizes the 

price for the mortgage loans and the mortgage securities. And as 

soon as that happens, then you will start to see credit flowing back 

into the housing market. And as soon as that happens, then people 

can get loans, then they can go buy a home, and then prices will 

begin to stabilize. 

Right now the market is completely frozen. There is no activity 

in the market because everyone is scared to trade with each other. 

There is no price. If you have a market maker, the Treasury, step 

in and say I am going to make a market, as soon as that happens 

you will jump-start things. And, in fact, at the end of the day, it 

may not cost the Treasury anything because prices will probably 

rise, because Dr. Blinder is right, there is now panic in the market 

and the prices—if you force someone to sell, it will be at a much 

lower price than the underlying value of the security. Am I making 

sense? 

Senator MURRAY. Yes, I am fine. 

Dr. Blinder, did you want to add anything to that. 

Mr. BLINDER. No. I agree. The basic symptom—you can see it in 

the market—is that the bid-ask spreads are incredible on a lot of 

these assets. When bid-ask spreads are like that instead of like 

that, it tells you the market is not working. It is not making a 

price, and there is no activity. So that is what prompted me, at the 

end of my testimony, to mention that I think we probably need two 

different sorts of institutions. One would be like what Dr. Zandi 

was just saying, picking up on what I had said, designed to try to 

get these markets functioning again. But the other would be aimed 

specifically at the bottom of the pyramid, so to speak, at the foreclosure problem. 

We did this in the Great Depression, and as Dr. Zandi showed 

on his slides, we now have a housing problem as big as we had in 

the Great Depression. The rest of the economy looks much better 

than then, but the housing sector looks just as bad as it did then. 

And we had this thing called the HOLC during the Great Depression, which assisted in refinancing mortgages. 

Now, none of that is going to happen in the next 2 days in a 

stimulus package. But in terms of addressing this longer-run problem, I think that is the direction in which the Congress ought to 

be thinking. 

Senator MURRAY. Yes, OK. I did hear your testimony. I thought 

you said that the U.S. economy may recover after the next two to 

three fiscal quarters. I heard a lot of other people saying that this 

housing market crisis may last well into 2009. On what are you 

basing your thoughts that it may be shorter? 

182 

Mr. BLINDER. Well, both can be true. The housing sector is about 

4 percent of the economy—and sinking, by the way. It is on its way 

to less than 4 percent of the economy. So things can get pretty terrible in the 4 percent, even worse than they are, and they are 

awful. But as long as the other 96 percent is doing pretty well, the 

economy will be ok. Exports were mentioned before as doing pretty 

well. Up until very, very recently, the consumer was holding up 

quite well. You could have a recovery, even a pretty good recovery, 

in the whole economy without having a recovery in housing. 

Now, that said, it is not going to be that easy because the housing problems are deep and they seem to be getting worse, not better. And much more importantly, the thing that I emphasized, 

which brings me to the idea we are now toying with, is the creditgranting mechanism more generally—not just mortgages. There 

are lots of other types of credit. And every economy runs on credit. 

Those mechanisms are getting jammed up, and that is quite serious because it is part of the blood that flows through the economic 

body to make it function. And I worry about that, which takes us 

way beyond housing and really does go to this question. OK, once 

we bottom out, whenever that is, do we actually come up rapidly 

or do we trundle along the bottom for a while? 

Senator MURRAY. Well, you have an intriguing fast-track procedure proposal that we would move forward on something but it 

would not be implemented unless there were other economic indicators coming out. What is the risk of not doing something quickly 

if we put in place something that is waiting for something else to 

happen? 

Mr. BLINDER. You are quite right. There is always a risk of being 

too late, and nobody can deny it. There is also a risk of doing it 

when you do not need it. 

I think the odds are that we probably do need it, and the specific 

indicators that I mentioned in the testimony—I think I also mentioned them verbally—are coming very, very soon. So far we have 

had one lousy-looking month of employment data and one lousylooking month of retail sales data. It could be that those are flukes. 

They could even disappear in data revisions. Things like that happen. My guess is they will not, but I do not know that. I would just 

like to see one more readius on each, and we are talking about only 

2 weeks from now when we will have seen one more on each. 

Now, where your question might really come to the fore is here: 

Now suppose the next employment report comes in rather goodlooking—say 100,000-plus jobs. And suppose the next retail sales 

report comes in rather good-looking. Then I think Congress might 

sit back and say, well, let’s think about this. Do we actually need 

a stimulus or not? 

Mr. ZANDI. May I respectfully disagree. 

Senator MURRAY. Yes, Dr. Zandi. 

Mr. ZANDI. Sorry. 

Mr. BLINDER. That is all right. 

[Laughter.] 

Mr. ZANDI. Because the quality of the data that we are looking 

at is always suspect, even in the best of times. At turning points 

in the economy, it is very difficult to read, and these data are revised. The two he mentioned, employment payroll employment, and 

183 

retail sales in particular—are notoriously revised significantly, and 

years after the fact. 

So, for example, this Friday we are going to get an employment 

report that gives us a read on January employment, but we are 

going to have revisions to the data back more than 2 years, and 

there will be downward revisions, significant downward revisions 

based on what the BLS has already told us. So my point is that 

you—I think the downside—we cannot have—we have to be very 

careful of focusing on a data point or two. We have to take the 

plethora of information that is before us. I think most importantly 

consider sort of what are the downside risks if you do nothing, particularly in the context of what everyone now believes you are 

going to do. If you do not do that and follow through at this point, 

in my view, I think that would be a much more serious harm to 

confidence and to the general economy. I think it would be a huge 

mistake. 

Senator MURRAY. OK. And I just have a few seconds left, but 

Senator Conrad was asking you about different proposals. What 

about unemployment insurance and food stamps? 

Mr. ZANDI. In my view, they are the most efficacious form of 

stimulus. I mean, in terms of I put a dollar into extending UI 

claims, UI insurance or expanding the food stamp program temporarily, I am going to get back much more in terms of economic activity and GDP than any other thing that you can do. 

Senator MURRAY. Dr. Blinder? 

Mr. BLINDER. I agree with that. I put it right at the top of the 

list. 

Senator MURRAY. Dr. Mitchell? 

Mr. MITCHELL. I think it is the perpetual motion machine of fiscal policy. If unemployment insurance benefits were so great, we 

should ask companies to fire everyone so more people can get unemployed so we can get more stimulus. It is just a silly idea. 

Senator MURRAY. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. There are some 

really strange ideas going around. 

First of all, I want to ask each and every one of you: When is 

the economy in recession? What is the definition of a recession? 

Mr. ZANDI. The definition is a persistent, broad-based decline in 

economic activity. It is a judgment call by—— 

Senator BUNNING. Two quarters? 

Mr. ZANDI. That is a rule of thumb. 

Senator BUNNING. Rule of thumb. 

Mr. ZANDI. Yes. It—— 

Senator BUNNING. It is not a fact. 

Mr. ZANDI. No. 

Mr. BLINDER. That is actually a media definition. The media—— 

Senator BUNNING. A media definition? 

Mr. BLINDER. Yes. 

Senator BUNNING. Well, I want to throw that out to start with. 

What is a recession, Dr. Blinder? 

Mr. BLINDER. That is exactly right. There is an organization, as 

you know, called the National Bureau of Economic Research, 

which, well after the fact—so it is not so useful in real time—dates 

184 

recessions. They do it based on a plethora of different time series 

data on the economy, focusing on sales, production, employment— 

am I leaving something out? 

Mr. ZANDI. Real income—incomes less transfer payments. 

Mr. BLINDER. Yes. Incomes less transfers—those would be sort of 

the big four. But they look at many other things. 

Senator BUNNING. Dr. Mitchell? 

Mr. MITCHELL. I have always thought the rule of thumb is that 

the most reasonable thing to—unless you want to go after the 

fact—and I already stated in my testimony I do not think economists do a very good job predicting, so it is really only looking for 

the rearview mirror that we can say these things with certainty. 

Senator BUNNING. Thank you very much. 

Dr. Blinder, many economists have expressed skepticism about a 

fiscal stimulus because Congress typically acts too late. I think we 

are proving that Congress can act quickly. Members can put aside 

their differences and work together for a common good when we 

face a dire threat to our economy. 

You also said that stimulus must be fast-acting, but you caution 

us to wait for more employment report—one more employment report and one more report on retail sales. If we wait too long, isn’t 

there a danger that the stimulus will be poorly timed and that will 

only result in a return to the 1970 style stagflation? 

Mr. BLINDER. I do not think the latter. But, yes, if you wait too 

long, it will be poorly timed. The wait that I was talking about specifically in the testimony is about 2 weeks. So I do not think that 

is—— 

Senator BUNNING. In other words, for the Congress to act and 

pass and have the President sign a stimulus package? 

Mr. BLINDER. The so-called fast-track proposal that I mentioned 

in the testimony and that Senator Murray brought up would have 

the Congress agree as soon as it can—and it looks like it is moving 

very fast—on what the package will be and then vote on it at the 

time, on a fast-track basis what it wants to put—— 

Senator BUNNING. One more question, Dr. Blinder. Should unemployment compensation benefits be taxed? Professor Feldstein, who 

testified before the Senate Finance Committee last week, believes 

they should be taxed. What is your opinion? 

Mr. BLINDER. I guess I do not think it is that important an issue. 

This question is part and parcel of how generous should they be. 

If you tax them, people above certain income levels are going to get 

less. I do not have a big quarrel with—— 

Senator BUNNING. Wouldn’t that get more money quickly into the 

economy if we did not—— 

Mr. BLINDER. You mean right now as part of—— 

Senator BUNNING. Oh, yes, as part of the package. 

Mr. BLINDER. To the extent you tax it back, you get less. I 

thought—I was interpreting that—— 

Senator BUNNING. No, no, no. That is part of the package. You 

do not tax the additional. 

Mr. BLINDER. Oh, I see. I see. You do not tax the additional. Yes, 

I think that would get more spending—— 

Senator BUNNING. OK. Thank you. 

Mr. BLINDER. Right away. Yes. Sorry. 

185 

Senator BUNNING. Dr. Mitchell, in your testimony, you point out 

that bad monetary policy was partly responsible for the economic 

weakness in the 1930’s. The Federal Reserve raised rates at the 

wrong time. What role do you think monetary policy has played in 

the current crisis? And would you agree with Professor Anna 

Schwartz, who recently argued that the Federal Reserve ‘‘failed to 

confront something that was evident,’’ meaning the asset bubble in 

housing, and kept interest rates too low for too long? 

Mr. MITCHELL. I agree with Anna Schwartz. I think one of the 

problems we have today is the housing bubble. One of the things 

that caused the housing bubble was artificially low interest rates 

by the Fed. As a matter of fact, I am a little bit worried about a 

return to stagflation because if you have an easy monetary policy, 

like we had in the 1960’s and 1970’s, combined with increases in 

the overall burden of Government—I do not think we are anywhere 

near where we were in the 1960’s and 1970’s, but I am worried 

that we are trending in that direction of the Fed not being focused 

on protecting the value of the dollar. I think the European Central 

Bank is doing a much better job than the Fed, and I think that 

shows up in the falling value of the dollar versus the euro, not to 

mention other currencies. And I also worry that certainly over the 

last several years we have had an increase in the aggregate burden 

of Government as a share of GDP, and I worry that is just not a 

good recipe unless we want to wind up like, you know, some of the 

slow-growth economies in Europe. 

Senator BUNNING. We are going to have an FOMC meeting this 

week, the end of this week, and it is anticipated that a 50-basispoint reduction in the Fed rate will occur on top of an emergency 

75-point reduction. 

Dr. Blinder, since you were on the Fed, don’t you think that is 

kind of a crisis management? 

Mr. BLINDER. Oh, I do, yes. I think the Fed has been watching 

this rolling financial crisis that really erupted in the July-August 

of last year timeframe. One might have thought that the markets 

would have cured all of this by now, but they have not. And if anything, it is getting better in some dimensions; but it is getting 

worse in other dimensions, and new things keep happening. You 

may have noticed in the newspapers in the last few days there is 

a lot of discussion about the bond insurers and what could happen 

if they go under or are impaired. So, yes, the Fed is looking at this 

as a crisis. If, in fact, they lower the Fed funds rate another 50 

basis points today—we will know in about 3 hours—— 

Senator BUNNING. 2:15, to be exact. 

Mr. BLINDER. 2:15, exactly right. That would be incredible speed 

by Federal Reserve standards. You have to go back—— 

Senator BUNNING. Incredible? 

Mr. BLINDER. Yes. You have to go back to the 1980’s to see them 

moving interest rates that much in that short a timeframe. 

Senator BUNNING. In my opinion, watching the Fed operate—and 

I have been a Fed watcher since you were on the Fed—it is total 

panic. Since they did not in normal operating procedures react, but 

with a 25-basis-point at their last meeting, all of a sudden in 2 

weeks—are you kidding me? And we are to believe that they knew 

what they were doing? 

186 

Mr. BLINDER. I think, Senator, they concluded on the 22nd of 

January, or probably a little before, that they had done too little—— 

Senator BUNNING. No kidding. 

Mr. BLINDER [continuing]. And they had some catching up to do. 

Yes. 

Senator BUNNING. No kidding. Everybody was urging—urging 

them to do more the last time they met, and there was one dissent. 

And that dissent was not to do anything. 

Mr. BLINDER. Well, the previous meeting, actually—— 

Senator BUNNING. Had one dissent, the same way, to do more. 

But I am telling you, 11 people in one room, or 12, depending how 

many people show up—well, that is a fact because some of our 

bank presidents do not get there in time or are absent and vote by 

telephone. I find the Fed inactivity, and now being very active, very 

disturbing to our economic well-being. 

Thank you. 

Chairman CONRAD. Thank you, Senator. 

Senator Domenici? 

Senator DOMENICI. Well, Mr. Chairman, as I told you privately, 

I have to go to a business meeting of the Energy Committee, and 

Senator Bingaman does not call those very often, so I probably only 

have two questions. I will only have time for that. 

I would like to ask any of you this question: As I participate and 

read and see what I can—how I can catch on to this and is the 

House-passed package going to work, because it is going to pass, 

it is going to be law—and I am quite sure I could predict that 

today. But it seems to me that everybody is acknowledging that 

there is a very big problem in housing and that that problem is a 

very entangled one because, you know, the securities got away from 

everybody. It is not like they are sitting around in a nice place, 

that the negative ones are perking up all over the place where nobody ever even expected them. People are adding assets to their 

portfolio that are broke all over the place. 

And I guess I am wondering if that is not bad enough that our 

typical anti-recession package, which is what we are doing and the 

House—all we are doing is doing it quickly and fooling everybody 

because the House did it bipartisan so quickly. Now the people are 

glad of that and are saying do something, do it. But I have a question. Is it not possible, even probable, that the housing mess may 

negate the effectiveness of this package that we are all talking 

about doing? 

Let’s start with you first, sir, in the middle. 

Mr. BLINDER. I do not think so, but in the following sense. 

Senator DOMENICI. Please. 

Mr. BLINDER. We could imagine having the same sort of macroeconomic environment but, that housing had nothing to do with it, 

that we were just sagging for some other reason, in which case the 

House probably would have designed the package very much like 

what they designed, with the exception of those things about the 

FHA and a few other little things. But it basically would have been 

essentially the same, and its macroeconomic impact would have 

been essentially the same, too. The package is intended to give the 

187 

economy some oomph in the short run from more spending to prevent the sag or to make it less than it otherwise would. 

The housing mess, as you quite correctly characterize it, is a big 

set of complicated problems that we do not have our arms around 

yet because it does go way beyond housing into the fixed-income securities markets. 

Senator DOMENICI. Yes. 

Mr. BLINDER. For that, we need longer-range things, including 

perhaps some unusual Government interventions that we have 

been discussing in this hearing. That is where you see the uniqueness of the current situation coming to the fore. And you are quite 

correct, it is not going to be solved in a stimulus bill passed tomorrow. 

Senator DOMENICI. Do you see any ideas around that are out of 

the ordinary? Since it is an out-of-the-ordinary securities problem, 

are there some ideas around of significance that you are aware of? 

Mr. BLINDER. Yes, there are several. I saw you had to step 

back—— 

Senator DOMENICI. But they are not going to be in this package. 

Mr. BLINDER. They would not be in this package because they 

take some thought about design. You know, these are the kinds of 

things in which truly the devil is in the details, and you do not 

want to try to design them in an overnight markup and pass it. 

Senator DOMENICI. But you think they can be drawn? 

Mr. BLINDER. I think so. I think so. There have been suggestions, 

for example, I mentioned earlier—— 

Senator DOMENICI. I am sorry I did not hear it. 

Mr. BLINDER. It is quite all right.—of bringing back something 

like was done in the Great Depression, with the Home Owners 

Loan Corporation to stave off foreclosures. There have been suggestions made about having Government assistance, let’s put it that 

way, to get the credit markets back functioning again, somewhat 

analogous to what the RTC did after the total collapse in the savings and loan industry back in the late 1980’s and early 1990’s. 

And there have been other suggestions like that. So there are 

ideas, somewhat out-of-the-box ideas, floating around. 

Senator DOMENICI. We had some pretty big people involved with 

that. James Baker was involved, and Darman, who is deceased, he 

was involved. They thought that one through and did something 

extraordinary. 

Mr. BLINDER. Absolutely. 

Senator DOMENICI. That is what we need now. 

Mr. BLINDER. And Bill Seidman, who is still around, was the 

head of the RTC then. 

Senator DOMENICI. Right. Well, do you think the same thing, Dr. 

Zandi? 

Mr. ZANDI. Yes, I do. I think Congress and the administration 

have done a number of good things. They are small, but they are 

all good things. I think HOPE Now is a useful process. 

Senator DOMENICI. Right. 

Mr. ZANDI. Give it a chance to work. I think FHA expansion and 

GSE loan cap expansion are good ideas. 

Senator DOMENICI. Too small. 

188 

Mr. ZANDI. And I think we should prepare for the possibility that 

the problems are bigger than all this and that we need to do something—in a broad philosophical sense, I think what the Treasury 

has done so far is try to facilitate the market. It has not put itself 

on the line. I think we are at a point where the Treasury is going 

to have to put taxpayer dollars on the line and say we are behind 

this, and once that happens, I think the cost to taxpayers and the 

Treasury ultimately will be less. 

Senator DOMENICI. Dr. Mitchell? 

Mr. MITCHELL. I am a Fairfax County homeowner. I have enjoyed a lot of appreciation in the value of my house over the last 

14 years, and I suppose I should be appreciative that you all are 

trying to prop up the value of my home, even if it is at the expense 

of low-income and young people who might be home buyers. But I 

think the problem we have in housing is that we did have a bubble, 

and the more the Government intervenes to try to prop up the 

value of homes, we will be making the mistake the Japanese made 

in not allowing the bad loans to work their way out of the system. 

The only really good thing I can tell you about the overall stimulus package is that at least it is not intervening in the housing 

market because I do worry that we might make the mistake the 

Japanese made. I do not want my home to fall in value, but I also 

know that over the last 14 years, I am still way ahead of the game. 

And I know that if we had the Government intervene in propping 

up the value of homes, it is going to hurt people who are lot less 

well off than I am, or any homeowners in this room are. 

Senator DOMENICI. Thank you very much. Thank you, Mr. Chairman. Thanks to all three of you. 

Chairman CONRAD. Thank you, Senator Domenici. 

I would like to go back to the housing situation. Dr. Zandi, I 

would like to go to your charts, if I could, and I would like to go 

to the chart that is headlined ‘‘Inducing an unprecedented surge in 

defaults.’’ 

Mr. ZANDI. Yes. 

Chairman CONRAD. First mortgage loan defaults. I would like 

you to help us understand this chart more fully. 

Mr. ZANDI. OK. 

Chairman CONRAD. Take us just briefly, if you could, through the 

implications of this chart. This is showing us mortgage loan defaults. Is this by month or by quarter? 

Mr. ZANDI. This is as of a certain—this is as of the last week of 

each quarter. 

Chairman CONRAD. OK. As I read this chart, it tells me we have 

1,800,000 mortgage loans in default. 

Mr. ZANDI. In that last quarter. 

Chairman CONRAD. That last quarter, and—— 

Mr. ZANDI. That is at an annual rate, though. I have annualized. 

Chairman CONRAD. Annualized. 

Mr. ZANDI. I think it was 450,000, if my math is correct. 

Mr. BLINDER. You need to divide that by 4. 

Chairman CONRAD. Yes. And then this thing is going up like a 

scalded cat. 

Mr. ZANDI. That is a great way to describe it. I would not have 

come up with that, but OK. 

189 

Chairman CONRAD. So tell us what you think the implications 

are? And, you know, Dr. Mitchell has this view that, you know, let 

the market work. And, you know, if the Government intervenes to 

make this less of a crisis, all you do is, as I hear you, Dr. Mitchell—correct me if I am misstating your perspective—that if we 

interfere in market correction, all we do is really delay the day of 

reckoning. 

Senator GREGG. Misallocate resources. 

Chairman CONRAD. Am I fairly characterizing your position? 

Mr. MITCHELL. Yes, I think the quicker we allow markets to 

work, the more efficient that capital allocation will be in the economy and the better our long-term rate of growth will be. There is 

a reason why countries with more laissez-faire capital markets 

grow faster than countries with more government intervention. It 

is because market forces, not political forces, are driving the allocation of resources. And I would not want us to travel down the path 

of countries that are less prosperous and growing less quickly than 

we are. 

Chairman CONRAD. OK. And, Dr. Zandi, what would be your reaction to that? 

Mr. ZANDI. I think that is a very appropriate principle for all of 

us to follow under—99 percent of the time. I think that is exactly 

correct. I think there are cases—and I think we are potentially in 

one of those cases—where the market does not work, or it will not 

work for a considerable amount of time and will create a significant 

amount of loss of wealth, income, and jobs. And there are other 

times when we faced that. The last time was in the early 1990’s 

with the S&L crisis. I think it was beyond a solution for the market, or at least one that was financially palatable for us, and we 

decided that we were going to solve this problem collectively and 

put our resources on the line. And we solved that problem in a 

very, I thought, at the end of the day, incredibly efficient way. It 

cost the taxpayers a lot less than it certainly could have. 

And I think there is a distinct possibility we are at one of those 

other points in time where we just cannot let the market do its 

thing because it is not going to do its thing in a reasonable amount 

of time. It is going to cost us a lot of wealth. 

Chairman CONRAD. Let me ask you this, if I could. I have had 

major financial players in this country call me and tell me they are 

extremely concerned about a potential lockup of financial markets. 

And by that, what I took them to mean was that people pulled 

back from even good deals and that that has a cascading effect on 

the economy. And what they were sharing with me is their top 

economists telling them they think there is a 50–50 chance of a severe recession, and that it is in all of our interests, our collective 

interest, to try to prevent that from occurring. 

What would be your reaction to that characterization of events? 

And I would ask each of you, starting with you, Dr. Zandi, and 

then Dr. Blinder, and then Dr. Mitchell. 

Mr. ZANDI. I think that is a reasonable concern. Just looking at 

the marketplace today, and as Dr. Blinder mentioned, it has now 

gone well beyond the mortgage securities market. It has affected 

the asset-backed securities market where credit cards and auto 

loans and student loans are traded and financed. That is where a 

190 

lot of capital for our credit cards come from. It has affected the 

commercial mortgage-backed securities market. So if you talk to 

anybody in commercial real estate, transactions are not happening 

because they cannot get financing. 

Chairman CONRAD. Let me just say that that was confirmed for 

me by our—I was just sharing with Senator Gregg. A person who 

is in commercial told me the deals that were good deals typically 

get 80 percent financing without much of a problem. They are now 

struggling to get 50 percent financing, and as a result, that market 

is locking up, at least in parts of the country. I do not know how 

widespread that is or if you have evidence that that is beginning 

to happen. 

Mr. ZANDI. Yes, it is happening across most of the commercial 

mortgage lending market, both in terms of the securities market 

and in terms of bank lending. It has not affected everyone. I mean, 

if you are a pristine borrower, meaning you have a lot of equity in 

your investment, your property, if you have good cash-flow, you 

still can get credit at a reasonable interest rate. But, increasingly, 

borrowers that you would deem to be reasonably good credits in 

normal times are not getting credit today. It is bleeding out into 

the corporate bond market, not in the high-grade, investment-grade 

market, but just one step below and certainly to the junk bond 

market it is happening. You know, credit spread are widening out. 

There is no bond issuance. 

So the market is very, very fragile. In my view, we are one event 

away from a very significant financial problem. And if the securities markets do shut down, then as Dr. Blinder mentioned, credit 

is the mother milk of economic activity; if that shuts down, even 

for a brief period of time, it will have very significant economic implications. So I think that is a reasonable risk, yes. 

Chairman CONRAD. Dr. Blinder? 

Mr. BLINDER. I would say 50 percent odds on a recession. A severe recession? Of course, one does not quite know what that 

means, but let’s say it is something like the early 1980’s. That was 

a very severe recession. I would handicap that as very low probability. No one can say it is impossible, but low. 

I am much more worried about a failure to snap back from the 

sluggishness, as I have said. You may remember the so-called head 

winds period in the early 1990’s when, from somewhat similar but 

not nearly as serious problems in the financial sector, the economy 

just could not quite get the engine stoked. It was growing, but not 

growing very well for a while, and then it finally did start going 

up. 

Regarding the question of whether the markets are locking up, 

to some significant extent they are already locked up. I mentioned 

the wide bid-ask spreads. That is a symptom that they are locked 

up. Another is to look at the rates at which the U.S. Treasury can 

sell debt at now. Why? That is the only thing anybody wants to 

buy. The financial markets are flooding into U.S. treasuries. They 

have beaten the rates down to incredibly low levels because they 

know the Treasury is going to pay them back, and they do not trust 

that the other so-called AAA credits are going to pay them back. 

So there is a tremendous amount of fear, which also leads to lockup. 

191 

And I would just like to relate this to the point we were talking 

about before about interfering with home prices versus letting the 

market work itself out. As Dr. Zandi said, letting the market work 

itself out is almost always the right answer. It becomes the wrong 

answer when the whole economy is at risk. I do not want to sit 

here, and I certainly would not want my representatives in Congress sitting here and saying, you know, it is too bad, you all made 

mistakes and you are all going to suffer for it. I think that is one 

of the reasons we have a Government. 

Falling housing prices are not the only problem, but they sit 

right at the base of the other problems. Why are we looking at foreclosures? A major reason is falling housing prices. Why are we worried about consumer spending sagging? A major reason is falling 

housing prices. Why doesn’t anybody want to buy MBS anymore? 

Mortgage-backed securities. Falling housing prices. Why are these 

CDOs that have been built on top in complicated ways totally unmarketable these days? Falling housing prices. 

So falling housing prices, for better or for worse—and it has been 

for worse, actually—have become central to this drama. And that 

is why I think it is appropriate for the Government to do things— 

not to go in and bail out particular people who have speculated and 

made bad bets. Certainly not. But to do things with the macroeconomy that make this market function better. 

Chairman CONRAD. My time is—I am well over my time, so I am 

going to turn to Senator Gregg. And, Dr. Mitchell, I will come back 

to you on my next chance. 

Senator Gregg. 

Senator GREGG. Well, why don’t you answer? Why don’t you follow on since all three of you were asked the question. 

Mr. MITCHELL. Well, I would simply add that in some sense falling housing prices are toothpaste that is out of the tube, and I do 

not know that anything that is going to be done is going to solve 

that problem. Instead, I look at what lessons can we learn and how 

can we avoid similar problems in the future. And I think that we 

have an awful lot of subsidies and programs and preferences for 

housing, and I think those are some of the things, combined with, 

I think, a lot of the blame with the Fed keeping interest rates artificially low, I think we should be cautious about programs, whether 

it is bailing out housing or bailing our Wall Street, we have to 

think about what sort of precedent we are setting and what sort 

of incentives that people in those markets are going to have in the 

future, if they think, well, we can go ahead and take a risk that 

might normally be imprudent because we think somehow the Government is going to be there to bail out our mistake. 

And so, you know, the problem with housing, it is there, it already exists. I think a lot of policies are trying to push on the 

string. We are not really going to solve the current slump in housing prices. I am more worried about are we learning the right lessons so that we avoid similar mistakes in the future. 

Senator GREGG. Well, we certainly got into the macro debate 

here, not much relationship to the stimulus package, which probably will have no effect on this exercise. But my frame of reference 

is this: I went through this as a bank attorney in 1978–79, and 

then I went through it—not a bank attorney. [I was a corporate atVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00197 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
192 

torney representing a bank.] And then I went through it again as 

Governor of New Hampshire in 1990 when seven of my—I had 

seven large banks in New Hampshire, and they were all insolvent. 

And my State revenues fell for 36 straight months in real terms. 

And what we saw was a contraction which was driven by the fact 

that the housing market collapsed as a result in New England not 

of fraud, as occurred in Texas, but because the mutual banks had 

converted to commercial banks, and they did not know how to 

make commercial loans, and they started throwing money at condo 

projects that did not have any viability. And so they collapsed, and 

what that led to was what Dr. Zandi was talking about, which is 

that people were not able to—the good loans were not able to be 

made because everybody had to rebuild their capital. And so it was 

a self-fulfilling problem. 

I guess my interest in this effort today is what have we learned 

from that. And it seemed to me that one thing we learned was that 

you did not concentrate the debt in the hands of the banks so that 

you spread the risk. And I think that has happened in this event. 

It appears to me that rather than having most of the banks in New 

Hampshire owning the loans that they made, they are probably 

owned by somebody in China or somebody in Europe, to a large extent. So we have spread this risk. So the capital issue on our banking community may not be as severe. 

But you have this chart here, Dr. Zandi, that seems to imply that 

we are going to have very serious problems with our capital structure of our banking system. And I guess since we are talking macro 

here, I would like to know—this is your chart entitled ‘‘The Banking System Is at Significant Risk.’’ I am wondering if that is true 

if we talk about the traditional banking system. With FIRREA in 

the 1990’s, we basically forced better capital structure. We do not 

have the smaller banking community—community banking, and I 

am talking about the less than $3 billion bank—with serious lending practices, because they did underwriting probably fairly well. 

Doesn’t this really apply more to the banking houses who were 

not forced to maintain capital, such as Bear Stearns and Merrill, 

rather than the big banks that are traditionally—and the banking 

community that has traditionally been the strength of our economy? Because if our banking community is in serious—if this chart 

is true to the banking community, then we do have a huge problem 

because they are going to start significantly ratcheting down this 

economy in order to get their capital position back. 

So I want to know where is this—what are the specifics of this 

chart? Is it banking generally? Or is it more the banking houses? 

Mr. ZANDI. Well—— 

Chairman CONRAD. Could we just interrupt? Could we get up on 

the—— 

Senator GREGG. Maybe you can punch that up. 

Mr. ZANDI. It is on my slide. 

Chairman CONRAD. ‘‘The Banking System Is at Significant Risk.’’ 

Mr. ZANDI. Yes, so this is data from the Federal Reserve that 

shows that there is just under $2 trillion worth of—these are residential real estate whole loans and residential mortgage security—— 

193 

Senator GREGG. But do they go to the capital structure of our 

banks? 

Mr. ZANDI. Yes, that is a good question. This is large commercial 

banks, so this is roughly the 30 largest banks in the country. They 

have asset bases of tens of billions of dollars. They are the most 

exposed. 

Senator GREGG. But is their capital position addressed? 

Mr. ZANDI. I believe it is, yes. And their capital position is measurably better than when you were advising a bank, the banks—or 

you were Governor of New Hampshire in the early 1990’s. Back 

then the bank capital/asset ratio was 6.5 percent. Before all this 

here in this period, it is 8.5 percent. But there have been some very 

positive developments. Every time a large commercial bank reports 

a loss on these assets that I am showing to you, they are able to 

fill the capital void by an equity investor, sovereign wealth fund 

or—so far it has been mostly foreign money coming in to fill the 

equity void. 

Senator GREGG. Well, I think Bank of America went out and financed it. But, anyway—— 

Mr. ZANDI. Yes, and, you know, Fannie Mae and Freddie Mac are 

going around and issuing various kind of equity to fill the void. So 

there is capital coming in. 

My concern, though, would be that if there are continued mortgage losses—and not only mortgage losses, it is now—if you listen 

to the banks, they are telling you it is in their credit card portfolio, 

it is in their auto lending portfolio, even in their CNI loan portfolio. 

B of A came out and said we are seeing a deterioration in our small 

business lending portfolio, which is the first time I had heard that. 

So the next time they come out with major losses—and this is 

a risk. I do not know if this is going to happen, but this is what 

I am concerned about—they will not be able to fill the void. Even 

though they have an 8 percent equity/capital ratio, they have to 

take a multi-billion-dollar writedown, and they are unable to fill 

the hole with another equity investor. They say, ‘‘No, I am going 

to wait.’’ 

Senator GREGG. Given that as a potential, there is nothing in the 

stimulus package that is going to address that. 

Mr. ZANDI. No, sir. No, sir. 

Senator GREGG. And is there anything the Government theoretically can do? You have your RTC idea here basically, right? I mean 

other than that. 

Mr. ZANDI. Well, in my view, I do think that it would take a philosophical leap but in terms of dollars and cents a small step to establish a fund that would buy up—say I am going to buy mortgage 

loans, whole loans, and mortgage securities, and I am going to establish a price in this marketplace. 

Senator GREGG. Well, why isn’t that the Japanese approach? 

Mr. ZANDI. The Japanese approach is they had no—— 

Senator GREGG. Basically underwriting—— 

Mr. ZANDI. No, sir. The problem in Japan was—no, they left 

the—they did not solve their problem. They left the bad assets on 

the banks’ balance sheet for years, and it impaired the capital position of the banks and their ability and willingness to extend credit. 

What I am proposing to do is clean that out right now. As soon as 

194 

you establish a price in the marketplace, then the banking system 

has to mark down to that price, and we clean it out. Right now 

they are not marking because they do not know what to mark to 

so they are having trouble. 

Senator GREGG. Obviously, Dr. Mitchell, you have a different 

view—— 

Mr. BLINDER. If I could just put in two footnotes to that. In the 

Japanese case, they finally did get the problem mostly solved—it 

is not 100 percent solved even to this day—with massive government intervention. They put public funds at risk. They nationalized 

some banks and then de-nationalized them. They did a lot of 

things. It took them a long, long time to get to that. For a long 

time they dithered and really did not do anything, and that was 

part of the problem. 

Second footnote. You asked, will the stimulus package do anything to help this set of problems? Not directly. But to the extent 

the economy improves, all problems shrink. One of the reasons that 

the RTC wound up spending much less taxpayer money than almost anybody thought at the beginning—it was still a lot, but the 

numbers that were bandied about were much higher—was that the 

economy started to improve as we got into 1992 and 1993. As the 

economy starts to improve, bad loans become good loans, just as it 

works in the other direction. And when the economy starts to deteriorate, good loans become bad loans. 

And so doing something to boost macroeconomic activity, which 

is what the Fed is up to and which is what the stimulus package 

is about, will at the margin also contribute to this particular problem. 

Senator GREGG. I am sorry. Dr. Mitchell? And I know, Ben, you 

have been—— 

Mr. MITCHELL. I actually will agree completely that if the economy does better, that helps everything. If the economy does worse, 

that hurts everything, and that is why I think the focus should be 

on what is good long-term policy, because I do not think it is under 

your control with a stimulus package to affect the short-term economic results. 

In terms of the Federal intervention in housing, I will repeat 

what I said before. I am very worried about what signal may be 

sent. If people in the future think that, well, maybe the Government is going to step in and prop up house prices at a certain level, 

I just worry that that is going to have implications for the overall 

efficiency of capital markets and what is being allocated where. 

And I think it is also going to probably lead people to take more 

risks than they otherwise would take because they think there is 

a possibility of the Government stepping in if somehow things go 

south. And I just think that is not a good signal to send in terms 

of long-term economic performance. 

Senator GREGG. I appreciate it. 

Chairman CONRAD. Senator Cardin, yes, I join the Ranking 

Member in thanking you very much for your patience. 

Senator CARDIN. Well, thank you, Mr. Chairman. I have found 

this discussion to be very, very helpful. But I could not help but 

think of how the typical person in my State of Maryland would be 

responding to this discussion. The typical family in Maryland is 

195 

concerned about energy costs, health care costs, and perhaps even 

job security. The stimulus package that passed the House is a conventional approach to try to restore some confidence in our economy, and to me it is helpful. 

But the point that has been raised here about the housing market is of particular importance to Maryland. Maryland does not 

have an high unemployment rate, but we have a high foreclosure 

rate. Foreclosures are increasing in our State, up significantly in 

the last quarter. Bankruptcies are also up in Maryland. The trigger 

for the economic problems we are experiencing right now is clearly 

the housing market. And I can tell you, having visited several parts 

of Maryland, that in the Washington suburbs, there are many 

homeowners with subprime loans that are behind and in danger of 

foreclosure. 

So I would say to Mr. Mitchell: the toothpaste is not out of the 

tube yet for them. They can still save their homes. And they are 

looking to this Congress to do something to give them hope that 

they will be able to restructure their mortgages, and be able to stay 

in their homes and not be forced into foreclosure. 

I was in Salisbury on Monday. It is in a rural part of our State. 

I asked the local leaders whether there was a problem with the 

housing market in rural Maryland. They told me that people cannot sell their homes, and inventories are very high. 

I was in Baltimore talking to a young family who cannot find a 

mortgage to buy a home. They want to buy a home. They cannot. 

So the credit crunch is real. It is affecting our economy today. 

So as we look at the stimulus package this afternoon on the floor 

of Congress, I believe we have a responsibility to do something 

about the housing crisis. And I was very much interested in our 

witnesses’ comments that if we can do something to ease the credit 

crunch, if we can do something that gives some degree of optimism, 

then maybe that will have an impact. 

When the Federal Reserve reduces the prime rate, we all know 

it has some direct impact, but it is also a signal. It is a signal of 

concern and confidence. And my own gut feeling is, for the people 

whom I visited in Maryland, they want this Congress to do something about the housing crisis. They do not want us to just sit back 

and say you cannot affect private contracts; we do affect the economy here. 

So I will leave that as an open-ended question. What we can do 

in the short term—and the long term, but we have the short term 

before Congress right now—to, first, help that person who has a 

subprime loan today in the Washington area, who is trying to make 

payments, but has fallen behind, has a good job, is creditworthy, 

and needs help. What can we do in the short term to assist those 

people? 

Mr. ZANDI. Well, I think one thing you can easily do is raise the 

loan caps temporarily for Fannie Mae and Freddie Mac. I think 

that has been proposed, and I think that would be very efficacious, 

particularly for your State, Senator. If you look at the 2006 data 

on mortgage originations, which is the latest full year of data we 

have, and you look at all the loans that were originated above 

$417,000—that is the current loan cap—about 10 percent of the 

borrowers in Maryland in that order of magnitude would be afVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00201 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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fected by that. They would be able to get Fannie- and Freddiebacked credit if we changed this rule. Right now they cannot get 

any credit because the market is frozen outside of what Fannie and 

Freddie are doing. 

So I think it is a very easy, very laudable thing to do, and I think 

it would be effective. It would have been more effective 6 months 

ago when Fannie and Freddie were in better financial situations. 

They have their own capital problems now, and that is going to 

limit their ability to use this and help the market. But it would 

still be helpful. 

Expanding FHA, I think that is a slam-dunk. I do not know why 

we do not immediately increase FHA to allow homeowners into 

homes. I think that would be very helpful. 

I think the proposal to allow for increased issuance of municipal 

bonds to finance State funds, to help in refinancing efforts of people 

who face payment resets on their mortgages to refinance into another loan is a very effective way, and it allows the States to—because they are on the ground with these folks, and they know and 

can help decide who gets this. 

So these are not big things, but they are things that can be done 

very quickly and would be very helpful now. 

Senator CARDIN. Thank you. Any other suggestions? I agree. 

First of all, the indirect impact that it will have will be positive. 

Mr. ZANDI. Right. 

Senator CARDIN. Additionally, it will demonstrate that we are 

taking action, which can feed on itself. 

Mr. BLINDER. Well, just a couple of quick points. I think your 

point about giving people the feeling that something is going on 

can be helpful in a variety of dimensions. Regarding some of the 

things we were talking about earlier about getting the capital markets functioning again, I am ‘‘convinced’’—nobody really knows 

what the future will bring, but I am relatively convinced—that if 

we could get these markets functioning so there are actually prices 

for these assets at which people knew they could buy and sell, then 

private capital would come pouring in, and the Government would 

have to do relatively little in the end. It is sort of an igniter in that 

sense. 

The other thing that I wanted to mention is that the refinancings 

are only one part of the issue. The other part of the issue is the 

debt workout. There are people who haveten themselves into debts 

that they are not going to be able to pay. This happens all the 

time. When it is banker to customer, the banker knows that if it 

goes to foreclosure, there is going to be value destroyed. If you 

think about how much value the banker and the homeowner together have, it is going to go down in a foreclosure. Bankers know 

that, and so they try to get workouts. How much can you pay? 

Stretch it out. Lower the interest rates. Whatever. 

The problem we are having now is that most of these mortgages 

have been securitized, sliced and diced, put into CDOs, MBSs. They 

are all over the world. And so some of your homeowners in Maryland may actually have mortgages that are owned by a pension 

fund in Italy or something. That pension fund does not even know 

that they own this mortgage of your homeowner in Maryland. So 

you get a very difficult coordination problem. 

197 

Now, in the fullness of time, the markets are going to solve those 

problems, no doubt. But the question is how full we want time to 

be, and I think there is a case for the Government coming in acting 

as a coordinating mechanism, as a catalyst to get this hypothetical 

pension fund in Italy and the homeowner in Maryland together to 

do something that will actually be in their mutual benefit—if only 

they knew each other. 

Senator CARDIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator. 

A couple of quick things before we end. One, Dr. Zandi, you men- tioned $250 billion of—I took it to be mortgage refinancings that 

have been typical in previous periods, and now we are down to $10 

billion. Was that your reference? Was it to mortgage refinancing? 

Mr. ZANDI. No. That was to bond issuance. 

Chairman CONRAD. Bond issuance. 

Mr. ZANDI. Bond issuance. And just to give you the—— 

Chairman CONRAD. Bond issuance in a particular sector or just 

broadly? 

Mr. ZANDI. In the nonconforming market, so that would include—— 

Chairman CONRAD. Nonconforming. That is over $417,000. 

Mr. ZANDI. And all the subprime and Alt-A and all the jumbo. That was half the market in 2006. In fact, in 2006, there was $1 

trillion, give or take a billion, in bond issuance to finance those 

loans, which obviously many of those loans should not have been 

made. 

In the fourth quarter of 2007, to give you context, there were less than $200 billion altogether, and by December we were down to, 

you know, nothing essentially—I mean, very little bond—— 

Senator GREGG. Can I ask a question? 

Chairman CONRAD. Yes, absolutely. 

Senator GREGG. And the rollover number I have heard is that 

there is a half a trillion of subprime coming due this year and a 

half a trillion coming due next year. 

Mr. ZANDI. Yes, well, this year it is subprime. In 2009 and 2010, 

it is the option ARMs, which are some subprime, but some are 

jumbo. You know, prime borrowers, they just have these balloon 

payments coming. But they are going to have a great deal of difficulty because they got in with housing values at a certain level, 

their mortgages were right up to the value, and now they are underwater. So this is a problem that is not going to end in 2008. It 

is going to extend into 2009 and 2010. 

Chairman CONRAD. And what could we do about that problem? 

I take Dr. Mitchell’s entreaties. But if one was concerned about 

that becoming an even bigger problem in the economy than it 

might otherwise be, taking his entreaties seriously that largely you 

want to market to deal with this, what steps could we take that 

would help the market resolve it in a less cataclysmic way? 

Mr. ZANDI. OK. Well, there is a multifaceted way, approach to 

this, and it is not just one thing. Some are small, some are large. 

The RTC idea, the RTC-like idea is a large idea that takes a lot 

of thought, but may be needed. But when you give permission to 

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nancing, that will help. That is going to go to help refinance people 

who are facing these ARM resets. So the more funds you can provide into that program, the more helpful that will be. 

HOPE Now, which is the initiative that Treasury has set up to 

facilitate the modification process, is a good idea. It is going to be 

very small, though. And one caveat I just want to throw out there 

so that you are aware of this, most of the effort so far has been 

in establishing so-called repayment plans. They do not help the 

homeowner at all. All a repayment plan does is say to the homeowner, You did not pay me the last few months, I am going to take 

the interest you owe me and the fees and roll it back into the principal, and you are going to be put on a new payment schedule, 

which, in fact, in most cases will have a higher mortgage payment. 

So when you hear that HOPE Now has resulted in a quarter million repayment plans, that is in my view not helping at all. That 

is going to be more of a problem—not years ahead—in months 

ahead. These people are not going to be able to make good on it. 

But HOPE Now, broadly speaking, is a laudable process. 

But, ultimately, the only way this problem is going to be solved 

is if there is more—if credit starts to flow into the mortgage market, that lenders are able to extend out credit to good potential 

homeowners, to first-time buyers, to people who under normal circumstances would not be able to get a loan. Not the investor, not 

the subprime borrower who had no chance of making good, but reasonably good credits. And anything you can do to improve that flow 

of credit I think is going to help. 

Chairman CONRAD. Let me go to one other thing because we are 

running out of time here, and that is longer term. Senator Gregg 

and I have a proposal to have a task force, eight Democrats, eight 

Republicans, that would have the responsibility to come up with a 

plan to deal with our long-term fiscal imbalances, deal with the entitlement shortfalls that we all know exist, and that if 12 of those 

16 members could agree on a plan, that plan would come to Congress for a vote. It would not be a commission that just comes up 

with a recommendation and nothing ever happens, because we 

have concluded that the normal legislative process simply is not 

going to take on these very tough, overarching issues absent some 

change in process. 

I would just ask each of you for your reaction. Do you think that 

is something that would be helpful? Would it be a confidence builder to markets to see the United States was facing up to its longterm mismatch between commitments and revenue? 

Mr. ZANDI. So the idea is that you would have a commission that 

would come with a proposal that is binding, it is up or down, kind 

of like a BRAC Commission process? 

Chairman CONRAD. Yes. 

Mr. ZANDI. You know, fundamentally that is absolutely—something like that has to happen because the only way we are going 

to come to a solution to this long-term problem is there has to be 

tax increases and spending cuts, a combination, and that is going 

to be very painful to get through any legislative body. And the only 

way is some kind of process outside of the current process. 

Mr. BLINDER. I agree with that very much. I have written about 

this also. It is a certainty that the ultimate long-run budget fix-up, 

199 

whatever it is, is going to have in it so many things that every single Member of Congress will not like something in it. And so, you 

know, the genius of the Base Closing Commission was exactly to 

sort of bundle it all together. That was also the secret to the Tax 

Reform Act of 1986, which had lots of things in it that individual 

members did not like. But somehow everybody came together and 

we got a very good tax reform. 

I do not have a personal opinion on whether the exact details of 

what you just said is the right way to do it. But maybe it is. But 

something that is philosophically like that needs to be done. And 

let me just add an obvious codicil to that. To the extent that partisanship can, not disappear but sort of be put in the closet for a 

little while, that would be a good thing, because in truth, in many 

of these cases it is partisanship that prevents the agreement from 

going forward. And if you could, you know, as a thought experiment, get a handful of nonpartisan people together, I think you 

would get agreement on many things without a great deal of difficulty. But that is hard to get done in Washington, I know. 

Chairman CONRAD. Dr. Mitchell? 

Mr. MITCHELL. I certainly applaud the attention that the two of 

you are giving to fiscal issues, long-term fiscal issues. I am a tad 

bit worried that the focus is on the imbalance as opposed to the 

growth of government. If we look at country like Sweden, they have 

a budget surplus, but government is consuming more than 50 percent of GDP, and their per capita disposable income is only 65 percent of American levels. SO I would not want to trade places with 

Sweden even though they have a surplus and we have a deficit. 

So I would certainly hope that such a commission would focus on, 

if it ever was passed and wound up producing recommendations, it 

would focus on how to control the size of government and keep it 

where it is now, as opposed to become like Sweden with a surplus 

but a much poorer society because government is too big. 

Chairman CONRAD. Let me just say in answer to that, I think the 

honest answer here is we are going to have to have some more revenue. I would prefer it to be in areas that are not actually tax increases, at least the first place we look for revenue not tax increases. But there are also going to have to be benefit adjustments. 

And if you look at the math, I think it is very clear that the heaviest part of the load is going to have to be on the benefit adjustment 

side of the house. We have a runaway train here, especially on the 

health care accounts, and that is the 800-pound gorilla that can 

swamp this boat. 

We talk about what is happening here. We have had repeated 

testimony before this Committee by Chairman Bernanke, the head 

of the Federal Reserve, by the head of the Congressional Budget 

Office, by the Comptroller General of the United States, and economists of all stripes telling us we are on an unsustainable course, 

and the quicker we make a course correction the better. 

Senator Gregg? 

Senator GREGG. Well, let me associate my comments with your 

comments. Again, Mr. Chairman, you are right on. And I thank the 

panel. I found this to be extremely informative and also entertaining and worthwhile, and I appreciate the point of views. And 

I like the fact that there were different folks, different views here 

200 

expressed. I wish we had a magic wand, but we do not. But hopefully we can get through this. 

Thank you. 

Chairman CONRAD. Thank you. Thanks to my colleague Senator 

Gregg. Thanks to each of the witnesses. I have enjoyed this very 

much. Dr. Zandi, Dr. Blinder, Dr. Mitchell, I think you all made 

an excellent contribution to the work of this Committee, and we 

thank you for it. 

Mr. ZANDI. Thank you. 

Mr. BLINDER. Thank you. 

Mr. MITCHELL. Thank you, Senators. 

Chairman CONRAD. We are adjourned. 

[Whereupon, at 12:12 p.m., the Committee was adjourned.] 


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THE LONG-TERM OUTLOOK AND SOURCES OF 

GROWTH IN HEALTH CARE SPENDING 

THURSDAY, JANUARY 31, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Wyden, Gregg, and Enzi. 

Staff present: Mary Naylor, Majority Staff Director; and Scott 

Gudes, Staff Director for the Majority. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

We would like to thank Dr. Orszag for being with us once again. 

You have been very busy, yesterday at the Finance Committee on 

the stimulus package. I think we all know the jobs data out this 

morning provides more evidence of critical need for us to take action on fiscal stimulus. And we hope that that can be done expeditiously. 

The turnout is not as strong as it might otherwise be because the 

leadership called a special caucus for 10 o’clock this morning to discuss the stimulus package. So we apologize for that, but we 

thought it was important to proceed, given what we are trying to 

do in terms of schedule on this committee this year. 

Let me just take a moment to inform colleagues and their staffs 

that it will be my intention to complete action on the floor on the 

budget resolution before the March break. That is an ambitious 

schedule but I think it is imperative that we do that. That would 

mean markup would occur the week before, and it would be our intention to do it on the Wednesday and Thursday in the Committee, 

then go to the floor the next week before the March break. So you 

might inform your members that that is the schedule. 

I have visited previously with Senator Gregg about that. He, as 

always, is wanting to move the work of this Committee in an expeditious way, as well. So that will be our intention. 

With that, we want to turn our attention to the health care circumstance that we confront that really is the 800-pound gorilla. We 

have said it many times in this Committee. That is where we have 

the biggest disconnect between the commitments that have been 

made and the resources that are available. This requires our urgent attention. 

206 

This is a matter of not only Medicare and Medicaid, but also veteran’s health care. All of the health care accounts in the Federal 

Government are jumping dramatically in cost. 

Let’s turn to that first slide. This is CBO’s long-term budget outlook from December of last year. This takes their scenario, makes 

the tax cuts permanent, provides for an indexing of the Alternative 

Minimum Tax, and Medicare physician payments growing with the 

higher MEI rate. This is all to try to reflect some notion of what 

the President has called for, coupled with CBO’s long-term outlook. 

And this is what it shows. It is a total runaway train, in terms 

of debt. Let’s go to the next slide. 


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We all know that one of the key drivers is the demographic tidal 

wave. We are going to have roughly 80 million retirees in 2050, up 

from about 40 million now. 

That, coupled with this next factor, which is health care costs, 

a point that the Director of CBO has made to us repeatedly, that 

this not just a demographic phenomenon, although that is certainly 

a component. The even larger component is rising health care 

costs. You can see that with Medicare and Medicaid alone, we are 


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heading for 12 percent, nearly 12 percent of GDP by 2050 if the 

current trend lines continue. 

That is almost incomprehensible. But that is the course we are 

on. And we simply cannot permit that to play out. 

If we look at spending on health care as a percentage of GDP, 

including Medicare and Medicaid but also adding in all other 

health care spending, we would be approaching 40 percent of gross 

domestic product just on health care. 


42157.345
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I know that Senator Enzi is working on an initiative in this area. 

Senator Wyden is, as well. Senator Whitehouse is deeply engaged 

in this. This is going to require our attention because we are clearly on a course that is unsustainable. 


42157.346 42157.347
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This is what the Comptroller General said to the House Budget 

Committee in February of 2005: ‘‘Federal health care spending 

trends should not be viewed in isolation from the health care system as a whole. Rather, in order to address the long-term fiscal 

challenge, it will be necessary to find approaches that deal with 

health care cost growth in the overall health care system.’’ I think 

he got it exactly right. Let’s go to the next slide. 

Health care reforms that have potential for long-term savings, 

even though they may have up front costs, include expanding comparative effectiveness research, something that I believe is critically important because we see this tremendous variance across the 

country in terms of approaches to health care. We see, in some 

treatment regimes, a five-to-one spending difference and no improvement in health care outcomes. Five-to-one difference in terms 

of expenditure with no evidence of better outcomes. 

No. 2, widespread adoption of health information technology and 

e-prescribing. The RAND Corporation has told us we could save as 

much as $80 billion a year if that were appropriately deployed. 

Third, coordinating care for the chronically ill. This is something 

that jumps out to me as being a key factor. Roughly 5 percent of 

beneficiaries are using roughly half of the budget. Now in business 

school, I was taught when you have that kind of statistic, you had 

better focus on it like a laser. 

Fourth, changing provider incentives and beneficiary cost-sharing. 

And fifth, promoting healthy lifestyles and preventive care. 


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The Chairman of the Federal Reserve, on the budget outlook, 

told the Senate Budget Committee last year ‘‘One might look at 

these projections and say well, these are about 2030 and 2040, and 

so we really do not have to start worrying about it yet. But in fact, 

the longer we wait, the more severe, the more draconian, the more 

difficult the adjustments are going to be. I think the right time to 

start is about 10 years ago.’’ 

I will end on that note and turn to my colleague, Senator Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman. Again, I congratulate 

you for holding a hearing that is critical and topical to what is the 

primary fiscal problem we confront as a Nation and obviously it involves a lot of social policy, too. And that is the cost of health care 

and the way it is going to affect the capacity of this Government 

to be affordable for our children and our children’s children. 

It is nice to have the former chairman and the ranking member 

of the Health Committee here, because he is obviously playing a 

huge role in how this gets moved forward. 

The Chairman has touched base on a number of key areas and 

I would just reinforce what he has said by taking a slightly tangential approach. Health care is not like Social Security. Social Security has five or six moving parts. We know how to fix Social Security; all it require is the political will. If you put the right people 

in the room, we could solve Social Security in probably half an 

hour, or significantly improve it. 

Health care, on the other hand, is an incredibly complex matrix 

of moving parts, which is constantly evolving and changing. BeVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00217 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH

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cause of the fact that diseases change, the ability to know how to 

address them changes and life expectancy changes. And of course 

research and development in health care is having a massive impact on both cost and quality, in many ways positive and in some 

ways not so positive on the cost side. 

But in any event, it is not something that there is a magic wand 

for. There are not four or five adjustments. 

So I do not subscribe to the Big Bang Theory of solving the 

health care issue. I think you have to do it with major incremental 

steps, find an area where you can address something that you 

know is not working, and try to improve it. 

For example, working with Senator Clinton, we introduced something called the Medicare Quality Enhancement Act, and with the 

assistance of Senator Enzi, a version of it was passed out of Senator Enzi’s Committee. The bill would make available to purchasers Medicare statistical data that would be collected in a central place and then be available to people who wanted to purchase 

health care so that they would know whether this hospital or this 

group of physicians or this procedure was more cost efficient and 

produced better quality than the other hospital or group of physicians or procedure. 

That type of information is critical. It is part of the transparency 

effort. Unfortunately, it is being held up now in a bigger issue with 

the health IT bill. 

In addition, things that are being done, for example, by the Dr. 

Wennberg at Dartmouth, where they are basically developing an 

atlas of how much it costs and what type of results occur across 

this country in different health provider groups, is absolutely critical information. Then using that information effectively through 

transparency and making it available to the people who purchase 

the goods, the health care services, is absolutely critical. 

So there are specific things we can do. And we should do them 

and line them up and knock them off one by one. 

And one of the things we can do, and I mentioned this yesterday, 

is use the reconciliation instruction strength of this Committee to 

start to move on specific areas where we can take action which will 

help bring into balance the cost of health care. I point again to the 

proposal from the Administration last year, which I think was terribly reasonable, that we require high income individuals to pay a 

higher portion of their Part D premium. It just is beyond me why 

a person working in a restaurant or a person working in a factory 

or a person working at any job that does not get paid dramatic 

sums of money, should have to underwrite people who do make 

dramatic sums of money such as Warren Buffet or Bill Gates’ father. Not to pick on those two people, but the fact, is they can afford to pay a larger percentage of their Part D premium and they 

should. 

Also, I think the Administration proposal last year to recover 

some of the effeciencies that have resulted in the health care community as a result of technology improvements and cost savings. 

Not all of that benefit is being asked to be recovered, but the taxpayers ought to get some of that back. 

213 

So there are specific things we could do using the reconciliation 

instructions to energize that effort. And I hope we will look at that 

as we mark up the budget. 

But I think in making these decisions, what we need is good information. You cannot make decisions unless you have good information. That is why what Dr. Orszag and his team are doing at 

CBO in this area is critical. And that is why I think this hearing 

is so important, because it will give us the information off of which, 

hopefully, we can build some of this significant instrumental policy 

to try to get this issue under control. 

So I think Dr. Orszag for being here today. 

Chairman CONRAD. Thank you, Senator Gregg. 

Again, welcome, Dr. Orszag, to the Committee and please proceed with your testimony. 

STATEMENT OF PETER R. ORSZAG, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ORSZAG. Senator Conrad, Mr. Gregg, members of the Committee, the rising costs of health care represent the Nation’s central 

long-term fiscal challenge. As my first slide shows, over the past 

four decades, health care spending overall has roughly tripled as 

a share of the economy from about 5 percent of GDP in 1960 to 

more than 15 percent today. 

Costs per beneficiary have been rising about 2 percent faster 

than income per capita. This metric, which is often referred to as 

excess cost growth—which, by the way, does not necessarily mean 

excessive cost growth, it just means that costs are rising faster 

than income—has been roughly the same in Medicare, in Medicaid, 

and the rest of the health care system, which underscores that 

many of the same factors driving up costs in our public insurance 

programs are also driving up costs in the rest of the system. 

The report that we released today examines studies that have 

concluded that the most important factor driving up costs historically has been the emergence, adoption, and widespread diffusion 

of new medical technologies and services, including new drugs, new 

devices, again new services, as well as new clinical applications of 

existing technologies. 

The bottom row of the next slide shows you that available estimates suggest that approximately half of the growth in long-term 

health care spending, or spending in health care over the longterm, has been associated with these technological advances. Those 

estimates are arrived at largely through the process of elimination. 

That is, trying to account for all other possible causes of spending, 

and then what you are left with is attributed to changes in technology. 

One example of another—— 

Senator GREGG. Can I ask a question before he goes on? 

Chairman CONRAD. Absolutely. 

Mr. ORSZAG. Absolutely. 

Senator GREGG. That is up to today? In other words, you are not 

counting the baby boom population? 

Mr. ORSZAG. I am going to get to that. 

Senator GREGG. OK. 

Mr. ORSZAG. Right. This is historical. 

214 

Older people do have higher health care costs than younger people. But if you look back over the past several decades that factor 

only accounts for a small share of the overall increase in health 

care spending, in part because the population has not been aging 

that rapidly yet. You can see a variety of studies suggesting only 

a couple of percentage points. 

Other factors that contribute to higher health care spending include the growth in personal income and the expansion in health 

insurance coverage and the resultant reduction in out-of-pocket 

costs as a share of total health care costs. Both of these tend to 

raise demand for health care. You can see, though, that they again 

only explain a minority of the total increase. 

Some other factors, which we could have a longer discussion 

about, include defensive medicine and physician-induced supply, 

also do not appear to explain a large share of the growth in spending according to published studies. We can come back to a more 

nuanced discussion about that. 

The conclusion from these studies, therefore, is that most of the 

growth, or at least about half, has occurred because of the expansion of technologies. That is, we can do more things now than we 

were able to do previously. 

Another cost increasing factor, which is illustrated in the next 

slide, has to do with changes in chronic disease and, in particular, 

changes in obesity. We know that obesity raises an individual’s risk 

of serious illness, including cardiovascular disease and diabetes. 

And the share of the population that is obese or morbidly obese has 

risen dramatically. 

In 2001, as this chart shows, spending per obese person was 

about $3,700. Spending per morbidly obese person was $4,700, relative to spending of a normal weight person of about $2,800. So it 

is natural to think that the roughly doubling of the share of the 

population that is obese or morbidly obese has significantly raised 

costs. 

Most of the increase in spending on obese or morbidly obese people has occurred because we are spending more per obese person 

rather than because we now have more obese people. In particular, 

if health care spending per capital remained at the levels that we 

saw in 1987 and we just ramp up the prevalence of obesity that 

we have experienced, you can only explain about 4 percent of the 

total increase in health care spending that actually occurred. 

The bigger factor has been that the spending per obese person 

has gone from $2,700 to $3,700, or for a morbidly obese person 

from $2,700 to $4,700. And that comes back probably to the same 

story. The technologies that we are now applying for those beneficiaries have changed and we are now spending more per person, 

rather than it primarily being that the population hasten more 

obese. 

Stepping back again, though, the bottom line from these analyses 

is that the single most important factor driving historical increases 

in health care costs involves medical technologies which, on average, have brought very significant improvements in health outcomes. But the technologies then often get applied in lots of settings where they may not be yielding significant benefits. And that 

215 

drives up costs without improving health quality, a topic I will 

come back to briefly at the end. 

Turning to the future now, Senator Gregg, we also project forward that in the absence of any significant change in these longterm trends national spending on health care is going to grow substantially. You can see the chart, and Senator Conrad already put 

this up so I will not belabor the point. One thing I do want to note, 

however, is that the projections are based on current Federal law, 

and therefore they are not a prediction of the future but rather an 

illustration of what will occur if you do not change Federal statutes 

and Federal policies. 

Health care spending will roughly double as a share of the economy by 2035 and spending on Medicare and Medicaid will rise from 

about 4.5 percent of the economy today to roughly 12 percent by 

2050 and almost 20 percent of the economy by the end of our projection window in 2082. That is the entire size of the Federal Government today. 

As has already been noted, most of that increase is not due purely to the fact that the population is getting older, but rather that 

we will be spending more per beneficiary. So again, just like the 

story with increased obesity prevalence, most of this spending increase is occurring because of increases in costs per beneficiary 

rather than the number of beneficiaries. 

All of these projections, as has already been noted, raise fundamental questions of economic sustainability. These increases are 

the largest driver of spending increases over the long term. If you 

combine that with projections on the revenue side, you get explosions in debt, which is shown in the next slide. 

The key question then becomes what can be done? Given that future health care cost growth is the most important factor driving 

our fiscal future, CBO is devoting increasing resources to assessing 

options for reducing such spending in the future. I think a few 

things are worth noting. 

First, straightforward changes to Medicare and Medicaid can 

save money for the Federal budget, in part by shifting costs to 

households. Ultimately, those kinds of cost-shifting approaches will 

not be sustainable if you want to maintain widespread access to 

the public programs over time. So the key is trying to restrain or 

reduce overall health care spending over the long term. 

In that light, two potentially complimentary approaches to reducing health care spending, rather than just reallocating it across different parts of the system, involving generating more information 

about what works and what does not, and then aligning incentives 

for better care rather than just more care. Today, most of our incentives are to provide more care, regardless of whether it is better. 

And I would just end by noting the final slide, rather than the 

geographic slide that I usually walk around with, I want to just 

highlight this final slide. We have very substantial variations, as 

has already been noted, in costs per beneficiary across parts of the 

United States, even at our top medical centers. If you look at beneficiaries within the last 6 months of life, costs per beneficiary at 

UCLA Medical are twice as high as costs per beneficiary at the 

Mayo Clinic for reasons that are not correlated with quality outVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00221 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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comes. That is to say, quality is actually better by the measures 

that we have at the Mayo Clinic. 

And I would just again end by saying taxpayers are paying for 

that difference. And we do not know what we are getting in exchange for the higher expenditures. So if there were a single thing 

that we could do, both to make sure that taxpayers are getting 

their money’s worth out of the dollars that we are putting into 

these programs, and also to help future generations address the 

key factor affecting long-term budget spending, figuring out why 

we have this kind of variation and, in particular, what we are getting for it and how we can do that better, I think is absolutely essential. 

And that will likely involve changes in information. It will likely 

involve changes in incentives. And it will likely involve changes in 

health behavior that will take a long time to pay off. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Orszag follows:] 

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Chairman CONRAD. It is pretty sobering, is it not? 

Mr. ORSZAG. Yes. 

Chairman CONRAD. I mean, you look at these things, it is really 

sobering. 

So, the question is what can we do about it? And as you know, 

Senator Gregg and I have a proposal to have a task force that is 

given the responsibility to come up with a long-term fiscal plan. If 

we were able to get that task force in place, would you have proposals that you think could have a significant effect in altering 

what we see as the future here? 

Mr. ORSZAG. Let me answer that by saying two of the most significant activities that CBO will be undertaking in this area this 

year are intended to produce two volumes, hopefully by the end of 

this year or perhaps early 2009. One is something that we are calling Critical Topics in Health Reform. The goal there is to go 

through systematically many of the major topics that people are 

talking about, disease management, care coordination, pay-for-performance, what have you, and provide some guidance to the Congress about what our views are in terms of what the effects may 

be. Probably in ranges, rather than specific, you know 22.2 kind of 

point estimates. This could be $10 billion to $20 billion a year and if you do it this way you are more likely to be closer to the $20 billion, if you 

do it that way you are more likely to be closer to the $10 billion. 

And then, in addition to that, we intend to pull out of the budget 

options volume that we do every other year and produce a separate 

health options volume that will provide for more detailed specific 

proposals, precise point estimates of what the budgetary and other 

impacts would be. 

We have a major cross-agency undertaking to provide that kind 

of information. So I guess it would depend when your commission 

started operating. 

Chairman CONRAD. Well, our intention now is that it would be 

next year. 

Mr. ORSZAG. Well, that timing works. 

Chairman CONRAD. In terms of the conclusion of your work, I 

heard you say either late this year or some time early next year? 

Mr. ORSZAG. Yes. 

Chairman CONRAD. Well, the earlier it was done next year, the 

better for the purposes of what we are trying to do. And I think, 

you know, if you look at the reality here, you get a new administration, whatever it is. They are going to have no choice but to tackle 

these issues because their whole presidency, I think, could potentially be defined by how they grapple with these challenges. 

As you think about this yourself, how serious a threat do you see 

these long-term projections to be to not only the fiscal stability of 

the country but the economic strength of the country? 

Mr. ORSZAG. If we were ever to actually wind up on the kind of 

debt path that is illustrated in the chart before this one, the economic consequences would be orders of magnitude much more severe than anything we are currently experiencing, which is obviously generating—in some quarters—concern. 

So that kind of path simply cannot happen. It would be an economic disaster. 

242 

Chairman CONRAD. I hope the word gets out, you know? Our colleagues have to join us in this effort. There is no sitting on the 

sidelines this time, I do not think. So I am calling my colleagues, 

through their staffs that are here, I hope they are paying very close 

attention to what we have just heard here. 

And I hope this moves them to support the proposal that Senator 

Gregg and I have made. If they have ideas for change, let’s hear 

them. But I want to once again state that we are going to go to 

markup on this proposal. To me, this cannot be kicked down the 

road anymore. This has to be—we have to have the beginning of 

facing up to this. 

And I do not pretend for a moment we are going to be able to 

solve all of the problem on the first bite at the apple. But it needs 

to be a big bite and it needs to be very serious and it needs to be 

bipartisan. 

Dr. Orszag, I would ask you, do you believe that an initiative 

along these lines is important and important to do now? 

Mr. ORSZAG. Yes, and I would also just add one other thing that 

Senator Gregg mentioned: in this key area of health care, we currently do not have the specific proposals and the specific information that you would need to alter that path immediately. We need 

to be building that infrastructure and being much more aggressive, 

just orders of magnitude more aggressive, in getting under the 

hood and finding out exactly what works and what does not, and 

trying different things and evaluating them. 

We cannot afford to just wait and kind of say well, we do not 

really know because we do not have the information base. We will 

not have it when the time comes unless we are building it now. 

Chairman CONRAD. Senator Gregg? 

Senator GREGG. Following up on that, do you think the Dartmouth studies are of value in this area? 

Mr. ORSZAG. The Dartmouth studies are of unbelievable value, 

which is why I walk around with their results all the time. But I 

would note that even the Dartmouth studies are hampered by data 

limitations and by data imperfections. We could be doing a lot more 

of that kind of research. I think they are path breaking and are 

leading the way. But we need the artillery to come in behind them 

and really bring this back down to a more serious thing. 

We should not be relying so much on a very dedicated but small 

group of researchers at Dartmouth University for this kind of absolutely key— 

Senator GREGG. Dartmouth College. 

Mr. ORSZAG. Oh my goodness, I am sorry, Dartmouth College— 

for this kind of key information. 

Can we strike that from the record? 

Chairman CONRAD. Yes. 

Senator GREGG. Otherwise, you will be beaten with hockey 

sticks. 

[Laughter.] 

Mr. ORSZAG. I have been to New Hampshire, I know. I do not 

want to do that. 

Senator GREGG. Well, as a result of those studies, I tried to figure out what can we do with this information. And what we came 

up with was this MQEA initiative, which is essentially to have this 

243 

clearinghouse where the information is gathered and we get over 

this hurdle of not having this information generally available. 

I mean, what good is it for Medicare to have all this information 

about the quality of providers if people cannot get access to it? We 

have this proposal which Senator Enzi has been kind enough to report out of his committee but has been tied up in the middle of the 

health IT bill. I do not know what is wrong with the health IT bill 

but somehow it got tied up. 

Is this not the type of thing we need to do—get information in 

a centralized place where it is easily accessible and transparent? It 

is good solid information so that an insurer or a business that has 

a lot of employees who have health insurance can go to that data 

bank and say well, if we send our employees to this hospital they 

are going to get this amount of care at this quality level at this 

cost. If we send them over here we are going to get better quality, 

better cost. 

Mr. ORSZAG. It is absolutely the kind of thing we need to be 

doing. We need to be getting better and more information and more 

transparency. 

I would also add, one of the limitations with many existing efforts, not necessarily the one that you are describing, of combining 

insurance claims data bases, which can be helpful, is that they 

often lack the quality part of the equation. And we need more information there, too. 

And, in fact, I think it is entirely plausible that one of the biggest payoffs to health information technology on a broader scale 

will not necessarily be the internal efficiencies of ordering fewer 

tests and what have you, but rather that you will have an information base for evaluating what works and what does not on a much 

more comprehensive basis. 

I would also note, however, that I think there is a major debate 

in the medical profession that also will have to occur. We are not 

going to be able to rely on randomized trials for all of the array 

of information that we are going to need. And that is unfortunate 

because randomized trials are better. They are the gold standard. 

But it is not practical to think that we are going to be able to study 

whether you should go back and see the doctor four times a month 

or twice a month and all the sorts of things that you are going to 

need to examine just using randomized control trials it will be too 

expensive and to impractical to do. 

Senator GREGG. But the Government’s role, really, is going to be 

to create a playing field where this information is available, where 

it continues to be able to be brought forward in a flexible way so 

that there is constant updating and it is substantive, useful, visible 

and transparent, I think. 

On another subject, in this out-year period, where the prices are 

driven dramatically, I saw an estimate that said the Part D premium had an $8 trillion unfunded price tag to it. If that is true, 

and the total Medicare unfunded price tag is somewhere in the $34 

trillion range, the Part D premium issue is a big part of this problem, is it not? 

Mr. ORSZAG. Well, I could come at that another way and say our 

long-term fiscal gap, that is the sort of collapsed imbalance between spending and revenue under our so-called alternative fiscal 

244 

scenario, is about 7 percent of GDP. The Part D program accounts 

for about 1 percent of that. So it is not a trivial share. 

Senator GREGG. No, that is pretty big. 

And I guess, wouldn’t it be logical to, at least, structure the payment process for that Part D premium along the lines of the Part 

B premium, where there is some larger percentage participation by 

the wealthier recipient? 

Mr. ORSZAG. I guess I would say that something has to change, 

and that is a policy decision. Clearly, you need some combination 

of more revenue and cost restraint, and that is one way of getting 

it. 

Senator GREGG. The issue which Senator Conrad has often spoken about, which elected governments find almost impossible to address, is the issue of the last 6 months of life and how you deal 

with that. The fact that you said, 40 percent of the cost is in the 

last 6 months is very hard for an elected official in a democracy to 

deal with. 

Other Western democracies, not even Western but industrialized 

democracies, have done it through basically rationing. That is what 

they do in Canada. That is what they do in England. They have 

a nationalized system where if you reach a certain age, your capacity to get certain treatments and devices is, if not curtailed, it is 

made very difficult. There is a time lag that is significant. 

Do you have thoughts on this area? Because it is such a big part 

of the whole overall issue? 

Mr. ORSZAG. Yes, and let me bring up that final slide again because that is literally for beneficiaries in the last 6 months of life. 

Maybe even a broader theme that I would suggest might be beneficial, given the very substantial differences we have within the 

United States, many of the cross-country comparisons that we often 

do are difficult to do. There is so much variation within the United 

States, even just within Medicare, which is the same insurance 

program—that I think we can probably get a lot farther by trying 

to examine exactly why that is happening and maybe ease up a little bit on the cross-country comparisons that are difficult to do 

well. 

That having been said, look at those data. Again, beneficiaries in 

the last 6 months of life, if you try to measure quality or outcomes 

or even how beneficiaries feel they are being treated, you do not 

appear to be getting anything for spending an extra $25,000 per 

beneficiary at one of our leading medical centers relative to another. 

It is what Elliott Fisher at Dartmouth College has said: how can 

the best medical care in the world cost twice as much as the best 

medical care in the world for those last 6 months of life? That is 

obviously a kind of cute way of saying it, but it is a very deep question that we need to be getting under the hood of. 

Senator GREGG. How do we? 

Mr. ORSZAG. That then raises the question— 

Senator GREGG. I mean, do we say to UCLA, at St. Mary’s they 

can do this for half the price you do it, so you better start doing 

it for that price? 

Mr. ORSZAG. I think there are several ways of getting to this. 

Why is the regional variation occurring? 

245 

I think a key reason why the regional variation is occurring is 

that we have a payment system that accommodates the more intensive approaches, even when they do not help. And we have different norms among practitioners in different parts of the country 

so that you have, in some parts of the country, much more intensive approaches without any medical evidence backing those 

approachs. And the payment system accommodates it, which gives 

you these huge variations in costs without any improvement in 

quality. 

There are lots of ways of trying to get at that. One way of getting 

at it is to note that this variation occurs most dramatically where 

we do not know what works or what does not. We do not know 

whether the MRI is indicated or how beneficial it is in this kind 

of diagnostic setting. 

In some parts of the country—for example, in the darker parts 

of the country, the parts with the higher spending according to the 

researchers at Dartmouth College—I am never going to make that 

mistake again—physicians are much more likely to order an MRI 

when someone has back pain—or says they suffer from back pain 

and there is some indication of nerve damage——than in the areas 

of the country with lower spending. 

If we had clearer guidance on when the MRI made sense and 

when it did not, I think the variations would be narrowed. And I 

believe they would likely be narrowed toward the lower spending 

regions. 

So one benefit from the kind of information agenda that you have 

already embraced involves, I think, that the more information we 

have and the more clarity about guidelines for the medical profession, the less variation there seems to be. 

A simple example again, is variation in imaging and in diagnostic tests. Things like MRIs, where there is a lot more ambiguity 

about when it should be applied, there is a lot of variation. Simple 

things that have been shown to work, like administering an aspirin 

for heart attack victims when they show up at the hospital, there 

is not a lot of variation. Where it is very clear what should happen, 

physicians tend to do that. 

Senator GREGG [presiding]. Thank you. 

Senator ENZI. 

Senator ENZI. Thank you. I want to congratulate you for your efforts to provide us with answers to deal with the growing health 

care costs. Those that have been suggested this morning might 

make a difference. 

I do have a statement that I would like to be part of the record. 

Senator GREGG. So moved. 

[The prepared statement of Senator Enzi follows:] 

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Senator ENZI. Senator Kennedy and I have been working primarily on education issues last year because the HELP committee 

handles everything from birth to retirement. And since most of 

those issues needed authorization, we are trying to get that done. 

We are about to finish up the Higher Education Act, I think. The 

House is taking it up next week. 

So now we will be able to concentrate more on health care. It is 

not that we have not been doing anything on it the last year. I was 

tasked with looking at the different ways people in both parties say 

that we should be dealing with health care issues, and what they 

feel we ought to be doing. 

And across the aisle I have compiled a list of 10 different things 

that we could do to improve access and the quality in health care, 

in addition to getting every American insured. And if we did all 10 

of them, that would be the result. 

It is proposed as 10 pieces because we seldom do anything really 

comprehensive around here. Because if you have 10 pieces, one of 

them will have five people that do not like it, another one will have 

eight people that do not like it, another one 11 people that do not 

like it. Pretty quickly you are at 51 and you cannot get it done. 

But if you pick out the one that has five people against it, 95 to 

five is not too bad and we can get it done. 

One of the key pieces in this is health IT. That is the great idea 

supported by Senator Gregg that seems to have stalled out. One of 

the reasons it has stalled is because the bill was scored as costing 

$47 million in 2008 and $317 million over 2008 to 2012. 

Yet the RAND Corporation says that this interoperability in 

health IT would save $162 billion a year—a year. Even if we had 

some costs associated with that, it seems to me that there would 

be a couple of bucks left over... 

[Laughter.] 

Senator ENZI. ...even with the way we do accounting here. 

But that is what I want to ask about. I want to know why it does 

not save any money? And what can we do with the bill to change 

it so that it will get a score that shows savings and still do the 

things that we need to have done? All we have in there is a small 

grant program to get it kicked off—eliminating that does not seem 

to do anything toward the $162 billion a year. 

Mr. ORSZAG. Thank you for that question. Let me first say that 

we will be coming out at some point early this year with a full report on health information technology and the evidence on what it 

does and what it does not do. I think a general theme is that there 

are many things that by themselves do not do very much, but that 

in conjunction with other features or other changes would have 

larger effects. 

For example, installing a health information technology system 

in a system that is relatively integrated likely has a lot different 

effects than installing a health information technology system in a 

part of the health sector that is not particularly integrated. 

We have had the RAND folks in so we have scrubbed those numbers. I think it is fair to say that there is, in many of the major 

items, skepticism about the specific magnitudes involves in some of 

those estimates. 

251 

I again come back to saying that because our health system is 

so decentralized and fragmented, if you will, installing health information technology more broadly, by itself, may not have as big a 

pay out as it would in conjunction with other changes——for example, using the health IT system as a basis for gathering information 

for comparative effectiveness research and then tying provider payments and incentive payments to that information. A health information technology system that is feeding data to some other effort—whether it is private or public or a combination thereof—to 

then study what works could, over the long term, significantly reduce costs. 

But if you just put the health information technology stuff in by 

itself, you do not get that big of a pay out because in a fragmented 

system it does not look like it is that beneficial. 

So the political economy of splitting up the 10 pieces that you described perhaps accurately, unfortunately under the scoring side 

may lead to problems because we have to score each proposal by 

itself. 

Senator ENZI. OK. Of course, in the Senate, we run into a little 

bit of a problem because we tend to work on jurisdictions and the 

doctor evaluation—which I prefer to call the pay-for-best practices—actually comes under the jurisdiction of the Finance Committee. And if the finance piece is combined with the health piece, 

then the Finance Committee may not get sufficient credit. But that 

is a problem that we— 

Mr. ORSZAG. These are problems I cannot solve. 

Senator ENZI. I understand that. But I will be asking some more 

questions in depth on how you come up with just evaluating the 

$47 million instead of giving even an iota of credit on $162 billion 

worth of savings. I mean, that—they do say that to put in that integrated system would cost about $40 billion, one-time. And it does 

have to be an interoperable, integrated system. 

And the reason we are trying to get this piece through is to enable us to reach that interoperability so that we do not have one 

system in Wyoming, another one in New Hampshire, a different 

one in Massachusetts, and a different one in Florida that will not 

interoperate, giving up a huge portion of that $162 billion. 

I always worry that somebody from Wyoming is going to come 

out to Washington and get in a wreck and because their medical 

records are not available, they will die. This would be a way for 

them to carry a card with all of their information on it. 

Mr. ORSZAG. Senator, if I could just add quickly— and I do appreciate the question. One of the reasons we are coming out with 

this report is this is among the various topics where I think CBO 

scores in the past have raised questions about how can it be so different than other estimates that you all have seen? 

One of the things I am trying very hard to do is to make sure 

that while you may not always like the answer, I want you to understand why we reached the conclusions that we did. The report 

and other things will attempt to do that. 

Senator ENZI. It probably would be helpful to have those at the 

time that we get the valuation on the bill instead of almost a year 

later. 

252 

One of the biggest savings, probably, in health care comes from 

prevention. But when CBO looks at the cost of health care and 

medical technology, does it take into account what savings might 

result as diseases are prevented or if they are caught at very early, 

more treatable, stages when it would be less expensive? Is there a 

cost savings in the scoring if a disease or injury such as a stroke 

is dealt with early before it leads to major disability? 

Mr. ORSZAG. There can be. For example, there was tobacco legislation that we scored yesterday or the day before. The reduced rate 

of teen smoking that would occur under the bill would have an effect on low birth weight children, which would then have an effect 

on Medicaid spending. And that was part of our score. 

One of the challenges in many of these settings, such as prevention, is that a lot of times those effects do not show up within a 

10-year window or do not show up dramatically within a 10-year 

window. There may be quality improvements but the cost savings— 

to the extent they do occur—often may occur down the road, which 

is not within the window that has been chosen for evaluating the 

budgetary impact. 

Senator ENZI. That is probably the problem that we have in trying to reward doctors for keeping people healthy, as well. 

I have some other questions but I will submit them in writing. 

Senator GREGG. Thank you, Senator. 

The Chairman needed to go to a meeting, that is fairly important, of his caucus since he is very much involved in the stimulus 

package and has a couple of key amendments that were in the Finance Committee. 

I certainly want to thank you, Dr. Orszag, for what you are 

doing. I think it is exactly what we need to have done. And the 

more information and the faster you can get it to us with some direction on how we can use it successfully is really, really important. 

I am hopeful that the Chairman’s and my proposal on a task 

force is fast-tracked and will be approved. If it is, it is going to need 

this type of information. Even if it is not, we are still going to need 

it because we are going to have to take action. 

So I congratulate CBO for doing this. I congratulate you for your 

leadership in this exercise. And we want to work with you and give 

you whatever you need to be successful here. Thank you very 

much. 

Mr. ORSZAG. Thank you. 

Senator GREGG. Thank you for your time. 

[Whereupon, at 10:48 a.m., the Committee was adjourned.] 

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(263) 

THE PRESIDENT’S FISCAL YEAR 2009 BUDGET 

PROPOSAL 

TUESDAY, FEBRUARY 5, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Murray, Feingold, Nelson, Menendez, 

Lautenberg, Cardin, Sanders, Whitehouse, Gregg, Allard, and 

Bunning. 

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

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. Senator 

Gregg is experiencing some flight delays, so he will be somewhat 

detained but will be joining us shortly. 

I want to welcome the Director of the Office of Management and 

Budget, Jim Nussle. This is Director Nussle’s first appearance before the Budget Committee since his confirmation, so we want to 

especially welcome him. He has, I think, the unenviable job of coming here to defend the President’s budget, but I have no doubt that 

he will do his best. 

As I said yesterday, we have seen this script before, and it is a 

script and a play that leads us to, I think, an unfortunate ending: 

more deficit spending, greater debts, and, unfortunately, a fiscal 

circumstance that will leave the next President inheriting what I 

believe will be a fiscal meltdown. 

Let me just go to the background in terms of what we see as the 

deterioration in the budget picture. 

The President’s budget indicates that for 2008 the deficit will be 

up to $410 billion, near record terms and dollar amounts; for 2009, 

at about the same level. 

264 

But I think that really misses the point, and to me, the media 

coverage and much of the analysis misses the biggest problem that 

we confront, which is the growth of the debt. I really believe increasingly the debt is the threat, and let me indicate why. 


42157.194
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While the President is saying that the deficit for 2008 will be 

$410 billion, the debt will increase by more than $700 billion in 1 

year. The total debt of the United States is now over $9 trillion, 

as we meet here today, some $9.2 trillion. By the end of this year, 

we could be approaching a gross debt of $10 trillion. 

Now, I see this all the time, a confusion between the deficit and 

the debt. The deficit is the difference on an annual basis between 

spending and revenue, but it neglects to take into consideration the 

money that is being taken from Social Security to pay other bills— 

some $200 billion this year alone, none of which is counted in the 

deficit, every penny of which is counted in the debt, every penny 

of which has to be paid back. 

And so when I read in the news media over and over and over 

‘‘deficit of $400 billion,’’ I do not see a word mentioned about the 

increase in the debt. And I never hear the word ‘‘debt’’ leave the 

President’s lips. Never. 


42157.195
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Let’s go the next slide. 

The result of all this is that the gross debt of the United States 

is going up like a scalded cat. As I indicated, by 2009 we now anticipate the debt will be over $10 trillion, headed for $13 trillion, 

and this is the sweet spot of the budget cycle. This is before the 

baby boomers retire. What is going to happen when you put on top 

of this legacy of debt the retirement of the baby boomers? 


42157.196
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And even more startling is foreign holdings of U.S. debt and 

what has happened there. I have shown this chart before, but it becomes even more dramatic as we include the latest numbers. It 

took 42 Presidents 224 years to run up $1 trillion of foreign-held 

debt. This President has more than doubled that amount in just 7 

years. So, increasingly, we owe hundreds of billions of dollars to the 

Chinese, the Japanese, and all around the world. 


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Now the President brings us a budget that says that as a result 

of all this, we have to cut Medicare and Medicaid some $600 billion 

over the next 10 years, and in the same document says, oh, by the 

way, cut taxes $2.2 trillion. Let’s dig the hole deeper, more debt, 

more borrowing from China and Japan. 


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I think this is the way that great nations squander their 

strength and wind up greatly diminished. I look at this budget, and 

what I see is largely a fantasy: no war costs beyond the first half 

of fiscal year 2009; no alternative minimum tax reform beyond 

2008; no spending policies beyond 2009, other than these very deep 

cuts in Medicare and Medicaid. 


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When I look at the war costs, the President says in this budget 

the war is going to cost $70 billion in 2009. Does anybody believe 

that? Does anybody believe that? In 2008, we are almost $200 billion. What is the President forecasting here? That there is an abrupt end to the war in Iraq? Is that the forecast? That must be the 

only possibility to see that kind of dramatic reduction, is that the 

President is forecasting an abrupt end to the war in Iraq. 


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Let’s go to the next slide, if we could. 

When I look at the specific priorities here, again, the President 

trots out proposals that have been completely rejected by Congress 

in the past, both Democratic Congresses and Republican Congresses. The President says cut the COPS program 100 percent, cut 

weatherization assistance—not 50 percent, not 75 percent. The 

President says eliminate it. First responder grants—that is our 

fire, that is our ambulance squads—cut those 78 percent. Cut clean 

water grants 21 percent. Cut community development block grants 

that every mayor will tell you are the most flexible funds available 


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to them to meet contingencies, cut those 20 percent. Cut low-income energy assistance program nearly 20 percent. 

When we look at the legacy of this President, I believe it will be 

summed up in three D’s: debt, deficits, and decline. And that will 

be a tragedy—not just a tragedy for this President’s legacy, but far 

more important, a tragedy for this country. 

If we look back, this President inherited a record surplus, projected surplus of $5.6 trillion, which he touted at the time. Now 

what do we have? Deficits of $400 billion a year and debt increasing at more than $700 billion a year. He inherited a circumstance 

in which we were on track to pay down all publicly held debt. Instead, as a result of his policies, we have a debt that is exploding, 

a debt that will nearly have doubled on his watch. He inherited the 

strongest economy in three decades. Now we have an economy that 

is slowing sharply, so seriously that the Federal Reserve has taken 

emergency action, and this Congress is now contemplating a stimulus package. 

Finally, this President had robust job growth when he came in. 

Now we have the weakest job growth since the Hoover administration. What a record. 


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But that is the fiscal record of this President and, again, tragedy 

for his legacy because at every step of the way he has been wrong. 

Every single year what he has said would be the outcome has been 

wrong. Not just a little bit wrong. Completely wrong. 

You will recall when we started this exercise he said there would 

be no deficits. When that proved not to be true, then the President 

said, well, the deficits will be small and short term. When that 

proved not to be the case, he said, well, they will be small by historical standards. When that proved not to be true, he said, well, 

sometime down the road we will get back on track. 

It has never happened. What has happened is an explosion of 

debt and deficit, a weakening economy, and this country’s future 

fiscal condition gravely jeopardized. This President is going to hand 

off to the next President the worst fiscal condition, I think, in the 

history of this country when you take into account that we are also 

poised to have the baby-boom generation begin to retire, and that 

beginning to retire starts this year and next. And this President 

has done nothing to prepare for it. 

Well, with that, I will end my opening statement and turn to our 

colleague, Senator Bunning, who will give the opening comment for 

the Republican side given that Senator Gregg is somewhat delayed. 

OPENING STATEMENT OF SENATOR BUNNING 

Senator BUNNING. Thank you, Mr. Chairman. 

For the first time this year, the President proposed a budget 

amounting to just over $3 trillion. Our population is now at just 

over 300 million. Therefore, the President’s budget amounts to approximately $10,000 for every man, woman, and child in America. 

Most Americans do not pay $10,000 in taxes, however. Because 

of our progressive tax system, only about 95 million individuals 

and families pay any net Federal income tax at all. Of this 95 million, only about 14 million have a Federal tax liability of more than 

$10,000. These taxpayers, more than 10 million of them, with incomes between $100,000 and $200,000 paid an average of $48,000 


42157.203
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per return in 2006. This productive minority will be asked to pay 

a much higher percentage of their income if the blueprint outlined 

by the Chairman of the Ways and Means Committee is ever enacted into law. Its members face the more immediate threat of the 

alternative minimum tax in the current year and the prospect of 

the largest tax increase in history when the 2001 and 2003 tax rate 

reductions expire. 

When Members of Congress called for more taxes on the rich, 

this group adjusted its behavior to the detriment of the remaining 

286 million. The Federal Government is likely to suffer as well. 

An interesting feature of this year’s budget is that it is divided 

into three parts, with a little over one-third representing all discretionary spending—one-third discretionary spending—and the two 

remaining parts represent mandatory spending and interest on our 

more than $9 trillion in Federal debt. We tend to focus on the third 

representing discretionary spending, but this Committee is responsible for the entire budget, and we should focus on it as a whole. 

I am pleased that the White House has again taken the challenge of entitlement spending seriously. I applaud the administration for tackling the issues of proposing to curb the unsustained 

growth in Medicare and Medicaid and Social Security spending. As 

a member of the Senate Finance Committee and Budget Committee, I look forward to examining the proposals in this budget 

thoroughly with the eye toward making changes that will put us 

on a path toward sustained entitlement programs, ones that we 

can live with, ones that will not bankrupt the country by the year 

2030 if we do not do anything about them. 

Thank you. 

Chairman CONRAD. Thank you, Senator Bunning. 

We will now turn to the witness, and, again, we want to welcome 

on a personal basis—we have strong disagreements with respect to 

budget policy, but this Committee has always treated our witnesses 

respectfully, and we certainly extend that to Director Nussle, who 

used to be the Chairman of the House Budget Committee, and we 

worked closely with him in that capacity. 

We welcome Chairman Nussle to the Committee. Again, I think 

you have a pretty difficult task of defending what I see as the indefensible. But take a shot at it. 

[Laughter.] 

STATEMENT OF HON. JIM NUSSLE, DIRECTOR, OFFICE OF 

MANAGEMENT AND BUDGET 

Mr. NUSSLE. Well, Mr. Chairman, first of all, thank you for your 

hospitality. The more I have an opportunity to sit here, the fonder 

my memories of sitting where you are, and being able to grill the 

witnesses and take the testimony. 

I want to start, if I may, by thanking the Committee and your 

staff for the respectful way I was treated during the confirmation 

process and the expedited way I was handled. I appreciate that, not 

only from you, Mr. Chairman, but from the members. We had 

things to discuss, we had challenges to overcome, but it was done 

in a very respectful way, and I appreciated everyone’s help in that 

regard. 

275 

Second, if I may, just before I begin with my testimony, I would 

like to thank the people who make it possible for the budget to be 

created in the first place. You know, as I told you at the time of 

confirmation, I had just scratched the surface of getting to meet 

many of the extraordinary professionals who work at OMB and 

have done so in many instances for five, six Presidents going back. 

We had a gentleman—a couple who retired this year who would as 

far back as Nixon and Johnson, and they just have done a fantastic 

job. And so many of them labor in obscurity and without a lot of 

credit, but they just do a tremendous job. They do not just work 

on the inputs. They also talk about the outcomes. There is a lot of 

that that goes into a process that puts this together, and I just 

have nothing but high praise for the opportunity to work shoulder 

to shoulder with so many of them. 

Chairman CONRAD. Mr. Director, I might just say some of them, 

after looking at this budget, may be glad for the anonymity. 

[Laughter.] 

Mr. NUSSLE. That is probably true every year, Mr. Chairman. 

And as you know, for the first time, this year we sent the budget 

in an electronic format, an e-budget, and we are proud of it. Now, 

we understand there were some who maybe did not like it. Change 

is always difficult. But I can tell you that the initial reaction from 

those who have had a chance to surf the Web and to use what I 

think is a much more user-friendly, fast, transparent, public way 

to display the President’s budget and some of the priorities, I think 

it has been successful. Certainly there are improvements that can 

always be made, and we would look forward to hearing from not 

only Senators but also from your staff as to ways we can improve 

this going forward. 

There is no question that as a result of the work we have done 

this year, we are just on the cutting edge of what can be, I think, 

a much better process moving forward if we stick together and say, 

hey, let’s try and make this electronic and transparent. 

Mr. Chairman, the President asked me to present a budget and 

in my preparation take into consideration five main goals that I 

displayed here for you in chart format. 

First, he wanted to make sure we addressed the immediate economic challenges. This has been something that has been at the 

forefront for him since he first took office and dealt with a downturn in the economy, the bubble bursting in the dot-com and the 

stock market. He has been addressing economic challenges 

throughout his Presidency and did so this time in a bipartisan way 

with the Congress, and we look forward to that continuing. 

Second, to sustain prosperity for the long term. We know what 

economic growth can do with regard to all of the challenges that 

you, Mr. Chairman, brought up. Whether it is the short-term deficits or whether it is the long-term obligations, economic growth is 

very important. You cannot grow your way out of it, as the old 

phrase used to say. However, economic growth is good, and growth 

can get you a long way in dealing with the challenges. And we 

want to continue to grow. 

He wanted to make sure that we kept America safe. Obviously, 

that is job one of our Constitution as the Commander-in-Chief. It 

is the most important thing. Our economy cannot function; We canVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00281 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
276 

not live in freedom or even have the kind of conversation we have 

today if America does not remain safe. 

He wanted us to balance the budget by 2012 and in doing so not 

take our eye off the ball which he has promoted since he came to 

office, and that is, let’s deal with the long-term entitlement problems, whether it be Social Security, Medicare or Medicaid. We have 

a challenge to meet. He has made proposals every year he has been 

President and will do so again this year. So let me turn to some 

of these. 

First of all, continued economic growth is really the most critical 

element in reducing the deficit, getting back to balance and addressing our long-term challenges. Obviously, in a bipartisan way 

this year, the growth package that has been promoted, which we 

do include in this budget at $145 billion—the President asked for 

1 percent of GDP, and so we included that in the budget—combined with a slowing economy does contribute to a much larger 

short-term deficit. There is no question about that. In fiscal year 

2008, the deficit will be 2.9 percent of GDP. But in fiscal year 2009, 

with economic growth coming back and rebounding, we can see an 

improvement to 2.7 percent of GDP. But both of these upticks in 

the deficit can be temporary and I think can also be manageable 

if we keep taxes low, if we accelerate economic growth, and if we 

keep spending in check. 

Second, let me just say I do not believe we are experiencing these 

short-term deficits because the American people are undertaxed. As 

this slide shows, the tax burden, if you measure it against the 

economy, GDP, it is 18.5 percent, which is higher than the 40-year 

historical average. Now, that may surprise a lot of people who 

think that because of the tax cuts in 2001 and 2003 that there obviously must be a lot less revenue coming into the Federal Government. Well, that was simply not the case. As the tax cuts took effect and the economy grew, actually revenue was quite strong and 

ran way ahead of GDP. In 2005, revenue grew at 14.5 percent, 11.8 

percent in 2006, and we had revenue growth of 6.7 percent in 

2007—all above GDP. And we can have that again if we continue 

to focus on economic growth. 

Revenue has really never been the problem here. Spending is the 

problem. We must do more, I believe, to keep spending in check in 

order to balance the budget in 2012 and address our longer-term 

spending challenges. The budget proposes to keep non-security discretionary spending growth below 1 percent for 2009 and then hold 

it at a level pace for the next 4 years. If debt is the threat, then 

spending must be controlled. 

Also in this budget, we need to terminate or significantly reduce 

151 programs that we identify as programs that are either underperforming, have outlasted their usefulness, or could be better done 

at the State level or by the private sector. By doing so, we save 

over $18 billion in the first year alone—again, by getting spending 

under control. These are programs that are not just—you know, are 

not achieving results. Frankly, you cannot just throw good intentions alone as an answer to justify a program that is not working 

or no longer is a high priority. Focusing on outcomes, not just inputs, I think is the answer here if you want to control spending. 

277 

We also believe that earmark reform is necessary in order to 

change not only the culture in Washington, which has led to lowpriority spending that has been, we believe, wasteful, but has also 

caused nearly 12,000 earmarks that have not been voted on by 

Congress, costing almost $17 billion. 

In addition, mandatory spending, as the Chairman said and so 

many others have said, is really overwhelming the rest of the budget. Sixty-two percent now of all spending is on autopilot, it is automatic. It will occur if Congress and the Executive Branch do not 

take some specific action in order to control that spending. And 

these trends are just not sustainable. As David Walker testified before you last week, the trends are not sustainable. The Fiscal 

Wake-up Tour, which has traveled around the country to wake all 

of us up and wake up the American people to these disturbing 

trends, has suggested that in the next 25 years automatic spending 

could swallow the entire budget, not leaving with regard to revenue 

for some of our basic requirements and responsibilities under our 

Constitution, such as national defense and homeland security. The 

President, therefore, is proposing a mandatory savings package of 

$208 billion over the next 5 years. 

Now, I realize, just reading the press accounts, that this may be 

challenging to Congress, but this package, I would remind my 

friends and members of the Committee, that we are proposing is 

smaller than the effort we took together in a bipartisan way in 

1997 under the Balanced Budget Act of 1997. It is a smaller package. It is a bite-sized piece of what is a much bigger challenge. It 

is a downpayment. And so I would challenge Congress to take a 

fresh look at this. We cannot just put off until tomorrow what must 

be done today. My Dad always told me growing up that tomorrow 

never comes. And I can tell you in Washington tomorrow definitely 

never comes. You have to be able to start tackling those now if we 

going to manage those challenges in the future, and that is why 

within this package the President has proposed reasonable steps to 

get Medicare growth under control. 

Medicare is growing. We propose $178 billion of savings from 

that growth. Medicare will continue to grow at 5 percent. We are 

just asking it to not grow at 7.2 percent. We believe this is a very 

responsible approach and one that was done in 1997 to bend the 

growth curve in order to get a handle on this problem. 

So, in conclusion, I would say to the Committee, the President, 

I believe, addresses within this budget the immediate economic 

challenges that have been undertaken in a bipartisan way. 

No. 2, it does, I believe, ensure sustained prosperity. Economic 

growth is the key in order to accomplish that. It does keep and continue to keep America safe, which we in a bipartisan and between 

branches believe is such an important issue. It balances by 2012, 

and it continues to address the long-term challenges that face our 

country. 

Mr. Chairman, I am pleased to present the President’s budget, 

and I look forward to an opportunity to address your and other 

members’ questions. Thank you. 

[The prepared statement of Mr. Nussle follows:] 

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Chairman CONRAD. Thank you, Director Nussle, for your opening 

statement. 

Let me put up a chart that I used in my opening remarks that 

reflects what is happening to the debt. At the end of the President’s 

first year, the debt of the United States was $5.8 trillion. We do 

not hold him responsible for the first year because he is working 

off the budget plan from the previous President. We are now at 


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over $9 trillion of debt. At the end of the President’s 8 years of his 

responsibility, we will be at over $10 trillion. 

Is this a sustainable course? 

Mr. NUSSLE. I believe that it is not a sustainable course, and, in 

fact, by my calculation about 50 percent of the debt that is added 

and that will continue to be added comes from our mandatory programs—not the programs that, unfortunately, we will talk about 

during the bulk of the appropriations process over the next 6 to 9 

months but, rather, the programs that unless we actually take active effort on both our parts will continue to grow and grow out of 

control. 

Chairman CONRAD. Director Nussle, this is what happens under 

the President’s plan. Take the President’s plan altogether, this is 

the result. You have testified it is not sustainable, and yet that is 

the President’s proposal. 

Mr. Nussle, it is to me not just irresponsible, it is wildly irresponsible to lay out this blueprint for the country’s finances. It is 

just debt on top of debt. 

What do you anticipate the debt will go up this year? 

Mr. NUSSLE. Well, let me get that figure in front of me. 

Chairman CONRAD. Gross debt, how much will that go up this 

year? 

Mr. NUSSLE. Let me see if I have that here. 

Gross Federal debt from 2008 to 2009 is $9.7 trillion to $10.4 trillion. 

Chairman CONRAD. So that is $800 billion. 

Mr. NUSSLE. From 2008 to 2009. 

Chairman CONRAD. So, again, what is the increase then in the 

debt that you are forecasting under this plan? From 2008 to 2009 

it is going to go up $800 billion? 

Mr. NUSSLE. I think you have it about right. Yes, sir. But if I 

may, Mr. Chairman—— 

Chairman CONRAD. Well, let me just say this to you: $800 billion—how much has it gone up since this President took office? 

Mr. NUSSLE. Well, what should we do about it? Let’s do something about—— 

Chairman CONRAD. Well, this is your opportunity to have done 

something about it, sir. You have come—— 

Mr. NUSSLE. We do. 

Chairman CONRAD. You do? You have increased it. 

Mr. NUSSLE. No, sir. 

Chairman CONRAD. The debt last—what did the debt go up last 

year? 

Mr. NUSSLE. Let me tell you what the President—— 

Chairman CONRAD. How much did the debt go up last year? 

Mr. NUSSLE. The President holds non-security discretionary 

spending at near a freeze, No. 1. 

Chairman CONRAD. Yes, but that—let’s talk about—— 

Mr. NUSSLE. No. 2—— 

Chairman CONRAD. That does not talk about the debt, sir. The 

debt. How much did the debt go up last year? 

Mr. NUSSLE. Well, I am willing to consider proposals that will decrease discretionary spending and, for that matter, save much more 

money—— 

296 

Chairman CONRAD. Well, that is good. Now you are working with 

one-sixth of the budget. 

Mr. NUSSLE. OK—— 

Chairman CONRAD. One-sixth. I am talking about—— 

Mr. NUSSLE. Let’s open up the mandatory spending—— 

Chairman CONRAD [continuing]. The final result. You want to 

focus on a sideshow. 

Mr. NUSSLE. No, this—— 

Chairman CONRAD. I want to focus on the result. The result is 

the debt has done nothing under this President’s watch but skyrocket, and the budget you bring before us today, sir, says let’s increase it some more. 

Mr. NUSSLE. All right. Let’s open up mandatory spending. 

Chairman CONRAD. And you say it is not—and it is not sustainable. 

Mr. NUSSLE. Then let’s open up mandatory spending. 

Chairman CONRAD. Let’s open up, sir, everything. 

Mr. NUSSLE. OK. 

Chairman CONRAD. Because you cannot just do it on one-sixth of 

the budget. You have to deal with all of it. You have to deal with 

the spending side. You have to deal with the revenue side. And 

what you all have done—you had your opportunity. This was the 

time to come forward with a plan. And your plan just explodes 

debt. 

Now, let me go to the second point, if I can, which is on war cost. 

War cost in 2008 was roughly $200 billion. Do you agree with that? 

Mr. NUSSLE. A hundred ninety—yes, ballpark, $196 billion requested. 

Chairman CONRAD. It can be 196, 193, depending on what you 

include. In 2009, what has the President got in for war cost? 

Mr. NUSSLE. $70 billion. 

Chairman CONRAD. What does the President have for 2010? 

Mr. NUSSLE. He has not proposed any additional spending for 

war cost in 2010. 

Chairman CONRAD. So he has nothing. Let me just remind you 

of what you said when you were going through confirmation. You 

stated you had been the first Chairman to criticize the Administration on funding of the war. You further stated you believed the administration’s last year had finally made greater progress on budgeting for the war and that you believe strongly that even though 

the estimate of multi-year war cost was uncertain, the correct answer was not zero. And yet as Budget Director, representing this 

administration—and I know you are here representing the President. This is not Jim Nussle’s decision. But you bring before this 

Committee a budget that says the cost for the war in 2010 is going 

to be zero, when you said in the confirmation process if there is one 

thing that is clear, it is that the right answer is not zero. 

Now, how can anybody take seriously this budget, which on one 

of the central costs before us is war cost, and you tell us the war 

cost is going to go down by two-thirds, how can anybody take that 

seriously? 

Mr. NUSSLE. Well, I think part of the challenge here, Mr. Chairman, is that because it is not zero, we also know that it is currently—— 

297 

Chairman CONRAD. But it is zero in your budget for 2010. There 

is a big zero. 

Mr. NUSSLE. But, Mr. Chairman, Congress has still not delivered 

on the war funding for this current year. It is not zero for this year 

either. 

Chairman CONRAD. No, no, but we are talking about the President’s budget. You are here defending the President’s budget. The 

President’s budget says all of a sudden war cost is going to go down 

dramatically this year, and next year it is going to be zero. 

Mr. NUSSLE. No, that is actually not what we are saying. What 

we are saying—— 

Chairman CONRAD. Well, that is what is in your budget. 

Mr. NUSSLE. Well, let me—if I may explain. 

Chairman CONRAD. Please. 

Mr. NUSSLE. May I explain? The President proposes $70 billion 

for a couple of reasons. First of all, Congress has still not delivered 

on, I believe, their responsibility to fund the troops in the field who 

are there now. We know that money is necessary. We know that 

the remainder is not zero—— 

Chairman CONRAD. So is the President telling us, Director 

Nussle, that what Congress should approve is $70 billion for the 

war cost in 2009? Because that is what is in the budget. 

Mr. NUSSLE. As a downpayment, that would be the important 

amount to—— 

Chairman CONRAD. But is that the full amount that the President believes would be the responsible thing for Congress to do in 

2009, to budget $70 billion? 

Mr. NUSSLE. If I may conclude, I would be happy to give you the 

rationale behind it. 

Chairman CONRAD. There does not appear to be a rationale. I do 

not know how you can say there is a rationale when the war cost 

last year was almost $200 billion, and in the President’s budget he 

is saying for this year it is $70 billion—— 

Mr. NUSSLE. If the war costs last year were $200 billion, how 

come we do not have the money yet? 

Chairman CONRAD. Why don’t you have the money yet? 

Mr. NUSSLE. Yes. Why don’t we have the money yet? When is 

Congress going to send us—— 

Chairman CONRAD. How much have you got? 

Mr. NUSSLE [continuing]. The money? 

Chairman CONRAD. How much have you got? 

Mr. NUSSLE. When is Congress going to send us the rest of 

the—— 

Chairman CONRAD. How much money have you got—— 

Mr. NUSSLE [continuing]. Billion dollars? 

Chairman CONRAD. How much money has been provided? 

Mr. NUSSLE. Barely $87 billion. So when are we going to get the 

rest of the funding for the troops in the field? 

Chairman CONRAD. Well, the President is asking this year—— 

Mr. NUSSLE. It is difficult to budget for next year or for 2 years 

down the line if you have not paid your bills for this year. How do 

you do that? You have to—— 

Chairman CONRAD. Well, I will tell you—— 

Mr. NUSSLE [continuing]. Pay your bills for this year. 

298 

Chairman CONRAD [continuing]. If you do not budget the—— 

Mr. NUSSLE. We know the bills are coming due, and it is not 

zero. 

Chairman CONRAD. Yes, well, in the President’s budget for 2010 

it is zero. 

Mr. NUSSLE. Well, we do not know—— 

Chairman CONRAD. And this year, the President is saying—— 

Mr. NUSSLE [continuing]. What it will be in 2010. 

Chairman CONRAD. This is not Congress’ document, sir. This is 

your document. Your document is telling this Congress that the 

amount of money you intend to spend on the war in this year, $70 

billion. 

Mr. NUSSLE. Well, in 2009—— 

Chairman CONRAD. That is not credible. 

Mr. NUSSLE. Well, we believe that in—— 

Chairman CONRAD. And 2010, you are going to spend zero? That 

is what is in your budget, in your document. Not a congressional 

document, your document. And it is not credible. It is not credible. 

I do not know of anyone that would consider it credible. 

I have used my time. We welcome Senator Gregg. 

Senator GREGG. Well, I apologize to the Director. Unfortunately, 

I had some airplane problems getting in here. But since I was not 

here in the allotted time, and since it is our tradition to recognize 

people at their point of arrival, I would yield to whoever on my side 

was next. 

Chairman CONRAD. Senator Allard? 

Senator ALLARD. I think Senator Bunning was here before me, 

but do you want me to go? 

Chairman CONRAD. Senator Bunning made an opening statement, but if you would like to defer, we are certainly glad to have 

Senator Bunning—— 

Senator BUNNING. I would like to followup on some of the questions that have been asked. 

Director Nussle, because of the unsustainable growth in the entitlements, basically Medicare, Medicaid, Social Security, and the 

other entitlement programs that we have, we have been told time 

and time again that we cannot afford to make the 2001 and 2003 

tax cuts permanent. The Chairman of the Ways and Means Committee also was so troubled by the looming deficit that he proposed 

an extraordinary 4-percent surtax on gross income on behalf of his 

party last year. Even so, in your budget you stubbornly cling to the 

idea—so out of tune with conventional wisdom here in Washington—that we should not increase taxes or allow the 2001 and 

2003 tax cuts. 

Can you explain to me why the conventional wisdom is so wrong? 

Mr. NUSSLE. Well, I guess first of all I would say to the Senator 

that the President believes making these tax cuts permanent is important for the economy, No. 1, in order to promote economic 

growth, sustained for the future. 

No. 2, that there are 116 million taxpayers across the country 

who would see their taxes go up an average of about $1,800 a person if, in fact, those tax cuts were not made permanent and would 

all of a sudden come back as a looming tax increase. 

299 

Third, I think you can see that the challenge over the course of 

the last number of years has not been because of lack of revenue 

in Washington. The revenue growth has been strong and sustained. 

It is a matter of not dealing with the spending challenges. 

I doubt seriously that I will hear anyone go below the President’s 

budget today. There may be a few who may propose one or two programs, but my bet or my guess is that there will not be a cry to 

go higher than $208 billion in mandatory spending savings or lower 

than the President’s number with regard to discretionary spending. 

The spending is out of control, and we have to control spending. 

And, yes, the debt is a challenge, yes, the deficit is a challenge, yes, 

we have to deal with wars, yes, we have to deal with the current 

economic challenge. But I can tell you that it makes it harder to 

increase spending at that same time. It makes it more challenging 

if you increase and do not deal with the entitlement spending at 

that same time. And that is why the President has proposed as 

part of this budget an attempt to begin to tackle both the spending 

and the growth of entitlements. 

Senator BUNNING. Let me get to one of the questions that the 

Chairman was hammering at. Last year, the President requested 

$196.4 billion for combat operations in Iraq and Afghanistan for fiscal year 2008. Congress approved less than half of that, about $70 

billion for the general operation and $16.8 billion for mine-resistant, ambush protection vehicles. 

What effect has Congress’ piecemealing funding of the war had 

on this year’s Department of Defense baseline budget? Thanks to 

increased politicalization of the Iraqi war by some of my colleagues, 

do you anticipate that the Department of Defense will become increasingly reluctant to streamline more of their anticipated costs in 

the baseline budget as opposed to emergency supplementals? 

Mr. NUSSLE. Well, it does make it very difficult, Senator, for the 

Department of Defense to operate on a piecemeal approach. In fact, 

this year, it not only did not get the war funding on time for our 

troops in the field, but it also had to live within its base budget 

and supply not only the base services from the Department of Defense but also fund the war at the same time. It is the reason why 

I think the President has made a decision not to send a detailed 

supplemental. We sent a detailed supplemental last year. It did not 

work out so well, for a couple of reasons. First, Congress did not 

consider it, still has left about $108 billion left to consider. We 

know that the number is not zero. We know it is at least $108 billion, No. 1. 

No. 2, even after we sent up the detailed request a year ago, it 

changed. It changed after the Petraeus testimony and report from 

the commanders in the field as to what was happening and what 

needed to happen. And so the strategy changed; therefore, the 

funding changed. 

Third, it also responds to a need not to make a decision and tie 

the hands of our commanders until General Petraeus has an opportunity to come back and testify yet again this year, most likely in 

March or early April. 

And then, finally, funding the war at $70 billion in 2009, yes, we 

know that is not the full amount, but we do not know the full 

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in-Chief who can make the decision about what that strategy ought 

to be, we decided to fund it to a reasonable time after this President has left office, to give that flexibility to the next Commanderin-Chief to make the decision about not only what the strategy 

should be but also what the funding level should be. 

Senator BUNNING. I will get back—my time has expired, but I 

wanted to get back to the mandatory spending. Thank you. 

Chairman CONRAD. Thank you, Senator. 

Senator Sanders? 

Senator SANDERS. Thank you very much, Mr. Chairman. Jim, 

thanks for being with us today. 

I strongly concur with Senator Conrad’s comments about what a 

disastrous budget this is and the very negative impact that it will 

have on the future of this country and our kids and our grandchildren. But I want to take this discussion a little bit away from 

the issue of the national debt, as important as that is, and the deficit to talk about what this budget means to ordinary human 

beings and to try to understand the moral values that have been 

placed in this budget, or I perhaps should say the lack of moral values. Senator Bunning a moment ago talked about tax burdens in 

this country, but let me talk about who pays the taxes, who earns 

the money in this country. 

Mr. Director, as I am sure you are aware, the United States has 

by far the most unequal distribution of income and wealth of any 

major country on Earth, and increasingly we are looking more like 

Brazil and Mexico than we are like Europe and Scandinavia and 

other industrialized countries. 

When Senator Conrad talks about legacy for this President, what 

we should be aware of, since President Bush has been in office, 5 

million more people have slipped into poverty, the middle class has 

shrunk, median family income has declined by over $1,000. Eight 

million Americans have lost their health insurance. Three million 

Americans have lost their pensions. And, yes, some people have 

done very well, and those are the people on top. And of all of the 

statistics that we throw out around here, I want to throw out one 

statistic, and I want to get your comment on it, Director Nussle. 

According to the latest reports from the IRS, the wealthiest onetenth of 1 percent—one-tenth of 1 percent; 300,000 men, women, 

and children—now earn more income than do the bottom 150 million Americans. One-tenth of 1 percent, more income than 50 percent of the American people, and that gap is growing wider. 

What is your sense about what it means to the future of this 

country and economic justice that we have such an unequal distribution of income and wealth? 

Mr. NUSSLE. Well, first of all, Mr. Sanders, Senator, I have not 

thought about that question. I will—— 

Senator SANDERS. Don’t you think it is a question that we should 

think about? 

Mr. NUSSLE. I will give it some thought. I have given some 

thought to tax distribution and tax reform, and I would agree with 

you that our Tax Code needs to be reformed, and there are problems within our Tax Code that need to be rooted out. We have the 

top 1 percent of the Tax Code of the people paying taxes in this 

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country pay 39 percent of all of the taxes. The top 5 percent pay 

59 percent—— 

Senator SANDERS. But I have just given you—— 

Mr. NUSSLE [continuing]. Of all of the taxes. 

Senator SANDERS [continuing]. An example of the fact that the 

wealthiest one-tenth of 1 percent earn more income than do the 

bottom 50 percent. 

Mr. NUSSLE. But they also pay taxes, don’t they? 

Senator SANDERS. Of course they pay taxes, but not proportionate to what they earn. 

Let me ask you another question, a moral question. Let’s forget 

about being in the U.S. Senate. Let’s get down to basic morality. 

In your budget, you propose over $700 billion in tax breaks for the 

wealthiest three-tenths of 1 percent—$700 billion in tax breaks for 

millionaires and billionaires at the same time as you want to eliminate, among other programs, the Low-Income Weatherization Assistance Program, as you want to make massive cuts in the 

LIHEAP program, which you are very familiar with. Well, in 

Vermont, and all over this country—in Iowa, I dare say—it is getting cold. Older people cannot afford to keep their homes warm. What is the moral justification for giving over $700 billion in tax 

breaks to millionaires and billionaires and then cut back on programs which keep people warm, which provide health care for desperate people, and which provide many other basic necessities? 

Give me the moral justification for that. 

Mr. NUSSLE. The tax cuts that the President proposed in 2001 

and 2003 are distributed much further than the top one-tenth 

of—— 

Senator SANDERS. But I have given you an example of how it impacts the top three-tenths of 1 percent, $700 billion. Tell me why 

the richest people in this country need tax breaks when poverty is 

increasing. 

Mr. NUSSLE. I would guess under that that you received a tax 

cut. 

Senator SANDERS. I may have. But I am talking about millionaires and billionaires. And I do not need a tax break. You do not 

need a tax break. Tell me why should the richest people—— 

Mr. NUSSLE. Why don’t I need a tax break? 

Senator SANDERS. Because you are doing well and other people 

are going hungry in America, and people are—the middle class is 

shrinking. 

Mr. NUSSLE. And so it is my responsibility—— 

Senator SANDERS. I am not talking about you. I am talking about 

millionaires and billionaires. 

Mr. NUSSLE. Then take anyone as a taxpayer—— 

Senator SANDERS. I will give you an example. You want to repeal 

the estate tax. Is that correct? All of the benefits of the estate tax 

go to the richest three-tenths of 1 percent. If the estate tax is completely repealed, the Walton family, which is worth $80 billion, 

which owns Wal-Marts, will get over $30 billion in tax relief. Do 

you think the Walton family needs $30 billion in tax relief when 

you are cutting back on health care, when you are cutting back on 

programs that feed hungry people, hungry senior citizens? Let me 

hear the moral—your administration talks a lot about morality and 

302 

family values. Now, tell me about the morality of giving tax breaks 

to the Walton family worth $80 billion and cutting back on the 

needs of the most desperate people. And throw in there a justification for raising the fees for our veterans for getting into the VA 

hospital, significantly increasing them, which will drive veterans 

off of the VA. 

Mr. NUSSLE. Well, these are the veterans who have incomes that 

are higher than—— 

Senator SANDERS. Yes, $27,000 a year. In other words, I want to 

hear a simple—Jim, man to man, man to man, you tell me about 

tax breaks for billionaires and cutting back on the needs of veterans and low-income people. 

Mr. NUSSLE. First of all, I do not know what the tax bill is for 

the Walton family. I do not know how much they pay. My—— 

Senator SANDERS. My estimate is they will save $30 billion 

through the repeal of the estate tax. Tell me why they need a $30 

billion—— 

Mr. NUSSLE. What do they do with that $30 billion then? 

Senator SANDERS. I have no idea, but I will tell you—— 

Mr. NUSSLE. But my bet is that they are quite philanthropic, as 

are many in that situation, and, again, I do not have personal 

knowledge about what they do with it, but they earned it—— 

Senator SANDERS. I am glad you are concerned about the Walton 

family. Some of us are concerned about—— 

Mr. NUSSLE. Well, no, you brought up the Walton family. I do not 

even know them. I have never met them. 

Senator SANDERS. But you are worried, your Administration is 

protecting their—— 

Mr. NUSSLE. I am not worried—I do not think the Waltons would 

tell you that we ought to be worried about them either. 

Senator SANDERS. Good. Probably not. 

Chairman CONRAD. Senator Gregg. 

OPENING STATEMENT OF SENATOR JUDD GREGG 

Senator GREGG. Mr. Chairman, if I might, just as a point of personal privilege, take a couple minutes here and then yield to Senator Allard and later I will come back and reclaim the balance of 

my time. But I do think it is important on this tax policy issue, because Senator Sanders in his usual eloquence has raised the issue, 

presenting the Vermont approach to it. Let me present the New 

Hampshire approach to it. 

If you could put up the first chart, under the tax policy which 

we presently have today, we are generating more in revenues than 

we have historically generated. We are up to about 18.7 percent of 

gross national product is now coming in in revenues as compared 

to 18.2 percent of gross national product. 

303 

Please put up the second chart. And the highest 20 percent of 

taxpayers in this country, income taxpayers today are paying more 

in taxes as a percentage of the total burden than they were during 

the Clinton administration. In other words, the top end of American income people are paying more in taxes as a percentage of the 

total burden of our Federal tax burden than the lower—than they 

were under the Clinton time. 


42157.189
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If you will go to the next chart? And presently today the bottom 

40 percent of people who have earned income in this country are 

getting more back—most of them do not pay income taxes. They 

get an earned income tax credit. They are getting more back in tax 

benefit through the EITC, almost twice as much as they got under 

the Clinton period. 


42157.190
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So we now have a tax law which, first, generates more revenue— 

more revenue—than has historically been generated for the Federal 

Government; second, taxes people at the high income and generates 

more revenue from high-income individuals; and, third, gives back 

more income to people in the lower-income brackets. That is called 

progressivity. It is also called a tax policy that works. Why does it 

work? Human nature. Human nature. You give people a reasonable 

tax rate, which is what we have done; you give people a reason to 

go out and be productive, to take that risk, to be the entrepreneur, 

to create that new job, they create economic activity. Economic activity does one very big thing. It creates jobs for Americans. It does 

a second very big thing. It creates a revenue for the Federal Government. And that is what our tax policy has done under this administration. 


42157.191
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42157.192 42157.193
307 

So I happen to disagree with the Senator from Vermont. We do 

disagree. That is why he lives in Vermont and I live in New Hampshire. We have the lowest tax burden per capita in the country. 

They have one of the highest. That is just a fundamental difference. 

Senator SANDERS. Will my friend from New Hampshire yield for 

a brief second? 

Senator GREGG. Not on my time. 

Senator ALLARD. I want to reclaim my time. I thank you very 

much. 

Senator GREGG. Not on my time, but I am sure you will get another second. That was my interlude. 

Senator ALLARD. And I also might note, you have a lot of people 

immigrating to New Hampshire, too. I assume that has to do with 

the lower tax burden. 

Senator GREGG. Yes, and we have a few people who come over 

from Vermont occasionally to buy a bottle of liquor, and we appreciate that. 

Senator ALLARD. Well, thank you for that point of interest because that is the point I wanted to make, Senator Gregg: we have 

seen revenues increase not only at the Federal level with the tax 

cuts of 2001 and 2003, but we have also seen revenues increase at 

the State level. And, of course, when you see that happening, there 

is money available to help to take care of the social needs that my 

friend from Vermont had talked about. 

I have a couple questions I would like to discuss with you. Obviously, we have had a problem with the debt, total debt, no matter 

which administration has been in power. That is because we have 

to do some major reform as far as mandatory spending is concerned, and I think you agree with that. You explained that, Mr. 

Nussle. 

I notice in balancing the budget that we see a decrease in spending under current law. Under current law, there is a 7.2-percent 

average increase, and then under the policy proposed in the budget, there is a 5-percent increase in budget policy on the Medicare 

spending section. 

Can you explain to me what policies those were that were put 

in place that drove that spending down on Medicare? 

Mr. NUSSLE. Well, there are a number of them that we are proposing. Many of them come from MedPAC, examples of policies 

that have been tried and true for many, many years, some of which 

were tried back in 1997 as well in a bipartisan way, and some are 

just a matter of allowing current law to continue. 

For instance, with regard to the doctors, we allow current law to 

just continue, and there is a natural decline in the amount of reimbursement for physicians. We freeze providers for 3 years. We establish competitive bidding for lab work. We do a number of things 

with regard to Medicare, encouraging hospitals under Medicare to 

be more efficient and productive and continue to promote quality 

and information technology, to root out errors and mistakes. So 

there are a number of things that we have done to build to this 

$178 billion figure, but we stand ready to work with Congress, if 

Congress is ready to work in a bipartisan way similar to 1997, to 

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look at other reforms and ways that we can curb the growth in 

Medicare. 

We want Medicare to grow. Medicare will continue to grow even 

under the President’s policy at 5 percent. It just will not grow at 

the current, what we believe is an unsustainable rate at 7.2 percent, and that is the basis for that. 

Senator ALLARD. And then the challenge that we have now before the Congress is to either decide to support your suggestions as 

far as holding down spending or Medicare, or to come up with our 

own plan. And I commend you for coming up with a plan in order 

to reduce spending in Medicare. I think the burden on us now as 

Members of Congress is to look at your plan and, if we have a better idea, make it better—if we want to cut it more, look at those 

options. 

Mr. NUSSLE. Yes, there is no question that the President has to 

be the first one out of the foxhole and show his cards on exactly 

what he wants to do. The question is: If, in fact, the—if debt is the 

threat, if the deficit is a concern, then we can control more spending. If the debt is a threat, we can go further with regard to our 

mandatory programs. You know, these are things that we can certainly consider, but, again, I have not heard anyone yet in any of 

the press statements suggest that we did not go far enough in cutting spending or we did not go far enough in reforming entitlements. In fact, most have said as much as—even today, we heard 

that the Majority Leader of the Senate suggested we are not even 

going to do appropriations this year. We are going to wait for a better deal under a President who might be willing to spend more. Or 

we are going to not worry about what happens with the entitlement spending this year because it is an election year. 

Well, we all know, I mean, friends, it is always an election year 

in Washington. We know that. I mean, my goodness, I think we 

have come to realize that over the terms of our time and careers 

here. 

So it is always difficult to make these changes, but we have to 

do it if we are going to bend the growth curve and get this growth 

under control. 

Senator ALLARD. Mr. Chairman, I have one more question if I 

might. 

If you look at the chart here on balancing the budget, it is deficits/surpluses as a percentage of gross domestic product. We see a 

jump in the deficit between 2007 and 2008. We see a decline in 

deficits 2004 to 2007, from 3.6 percent down to 1.2 percent. And 

then in the 2008 budget, we see a jump in the deficit to 2.9 percent. Can you explain that jump to us, please? 

Mr. NUSSLE. From 2008 to 2009? 

Senator ALLARD. 2007 to 2008. 

Mr. NUSSLE. Oh, that is—— 

Senator ALLARD. You see a jump there in deficits, and then we 

see it is sustained at that level at 2.7. And then it takes a pretty 

dramatic drop down to 1 percent. You have a spike there for 2 

years. I wonder if you might explain that. 

Mr. NUSSLE. Well, the biggest challenge is what we have certainly been talking about. Obviously, we are funding a war during 

this period of time. We are also funding in a bipartisan way a 

309 

growth or stimulus package. Both of those obviously have a dramatic impact on the budget. The downturn in the economy and the 

slowing of revenue growth, particularly from corporate receipts 

have added to that, and that is the reason why you see some of the 

large jump from 2007 to 2008. There is no question that those have 

been probably the three biggest drivers to that effect. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Chairman, I have a statement that I would like included for 

the record at the beginning of the hearing. 

Chairman CONRAD. Without objection. 

Senator MENENDEZ. Thank you. 

[The prepared statement of Senator Menendez follows:] 

310 


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Senator MENENDEZ. I welcome the Director. I will say that it 

seems that you are as combative as the Director as you were as a 

Member of Congress. So it is interesting. 

Let me just say I believe this budget is a continuing legacy of lost 

opportunities, lost priorities, and misplaced values. I think we 

could have seen a budget in this last year of this Presidency that 

would have provided and built on the legacy for hope. Instead, we 

leave working Americans to fend for themselves on a variety of 

these programs that are critical to their ability, particularly in a 

struggling economy, we leave them behind. We leave a record, if we 

were to adopt this budget, of fiscal irresponsibility, turning a surplus into the five highest deficits that the Nation has seen. And, 

you know, my colleague Senator Sanders I think put it aptly. We 


42157.185
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could have waged the war on income inequality. Instead, we used 

fiscal policies that spent more than $2 trillion on tax cuts skewered 

to the wealthiest 1 percent of the country, and all we hear about 

from the Director is why don’t we cut further on the discretionary 

side that helps average working Americans. 

But, most importantly, what is so alarming to me—and I think 

the Chairman pointed it out, and I want to pursue that a little bit 

more—is that the war funding—which is not paid for, by the way. 

It is not paid for. It is totally irresponsible and deceiving to put the 

amount in this budget that has been put in when, in fact, we are 

far away—know, all of us know, that there is far more to be asked 

for. 

So as far as I am concerned personally, as one member of the 

Committee, this budget is not up for negotiation. It is dead on arrival. And so the question is: Where do we go from here? 

I want to ask you, Director, to followup, you know, the President is asking for $70 billion for Iraq while at the same time stipulating 

that more requests are on the way. He boasts by, you know, projecting surpluses, but, on the other hand, he is concealing the true 

costs of the war. Isn’t the real reason—isn’t the real reason that 

you only got $70 billion when we spent $193 billion, you know, 

when you have put in $193 billion, when your experiential factor 

is clearly there—you know how many troops you have, you know 

how much cost it is to do this operation. This is now 5 years. To 

come before the American people and put $70 billion, isn’t that dishonest? 

Mr. NUSSLE. If it is, in fact, a fact that we know that it is going to cost $193 billion, then when will Congress be sending us the 

check to pay for that? 

Senator MENENDEZ. You know, the beauty of the relationship we 

now have, Director, is that I get to ask the questions and you get 

to answer them. And the bottom line is I want to know. Is it dishonest to have 70—clearly, you believe—— 

Mr. NUSSLE. No, I do not believe it is. 

Senator MENENDEZ. Can you—if we put you under oath—— 

Mr. NUSSLE. I do not believe it—— 

Senator MENENDEZ [continuing]. Could you tell this Committee that all we are going to need is $70 billion? 

Mr. NUSSLE. And I acknowledged—— 

Senator MENENDEZ. Is that what you would testify to? Yes or no. 

Give me a yes or no. 

Mr. NUSSLE. I acknowledged that earlier, yes, sir. 

Senator MENENDEZ. That we would only need $70 billion? 

Mr. NUSSLE. I acknowledged that earlier, that, of course, it is 

going to cost more than that, yes. 

Senator MENENDEZ. Then why not put that in the budget and be 

honest? 

Mr. NUSSLE. Because we don’t know how much it is, and we 

rarely put supplementals into the budget. Last year was the first 

time it was done. We put it in specifically and—— 

Senator MENENDEZ. Isn’t this exactly the problem? 

Mr. NUSSLE. —Congress did not act. 

Senator MENENDEZ. The exact problem we have is that by hiding 

the true cost of the war and adding it onto debt, the supplemental 

313 

is—you put in supplementals knowing how many men and women 

are in the field and the costs, and you have a well-established experiential factor. So even with, you know, the reduction of the surge 

by mid-May or end of May, you know what it is going to cost to 

continue to operate them, clearly, beyond this administration. And 

so you do that purposely. 

Let me ask you one other question. We talk about, you know, the 

realities of working families, health care. This budget does not 

have enough money in it to simply keep the children who are presently under the Children’s Health Insurance Program funded moving forward. Isn’t that true? 

Mr. NUSSLE. No, that is actually not true, Senator. We fund 

$19.7 billion for SCHIP moving forward, which takes into consideration the population growth and not removing any of the children 

that are—— 

Senator MENENDEZ. In fact, States need at a minimum $21.5 billion over the next 5 years simply to maintain their current program. So who are you knocking off? 

Mr. NUSSLE. Well, that is not—we do not calculate it quite that 

way, Senator. We believe that the program is for poor, uninsured 

children and—— 

Senator MENENDEZ. So, in other words, you are going to cutoff 

children over 200 percent. 

Mr. NUSSLE. We believe that the program should be for poor, uninsured children. 

Senator MENENDEZ. You are going to cutoff children over 200 

percent. That is what you are telling me. 

Mr. NUSSLE. This is not an entitlement. It is a program that—— 

Senator MENENDEZ. Can you just give me a simple, direct answer? You are going to cut children over 200 percent. 

Mr. NUSSLE. We believe there are other options for families that 

are over the poverty level that have the ability to pay for insurance 

or that are already on insurance in many instances. So it is for 

poor, uninsured children. 

Senator MENENDEZ. I agree, but the reality is that, you know, 

there is a wide swath of States across the country that, in fact, 

when you cut children over 200 percent—and I know what you are 

referring to is the Medicaid match. The reality is that what you do 

is shift the cost to the State. And that is what this budget is replete of. And the COPS program, you zero it out. Crime has gone 

up for the last 2 years in this country, and, in fact, you zero it out. 

That means shifting the cost to municipalities. You shift the costs 

on Leave No Child Behind. You shift the costs on the Children’s 

Health Insurance Program, and that means the local taxpayers— 

a former mayor—pays more. That is what this entire budget is 

about: hide the war funding, shift the costs to the States, add to 

the debt, while we take care of the wealthiest people in the country. That is not, in my mind, the set of values that average working 

Americans have. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Gregg? 

Senator GREGG. Thank you, Mr. Chairman. I understand my 

time is a little truncated because I took some of it earlier, but let 

me just make a couple points here. 

314 

First, I do not think the other side of the aisle necessarily comes 

at this with clean hands on the issue of fair and accurate budgeting. Last year, we saw a Democratic budget which claimed it was 

going to use PAYGO as the mechanism for disciplining spending. 

Put up the PAYGO chart. Well, they spent $146 billion by adjusting, abating, going around and basically playing games with the 

PAYGO rules, so that did not work. 

Then put up the SCHIP chart. Then they brought forward an 

SCHIP proposal which basically had a drop-off which represented 

a $46 billion hold when you got outside the 5-year window. So that 

did not make any sense. 

The budget also assumed a huge amount of revenues from just 

basically doing a better job collecting revenues. None of those revenues were realized. In the supplemental, you added $17 billion of 

domestic spending, which was basically earmarks. In the general 

budget, you increased spending by $22 billion, which, if the President had not insisted on maintaining some fiscal discipline on the 

discretionary side, would have been spent, and instead we ended 

up with about half of that being spent, if you factored out all the 

emergencies. 

So I wish there was some realistic effort around here to control 

spending, but it certainly is not coming from the other side of the 

aisle. And I think, yes, you can point fingers at this budget. I have 

pointed a few fingers at this budget because this budget has some 

serious flaws from a standpoint of accuracy, and even more serious 

flaws from a standpoint of policy. But it is not just one side of the 

aisle that has been playing games around here. 

The war cost issue is a legitimate issue. I was not here for the 

exchange. I understand it was enjoyable and good theater between 

the Chairman and the Director. But the simple fact is you cannot 

put a $70 billion figure in this budget and claim that you are funding the war—unless you are going to say that that is all it is going 

to cost, and we know that is not all it is going to cost. There should 

be full transparency on the war cost, and last year the administration sent up a real number, and I regret they did not do it this 

year. 

There are also other issues in this budget which bother me, but 

let me go to the more philosophical question here. This budget is 

driving us toward—not necessarily this budget, but the economy, 

coupled with the stimulus package, coupled with the war cost, is 

driving us toward a $400 billion deficit in the year 2009 and a potentially bigger deficit in 2010. 

I guess my question to you, Mr. Director, is: Here we are on the 

cusp of how we are going to deal with the tax policy question of 

maintaining capital gains and dividends rates. Is it in the better 

interest of the long-term strength of this economy that we maintain 

the present rates on capital gains and dividends, which the administration put into place at the beginning of this administration? Or 

is it better that we have the stimulus package? 

Now, I recognize it is not in your view an either/or issue, but 

from a standpoint of just fiscal policy, which would have a stronger 

impact on the long-term structure of our economy? 

Mr. NUSSLE. On the long term, I do not think it is even a question that it is making the tax cuts permanent. This is the shortVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00320 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
315 

term challenge with the economy, and that is why a short-term 

stimulus is necessary. But the President has said—and I certainly 

agree—that for the long-term strength of our economy, making the 

tax cuts permanent and not having an automatic tax increase in 

2011 is exactly the right policy. 

Senator GREGG. Well, here is the problem we have. The stimulus package is going to cost us $150 billion. When you compound it 

with its interest, it is around $200 billion over 5 years. That means 

we are going to be heading toward a deficit probably in the $400 

billion range in the year 2010. 

It will be very hard. that makes the argument for maintaining 

the cap gains and dividends rates much more difficult when you 

are dealing with those size deficits. I happen to think that they 

generate revenue, but there are not a lot of people around here who 

necessarily subscribe to that view. And I am perfectly willing to 

argue that until—you know, until I lose, which I will. But the point 

is if we do this stimulus package, what do we get for it other than 

putting ourselves into the whole $400 billion at—other than aggravating the deficit by $150 to $200 billion and creating a disincentive or an atmosphere where it is going to be much harder to maintain those good fiscal policies which are a lower rate on capital formation on dividends. I mean, what are we getting for this stimulus 

package? We are spending—most of this money is going to be sent 

out as individual rebates which are going to be spent on 

consumable items made in China. So we are going to stimulate the 

economy of China. And we will get the one-time accelerated depreciation, which will assist. But as a practical matter, it will probably 

all occur after we have moved into some transition on this slowdown, hopefully. And other than being a wonderful political statement that the Congress can join with the administration in a 

‘‘Kumbaya’’ event and make everybody feel good, what substantively when we get to this that we put our—are going to be 

digging such a deeper hole on the deficit that it will make it so 

much harder for us to deal with the tax policy, which is really important to us, that is coming down the pike? 

Mr. NUSSLE. Well, Senator, it is—and all of this, of course, is 

forecasting based on what economists will tell you, and they may 

disagree. But in the short term, by the third quarter, they estimate 

that it could and would bump GDP by six-tenths of a percent. That 

is enormous, particularly when you see what that does for job 

growth, which is also estimated at about 500,000 jobs. 

Senator GREGG. Well, that works out to $300,000 per job. Divide 

500,000 jobs into $150 billion, you get $300,000 per job. 

Chairman CONRAD. They are really good jobs. 

Senator GREGG. Right, they must be good jobs. Well, they are 

going to pay a lot in taxes, I will tell you that much. 

[Laughter.] 

Senator GREGG. But—well, anyway, I think I have made my 

point. It was almost rhetorical. So my time is up. 

Chairman CONRAD. I just want to take a moment on the PAYGO 

because the Ranking Member likes to put up this Swiss-cheese-go 

chart, but let’s go back to reality. We had a positive balance on the 

PAYGO scorecard until the tax relief provided for in the alternative 

minimum tax. That meant the spending initiatives that we had 

316 

were paid for. They did not increase the deficit or the debt. That 

is a fact. 

The alternative minimum tax is the one place where we diverged 

from PAYGO rules. That was with respect to providing tens of millions of people tax relief in this country, and that was not paid for. 

I did not agree with that. The administration insisted on providing 

the alternative minimum tax relief without paying for it, and a significant majority of Congress went along. That is also provided for 

under PAYGO because if you get more than 60 votes, you can 

waive the PAYGO rules. The fact is until that moment we had a 

positive balance on the PAYGO scored. 

Senator GREGG. Well—— 

Chairman CONRAD. Senator Murray? 

Senator GREGG. Mr. Chairman? 

Chairman CONRAD. Senator Murray is recognized. 

Senator GREGG. You do not want to hear the other side of the 

argument? 

Senator MURRAY. Thank you, Mr. Chairman. 

Chairman CONRAD. I will, I am sure. 

Senator MURRAY. Well, thank you, Mr. Chairman. And, Director 

Nussle. You know, a lot has been discussed this morning about the 

honesty of the budget proposal that has come before us, focused a 

lot on the war in Iraq, and I think we are all very disconcerted by 

that. But let me go to another point in this budget that I think is 

not very honest, and it is the Department of Energy’s environmental management request. 

You know, a budget has to be not only a statement of priorities 

and a budget blueprint, but it also has to share honestly with the 

American public the obligations that we have as a country. As you 

know, the Hanford site is in my home State of Washington. I wish 

it was somewhere else, but it is in my State. We have to deal with 

it. But it is not just my State. The entire country has to deal with 

this. We are cleaning up from the cold war and from the Manhattan Project, and it is an obligation of the entire country. 

Now, I have to say I was stunned—stunned to see a significant 

cut from this administration to clean up these nuclear sites across 

the country. The total EM budget that you sent over is $166 million below fiscal year 2008 appropriated dollars. That is a budget 

that is going to ensure that this government will not live up to its 

obligation with regulators and with the States. 

You know, this is going to cause our contractors to virtually stop 

working. I do not know how we can tell our contractors that we are 

not going to fund what we need to do under contracts that are out 

there. This is just, to me, poor management. 

Tell us how the Government is expected to meet its legal obligation to clean up these sites when it does not provide adequate dollars to the contractors for the contracts that are out there. 

Mr. NUSSLE. Well, we worked with the Energy Department on 

this issue, and they made their determination based on risk: what 

were the sites that posed the highest risk, what were the ones that 

needed the most attention. Hanford was one of those sites. 

Senator MURRAY. Well, you cut the river corridor closure by $58 

million. That is an extremely important project to clean up waste 

from the cold war that is going into the Columbia River, that will 

317 

become an environmental and physical disaster for not just my region but the entire country if we do not stop it. 

Mr. NUSSLE. Again, I can tell you that we worked with the Department of Energy. It was based on risk and their risk assessment 

of what—— 

Senator MURRAY. They do not think it is a risk to have nuclear 

waste going into the Columbia River because we have not cleaned 

up a site adequately that we have contracts with, tri-party agreements, agreements with the States? They do not think that is a 

risk? 

Mr. NUSSLE. Well, I cannot speak for them. 

Senator MURRAY. But you can speak for the Administration. 

Does the administration not think it is a risk to have nuclear waste 

seeping into the Columbia River? 

Mr. NUSSLE. We do believe it is a—— 

Senator MURRAY. That we know is happening? 

Mr. NUSSLE. We do believe that these sites are important. It is 

the reason why we do maintain it as a priority in the budget. But 

we base the determination across all of the sites that were available for cleanup based on risk. 

Senator MURRAY. Well, I disagree. I think you know full well 

that Congress is going to keep its obligation and fulfill this. This 

is just a way for you to balance the budget. So I just think when 

I got to honesty, that one just sticks out clearly to me. 

But let me go to another one, and Senator Sanders brought it up, 

and that is the budget for our veterans. Once again, the administration is proposing to double the drug copayments for our veterans 

and forcing our veterans to pay new user fees to access VA health 

care. 

Now, you know that this Congress has not agreed to do that in 

the past, and it seems to me that at a time of war, when we are 

asking the world of these men and women who have fought valiantly and put their lives at risk, when we ask them to sign up, 

we do not say, ‘‘Gee, and, by the way, if you earn $27,000 or more, 

we are going to charge you for your health care.’’ We say to them, 

‘‘You sign up and fight for this country, and we will provide your 

health care.’’ 

So I find it very dishonest for this administration, who has 

worked very hard to recruit men and women to fight for this war, 

to then turn around and say to them, ‘‘By the way, we are going 

to tell Congress that you are going to have to pay user fees and 

copayments for the health care we promised you.’’ And not only 

that, these copayments that you are collecting from them will not 

go to pay for VA health care. You put it back into the budget. 

So what I see is that you are proposing these new user fees simply to balance the budget. 

Mr. NUSSLE. Well, these are proposals that the Administration 

has carried in its budget—I believe every year it has proposed it, 

and certainly we understand that Congress may not take it out, 

but—— 

Senator MURRAY. Then I assume we should—this administration 

should be telling our recruits that if you earn more than $27,000 

you are not going to get health care. 

318 

Mr. NUSSLE. No, that is not what we are telling them. We are 

telling them it is a very good health care plan and that if you earn 

more than actually $50,000, the copayments go up, as well as an 

enrollment fee. It is something that we believe is a responsible way 

to not only maintain the program but it is also for veterans—— 

Senator MURRAY. Well, I would just say it is balancing the budget—— 

Mr. NUSSLE [continuing]. That have higher income. 

Senator MURRAY [continuing]. On the backs of her veterans, is 

how I see it. But I have a couple seconds. Let me quickly ask you 

about the VA construction program. We all saw what happened 

with Walter Reed. We looked across the country. We know these 

facilities are inadequate. We know that they have not met the 

standards for earthquakes or fires or patient privacy or so many 

other things. And it is really amazing to me that in this budget you 

short-fund the needs of veterans by hacking away at the construction account, which is clearly important for us to put money into, 

especially at a time when we have an increasing number of men 

and women who are coming into the VA. Can you tell me why you 

targeted the construction account? 

Mr. NUSSLE. Well, first of all, the President since he came to office has proposed and the Congress has added to and together we 

have increased the veterans budget 100 percent just in the last 7 

years alone. 

Senator MURRAY. For health care. 

Mr. NUSSLE. So we have not been—— 

Senator MURRAY. For health care. 

Mr. NUSSLE. So we have not been shortchanging veterans—— 

Senator MURRAY. For health care. 

Mr. NUSSLE [continuing]. And I think in a bipartisan and also 

between branches, we have done a good job of addressing those 

needs. We have also addressed the needs of Walter Reed, and those 

are met within this budget as well. So we believe we are meeting 

those obligations and priorities in this budget. 

Senator MURRAY. Well, not when you have massive cuts to the 

construction program. 

Chairman CONRAD. Senator Whitehouse? 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Director Nussle, the health care problem, the future liability of 

America for our health care obligations problem, has been estimated, depending on whose numbers you look at, in the $30 to $70 

trillion range. Is that correct? 

Mr. NUSSLE. It does depend on who you ask, but certainly there 

is a huge challenge, yes, sir. 

Senator WHITEHOUSE. And with respect to the President’s desire 

to reduce the earmarks by Congress by half, that would create an 

$8 billion savings, correct? 

Mr. NUSSLE. I believe so, yes. 

Senator WHITEHOUSE. Just to put that to scale, here are 8 pennies in a little stack in front of me, and let’s say that each penny 

was $1 billion. In order to equate that to the liability that we face 

on health care, you would need to stack 30,000 to 70,000 pennies 

next to it, wouldn’t you? Isn’t that the math? 

319 

Mr. NUSSLE. Well, that is why the President has a proposal in 

here for Medicare in order to help bend the growth curve on Medicare, which drives a lot of the health care inflation and costs 

throughout the country as—— 

Senator WHITEHOUSE. But I am correct about the math, that if 

it was $8 billion, then it would be—— 

Mr. NUSSLE. I am sorry. I have not done the math, but I will 

take your word for it. That sounds—— 

Senator WHITEHOUSE. If you knock off a billion from each, you 

end up with 30,000 to 70,000 versus 8, right? 

Mr. NUSSLE. OK. 

Senator WHITEHOUSE. And a stack of 30,000 to 70,000 pennies 

would go well through the roof of this very high room, correct? 

Mr. NUSSLE. Well, I do not know about you, but I grew up with 

a Dad that said if you worry about the pennies and the nickels and 

the dimes, the dollars will follow. And so I would worry about those 

8 pennies that are sitting there just as much as—— 

Senator WHITEHOUSE. And the 30,000 to 70,000 would go 

through the roof of this room, would it not? 

Mr. NUSSLE. I would worry about both, actually. 

Senator WHITEHOUSE. And it would go through the roof of this 

room, would it not? 

Mr. NUSSLE. I have not—I am sorry. I will take—I will have to 

take your word for it. 

Senator WHITEHOUSE. What does it tell you about the culture of 

Washington when you consider this little pile of 8 pennies and the 

30,000 to 70,000 stack of pennies that goes through the roof of this 

room to merit equal time in your testimony to the American people? 

Mr. NUSSLE. Actually, my testimony I think focused on the need 

to deal with some of those long-term spending challenges. 

Senator WHITEHOUSE. Two paragraphs each. It was equal. 

Mr. NUSSLE. Well, the Chairman only gave me 5 minutes. I 

would have—— 

Senator WHITEHOUSE. In your prepared testimony. 

Mr. NUSSLE. I can be—— 

Senator WHITEHOUSE. In your prepared testimony. 

Mr. NUSSLE. I can be very eloquent and go off on a number of 

tangents if you want me to on this subject, but this has nothing—— 

Senator WHITEHOUSE. Well, let me ask you about one tangent—— 

Mr. NUSSLE [continuing]. Based on—— 

Senator WHITEHOUSE. Because you said earlier that—— 

Mr. NUSSLE [continuing]. The amount of paragraphs. 

Senator WHITEHOUSE [continuing]. One of the ways to address 

this would be to promote quality and information technology. And 

let me start with by way of a framing section. I think there are two 

ways to address this problem. One way is to get into the health 

care system and repair it so that it is much more efficient in terms 

of delivering health care and save money that way. The other is to 

leave the existing broken health care system in place and simply 

stop putting money into it, cut people’s benefits or raise taxes. 

320 

It seems to me that it is responsible for us to really embark on 

what we can do to reform the health care system so that the terrible choice between either massive tax hikes or massive benefit 

cuts is with any luck foregone, but at least reduced. So in that context, and given your reference to the importance of promoting quality and information technology, what is the President’s budget for 

the Office of the National Comptroller for Health Information Technology, the ONCHIT office? 

Mr. NUSSLE. I would have to check that for you. I do not have 

that off the cuff. 

Senator WHITEHOUSE. Well, I will tell you. It is $66 million. 

Mr. NUSSLE. OK. 

Senator WHITEHOUSE. Which means if you took one of these pennies, you would have an infinitesimal piece, smaller than a half a 

grain of rice, that would reflect this administration’s investment in 

trying to do something about the stack of pennies 30,000 high that 

goes through the roof. I really think that if you are going to be serious about this—and you say you are going to be serious. You have 

a serious record. You are a serious man. I am inclined to try to 

take you at your word on that. It would seem to me that some serious effort at reforming this health care system and building in appropriate health information infrastructure and really addressing 

the quality issue in a significant way would merit a lot more attention than it is getting from this administration. 

Mr. NUSSLE. I would just say to the Senator, and this is just an 

example of where there sometimes is a disconnect: For the 2008 

budget, the President requested $118 million for this office that you 

just described, and Congress only came up with $61 million. So I 

am not suggesting that—I mean, there is a disconnect. I do not disagree with you. I think certainly health information technology is 

an important priority. 

But when the President makes it a priority and Congress obviously does not see that, and then we actually increase it, which is 

what that $66 million would be as an increase over what the Congress gave, I think it does show in a tight budget that we are making it a priority. But I think Secretary Leavitt, as you know, has 

this as a very enormous priority, one that he believes can help with 

the overall challenge that we face in health care—— 

Senator WHITEHOUSE. He talks a good game, but even at $118 

million—— 

Mr. NUSSLE. Well, I was trying to be respectful—— 

Senator WHITEHOUSE [continuing]. The number is—— 

Mr. NUSSLE [continuing]. But how can you explain, if you will, 

why—— 

Senator WHITEHOUSE [continuing]. Terrible. 

Mr. NUSSLE [continuing]. We propose $118 million and Congress 

cuts that in half, and then I am—— 

Senator WHITEHOUSE. I cannot. I think that was a terrible mistake to cut it in half. 

Mr. NUSSLE. All right. Well, we—— 

Senator WHITEHOUSE. I think it should be way more than this, 

and I am trying to enlist—— 

Mr. NUSSLE. Well, we are willing to work with you—— 

321 

Senator WHITEHOUSE [continuing]. Some interest on your part. It 

is your Health and Human Services Department. It is your budget 

in the first instance. It is the President’s emphasis on this that 

matters. And I want to see the emphasis. Where is it? 

Mr. NUSSLE. Well, we will be glad to work with the Congress on 

this office and in this area for this priority because it is very important, and the President did propose that in 2008. But based on 

Congress’ reaction, we had to make a judgment and we did. 

Senator WHITEHOUSE. My time has expired. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Whitehouse. 

Senator CARDIN IS NEXT. 

Senator CARDIN. Thank you, Mr. Chairman. 

Mr. Nussle, first let me say I am disappointed by the budget but 

not surprised—disappointed because I think it does not reflect the 

priorities that are important for our country. I do not believe it is 

an honest budget. Not only are the costs of the war not reflected 

in the deficit that you advertise, but there are many other items. 

The Alternative Minimum Tax—when we fix that, it is going to add 

to the deficit if we do not offset the costs. I could go on and on 

about areas where the deficits are much greater. 

But I want to spend my time dealing with the recommendations 

for Medicare cuts that are in your budget. I am really troubled by 

the way that you are trying to achieve Medicare savings. We need 

to have a much more cost-effective health care system. I agree with 

you on that. But the suggestions that you are making will have a 

major impact on the ability of seniors and disabled persons to find 

doctors who will treat them. More and more doctors are opting out 

of the Medicare system. The problem I find with your proposal to 

cut provider reimbursements is that you are cost shifting. You are 

cost shifting to the individuals who will pay for the hospitals and 

doctor bills and to companies that have to pay for their health insurance because Medicare will not be paying its fair share of the 

cost. 

It is unrealistic to expect that Congress will not take up the 

pending ten percent physician reimbursement cuts. We have done 

that every year. You do not provide funds in your budget to prevent 

a significant cut in Medicare physician reimbursements. 

But you are recommending that of the 2001 and 2003 tax cuts 

be made permanent. Your estimate is that over 10 years that costs 

$2.2 trillion. The Medicare savings are $603 billion. So from a fiscally responsible point of view, we could argue whether this makes 

sense. 

But there are certain areas where we could save money in Medicare and in the entire health care system that you choose not to 

deal with: the cost of prescription medicines, which are far higher 

to American consumers than to any other industrial nation’s consumers because we fail to organize the market and use market 

forces collectively to bring down the cost. Also, in Medicare Part C 

we continue to reimburse private insurance companies much more 

than it would cost the taxpayers of this country if the senior were 

enrolled in traditional Medicare. You know those numbers. And yet 

you are leaving the private insurance companies alone. You are 

leaving the pharmaceutical manufacturers alone. But yet you are 

322 

making recommendations that could affect access to care for people 

in my State and around the Nation. 

I want to work with you to bring down the cost of health care, 

but I do not see a good-faith effort here. Why don’t you put on the 

table options that will save Government expense that affect the 

drug manufacturers and the insurance companies? Why should private insurance companies get 20, 30 percent more to cover seniors 

than it would cost the taxpayers to subsidize a senior in traditional 

Medicare? 

Mr. NUSSLE. Well, first of all—and the Senator is an expert in 

these programs, and I greatly respect your knowledge and willingness to work with us on that, on many of these issues. And that 

is the reason why the President has at least opened the door yet 

again this year for Medicare reform—not suggesting that this proposal is the only proposal that would be considered. This is an 

opening opportunity to, again, as we did in 1997, bend the growth 

curve on health care and on Medicare and tackle some of that longterm challenge. 

I am not saying anything is on the table or off the table. I am 

saying the President has opened the door for what we think is an 

appropriate and very important debate this year on Medicare if the 

Congress is willing to engage in that. And we believe the order of 

magnitude in this instance is one-third of that long-term liability, 

which is the reason why we picked the number of $178 billion. And 

some of the proposals, again, you have seen them before. These are 

proposals that we have debated many times over the years, and 

some have been accepted even in a bipartisan way. Many of them 

are put forward by MedPAC. 

And the part about the drug benefit, as the Senator knows, the 

cost of the drug benefit, Part D, was not what it was advertised 

when it first passed. It was supposed to be 634, and it has come 

in at 390, as I understand it. So, yes, we certainly continue to have 

high costs, but the program is working—— 

Senator CARDIN. Let me stop you there because my time has expired, and I am going to quit while I am ahead. 

I take that, Mr. Chairman, as an offer by the administration to 

deal with Medicare Advantage and negotiate prescription drug 

prices. And I will use that later in some of the arguments with our 

Committee. Thank you very much. 

Mr. NUSSLE. Well, Medicare Advantage, if I may, just to finish, 

Medicare Advantage under this plan does have as a result—because, as you know, it is based on fee-for-service. I think it is like 

$40 billion that comes out of the Medicare Advantage plans as a 

result of the changes that we are proposing. 

Senator CARDIN. But they still will be reimbursed at a level higher than if the individual were enrolled in traditional Medicare. 

Mr. NUSSLE. Yes. 

Senator CARDIN. Still a premium. 

Chairman CONRAD. Senator Nelson? 

Senator NELSON. Thank you, Mr. Chairman. 

Good morning, Mr. Director. 

Mr. NUSSLE. Good morning. 

Senator NELSON. If you could explain the philosophy in a portion 

of the Medicare budget, I would appreciate it. Under the law a senVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00328 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
323 

ior citizen who falls below a certain income level gets a subsidy in 

order to be able to pay his or her monthly premium for Medicare 

parts B and D. The President’s proposal would eliminate inflationary updates to the qualifying income level, reducing the number of individuals eligible for this subsidy.. 

Please explain to the Committee why you would do that to poor 

senior citizens. 

Mr. NUSSLE. What we do is we freeze it at—instead of allowing 

it to continue to grow at CPI. And it is one of the ways that we 

believe you not only have program integrity and you have the person involved in the program taking some responsibility for utilization, but it is also a way, again, to begin to grow—bend that 

growth curve that allows the program to continue to grow at 5 percent as opposed to over 7 percent. 

Senator NELSON. Well, understandably, you are looking for areas 

in which to cut, and I just want to share with you that in my State, 

where we are fortunate to have a lot of senior citizens, that in the 

year 2008 there indeed are senior citizens that are having to make 

the choice between food or their medicine or cutting their medicine 

in two because they are at a certain level of income that they cannot afford both. And it just seems to me that as the Good Book 

says, when we come and reason together, we have an obligation to 

take care of the least privileged among us. And poor senior citizens 

would certainly be a part of those that we want to make sure are 

made whole. And I just did not understand the reasoning for that. 

Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Senator. 

Senator Feingold? And I just want to alert all Senators that the 

live quorum may commence in roughly 5 minutes or so. 

Senator Feingold? 

Senator FEINGOLD. Thank you, Mr. Chairman. This Committee 

and this country have benefited by your leadership and by the 

leadership of our Ranking Member, Senator Gregg. I know you 

have significant policy differences, but I think you both have an 

abiding concern for the Nation’s fiscal position. And I cannot help 

but believe that, as bad as things are, we would be a lot worse off 

but for your service as budget guardians. But despite your efforts, 

Mr. Chairman, despite the efforts of Senator Gregg, we are in a 

huge fiscal mess. The contrast between where we are now and 

where we were when the current President first took office could 

not be greater. And the same is true of the attitude of Congress 

about budget matters, both now and then. I find the difference 

startling. I came here in 1992 when Senator Gregg and I were both 

elected, and the rallying cry really was, ‘‘Eliminate the deficit.’’ 

And thanks to the deficit reduction package passed in 1993, to a 

continuing concern about the Government’s bottom line and ultimately to an economy that was certainly helped by fiscally responsible policies, we actually balanced the books by the end of that 

decade. And when President Bush took office, he was handed a 

Government in surplus, and with projected surpluses coming into 

the decade. 

Unfortunately, since then, the fiscal stewardship of our Government has been tragically lacking. But even though this has happened on our watch, we will not be the ones who will pay for this 

324 

malpractice. The cost of this negligence will be borne by our children and grandchildren in the form of massively increased debt. 

This administration will add $4 trillion to the mountain of debt future generations will bear, and they will be the ones who will have 

to pay that debt in the form of either higher taxes or fewer Government services. 

Mr. Chairman, there are a number of programmatic issues in 

this budget that I would want to pursue, including areas such as 

funding for local law enforcement and the Women, Infants, and 

Children program, but I will address those later. 

Let me just finish by noting that the budget the President is 

sending Congress this year appears to be more of what we have 

seen in the past 7 years. The administration has again circumvented a basic principle that should govern the budget of any 

President, one that Chairman Conrad has enunciated on several 

occasions to this Committee: either provide the revenues necessary 

to pay for the spending you want, or limit your spending appetite 

sufficiently so that the taxes you are willing to levy can fully pay 

for it. 

This budget just simply does not conform to that principle. Instead, it adheres to an unfortunate alternative view: Do all the 

spending you want, but only pay the bills you want to pay, and 

your kids will make up the difference. 

Director, it may come as a surprise to some that on occasion I 

actually agree with the administration. For one, I strongly endorse 

your efforts to rein in unauthorized earmarks. I think it has been 

a little late in coming, but I certainly welcome those efforts. And 

along these lines I hope you will consider endorsing a bill I have 

introduced with my colleague from Wisconsin and a former colleague of yours, Congressman Paul Ryan—namely, a line-item veto 

measure that applies specifically to earmarks. It targets the abuse 

everyone says is the real reason a line-item veto is needed—namely, to go after earmarked spending. 

Have you had a chance to look at the proposal at all? 

Mr. NUSSLE. I have not, Senator, but I will, and the President 

obviously continues to support the legislative line-item veto and 

would probably look favorably on anything that would provide 

some control on not only earmarks but, in general, excessive spending. 

Senator FEINGOLD. Well, I appreciate that. I hope you will give 

it a good look. I know it may not be everything that this President 

or any President would want. I voted for the previous line-item 

veto that was struck down by the Supreme Court. What we are trying to do here is find something that would pass muster with the 

Supreme Court and still give the President the ability to help us 

get rid of some of these unfortunate provisions. 

Thank you, Mr. Chairman. 

Chairman CONRAD. I thank the Senator. 

Senator Lautenberg? 

Senator LAUTENBERG. Mr. Chairman, thank you, and, Director 

Nussle, I would appreciate it if we could keep the answers short. 

The reins are tight on time allotment, so I am going to get right 

to the subject of my interest, and I would appreciate the quickest 

response you can give. 

325 

Over the last 7 years, the President has tried to destroy our national passenger rail system, yet everybody knows how bad traffic 

is no matter where you go, whether it is the skyways or the highways. Why does the President continue to propose funding levels 

which would shut down Amtrak? 

For your information, it is a $500 million cut from what we used 

in our appropriations last year—$500 million. How is that a conclusion that we can comfortably live with? 

Mr. NUSSLE. Well, Senator, as you know, the Northeast corridor 

line is very profitable, or at least has a good economic track record, 

looks—— 

Senator LAUTENBERG. It covers its operating costs; it does not 

cover its capital costs. 

Mr. NUSSLE. But that is not the same for some of the long lines, 

as the Senator knows, and it is for that reason that we continue 

to agitate on this issue. We need to—— 

Senator LAUTENBERG. Is there traffic congestion throughout this 

country of ours? 

Mr. NUSSLE. On the rail lines? 

Senator LAUTENBERG. On the highways and the skyways. Is 

there traffic congestion wherever you look here? 

Mr. NUSSLE. There are many places where that is true. 

Senator LAUTENBERG. OK. So is there any logic, in your view, 

your personal view, to making a cut like that in Amtrak which 

would effectively destroy its ability to function? 

Mr. NUSSLE. Well, Amtrak just has not been managed well—— 

Senator LAUTENBERG. I do not want any of your opinions other 

than on the numbers. 

Mr. NUSSLE. OK. 

Senator LAUTENBERG. Does it make sense to you to project a 

$500 million cut? 

Mr. NUSSLE. Yes. 

Senator LAUTENBERG. It does. It is irresponsible, I must tell you, 

to say the least. For every $1 billion invested in transportation 

projects, 47,000 jobs are created. Given the state of our Nation’s 

aging bridges, roads, airports, et cetera, and now the focus on the 

decline in jobs, why then should there not be more consideration 

for those investments in refurbishing our transportation system? 

Mr. NUSSLE. Well, the President spends the final increment of 

SAFETEA-LU in this budget that was allocated under that Act 

and, in fact, has met the obligation. There will be a shortfall of 

about $3.2 billion in that fund because receipts will not meet the 

obligations that were put into SAFETEA-LU. And so a transfer has 

been proposed in order to fill that in, but there is no question that 

in the long term—and, actually, in the short term—there is a 

shortfall within the transportation account that the Congress and 

the President are going to have to work together on in order to resolve. 

Senator LAUTENBERG. Thank you. In other words, you are suggesting that maybe the President would compromise a little bit on 

this, because if you are suggesting we work together, I can tell you 

the attitude here is certainly not for continuing to reduce the 

amount of spending that we need for our infrastructure. 

326 

The President claims he is concerned about reducing spending 

based on the effectiveness of programs. In that case, Director 

Nussle, how can he justify continued funding for abstinence-only 

education programs, which have been proven to be highly ineffective? 

Mr. NUSSLE. I do not think they have proven to be highly ineffective. I think, again, there are differences of opinion when it comes 

to that. 

Senator LAUTENBERG. Differences in opinion in the number of 

teen pregnancies and the exposure to sexually transmitted disease? 

Do you think that we have been gaining on that? 

Mr. NUSSLE. I have not seen the statistics in the last number of 

days or months, but I can tell you the last time I checked, I believe 

that teen pregnancy was actually down. 

Senator LAUTENBERG. Not in the abstinence-only programs, I can 

tell you, in school districts. 

Hospitals across the country are in bad financial straits. In New 

Jersey, nearly 50 percent of hospitals are operating in significant 

financial difficulty. How can we keep those hospitals open and provide the service for patients when the budget reduces the amount 

of Medicare payments to hospitals by $12.4 billion? How can we do 

it? 

Mr. NUSSLE. Well, Senator, the President has put forth a budget 

that tries to balance all of those priorities within a budget that realizes that there is a constraint based on the deficit. And what I 

hear from what you are telling me is that we need to spend more 

in all of these areas, which we certainly can look at, but that just 

drives the deficit higher, and the debt—— 

Senator LAUTENBERG. Well, there has been expert deficit driving 

in this administration already on a continuing basis. 

Mr. Chairman, since there is—I do not see anybody else sitting 

here. Can I steal another minute. 

Chairman CONRAD. Yes, sir. 

Senator LAUTENBERG. Mr. Nussle, how much has the average 

weekly cost been for the war in Iraq in the past year? 

Mr. NUSSLE. I am not sure I have that statistic in front of me. 

Senator LAUTENBERG. Well, let me help you. It is $3 billion a week. It is $3 billion a week. Now, when the President proposes 

$70 billion for the war costs in the 2009 budget, I guess he thinks 

that the war stops with the day he leaves office because that is as 

much of the 2009 budget the President is taking responsibility for. 

Is that a proper conclusion on my part? 

Mr. NUSSLE. I think it is only a proper conclusion if you also believe that Congress thinks the war stops here at about Memorial 

Day because they have not funded beyond Memorial—— 

Senator LAUTENBERG. No, but doesn’t the President have the responsibility a Commander-in-Chief—he has taken the responsibility so far—for doing all of the financing—— 

Mr. NUSSLE. Well, my understanding is that Article I of the Constitution is where the power of the purse is and the responsibility 

to pay for this kind of a conflict. 

Senator LAUTENBERG. Mr. Chairman, I hope you are listening to 

this explanation. What we are getting here are political analyses. 

You know, I once asked a political consultant, ‘‘How do you respond 

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to questions?’’ He said, ‘‘Avoid answering it until you get your point 

across.’’ It is good politics. Thank you, Mr. Nussle. 

Chairman CONRAD. I thank the Senator and the former Chairman of this Committee. 

Let me just say—we have only got 6 minutes left on this vote, 

so you are saved by the bell, or at least relieved by the bell. I just 

want to tell you that some have said this budget is dead on arrival. 

I have never applied those terms to a President’s budget, but I was 

thinking, What does this represent in three words? And the President’s leaving. I think this represents ‘‘Debt on departure.’’ He is 

leaving a debt bomb on the steps of the next President. And the 

next President is going to inherit the worst fiscal mess that I have 

seen in my 21 years here. And if I look back historically, other than 

the time right after World War II, if you look at debt as a share 

of our economy, it will be at its highest level after this Presidency 

in 50 years. So this President has it going in precisely the wrong 

direction. 

With that, we again thank you for your appearance here, Director Nussle. We apologize that we are interrupted by this vote, but 

I do not think it would be fair to ask you to stay for another round 

of questioning at this point, unless you were really eager to be here 

another hour. 

Mr. NUSSLE. I am pleased to do so, Senator, Mr. Chairman, if 

you would like me to. 

Chairman CONRAD. No. I think you have discharged your responsibility here, and we thank you again for your appearance. And, 

look, we have strenuous disagreements on policy, but we also admire your service and your willingness to take on a responsibility 

like this. I think it is one of the toughest ones in Government. 

Maybe it is the toughest one to be the Director of OMB. 

So, again, thank you for your attendance and your answering the 

questions of the Committee. 

Mr. NUSSLE. Thank you. 

Chairman CONRAD. The Committee stands adjourned. 

[Whereupon, at 11:49 a.m., the Committee was adjourned.] 

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(361) 

THE PRESIDENT’S FISCAL YEAR 2009 BUDGET 

AND REVENUE PROPOSALS 

WEDNESDAY, FEBRUARY 6, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:04 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Murray, Menendez, Cardin, Sanders, 

Whitehouse, Gregg, Allard, and Bunning. 

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

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. 

The Senate Budget Committee wants to welcome the Secretary 

of the Treasury, Secretary Paulson. We are delighted to have you 

back before the Committee. We thank you for your service to the 

country in this incredibly important position and at this extraordinarily important time. 

I think we all know the considerable risks that are out there to 

the economy and are eager to work together to prevent an economic 

downturn from turning into something steeper and longer-lasting 

than might otherwise be the case. 

Let me just start by putting in perspective our budget deliberations as we look forward to this year. We now have under this administration five of the highest deficits in U.S. history. 

362 

The administration is telling us we can expect a $410 billion deficit in 2008, and $407 billion in 2009. I hear often the pundits say, 

well, it is not so bad in terms of the share of gross domestic product. I just want to counter that by suggesting to those in the media 

that they are really missing the point, that the debt is going up 

much more rapidly than the deficit, and that while the deficit is 

forecast to be $410 billion for 2008, there is also almost $200 billion 

of Social Security money that is being used to pay other bills. And 

if you put those two together, it exceeds $600 billion. That is over 

4 percent of GDP. 


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If you go back to the 1980’s, which many people are eager to 

compare it with, we had a deficit then of $208 billion, but the Social Security surplus was only $200 million—$200 million. So when 

people were looking at deficits to GDP in those days and compared 

to now, it is apples and oranges. There is no comparison between 

what the real shortfalls are now as a share of GDP and what they 

were then. 

Let’s go to the next slide if we can. 


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The total debt for this year is not going to go up by the deficit 

of $410 billion. The debt of the country is actually going to go up 

by over $700 billion. 

Of course, the biggest difference is what I have already described, the Social Security money that is being taken to pay other 

bills, and other trust funds as well that are being tapped. So if you 

look at the gross debt of the United States, it is going up by $700 

billion. 

Let’s go to the next slide. 


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The result of all this is that we are building a wall of debt of 

stunning proportion, going from $5.8 trillion at the end of 2001 to 

$10.4 trillion by the end of 2009—the 8 years that the President 

will be responsible for—nearly a doubling of the national debt. And, 

increasingly, this is money that we are borrowing from abroad. We 

are increasingly dependent on the kindness of strangers. 


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If we look at the top ten foreign holders of our national debt, we 

see Japan at the top at nearly $600 billion; China, approaching 

$400 billion; the United Kingdom, $300 billion; the oil exporters, 

over $120 billion; and on it goes. We even owe Korea more than 

$40 billion. 

The Comptroller General in testimony before the Senate Budget 

Committee on January 29th said this: ‘‘I believe we have a 5- to 

10-year window of opportunity to demonstrate to our foreign lenders that we are going to get serious about this—5 to 10 years, and 

it is closing. And I think it is closer to 5 than to 10. Keep in mind, 

we are the largest debtor nation in the history of mankind, and it 

is getting worse, not better.’’ 


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That is the Comptroller General of the United States telling us, 

all of us—Congress, the administration—that time is a-wasting and 

we cannot continue to run up this massive debt. 


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The administration comes forward with a proposal that says, 

well, we are going to start, we are going to lay down a proposal 

to save $600 billion in Medicare and Medicaid over 10 years. But 

in the same budget document, they are saying cut taxes another 

$2.2 trillion. That just digs the hole deeper, and somehow my own 

belief is together we have to come up with a comprehensive plan 

that deals with the imbalance between our revenue and our expenditures and these enormous shortfalls in our entitlement programs. 


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When I look at the assumptions behind this forecast, I see that 

OMB is estimating economic growth for this year of 2.7 percent. 

The Congressional Budget Office says it will be 1.5 percent. So as 

bad as these numbers are, they are buttressed by what looks like 

a rosy economic forecast. 

I think we all understand the need for a stimulus package. I am 

not going to go through here the elements that are in the stimulus 

package that has passed the Senate. We will get to that in questions. But I do want to conclude on this note. 


42157.223
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Senator Gregg and I have made a proposal for a task force—16 

members, evenly divided—to address the long-term fiscal imbalance and to come up with a plan that would then come to Congress 

for a vote, everything on the table. 

You know, when we started this earlier last year, I was convinced of its need then. Virtually every witness before this Committee has said it is imperative. It is imperative that we have some 

approach, either this one or something like it, to get at the extraordinary challenges that the next administration will face. 

With that, I want to call on my colleague Senator Gregg. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman, and again, I want to 

thank the Secretary of the Treasury for being here today. I want 

to thank him for his extraordinary service to the country and his 

leadership during what is a very critical period in our economic 

cycle. We thank him for that. 

I wanted to respond to a couple of things that the Chairman 

said. First, I congratulate him, obviously, and appreciate the 

chance to cosponsor with him this initiative to try to address the 

fiscal out-year catastrophe which we face as a country. That is 

something that must be addressed, and we have proven beyond any 

doubt that as a Government we cannot address it item by item or 

policy by policy. Because of the nature of democracy, people tend 

to jump on policy proposals as they are put forward, depending on 

what their interest group is and what they desire to promote. And 

so sometimes you have to use procedure to drive policy, and that 

is why we have put this proposal forward. 


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I respect the Chairman’s interest and focus on debt. But I think 

you have to also reflect the fact that if you look at the Democratic 

budget that we have been functioning under this year, it has significantly aggravated the debt situation. On 15 to 19 different occasions PAYGO, their rule of fiscal enforcement, was either waived, 

ignored, or basically gamed, causing about $145 billion of spending 

to escape PAYGO enforcement. Revenues which were projected 

under their budget through more enforcement and better enforcement of the Internal Revenue Service Code did not come forth. And 

then, in addition to that, on the discretionary side they proposed 

and put into the first supplemental $17 billion of new spending, 

which was essentially earmarks, and coupled that up with another 

$22 billion in the underlying budget, which, as a result of the 

President being aggressive, was cut back to approximately $10 to 

$12 billion, depending on how you account for emergencies. 

So there has been no significant contribution here. In fact, their 

budget made no effort in the area of entitlement reform, even 

though the President sent up two very reasonable proposals last 

year in entitlement reform—one of which was to simply ask that 

people like Warren Buffett actually pay a fair share of their cost 

of the Medicare Part D premium. Those reasonable proposals were 

rejected. So instead of controlling entitlement spending, we actually 

added to entitlement spending by increasing entitlement accounts 

last year and creating new entitlement accounts outside the 

PAYGO window, SCHIP being the classic example of that. 

So, while I appreciate Senator Conrad’s focus on debt, there is 

no action here coming from the other side of the aisle to substantively address that. 

What I wanted to point out today, as the Chairman has already 

cited, there is $2 trillion of tax relief in the President’s budget over 

5 years, and that is not acceptable to the Democratic Party. I think 

it is important in the context of this economic slowdown that we 

are facing. I think it is important to point out what that means in 

real terms. And as we look at the present tax structure of our country, it is important to recognize that that tax structure which we 

have in place as a result of the tax cuts of the early part of this 

administration has generated more revenue than has historically 

been generated in this Government. We are up now in this year to 

approximately 18.7 percent of gross national product coming in in 

revenue. Historically, we have had about 18.25 percent of gross national product coming in in revenue. So under the present tax law 

as it exists today, we are actually generating more revenue than 

we have historically generated. 

372 

At the same time it is important to note that under the present 

tax law, people in the highest brackets of income are paying a 

higher share of the Federal income tax than they paid under the 

Clinton years. Eighty-five percent of Federal income tax is now 

paid by the top 20 percent of earners in this country as compared 

to 81 percent during the Clinton years. 


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And the people in the bottom 40 percent of the tax income brackets are actually getting money back. They do not pay income taxes 

in general, as an average rule. They obviously pay payroll taxes, 

but they do not pay income taxes. They are getting more back from 

the Federal Government—more—through the EITC than they did 

during the Clinton years; almost twice as much. 


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So the tax laws, while generating more revenue than has been 

the historic norm of this country, are actually more progressive. In 

other words, the high-income people are paying more of the burden; 

the lower-income people are bearing less of the burden and actually 

getting more back. 

Why is that? Why is that happening? Well, it is called human nature. When you create a tax climate where people have an incentive to go out and work, to take a risk, to be productive, to be entrepreneurs, they do that and they create jobs and they create economic activity. We have had many quarters of job creation and economic activity here, and we are coming, unfortunately, to a slowdown. But for the last 4 years, 4–1/2 years, we have had dramatic 

expansion in jobs and economic activity in this country. And it has 

been a function of the fact that we have finally gotten to a tax law 

which says to the entrepreneur, Go out and invest, go out and take 

a risk, be a true American, take that risk, create that small business and create a job as a result. And as a result, we have generated more revenues. It is that simple. Whereas, if you dramatically increase taxes—and the proposal here from the other side, I 

guess, is going to be that we raise taxes by $2 trillion, not accept 

the President’s budget in the area of tax policy. That is going to 

cause an economic slowdown. That is going to cause more than an 

economic slowdown. That is going to be hitting a great, big, huge 

cement wall if you raise taxes around here $2 trillion, especially on 

the productive side of our economy. 

So I just think it is important to stress again the success of having a tax law which says to the entrepreneur, Go out and invest, 

go out and take a risk, go out and create jobs, because that is how 


42157.212
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you generate a strong economy. That is how we compete with the 

rest of the world, and that has been one of the things that we have 

done under this administration. 

I appreciate the Committee’s time. 

Chairman CONRAD. Let me just take a moment to respond to the 

PAYGO assertion that the Ranking Member continues to make. 

The fact is we had a balance on the PAYGO scorecard last year, 

a positive balance, with one exception, and that was providing alternative minimum tax relief. I voted against extending that relief 

without paying for it, but our colleagues did not agree. The administration insisted on not paying for it. So the fact is on the PAYGO 

scorecard, we had a positive balance, with the exception of alternative minimum tax. 

Senator GREGG. If the Chairman will allow—— 

Chairman CONRAD. No, wait a minute—— 

Senator GREGG. I would like to submit for the record my list of 

where—— 

Chairman CONRAD. Wait. The Senator is out of order. Wait. I am 

making a statement here. I did not interrupt you during your 

statement. 

Senator GREGG. I thought you had completed your statement. 

Chairman CONRAD. No, I had not. 

Senator GREGG. OK. As soon as you complete it, I would like to 

have 2 minutes to respond. 

Chairman CONRAD. No, no. We are not going to do that. You 

have had your chance. Then we are going to go to the witness. 

Then you can respond in your question period. 

Look, we had a positive balance on the PAYGO scorecard, the 

only exception being the alternative minimum tax relief the administration insisted on not paying for. That is a fact. We will have a 

chance in the question period to go back and forth on this and any 

other issue anybody wants to do. 

Secretary Paulson, again, welcome. Please proceed. 

STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY 

Secretary PAULSON. Chairman Conrad, Senator Gregg, members 

of the Committee, I am pleased to be here today to discuss the 

President’s budget for fiscal year 2009. As you know, my highest 

priority is a strong U.S. economy that will benefit our workers, our 

families, and our businesses through a measured approach that 

balances our Nation’s needs with our Nation’s resources. The President’s budget supports that priority. 

This is especially important now as, after years of unsustainable 

home price appreciation, the U.S. economy undergoes a significant 

and necessary housing correction. This correction, combined with 

high energy prices and capital market turmoil, caused economic 

growth to slow rather markedly at the end of 2007. 

The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. I believe that our economy will continue to 

grow, although at a slower pace than we have seen in recent years. 

Yet the risks are clearly to the downside, and President Bush 

knows that economic security is of the utmost importance to the 

American people. In recent weeks, the potential benefits of quick 

376 

action to support our economy became clear and the potential costs 

of doing nothing too great. 

So we are gratified that Congress is advancing toward a growth 

package to support our economy as we weather the housing correction. We believe that a growth package must be enacted quickly; 

it must be robust, temporary, and broad based; and it must get 

money into our economy quickly. The Senate has begun to consider 

its version of this bill, and I am hopeful that you will complete your 

consideration very soon. 

If we keep moving along a fast track and Congress sends the 

President a bill that meets our shared principles, rebate payments 

can start in May and be completed this summer. Together, the payments to individuals and the investment incentives for businesses 

will help create more than half a million jobs by the end of this 

year. 

In addition to an economic growth plan to help us weather this 

housing correction, the administration will continue to focus on aggressive action to try to provide alternative options to foreclosures. 

This includes encouraging the Hope Now Alliance’s outreach to 

struggling homeowners. Congress can do its part by finalizing the 

FHA modernization and GSE regulatory reform bills and by passing legislation that will allow States to issue tax-exempt bonds for 

innovative refinancing programs. We continue to monitor capital 

markets closely and to advocate strong market discipline and robust risk management. 

Working through the current stress is our first concern. Through 

the President’s Working Group on Financial Markets, we are also 

reviewing underlying policy issues because it is just as important 

to get the long-term policy response right. While we are in a difficult transition period as markets reassess and re-price risk, I 

have great confidence in our markets. They have recovered from 

similar stressful periods in the past, and they will do so again. 

The administration will also continue to press for long-term economic policies that are in our country’s best interest: a pro-growth 

tax system, entitlement reform, and a balanced budget. To that 

end, the President’s budget makes the 2001 and 2003 tax relief 

permanent and keeps the Federal budget on a track for surplus in 

2002. In the future, as in the past, our long-term economic growth 

will also be enhanced by supporting international trade, by opening 

world markets to U.S. goods and services, and by keeping our markets open. Congress can help create economic opportunity by passing the pending free trade agreements with Colombia, Panama, 

and South Korea. 

I appreciate the cooperative and bipartisan spirit that has 

brought the Congress and the administration together to support 

our economy and look forward to that spirit continuing as we work 

through this period. 

Thank you. 

[The prepared statement of Secretary Paulson follows:] 

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Chairman CONRAD. Thank you, Mr. Secretary. 

Let me start with the economic assumptions that underlie this 

budget. Do we have that chart that we could put up? 


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In the administration’s forecast, they say economic growth will 

be 2.7 percent this year. What is your forecast for economic growth 

for this year? 

Secretary PAULSON. Mr. Chairman, that administration forecast 

was made in November. The economy has slowed down significantly since that time. I think over the budget window, our forecast 

is very similar to CBO’s forecast, but that forecast was made at a 

different time. 

I would say to you, though, if CBO’s forecast is right for this 

year, I think the difference, the added cost will be something in the 

neighborhood of $10, $15 billion. So it is real money, but when we 

look at the longer-term issues you and I have been talking about 

and you have been talking about, this is not the driver here. 

Chairman CONRAD. All right. I want to get that on the record 

that your forecast is closer to the CBO forecast, but you do not see 

a material difference in outcomes with—— 

Secretary PAULSON. I did not change—I am not making a forecast. I am noting the fact that that forecast was made in November, that we have been pretty clear in saying the economy has 

slowed since that time, and I do not think that is a driver. And as 

far as I am concerned, I never place too much reliance on any economic forecast for 1 years. I look at it over a longer period of time. 

Chairman CONRAD. All right. Let me turn to a chart that talks 

about what countries around the world are experiencing in GDP 

growth and their tax burdens. Can we put that up? 

I do not know if you can see that, Mr. Secretary, from where you 

are, but it is—— 

Secretary PAULSON. I do not have great eyes. I see the United 

States there in the middle. 

Chairman CONRAD. Have we got a handout, a smaller version of 

this that you could hand the Secretary so that he could have this? 

Maybe somebody can hold that up while he is getting a copy of the 

Secretary. 

381 


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What this chart shows is leading industrialized countries and 

what their economic growth rates are and what their tax burden 

is. You know, I hear all the time that the key to economic growth 

is the level of taxation in a country. So I decided let’s go actually 

look around the world, let’s look at what tax burdens are, and let’s 

look at what economic growth is. And what jumps out at you as 

you look at this chart is there seems to be no connection. We have 

all kinds of countries that have much higher growth rates than we 

do—Ireland, Hungary, Korea, Finland, Spain, Iceland, Sweden, 

United Kingdom—that have higher growth than we do, but much 

higher tax burdens than we do. Similarly, we have a whole series 

of countries that have lower taxes than we do, and they do not 

have more economic growth. 

So I am wondering, in your analysis what is the connection between GDP growth and tax burden? 

Secretary PAULSON. Mr. Chairman, that is a very important 

question. I am looking at this chart for the first time, but let me 

make an observation. 

I think there are two issues when you look at taxes. First is what 

is the level of revenues that is appropriate to raise, any economy 

to raise, you know, through taxes, and then what is the form of 

taxes. And what we are finding increasingly is that other nations 

are not emulating is in terms of the form of taxes. And if we looked 

at it just in terms of growth, we would be saying what form of 

taxes will give us the greatest growth, give us the most jobs. And 

that is—Treasury has started doing work on this because what we 

have found is I think in many ways the most expensive tax dollars 

we raise in terms of inhibiting competitiveness and jobs and 

growth are the way in which we tax our businesses that compete 

globally, because some of these countries at the top of the list—and 

most of them have now learned that the key is reducing corporate 

taxes and the way in which corporations are taxed. 

So, again, I think this is a complicated question, and many of 

these countries make greater use than we do of consumption taxes. 

And various taxes on consumption I think have less of a drag on 

growth and jobs. 

Chairman CONRAD. Have you looked at this fair tax proposal 

that is being advocated by some? They say with a consumption tax 

at 23 percent, with lower-income people being exempt, that that 

would raise the same amount of revenue as our current system. 

Have you done an analysis of that? And would a consumption tax 

at 23 percent, with low-income people being exempt, raise the same 

amount of revenue as our current system? 

Secretary PAULSON. I would have to get back to you on that, but 

I would say the one thing we have done, which we have recently— 

Treasury has come out with a number of studies on the way we tax 

our businesses, small businesses that compete globally and corporations that compete globally. And we have documented the fact 

that we are out of step with the rest of the world, and we see grave 

danger there. And then we have put out a number of alternatives 

for addressing this, and one of these is replacing the corporate tax 

with a business activity tax, which is a form of consumption tax. 

And, again, there is no—every alternative has some issues. There 

is no perfection here. But I do think the kinds of questions you 

383 

have been raising are the right ones, I very much agree with Senator Gregg when he said that we need to ask the questions: What 

portion of our economy should be taken up by taxes? What is the 

right level given the world we live in, given the entitlement issue 

we see coming? Then we need to ask, what is the right form of 

those taxes to maximize our competitiveness and maximize the 

jobs? That is what we should be asking ourselves, because taxes 

are necessary. They are necessary because we need revenues, and 

so now the question is how do we get the least drag on job production and continue creating good jobs for American workers and 

American people. 

Chairman CONRAD. Yes, it really is quite striking. I mean, you 

look at this. You have a country like Finland that is taking much, 

much more in taxes, much higher tax burden, but much higher economic growth. Spain, much higher tax burden and much higher 

economic growth than we have. Sweden, Norway, all of them the 

same. On the other hand, Japan, has lower taxes than we have and 

economic growth at about half of our rate. 

Secretary PAULSON. And Japan is the one country the world that 

has higher corporate taxes than the United States. So, they are 

also a case of having a form of taxation that is a big inhibitor to 

their economic growth. 

Chairman CONRAD. Well, I hear all the time that we have the 

second highest corporate tax rate. But our effective rate is not the 

second highest, is it? 

Secretary PAULSON. You are right. The headline rate is the highest. The effectiveness rate is above average. 

Chairman CONRAD. Isn’t it pretty close to average, our effective 

rate? 

Secretary PAULSON. Our effective rate is pretty close to the average of the OECD countries, but the direction of change is what I 

find alarming. We went from being a high taxer of corporations in 

the 1970’s to then in the 1980’s becoming the lowest, and then others have all sort of copied, understood what we did and the benefits 

of lowering taxes. Now we have a higher corporate tax rate than 

the French and the Germans. Not only are we just about average, 

but that they are reducing taxes. And then our form of tax is not 

something that anyone is emulating anymore. I think most people 

recognize the way in which we tax is an inefficient way to do it. 

Chairman CONRAD. If you could share with this Committee what 

analysis you have done along these lines, because many of us believe we are going to have to have thoroughgoing tax reform. 

Secretary PAULSON. I will be able to send some analysis up to the 

Committee. Thank you. 

Chairman CONRAD. Senator Gregg. 

Senator GREGG. Well, before I pick up on that point, I would just 

add this whole issue of tax policy is critical. I am sorry we were 

not able to submit it for the record, but let me just review, therefore, orally the ways in which PAYGO has been gamed. I am sure 

the PAYGO scorecard was positive, but that is because gimmicks 

were used to get around PAYGO enforcement. These were specific 

PAYGO violations under the Democratic Congress: the revenue loss 

from minimum wage, the Water Resources Development Act, the 

Prescription Drug User Fee Act, the Mental Health Parity Act, the 

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Immigration Reform Act, and the Energy Act. Those were all very 

specific violations of PAYGO, and those bills were passed. And then 

PAYGO was gimmicked—gimmicked—so it would not show up on 

the scorecard. 

The MILC program, that was one of the most outrageous, where 

they took the MILC program and put it in the supplemental and 

declared it an emergency, total gimmick on PAYGO. 

Pell grant spending, that was a huge gimmicking of the process, 

using the reconciliation bill, creating a student loan interest rate, 

snapback. On the student loan interest rate, it drops to 3—I think 

it is 3.4 percent, but it goes back up to 6.8 percent in 2012. Why? 

To gimmick PAYGO so PAYGO does not look like it has been violated. 

The PILT program, which is the county Payment in Lieu of 

Taxes program, again, another gimmick used in the Senate-passed 

bill to extend that program, declaring it an emergency. 

The SCHIP program, which had this huge, huge gap—so we basi- cally reduced SCHIP in 2012 back to a $3.5 billion per year program from a $14 billion per year program in order to declare that 

it had met PAYGO. So there is a $45 billion—billion—hole on the 

PAYGO side. 

The farm bill, now that is a classic one. The farm bill is a $9.8 

billion PAYGO gamesmanship, and then, of course, there are hidden costs in the farm bill which represent $17 billion, all of which 

adds up to $143 billion in PAYGO gimmicking around here. 

I would like to return to the issue of tax policy, which I think 

is critical. I believe it is intuitively obvious that if you are dealing 

with something like our Internal Revenue Code, which has literally 

thousands of deductions, thousands of ways to basically invest or 

not invest, and you create different tax rates on you as an individual or on you as a business, those incentives for investing or not 

investing are driven by social policy or political policy, but not necessarily by efficient use of economic dollars policy. The most efficient use of economic dollars, would be to simply say to people, 

‘‘Here is your money, here is your tax rate, you invest in the ways 

that you are going to get the best return.’’ That is not what our 

tax law says. It says, ‘‘Here is your money, here is your tax rate, 

but you can change that tax rate if you invest in A, B, C, D, E, 

F,’’ some of which is not efficient at all. 

In that type of an atmosphere, where you have that type of a tax 

law, it is intuitively obvious that as you get rates higher and higher, people will take action, legal action, to avoid taxes by investing 

in a way which basically undermines productivity in the economy. 

Is that incorrect, Mr. Secretary? 

Secretary PAULSON. That is correct. We had a conference at 

Treasury where we brought all kinds of experts from all over, and 

they clearly talked about all of the distortions and all of the policies—and the special benefits that are there for one industry or one 

company or another—that drive behavior in ways that are not always desirable. Complexity is an issue, and it is an issue very 

much with the individual income taxes and with business taxes. No 

doubt about it. 

Senator GREGG. Actually, Senator Wyden and I are hoping later 

this year to introduce a bill which would go back to sort of the 1986 

385 

Tax Act reform approach, which takes a lot of this out and gets us 

to a much lower rate and allows the economy to be hopefully more 

efficient. But the second approach is, of course, this approach 

which, if you look at the Chairman’s chart there, I suspect that 

most of the countries which are above us in terms of revenue as 

a percent of GDP, especially if they are European countries, are 

using a value-added tax as their basic source of revenue. 

Secretary PAULSON. You are absolutely right, sir. 

Senator GREGG. And I suspect, in fact, that their corporate rates 

are significantly less than ours and that their capital gains rates— 

for example, Ireland, I think, has a 15-percent corporate rate and 

a 0 capital gains rate, or something like that. 

Secretary PAULSON. Absolutely. I remember spending a lot of 

time in my former job talking with Government leaders in many 

of these European countries. And at first they complained vociferously about what Ireland and England were doing, and they said 

it was unfair competition. Then they finally woke up and have 

started lowering their corporate rates and changing the form of 

taxation. 

Senator GREGG. And isn’t this actually affecting our ability to 

form capital in this country? One of the concerns many of us have 

is that London is sort of becoming a center—and you, of course, are 

the ultimate expert on this—a center of initial public offerings and 

capital formation versus New York. U.S. capital markets, obviously 

still the leading capital markets in the world, are being tested by 

the competition. And that competition is driven in large part by our 

tax policy here, as well as, obviously, our regulatory policy. 

Secretary PAULSON. Well, first of all, you are not going to get me 

to say the U.S. isn’t No. 1 in capital markets. 

Senator GREGG. No, I am not saying it isn’t. I am just saying 

that there is competition. 

Secretary PAULSON. What I will say is that in today’s world it is 

increasingly easy for major corporations, multinationals, to set up 

a headquarters wherever they choose to. And, the number of companies we have headquartered in the United States is a big benefit 

to us. I just think we need to be increasingly mindful of that and 

think about the impact on jobs and growth. To me the one thing 

to look at is which tax policy will help the American people the 

most, create the best jobs for our citizens. 

Senator GREGG. In that context, the Chairman has complained 

about the $2.2 trillion, maybe it is $2.7 trillion, of what the Chairman and members on his side of the aisle view as tax cuts, which 

is basically the extension of present tax policy over the next 5 

years, current tax policy being a 15-percent capital gains rate, a 15- 

percent dividend rate, lower estate tax rates, and lower marginal 

rates. 

If we were to raise those rates in this weakening economy in 

order to raise the $2.2 trillion that the Chairman feels is inappropriately in the budget from the President’s side, what would be the 

practical effect of that in this slowing economy? 

Secretary PAULSON. I think very few people would recommend 

that. That is the last thing you would want to do right now, given 

what is going on in our economy. And on top of that, using capital 

gains as an example, I believe that it is intuitively obvious that 

386 

when you tax something, you have less of it. And I believe capital 

is a key to capital investment and to good jobs. So there is plenty 

of room for reform and simplification of all aspects of the tax system. 

Senator GREGG. Thank you. My time has expired. 

Chairman CONRAD. I thank the Senator. I thank the Secretary. 

I just want to hopefully conclude on PAYGO. 

Senator GREGG. I would like time to respond. 

[Laughter.] 

Chairman CONRAD. Well, you will have your chance. 

Look, the simple fact is the PAYGO scorecard had a positive bal- ance of $1.3 billion over 11 years. Every bill sent to the President— 

the Senator has a list here of things that never went to the President, never completed action. That is not how the PAYGO scorecard works, I would say to the Senator. The way the PAYGO scorecard works is what gets sent to the President, and the fact is we 

had a positive balance on the PAYGO scorecard of bills sent to the 

President, with one exception, and that was alternative minimum 

tax relief that the administration insisted not be paid for. That was 

done over this Senator’s objection. But that is the fact. The Senator 

has all kinds of things his staff has put together. They criticize the 

College Cost Reduction Act. According to the Congressional Budget 

Office, which is the official scorekeeper, that contributed to a positive PAYGO balance, was not a violation of PAYGO. And if you 

look at—— 

Senator GREGG. Well, that is because it was gamed in by moving 

the interest rate back up to 6.8 percent. That is the only way you 

get to that number. 

Chairman CONRAD. It was paid for, sir, by the scoring from the 

Congressional Budget Office. You do not agree with the means that 

were used to pay for these things. You do not agree with it. That 

is your business. 

Senator GREGG. No, I do not—— 

Chairman CONRAD. I would just say to the Senator, you did not 

like the Democratic budget, but you never offered a budget. So, 

frankly, if you do not offer a budget, you know, it is hard to take 

very seriously your criticisms of a budget that is adopted and is 

passed and is put into place. If you are going to offer a budget, 

then I think you have something to say. But you did not offer a 

budget. 

Now, this year, we will eagerly await your budget submission, 

and I would be—— 

Senator GREGG. Well, let me respond to that. 

Chairman CONRAD. I would be happy to have you respond. Go 

ahead. 

Senator GREGG. The point on PAYGO is that you offered—not 

you personally, because I know you believe very firmly in PAYGO. 

But your party offered up a budget which supposedly was going to 

be disciplined by PAYGO. And then on the Senate floor, either 

through gimmicks or through direct waiver, PAYGO was gamed to 

the tune of $145 billion. And the student loans is a perfect example 

of that. You set the rate at 3.4 percent, which was a very nice thing 

to do, and it was appropriate, and we recovered the funds from the 

lenders that were getting a windfall. But then in the fifth year, you 

387 

jumped the rate back to 6.8 percent because you could not make 

the PAYGO numbers work under the lower interest rate that you 

had set. Now, that interest rate snapback is not going to happen. 

The same thing happened with SCHIP where basically you set a 

reasonable rate on SCHIP, a $14 annual billion program, and then 

in the fifth year you take the program down to $3.5 billion per 

year, in order to meet PAYGO. Obviously, that is not going to happen. These were all gimmicks. 

Now, I understand the PAYGO scorecard, but the PAYGO scorecard only can be viable because these gimmicks were used—and 

some of these bills were stopped, obviously, but the gimmicks were 

used. So that is my point. Now, you have given your point, I have 

given my point. We disagree. That is the way we should—— 

Chairman CONRAD. We do disagree because what is your gimmick, two-thirds of what you have described as gimmicks have 

been scored by CBO as legitimate— 

Senator GREGG. Well, they have no choice. 

Chairman CONRAD. Well, they have no choice because they, in 

fact, are paid for. That is why they have no choice. These things— 

Senator GREGG. But they are not realistic. 

Chairman CONRAD. Well, in your mind they may not be realistic. 

Let’s talk about SCHIP. Is anybody—— 

Senator GREGG. A $3.5 billion program—— 

Chairman CONRAD. Well, does anybody believe that we are not 

going to change the health care system of this country in the next 

5 years? That is not your position. Your position is not that we can 

just stay with the current system. 

Senator GREGG. Of course. 

Chairman CONRAD. And it is not my position. And so talking 

about what is going to happen in the fifth, sixth, seventh year 

frankly is not terribly relevant to the real world—— 

Senator GREGG. Well, it is to—— 

Chairman CONRAD. And the fact is it was paid for under the 

PAYGO rules. Now, look, the larger—— 

Senator GREGG. It—— 

Chairman CONRAD. No. The larger—but you have raised this, 

and I am going to answer it. 

Senator GREGG. No, no. You actually raised it. 

Chairman CONRAD. No. You raised the PAYGO issue. I did not. 

Senator GREGG. One of us did. 

Chairman CONRAD. The reality here is that PAYGO has disciplined this process. No one knows that better than I do because 

I am the one who has to referee this, and I can tell you PAYGO 

has stopped tens of billions of dollars of spending around here. I 

deal with it every week. Anybody who says PAYGO has not contributed to the disciplining of the process is not being straight with 

the American people or colleagues on this Committee. 

Senator Murray? 

Senator MURRAY. Thank you, Mr. Chairman. 

Mr. Secretary, thank you. Good to have you here. I wanted to 

talk with you about an issue that concerns me a lot, and that is 

one that I know you have spoken to as well. Early on in your tenure at the Treasury Department, you actually distinguished yourself from your two predecessors by highlighting the issue, and that 

388 

is the one of the growing wage and wealth inequality in America. 

I know that during a speech at Columbia University, you spoke to 

that issue and talked about how the wage gap has grown, I think 

it is more than 60 percent since 1975. You said, ‘‘Amid this country’s strong economic expansion, many Americans simply aren’t 

feeling the benefits.’’ You cited rising energy and health care costs 

as part of the problem in that inequity, and I agree with you. I 

would also argue that globalization, with all the good that it brings, 

bring economic disparity as well, particularly with some of the 

weaker labor and environmental standards that we see overseas. 

And it is hard for American workers to compete with that, especially, I think, in the area of manufacturing. 

But independent of all the causes, the erosion of the middle class 

is an issue that I am very concerned about, so I am somewhat confused by what you said in your testimony today. You said that the 

President’s budget continues to press for long-term economic policies that are in the country’s best interest, with specific reference 

to making permanent the 2001 and 2003 tax cuts. 

Do you believe that extending the 2001 and 2003 tax cuts helped 

to reverse that growing income and wealth inequality that you talk 

about in our country? 

Secretary PAULSON. Senator, I look at the purpose of the tax system as being to raise revenues and do it in a way that promotes 

growth, because I think promoting growth and jobs is going to help 

American workers and American citizens. 

So I would agree with Senator Gregg in saying what we have 

seen happen under this President is that low-income earners, families of four right up to $42,000, no longer paying Federal income 

taxes. And when you look at the top 5 percent, the top 20 percent, 

they pay more than they ever paid. 

We have also done analyses at Treasury that show that we have 

more economic mobility than I have seen in just about any other 

country. So the great thing about our system, as you look at the 

people who move out of the bottom the move up the ladder, some 

all the way to 20 percent, the top. So that is all good. 

But to get to your point, I think the structural issue we are dealing with right now is an issue that has partly to do with 

globalization, and largely to do with automization and technological 

advancement. And I think the challenge that we are increasingly 

going to have, in the United States and other developed countries, 

is how to get the skills to the people, how to provide more skills, 

more training to the people that are going to need it to compete. 

I think we have to be careful with some of the tax policy changes 

that some would like to make through the use of our tax system 

to further redistribute wealth, because what you may find is that 

it is going to slow down growth and slow down job creation. 

So, again, my big focus is on tax policies that are going to create 

better jobs over time. 

Senator MURRAY. Right. But you said the economic mobility of 

workers is there, but we have to have job training and skills training in order to give those people the ability to be mobile. 

Secretary PAULSON. That is right. 

Senator MURRAY. What concerns me is that the budget that 

President sent us, by extending those tax cuts, forces large cuts; 

389 

and where the President has chosen to do that is in the very education and training programs that that lower class needs in order 

to have that economic mobility that you just referenced. 

Secretary PAULSON. When Margaret Spellings is here, she and 

others may talk more about what is in the education budget. But 

what I was talking about is that I do think that in the future we 

are going to have to rethink how we think about skill training to 

get the worker who is—— 

Senator MURRAY. Well, do you agree with the President’s budget 

that cuts job training, low-income housing assistance, home heating 

assistance, food assistance for seniors, all those things that the 

lower economic strata needs to have that economic stability to 

move up? 

Secretary PAULSON. I think when you are talking about some of 

the programs you are talking about being cut, again, I would note 

that putting together a budget is a very difficult thing given 

the—— 

Senator MURRAY. Well, especially when you do not have the revenue if you are giving tax cuts. 

Secretary PAULSON. But I would say a lot of the programs you 

mentioned were not the kinds of skill training that—— 

Senator MURRAY. Well, but the President’s budget actually cuts 

job training and skill training dollars. So would you agree that that 

is probably not a wise place to put your cuts? 

Secretary PAULSON. Well, I will tell you, the programs that I 

have looked, and these programs in the middle of my plate here, 

but the ones that I have looked at most carefully, for instance, 

trade adjustment assistance and others, I view as very much structurally flawed. I think it is not going to be just a matter of throwing money at something called training. It—— 

Senator MURRAY. Well, but not having any resources, wouldn’t 

you argue—OK. I hear you saying we need to give those people the 

skills. 

Secretary PAULSON. Right. 

Senator MURRAY. But you are here defending a budget that takes 

away our ability to give those people the skills. 

Secretary PAULSON. Well, again, I wouldn’t make it quite as simple as you do. In terms of the specific programs, I do not have the 

details on the specific programs, and, again—— 

Senator MURRAY. Well, then I would just argue—— 

Secretary PAULSON. Some of the programs that I have looked at 

I felt were structurally flawed and should be reformed before more 

money is put into. But to get to your basic point, I very much agree 

that there is a widening income gap, wealth distribution—— 

Senator MURRAY. And you would agree that we need to train 

workers in order to give them the economic ability to move forward? 

Secretary PAULSON. I think that is increasingly going to be the 

challenge that we face in today’s—— 

Senator MURRAY. And I would argue that the President’s budget 

does not give us the flexibility to do that. 

Secretary PAULSON. I hear your argument. 

Senator MURRAY. All right. Thank you very much. 

Chairman CONRAD. Senator Bunning. 

390 

Senator BUNNING. Thank you, Mr. Chairman. I am sorry that 

you and the Ranking Member are having a bad day. 

[Laughter.] 

Chairman CONRAD. We are actually have—we are having a good 

day, other—just on this one area of disagreement. Other than that, 

we are having a very good day. 

Senator BUNNING. Oh, good. I am very happy to hear that. 

Secretary Paulson, I want to ask you a question about your policy on China currency. Last month, one of your colleagues, Chris 

Padilla, praised China for ‘‘brokering the most remarkable economic and social transformations in human history,’’ and that is a 

quote. If you occasionally read Daily Report for Executives, I have 

it outlined in here. 

Later, when he came back home, he said that legislation—I have 

sponsored it with 21 other Senators—that deal with China manipulating its currency ‘‘won’t work’’. ‘‘I could throw armies of people at 

the problem,’’ he said, ‘‘but I just don’t know how we would do what 

we are being asked to do.’’ 

That is a very revealing statement, Mr. Secretary, and I am troubled by it, because employment in manufacturing is down, and this 

is one of the reasons for our economic weakness. I know where you 

stand on this. 

I know you prefer to stick your head in the sand while China manipulates the WTO rules, denies us access to sell products there, 

counterfeits our goods, exports corrupted products, and exports prolonged unemployment here by manipulating its currency. But you 

must understand that the Administration does not control trade 

policy. 

I am troubled by Mr. Padilla’s statement because it is suggests 

that you will not carry out the law when we enact it. It also suggests to me that you are ignoring laws on the books. For years, you 

have failed to recognize that China is manipulating its currency, 

and this has made it impossible for the United States to seek 

changes through the IMF. Do we need to add civil penalties to our 

bill? 

Secretary PAULSON. Senator, let me say I have been accused of 

many things; this is the first time of sticking my head in the sand. 

Senator BUNNING. It will not be the last. 

Secretary PAULSON. Although some people think that with my 

bald head, maybe it would be better under the sand. But let me 

respond very clearly to you. 

I have engaged very actively with China, and I think with some 

results when you look at the currency. Do not be confused by the 

fact that I say I would like them to move quicker, because I would 

like them to move quicker. But the rate of appreciation of their currency roughly doubled last year to 6.7 percent. In the last 3 

months, their currency appreciated 4 percent. 

Senator BUNNING. If you add inflation to the fact, in the United 

States it almost is negated. 

Secretary PAULSON. Do you want me to continue and answer—— 

Senator BUNNING. Well, sure. That is why you are here. 

Secretary PAULSON. And answer your question, sir? Well, I will 

answer it. 

391 

So I said they are definitely moving quicker. I would like them 

to move even faster. 

Now, to get to the question of legislation, I will just be direct 

since you are direct with me. I think it is bordering on the silly to 

say that one nation—— 

Senator BUNNING. Well, you are going to get it. 

Secretary PAULSON. OK. 

Senator BUNNING. Whether you like it, and you can have the 

President veto it, and we will override his veto. 

Secretary PAULSON. Well, if I could just finish—for one nation to 

legislate another nation’s currency policies or macroeconomic policies. 

Now, the other thing I would say, with all due respect, is that 

we are in a market right now where we are benefiting greatly from 

the growth of our exports, we are benefiting from trade. That is one 

of the drivers we have right now—— 

Senator BUNNING. Yes, the dollar has a lot to do with that. 

Secretary PAULSON [continuing]. Over our economy, and I would 

say again, with all due respect, that I think given what is going 

on in the capital markets, the last thing in the world we need is 

something like this. I believe that. And I also think—— 

Senator BUNNING. We have a major difference of agreement. 

Secretary PAULSON. We do. And I also think the other place we 

have a difference of agreement is that some of those people who 

wish that China would have economic problems are wishing for the 

wrong things. That is what we do not want and what we do not 

need. 

Now, I have to say, I think we are making real progress—— 

Senator BUNNING. Sir, you are using up all the time I get. I get 

7 minutes, and you are using up all the time answering one question. 

Secretary PAULSON. OK. 

Senator BUNNING. I want to ask you about the economic stimulus 

package. 

Secretary PAULSON. OK. 

Senator BUNNING. I understand that in your negotiations with 

the House leaders, there was give and take. The final package represents some of Speaker Pelosi’s priorities and some of the President’s priorities. Each side put aside its differences in the interest 

of the American people, and I hope we will do the same thing when 

we vote on the economic stimulus package. 

Yesterday, when you testified before the Finance Committee, you 

seemed to indicate that the President is willing to allow some 

changes to the bill. Can you tell us in general terms what changes 

the President is willing to accept and what changes he will not accept? 

Secretary PAULSON. Senator, let me first of all say you are right, 

the House bill is a bipartisan bill. I very much would prefer the 

House bill and would like to see that enacted quickly. That is No. 

1. 

No. 2, I am increasingly concerned that in the Senate the bazaar 

is open, the special interests are coming to the trough. And when 

I am reading about and hearing about things like tax rebates for 

coal companies, benefits for oil well drilling and things like this, I 

392 

am concerned that it is going to get bogged down. I am concerned 

that if we see things that are not stimulus and are not going to 

get money to the American people quickly, it will get bogged down. 

So to me, the point I want to make is that time is of the essence. 

Some people have said timing does not make much difference, we 

cannot do anything until after April 15th. Nothing could be further 

from the truth. The day that a bill gets on the President’s desk, the 

IRS can start working. More or less within 60 days, with a little 

timeout for a few weeks in April, we can start getting checks to the 

American people and make a difference in the economy. 

So, first and foremost, I would say it has to be done quickly. If 

it is not, the American people are going to pay the price. The economy is going to pay the price. And complexity is our enemy here, 

and provisions that are not stimulus are our big enemy here. We 

are seeing some businesses saying that they would like some cash, 

give us some money. But if it is not stimulus, I do not think it is 

wise. 

So that would be my answer. 

Senator BUNNING. Thank you. 

Chairman CONRAD. I thank the Senator. 

Senator Sanders? 

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

It is a strange morning. I almost find myself in agreement with 

something that Senator Bunning said. There you go. How is that? 

Senator BUNNING. Well, isn’t that amazing? 

Senator SANDERS. Isn’t that amazing? 

Senator BUNNING. It is amazing. 

Senator SANDERS. All right. And Mr. Paulson, Mr. Secretary, 

thank you very much for coming, and I think you deserve a special 

commendation for giving us one of the shortest introductory remarks that I have experienced. Thank you very much. And thank 

you for being—although it does not necessarily say a whole lot— 

one of the illuminating lights of the Bush administration. It does 

not say a whole lot, but thank you very much for being here. We 

appreciate it. 

Now, I take a different look at economics, I think, than many of 

my colleagues. I share Chairman Conrad’s deep concern about 

what this deficit and national debt is going to mean for our kids 

and our grandchildren and the future of this country. But I kind 

of look at economics as a question of winners and losers. You know, 

when we look at the Super Bowl, nobody goes around saying, well, 

they scored 31 points. Yes. Who got 17 and who got 14 is the issue. 

So we talk about economic growth, we talk about jobs, and all that 

stuff. That is great. But at the end of the day, what people want 

to know is who is winning, who is losing. And the reality is indisputable that the winners in this economy are not only the wealthy, 

but they are the super, super, super wealthy. 

We are in a situation now—and I do not want to suggest that 

it just began when George Bush became President. It certainly has 

been a long-term trend. It has accelerated under George Bush. We 

have a situation today which to my mind is quite incredible for a 

major industrialized Nation, because it is unparalleled in the industrialized world, where the wealthiest one-tenth of 1 percent— 

393 

300,000 men, women, and children—earn more income than the 

bottom 50 percent of our population—150 million. 

So when my friend from New Hampshire talks about economic 

growth and job expansion and all this stuff, the question is: Who 

gets what? And the reality is the people on top are making out like 

bandits while poverty is increasing, while millions of people—since 

Bush has been in office, 8 million people have lost their health insurance, 3 million people have lost their pensions, median family 

income for working families has gone down. 

Now, in the middle of all that, I am not a believer in magic like 

my friend from New Hampshire, and he thinks all we have to do 

is give tax breaks to billionaires and, voila, every good thing happens. Now, he forgets to mention that when Clinton was in office, 

at the end of Clinton’s administration, he raised taxes on the 

wealthiest people in this country. Guess what happened? More tax 

revenue developed. 

Now, it is true tax revenue is coming in now. But I think most 

economists, probably including you, would not think that there is 

a magic formula that giving tax breaks to billionaires suddenly results in more revenue coming in. 

My question is a simple one. If you look at the needs of ordinary 

people, as you know—you read the polls—massive dissatisfaction 

with the state of the economy, front-page story Washington Post 

just yesterday, and we understand why. Tell me why you think the 

repeal of the estate tax, $1 trillion which will go to the wealthiest 

three-tenths of 1 percent, $30 billion to one family, is more important than providing weatherization for low-income homes, a 

LIHEAP program, decent health care, decent education, not forcing 

our veterans to pay $250 or $750 more to get into the VA. Tell me 

why you think we should give $1 trillion over 20 years in tax 

breaks to the wealthiest three-tenths of 1 percent. 

Secretary PAULSON. Senator, hopefully you will find this constructive. In the interest of doing something that brings people together, take a look at the estate tax, because I think what we have 

here is something that no one on your side would find very desirable. We have a situation where today, the exemption amount is 

2 million. Next year it will be 3.5 million. Then you are going to 

have a situation in 2010 where the estate tax is totally repealed. 

And then in 2011, you are going to have a situation—— 

Senator SANDERS. Mr. Secretary, I do not have a lot of time. I 

am familiar with all that. We are all familiar with that. 

Secretary PAULSON. So what I am saying is to me the President 

has been very up front, forward leaning in saying, let’s get together 

and for the good of the American people, work something out. 

Senator SANDERS. Well, but no, no, that is not quite accurate, sir. 

Secretary PAULSON. And that—— 

Senator SANDERS. No, let me have it back. 

Secretary PAULSON. And you would be against that? 

Senator SANDERS. Let me have it back. I love working with everybody, but that is not what we are talking about. He wants—in 

1 second, answer my question, please. You are a direct guy. Ninetynine-point-seven percent of the people do not gain one penny by the 

complete repeal of the estate tax. All of the benefits go to the very 

wealthiest. One family—let me finish. One family, the owners of 

394 

Wal-Mart, the Walton family, gets $30 billion in tax relief over the 

period. Meanwhile, this budget is cutting back on food programs for 

low-income senior citizens. Tell me why you think it is more important for the Walton family to get a $30 billion tax break than lowincome seniors get nutrition. 

Secretary PAULSON. I do not think that is the right way to frame 

the issue. It is—— 

Senator SANDERS. I think it is exactly the right way to frame it. 

Secretary PAULSON. The President has been very clear that he 

believes that the estate tax should be eliminated. 

Senator SANDERS. Yes. 

Secretary PAULSON. But he has also been very open to saying—— 

Senator SANDERS. But you are not answering my question. The 

President, as you just said, wants to eliminate it. You tell me why 

that is a good idea. Don’t tell me that we may negotiate it. We are 

in the majority now. Of course we will negotiate. 

Secretary PAULSON. I am saying that the question is: Why aren’t 

you trying to negotiate something and reform this? Because I do 

not believe the American people want the exemption to be as low 

as $1 million—— 

Senator SANDERS. You did not answer my question. The Presi- dent wants to give $1 trillion in tax breaks—does he or does he 

not? Am I inaccurate? 

Secretary PAULSON. The President does not want tax rates to go 

up. 

Senator SANDERS. The President wants to give—tell me if I am 

right or wrong. Three-tenths of 1 percent of the population, all millionaires and billionaires, will get $1 trillion in tax breaks if we do 

what the President wants. Is that true or not true? 

Secretary PAULSON. I do not believe it is true. 

Senator SANDERS. What do you disagree with? 

Secretary PAULSON. I would simply say that the $2 trillion tax 

number is if the tax relief was not permanent: tax rates would go 

up and everyone would pay the cost. In terms of the—— 

Senator SANDERS. OK. I do not want—we do not have a lot of 

time. 

Secretary PAULSON. OK. 

Senator SANDERS. Here is what the story is, and the reason why 

I think people are very upset about what goes on in Government, 

and especially at the White House. Major cuts in programs that 

people desperately need at a time when poverty is increasing and 

the middle class is shrinking, and people look incredulous. You 

want to give tax breaks to billionaires when ordinary people are 

hurting, drive up the national debt, drive up the deficit, cause more 

pain. And you have no answer. You did not give me an answer. 

That we would negotiate, that is fine. 

Secretary PAULSON. I would say the answer, which I just said, 

and the Chairman and I were talking about it earlier, is that we 

need to bring people together. There is no doubt that the President 

has made clear that he would like to reform the estate tax. 

Senator SANDERS. Reform the—no. The President has said he 

wants to repeal the estate tax. 

Secretary PAULSON. He has said he is willing to compromise. You 

all know that. And the American people would love to see a comVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00400 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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promise and would love to have some certainty. And there are 

many, many Americans, hard-working Americans—— 

Senator SANDERS. All right. Last question—— 

Secretary PAULSON [continuing]. Who own farms, who—— 

Senator SANDERS. Last question—very hard to find a farmer, a 

small farmer, who benefits. Last question. Last question. As you 

know, oil prices are soaring. Correct? Our friends at Exxon Mobil 

are doing very well. The average person cannot hear their home. 

All right—let me finish. And yet in your wisdom—in your wisdom, 

oil prices are soaring, middle class is shrinking, poverty is increasing. You substantially cut back on the LIHEAP program. Please 

tell the American people the sense of that. The LIHEAP program, 

as you know, is fuel assistance for low-income people, 40 percent 

of whom are senior citizens. Tell me why it is a good idea with oil 

prices soaring to cut back on LIHEAP so that people go cold in 

America. 

Secretary PAULSON. That is a little bit like asking me, when did 

you stop beating your wife? You know, that is a loaded question. 

Senator SANDERS. Well, if you were beating your wife, I would 

ask you that question. 

[Laughter.] 

Senator SANDERS. But what you are doing is giving forth a budget which makes people go cold. Why do you do that? 

Secretary PAULSON. I do not agree with your basic hypothesis 

that we are offering a budget that is making people go cold. 

Senator SANDERS. Oil prices are going up, and you are cutting 

back on LIHEAP. What do you think the implications of that are? 

Secretary PAULSON. Senator, I understand your point of view. 

Thank you for it. 

Senator SANDERS. Well, I wish you would answer the question, 

sir. 

Chairman CONRAD. Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. 

I want to go back to the chart that you had brought up at the 

start of our discussion here, where you implied that—well, it 

showed on your chart that if you have increased taxes, the economy 

was going to grow more. And I just want to be very specific in my 

question to the Secretary here. In relation to corporate taxes, that 

does or does not apply? 

Secretary PAULSON. This chart? 

Senator ALLARD. Yes, that we talked about earlier. 

Secretary PAULSON. Yes, what I said is that when I looked at 

that chart, the countries at the top of the chart and the one at the 

very top had the lowest corporate taxes, OK? 

Senator ALLARD. OK. So the point that you want to make is that 

the lower the corporate taxes, then the better the economy. 

Secretary PAULSON. I would have to look at every one of those 

countries before I made that point quite as emphatically as you did. 

But the one thing I have looked at is not only the total amount of 

taxes but the form of those taxes. And I believe that our taxes on 

corporations are relatively high, and the form of the taxes we 

charge inhibits growth. And, that countries that rely to a greater 

extent on consumption taxes are able to raise more money with 

396 

less of an impediment on growth and jobs and competitiveness 

than our tax system will allow. 

Senator ALLARD. Well, how do we rate on capital gains tax with 

other countries? 

Secretary PAULSON. I have not done a study with all other countries. 

Senator ALLARD. Well, I think we are high. 

Secretary PAULSON. Yes, I believe we are. 

Senator ALLARD. I think we are very high. I do not know that 

we are at the highest—we may even be at the highest, but I know 

it is very high compared to other countries. Would that have an adverse impact on our economic growth? 

Secretary PAULSON. Clearly, when you get to corporate capital 

gains, this is a concept that does not even apply in certain other 

countries. But we have corporate capital gains at a level above 

even individual capital gains. But, again, I am just a believer when 

it comes to taxing something, if you tax it, you have less of it. And 

I think capital is what we need for investment to drive jobs and 

growth. 

Senator ALLARD. Do you want to explain to me why you think 

we have companies that leave the United States and move to other 

countries? I think Senator John Ensign had proposed a repatriation 

provision where that if we get certain companies a tax break, they 

would move back in. And as a result of that, even though it was 

scored negatively—this happened last session, last year or so, these 

companies responding—it actually had a very positive impact on 

our budget because they would have been moving back. Do you 

want to talk about that? 

Secretary PAULSON. What I would say is when you look at corporate taxation, the rest of the world uses a system, by and large— 

and this is an oversimplification—under which their corporations 

pay the rate that the domestic companies pay in any particular 

country. We charge that rate, and then we gross it up for the U.S. 

rate. We charge a tax to bring money back. 

That does not seem to make a lot of sense to me, because you 

would think it would be in our interest to have our companies 

bring money back to the United States. And, again, I think it benefits us if our companies are able to compete successfully outside of 

this country as opposed to ceding that ground to the competition. 

Their success globally helps drive jobs and growth in the United 

States, and that is just simply the way I look at it. 

Senator ALLARD. What about the marginal tax rate on corporations? Is that beneficial to deal with marginal tax rates? 

Secretary PAULSON. Well, there are three or four ways in which 

to approach this, and one would be to bring that rate down rather 

dramatically and simplify. There are a number of other ways, but 

I think that would one effective way of looking at it. 

Senator ALLARD. Now, I am assuming when you are talking 

about simplifying, you are talking to a certain degree about regulatory relief, and there is a cost to it. So that kind of brings me 

into another question. You know, if we look at some of the regulatory costs in the economy, I think that has an impact. Do we 

have some unnecessary regulatory costs in our tax structure that 

397 

we can deal with without going into complete tax reform, like a 

value-added tax? 

Secretary PAULSON. There are many things we can do to simplify, and we at the Treasury Department have tried to simplify 

the regulations. But I would say that the whole momentum is 

going in the other direction, because when Congress and others 

want to drive a certain policy, they very often look to put something in the tax code. And so our tax code, as you know, is overly 

complex on the corporate side and on the individual side as well. 

Senator ALLARD. I happen to be of a different persuasion than 

what you have heard around here. I do not have a problem with 

the differentiation between a low tax rate and a high tax rate because I think what happens, instead of shrinking the middle class, 

you have actually expanded the middle class. I think it also indicates that your economy is more mobile. In other words—— 

Senator SANDERS. Will the gentleman yield? 

Senator ALLARD. I will not yield, sir. 

Senator SANDERS. OK. 

Senator ALLARD. You know, when you start out, out of college, 

like most of us did, you usually start out at a minimum salary, but 

then there is hope of being able to move up—and so that differentiation just indicates the upward mobility and the growth in our 

economy, and you have to have it there. Otherwise, what you begin 

to do is you begin to destroy the opportunity for new people entering into your economy to grow and someday gain the advantages 

that the previous generation enjoyed. 

Secretary PAULSON. Senator, when I look at what positively differentiates us from a number of other countries, it is income mobility. And as troubling in some ways as is the widening income gap 

and wealth distribution gap, it is encouraging to see the mobility 

we have in our economy and among our workers and our people. 

As far as I am concerned, though, it does not take away the need 

to keep this economy growing, and I do believe that the biggest 

challenge we are going to have in the next 20 years, one of the biggest challenges, is finding ways to get skills to the people who are 

going to need them to compete in this economy. And I have had a 

lot of experience working with manufacturing companies, and I 

keep coming back to this is example. In 1950, we had 15 million 

manufacturing jobs in the United States. That was 30 percent of 

our work force. Today we have 15 million. That is 10 percent of our 

work force. And people say, where did the manufacturing jobs go? 

Well, the output is 7 times greater. Each worker produces 7 times 

the output. We are the largest manufacturing country in the world, 

2–1/2 times bigger than China. 

But to me, the issue is automation. When I walk through plants, 

I used to walk through a Caterpillar plant in my early days and 

see a lot of workers. Now I see automation. 

We are creating a lot of other good jobs, but, again, this challenge we face is faced by other—— 

Senator ALLARD. Well, I just want to make a point. I would like 

to hear your explanation of how you encourage the economy to 

grow when you compress people’s ability to grow in that economy 

by trying to compress the wealthy down with the poor. 

398 

Secretary PAULSON. We can look at the issue, which is the widening gap. To me, I would not look at the tax code as a way to address that issue. The tax code under this President hasten more 

progressive. You can just look at the numbers. It has become more 

progressive. 

Senator ALLARD. I agree. 

Secretary PAULSON. The challenge is to create jobs and to help 

people that need the help, and that is—— 

Senator ALLARD. Yes, but you are going to have to do some explaining to me how you are going to com6press people by not allowing them to grow income and reach higher levels, and yet expect 

your economy to grow. I just think it is very difficult, and I do not 

think you can do it. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Whitehouse? 

Senator WHITEHOUSE. Thank you. 

Secretary thank you for being here. I have a personal view that 

we have a White House that, in a fashion rather unique in recent 

history, really loathes and despises the American process of government, and that, you know, judicial review is anathema to them 

even though it is a core constitutional principle. They would like 

to do things without congressional oversight everywhere possible. 

And I cannot help but have that opinion in mind when I see the 

way the stimulus package is proceeding. 

We have a bicameral legislature. We have always had a bicameral legislature. It should not be news to anyone that the 

United States of America has a bicameral legislature. So the idea 

that a stimulus package gets negotiated between the White House 

and the House of Representatives and that is supposed to end the 

process is just silly from a process point of view. I cannot express 

how basic the process question is here. And I really think that unless this administration in its last year wants to govern by veto 

and veto alone, then in order to be relevant, you also have to be 

reasonable. You cannot just use force and pressure to get your way. 

And what I see right now as backdrop to this is the White House 

putting intense pressure on Republican Senators, heavily arm 

twisting to get them to vote against the Senate Finance stimulus 

package despite the fact that it will put them in real peril with 21 

million seniors out there who will see a benefit that is now waiting 

for them stripped, despite the fact that it will cause intense damage to the wind and solar industry from the tax rebate not being 

granted to them, despite the fact that 250,000 veterans would 

lose—disabled veterans would lose a benefit. 

It strikes me that the sensible thing to do, and consistent with 

the American process of Government, which is no mystery to anybody, would be to let the Senate do its work, since you have not 

negotiated with us, and then take the bill that emerges from the 

Senate, and then it goes back to conference. And in conference, 

with the input from the White House, the House and the Senate 

negotiate to a bill that then goes to the President for signature. 

But the idea that you try to stop this in the Senate without the 

Senate having any voice in the process by putting pressure from 

the White House on us I think is a misuse of the American process 

of Government, and I would urge you to use your credibility and 

399 

your authority in this administration to ask them to calm down, to 

take the pressure off the Republican Senators, to let this thing 

work its way through the legislative process, to take it up in conference, and to come up with a bill. Because I really do not think 

it is such a bad thing to give 21 million American seniors a break 

or to give 250,000 disabled veterans a break that is worth putting 

the White House into the legislative process and stopping this 

stimulus. Because what is stopping the stimulus is the White 

House pressure on Republicans Senators jamming it up. 

Secretary PAULSON. Senator, let me respond to that. 

Senator WHITEHOUSE. I wish you would. I would appreciate the 

opportunity to have you discuss this. 

Secretary PAULSON. I would say, first of all, that what was done 

in the House was bipartisan and was simple. 

Senator WHITEHOUSE. But not bicameral, and we are talking 

about the American process of Government. 

Secretary PAULSON. I was going to get to that. And the reason 

it was able to be done was that your leaders said, in the interest 

of speeding up the process, why doesn’t the house take the lead, 

work something out in the House, and then the Senate can take 

it up quickly. 

Now, I recognize and the Administration recognizes—and I am 

leading the effort from the Administration, so if you are going to 

point the finger, point it at me—but we recognize that the Senate 

has an important role to play here. I recognize that. And what I 

said yesterday, when I was asked a question about low-income seniors and veterans, is that the starting point was the 2001 legislation where the rebates went to taxpayers. The House changed that 

and broadened it to include working families. And when the question was put to me about seniors, low-income seniors, and veterans, 

I said I cannot negotiate this here, I should not negotiate in a public hearing. But we are well aware of the difficulties faced by lowincome seniors and veterans, and I am sure something can get 

something worked out. 

Senator WHITEHOUSE. The problem is, though, that from a process point of view, the Republican Leader is stopping anything happening on this bill. 

The Republican Leader is stopping anything happening on this 

bill in process so that those discussions, those debates, what we do 

in the Senate does not happen at all, and the information we have 

is that he is doing it on instructions from the White House. Since 

you are in the middle of this—— 

Secretary PAULSON. No, I would say—— 

Senator WHITEHOUSE. Why don’t we get to vote on these things? 

Secretary PAULSON. I would say this: I am not going to get into 

your legislative tactics and what is being done. The other thing I 

would take issue with—in all due respect because I understand 

what you are saying. But I think the American people are not 

going to be very patient if we are going to have two different bills, 

go to conference, get bogged down there, and you are going to delay 

getting the checks to the American people. So—— 

Senator WHITEHOUSE. But we could already be done if it had not 

been stopped by the Republicans in the Senate. It could be through 

conference now. 

400 

Secretary PAULSON. Again, all I am calling for is speed. I was 

hopeful that there would have been a vote last week. I was hopeful. 

I am looking forward to the vote. I am looking forward to a resolution. I am looking forward to getting checks to the American people. I certainly am not trying to rain on this bipartisan moment or 

cast a shadow on it, because I do think we have a bill that reflects 

Democrats’ views, Republicans’ views, and the primary driving factor is what is stimulus and what is going to benefit the American 

people. But—— 

Senator WHITEHOUSE. From the White House point of view—— 

Secretary PAULSON. Let me just say one other thing. When I 

made my comment, the things I singled out were things that were 

not necessarily Democratic provisions. They were things that were 

not stimulus, benefits for business that just were not stimulus. 

I think we want something that is going to work quickly, is going 

to help, and is going to be stimulus. And I am for a fast process. 

Senator GREGG. Mr. Chairman? 

Senator WHITEHOUSE. OK. I just wanted to say that from the 

White House point of view, it is not enough to just say, look, I went 

and did the distasteful thing of negotiating with a Democrat, I did 

it with the House, and now I am done with it, I have done it and 

I am not going to do anymore, now it is bipartisan. 

We have a process of Government here in the United States of 

America that has two Houses of Congress—— 

Secretary PAULSON. Absolutely. 

Senator WHITEHOUSE [continuing]. And ours has a right to go 

through a process. 

Secretary PAULSON. I could not agree more. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

Secretary PAULSON. This started, as far as I am concerned, with 

Senators Reid and McConnell being gracious and saying to the 

House, move and then we will move quickly. The Senate is going 

to have its say. You are working. I do not think it is pressure to 

express a view that I think it would be good to pass the House bill. 

You do not have to do it. I have expressed the view I did as it relates to some of these other things. But the one thing I want to resist is any thought that we have extra time and that delaying a 

few days is not going to hurt the economy, because it will. We need 

to get the checks to the American people. 

Chairman CONRAD. Senator Cardin? 

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

Secretary Paulson, first, I genuinely want to thank you for your 

public service, and I thank you for the manner in which the negotiations took place in the House on the stimulus package. I think 

that was healthy for our economy, and I think it showed the right 

type of respect for negotiations. 

I first need to respond to Senator Allard’s exchange with you because I found it very misleading. And I must say, you have an impossible task to try to defend this budget submitted by the Bush 

administration given the objectives that you have so eloquently 

pointed out for our economy. 

Senator Allard talked about the middle class growing. To let that 

go unchallenged is just intellectually dishonest, and it is not what 

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parity of wealth in this country, which you have acknowledged. 

And this budget does very little to correct that. 

To suggest that our code is progressive and then take on Senator 

Sanders’ point about the repeal of the estate tax to me, again, is 

not furthering the debate. 

According to information that has been made available through our Committee, the budget provides $51 billion of tax relief for 

those making over $1 million in 2009. That is the gap that has to 

be filled because of the policies that you are recommending. And 

yet for just a fraction of that amount, we could deal with the problems that you are bringing up. We could develop a workforce able 

to compete in the future, put money into education, job training, 

and other programs that are well below any reasonable growth levels necessary to meet the challenges that you point out that we 

must meet for our economy to grow. 

I point that out because it will be difficult for us to make that 

connection if we are not going to work in the same spirit as the 

short-term economic stimulus package. 

I want to share with you some of the experiences I have had in 

Maryland regarding our economy and my disappointment with the 

budget that has been submitted. Marylanders are hurting today. 

They are having a hard time paying their health care bills, having 

a hard time paying their energy bills. They are worried about losing their homes. And I look at the Bush budget, and I do not see 

remedies for those deep problems. It might have been the housing 

market that triggered this economic problem, but there are also 

deep problems within our economy. And I would like to see us take 

action in 2008. I do not think we should wait until 2009 to deal 

with these problems. 

So let me start with housing, first. Over 2 million homeowners 

in this country are in jeopardy of losing their homes through foreclosure because of the subprime mortgage crisi by the end of next 

year. The initial program recommended by President Bush would 

do very little for those that are in danger of delinquency or are in 

delinquency in their mortgages. Part of the Senate Finance stimulus package, a proposal that the administration supports, would 

add some revenue bonding authority to be able to help homeowners. I make a plug for that because I do not want to forget 

homeowners. We talk about low-income seniors, very important. 

We talk about disabled veterans, very important, but let’s not leave 

out the housing issues, which we need to deal with now, and I hope 

that provision gets into the final package and becomes law. 

My question is, I do not see much in this budget that is going 

to help someone who was victimized by the subprime crisis—and 

in my State, many homeowners were victimized. The majority of 

subprime borrowers awere eligible for a conventional mortgage. 

They were steered into subprime loans, and now they are in danger 

of losing their homes. The credit crunch is affecting them, and I 

think we have a responsibility to be more aggressive, not only to 

ensure that homeowners are treat fairly, but also for the sake of 

our economy. 

In Baltimore, we just had layoffs announced from General Motors Transmission because light trucks are not being sold because 

of the building industry cutting back. So all of us are being affected 

402 

by what is happening in housing. I would hope to have a more aggressive budget on this issue, and I welcome your thoughts. 

Secretary PAULSON. Senator, let me talk about housing because 

that is the biggest drag on our economy, and it is the major risk, 

and it is a risk to the downside. First of all, the Hope Now Alliance 

is aimed at dealing with the 2 million subprime resets, and I am 

much more optimistic about that than you are. I think what you 

are going to find is that if you are a homeowner and you are able 

to make your initial mortgage payment—if you cannot make that, 

you are right, then it is going to take other alternatives—but if you 

can make the initial payment but have trouble making it under the 

higher rate, fast-track—— 

Senator CARDIN. Well, what are the other alternatives? 

Secretary PAULSON. What? 

Senator CARDIN. What are the other alternatives? You said it 

will take other alternatives. 

Secretary PAULSON. I would say it will take one of the FHA products. We have FHA Secured, and if we can complete the legislation 

that has already passed the House and the Senate, this will give 

the FHA ability to help another couple hundred thousands homeowners. But I am saying that there are a large number—two-thirds 

of those resets—that we think will be homeowners who can make 

the initial payment. 

But I want to get to your more basic question, which is what we 

are doing for the homeowners that have been victimized who have 

other issues. We have thought about this a lot, and we said that 

dealing directly with homeowners is, we think, the right way to go. 

And then, the fairest and the most effective way of dealing with 

thus more broadly, is by putting these stimulus checks in the 

hands of people, many of whom will be homeowners. With the 

House package, you would see rebates of $600 for individual, up to 

$1,200 for married couples, and, of course, the child credit on top 

of it. 

So, again—— 

Senator CARDIN. I would just point out that these asre very limited, short-term protections. The problem is that these at-risk 

homeowners have loan structures that they could have avoided, but 

they were steered into it. And I think we have a responsibility not 

to bail out the lenders—— 

Secretary PAULSON. Right. 

Senator CARDIN [continuing]. But to help these homeowners refinance. And I think the revenue bond package will help. I think it 

is a good proposal, and I hope it is part of the stimulus package. 

Secretary PAULSON. The revenue bond proposal was something 

we proposed in the budget that would be very helpful. We are also 

going to work very hard with this Hope Now Alliance to expand it 

and strengthen it as we go forward. But the one thing that we have 

not been able to figure out is how to deal with a homeowner who 

bought assuming the price of the home was going to keep going up 

and it has not, and who no longer wants to own the home and no 

longer wants to make the initial payment. We are not able to deal 

with that. But I think we do have a program aimed at those that 

can make the initial payments, and we need to get this FHA modVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00408 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
403 

ernization legislation done, which will help with those that are 

having added trouble—— 

Senator CARDIN. Let me just conclude. I agree with what you are 

saying, but I blieve we need to go further. And I do agree with the 

point that you are raising, but there is a group out there that has 

been victimized. I am not talking about those who made bad judgments but those who have been victimized, and I think we have a 

responsibility. When you take a look at the communities that are 

particularly affected by the crisis, you find a lot of minority communities where the practices were different than in non-minority 

communities. And we have a responsibility to respond to that. 

Secretary PAULSON. I agree. Senator, I have visited a number of 

those communities. I have spent time on the road. I am well aware 

of it. You know, there are abusdes that took place. Another big part 

of my focus is to come up with policy responses to minimize the 

chance of that happening again and a repeat of those kinds of practices. So we are trying to get through this period with as little 

harm to the economy and to individuals as possible and then come 

up with a strong policy response to deal with that problem. Thank 

you. 

Senator CARDIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Secretary, I am sorry that I did not get to hear your testimony, although I did read it, and the exchanges since I was on the 

Energy Committee, but I appreciate you being here. 

Mr. Chairman, I have a statement that I would ask to be included at the beginning of the hearing. 

Chairman CONRAD. Without objection. 

Senator MENENDEZ. Thank you. 

[The prepared statement of Senator Menendez follows:] 

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Senator MENENDEZ. I want to pick up where Senator Cardin finished. You know, at the Banking Committee, I raised this issue 

about your Hope Now program, and, you know, we hope it has 

hope. But the reality is that, you know, if we look at some of the 

percentages that have been extrapolated by independent entities, 

not very much has happened in percentage terms. As a matter of 

fact, the Center for Responsible Lending predicts that the plan only 

helps 3 percent of the subprime ARM borrowers, and that, in fact, 

the percentage of those who have actually been helped to date are 

incredibly small compared to the universe. 

What do you say to that? 

Secretary PAULSON. Well, what I would have to say that is 

wrong. You will see some information put out later this week on 

what happened through December. 

Now, remember, the biggest issues we have are coming up this 

year, Senator. Over the next couple of years, we have the big wave 

of resets, and those are the mortgages that have the most lax underwriting standards, some of the abuses that Senator Cardin was 

talking about. So that is where the challenge is going to be. What 


42157.209
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I am pushing for and what we will get are metrics. We are going 

to get numbers, and we are going to just see what the answers are 

to your question. 

But what the—— 

Senator MENENDEZ. Well, for you to say it is wrong mean that 

you already have a different set of circumstances. 

Secretary PAULSON. I would say what the latest numbers that 

were released near the end of the year show a real step-up into the 

third quarter in terms of the number of people that were helped, 

and so that has moved up dramatically. I am not going to make 

this out to be a silver bullet, but I am going to say that I will be 

unpleasantly surprised if we do not find that those people who are 

facing resets and have been able to afford the initial rate are 

helped. I believe that is what the facts are going to show, and we 

are going to drive that very hard. I think the numbers that have 

come out to date, the most recent numbers show there was a big 

step-up at the end of the year in terms of the number of people 

helped, 370,000. 

So, you know that different organizations can put out different 

guesses as to what will happen, and what I am going to drive for 

is metrics and numbers and getting the numbers out there. And I 

have to tell you that, if the members this alliance are not doing 

what they have said they are going to do, I am going to be all over 

them. And they will have to do other—— 

Senator MENENDEZ. I am all for metrics. But I must say that 

when your house is being foreclosed on, metrics alone is not a solution. 

Let me just say it is not just what they—— 

Secretary PAULSON. Metrics will prevent us from having—— 

Senator MENENDEZ. It is not what they just project will happen. 

They project that what has happened is very little. 

Secretary PAULSON. The numbers that have come out for the 

fourth quarter—and we will send you those numbers—show that 

370,000 people have been helped. But, again, the reason I say 

metrics are important, and I know metrics will not save your 

house, is that when we are having this discussion in the future, we 

will know what the facts are. And, again, I believe what we are 

going to see is that a good number of people are going to be helped 

because they are going to be fast-tracked and do a quick modification or refinancing. 

Senator MENENDEZ. Well, I just simply hope, Mr. Secretary, that 

you and others will be as aggressive about this as we are about 

making sure that the marketplace and Wall Street are reinvigorated. 

Secretary PAULSON. I could not be more aggressive. 

Senator MENENDEZ. Well, let me ask you about a different question. 

Secretary PAULSON. I got to tell you, if this group does not perform, I am going to say so publicly, and I am going to be all over 

them. 

Senator MENENDEZ. And I am going to be there right with you. 

Let me ask you the following: Yesterday at the Finance Committee 

hearing, you said that you were open—and correct me if I am 

wrong—to including rebates for seniors and disabled veterans in 

408 

the stimulus, but you disagreed with including unemployment benefits. Is that a correct statement? 

Secretary PAULSON. Well, I think that is an oversimplification. I 

chose my words very carefully because I was not there to negotiate. 

But I did say, and I said here today, that we understand the difficulties that low-income seniors and veterans are facing, and I am 

optimistic we will work something out. 

With unemployment, you have me right, because I oppose that 

very strongly for one major reason: the unemployment rate in this 

country is now 4.9 percent, and it would be unprecedented, it 

would be a huge break with precedent, to extent unemployment insurance at that rate. I have analyzed it. The lowest unemployment 

rate ever when we extended it was March of 2002. Then it was 5.7 

percent. In November 1991, it was 7 percent; September 1982, it 

was 10.1 percent; January 1975, 8.1 percent; January of—— 

Senator MENENDEZ. So your opposition is simply based on that 

it is not high enough, the percent of unemployment? 

Secretary PAULSON. I am saying that would send the wrong signal to the whole world. Again, I have been up front and very early 

out on the fact that the economy has been slowing down. I continue 

to believe growth is going to slow down, but we are going to keep 

growing. 

My only point is, if the situation that some people on the other 

side are predicting is correct, if the economy slows further than expected, if the unemployment rate rises significantly, then let’s have 

the discussion at that time. 

Senator MENENDEZ. Well, even though the economy lost 17,000 

jobs in the month of January, the first monthly loss of jobs in more 

than 4 years, which some say is an indicator of what forbears—you 

know, in March of last year, I said we are going to have a tsunami 

of foreclosures. Everybody pooh-poohed it. Unfortunately, we are 

facing a tsunami of foreclosures. This wave of unemployment I 

hope is not the reality, but I am really concerned about it. And the 

economists say that it is a quick and high bang for the buck that 

we get $1.64 for every $1 that we provide in this process, plus we 

help people who are trying to find a job but just cannot find one 

in this economy. 

So with all of that considered, if the whole purpose is stimulus, 

isn’t this a good way to stimulate quickly? 

Secretary PAULSON. I have had a huge focus on stimulus. I believe the rebate checks in the House bill, which is broad based, and 

given what I think we are going to be able to do with the IRS in 

terms of getting checks out quickly, much more quickly than people 

had expected, and getting a big check out all at one, I think will 

have a significant stimulus effect. 

And so, again, I understand your position; I have heard it. There 

were a lot of people in the House that felt the same way. The 

Speaker made the tough decision, let’s do something that is stimulative and balanced and get support from both sides. Because I am 

for things that are stimulative, I gave you my objection and why. 

Senator MENENDEZ. Well, I appreciate hearing your objection. 

Let me just say—and I know my time has run, but let me just say 

that if we are talking about timely, it is going to be far more timely 

than anyone who is going to get a rebate. That is for sure. It may 

409 

not be as big as the rebate in the immediate—but timely, this will 

be far more timely. It will be in the hands of people far quicker, 

and probably by the time you get that rebate out, they will have 

had more money in unemployment benefits than they will get in 

a rebate. And the stimulus context as well as helping people stay 

on their feet, it seems to me that it is far better. 

Secretary PAULSON. The numbers do not bear you out in terms 

of the amount of money, especially when you look at what it means 

to make a small increase in a monthly check, and when you look 

at the kinds of stimulus we are talking about with the benefits for 

children, and you look at the speed of getting the checks out. 

Again, that is why I am pressing so hard to get this on the President’s desk, because we can then start programming immediately 

at the IRS, and I think we can start getting this money out in May. 

And so that is where we are. 

Senator MENENDEZ. Well, hopefully you will talk to our colleagues, and we can get the Senate bill passed, and then we can 

have a conference. 

Secretary PAULSON. The best of all worlds would be to get something passed and not need a conference. Then we would really get 

it out quickly. 

Senator MENENDEZ. Well, it is not just doing it quick. It is getting it right. And, you know, there are two sides to the Congress, 

Mr. Secretary, having been here in both Houses for a while. You 

need to negotiate with both sides on behalf of the American people 

and its totality. 

Thank you, Mr. Chairman. 

Secretary PAULSON. I agree with you on that, but do you agree 

that it could be possible to get quick action in both the Senate and 

the House and still not need a conference where it could get bogged 

down? 

Senator MENENDEZ. I think there is every desire to get it out 

quickly, and there is also every desire to get it out right so we really stimulate this economy. And I think both can be reconciled. 

Secretary PAULSON. Thank you. 

Chairman CONRAD. Thank you, Senator. 

Mr. Secretary, there has been a lot of skepticism expressed about 

the stimulus package. I was on a talk radio show the other day, 

and the host posed the question to me in this way, and I would like 

your response. He said to me: ‘‘Senator, you are going to go out 

there and borrow, you, Congress, and the administration are going 

to go out there and put $150 billion, roughly, into this package. All 

of it is going to be borrowed. Much of it is going to be borrowed 

from China and Japan. You are going to send checks to people who 

are then going to go down to the store and they are going to buy 

goods from China and Japan. Whose economy are you really stimulating?’’ 

What would your response be? 

Secretary PAULSON. First of all, I also have had skepticism from 

a couple of groups of people. I have had skepticism from people 

who point to fundamental, long-term policy objectives that, if they 

could be enacted, would make a bigger difference in the intermediate and the long term. And so I have had skepticism from peoVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00415 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
410 

ple there. I have heard skepticism from people that are concerned 

about the deficit, and I really respect your concerns there. 

What my position has been has been is that there is a need, and 

we should do something quickly that will make a difference. We 

need to do something that is big enough to make a difference in 

terms of the size, but not so big that it is going to create a big impediment to what we are trying to do in balancing the budget and 

dealing with the deficit. That is why we came up with the size we 

did. I would just say very directly that I have no doubt that if we 

can keep this simple and we can keep it focused on stimulus—I do 

not want to spend money that really is not going to be stimulus— 

it will make a difference this year. 

What I would say to the talk show host or anyone else is that 

if we get money out and put it in people’s hands, not government 

programs, but people’s hands and let people spend it, this will create jobs. It will create real jobs. It will create economic growth. It 

will make a difference this year. 

Chairman CONRAD. And economic growth in this country? 

Secretary PAULSON. In this country. Oh, absolutely economic 

growth in this country. That—— 

Chairman CONRAD. Is it true—I had an economist tell me 90 percent of the goods and services sold in this country are American. 

And so this idea that—— 

Secretary PAULSON. I do not have the number, but—— 

Chairman CONRAD [continuing]. To whatever extent you stimulate—— 

Secretary PAULSON. The vast majority. I would just simply say 

that the No. 1 bogeyman we are fighting, I believe, are all those 

people who somehow or other believe that trade or globalization is 

hurting the United States or that we should lose our self-confidence 

and think we cannot compete with others around the world, or that 

we should not open ourselves up to that. And I will tell you, with 

repect to the imports we do get, the low-cost imports, the same people who are concerned about low-income citizens, that are concerned about what is happening to the middle class, some of those 

people are the ones who are trying to prevent low-cost imports and 

increased options and choice for citizens of this country. 

So, again, we benefit from our trading relationships around the 

world, and I think we can be self-confident. And, you know—— 

Chairman CONRAD. Can I just say, can I just give this word of 

advice? 

Secretary PAULSON. Yes. 

Chairman CONRAD. I think instead of getting off on a trade dispute, which gets off into a whole series of other issues, if we stayed 

focused on the question of stimulus, if you could get us what your 

analysis is of what the goods and services that would be bought by 

these checks, is it true—is it true that 90 percent of the goods and 

services are American? 

Secretary PAULSON. The vast majority are going to be American, 

and I want to stay—— 

Chairman CONRAD. Could you get us an analysis that would tell 

us—— 

Secretary PAULSON. I will do my best, but the analysis—— 

411 

Chairman CONRAD. Because I will tell you something, this is 

going around. This is going around the talk show world, this is 

going around the political world, this notion that we are going to 

borrow money from China and Japan and we are going to turn 

around and buy Chinese and Japanese goods, and that we are really stimulating their economies, not ours. We need some factual 

analysis that tells us whether or not that is true. 

Secretary PAULSON. I am going to say two things to you here. 

First of all, I believe that the talk show hosts are going to have 

a hard time convincing the American people that it is not good for 

them, that the American people are going to oppose getting checks. 

That is No. 1. 

No. 2, I have been very clear in saying that with a stimulus 

package like the House bill we expect to get at least 500,000 jobs 

this year. We have looked at what it does to the GDP. It is sevententh of a percent, more or less, if we can get this out quickly and 

keep the package simple. I will do my best to get you an analysis 

that you have asked for. 

But, again, I think the overriding analysis is that this will give 

a boost to the economy. This will—— 

Chairman CONRAD. And to our economy. 

Secretary PAULSON. Help our GDP. That is all we are talking 

about, our GDP, our jobs. And the only reason I go off a little bit 

on a tangent, is that it is just amazing how people want to point 

the finger at globalization or trade to fight almost anything good 

you would like to do. 

Chairman CONRAD. Let me go to one other point that we have 

discussed previously, and that is this long-term debt. This is not 

a projection, at least until 2008. We know the debt of this country 

is going up like a scalded cat, and the question is: What do we do 

about it? 

Senator Gregg and I have made a proposal to empower, give the 

responsibility to 16 representatives, some from the administration—this would be done next year, now. We have changed the timing. It would be done next year. Some from the administration, 

some from the Congress, to come up with a plan; and if a significant majority of the members of that group would agree on the 

plan, that plan would come to Congress for a vote. 

As I look at what the next President is inheriting and the next 

Secretary of the Treasury is inheriting, it is a mess. Do you think 

that kind of approach has merit? Do you have an alternative recommendation for us? What would you tell our colleagues? Because 

there is a tremendous debate going on behind the scenes right now 

on what we should do about this longer term? 

Secretary PAULSON. First of all, I want to commend your leadership and Senator Gregg’s leadership in this area, and this Committee, because this is one of the major structural issues that this 

country is facing. I listened carefully to what you said about debt, 

and I would characterize it a different way. But I agree with the 

overwhelming issue you have raised. The big issue is what is happening with the Social Security and Medicare and how to deal with 

this. 

I think what you have suggested is a constructive approach, and 

I think it will take something like this to cut through all of the 

412 

cross currents and the sentiment out there. This is an easy issue 

to demagogue if you do not want to get something done. And I have 

no doubt, Mr. Chairman, something will get done. It has to get 

done. But the longer we wait, the more costly it will be, and it is 

the younger generation that will pay the cost. 

So I just commend your leadership, I commend Senator Gregg’s 

leadership, and I hope as you work behind the scenes, you get some 

traction for an idea like this. 

Chairman CONRAD. Thank you very much. 

Senator Gregg? 

Senator GREGG. Mr. Secretary, I just want to make a few points, 

and they are rhetorical in nature, and then I have to leave, regrettably. 

First, I want to thank you for your service. The Nation is lucky 

to have you. And I think that the good fortune of our Nation is reflected through your leadership in this Hope Now program. I mean, 

you had this up and running last summer or early fall, and I guess 

Senator Menendez is not too impressed with it. But I am impressed 

with it. You got $150 billion, I think it was, in play for the purposes of addressing the rollover relative to the subprime issue on 

the adjustable rate mortgages, and it is going to relieve some of the 

problem here. And certainly for those people who got drawn into 

a subprime contract, who could not afford the step-up in the interest rates but could afford the underlying contract at the original 

rates, it is going to give them some options, which is very, very important for those individuals. And I congratulate you for setting it 

up, and I appreciate your leadership there. 

Second, Senator Whitehouse said that Senator McConnell is 

holding up the economic stimulus package and will not tolerate the 

issue of the Senate add-ons. Actually, what Senator McConnell has 

suggested in order to expedite this process is that we add the senior language, we add the veterans language, we straighten out the 

immigration language, and we put those in the House bill and we 

pass it and sent it over to the House and have them pass it. The 

House is ready to do that, as I understand it. Senator McConnell 

has asked that in numerous unanimous consent requests, and it 

has been objected to by the Democratic Leader. Why? Because the 

Democratic Leader wants to bring to the floor a Senate package 

which throws in a lot of other stuff. I mean, this is a train leaving 

the station and everybody wants to put their baggage on. We have 

a coal tax break. We have a windmill tax break. We have some sort 

of other energy tax breaks thrown onto this train. Totally inappropriate to the effort because those items are not stimulative. 

Obviously, there is some debate about the utility of extending unemployment insurance when you are at technically a full-employment economy, 4.9 percent unemployment. As you say, and you say 

accurately, to do an unemployment insurance extension when you 

are at 4.9 percent unemployment makes no sense in the historical 

context. You do an unemployment insurance extension when unemployment has jumped significantly and when people cannot find 

jobs. At a 4.9-percent unemployment rate, at least in some regions 

of this country, there are obviously jobs that are not being filled because that is a full employment number. 

413 

In New Hampshire, for example, we have 3.6 percent unemployment. Arguably, if you extend the unemployment benefit for another 6 months, you are basically saying to people, Do not go out 

and look for a job even though there may be jobs available. So any 

unemployment insurance extension should be tied to an unemployment rate which reflects the fact that there are not jobs, and that 

would be at around a 5.7 percent unemployment rate at the base. 

So it should be a trigger event. At the best it should be a trigger 

event. It just should not be a national extension of the unemployment insurance. 

And that is a point I have been making. Sure, there may be regions in this country, like Michigan, where you should extend the 

unemployment insurance. But it should be done by a trigger based 

on actual unemployment numbers that show that there are no jobs 

available or the jobs are scarce versus undermining the productivity of the country by keeping people on unemployment insurance 

in regions where there are jobs available. 

So those are the three points I wanted to make in response to 

your efforts, and, again, I appreciate all you are doing. And I certainly appreciate your strong endorsement of Senator Conrad’s and 

my efforts to try to address the entitlement issue which is coming 

at us. 

Secretary PAULSON. May I say just one thing? 

Chairman CONRAD. Yes, sir. 

Secretary PAULSON. Currently, imports are 17 percent of GDP. 

Of course, we have imports from many parts of the world. So the 

vast majority of the spending for stimulus will go to U.S. goods. 

And so when we came up with our estimates on jobs and GDP, we 

took all of that into effect. 

Chairman CONRAD. Well, we thank you for that. 

Let me just go back to this question of stimulus and what Senator Gregg was raising. There are other parts of this package that 

some of us think are important, the net operating loss provisions, 

and let’s look at housing. Home builders employ about 3.5 million 

people in this economy. They are not in a recession. They are in 

a depression. And the package that was in the Senate was expanded to provide for 2008 losses to be carried back to profitable 

years, and the reason was we are being told by the home building 

industry that they are faced with a very serious problem. Not only 

are they facing operational losses and write-down on their book 

value from that, but in addition, their accountants are coming and 

telling them you cannot write off your losses, you cannot take them 

back to profitable years, and so you have to take another hit on 

your book value. That means they are under pressure to have a fire 

sale of assets to raise cash to continue operations. 

Now, this is the case they have made to us very persuasively, 

that they need to be included here if they are going to buffer the 

downturn that has already hit them, and hit them sharply. 

We had Mr. Zandi here of Moody’s Economy.com last week for a 

hearing, very impressive economist, one of the most impressive witnesses that has come before this Committee. And he was sharing 

with us his forecast of where this is all headed, and I am sure, Mr. 

Secretary, you have seen it. 

414 

I think every member of this Committee found it very sobering 

because, as you have described, we have not hit bottom here. And 

so I think the need for stimulus is absolutely clear, and the need 

to do it quickly is clear. The need for us to resolve these differences 

is also clear. 

I would say on unemployment, the one concern that I have about 

not including it is we are seeing long-term unemployed workers 

now comprise 18 percent of all unemployed workers. Those are people who have exhausted their 26 weeks. And, you know, in our conversation, the phone call that you made to me, which I welcomed, 

over last weekend, we talked about this issue. I did not know then 

that the percentage of unemployed workers who have exhausted 

their 26 weeks, remaining jobless for more than 26 weeks has now 

reached 18 percent of the unemployed. Does that give you any concern? 

Secretary PAULSON. That is part of the structural issue we were 

talking about earlier when we were talking about income distribution. Of course, it is something I am concerned about, and I watch 

it carefully. But it does not change my view about extending unemployment benefits, extending the period across the board, when we 

have a 4.9 percent rate of unemployment. And I would—— 

Chairman CONRAD. Is it 4.9 or 5? I have been told—— 

Secretary PAULSON. It ticked down to 4.9. It was 5 percent. But 

whether it was 4.9 or 5, I would make the same point. 

Chairman CONRAD. I think the message that should go forth— 

and I apologize. I have to end because I have another obligation. 

But I would just say this: We have a mutual responsibility to reach 

a conclusion. It is absolutely true the administration reached an 

agreement with the House of Representatives, a good-faith effort 

and a very good beginning. It is also true that there is another 

body. That is the U.S. Senate. They have weighed in through the 

Senate Finance Committee. And while there are elements there 

that you may not support, somehow we have to find a way to reach 

a conclusion here in a rational way. 

Secretary PAULSON. I am optimistic. I believe we will do it, and 

we will do it quickly. So let’s hope we are both right. 

Chairman CONRAD. On that positive note, the hearing is adjourned. 

Secretary PAULSON. Thank you. 

[Whereupon, at 12:06 p.m., the Committee was adjourned.] 

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THE PRESIDENT’S FISCAL YEAR 2009 

DEFENSE BUDGET AND WAR COSTS 

TUESDAY, FEBRUARY 12, 2008 

U.S. SENATE, COMMITTEE ON THE BUDGET, Washington, DC. 

The Committee met, pursuant to notice, at 9 a.m., in room SD– 

608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman 

of the Committee, presiding. 

Present: Senators Conrad, Wyden, Feingold, Nelson, Menendez, 

Sanders, Whitehouse, Domenici, and Allard. 

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

Denzel McGuire, Minority Staff Director. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. The hearing will come to order. I especially 

want to welcome everyone to today’s Budget Committee hearing on 

the President’s defense budget and war costs. Our witnesses are 

Gordon England, the Deputy Secretary of Defense; General James 

Cartwright, the Vice Chairman of the Joint Chiefs of Staff; and 

Tina Jonas, the Under Secretary and Comptroller of the Department of Defense. 

Secretary England serves as the Chief Operating Officer of the 

Department of Defense and was previously the Secretary of the 

Navy, where he provided very distinguished service. Secretary England, we want to again thank you for taking on these chores. It is 

certainly not for the pay. It is certainly not for the cushy hours. It 

is terrific that people of your quality and character are willing to 

serve our country, and we appreciate it. 

General Cartwright is our Nation’s second highest ranking military officer, with primary responsibility for overseeing the defense 

acquisition and budgeting process. General Cartwright, it is good 

to have you before the Committee. We also deeply appreciate your 

public service. These are difficult, challenging times, and we are 

fortunate to have people with integrity and quality in our Nation’s 

service. 

And Under Secretary Jonas is the Chief Financial Officer of the 

Department of Defense. She is well regarded by this Committee, 

somebody who has done her homework, which we very much appreciate. 

Let me make a quick presentation. As you can imagine, I am 

going to be saying things here that do not reflect on any of our witnesses here. These are matters, frankly, that are of concern to this 

Committee that are decisions by this administration with respect 

418 

to providing transparency or failing to provide transparency to this 

Congress and this Committee with respect to ongoing costs. 

Let me put up a recent headline from the New York Times to put 

the President’s defense request in historical perspective. Its headline read, ‘‘Proposed Military Spending Is Highest Since World War 

II.’’ In fact, if we look at defense outlays, we can see that under 

the President’s request, defense spending will exceed the highest 

levels during the cold war. We will spend more than at the peak 

of the Vietnam War or the peak of the Korean War, even after adjusting for inflation. Keep in mind we had several times as many 

troops deployed overseas during those war years as we do today. 


42157.238
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The costs of the war in Iraq are the major factor driving our defense expenditures. It is worth noting that before the Iraq War 

began, the Bush administration suggested that we would not see 

spending anywhere near this level. Here is the transcript of an 

interview in January of 2003 with Defense Secretary Rumsfeld on 

‘‘This Week with George Stephanopoulos’’: ‘‘What should the public 

know right now about what the war in Iraq would look like and 

what the cost would be?’’ 

Rumsfeld: ‘‘The Office of Management and Budget estimated that 

it would be something under $50 billion.’’ 

Stephanopoulos: ‘‘Outside estimates say up to $300 billion.’’ 

Rumsfeld: ‘‘Baloney.’’ 


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Well, if that was baloney, we have double baloney now because 

we are now over $600 billion, either received or requested by this 

President for the war in Iraq alone. In fact, our most recent calculation is $624 billion on top of the regular defense outlays. That 

is for the war in Iraq from 2002 through 2009. That is more than 

12 times the administration’s original war cost estimate. And that 

only includes the $70 billion of war funding requested for 2009 in 

the President’s budget. We all know that the costs will be far higher in 2009 under the President’s policies. 


42157.240
421 

It is disappointing that the Bush administration has again left 

realistic war costs out of its budget. This is not just an issue of concealing war costs from the American people and underestimating 

deficits under the President’s policy. It is also ignoring the law the 

President himself signed. 


42157.241
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Last year’s defense authorization bill, signed by President Bush, 

included a provision requiring the President to include war costs in 

his budget. I helped to get that provision adopted because having 

a good projection of war costs is essential to the work of this Committee as well as the Congress. In last year’s budget, President 

Bush included $145 billion for 2008, a $50 billion plug for 2009, 

and nothing for the years after that. 


42157.242
423 

In this year’s budget, he included $70 billion for 2009 and nothing for 2010 or any year after that. The President is clearly understating likely ongoing war costs under his stated policies. We know 

that more will be needed in 2009 and beyond no matter what happens next. In fact, Secretary Gates testified last week that the real 

2009 war cost is likely to be closer to $170 billion, not the $70 billion that is in the President’s budget. 

Meanwhile, the Congressional Budget Office has estimated that 

ongoing military operations could cost $616 billion from 2009 

through 2013 while the administration has included nothing after 


42157.243
424 

2009. Even if the next President chooses to reduce troop deployments promptly, there are still foreseeable costs beyond 2009. The 

Army has said that they need reset funding for 2 years after the 

war in Iraq ends. None of that is in the budget. 

Finally, I want to raise the issue of military readiness. It is clear 

the war in Iraq is severely undermining readiness. Here is what 

Admiral Mullen, the Chairman of the Joint Chiefs, said last week: 

‘‘Tenuous, too, sir, [are] the long-term risks we are taking to our 

security commitments elsewhere in the world if we do not address 

the toll that ongoing combat operations are taking on our forces, 

our gear, our people, and their families. The well is deep, but it is 

not infinite. We must get army deployments down to 12 months as 

soon as possible. People are tired.’’ 

I would just say that ought to be an alarm bell to all of us. Military readiness is a critical component of deterrence. Instead of getting help, our troops have been overextended. Too many have been 

placed in harm’s way without the proper equipment. Their deployments have been repeatedly extended, and when they leave the 

service, their veterans’ care has been underfunded. They certainly 

deserve better than that. 

This Committee has tried to provide better. I am especially proud 

of what we did last year in terms of increasing veterans’ health 

care funding to match and even surpass the Independent Budget 

in virtually every area. That has now been adopted and has become 

the law of the land, and I am especially proud of this Committee 

that provided the leadership to accomplish that. 

With that, I want to call on my colleague Senator Allard. I want 

to indicate that Senator Gregg, who is the Ranking Member of this 


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Committee, could not be with us this morning. That is a rarity. 

Senator Gregg is a faithful participant in the deliberations of this 

Committee. But he could not be with us this morning, and he is 

ably filled in for by Senator Allard of Colorado. Senator Allard. 

OPENING STATEMENT OF SENATOR ALLARD 

Senator ALLARD. Mr. Chairman, thank you for yielding, and I appreciate you making arrangements to hold this hearing today. We 

are going to have a tough schedule this morning with a bunch of 

votes scheduled, so I know that you are anxious to get going. 

The subject matter of this hearing is, arguably, the most important function Congress will discharge this year: paying for the resources by which the Department of Defense fulfills the mission to 

defend the American people. The Department’s requested core 

budget to carry out this mission is $515 billion. That is about 20 

percent above the cold war average in real terms and more than 

$200 billion more than DOD received in the year 2000. 

Yet some have doubted DOD’s ability, even under these trends, 

to modernize its force within budget. The coming generation of 

weapons systems will be very expensive. For example, the Future 

Combat Systems may have a total program cost of up to $200 billion, and that is only one of our many modernization initiatives the 

military is planning. 

At the same time, DOD’s current weapons inventory is aging rapidly. One of the objectives of this hearing is to satisfy ourselves 

that DOD has a plan to reconcile its military requirements with 

the budgetary resources available. 


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Beyond DOD’s core budget, we must also consider the supplemental budget. This country has been engaged in the global war 

on terrorism for more than 6 years. It has been paid for by a budgetary mechanism that is not a part of the Defense Department’s 

regular budget. Last year, DOD for the first time took steps to 

budget for the war in advance and submitted a detailed supplemental budget request along with its regular 2008 request. This 

year, however, the DOD budget submission for 2009 arrived with 

a $70 billion plug for the war on terrorism. 

There was no detailed justification, and the amount, $70 billion, 

was far below what will realistically be spent in 2009. The administration has offered varying rationales for this placeholder submission, and it is one of our goals today to obtain greater clarity on 

war funding. 

Since our last hearing, the war in Iraq has reached a critical 

juncture. Over the past year, a surge has brought positive results 

as our troops have done everything asked of them. Through their 

brave and dedicated efforts, U.S. casualties are down, Iraqi civilian 

casualties have declined, and many indicators of progress—such as 

economic activity and delivery of public services—have started to 

improve. 

I hope our witnesses can give us a more specific sense of the way 

forward in the war on terrorism as we continue to make progress 

in this particular war. I, too, would like to join the Chairman in 

welcoming Deputy Secretary England, General Cartwright, and 

Under Secretary Jonas. 


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I just might add that we do have our soldiers that are stressed, 

we have equipment that is getting old, is starting to show its wear 

and tear, particularly in the harsh environment in which our global 

war on terrorism has to be carried out. And yet last year, the Congress did not fully fund the dollars that were needed for our men 

to do the job. 

So my hope is that we can show a stronger commitment to our 

men and women in the armed forces overseas and the tremendous 

job that they have and that Congress was willing to show in standing behind them last year. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Allard. 

Now we will turn to our witnesses. Let me just indicate our appreciation, the Committee’s appreciation of the witnesses for changing the time of this hearing because we had originally intended our 

typical hour of 10 a.m. But because a series of votes has been 

scheduled for roughly 10:15, eight or nine votes, there would have 

been no way to get the hearing in. So I very much appreciate the 

witnesses’ agreement to move the hearing up, and with that, we 

will turn to Secretary England. Again, we welcome your testimony. 

STATEMENT OF GORDON ENGLAND, DEPUTY SECRETARY, U.S. 

DEPARTMENT OF DEFENSE; ACCOMPANIED BY GENERAL 

JAMES CARTWRIGHT (USMC), VICE CHAIRMAN, JOINT 

CHIEFS OF STAFF, U.S. DEPARTMENT OF DEFENSE; AND 

TINA JONAS, UNDER SECRETARY OF DEFENSE (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE 

Mr. ENGLAND. Chairman Conrad, Senator Allard, first of all, I 

thank you for your very kind words. And, Chairman Conrad, you 

are right. These are difficult and challenging times. By the way, we 

are just pleased to be here today. I enjoy coming to this hearing 

with you. I do appreciate the interchange, and I appreciate the opportunity to be here. So I thank you. It is, I think, helpful for us 

and hopefully helpful for the Committee when we appear before 

you. 

It is a pleasure to have really good friends and people I work 

with every single day, General Cartwright and the Comptroller, 

Tina Jonas. As you rightly observed earlier, you need to have people with you who are extraordinarily smart, and so I did follow that 

advice today and brought with me some extraordinary people to 

help in this. 

A comment about the war and our respective roles. One thing we 

do share between us, between the legislative and the executive and 

the DOD for us, is we do have a common objective, and that common objective is to defend our Nation and defend our people, which 

is the first imperative of Government to do that. And so the budget 

that is before you is designed to do that. It is designed to defend 

the Nation in these very difficult and challenging times. 

As you know, this is a complex security environment that we are 

in today, and perhaps more complex than we have had in the past, 

and it is distinguished by a variety of very prominent challenges. 

First, as we are all familiar with, there is terrorism, extremism, 

and jihadism. We have ethnic and tribal and sectarian conflict in 

various places in the world. We still, obviously, are concerned about 

428 

the proliferation of weapons of mass destruction, failed and failing 

states, and eventually emerging powers whose intentions today are 

not totally clear, but we need to be prepared in case they move in 

the wrong directions. 

Each of these threats possess and pose unique challenges and demands on the Department of Defense. Our security, however, relies 

on a comprehensive approach and is distinguished by a balanced 

set of capabilities for the entire spectrum of these challenges. So 

even while we are committed in Iraq and Afghanistan, we do have 

to be concerned about the other security challenges to our Nation. 

So we look at this in a much broader context. 

The budget request, you are right, is $514 billion. It is a lot of 

money, but it does reflect the reality of the world we live in and, 

when appropriate, it will provide the necessary resources to execute 

the National Military Strategy. 

Now, it is a lot of money, there is no question. We understand 

that at the Department of Defense. I guess, fortunately, our Nation’s economy has grown, so, frankly, from the total macro point 

of view, it is an affordable amount of money. It is about 4 percent 

of GDP. So while we have indeed increased the total amount of 

money, it is affordable in terms of providing the defense of our Nation and our citizens. And that, by the way, is much less—even 

though in absolute terms it is high, it is much less than we have 

had in other periods of conflict. 

The comment about our $70 billion, you are absolutely right, we 

only turned in this year $70 billion in our supplemental to cover 

the war costs into the next year. I will say that while that is a decision of OMB, nonetheless it partly reflected my own views on this 

matter, so I need to frankly tell you some of the rationale for that, 

because it will be larger—there is no question it will be larger than 

the $70 billion. However, a couple of the confusing elements were: 

In our view, it would not have been—it would have, frankly, been 

dishonest to give you a number that we couldn’t support. And since 

we do not know when General Petraeus comes in, in late March or 

early April, what he will say in terms of going forward or what decisions will be made at that time, we did not feel that we could 

‘‘guess ahead’’ for that period of time. 

Also, as Senator Allard commented, in the 2008 budget, we have 

also only received $70 billion, and we know that is not the right 

number. And so that has been very disruptive, both, you know, the 

money being late, all the uncertainty in this budget time. So there 

are some very complicating issues in terms of trying to project our 

way ahead, and to do that with any degree of certainty. 

I would urge the Congress to, frankly, do two things for us this 

year: One, try to get the 2008 supplemental squared away because 

that is very difficult for us. Also, this fall, I mean, we go with what 

I call a ‘‘planned disruption.’’ To change administrations, whatever 

that administration is, there will be great disruption as we go 

across from this administration to the next administration. It will 

be extraordinarily difficult, in my judgment, to manage the Department and to maintain our security both for our people in combat 

and for our citizens if we are also at that time in a budget turmoil 

like we were last year. 

429 

So I would urge the Congress—I think this coming year it is vitally important that we have some consistency in terms of our 

funding and predictability in that funding; otherwise, it will be 

hugely disruptive, I think, for everyone come this fall. 

Chairman CONRAD. Might I just interrupt you at that point and 

indicate that this Committee last year not only acted on time, but 

gave the President everything he asked for in terms of defense operations, both with respect to the war and with respect to the underlying budget. And the problem developed in the appropriations 

process and the negotiations between Congress—that is at a higher 

pay grade than ours, and a higher pay grade, I might say, than 

yours. 

Mr. ENGLAND. Thank you. 

[Laughter.] 

Chairman CONRAD. I think we need to call on everyone with respect to that issue, and I am happy to have you complete your testimony, and then I want to address this question of what is in the 

budget, because that is the primary responsibility of this Committee. 

Mr. ENGLAND. Absolutely. Thank you, sir. 

So my last comments are while there is some confusion in all 

this, I do want to say that our security requirements remain. I 

mean, we do have a significant security threat that we need to address at this time, and we have these magnificent men and women 

who come forward to protect and defend our Nation. And it, therefore, is incumbent on us, frankly, to provide them the funding they 

need. They are deployed today, and it is incumbent on our Nation 

to support our men and women in uniform. 

So, again, I appreciate the support of this Committee, and, Mr. 

Chairman, Mr. Allard, we do look forward to a discussion with you 

on these issues. Thank you very much. 

[The prepared statement of Mr. England follows:] 

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Chairman CONRAD. Thank you, Secretary England. 


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Let me just go to the question that I started with and that you 

addressed directly in your testimony, and that is, what is included 

in the budget. Let me just say for the purposes of this Committee, 

transparency is critically important because we have to act—our 

intention is to be on the floor the second week of March. The work 

week of March 10th we intend to be on the floor with the budget 

resolution. Senator Gregg has completely agreed with that timing. 

That puts considerable pressure on this Committee to do the work 

of building a budget. Secretary England, you know what that work 

is like, and all of the witnesses here do. 

Let me just say this: Here is what is very troubling to us. In 2008, the President asked for $145 billion, and in that budget year, 

in 2009, he put in what we call a plug for 2009 of $50 billion. We 

considered that progress in the sense that he was beginning to tell 

us for the first time in the budget process what the war might cost. 

But I can say on a bipartisan basis on this Committee—I am at 

least speaking for Senator Gregg and myself—we are extremely 

disappointed with this year’s budget telling us it is going to be $70 

billion for 2009 and there is nothing, a big goose egg, for 2010. 

Now, one thing we know for us, the right answer is not zero. Secretary, you said hard to guess ahead, but, you know, that is what 

budgeting is. Budgeting is trying to bring some predictability out 

of uncertainty. That is our obligation. That is this Committee’s obligation to our colleagues. And that is your obligation to us, to try 

to give us your best estimate of what things are going to cost. And 

we know, I think with great certainty, $70 billion is not the right 

answer for 2009; zero is not the right answer for 2010. 

With that, Secretary England, can you tell us—Secretary Gates 

indicated the other day, as I understand it, that the cost is more 

likely to be in the range of $170 billion for 2008. Can you give us 

your best estimate? Do you think Secretary Gates—after all, you 

report to him so I assume you are in pretty close harmony on this 

question—are we reading his statements correctly that the cost is 

likely to be $170 billion? 

Mr. ENGLAND. Mr. Chairman, I would not say it quite that strong. I do not believe the Secretary believes it is likely to be $170 

billion. I believe, under some duress to come out with a number, 

he said, listen, if you just want me to state a number, I will state 

a number, but it is more a guess than it is an estimate. Because 

earlier this year, when we were looking ahead in 2009, we realized 

that there were going to be significant changes taking place this 

year, unknown changes this year. In addition, we also know that 

this budget—most of this budget will be basically spent by the next 

administration. So there are a lot of decisions that will be made 

this year into next year, because this is 2009. So this is really the 

next administration’s budget in terms of the war. Plus changes will 

be made this year when General Petraeus comes back to Washington. So there will be more debate and discussion at that time. 

So the judgment was rather than just try to put numbers together and not understand the basis—because, on the other hand, 

the Congress asks us to support these numbers when we submit 

them to the Congress. We do provide you detailed justification for 

the numbers. So the decision was since we cannot provide you detailed justification, let us just delay providing you those numbers, 

442 

and then we will provide you numbers with detailed justification 

when those decisions are made this spring. That was—— 

Chairman CONRAD. Mr. Secretary—— 

Mr. ENGLAND. That was the decision’s rationale. 

Chairman CONRAD. But, Mr. Secretary, isn’t the truth of the 

matter that the expenditures are going to be much greater for 2009 

than $70 billion under any scenario? 

Mr. ENGLAND. Mr. Chairman, you are right, but I will tell you 

at least my thinking was, on the other hand, I mean, we know that 

this year the expenditures are more than $70 billion, but the Congress only appropriated $70 billion. 

Chairman CONRAD. No, I think the right number now is, with everything, $86 billion. 

Mr. ENGLAND. It is 86—— 

Chairman CONRAD. Our number is—— 

Mr. ENGLAND. No, you are right. It was 70 plus the MRAP vehicles, which was, I think, 86-plus. You are right. So it is more 

than—but it was the fundamental 70, and then we added the 

MRAP. The Congress agreed to that because of the protection of 

our troops. 

So, I mean, we are sort of in the same position here. In 2008, 

the Congress decided to appropriate 70—or 86, knowing that it 

was—— 

Chairman CONRAD. But we know—we know that—we are just 

into 2008 now. This is February. We all know that much more 

money is going to be provided. We know that with a certainty. And 

we know with a certainty that 2009 is not going to be $70 billion. 

And so let me just say for the purposes of the Committee and the 

Congress, to be told by the administration it is going to be $70 billion and that 2010 is going to be zero, we know that is not so. 

Senator ALLARD. Senator ALLARD. Thank you, Mr. Chairman. 

I sympathize with the Ranking Republican as well as the Chairman in that I am disappointed that we did not have a more precise 

figure that we could plug into the budget. And I think the Chairman has pretty well pursued that issue, so I will not, except I am 

just going to ask this question: Can you give us some idea of when 

there might be a supplemental request? Because, obviously, we are 

looking at a supplemental request. Maybe you cannot give us a specific date, but maybe are we looking at late spring, summer, this 

fall? Do you think we might be looking at two additional supplemental requests? 

Mr. ENGLAND. Mr. Allard, I sort of hate to jump in for OMB here 

because, obviously, that is their responsibility. But I would say the 

Department, based on what I know about testimony and decisions, 

it would be late springtime. Yes, sir. 

Senator ALLARD. OK. And so I think Secretary of Defense Gates 

mentioned $100 billion in a public comment he made about a week 

ago, and that is on top of the $70 billion that we have now, so a 

total expenditure might, if I understand his comments, would be 

somewhere around $170 billion. Is that correct? 

Mr. ENGLAND. Again, I am not sure it is likely, and I am not sure 

it is an estimate, because we have not accomplished the work to 

do that. But I would say based on past expenditures, that is probVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00448 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
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ably, you know, a rational number to look forward to. But, again, 

we do not have any detailed estimates to support that, Mr. Allard. 

Senator ALLARD. So if this Committee was to look at plugging in 

a figure here, I do not think the Committee is going to accept $70 

billion. But we want to plug in a figure. I may even have an 

amendment—I do not know what the Chairman thinks—if he does 

not. To try and realistically plug into our budget about what that 

would cost, $170 billion would not be out of line. 

Mr. ENGLAND. I certainly would not disagree with the Secretary 

of Defense, so I would say that—if you are going to plug in a number, that is probably an appropriate number to plug in, sir. 

Senator ALLARD. OK. Thank you. 

I want to talk a little bit about the sustainability of our forces 

right now. As I mentioned in my opening comments, we have some 

real challenges, particularly when you look at the Selected Acquisition Report. It seems to be one of the best tools for future budget 

consequences of present and past decisions. And there has been a 

doubling of acquisition costs in only the last 4 years, and in previous history we have not seen that dramatic an increase. So I 

guess the question is: How are we going to sustain some of our developmental systems? It looks like we are facing some real challenges there such as the Future Combat System, the Joint Strike 

Fighter, and the DD–1000, when they hit full production a few 

years from now. 

Mr. ENGLAND. Mr. Allard, I do not believe that is—I mean, while 

that projection is put together, it is sort of a straight line to where 

we are today. And that is not what happens. I do not expect we 

will have those kind of funds in the future to double those kind of 

programs. So we will make modifications as we go. I mean, we are 

certainly not going to double the cost of those programs. I mean, 

even though the Congress has been extraordinarily generous these 

past several years, I do not see that we can double those budgets. 

So we will take other measures to control the budget. We either 

change some of the requirements or change the rates or, you know, 

we will take other actions to control that cost growth. 

So that is a projection of future costs, but we then manage our 

way, you know, into a more realistic dollar amount as we go forward. So my view is that it is not what we would expect in the future. We would rather manage our way to a more realistic number. 

Senator ALLARD. The Secretary of the Air Force is saying there 

is a $20 billion shortfall. The Secretary of the Navy has a goal of 

313 ships. Are those overly optimistic, or are they reasonable requests, do you think? 

Mr. ENGLAND. So, Mr. Allard, I expect in the 2010 budget we will 

look more carefully at those numbers to see exactly what the basis 

for those numbers are. The Navy ships, right now operational ships 

are, I believe, like 280-some ships. The Littoral Combat Ship, 

which the Navy was planning to build 55—I think they still are, 

but they basically had a setback, a delay of some couple years on 

that program. So they do have a way forward to the 313. The way 

forward, however, in the out-years does require more money than 

we presently have programmed. So that is an issue in terms of 

achieving the 313. 

444 

The Air Force issue, they do have older airplanes, and, unfortunately, I mean, a lot of money was spent on a relatively small number of F–22s at a very high cost, and they do not begin to recover 

until the Joint Strike Fighter comes along, which is a more affordable, what we call fifth generation airplane. 

So these are valid concerns. I will say they are concerns we face 

every year in terms of trying to get all the demands fit within the 

budget. But we will look at that more as we do the 2010 budget 

and better understand their requirements. 

Senator ALLARD. Just one final question, if I may, Mr. Chairman. 

Are the services now feeling any adverse effects from the failure to provide the $102.5 billion in the supplemental request this last 

year? 

Mr. ENGLAND. Tina, perhaps you can help me here. I do know 

they are having some effect because we are not placing all the orders we would normally place. But I expect that will become a 

much more significant problem here in a couple months. But what 

would like to have is continuity of production, continuity in our facilities in terms of depots, et cetera. And when we have uncertainty 

of funding, you are not allowed to commit funds in advance. You 

know, it is anti—deficient you are not allowed to do that. So this 

does cause a lot of disruption. 

If we look at a few programs here just recently, I know in just 

a couple months we are going to be at the point where we will be 

uneconomical in terms of some of our ongoing maintenance programs, and, Tina, perhaps you could elaborate. 

Ms. JONAS. Sure. Mr. Chairman and Mr. Allard, some of the concerns that we have regarding the 102 that has not been passed by 

the Congress yet include the resetting of the force. There was about 

$32.6 billion that is still required by the military, and I think there 

are concerns there, as the Secretary has just discussed, that it becomes problematic when they are trying to plan and look forward 

as to how to plan production, et cetera, and inventories. So we 

want to make sure that the next-to-deploy forces have what they 

need and the inventories that we have are there. 

Also in that piece of procurement is about $11 billion worth of 

force protection. We did get the full amount for the MRAPs, the 

16.8 in the initial amount, but there are about 300,000 sets of body 

armor, a portion of which are still required in the second set of requirements. So that is important to us as well. 

And one date that kind of looms with me is our Army military 

pay accounts will be exhausted in June, so that is one of the greater concerns I have about not receiving the funds in a more timely 

way. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Allard. 

Senator WHITEHOUSE. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

In the written testimony that you have provided, you requested 

$41.6 billion to maintain high-quality health care benefits for 2.9 

million military members and their families. I am interested in a 

particular piece of that. As you probably know, the American 

health care system lags terribly in the deployment of information 

technology. It is probably the worst industry in the country except 

445 

the mining industry. And in that rather desolate landscape, the VA 

program is a relatively bright spot, and there have been difficulties 

between the Department of Defense medical programs and the VA 

medical programs in terms of each of them have set up various 

types of information technology support, but they did not organize 

it so that they could talk to each other. There is now a VA/DOD 

health information-sharing program going on. I consider that to be 

a matter of pretty significant priority, and I am wondering: Of the 

$41.6 billion, what in there goes toward reconciling and bringing 

together the VA and the DOD information systems under this sharing program? And what is the schedule for completing that task? 

And what do you need to get it done completely? 

Mr. ENGLAND. Senator Whitehouse, first of all, I share your view. 

This is something vitally important to DOD and the VA. Last year, 

we put together a special group between myself and Gordon Mansfield, who is the Deputy at Veterans Affairs, a great American and 

a great friend. So we put together a group that met every week 

with all the senior leadership of both Departments. And we had, 

I believe, what we called ‘‘eight lines of actions.’’ One of those was 

specifically devoted to this issue of electronic data sharing between 

DOD, VA, and both directions, but to make sure we had all this 

data readily available in both our organizations. 

So I believe we are now on a path—we have made great 

progress. A lot of that data today can be transferred between DOD 

and VA. I mean, we have moved—— 

Senator WHITEHOUSE. Can be transferred or is accessible? 

Mr. ENGLAND. No; can be transferred. We now—— 

Senator WHITEHOUSE. So not full accessibility but—— 

Mr. ENGLAND. Right. But we can now transfer medical records. 

We cannot transfer, say, high-resolution brain scans or something 

because that is much more difficult for us to do. But we can all the 

medical records, all the pharmaceuticals, and all that. So you can 

now receive a lot of that data. And I will need to get back with you 

in more specifics here, but I believe it is later this year that we will 

have a vast majority of this completed between DOD and VA. So 

I am not sure of the exact money that is in the budget, but I can 

tell you we are adequately funded to do this, and it is a priority 

of our two Departments. 

And so if you will allow me, what I would like to do is get back 

with you on the very specifics, and we will come meet in your office 

and give you a lay-down of exactly this entire program with the 

milestones. 

We do have people assigned. We have milestones. We have funding. We regularly look at this. So we will be happy to come and 

address this. And perhaps, General Cartwright, you may want to 

add your thoughts too, because I know you have been involved in 

this. 

General CARTWRIGHT. I just would add one piece to this, which 

is the long term. It is not easy, but we can go out and buy for one 

time a program, an application that would allow us to trade this 

information. So we have taken it a step further with the services 

and the interagency to set standards so that as one application becomes worn and we find a better way of doing this as we move to 

the future, we will be on the same standards so that we are not 

446 

depending on one agency buying at the same time that the budget 

is available for a second agency. So we also have gone to that step 

so that as we move to the future, we are going to have data standards for exchange and transfer of information that will be longstanding and allow people to improve these applications as the opportunity presents itself. 

Senator WHITEHOUSE. OK. Thank you. Mr. Deputy Secretary, I 

accept your invitation. 

Mr. ENGLAND. Yes, Mr. Whitehouse, we will call your office very 

quickly. We have that data immediately available, so we will do 

this very quickly and get back to your office. 

Senator WHITEHOUSE. OK. My time has expired. I thank the 

Chair. 

Chairman CONRAD. I thank the Senator. 

Senator DOMENICI. 

Senator DOMENICI. Thank you very much, Mr. Chairman. I know 

you are going to have another difficult year, and I compliment you 

for your work and efforts that I hear about this year’s ideas that 

you have. 

I want to ask the General a question based on some facts that 

I know. As you know, General, among the things that I am interested in, I am very involved in our future domestic nuclear power. 

We are now finding that the time between getting a permit from 

the Nuclear Regulatory Commission, which we used to hear stories 

about for many, many years—we think we have that all on the 

right path. But now we hear from the companies that plan to build 

these nuclear power plants—I will get to my point pretty soon. 

They get ready and their boards of directors, are passionately 

frightened because they do not know where they are going to get 

the manpower, the equipment, the technology, just, believe it or 

not, the 30,000 electricians and welders that are going to have to 

be out there when they build three nuclear power plants. You 

know, they are not—they do not exist in America anymore. Nobody 

wants to do that kind of work, and there is nobody trained for it. 

And $40 an hour is not enough to entice people to go be an electrician and go to vocational school. 

Now, that is not an exaggeration. It is really happening, such 

that we had one very powerful company drop off the list of builders 

of nuclear power plants. I do not know if you read about it, but one 

big company said, ‘‘No dice.’’ And the only reason was their board 

of directors could not be assured of manpower, of times of delivery, 

et cetera, for the things they needed to build this complicated $6.3 

billion power plant. 

Now, I ask you—and I have never heard anybody ask somebody 

in your position this question. As we attempt to maintain our military forces, are we having any problems with the delivery of parts 

and delivery of equipment in a timely manner and at bid price because we do not have the manpower and the ability to manufacture 

that as equipment we once had? 

General CARTWRIGHT. Senator, are you speaking broader than 

the nuclear—— 

Senator DOMENICI. Yes. I am asking about you and the military. 

We are here talking about procurement, and that means all kinds 

447 

of procurement. I assume it means equipment from General Motors. It means specially built things from Boeing. Right? 

General CARTWRIGHT. Right. 

Senator DOMENICI. I am asking the general question: Do we have 

the capacity to build for this war or not? 

General CARTWRIGHT. The capacity is there. It is spread globally. 

It is challenged by restrictions that we have on trade, special materials, the assurance that the equipment, the workmanship, and the 

quality of the basic design is to the standards that for the military—and I will only speak to the military need—are necessary. 

We have worked around in several cases issues with metals, 

issues with offshore suppliers, and so the answer to you is, in this 

global economy we do not—we are challenged in the United States 

to provide all of the technical expertise, equipment, and supplies 

necessary for all of the systems that the Department of Defense 

runs. 

We have found work-arounds. In many cases we have had to 

train. A classic case is the MRAP where you will find the assembly 

work and you will find much of the manufacturing down in South 

Carolina, and one of the reasons is because we were able to take 

the welders that worked in the shipyards that used to be there, retrain them, bring them up to a level of skill so that they could contribute to the MRAP. 

At the same time, at that same factory, you can walk out on the 

front lot, and the way that they get the transmissions and the way 

that they get the axles is to tear down existing, already built, new 

trucks because that is cheaper than finding the labor to build those 

economically in the United States. 

Now, when that business case changes, that company will certainly change, but the company is going to find the best way they 

can to produce this. So we are filling in some of these voids in critical areas, but we do not have sufficient to fill in all of them for 

all of our materials. 

Senator DOMENICI. Well, General, I am fully aware also that if 

we think the cold war has ended totally, we are big fools because 

Russia is back in the business across the board, especially when it 

comes to nuclear activity and to intercontinental ballistic missile 

work and the re-establishment of their great laboratories of old. 

And I just want to keep myself and the generals that I talk to publicly, I want to keep this on the front burner, that the United 

States of America has big problems—it is not just the problems of 

this war in Iraq. The confrontations that exist between us and Russia are real today, and their production of things of war are very 

powerful as of now. And we have to do our share, and I am very 

fearful that this war we are in in Iraq is taking too much of our 

energy and time, and we just have to hope that that war will not 

have these budgets for 15 or 20 years, like some think, because I 

am quite afraid we will not have enough left over to develop the 

military that we need for other threats. 

I do not know what you think about that, but I know you have 

a lot of intelligence and you understand. Does this ever bother you, 

sir? 

General CARTWRIGHT. It is one of the things that would keep me 

up at night. As the Chairman spoke to, the broad range of our 

448 

threats out there today is what really challenges the military. We 

have to be ready to go against those threats that existed in the cold 

war, as ready as well as the counterinsurgency threats that we face 

today, and as we look to the future, issues like the cyber challenges 

that we are going to face in the future, and the intellectual capital 

in this Nation to provide us the soldiers, sailors, airmen, and marines that will be able to work across this broad range of threats. 

It is going to be challenging for the individual. It is going to be 

challenging for us as a Nation to grow those people. And it is going 

to be challenging for this Nation to compete in that world. And if 

we do not pay mind to that, we will be challenged. 

Senator DOMENICI. Am I finished, Chairman? 

Mr. ENGLAND. Could I make one comment, Mr. Domenici, if I 

could, though, on this? An issue that I think is important, because 

Mr. Allard and Mr. Conrad both commented earlier. We tend not 

to buy things at economic order of quantities, and we tend to buy 

them on a yearly basis. We have some programs that are multiyear. I think the industry view would be to maintain a base of 

workers and expertise. The very best thing we could do is longterm commitments at reasonable rates of production. 

So we are always in this position, frankly, of low rates and not 

having long-term, predictable production. And if we could get to 

that point somehow—I do not know if that is achievable, but I believe that becomes the critical flaw in the system. 

Senator DOMENICI. Sure it is. Right now we are talking at very 

high levels about doing 2-year budgets and 2-year appropriations. 

At least that is one jump away from where we are now. And that 

is a very serious issue. This Chairman has not decided where he 

is, but this old Chairman has decided where I am, and apparently 

within the next few days, there will be an effort to get before the 

public the starting of a momentum to change our process so we 

have everything 2 years, 2-year budgeting, and you do all your 

work on 2 year cycles. That would be helpful. 

Mr. ENGLAND. Yes, it would. 

Senator DOMENICI. You would like four, but, obviously, I have 

pushed to give you two, and we know why. 

Mr. ENGLAND. But that would be a step in the right direction. 

Predictability for industry is very important for the investment 

both in assets and people. 

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

Chairman CONRAD. Senator Sanders. 

Senator SANDERS. Thank you, Mr. Chairman. 

Thank you very much for being with us this morning on an issue 

of enormous consequence. 

Mr. ENGLAND. Good morning. 

Senator SANDERS. Mr. Chairman, I am going to take this discussion, if I might, in a slightly different direction. You will recall, 

gentlemen, Mr. Chairman, and other Senators, that in 1960 a very 

great Republican President, Dwight David Eisenhower, warned us 

about the power of the military-industrial complex. And he also 

told us at that point, a Republican President, that every dollar 

spent on the military in many ways is a dollar not spent on our 

children, not spent on the most vulnerable people in our society— 

449 

which makes it terribly important with this budget, as well as 

every other budget, that we scrutinize it carefully. 

And, Mr. Chairman and members of the panel, I would remind 

you that this budget calls for a very significant increase in military 

spending, $515 billion; plus $15 billion, as I understand it, for nuclear weapons, which are not included in this budget; plus the war 

in Iraq; plus the war in Afghanistan. The bottom line, it is a lot 

of money. It is a huge amount of money. 

Meanwhile, in this same budget, the President has said that we 

should cut back on Medicare and Medicaid. He wants to eliminate 

the weatherization program in this country, which means that people are going to spend a whole lot of money on fuel to keep warm. 

He wants to cut back on the low-income LIHEAP program. Oil 

prices are soaring. People in my State will go cold. LIHEAP does 

not have any money. He wants to cut back on that, cut back on 

programs for education, cut back on programs that impact tens of 

millions of people. 

So it is terribly important that we take a hard look at what you 

are doing because, let’s be clear, the money that the President is 

proposing, increases, huge increases for you, are resulting in massive cutbacks for millions of American people. 

Now, I have some very simple questions that I want to ask you. 

All of us are aware that terrorism is a major, major problem. We 

are worried that al Qaeda is, in fact, growing around the world. I 

do not want anymore to get into the war in Iraq and whether that 

has stimulated the growth of al Qaeda, another issue for another 

time. And we all know that we have to spend money to fight international terrorism. 

But let me ask you this question: In a budget this massive, I am 

curious to know actually how much of it is really being focused on 

international terrorism? When you build nuclear submarines, by 

and large that is not really targeted against Osama bin Laden. I 

know you can make the case that all $600 billion are focused on 

international terrorism, but it is not really. 

Now, we all know—and Senator Domenici raised this issue. We 

went through a cold war. We had an enemy. It was called the Soviet Union. Conventional enemy, very powerful, huge army, nuclear 

weapons, and we spent hundreds of billions of dollars fighting 

them. 

My concern is that within your budget, there are tens and tens 

and tens of billions of dollars fighting the old Soviet Union. And I 

am curious who the enemy is. We know it is al Qaeda, and we 

want to fight them. Is China the enemy? As Senator Domenici 

mentioned, is it Russia again? Who are we fighting above and beyond al Qaeda? Mr. Secretary? 

Mr. ENGLAND. So I would say, Mr. Sanders, certainly you are 

right, all this money is not to go fight an adversary. That is part 

of our mission, but that is a mission hopefully that the Nation does 

not find itself fighting in. Our budget is to deter future aggression. 

Senator SANDERS. Who are we deterring? Are we deterring 

China? 

Mr. ENGLAND. So we deter whatever country may decide in the 

future, you know, that they find us in a weakened position. 

450 

Senator SANDERS. But let me be—we do not have a lot of time. 

I mean, we are not spending this money deterring Chile or Uruguay. Who are the countries we are deterring? 

Mr. ENGLAND. I would say that I think it would be better if we 

had another discussion on this in a more classified area for you. 

But let me just say that we do spend funds to deter—I mean, we 

do track what other nations are doing. We see what they are doing 

in terms of their own development of armament. And so it is prudent—and, by the way, you are absolutely right. I believe this is 

something that should be debated. This is a national decision of 

how funds are spent. So the Nation historically has spent money 

to deter aggression—— 

Senator SANDERS. Right, but we need—— 

Mr. ENGLAND [continuing]. And to fight the Nation’s wars. 

Senator SANDERS. All right. Here is the point. If you come here 

and you tell us that our soldiers need armor in Iraq, everyone says 

that is right, we understand that, let’s get them the armor. And we 

did. But your answer is a little bit vague, and I would love to go 

into it in a classified situation. But when you are asking for hundreds of billions of dollars above and beyond al Qaeda, I want to 

know who the enemy is. Is China the enemy? 

Mr. ENGLAND. Well, we know that China has nuclear submarines. We know the Soviets have nuclear submarines. We know 

that they have, you know, significant arms and—— 

Senator SANDERS. We also know that China is buying up a significant part of America. We know that corporations like General 

Electric see their future in China. My question is: If you come in 

here and you say, look, we want to go classified, we are really worried about China, that has impact about our trade policies, impact 

about whether or not we think it is OK for Chinese companies to 

be buying up America, does it not? 

Mr. ENGLAND. Senator, as all elements of national power come 

to bear for America’s position in the world, one part of that is our 

military and DOD. So there are many elements of national power. 

It is economic, it is trade, it is military. And there is typically, I 

would say, in an administration and Congress a debate about the 

balance between all those in terms of deterring future aggression. 

Obviously, we always want everyone to be our friend and ally. 

Senator SANDERS. Mr. Chairman, I think, frankly, we do not 

have enough of this discussion. This is a lot harder discussion than 

saying, look, I voted against the war, I do not think the war is a 

good idea. But you can make the case this is what you need for the 

war. We can understand that. 

But we are talking about hundreds of billions of dollars, and I 

would love to go in classified discussion with you to get more information. I look forward to doing that. 

I want to ask you one other question. 

Mr. ENGLAND. Sure. 

Senator SANDERS. We scrutinize waste and fraud all over this 

place. We do not do it enough in the Defense Department. I want 

to give you one example. The Air Force inventory system, the 

GAO—I do not know if you are familiar with it. A GAO report 

noted that $18.7 billion, or 65 percent, of the Air Force’s secondary 

inventory was not needed to support required needs. And the truth 

451 

is that the Air Force now has warehouses full of part supplies not 

needed. According to the latest data available, the Air Force has on 

order—on order—$235 million in inventory already identified as 

ready for disposal. In other words, it is coming in, it is going out. 

They do not need it. 

Now, when we have kids in this country who do not have any 

health insurance, clearly we can spend money a little bit more 

wisely. Now, can you comment on the Air Force’s spare parts program and what we are going to do to deal with that? 

Mr. ENGLAND. Senator, I have not seen the report so I cannot 

comment, but I will, now that you have brought it to my attention—having not seen it—— 

Senator SANDERS. CBS Television did a little segment on it. 

Mr. ENGLAND. Can I just comment? We do, I believe, Tina, what, 

over 3,000 audits each year? 

Ms. JONAS. Yes, sir, the Defense Contract Audit Agency last year 

did 35,610 audits. They saved the taxpayers over $2.3 billion. 

Mr. ENGLAND. So, I mean, we do regularly have audits, and we 

look at this, and so this particular case I am not familiar with. But, 

Mr. Sanders, I mean, perhaps that is right. I just cannot comment. 

I can tell you that we do try to put systems in place to make sure 

that we do not have these kind of problems. Do they happen? Unfortunately, they do happen, but hopefully that is an exception, if 

that is a valid report. I just cannot comment. 

Senator SANDERS. Well, two points. Mr. Secretary, I would like 

to take you up on meeting on that. And, second, the last question 

is: The number of auditors in the DOD—— 

Chairman CONRAD. Senator Sanders, we have to move on. 

Senator SANDERS. OK. Thank you, Mr. Chairman. 

Chairman CONRAD. We have just been advised that the first vote 

is going to start in 20 minutes. 

Senator SANDERS. Thank you very much. 

Mr. ENGLAND. Mr. Sanders, I will call you, though. 

Senator SANDERS. Thank you. 

Chairman CONRAD. Senator Wyden? 

Senator WYDEN. Mr. Secretary, there are tens of thousands of 

brave men and women who have waited more than a year and a 

half for the Defense Finance and Accounting Service to approve the 

benefits that they earned when they were fighting for our country. 

Now, as of yesterday, the agency—the Defense Finance and Accounting Service—told us that they have over 39,000 cases to be 

processed of what are known as the CRDP or the CRSC claims. 

These are also known, of course, as Concurrent Retirement and 

Disability Pay claims or Combat-Related Special Compensation 

claims. And I know of one veteran in my State who died waiting 

for his claim to be processed. And my fear is, looking at your budget, that that constituent of mine isn’t the only such veteran to be 

out there languishing waiting for a claim to be paid. These are 

some of the most courageous Americans we have ever known, and 

thousands of new claims are coming in. 

So can you point specifically, to me and to the Committee, how 

under your budget you are going to turn this around and get at 

this huge backlog of claims? 

Mr. ENGLAND. So, Tina, if you could address that, please? 

452 

Ms. JONAS. Senator, you are absolutely correct. I was made 

aware of this problem recently, and I asked the Director of the Defense Finance and Accounting Service, Zack Gaddy, to triple the 

number of people on this effort. And he is doing so. You are absolutely right, the backlog needs to be cleaned out. And so I wanted— 

I told him that we would like to have that done by April, and I accept what you are saying, sir. 

Senator WYDEN. That sounds constructive, and I want to make 

sure that we are clear for the record, because there are thousands 

of these claims. You have now indicated to the Committee that you 

are setting in place a plan so that the backlog of these claims will 

be cleaned up by April—— 

Ms. JONAS. I have told them that I want the staff—the staff is 

supposed to be tripled, and that they need to get the claims, particularly the most—the oldest claims done by April. So they are on 

track to try to get that done. 

Senator WYDEN. I like the first answer a little better than the 

second answer. Of the 39,000 claims in the backlog, how many are 

going to be addressed by April? 

Ms. JONAS. I will have to get him to give you the exact number, 

but what I have directed him to do is get it cleaned out. So, obviously, they will—in fact, we will be happy to have them give you 

a weekly update on that, if you would like. 

Senator WYDEN. That would be constructive. 

Ms. JONAS. OK. 

Senator WYDEN. And I appreciate the tripling of the people because that is the kind of commitment that is needed. And if you 

would update us a weekly basis, that would be helpful. 

Ms. JONAS. Absolutely, Senator. 

Senator WYDEN. One last question, if I could, Mr. Secretary, 

about the F–15s, and I know other Senators are concerned about 

this as well. You know, we have them in Oregon. The Fighter Wing 

in Portland and the one in Klamath Falls both fly the F–15. They 

have been grounded for structural problems. The President has requested money to repair them. Regrettably, the F–15s are so old 

and stressed that they are going to encounter more problems soon. 

My question to you is: Does the Department have a plan for replacing the F–15 in the near future? And if yes, is the plan to go 

forward with the F–22? And my reason for linking these two is that 

together we have to come up with some way to get planes that are 

safe to fly. So if you put it in the context of both the relationship 

of the F–15 and the F–22, that is the purpose of my question. 

Mr. ENGLAND. So, Senator, the F–15s, first of all, the Air Force, 

there is still an investigation on the F–15. A lot of them have returned to flight, there are still some that have not. I believe there 

are like 160—158 that have not yet returned to flight. And so there 

is still an investigation in terms of what they can do to those airplanes, if anything. So the first question is: Can we fix those airplanes? I believe is a long-term issue with the airplanes. So that 

investigation is going on, and they have, I think, NASA and everyone involved in a pretty comprehensive study, analysis of that 

problem. 

So first we will hear the answer to that analysis. Depending on 

that outcome, then we will decide what to do on F–15s. But in anVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00458 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
453 

swer to your question about the F–22, I do not believe the F–22s 

will be replacements for the F–15. The F–22 is a much more expensive, higher-end airplane, fifth generation. So I would expect that 

instead we would try to accelerate the Joint Strike Fighter, which 

is more the class of the F–15, so that the Air Force would move 

into Joint Strike Fighter, not into the much more expensive F–22 

airplanes. So that would be my judgment, but, again, I need to 

temper that without having the specific data on the F–15s themselves until all that study and work is completed. 

Senator WYDEN. I hope you will—and my time has expired—continue to make sure that you address the future of the F–15s as 

well. My constituents care a great deal about this. We feel that 

they have made an important contribution to the country’s national 

security. And I am sure you will get questions from other Senators 

on this. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Wyden, and thank you 

for bringing up the F–15 issue, which has broad interest on the 

Committee on both sides. 

Senator MENENDEZ. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Secretary, let me ask you, I have a difficulty understanding 

why the Department of Defense does not seem to be able to put in 

for budget purposes, now that we have 5-year experiential factor in 

Iraq, the resources necessary. You know, we have seen supplemental appropriations for this war have grown from $62.5 billion 

in fiscal year 2003 to $189.3 billion in 2008. Every year, we have 

had additional supplemental requests, and we have clearly some 

experiential factor here. And then we had the Director of OMB 

here who, under questioning that I had of him, said, yes, clearly 

we will need more than $70 billion, but we do not know the 

amount. And then we had Secretary Gates before the Armed Services Committee, and when Chairman Levin pressed him about give 

us some sense, he said $170 billion. 

Why is it so hard for the administration to give the taxpayers a 

straight answer as to about what this war is going to cost? 

Mr. ENGLAND. Well, so if I could answer maybe two. First, what 

is in the budget as opposed to the supplemental, that is really a 

decision by OMB. But the $70 billion is really a decision by ourselves and OMB. And there, Senator, the decision was made that 

we would go with the $70 billion until we had a better understanding of the 2009 requirement so that we could provide a higher 

precision number. So rather than just sort of guesstimate the number going forward, in our judgment it was better that we turned 

in basically a bridge number, which is similar to what we had been 

doing in the past, and then provide a more definitive number to the 

Congress that we could justify. So, I mean, that—— 

Senator MENENDEZ. But, Mr. Secretary, you know—you know— 

that $70 billion is clearly not enough. 

Mr. ENGLAND. Senator, you are absolutely right. I mean, you are 

absolutely—— 

Senator MENENDEZ. So why aren’t we closer to the truth? 

Mr. ENGLAND. Because we have two requirements. One is when 

we provide numbers to the Congress, we also provide detailed jusVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00459 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
454 

tification for those numbers. So we provide you great justification 

for the numbers, so our dilemma is if we cannot provide what we 

believe is accurate and complete justification, that gives us a dilemma. And since we know the situations will change or that it is 

highly likely things will change come March or April—— 

Senator MENENDEZ. Well, you know, I do not understand, Mr. 

Secretary, when in the Vietnam War, war funding for Vietnam was 

in the regular budget from 1967 on. What has changed so dramatically that the Department of Defense could do it then and cannot 

do it now? 

Mr. ENGLAND. Again, Senator, that part is not our decision as to 

how it is handled. That is an OMB decision. 

Senator MENENDEZ. Mr. Secretary, yesterday the New York 

Times reported on a Rand study from the summer of 2004. The report, called ‘‘Rebuilding Iraq,’’ was part of a seven-volume series on 

lessons learned from the war. It was very critical of the White 

House and the Department of Defense. The study found problems 

with ‘‘nearly every organization that had a role in planning the 

war.’’ And it seems that this report has upset senior Army officials, 

and they have refused to allow the publication of the unclassified 

report. 

When can we expect the Army to permit the publication of the 

unclassified sections of this report? 

Mr. ENGLAND. Senator, that is the first I heard about the report 

yesterday. I read the same article. I have not had an opportunity 

to talk to the Army about this. We will do so, and we will get back 

with you on that, sir. I am just not familiar with the report. 

Senator MENENDEZ. Well, I hope you get back to the Committee. 

You know, here is the problem. When I sit here, at least for myself—I cannot speak for my colleagues—I view my role as the fiduciary to the American taxpayers, and that means you have to have 

a judgment when you are being asked for more money for an engagement in which there are official reports that say that it is replete with errors, that cost maybe lives, but certainly cost the taxpayers money. And how does one make a judgment about whether 

the requests coming forward, which obviously are less than what, 

in fact, are necessary in the first place, clearly—clearly, Secretary 

Gates, OMB Director, clearly the experiential factor. And, second, 

how do you know that—how can the American people or those who 

have to act as fiduciaries on their behalf have an honest sense that 

your request is being used appropriately? I want to see the unclassified sections of that report published. 

Mr. ENGLAND. So, first of all, I know nothing about the report. 

I do not know if that report is a valid report or not. I just know 

there is a report that was put out. 

On the other hand, we do provide to the Congress, Senator—— 

Senator MENENDEZ. A valid report? This is a report that I understand was commissioned. That is why you are holding it. What do 

you mean it is an unvalid—this wasn’t from some organization 

doing it on its own, they would have published it. This is a report 

that the Department actually authorized. What does it mean, an 

unvalid report? 

455 

Mr. ENGLAND. So I will pass no judgment on the report. I do not 

know the quality of the report. And when we look at the report, 

we will provide feedback to you, sir. 

Senator MENENDEZ. This is why, with a track record such as 

this, this is why the American people have little faith in asking for 

billions more when you cannot tell us the right amount, when you 

come in with supplementals every year that far exceed it, even 

though you have 5 years’ experience, when in Vietnam we could 

have it as part of the regular budget since 1967, and then when 

you keep reports, you know, secret when they should be clearly 

made public in terms of unclassified because they are critical, this 

is why you face the consequences of a reluctant Congress to give 

resources when we cannot make the judgments that in the first 

place the resources are being used appropriately. 

Mr. Chairman, I urge you as the Chair of this Committee to join 

us in trying to make sure that the elements of this report that are 

unclassified become public, because we need to know what went 

wrong so we can decide, when we are being asked to make budget 

decisions here, whether we are making the right or wrong ones. 

Thank you, Mr. Chairman. 

Mr. ENGLAND. I do need to comment, though, Senator, in terms 

of your fiduciary responsibility. We do provide monthly Global War 

on Terrorism (GWOT) expenditure reports to the Government Accountability Office. Every month they come into the Congress, and 

they are here in detail. We provide summary reports quarterly to 

the Congress. We provide our coalition expenditures quarterly to 

the Congress. So we do provide—— 

Senator MENENDEZ. Mr. Secretary, those are after the fact—— 

Mr. ENGLAND [continuing]. Exceptionally detailed data to you. 

Senator MENENDEZ. We are going to be marking up a budget in 

March. You know, those are after the fact. We need, after 5 years— 

we are going to into the sixth year of this. There is no reason why 

we cannot have greater accountability. There is no reason that we 

cannot have this report public so that we know what went wrong. 

There is no reason that, in fact, you know, even the reports you 

refer to, the GAO has a report that says DOD needs to take action 

to encourage fiscal discipline and optimize the use of tools intended 

to improve the global war on terror cost reporting. So these are not 

just my views. These are the views of people who have independently looked at it. 

Thank you, Mr. Chairman. 

Mr. ENGLAND. One last comment, if I can, because of the GAO 

report, and it is germane, I think, to this Committee. In 2001, 

when we came in office, there were 119 internal control deficiencies 

in terms of our financial systems. We now have that down to 19, 

and they will be completely taken care of by the end of this year. 

So I believe the reporting has improved considerably during this 

administration, and hopefully we will have all of our internal controls that we inherited, frankly, down to zero or very close to that 

by the end of this year. 

So we are making progress, Senator, in terms of our reporting 

and our confidence in terms of the expenditures and the rationale 

for those expenditures. 

Thank you. 

456 

Chairman CONRAD. I thank the Senator. 

I want to go, in the moments we have left here, into something 

that is critically important for this Committee, and members on 

both sides have asked me to pursue these questions. 

Last year, the press reported that the classified Chairman’s Risk 

Assessment, which describes the risk that our military will not be 

able to win another war, showed significant risk. The Commission 

on the National Guard and Reserve found that the current Army 

plans for equipment will ‘‘not restore readiness and attain the goal 

of fully manning training and equipping its units until 2019.’’ 

In 2006, Lieutenant General Blum noted that readiness levels for 

non-deployed National Guard forces had plummeted because those 

units only had 26 percent of their authorized equipment. 

I know, as you do, that the detailed reports are classified, so in 

an open hearing, I will only say what defense officials have said 

publicly: that the trends for the Army and Marines over the last 

few years raised serious concerns. Congressman Skelton said last 

month that readiness was declining at an alarming rate. That is 

of very serious concern to this Committee, as you can imagine. 

Last year, there was press reporting suggesting that the Chairman of the Joint Chiefs raised his assessment of the level of risk 

that we face in executing the National Military Strategy. My understanding is that Congress has not yet received the Chairman’s 

Risk Assessment for this year, although it is supposed to be transmitted along with the budget. 

My first question is: Secretary England, do you know why the 

Chairman’s Risk Assessment has not been forwarded with the 

budget, as has been the long-term practice? 

Mr. ENGLAND. No, I do not know why it has not been. I know 

we were looking at—we are required to turn in a risk assessment 

and also the mitigation approaches by the Department to mitigate 

that risk identified by the Chairman. So I know we have had a 

number of discussions and meetings on this subject, Mr. Conrad. 

So perhaps that is still being put together. I am not exactly sure 

of the schedule or why it was not exactly on that date. But I do 

know that we have a mitigation measure to go along with the 

Chairman’s Risk Assessment, and I will just have to get you a date 

when we will submit that. 

Chairman CONRAD. Can I just say that that is critically important to the work of this Committee. 

Mr. ENGLAND. OK. 

Chairman CONRAD. We need to know, and I am sure you appreciate that it is absolutely critical to the work of this Committee. 

And I have announced we are going to mark up in this Committee 

on the week of March 3rd. We are going to be on the floor the week 

of March 10th. We need that as soon as we can get it. 

General Cartwright, can you enlighten us with respect to this 

matter? 

General CARTWRIGHT. We are working our way through the final 

phases—we call it ‘‘chops’’—of the Mitigation Plan. The risk assessment is done. It has been—and this is the response to it. It has 

come to my level. I approved it yesterday. We should have it ready 

and to the Secretary within the next 48 hours. 

457 

Chairman CONRAD. Can I just emphasize the need to get that up 

here as rapidly as possible? Because it is really irresponsible of this 

Committee to go forward with a budget mark without having the 

latest risk assessment by the Chairman and to understand the 

mitigation measures that are necessary to address whatever that 

risk assessment might be. And I understand that is classified. I 

have only talked here in open session about things that have been 

publicly reported. And I do not want to go beyond that. 

I do want to indicate the serious concern of the members of this 

Committee with respect to readiness issues. And we have seen 

that. All of us have National Guard and Reserve in our States. All 

of us hear frequently from those who command those forces and 

their growing concern reflected in the statement of General Blum 

for whom we have high regard. 

Mr. ENGLAND. Mr. Chairman, I do have to say on the National 

Guard and Reserve, I believe the National Guard and Reserve at 

the national level is about 79 percent, I believe, the last I saw— 

and maybe somebody can correct me here—in terms of their ‘‘fill 

rates.’’ And that is well above historical averages for the National 

Guard, and it is also against new standards. That is, we have increased the amount of—— 

Chairman CONRAD. But that does not go to the question of readiness, I think you will agree. I mean, that is one component, but 

that does not go to the larger question of the Chairman’s Risk Assessment. And that is what is not before us, typically has been. At 

the time the budget comes up, we get the Chairman’s Risk Assessment. For whatever reason, we have not received that. 

Mr. ENGLAND. No, we will definitely get that to you. I mean, 

there is no question we will get that. I was just addressing on more 

of this National Guard and Reserve issue about the fill rates. The 

fill rates of the National Guard and Reserve I believe are at an alltime high now, and not only at an all-time high, but—— 

Chairman CONRAD. But there is also a question of recruiting, 

and, of course, this is a larger issue, because we know that to meet 

those recruiting rates, they have issued a series of waivers in terms 

of kinds of people they are able to recruit. So that takes us down 

a whole other line of a question of what is the quality that we are 

able to attract, what else has to be done. 

Let me just indicate that the first vote has now commenced, and 

I would be happy to give you, Secretary England, any final statement. Secretary England. 

Mr. ENGLAND. Look, there are some issues we need to discuss 

and probably more so as followup to this meeting. First, Mr. 

Conrad, any questions you have, we would be pleased to respond 

to those questions by any member of the Committee. Obviously, if 

you will get them to us, we will. I do think some of these topics 

need to be addressed in more detail, and perhaps we will have an 

opportunity to do that. 

In the meantime, I do thank you again for the opportunity to be 

here with you and to express some of the views of the Department 

and to hear the views of the Committee. And I thank you for those 

views. We do respect your input, and we do appreciate it, and I do 

thank you on behalf of the Secretary. 

458 

Chairman CONRAD. We thank you, Secretary England, General 

Cartwright, Tina Jonas. Thank you very much for being here. As 

always, we look forward to working with you. And, again, if you 

can get us those items that we have mentioned here today, the 

highest priority is obviously the Chairman’s Risk Assessment and 

mitigation measures that are necessary. 

Mr. ENGLAND. We will do that, Mr. Chairman. Thank you very 

much. 

Chairman CONRAD. We will adjourn the Committee—oh, excuse 

me. Senator Nelson has come. We will give him a chance to ask 

questions. 

Senator NELSON. And it will be quick. There is-#I21Mr. England. 

Hello, Senator. 

Senator NELSON. Good morning. 

Mr. ENGLAND. Good morning. My favorite Marine right there. 

[Laughter.] 

Senator NELSON. There is a Reuters story that a Russian bear 

bomber has buzzed one of our aircraft carriers. Can you tell us 

what is going on. 

General CARTWRIGHT. Russian aviation, long-range aviation, has 

started to ramp up the number of sorties and the routes that they 

fly similar to the activity that they did during the cold war. One 

of those flights in the recent days came down the coast of northeastern Russia, Japan, to a carrier battle group that was doing 

training in the waters adjacent to Japan. They flew over the carrier. They were detected really more than 500 miles out, escorted, 

as is the normal procedure in international waters, to an overflight 

of the battle group, and then to a subsequent turn, then back 

home. 

These are the standard practices from our standpoint of intercept, escort, follow them through, and then follow them until they 

are out of range of the battle group’s normal operations, both for 

safety of flight in the area and for the potential protection that 

would be afforded by having an escort along. 

We treat that as something that is unusual from the standpoint 

there has been a significant lapse in time since that last occurred, 

but not significant in that the practice was done safely, professionally, and they were escorted out of the area. 

Senator NELSON. The Russian bomber flew over our aircraft carrier? 

General CARTWRIGHT. It flew over the battle group, several of the 

ships in the group. 

Senator NELSON. At what altitude? 

General CARTWRIGHT. I understand that it came in at low altitude, but still within the normal air structure. 

Senator NELSON. Is low altitude like 2,000 feet? 

General CARTWRIGHT. Low altitude in this case is below 2,000— 

below 3,000 feet. But what we observed was nothing different and 

nothing unprofessional. Now what we are concerned about is what 

are the indications of this return to a cold war mind-set, what are 

the implications of that activity, and how do we best address that. 

It is free and international airspace, and we are just trying to now 

go back and look what message was intended by this overflight. 

459 

Senator NELSON. Well, that sounds pretty provocative to me, Mr. 

Chairman, that they would be flying over one of our aircraft carrier 

battle groups, and specifically if it were the aircraft carrier itself. 

We will followup on this in the Armed Services Committee. 

Senator DOMENICI. Mr. Chairman? 

Chairman CONRAD. Senator Domenici. 

Senator DOMENICI. I told you privately after my questions, and 

I want to say publicly that it is incumbent upon any Senators that 

are in the business we are in that they ask to see the current CIA 

report on Russia’s rebuilding of its armed forces, in particular the 

science involved. It is rather incredible what is happening. As you 

know, there are making billions of dollars, and the billions of dollars are going just as they did before: first, to build their military, 

and then to the citizens. And they are pretty modern in terms of 

what they are building compared to what we have thought over the 

last decade, and nobody ought to be fooled. They are not built just 

to be parked up there in the icelands. They are also drilling oil in 

the icelands up there, exactly like we are not. Where we think we 

cannot go, they are up in their icelands drilling great, great new 

oil production. 

Chairman CONRAD. Let me just say to the Senator that will have 

to be the last word because we have been notified we have 7 minutes until this vote. 

I thank the witnesses. 

Mr. ENGLAND. Thank you very much, Senator. 

Chairman CONRAD. The hearing is adjourned. 

[Whereupon, at 10:25 a.m., the Committee was adjourned.] 

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(487) 

HEALTH CARE AND THE BUDGET: INFORMATION TECHNOLOGY AND HEALTH CARE REFORM 

THURSDAY, FEBRUARY 14, 2008 

U.S. SENATE, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:03 a.m., in room 

SD–608, Dirksen Senate Office Building, Hon. Kent Conrad, Chairman of the Committee, presiding. 

Present: Senators Conrad, Wyden, Nelson, Stabenow, 

Whitehouse, Gregg, and Grassley. 

Staff present: Mary Naylor, Majority Staff Director; and Denzel 

McGuire, Staff Director for the Minority. 

OPENING STATEMENT OF CHAIRMAN CONRAD 

Chairman CONRAD. I want to bring the Committee to order and 

thank our witnesses. We have had a little traffic incident/accident 

on one of the bridges, apparently, but all of our witnesses are now 

here. We want to welcome them all. 

Valerie Melvin, the Director of Human Capital and Management 

Information Systems at the GAO, good to see you. Thank you for 

being here. 

Laura Adams, the President and CEO of the Rhode Island Quality Institute, we are glad that you are here as well, undeterred by 

the traffic conditions in the Washington Metro area. 

And Mary Grealy, the President of the Healthcare Leadership 

Council. Thank you all for being here. What a distinguished group 

of witnesses we have. 

We want to thank, as well, members of this Committee who have 

been so active on this issue. I particularly want to thank Senator 

Whitehouse for his leadership. He has been a foremost advocate for 

health care information technology and we appreciate his really 

tireless efforts to address this issue. Thank you, Senator 

Whitehouse. 

I also want to acknowledge the work of Senator Stabenow and 

her pushing of information technology in health care and what it 

can do to both reduce costs and improve outcomes. 

We also should salute Senator Enzi on the other side, who is the 

Ranking Member of the HELP Committee and who has been actively engaged on this. 

And I would be remiss if I did not thank our Ranking Member, 

Senator Gregg, who has helped push through legislation that if we 

488 

can get it passed would really form a foundation of the information 

that is required to make dramatic improvements in health care. We 

really want to salute his leadership role. It has been very important and we thank him for it. 

Let me just run through a couple of items to put this in perspective, or at least as I see it. Our health care system is simply not 

as efficient as we would all like it to be. We are spending far more 

on health expenditures as a percentage of gross domestic product 

than any other country in the OECD, and we spend more and more 

on health care as a percent of GDP each year. It is really quite 

startling that we are at 16 percent of our gross domestic product. 

That means that one in every seven dollars in this economy is 

going for health care. 

Despite this additional health care spending, health care outcomes in the United States are no better than health care outcomes 

in the other OECD countries. And OECD stands for the Organization for Economic Cooperation and Development. The OECD is 

really the international scorekeeper on these issues. 

Despite this fact, the number of uninsured continues to grow. In 

fact, the number of uninsured increased by over 2 million in 2006 

to now reach of 47 million people. 


42157.331
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It turns out, however, that demographics are not the biggest 

issue driving our long-term budget outlook. Rising health care costs 

will have a far bigger impact, as the head of the GAO has testified 

before this Committee. This is not just an issue of Federal health 

spending, its impact on the Federal budget. We can see it in the 

private sector as well. 

If we continue on the current trajectory, private sector will be 

overwhelmed by rising health care costs. In fact, if we look if we 

look at total health care spending if we stay on this trend line— 

I want to emphasize that, if we stay on this trend line—it will grow 


42157.332
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from 16 percent of gross domestic product, which is already high, 

to more than 37 percent by 2050. 

Clearly, we must make changes. That would be one in every 

three dollars in this economy. No one is more acutely aware of that 

than the Ranking Member. 

Here is what the CBO Director told this Committee earlier this 

year. ‘‘I think it’s a mistake to look at containing costs just within 

the Federal programs themselves, Medicare and Medicaid. The underlying driver of that cost growth, of the costs in those programs, 

is the underlying rate of cost growth in the health care sector as 


42157.333
491 

a whole. And tackling that problem is the fundamental fiscal challenge and an important economic challenge facing the Nation.’’ 

There are a number of health care reforms that have potential 

to provide savings and improve health care outcomes. I think we 

should also acknowledge, if we are going to be honest with ourselves, that some of these reforms will have up front costs. We do 

not know yet how much they will ultimately save. But if we are 

going to address rising health care costs, we need to get started on 

some of these reforms. 

Here are several of the options with potential for long-term savings. 


42157.334
492 

One, expanding effectiveness research. Two, better coordinating 

care for the chronically ill. Three, changing provider incentives and 

beneficiary cos-sharing to encourage use of best practices. Four, 

promoting healthy lifestyles and preventive care. And finally, the 

widespread adoption of health care information technology. 

I am going to stop there and turn to my ranking member for his 

opening observations and then we will go right to the witnesses. 

OPENING STATEMENT OF SENATOR GREGG 

Senator GREGG. Thank you, Mr. Chairman. Thank you for holding this hearing and I thank the witnesses. This is a very important issue from a budget issue but, more importantly, from a standpoint of where this country is going. 

We know that health care is an extremely complex interwoven 

and overlaid matrix, that there is no one single answer to maintaining or producing a health care system that is affordable and delivers quality health care to all Americans. But we do know that 

one element of this matrix, and a fairly significant one, is how you 

communicate what is happening in the system and how you communicate within the system so that information is transparent and 

outcomes are known and costs are known, and we can use that information in order to effectively, hopefully, be better providers and 

purchasers of health care. 

The Chairman was kind enough to refer to a bill which I have 

sponsored with Senator Clinton called the MQEA bill, which is the 

Medicare Quality Enhancement Act, the purpose of which is to 

make information more readily available that already exists, basically Medicare data and creates secure entities where people can 


42157.335
493 

request information along with the ability to combine it with existing data in private sector and then use it as purchasers, either as 

insurers, business people who have a large number of employees, 

or the general public. The idea is to make this taxpayer paid for 

information more transparent relative to outcomes and costs. 

We also have the excellent work being done by Dartmouth Atlas 

Project in this area, the Dartmouth Atlas, which basically is the 

gold standard for assessing what is happening in outcomes and 

quality across the country. It is a work in programs due to the complex nature of this issue, but their initial findings are really rather 

important and can have a big impact on where we go here. 

So I am looking forward from hearing from this panel because it 

is a continuation of the discussion of what I consider to be one of 

the essential issues in how we do start to get a handle on health 

care, which is the question of how we handle health care information and how we make it more readily available to consumers. 

Chairman CONRAD. Thank you, Senator. Now we are going to 

turn to our witnesses and we will start with Dr. Melvin. Welcome, 

good to have you, representing the GAO. 

STATEMENT OF VALERIE C. MELVIN, DIRECTOR, HUMAN CAPITAL AND MANAGEMENT INFORMATION SYSTEMS ISSUES, 

UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. MELVIN. Thank you, Mr. Chairman, Ranking Member Gregg, 

and members of the Committee. 

I am pleased to be here today to comment on Federal efforts to 

advance the use of information technology for health care delivery. 

The use of information technology has great potential to help improve the quality of health care and the performance of the U.S. 

health care system. Its benefits offer promise for making patients’ 

health information more readily available to health care providers 

and for reducing medical errors and streamlining administrative 

functions, all of which can help improve quality of care and patient 

safety and reduce administrative costs. 

In 2004, President Bush issued an Executive Order that call for 

widespread adoption of interoperable electronic health records by 

2014. He then established a National Coordinator for Health IT 

within the Department of Health and Human Services to lead and 

foster public and private coordination of this initiative. 

Since 2005, we have been reporting on the efforts of HHS and 

the National Coordinator’s Office to develop and implement a national health IT strategy. Today, at your request, my testimony 

summarizes their efforts to complete key health IT-related activities based largely on our prior work. 

Overall, HHS and the National Coordinator’s office have been 

pursuing various initiatives in support of nationwide health IT. 

Among other actions, the Secretary formed the American Health 

Information Community in 2005 to help define the future direction 

of a national strategy and to advise the Department on developing 

interoperable health information exchange capabilities. 

In this regard, initiatives have been undertaken in several areas, 

including advancing the certification and implementation of outpatient and inpatient electronic health records, identifying interoperability standards to be implemented in Federal health care 

494 

programs, beginning trial implementations of a nationwide health 

information network to demonstrate real-time information exchange, and addressing health information, privacy, and security. 

However, even though HHS has been pursing these important 

initiatives in an attempt to expand the nationwide implementation 

of health information technology, it has been doing so without a national strategy that integrates the outcomes of the various initiatives to help ensure that the President’s goal is met. Given the 

many activities to be coordinated in an effort of this magnitude, 

such a national strategy is essential. 

Thus, in May 2005, we recommended that HHS develop a strategy that includes the detailed plans, milestones, and performance 

measures needed to ensure that its goals are met and we reiterated 

this recommendation again in March and September 2006. 

To his credit, the National Coordinator for Health IT has acknowledged that more detailed plans are needed to guide the various initiatives. And according to HHS’s Fiscal Year 2009 performance plan, the Office has prepared a draft plan which it intends to 

release in the second quarter of 2008. 

Overall, the National Coordinator’s stated intent to act on such 

an approach is promising. However, Mr. Chairman, until HHS actually delivers an integrated national strategy, progress in pursuit 

of the President’s goal for widespread adoption of interoperable 

electronic health records will be uncertain and the Department will 

be challenged to ensure that the outcomes of its various health IT 

initiatives will be successful. 

This concludes my prepared statement. I would be pleased to respond to any questions that you may have. 

[The prepared statement of Ms. Melvin follows:] 

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Chairman CONRAD. Thank you very much. 

Now we will turn to Ms. Adams, Laura Adams, the President 

and CEO of the Rhode Island Quality Institute, who is here on the 

recommendation of our own Senator Whitehouse. Welcome. 

STATEMENT OF LAURA ADAMS, PRESIDENT AND CEO, RHODE 

ISLAND QUALITY INSTITUTE 

Ms. ADAMS. Thank you. Chairman Conrad and members of the 

Committee, thank you so much for this opportunity to appear before you today to testify on this issue of great importance to health 

care in our country. 


42157.263
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My name is Laura Adams and I am the President and CEO of 

the Rhode Island Quality Institute, an organization founded 6 

years ago by then Rhode Island Attorney General, now U.S. Senator, Sheldon Whitehouse. This multi-stakeholder organization 

comprised of hospitals, physicians, nurses, consumers, insurers, 

Government and employers has the singular mission of significantly improving quality, safety and value of health care in Rhode 

Island. 

We are not-for-profit. We are beholden to no one but the people 

of the State of Rhode Island and to the Nation insofar as we develop models of innovation worth replicating. 

My remarks today will reflect the perspective of our broad-based 

coalition working together to transform the health care system in 

the State. 

The Quality Institute serves as Rhode Island’s Regional Health 

Information Organization and we strongly believe in the value of 

health IT as an essential element in literally any viable proposal 

for the problems that plague our health care system. It is our goal 

to bring the delivery of health care out of the paper-based system 

which we recognize as a root cause of significant waste and harm. 

But we are under no illusions. We fully recognize that health IT 

alone adds little to no value and if developed in isolation from 

other critical reforms is likely to be—to borrow a phrase from Don 

Berwick—the next festival of waste. We have a clear understanding 

that health IT undergirds virtually every major health care reform 

initiative being advanced today. 

Whatever you support in terms of health care reforms, whether 

it’s primary care’s medical home model, emphasizing patient-centered primary care and prevention, consumer-driven health care, 

quality improvement and reduction of medical errors, pay for performance, population health and disease management, access for 

all, fraud and abuse detection, transparency and public reporting 

on quality and costs, none of these can succeed without a constant 

flow of reliable and timely clinical and administrative information, 

the kind that is only produced electronically. 

Therefore, it would be a mistake to regard health IT as merely 

one good idea in a sea of good ideas for reform. Those that are pioneering efforts to promote adoption and full use of health IT deserve our attention and strong support as a Nation. So much is 

riding on the failure orR success of these grass roots initiatives. 

I applaud the efforts of HHS, the Office of the National Coordinator on Health Information Technology, and especially the Agency 

for Healthcare Research and Quality, which has been particularly 

effective in grasping what is needed to prioritize and fund critically 

important initiatives in the field. However, our collective approach 

to funding and supporting these initiatives almost guarantees failure. 

To illuminate the point, let us assume for a moment that our 

goal is to make toast. One idea advanced by bread producing vendors is to put bread in the toaster. Yet a credible scientific studies 

suggests that toast-making benefits from efforts to push the lever 

down to lower bread into the toaster. Another prominent industry 

group insists that plugging the toaster in is the key and everyone 

should work on getting electricity to the toaster. 

512 

Fund the testing of each of these ideas separately and we will 

conclude that there is simply no way to make toast or that reliable 

toast-making is still decades away. It is only when we combine all 

three of these in the same setting that we realize the potential. 

Achieving the significant and sustained improvement we need in 

health care requires the testing of multiple concepts in the field simultaneously. We believe that health IT adoption, work on quality 

improvement and prevention, and reforming the toxic payment system must be tested in aggregate in what is an essential, yet virtually non-existent, research and development role for health care. 

Efforts to test these concepts in real-world settings in which they 

must prove their worth are crippled by the necessity for local collaborators to cobble together funding and support, almost always 

with huge gaps for key elements necessary for informing the Nation of what truly works and what does not. As a result, we are 

learning at an achingly slow pace as a Nation. 

We have some initiatives focused on implementing health IT, 

others advancing improvement projects, and a brave few testing 

the new payment structures, each struggling independently against 

the gale force winds of status quo. Yet after literally years and 

years of toil, we have come nowhere near what the architects of 

these initiatives have envisioned. We are testing these as isolated 

concepts and, not surprisingly, we are having difficulty making 

toast. 

Rhode Island is no exception, even as some consider us as a candidate for most likely to succeed. For 6 years, we have had the 

CEO level leadership of every major health care stakeholder required to remake this system at the table and actively participating. We were the birthplace of SureScripts electronic prescribing 

system and currently ranked No. 2 nationally behind Massachusetts in e-prescribing. We are implementing a State-wide health information exchange with the help of a $5 million AHRQ contract 

which ignited our State’s progress unlike anything else. 

We have spawned unprecedented in the work of EMR adoption, 

an initiative co-led by our State government and our QIO. The 

Rhode Island organization is testing a medical home model that includes payment reform. 

Our Governor championed the work that led to the Wellness 

Councils of America naming Rhode Island as the first well State 

in the Nation, as measured by the percentage of the work force employed in award-winning well workplaces. 

We have every single ICU in every single hospital in the State 

participating in an improvement collaborative that has lowered 

deadly and costly central line infections by 47 percent in 18 

months. 

Our insurers, most notably BlueCross and BlueShield of Rhode 

Island, have stepped up, and so have our doctors, hospitals, and 

pharmacies, our consumer advocacy groups, our State government 

and, most certainly our Congressional delegation, all of whom are 

working nonstop to advance our work. 

So yes, we are progressing but at a far slower pace than the crisis warrants. All of our initiatives are funded on a shoestring and 

depend heavily on the in-kind contributions of local participants 

and we are wearing them out. The funding sources are fragmented, 

513 

each with their own set of deliverables and timelines which, while 

well-intentioned, can draw focus and energy away from critical 

business at hand. 

We are respectfully urging Congress to place more trust and 

higher levels of aggregated resources in our organizations like the 

Rhode Island Quality Institute and a number of similar organizations across the Nation, many of whom would challenge us for the 

designation of most likely to succeed. We would like you to join us 

in our model of shared responsibility and contribution and then 

hold us accountable for the results, just as our other stakeholders 

do. We will deliver. 

It is not a question of whether we can afford to spend the money 

to do this. We are already spending the money. The question is 

what we will buy with it. Unless we act, the money will be spent 

on more duplicate tests, avoidable hospitalizations, and the care required to mop up after the physical and emotional damage caused 

by medical errors and the consequences of uncoordinated care when 

we could be rapidly advancing toward a way out. 

On behalf of my colleagues in Rhode Island and across the Nation, I would like to thank you for devoting your time and attention 

to exploring the value of health IT and its role in reform. We stand 

ready as an energized, committed, and capable partners in maximizing its worth for all of our citizens. 

Thank you. 

[The prepared statement of Ms. Adams follows:] 

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Chairman CONRAD. Thank you. 

And now, Ms. Grealy, the President of the Healthcare Leadership 

Council. Welcome. Good to have you here as well. 

STATEMENT OF MARY GREALY, PRESIDENT, HEALTHCARE 

LEADERSHIP COUNCIL 

Ms. GREALY. Good morning, Chairman Conrad, Senator Gregg, 

members of the Committee. I want to thank you very much for this 

opportunity to testify on a subject that is so critical to the future 

of American health care. 

For the members of the Healthcare Leadership Council, the 

issues being discussed today are neither abstract nor theoretical. 

The hospitals, health plans, pharmaceutical companies, medical device manufacturers, health product distributors, retail pharmacies 

and the other sectors that make up the HLC membership are 

among the early adopters of health information technology. They 

are witnessing firsthand what health information technology can 

mean for patients and for the effectiveness of our health care system as a whole. 

The experiences of these companies and organizations form the 

impetus for the three points I would like to make this morning, 

points that are discussed in much greater detail in my full written 

statement. 

First, the closer we get to nationwide information connectivity 

between health care providers, the more we will improve both the 

quality and the efficiency of patient care. We are not saying that 

health information technology in and of itself is health care reform. 

What we are saying is that you cannot have optimal health care 

reform without the expansion of health information technology. 


42157.247
517 

The benefits of an interoperable information network, of having 

an electronic health record for every patient, are almost too numerous to mention. We know we can significantly reduce the medication errors that cost the health care system $76 billion each year. 

We can have a dramatic impact on the overutilization and 

misutilization of health care services. We can improve the ability 

of health care professionals to make informed decisions by placing 

critical data at their fingertips in real time. 

We can also make it possible for physicians to have ready access 

to the most current practice guidelines and achieve the full promise 

of evidence-based medicine while eliminating things like geographic 

disparities in care. 

We can take bold steps forward in making the concept of personalized health care through the use of genomic information a true 

reality. 

Mr. Chairman, the future is exciting and it is already happening, 

as exemplified by the specific HIT achievements of Healthcare 

Leadership Council member organizations detailed in my written 

statement. 

But that leads me to my second point, having to do with the obstacles standing between our status quo and this achievable future. 

Today, according to a RAND study, at best 25 percent of hospitals 

and 20 percent of physician offices in this country have 

transitioned from paper to electronic medical records. The primary 

reason for the slow evolution is not a mystery. At a time when 

health provider budgets feel the pressure from uncompensated 

care, disaster preparedness, staffing shortages, medical liability 

costs, and other factors, many hospitals—particularly smaller community and rural hospitals—do not have the capital to make HIT 

infrastructure investments. 

We are not calling on Congress or the administration to write a 

blank check to overcome this obstacle, particularly in these challenging fiscal times. But we know that there are creative options 

that should be discussed such as revolving low-interest loan funds, 

matching grants, reimbursement incentives that are based on improved patient outcomes, and exceptions to the physician self-referral and anti-kickback rules that are preventing some hospitals 

from sharing their HIT investment with physicians. 

The fact is that the benefits of HIT should be available to every 

American patient and health care consumer. And that requires 

that every health care provider have the ability to be part of a nationwide information network. 

My final point, Mr. Chairman, goes to the issue of standards for 

such a network. Developing a multistate interoperable system depends on national technical standards, as well as national uniform 

standards for confidentiality and security. We have some work to 

do in this regard. 

With the existing HIPAA privacy rules, they do provide effective 

patient privacy protections but they currently stand alongside volumes of sometimes conflicting State laws, rules and guidelines. 

This is problematic as we try to ensure that a patient’s health 

records can follow them wherever they go in our increasingly mobile society. We believe that Congressional action to establish a 

518 

uniform privacy standard is vital in order to achieve this national 

health information network. 

Mr. Chairman, members of the Committee, over the last 2 years, 

Congress has taken some very important steps and moved in a welcome bipartisan manner to achieve progress on this important 

issue of health information technology adoption. We believe that 

this momentum must continue if we are to realize health information technology’s full potential in improving health care quality, 

lowering costs, and generating greater value and efficiency. 

Again, thank you for this opportunity and I will be pleased to answer any questions. 

[The prepared statement of Ms. Grealy follows:] 

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Chairman CONRAD. I thank all of the witnesses. 

I am going to defer today to Senator Whitehouse. And then on 

the second round I will defer to Senator Stabenow, as well, because 

they have really led the effort on this Committee. And so, in fairness, I would ask them to do the first rounds of questioning. 

Senator WHITEHOUSE. 

Senator WHITEHOUSE. Thank you, Mr. Chairman. 

And first let me welcome Laura Adams to the Senate Budget 

Committee. I think my colleagues can see from her testimony why 

it is that the Rhode Island Quality Institute has been such an extraordinarily successful experiment. And I want to particularly 

thank the Chairman for allowing us to go forward with this hearing. 

The Chairman is an extraordinary dedicated and articulate proponent of the need for addressing our health care problems before 

they get out of hand. He has described them as a tsunami of costs 

washing down on our country. I think that today’s hearing helps 

illustrate that there are really two ways we can address this problem. We can wait until the tsunami is really on the shore and then 

we can apply fiscal adjustments to the problem, which are tax 

hikes and benefit cuts. And we are going to have one of the bloodiest and most ugly fights that this institution has ever seen when 

that day comes. 

Or we can get ahead of it and work on system reforms. But they 

do not enjoy the benefit of immediacy that a fiscal adjustment has. 

You really have to build an awful lot of infrastructure before they 

take hold. It could be really a decade until the full value of something we started today began to be realized, which means that the 

time really is now to start on this. 


42157.311
567 

I would like to ask Laura to comment on two things. We have 

been at this now for so long together, we kind of channel each 

other. So it is going to be a little redundant. 

But the observation that we share, I think, is that one of the big 

handicaps of getting through to system reform is the siloization of 

the present health care system and the tendency for participants 

in the system to try to defect to their own economic interests within that silo which do not coincide with the interests of the health 

care system as a whole. 

And so the trick, in many respects, is simply to find a forum 

where people can step out of their silo roles and move into a reform 

role, a leadership role, and start to think about ways to improve 

the health care system. 

Part of what the Rhode Island Quality Institute has done is simply to be that forum where all those CEOs can come together and 

have that plan. So I would like to ask Laura to comment, first of 

all on the forum function that she has experienced with the Rhode 

Island Quality Institute. 

And then also describe a little bit the resources that she has had 

to work with over 6 years. I would make the proposition that the 

Rhode Island Quality Institute and other agencies like it around 

the country are the R&D function for this critical problem that we 

have. And yet, they are essentially non-resourced. 

So with respect to the forum and with respect to the resources, 

tell us what your experience is with the forum question and what 

you have been able to find to work with from an infrastructure 

point of view. 

Ms. ADAMS. When Senator Whitehouse convened the organization in 2001, I think that one of the most effective things he did 

was to convince this group that they are responsible for the performance of the health care system in that State. I mean, if not 

them, who else? When you look at every major leader from every 

major sector sitting around that table, we knew that if we did not 

like the performance of that health care system—and we did not— 

who did we expect to come and change it? 

Now one of the elements of magic of the Quality Institute is that 

everybody’s behavior is public. So when you start laying out these 

issues publicly with each other and we start talking about and calling on others to take action, to change the system, it is very hard 

to decide to act in your own interests when you have the community watching you. All of our board meetings are open. Our committee meetings are open. Anyone can attend the Institute 

neetings. If you want to see who has contributed to the Institute, 

you check the website. Every dime we have ever gotten from anybody is listed on that website. We do not sign anybody contracts. 

We do not make laws. We do not direct business one way or the 

other. 

The only force we have is trust and a vision of the future that 

is far greater if we work collectively than the future we face if we 

work alone. 

So there has been tremendous power in having people’s behavior 

public. It certainly causes people to act in the best interests of the 

community. 

568 

The second thing is that we have had, I think, two non-unanimous votes in the 7-years because we work hard to work through 

the issues. We do not force anybody to vote a certain way but we 

work on it until the issue is resolved and we can all live with the 

path that we are proposing. 

As far as the resource goes, yes, I am the President and CEO. 

But for the first five or 6 years of organization I was the only employee. And it was a little disappointing because obviously I could 

say—go get me a cup of coffee. Yes, ma’am—it was a little 

unsatisfying. But we have a VP right after that and so I am happy 

to say that under my leadership the Institute doubled in size. 

We now have an assistant, so we have tripled in size in the last 

18 months. I am very proud of that. 

But the initial thought about the organization was that what we 

did not want to create yet another organization in the middle of all 

of the silos. So we did not to build it out, staff it, and then have 

somebody say oh, the safety thing? Yes, that is going to be taken 

care of by group over there. What we wanted to say is we have a 

safety problem collectively in Rhode Island. What are we going to 

do about it? 

So what that has resulted in is probably about $5.5 million in 

local contributions to support these efforts that we are putting together. And I can tell you there is probably another $2.5 million 

in in-kind contributions coming from people. So a large number has 

skin in the game. 

But still the resources leave us wanting. We have so much yet 

to accomplish. We are unable to take on the payment reform that 

we need to address. We are unable to expand our health information exchange in the way we want to until we come up with further 

resources. 

Senator WHITEHOUSE. About $2 million a year has been your average resource, and a lot of that is dedicated by the funding source 

to specific task? 

Ms. ADAMS. Exactly. We have had $1.7 million dedicated to our 

ICU effort. That returned, by the way, about $5.5 million on that 

$1.7 million. So the return on investment here is significant, as far 

as we are concerned. And that one is very well-established in terms 

of the data we have on that. We have been working with Johns 

Hopkins as our clinical lead on that for the first 2 years of that 

project and so those data, are incontrovertible. 

Ms. ADAMS. Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you. 

Senator GREGG. 

Senator GREGG. Thank you. A lot of intriguing issues raised here. 

We are now, as a Senate, we have a health technology bill that 

has been passed by the HELP Committee under the leadership of 

Senator Kennedy and Senator Enzi, in which portions of the Medicare Quality Enhancement Act, which I mentioned earlier, are involved. 

I was wondering, Director Melvin, have you looked at that bill? 

Ms. MELVIN. We have not looked specifically at that bill. We 

have tried to peruse some of the legislation that is out there to get 

a sense of where areas of emphasis have been placed. 

569 

Senator GREGG. This bill is about to pass, hopefully. I understand there are holds left on it and we are trying to clear them. 

But essentially this bill will hopefully create a capacity of the Federal Government to begin to fund interoperability in the area of 

technology. 

The problem, as I see it, is that we all say we want interoperability but it is really a huge issue to get it. I know, I had a hospital in New Hampshire which was not a very big hospital—big by 

New Hampshire standards but not big by national standards. And 

they came to me and asked if I could earmark a grant so that they 

could get their hospital to be interoperable. I mean, basically their 

radiology department could not talk to the emergency room. The 

emergency room could not talk to pediatrics. Pediatrics could not 

talk to maternity. 

And just getting within the hospital interoperability was a huge 

issue. 

So I am interested, Ms. Adams, because I am impressed with the 

initiative you have started in Rhode Island and New Hampshire 

does not have such an initiative—I think it is a great initiative. 

How successful are you in just doing the local hospital interoperability efforts? Or is that not the focus of your effort? Is your focus 

more on quality? 

Ms. ADAMS. No, the focus of our effort is making sure that this 

entire State is connected because that undergirds any quality effort 

we are going to be successful at doing. 

Senator GREGG. And is it possible to do that? I mean I do not 

honestly know if it is possible for Southern New Hampshire to be 

able to communicate with Catholic Medical Center in Manchester. 

I just do not know. Is that possible in Rhode Island? Do you have 

Warwick communicating with Providence? 

Ms. ADAMS. What we are doing right now is establishing a statewide health information exchange based on the best current standards that we have. I have to say that up to this point—I would say 

the last 18 months to 2 years—vendors have not been focused on 

standards. There was more a value in keeping your system proprietary and unable to communicate with anyone else. Then if you 

added on to the lab, you needed to buy their system. If you added 

on to the ED, you want to talk to it, you buy their system. 

Now we understand that any vendor that pursues that avenue 

is going to be out of business shortly because we all recognize now 

the destructive force that that has been in trying to communicate 

with each other. 

So in Rhode Island, we are fortunate to have one of our largest 

IDNs, integrated delivery networks, Lifespan, has achieved almost 

full interoperability between all of their entities. 

There is a discussion of a merger with them and Care New England, which would cause about 70 percent of our health care system to be merged and connected. Now we have the Westerly Hospital that received an earmark to get the very thing going that you 

are talking about, some interoperability and additions. 

But we also see that as something that falls under that health 

information exchange financial nut that we have to find the money 

for it. 

570 

In Rhode Island, we are looking at a model of whoever benefits 

pays. So we do know that if you look at the pie diagram of who 

benefits from health information exchange and the value that 

comes from that, nobody’s piece of the pie is any bigger than 27 

percent and that is the problem. 

Senator GREGG. Actually, the IT bill which is hung up right now, 

that is the focus of it. We are basically going to say Federal funds 

only go to interoperable systems. 

And you are right what happens is that people want to predict 

their proprietary interests so there is an actual disincentive to be 

interoperable or has been historically. 

Ms. ADAMS. Not anymore. 

Senator GREGG. I guess my second question is are you also going 

to the issue of quality amongst hospitals? In other words, if there 

is a hospital in Rhode Island that does an appendectomy at half 

the cost of another hospital, are you looking at whether that appendectomy—the outcomes are as good and the difference in cost is 

disclosed? 

Ms. ADAMS. This is one of the things that we see as, once again, 

the high leverage value of something like a regional health information organization. When the State needs that kind of money to 

begin to pair cost and quality, there is no sense in creating yet another data base besides the exchange. You can leverage that exchange to do it. 

In Rhode Island, we will look to have the introduction of a patient safety organization bill this year in the legislature which will 

create an opportunity for us to share information. 

We had two suicides in hospitals in Rhode Island this year. The 

second suicide followed exactly the same pattern as the first suicide. Yet that first hospital had put good procedures in place to 

stop it. We did not have a mechanism for communicating it to our 

second hospital. 

Senator GREGG. So your patient safety bill is not going to limit 

information as some patient safety bills have. It is actually going 

to attempt to expand the availability and yet protect the patients? 

Ms. ADAMS. Yes. We introduced our privacy bill on Tuesday of 

this week. That privacy bill we put together with people like the 

Domestic Violence Coalition, ACLU, and others that we knew 

would hold our feet to the fire until they blistered on the issues of 

privacy and security. And we are very proud of that bill. It extends 

the protections far beyond HIPAA and we expect that bill pass. 

Senator GREGG. Sometimes that becomes a bigger problem than 

a plus. 

Ms. ADAMS. We very carefully looked at the architecture and 

spent 18 months figuring out how we can do this Rhode Island. At 

the same time, consumers have to trust this system or they simply 

will not opt-in. And if they do not opt-in, we have nothing. We have 

done a good job, we think, of developing a system that will allow 

us to operate the system at a price we can afford and still protect 

their privacy. 

Senator GREGG. Does anybody else on the panel have a thought 

on this issue of disclosure of quality in different provider groups? 

And how we make that quality more visible, transparent, and 

therefore more available to purchasers, quality and cost? 

571 

Ms. GREALY. Senator Gregg, I think that really is one of the 

goals, information sharing and how we can improve the quality and 

safety of the care that is being provided. So we know that we have 

CMS driving toward value-based purchasing. We have private 

plans that are driving toward value-based purchasing. 

Senator GREGG. But you need specific information on the actual 

on the ground delivery. You have to know if hospital A or provider 

group A is delivering a service that has a quality issue or it does 

not have a quality issue but is less expensive than somebody else 

who is the same quality or maybe less. You have to know the specifics; right? 

Ms. GREALY. Right, I think that is—— 

Senator GREGG. You have to have that available. 

Ms. GREALY. I think that is why this is such an important tool 

in making that information available in a way that you can do this 

comparative analysis, which I think is your point. How do we compare providers? We have guidelines. We have a whole host of organizations that are developing what are the appropriate practice 

guidelines, what is the best use of evidence-based medicine. And 

then I think the next step is how do we do this comparative analysis so that payers for health care as well as consumers of health 

care have that information available to them so that they can make 

that choice. 

Senator GREGG. And how do we do that? 

Ms. GREALY. I think by implementing health information technology. I think what you are hearing from this panel is that this 

is a tool that is so important in so many ways in terms of improving quality and safety but also in increasing the efficiency of health 

care. And so we need the funding to get these systems in place. 

We have organizations that are currently doing it. I think what 

you are hearing Rhode Island, light-years ahead of many other providers and systems. But we are seeing this throughout the country 

but they are still in their silos. 

And I have been impressed with my members like the Mayo 

Clinic, the Cleveland Clinic. When you talk to them, what do they 

want out of the system? We are doing it. They have made the investment. What they would like to see is how can we help smaller 

community hospitals? How can we help small group practices of 

physicians? How can we help rural providers do what we are 

doing? 

They made the investment, they did not expect to see a return 

on their investment, and they have been very pleasantly surprised 

that they actually have seen cost savings as a result of doing this. 

They now want to make sure that others can access the system so 

that we can share this information nationwide. 

And I think really achieve the goal that Senator Whitehouse was 

mentioning. If we do not do system reform to get control over making the system more efficient, then I think the only alternative we 

have is imposing across-the-board cuts, price controls, things that 

will not work. 

Senator GREGG. Have you looked at the IT bill? 

Ms. GREALY. Yes, and we are very supportive of that legislation 

and have worked very hard with Senators Kennedy and Enzi to try 

and get that legislation passed. 

572 

Senator GREGG. Thank you. 

Chairman CONRAD. Thank you, Senator. I am going to defer 

again to Senator Stabenow because she has played such a lead role 

on this Committee on this subject. We will turn to Senator 

Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, very much for 

this important hearing. This has been a passion of mine. I think 

one of the very first conversations Senator Whitehouse and I had 

in his coming to the Senate was on this topic? And so it has been 

wonderful to work with you and to see the energy that you bring 

to this. 

I would say to my friend, Senator Gregg, that the answer is yes, 

in terms of being able to demonstrate quality and comparisons and 

so on, using health IT because we are actually doing that in Michigan. 

Mr. Chairman, we may even want at some point to have another 

hearing that relates more to the specifics on the quality pieces of 

sort of what has been demonstrated. There is something called the 

Keystone Initiative that was started by the Michigan Hospital Association, that has received national attention. Senator Whitehouse 

and I have also talked about that extensively, but where they are 

focused on certain benchmarks of quality, eliminating infections, 

now surgical procedures and so on. And they have had terrific results. 

But again, they go back to the ability to cut data and health information technology and it all goes back to the same thing that 

we are talking about now and issues around privacy, which are 

also something I would like to ask you about which are very important. 

We, though, in Michigan—and just to brag about Michigan because we have had a number of areas of leadership on this—and 

frankly because we have the largest employers that provide employer-based health insurance in the country. And so there has 

been a real incentive, the auto industry and others to really focus 

on this. 

But we have had one area specifically where we have seen just 

tremendous results in just a couple of years. And that is around 

e-prescribing. We had the auto industry and BlueCross BlueShield 

and physicians and others that came together in 2005. And since 

that time, they have had over 6 million prescriptions that were 

written electronically in Southeastern Michigan, the Detroit region. 

They have 2,500 physicians that are actively involved in this now, 

providing more than 282,000 electronic scripts each month. What 

they have found, when they evaluated this after 2 years, is that it 

substantially improved patient safety. It was not just an issue of 

cost, as all of you know. It is an issue of safety. 

And they found that doctors were alerted about incorrect drug 

prescriptions, incompatibility with prescriptions that people were 

already on. They found that 423,000 prescriptions were actually 

changed or canceled by the doctor when they had better information by using e-prescribing, and that there were 100,000 medication 

allergy alerts that went out that caused the doctor to be alerted 

and to be able to change the medicine. And they also found that 

38 percent of the time the doctor changed the prescription to a 

573 

lower-cost generic once they were given information about other 

medicines that were available that would address the same issue 

of concern. 

Plus you can read their handwriting better. 

So I say that only to say there is a tremendous amount of effort 

happening here and also among individual hospitals. 

But what I am leading up to is what I hear over and over again, 

I hear from major hospital systems in Detroit that are doing health 

information technology. I hear it as it relates to the e-prescribing 

effort, is that the most difficult part is physicians participating. So 

you have a hospital doing this and yet it is dependent upon the 

physician sharing information and being a part of this. 

And I am not being critical of them. They face Medicare cuts, 

Medicaid cuts every year. Then we say to them by the way, we 

want you to go out and buy this equipment, we want you to train 

your people, we want you to spend these resources, do these new 

systems. And the folks that will benefit the most are the Federal 

Government or others. 

And so I wondered if you might speak to the importance of 

incentivizing physicians and others to participate? And I would say, 

on that note, that there are two initiatives happening. Senator 

Snowe and I have had legislation for some time to provide incentives through Medicare for physicians that use health information 

technology to be able to help them be able to address the costs and 

be incentivized. 

And Senator Kerry and I, in the last Medicare legislation we 

were working on concerning physician payments, worked with colleagues on an e-prescribing effort that would provide an incentive 

payment to physicians as well as one-time grants to help them be 

able to get the equipment. 

So I wonder if you might speak to sort of—the saving comes to 

the providers and the Government and yet we are asking the providers, the physicians, to go through a tremendous amount to be 

able to make it happen. 

Ms. ADAMS. We see that problem as likely one of the most significant root causes of why we are stuck in the status quo. When you 

really think about the fact that a physician may put something in 

place that prevents a medication error, what that means for that 

physician is that patient will not be returning to the office numerous times for followup visits. 

They get paid by the visit, not for the continuous healing relationship that the IOM described, not for treating the patient at 

home and making sure that if they see their A1c hemoglobin is 

going up, their blood sugar is going up, that they intervene at 

home and keep them out of the office or hospital. For every patient 

they do not harm, that patient is not hospitalized, that money goes 

back to somebody else. 

I think it was Jim Reinertsen that was so eloquent when he said 

every step we take toward this collective vision of nirvana is one 

step physicians take toward insolvency. And then we wonder why 

they will not participate as actively. 

So in Rhode Island we have addressed it in a couple of ways. 

First of all, our major insurer, BlueCross BlueShield, stepped up 

huge. They put in a significant reimbursement rate increase but 

574 

they split it in half. They said you get 50 percent of it because you 

need it. And the other 50 percent you get if you go electronic, certified electronic. And if you do not, you do not get it. Because it is 

safer, better care, it is cheaper care. So we had a big incentive program there. 

They also put in a program called Quality Counts, which means 

that the first year is a pay for adoption. Not pay for performance 

yet, pay for adoption. So that system went into place also. 

We also have a group that we have assembled under the Quality 

Institute umbrella of the senior-most thought leaders physicians. 

We recognized that the pharmaceutical companies were just ingenious at figuring out how to identify thought leaders in communities, talk to them about prescribing certain medications, and 

those would sweep across that social system and any population 

they were trying to change. 

Now the physicians chafe at that idea but we should not throw 

the baby out with the bath water. That is a brilliant idea. So we 

are conducting a study right now with the same group that formulated that capacity for finding those opinion leaders, finding their 

communities of practice and making sure we understand those 

thought leaders in HIT Rhode Island, physicians. What are they 

saying? Are they saying yes, adopt or no, do not adopt? It helps us 

develop our strategies if we can find those physician thought leaders because really the tipping point and diffusion of innovations 

theory tells us that if you can convert 20 percent of the thought 

leaders, that innovation will continue through the population and 

you cannot stop it even if you wanted to. 

So we are doing a couple of different approaches—and we are 

also working on things like low-cost loans, whatever we can do, 

supports because we know that the biggest challenge for them after 

they get past the OK, I am going to buy it is they need their hand 

held every step of the way during the early part of the transformation. That is where the failure occurs most of the time. 

Ms. GREALY. Senator, I think there is another area and we have 

seen some progress in this. We have many hospitals that are willing to help physicians that are affiliated with them or even not affiliated with them. Under the Stark self-referral and the anti-kickback statute they can do that with their employed physicians and 

not be concerned about the penalties. 

But for those physicians that are not employed by the hospital 

it is a little more vague. And the penalties for violating these laws 

are quite severe. So I know that hospitals tread very cautiously 

there. 

There has been some new regulations that have helped clarify 

that. We probably could use more clarification in that area. 

But I think what you are hearing, and I think Rhode Island, you 

know, if we could just expand that model nationwide, it really is 

a shared responsibility. Providing incentives, and I think that absolutely is the way to go, provide that carrot. Having physician leadership. For every hospital leadership that has done this and done 

it well, it has been with great physician leadership and leadership 

at the top. So it is that cultural change, as well. 

575 

And the low-cost loans. There is a variety of tools that we can 

use. Something that we can do on the regulatory side as well as 

the financial side. 

Senator STABENOW. Mr. Chairman, I hope we are going to be 

able to really address these things as we move forward, whether 

it is Budget or whether it is Finance, to really address those incentives that will allow this to move forward, through Medicare payments, through other things that will really make the difference. 

Chairman CONRAD. You know, this is a situation where two committees have cross-jurisdiction. We have a responsibility as the authorizing committee. Finance has a responsibility in two areas, provide the money and as an authorizing committee, as well. And so 

we are going to have to work hand in glove in order to provide resources necessary to actually accomplish an outcome. 

Senator WHITEHOUSE. Mr. Chairman, can I offer an observation 

to you? 

Chairman CONRAD. Yes, absolutely. 

Senator WHITEHOUSE. I would like to followup on what Ms. 

Grealy just said, that Rhode Island could be a model if you would 

expand it nationally. I think it is, obviously for our purposes, a 

very flatting point but also one that is worth considering is how 

you might do that. 

I think if you look at what identifying characteristics are that 

made Rhode Island successful, the key one was this question of 

having a place, a forum, a location, an organization where local 

leadership could get together and step outside of their siloed roles 

and start to think collectively about the direction of the system 

they were, until then, trapped in. 

I think that if you are going to try to take the Rhode Island system national, the best first step would not be to take what you do 

in Rhode Island and go to Michigan or to the Dakotas or to California or to Texas some place and say here, do this. It would be 

to try to facilitate that same process where the local leadership has 

the opportunity to get together and start making these decisions. 

Because there are other ways to do this and we know so little 

about what we are doing at this point that experimentation, health 

care federalism would really be, I think, valuable. 

So I just wanted to followup on Ms. Grealy’s point because I 

think is a valuable one. But I really think it is important that we 

try to drill down to how you would make that happen. And I think 

counting on local leadership, where people trust each other, they 

see each other at the market. They go to the same church. They 

see each other at the football games when their kids are playing. 

Chairman CONRAD. So we call it the grocery store. 

Senator WHITEHOUSE. The grocery store. 

Senator STABENOW. I am sorry, we keep going back and forth 

here. But I would just echo that because on e-prescribing in Michigan, that is exactly what happened. Employers, BlueCross, hospitals, physicians, everybody came together to do something that 

was across lines. And so I think that is an important point. 

Chairman CONRAD. Can I just make this observation, that the 

crisis is now. The crisis is now. 

I just tell you Senator Whitehouse described very aptly what is 

going to happen at some point. We are there. 

576 

The next administration is going to walk into this town and they 

are going to have seen the Federal Government’s debt go up $800 

billion in the previous year. Not the $400 billion that all of the 

news media writes about. Wrong. That is not the problem. The deficit, that is all they can write about is the deficit. 

I do not know why the news media cannot write a four letter 

word, debt. They do not want to deal with that. 

I had one very prominent reporter tell me we do not write about 

the debt. It is too complicated. We do not know whether to write 

about the gross debt or the publicly held debt. 

Well, guess what? The gross debt is what the country owes. It 

is what is going to have to get paid back. And the gross debt of 

the United States, now $9 trillion, is going to go up $700 billion 

this year. It is going to go up $800 billion the next year. Nobody 

talks about it. Nobody mentions it. It is like the crazy cousin in the 

closet or what did Ross Perot talk about, the crazy aunt in the 

basement. 

It is unbelievable what is going on in this country, just a collective kind of hide the ball from the American public. 

The next administration is going to walk in here. At some point 

this will precipitate a crisis because we are borrowing this money, 

increasingly from the Chinese and the Japanese. And it is just a 

matter of time before the roof caves in. 

I had another senior colleague tell me well, that is what has to 

happen, we have to wait for the crisis. I love that. That is a great 

plan, let us wait for the crisis. But that apparently is what is happening. 

None of us knows when the crisis is going to occur, but you can 

just write it down. It is going to occur because there has never been 

a country ever that has been able to sustain itself by borrowing 

from abroad. And over half of our debt now is financed abroad. 

And guess what? The dollar is going down in value, which is exactly what you would predict. And at some point, those of us who 

are loaning the money and they are going to look at their holdings 

and they are going to say gee, we are holding all of these dollars, 

and the dollar is going down dramatically in value. Maybe this is 

not such a good idea. And then we have a big problem. 

Because if they make that decision, singly, collectively—we have 

already heard warnings from Chinese finance ministers, Japanese 

parliamentary members, that they might have started diversifying 

out of dollar-denominated securities? Then what happens? 

To get the money you have to raise interest rates. And I will tell 

you, that is when it is going to get really ugly in this town because 

we are just in a financial dream world. We are just running up the 

charge card and hoping the bill never comes due. 

But it will. Absolutely, without question, it will come due. 

So that is why this subject is critically important and your observation, Senator Whitehouse, that you have to build to prepare, that 

is exactly right. Unfortunately, we are going to get caught in an 

unbelievable crunch. 

I sometimes think of it and I wonder what this town is going to 

be like when this realization hits. 

577 

Senator NELSON. Mr. Chairman, did I not see a story recently 

where some stores in New York were only dealing with euros instead of dollars? 

Chairman CONRAD. You have some European super model that 

will only take a contract in euros now because the dollar is going 

down in value and so she wants to get paid only in euros. Who 

would ever have believed we would be in a circumstance like that? 

I want to go to a question that was raised by something that you 

said, Ms. Adams, on infection that really caught my attention. An 

initiative through the use of information-technology, as I took it— 

and correct me if I am wrong—that helped bring down the rate of 

infection I heard you say 57 percent. Could you tell the Committee 

a little more about that? I would be very interested. 

By all accounts the infection rate in hospitals has always been 

a serious concern. But now it is a growing concern. We have infections in hospitals not seen before. What was done to so dramatically reduce the rate of infection? 

Ms. ADAMS. We took our inspiration from the Keystone project in 

Michigan. That is the project that originated this, and we replicated because we know that there is no sense in starting from 

scratch when somebody has done something dramatic. They have 

achieved results beyond what we have achieved. They have been 

going on I think 2 years longer than we have. 

What it entails is we have almost no feedback loops in health 

care. We do not know how often we are infecting people. We do not 

know how often we are harming people. We do not know what it 

costs. We have so little information to operate on, yet we keep imploring people to do better. They have no metric. 

So one of the most important cornerstones of our initiative was 

to get them a metric. How often are we infecting people? Let us 

standardize our definitions so we know it across the State. 

Then we know that there are certain interventions based on 

science. To keep people from getting a ventilator associated pneumonia, you have to keep their head of the bed elevated 30 degrees. 

We have to find some way to measure to make sure that it is happening. And if it is not, then we have to find ways locally to make 

sure that that head of the bed says 30 degrees, even if it is making 

sure that the daughter knows that that head of the bed ought to 

stay 30 degrees. And anybody that leaves the room, nail them and 

tell them that mom needs to have her head of the bed up 30 degrees. 

But if we do not have those metrics that come back and tell us 

about our performance, we have no way of knowing how we are 

doing. And it is incredibly demotivating to staff to be—sometimes 

we will devolve to such things as like the hand washing police and 

we will count how many times people have washed their hands. 

But we will not put up on the wall how many people have been infected by the fact that we are not washing our hands. 

Now when we put up there that it has been 66 days since the 

last infection, 67 days since the last infection, 68 days since the 

last infection, they wash their hands because they have a metric 

up there. But without information technology, we continue to try 

to deliver care in an information-free zone. 

Chairman CONRAD. That is a very interesting point. 

578 

Let me ask you, when we are talking about information technology, we are talking about deploying it within an institution. We 

are talking about deploying it across institutions. And then there 

is the question of where does the product go. 

Because I, as a consumer, if I have to make a decision what hospital I am going to take a loved one to—I just went through this 

with my daughter who had an emergency appendectomy over the 

Christmas holidays. You know, I went to the hospital where I went 

to school. I did not go to the medical school but I went to the 

school. 

But I have no idea—actually I had a wonderful experience there, 

so I was fortunate. 

Where would you find the basic information on something like infection rate that would be publicly available? Is there a place that 

a consumer could go and find out what is the consumer satisfaction? What is the infection rate? What is the survival rate of various surgical procedures? What is length of stay? What is cost? 

Is there any public source where you could readily find that information as a consumer? 

Ms. ADAMS. We have increasing opportunities for that now. In 

Rhode Island we have been doing public reporting on a certain set 

of outcomes. We have really been fortunate in having CMS advance 

that program of public reporting. We publicly report satisfaction in 

California, for example. 

There been a number of places that attempted to publicly report 

the outcomes of cardiac surgeries. Pennsylvania has become a marvelous job in beginning to become very transparent about this. 

It is a difficult science to do the measurement? And of course, the 

measurement also causes some interesting behavior. If you end up 

as the person with the highest mortality rate for cardiac surgery, 

we have seen physicians refuse—— 

Chairman CONRAD. Do they start to hide bodies? 

Ms. ADAMS. They refuse to take on the difficult cases or operate 

on more healthy people to get their average up. So in some ways 

we have to be careful about the programs themselves. But increasingly we are seeing those. There is Health Grades on—the Internet 

is becoming a rich source of opportunity to look to see. 

And also, hospitals that do not pay attention to bad outcomes, for 

example, and do not listen to the consumers and families that they 

have harmed will find their story being told on the Internet. I could 

give you five sites—I will not right now—where families have told 

their stories in aching excruciating detail about what happened to 

their loved one. 

If we pave a way for that information to be known in a format 

that is acceptable to all of us, patients and families find a way to 

make it known. It is word-of-mouth on steroids. 

Chairman CONRAD. Ms. Grealy? 

Ms. GREALY. Senator, we are seeing great progress in this area. 

I think we have moved beyond providers not being willing to share 

this information. And I think they see that we now have an opportunity really to get in front of this. So you have the National Quality Forum. You have various projects going on where medical societies and other health care providers are getting together and deVerDate Aug 31 2005 08:56 Oct 28, 2008 Jkt 000000 PO 00000 Frm 00584 Fmt 6601 Sfmt 6601 C:\DOCS\42157.TXT SBUD1 PsN: TISH
579 

termining what are the appropriate measures. And I think that is 

the important point. 

We want to make sure that we are measuring and reporting the 

right thing, that we are not penalizing providers that are taking 

the tough cases. 

But this movement is well underway. We are seeing great 

progress. CMS is helping to drive it. Private health plans are driving it. Consumers are now demanding this information. Providers 

get it. And now we are just trying to find what is the best format 

both for the provider as well as for the consumer. 

Chairman CONRAD. And is this something you would anticipate 

would be available in a certain timeframe? 

Ms. GREALY. I think much of it is available already. What we 

need to do is get it more unified. So you can go to Leapfrog, you 

can go to the CMS website. There are a variety—as Laura just 

said—of different websites that are available now. But I think everyone is trying to do this in a much more unified, uniform way. 

CMS is driving it to a great extent, as well as the private health 

plans. 

Chairman CONRAD. Senator Whitehouse. 

Senator WHITEHOUSE. I have a question and I would like each 

of you to answer it. President Eisenhower, not exactly a major 

league liberal lefty, decided that it was very important to build a 

national highway system. Now pretty much every American drives 

out of their driveway onto a publicly maintained road and we all 

accept that the roads should be publicly maintained. We are very 

comfortable with the idea of a huge Federal transportation budget 

that maintains that infrastructure. We all recognize that collectively, when we get together to build that infrastructure, we do 

ourselves a great common good because goods travel more cheaply 

and they travel more efficiently and the prices of goods go down 

and it is easier to visit grandma on the holidays. And for all of 

those reasons we get together and do it. 

And if somebody came to us and said well, the way we are going 

to do this now is we are going to make everybody responsible for 

the care of the roads and highways in front of their houses individually, you would end up with a nightmare. You would end up in 

potholes. You would end up with mud. You would end up with everybody trying to deflect from their responsibilities. 

What is it about the health information infrastructure that is different from say the highway infrastructure? We had a bridge fall 

in Minnesota. It was a terrible tragedy. We leapt, as a Senate, to 

go and build that new bridge and put that infrastructure back together. 

What is it about health information infrastructure that makes it 

so hard for us to see it as infrastructure like the highway system? 

Why don’t we have a more prominent Federal role in it? The wave 

of debt that Chairman Conrad talked about, I use my eight pennies 

example because I keep hearing from our colleagues across the 

aisle about how bad earmarks are and how there is 8 billion too 

many of them. 

If a penny is $1 billion, that is the pile of what we save if we 

cut the earmarks in half, $8 billion. There is eight pennies. 

580 

If you look at our long-term unfunded health care liabilities, it 

is a pile of pennies, my staff has calculated, that is 221 feet high. 

And what we spend on it through ONCHIT is $66 million in the 

president’s budget. That is one-fourteenth of this piece of penny. 

You would need a little clipper to clip one-fourteenth off. 

And when you put that against that, I do not get why do we do 

not see this as infrastructure, particularly with the savings available. 

Ms. MELVIN. Senator Whitehouse, in the work that we have been 

doing at GAO, one of the things that we have recognized is that 

there are a number of initiatives that HHS is undertaking. There 

are initiatives related, I think in the same sense, to some of the 

discussion that we have had earlier relative to e-prescribing, Rhode 

Island’s experience so far. So there are ongoing efforts—— 

Senator WHITEHOUSE. But is it not fair to describe the HHS efforts as regulatory? 

Ms. MELVIN. I think they are more from the position of trying to 

determine solutions and how they can move forward. 

The concern that we have had, and I think it goes to part of the 

reason that have not been able to perhaps come to some more definite statements or positions relative to infrastructure, is that what 

we have seen is that there has not been a national strategy, if you 

will, to really carry the initiatives forward. While there have been 

important progress made in a number of areas, even from the 

standpoint of what you have spoken of today, there are national 

trial implementations going on that do address some of the issues 

that, for example, Chairman Conrad mentioned relative to trying 

to get a handle or a better understanding of interoperability. 

The concern that we have is that there is no defined strategy 

that identifies the plan in terms of overall what it is that they are 

trying to accomplish that addresses all of the nuances that I think 

have been mentioned here today through the experiments of Rhode 

Island and other places, that there are not specific milestones for 

how to reach the objectives. 

And then ultimately, as was mentioned earlier, having outcomeoriented results measures that, in effect, allow them to look back 

at what it is that they set out to achieve, knowing definitely where 

they want to go to, making informed decisions based on the various 

activities that are being undertaken—and there are good projects 

in the works from what we can see. It is a matter of trying to utilize those projects in an effective way to get information that allows 

them to make informed decisions, whether it is on a public 

level—— 

Senator WHITEHOUSE. If you do not mind, the time is running 

out. 

Ms. MELVIN [continuing]. Or a private level. 

Senator WHITEHOUSE. I want to give the other witnesses a 

chance to answer, as well. Laura, Ms. Grealy, is this infrastructure? 

Ms. GREALY. I would agree it is infrastructure. It is a very complex, challenging problem. As I said in my testimony, we recognize 

the fiscal difficulty of doing this in a huge way, which is why we 

are really looking for what I would call seed money. There are a 

581 

whole host of organizations, entities, out there that really could do 

this. They just need help with the initial investment. 

So we are not saying that the Federal Government has to finance 

this 100 percent, or that the private sector has to finance it 100 

percent. But we think through a partnership—and some of the legislation that is out there, I think, really provides that. 

It would be nice to have the overall framework, kind of the map, 

so we know where we are headed and get this coordinated. But the 

movement is underway. And people are doing it and they are willing to make the investment. They just need the helping hand. 

Ms. ADAMS. My take on this is that it is a failure of market 

forces and people are putting way too much stock in the idea that 

market forces are going to fix it. Whenever I am speaking to employers and other people who look at health care as another industry, they will say nobody paid for my IT infrastructure, why should 

I pay for yours? They fail to understand that the benefits accrue 

to everybody else but the person who puts it in. 

And then I think the other concern that I have is things like 

competition does not work in health care. You get another MRI on 

the corner, you have another MRI on the corner. Having more does 

not drive down costs. It does not drive down the number of MRIs. 

It drives both of those up. 

When you look at things like our payment structure, the worst 

cardiac surgeon is paid the same as the best cardiac surgeon. We 

have no set of market forces and people rely on that. 

I think one of my greatest concerns, I would like to sound an 

alarm a little bit, on the issue of the relaxation of the Stark. Because what I think that that is going to do, in the absence of the 

group that you talked about, the community governance structure 

coming together, then what the relaxation of Stark allows us to do 

is say I am going to connect. But I am going to connect just with 

that orthopedic hospital that sends me referrals and just that one 

that sends me the referrals over here. 

The rest of you, patient-centeredness? That is your problem. And 

to get your little doctor on the corner linked, really not financially 

in my best interest. 

So we are going to see what John Glaser of Partners has described as RHIO 2.0, the default to the market structure. And we 

will once again have more duplication and it will fail again. 

So my concern is if we do not see it as the public good then we 

are headed toward—talk about the next festival of waste. 

Chairman CONRAD. I think we should go to Senator Wyden because he has not had a round, if we can do that. 

Senator Wyden, welcome. Senator Wyden, of course, has been 

legendary in terms of leadership on health care. He has spent 

years trying to put together an alternative structure that we could 

look to for reform. 

Senator WYDEN. 

Senator WYDEN. Thank you, Mr. Chairman. And I would probably characterize it more as infamous rather than famous, but I 

thank all of you. I apologize, we have had a huge hearing for Oregon today in terms of forestry, and Senator Stabenow and Senator 

Whitehouse, of course, have had a tremendous interest in this, as 

well. 

582 

I am so glad that you are here and that we are having this hearing because the history of this debate, of course, is that what gets 

most of the attention is cost. And if you look at the 1993 discussion 

about the Clinton plan, there was oceans of debate about the costs 

of health care and virtually no discussion about what we are talking about here today which is quality and people, in particular 

being able to find affordable services and providers that are good 

quality. 

And what we do in the Healthy Americans Act is to try to take 

some steps in that direction, certainly not anywhere near as bold 

as Senator Whitehouse has been advocating in his good work. But 

we secure a way to pay for electronic medical records. A number 

of insurers have indicated that they would be supportive of that 

under the approach that we advocate. 

We use the Agency for Healthcare Research and Quality to publish nationwide by ZIP code information about the kinds of providers and services you are talking about. 

I want to talk about the role of the individual to start with in 

this because I think it is something that we have missed. And it 

is, to a great extent, a transparency issue. Right now in America, 

if you got an employer buying you $12,000, $14,000 of health care, 

and it is part of your compensation, you are basically in the dark 

about whether that purchase of health care for you really addresses 

the kinds of quality concerns that you all are talking about. 

So I think I would like to start, and maybe we can start with you 

Ms. Grealy, and go right on down the line. How important is it to 

you, in this effort to drive quality, that we show the individual how 

that money is being spent today? Because I think if individuals see, for example, that $14,000 or $16,000 is being spent on their health care benefits, I think the 

first thing they are going to say is darn it, I want to get more value 

for my money. I want to do some of these things Senator 

Whitehouse and Senator Stabenow are talking about, the e-prescribing and the sensible suggestions Senator Whitehouse is talking about. 

I think they are going to say I want to see that done so that my 

$14,000 is going to get more for me and my family. 

So starting with you, Ms. Grealy, how important is it that the 

individual see what the health care dollar that is being used in 

their name goes to? 

Ms. GREALY. We strongly support a patient-centered or consumer-centered health care system. In just talking with my members, who not only are health care providers and manufacturers of 

health care products and health plans, but they are also, in many 

instances, large employers. And more and more they are telling 

their employees: here is how much is being spent on your health 

benefits. And for every dollar that is being spent on your health 

benefits is a dollar that is probably not being spent on wages. 

So I think consumers are very interested not only in what is 

being spent on their health care, but I think we are trying to create 

more of that market force that is missing by getting consumers 

closer to the cost as well as the quality of their health care. 

That is why I think the whole discussion about transparency is 

so critical. We have to make sure that we are providing them good 

583 

information. But we need to get the consumers much more involved, both in managing the costs of their health care as well as 

the quality. And of course, what can they do to make a difference 

in health care costs, which is managing their health better, as well, 

the whole disease prevention movement. 

I think this is a very exciting time. I feel like we are just on the 

precipice of making true health system reform, not just talking 

about costs but really talking about the system and how we can improve it. And the consumer just absolutely has to be part of that. 

We have not really spent much time today talking about what I 

think is the real critical problem here. Why do we need a unified 

electronic health record? It is so that parents like mine, who are 

in their 80’s, that are seeing on average 10 health care providers, 

that each of those providers know what is going on with them and 

that they have a better sense of what is the health care that they 

are getting. 

So again, I think there is a very critical role for the individual 

consumer and patient to play in this, and it is all about having useful information. 

Senator WYDEN. Let us give your colleagues a chance at this. The 

question of transparency with respect to where their health care 

dollar goes today and how it might be better utilized. 

Ms. ADAMS. I would say that I think we ought to keep in mind 

the notion of the connection between quality and cost and be sure 

that if they get the cost information, they get the quality information. 

I was fortunate enough to learn and travel with W. Edwards 

Deming, a theorist who essentially brought Japan’s economy back 

from World War II. And one of the things that Deming taught me 

about was the notion of price tag versus total cost. 

He was wearing a pair of shoes 1 day and an old engineer friend 

walked up and said hey, those are a great pair of shoes. How much 

did they cost you? And he said I have no idea, I am not done wearing them yet. 

His point was that there is a total cost and there is a price tag. 

My concern is if we show people price tag—we have a good study 

that just came out from Brown recently, in the last month, that 

showed even a small copay and the showing of the cost of a mammogram will cause some women not to go get that mammogram. 

Now we will understand that there is a price tag there and they 

may reduce the price tag but they will not increase the overall cost. 

So I think it is a very difficult conundrum. 

Senator WYDEN. Just so we are clear, under the Healthy Americans Act all of those essential preventive services would not get a 

copay. What we are talking about here is just access to information 

so that you would be in a position to say boy, they are spending 

all this money in my name. Gosh, I would like to look around a little bit and see if we might get more for my money. 

Ms. ADAMS. Yes, and all I am saying is if we can tie that to quality, because I would like to know what my money is buying. Few 

of us would want to put our health care out for bid to the cheapest 

provider. 

Senator WYDEN. That is for sure. 

584 

Let’s hear from the folks from GAO. You are from GAO, aren’t 

you? 

Ms. MELVIN. Yes, I am. 

From the work that we have been doing, it has been focused on 

the technology aspects. And certainly, driven by patient-centric emphasis on having quality care to the patient. In the work that we 

are doing, we have seen that with the electronic health records the 

key is in being able to have information readily available regardless of the provider that the patient chooses to use. 

Hopefully, in terms of that intent, you would see that through 

the availability of that information, that hopefully that would 

translate into better care which ultimately makes the bottom line 

for the actual patient, makes it clear in terms of quality improvement. 

Senator WYDEN. My time has expired and let me just ask one 

question that perhaps you could respond in writing. In the past we 

have really looked to the Agency for Healthcare Research and 

Quality to take the lead in terms of getting this kind of information 

out. I think there is certainly going to be a debate about whether 

we ought to reconfigure their role and have them take on additional assignments. 

If you could get back to us for the record what kinds of suggestions you could give us for the best way to use that premier agency 

with respect to information and data as it relates to quality, that 

would be very helpful. 

We may get another round and if so I will get a chance to get 

into it. But again I want to thank also my colleagues, Senator 

Whitehouse and Senator Stabenow. They have been the champs on 

this issue and have been educating me and I look forward very 

much to working with them. 

Thank you, Mr. Chairman. 

Chairman CONRAD. Thank you, Senator Wyden. And thank you 

for your contribution to this committee. 

Senator STABENOW. 

Senator STABENOW. Thank you, Mr. Chairman. 

Just for a moment on the issue of quality again in the Keystone 

project, just to followup. And I appreciate Rhode Island’s work in 

working with what has really been a phenomenal initiative by the 

Medical Society in Michigan. Within an 18 month period, they first 

focused on intensive care units, as you know, the intensive care 

unit and diseases? And within an 18 month period actually saved 

1,500 lives and $165 million. It was just extraordinary. 

So it is very exciting what can be done. It is very exciting what 

you are doing, as well. It is very exciting what the possibilities are. 

But if we are going to get ahead of this curve that the Chairman 

talked about and Senator Whitehouse talked about, it takes time 

to do this. So we have to start doing it so we have time to develop 

it and really see those results. 

I wanted to turn a little bit to the issue of privacy. We hear a 

lot of concerns. I find it interesting when I can go to the ATM. I 

bank online. I can go anywhere in the world to an ATM and be able 

to get cash, assuming I have some in the account. So we have security systems. We do this for financial services all the time. 

585 

But there is a legitimate concern about health privacy and how 

we manage that, who owns that information and how do we do that 

and so on. 

It was interesting, I had a psychiatrist who was in the office for 

a meeting this week, a woman in psychiatry, talking about the fact 

that she was very concerned about health IT because there were 

medicines and physical ailments that she needed to know in treating her patients, whether they were on heart medicine, other kinds 

of things, that even though it did not directly relate to what she 

was doing, she needed that information from a safety standpoint in 

working with the person. 

And she talked about how her records are private, from a privacy 

standpoint, from a mental health or psychiatric standpoint, and 

that they have a firewall to protect information in her system, in 

the hospital that she works in. 

So I wondered if you might speak, I mean I personally think that 

having a password and some kind of an electronic system is actually much more secure than a file in somebody’s filing cabinet that 

anyone could open up. 

But I wonder if you might speak to the security issues and the 

progress in dealing with these issues around privacy and security 

and how we tackle that. Because I personally believe that is one 

of the barriers publicly in moving forward, that is an initial comment that people have in terms of who will have my information? 

How will it be used? Will an insurance company use it in some way 

against me if I am looking for coverage? And all of those kinds of 

things. 

Ms. GREALY. Senator, I would like to respond. We have done a 

lot of work on the privacy issue. We head up a confidentiality coalition of over 100 groups and have been working on this for over 10 

years. I think we have not done a very good job of educating the 

public about what protections are currently in place. 

As we began working on health information technology legislation, I felt like we were starting all over again, that the HIPAA privacy rule that we worked on did not exist. 

So I think we need to make sure we inform the public. Protections are in place. Your information cannot be disclosed to your 

neighbor, to your employer, to a reporter. And if it is disclosed 

without your permission, there are penalties. So we need to educate. 

We also need to educate people that, as you pointed out, your information is much more secure in an electronic health record and 

system because there is an audit trail, there are passwords, there 

are protections that you do not have if your record is just sitting 

in a file cabinet on a piece of paper. 

As I said in my statement, we would like to see more uniformity 

just to make it easier, as you are going from state to state, and not 

having to spend much time and much money trying to figure out 

those rules and regulations. 

But I think more importantly is just coming back, looking at this 

from the patient’s point of view and assuring them one, your information is protected. 

But I think more importantly, why is it important that health 

care providers have access to your information? Why is it good for 

586 

you? Why is it good for your children? Why is it good for future 

generations? And that is the case that we have to make. 

It is important that we have the information. We will de-identify 

it when we are using it for research. We will not disclose it inappropriately. But we have to make them feel comfortable with how 

it is being used and, more importantly, how it is being protected. 

Ms. ADAMS. In the traditional Rhode Island way, we started with 

this about 2 years ago and got everybody and their brother together in the community to talk about it. We were educated quickly 

by people like the Domestic Violence coalition who said you talk 

about HIV and mental health as sensitive information. Well, for an 

abused woman who does not want her abuser to know she sought 

treatment, a cracked rib is sensitive information. 

So what we got those groups that felt most vulnerable by the 

idea of having their information on the Internet. And the legislation that we introduced in Rhode Island this week includes a couple of things such as it is voluntary. You can opt in or not. 

The second level of opt-in is you can OK, for this physician and 

that group and that group but not this one, that one, and that one. 

So there is the opportunity to direct your care. 

The ACLU was somewhat concerned because we did not allow 

yes, this lab test, no, not that lab test, that level of granularity. 

But our concern was for our providers that if they go into that information exchange and they do not know whether 5 percent of the 

information on the patient is there or 95 percent, it renders it 

worthless and we can stop now. 

So we did go with the you are all or you are all out. 

We did also set up a regulatory body because these groups like 

the Quality Institute, we are freestanding. We are not for profit. 

And I think their concern is wait a minute, you have a sustainability issue. So how do we know some pharmaceutical is not going 

to swoop in and offer you a bunch of money for our sensitive information and you sell our soul. 

Chairman CONRAD. Can I interrupt for just a moment? Can I interrupt for just a moment? 

Could I ask Senator Stabenow to take over direction of the Committee? I have been called out for a moment. 

Senator STABENOW [presiding]. Absolutely. 

Ms. ADAMS. I think it was the concern that there be a regulatory 

body. And then obviously authentication and penalties because 

there is the situation and we do feel the need to communicate it 

to the community that—the situation like Mary Jones, the young 

girl that was beaten to death in New York and 34 providers in the 

New York hospital looked in her record. Well, there was an electronic fingerprint of that and those people were fired. 

We have not had that kind of protection before of who can peruse 

your record. And short of getting a dusting for fingerprints, we do 

not know who has been in your paper record. So we would agree 

that that notion of informing the public is critical. 

Ms. MELVIN. In our oversight role, our work has also identified 

challenges associated with protecting personal health information 

as it relates to, for example understanding and resolving legal and 

policy issues on variations in State laws that relate to privacy. Also 

on ensuring, for example, the amounts of information necessary to 

587 

be disclosed and giving patients the right to really decide whether 

there should be amendments to their information. 

What we have noted overall, which again goes back to the overall 

strategy that we have talked about, is there has been a need for 

an overall privacy approach in looking at this from a national perspective to make sure that there are plans and there are milestones and, again, measures for being able to really assess the extent to which privacy is being addressed in an effective manner. 

Ms. ADAMS. Could I correct my testimony? I said those people 

were fired in New York. They were disciplined. 

Senator STABENOW. Thank you. I think at this point, unless 

there are further questions, we will bring the hearing to an end. 

But we want to thank you very much for your testimony. This is 

an extremely important topic and I appreciate both the Chairman’s 

commitment and Senator Whitehouse and others on the Committee. I hope that together we can move this and begin to move 

this. 

We have an opportunity under Medicare, with the effort that is 

going on that could very well happen this year in terms of incentives around e-prescribing. And then hopefully we can take that 

next step and as quickly as possible begin the incentives to be able 

to support what you are doing. 

So thank you very much. 

[Whereupon, at 11:33 a.m., the Committee was adjourned.] 

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Æ 


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