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46–362—PDF 2007

S. HRG. 110–708

CAN THE MIDDLE CLASS MAKE

ENDS MEET? ECONOMIC ISSUES FOR

AMERICA’S WORKING FAMILIES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 10, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

WITNESSES

Burtless, Gary, John C. and Nancy D. Whitehead chair in economic studies,

Brookings Institution, Washington, DC ............................................................. 3

Warren, Elizabeth, Leo Gottlieb professor of law, Harvard Law School, Cambridge, MA ............................................................................................................ 6

Blackburn, Sarah, social worker, Billings Clinic, Billings, MT ........................... 8

Hodge, Scott, president, Tax Foundation, Washington, DC ................................. 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Blackburn, Sarah:

Testimony .......................................................................................................... 8

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

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 35

Burtless, Gary:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 36

Responses to questions from committee members ......................................... 53

Grassley, Hon. Chuck:

Prepared statement .......................................................................................... 55

Hodge, Scott:

Testimony .......................................................................................................... 10

Prepared statement with attachments ........................................................... 56

Warren, Elizabeth:

Testimony .......................................................................................................... 6

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

COMMUNICATIONS

American Prepaid Legal Services Institute ........................................................... 91

Initiative on Financial Security of the Aspen Institute ........................................ 94

(III)

(1)

CAN THE MIDDLE CLASS MAKE

ENDS MEET? ECONOMIC ISSUES FOR

AMERICA’S WORKING FAMILIES

THURSDAY, MAY 10, 2007

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:10 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Lincoln, Stabenow, Salazar, Grassley, Lott,

and Bunning.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

In the Annalects, Confucius said, ‘‘When wealth is distributed,

the people are united.’’ Twenty-five hundred years later, the success of a broad middle class has been one of the keys to America’s

success.

Today’s hearing will try to understand the question: Can the

middle class make ends meet? Next month, we will hold hearings

on continuing and expanding middle-class tax relief.

Lately, the incomes of middle-class households have not been

doing that well. Between the year 2000 and 2005, median weekly

earnings of full-time workers, adjusted for inflation, fell by 9⁄10 of

a percent. In the same period, total income for the median household, adjusted for inflation, fell by nearly $1,300.

But when you adjust for taxes, the data tell a different story.

Many view the middle class as the middle three-fifths, or quintiles,

of the income distribution. Between 2000 and 2004, after-tax income for the three middle-income quintiles, adjusted for inflation,

rose.

For the second quintile from the bottom it rose by 2.8 percent,

for the middle quintile it rose by 5.4 percent, and for the fourth,

it rose by 4 percent. That provides a strong case for the proposition

that middle-income tax relief is doing its job.

Even so, income inequality is rising. Between 2004 and 2005, the

average income of the top 1 percent of households, adjusted for inflation, increased by more than $100,000. On the other hand, average income at the bottom 90 percent of households increased by

only $250.

2

So why aren’t middle-class incomes doing better? One explanation is corporate profits. Corporate profits are at a record high

as a share of the total economy. Corporations are distributing less

of their revenue to workers as wages and retaining more as profits.

Corporate profits go primarily to the well-off through capital

gains and dividends, taxed at a very low rate. In contrast, wages

and salaries form most of the income for the middle class. Wages

and salaries are at a record low as a share of the total economy.

Another concern is health care costs. Out-of-pocket health care

costs for consumers who are not in group health insurance plans

are much higher than for consumers who are in group insurance

plans. The normal adjustments for inflation do not adequately reflect the expenditures of middle-class consumers who are not in

group plans. They pay much higher out-of-pocket costs.

Another concern is college costs. The normal adjustments for inflation put too small a weight on the cost of going to college for

those families incurring those costs, and college costs have been

rising, as we all know.

Between the 2005–2006 school year and the next one, annual

cost of tuition, fees, room and board at a 4-year private college

grew by 5.7 percent, to more than $30,000. The annual cost of a

4-year public college grew by 5.6 percent, to nearly $13,000. Both

are growing much faster than the cost of living generally.

Another concern is gasoline prices. In January of 2001, the average price of gasoline nationwide was $1.47 per gallon; by March of

this year, it more than doubled to $3.05. Although the standard inflation adjustments cover gasoline costs, they understate the

squeeze on drivers who need to use a lot of gasoline, for example,

driving distances across the State of Montana, where long distances can take up and consume a lot of gas.

So far, I have been talking about income and expenditures for

middle-class families. Another way to look at the middle class is to

consider what happens when a calamitous event occurs to a middle-class family. Such an event might be an illness striking a member of the family, or it might be the loss of a job, and too often the

result is bankruptcy. That suggests that we should consider expanding refundable tax relief, like the Earned Income Tax Credit.

We will look at issues like that today.

So the story of the middle-class families makes a good case for

middle-class tax relief. It argues for expanding health care affordability and coverage, it argues for making college more affordable,

and argues for targeted tax relief, like the Earned Income Tax

Credit.

So let us examine how to increase the distribution of wealth, particularly to the middle-class families. Let us look for ways to improve the success of America’s broad middle class, and let us thereby work to maintain that key to success of America.

I might say to our witnesses who have very generously come

here, the attendance here is low because we are still in the middle

of a vote on the Senate floor. We are concluding the roll call right

now.

When Senator Grassley, the ranking member of the committee,

arrives, I will ask if he wants to make a statement. But pending

3

that, I would like to begin now with introducing all of you, and also

encourage you to go ahead with your testimony.

The first witness is Gary Burtless, who holds the John C. and

Nancy D. Whitehead chair in economic studies at the Brookings Institute in Washington, DC; then Elizabeth Warren, the Leo Gottlieb professor of law at the Harvard University at Cambridge, MA.

Then we have Sarah Blackburn, a social worker in pediatric oncology at the Billings Clinic in Billings, MT. Sarah has worked very

hard, helping a lot of people in the Billings area for more than 25

years. She is a patient advocate, counselor for runaway children,

and manages a clinic and other programs in Montana. Thank you,

Sarah, for making the extra time and effort to come here. It is a

long way from home to get here to Washington, DC. And finally,

Scott Hodge. Scott is the president of the Tax Foundation in Washington, DC.

Again, thank you all for coming. You can all make statements of

5 minutes, and, if you have longer statements, they will be automatically put in the record.

So, Mr. Burtless, why don’t we begin with you?

STATEMENT OF GARY BURTLESS, JOHN C. AND NANCY D.

WHITEHEAD CHAIR IN ECONOMIC STUDIES, BROOKINGS INSTITUTION, WASHINGTON, DC

Mr. BURTLESS. About a month ago, CBS News commissioned a

poll to determine whether people believe that middle-class Americans have seen their circumstances improve over the last decade.

Its polling organization asked 1,000 adults whether they thought

life for the middle class had gotten better, worse, or remained

about the same.

Fifty-nine percent said they thought the middle class was now

worse off, 30 percent said it was now better off, and the rest had

no opinion or thought the middle-class circumstances had not

changed very much. By the way, among the respondents who actually had middle-level incomes, the answers were roughly the same.

A majority believes the middle class is worse off. For an economist who studies income statistics, the answers might seem a bit

puzzling. Inflation-adjusted incomes today are almost certainly

higher than they were a decade ago, and this is just as true for

people in the middle class as it is for folks with higher or lower incomes. Maybe they have not gone up as much, but they certainly

have increased according to income statistics available to us.

The last business cycle peak occurred in 2000, and a recession

began and ended in 2001. Comparing average incomes today with

those in the last business cycle peak in 2000, an impartial observer

would have to say that average incomes have improved, even after

we make a suitable adjustment for the effects of inflation.

In my formal statement I summarized some of the aggregate statistics that economists look at when they track the progress of

Americans’ real incomes. According to these statistics, U.S. GDP

per person increased 9.5 percent between 2000 and 2006, personal

disposable income per person increased almost 9 percent, and personal consumption spending increased more than 13 percent per

person.

4

If average income and consumption are growing at a moderate

pace, how is it that middle-class Americans are feeling so

stretched? I think that are three main explanations. First, many

people in the middle class are faring poorly. Even in an economy

that is growing, millions of people a year lose their jobs or receive

pay increases that are not big enough to cover the increases in cost

of living.

Other people get sick or injured and have to cut back on their

work hours, and then they have to scrounge up the money to pay

the resulting medical bills.

But in an economy that is generally growing, we should expect

people in improving circumstances to outnumber those who are facing rough times. The ups and downs of capitalism and some folks’

sheer bad luck can explain why a minority of people say things are

getting worse. They cannot explain why a majority of folks feel that

way.

A second reason many of us feel our incomes are growing too

slowly to cover our growing expenses is that some things that count

as income gains in the national statistics are just not that visible

to us. One thing that counts as income in the national accounts is

the money that is spent by the government to pay for doctor and

hospital bills through public health insurance programs. Another

thing is the contributions our employers make so workers can have

health insurance coverage through their companies.

Now, as it happens, these two things have been growing pretty

fast. The extra spending on them counts as higher disposable income, and it is one reason disposable income was higher in 2006

than it was in 2000. How many people know how much their employers are contributing to their health plans and how many people

insured under Medicare know the cost to the government of paying

for their doctor and hospital bills? The answer is, not very many.

In my formal statement you will find a picture labeled ‘‘Chart 3.’’

It shows how compensation increases between 2000 and 2005 were

divided up. According to the Commerce Department, a full-time

equivalent worker was paid a little less than $45,000 in 2005. However, the worker’s total compensation was closer to $55,700. This

amount is $3,000 more than a full-time equivalent worker was paid

back in 2000. All these numbers are adjusted for inflation.

This means that average compensation for a full-time worker increased 5.5 percent. So where did the extra $3,000 go? Only $850

was received by the worker in his pay packet as higher money

wages, $1,060 was spent by the employer in higher health insurance premiums, $710 was spent by the employer on higher pension

contributions, and the rest went for social insurance contributions

and other items.

Even though total compensation increased 1.1 percent a year,

after inflation, a full-time equivalent worker, on average, saw gains

of only 0.4 percent a year in money wages.

In the census money-income statistics, which I discuss in some

detail in my formal statement, the extra $850 in wage increases

shows up as an increase in income, but the other $2,150 does not

show up at all.

That is a big reason the census money-income statistics look so

gloomy compared with the aggregate statistics on income growth.

5

My guess is, this kind of income gain is also missing when workers

are asked to tote up their circumstances: are they better off or

worse off? They do not know about that money either.

Now, one thing middle-class people should be aware of is the

taxes they pay. Income and payroll taxes, after all, subtract from

the income they have left over to pay for their bills.

Congress cut income taxes in the early part of this decade. The

cuts added to net incomes up and down the income distribution.

They certainly added to the net incomes of middle-class families.

My tabulations, which are reported in the full statement, show

that Federal taxes fell by 1.5 percent of pre-tax money income of

a person who is in the exact middle of the American income distribution. For some people, this may have made the difference between whether they experienced a net income improvement or net

income loss over those 5 years.

It is hard to say why middle-class people miss this fact when

they tote up the pluses and minuses of their current condition relative to what it was 5 or 6 years ago.

Let me make one last observation, and it is not a very complicated one. The national average statistics on income growth tell

us how much incomes went up in total, that is, on average, across

the entire population. Let us say the increase is 1 percent a year.

Now suppose that incomes grew faster among people with high incomes than among people with low incomes.

When that happens, the people with lower incomes will see their

incomes grow more slowly than 1 percent a year, possibly much,

much more slowly. Given the way incomes are distributed in the

United States, if people in the top one-fifth of the income distribution see their incomes climb 1.5 percent a year, and if average income growth is 1 percent a year, then folks in the bottom fourfifths of the distribution will only see their incomes grow by a halfpercent a year.

Now suppose the folks in the top one-fifth enjoy income growth

of 2 percent a year. Then incomes in the bottom four-fifths will not

grow at all. In fact, on average they are going to decline slightly.

So it does not take very big differences in income growth when incomes are growing more unequally, so that a very large majority

of American families experience only very tiny growth in income or

actually experience losses.

If incomes are growing more unequally, there will be a lot more

people who see their incomes grow more slowly than average than

there are people who see their incomes grow faster than average.

That is precisely what has been happening to the U.S. income

distribution for most of the past quarter century. American incomes

have been growing more unequally, and this is true whether incomes are measured on before-tax or on after-tax basis. Thank you.

The CHAIRMAN. Thank you, Mr. Burtless.

[The prepared statement of Mr. Burtless appears in the appendix.]

The CHAIRMAN. Ms. Warren?

6

STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW, HARVARD LAW SCHOOL, CAMBRIDGE, MA

Ms. WARREN. Thank you, Senator. Thank you for inviting me

here today to talk with you about the changing economics of the

middle class.

In the last generation, middle-class families have undergone a

powerful economic transformation that has attracted little attention, but that is quietly reshaping America. What I am going to

talk about today, I am going to change the focus slightly from

where Mr. Burtless took it, and that is look at one generation,

what it was like for a family in the early 1970s versus what it is

like for a family in the early 2000s; what has happened to us over

a generation.

I had some cool pictures for you, but they are not here, so I will

dance them out and see if I can make this work.

Senator BUNNING. Will you get up on the table?

Ms. WARREN. I could. I could. But we will do the more subdued

version. I will gesture a lot.

The CHAIRMAN. You know, if you want we could put those photographs in the record, too.

Ms. WARREN. That would be fine. Actually, they are in my testimony in small pictures.

The CHAIRMAN. All right.

Ms. WARREN. I just cannot point to them here for you.

The CHAIRMAN. All right. Well, you can refer to them in your testimony and we can look at them if you want.

Ms. WARREN. Good. If you want to start, you can follow in your

hymnals on page 2 and get the first graphic. This is the graphic

about income, what has happened in a single generation, inflation

adjusted to income.

It has two critical parts to it that you will want to keep in mind

when people talk to you about income over the last generation. The

first is that a fully employed male today is earning about $800 less

than his father was earning a generation ago when adjusted for inflation.

The CHAIRMAN. That is since 1970?

Ms. WARREN. That is since 1970. So basically, over one generation, if you are a man and you are fully employed, your income has

not gone up.

Household income has gone up. Family income has gone up. The

principal reason has been because the median family in the United

States has gone from being a one-earner family to being a twoearner family. That is, principally, mothers have gone back into the

workforce, and that is what has boosted family income.

Now, one would think, with that second income, the family would

be wealthier. If you flip over to page 4, you will see at least one

indication of the trouble that families are in, and that is comparing

that family from the early 1970s. That one-income family was putting aside about 11 percent of its take-home pay in savings and

carrying about 1.3 percent in revolving debt, essentially credit

cards and other short-term debt.

Move forward a generation and you will see that today’s twoincome family is putting aside nothing, that is, the savings rate is

below zero—it is about minus 0.7 or 0.8 percent—while they are

7

carrying, on average, about 12 percent of their income in credit

card and other revolving debt.

So there is the box. There has been no income growth for a fully

employed male. Today’s family has no savings and is spending

money it does not have. So where has the money gone?

The classic story in the United States today is one of over- consumption. Everyone likes to tell the story about $200 sneakers

and designer toddler outfits. But the reality is actually on page 7,

and that is that, in principal categories that we think of as consumption—clothing, food, appliances, what you spend on a car, percar cost—the actual costs for the American family in a generation

are down.

That is actually what the median-earning mom, dad, and two

kids—this has been adjusted for changes in family size—is actually

spending in those categories. They have changed what they wear,

they have changed how they eat, they have changed how they shop,

and they spend less on consumption. Now they are spending more on electronics, a whopping $225 a year; more on computers, about $300 a year. But by and large,

many of these expenses, one washes out another. Those two expenses alone are more than offset by the savings on appliances. We

spend more on telephones, less on tobacco; more on pets, less on

carpets; more on air travel, less on dry cleaning than we did a generation ago.

The short version is that, in these ordinary consumption expenses, there is just no evidence that families have gone crazy. If

anything, median-earning families shop carefully and spend carefully. Where the changes are, as the chart on page 7 shows you,

is in the big fixed expenses. Housing has gone from being 5.8 rooms

to 6.1 rooms.

This is not an issue about granite counter tops and spa bathrooms and McMansions, this is an issue for median-earning families. The median family in the United States has either gone from

two bedrooms to three bedrooms, or from one bath to two baths,

but not both.

So how much more do they spend in mortgage payments on that

house? The answer, in inflation-adjusted dollars in a single generation, is a 76-percent increase that families are spending. In short,

many families in America today cannot buy the houses they grew

up in, even if those were quite modest homes.

Health insurance, 74-percent increase. Cars have actually gone

up 52 percent, but that is because, with two people in the workforce, families have gone from one car to two cars.

Child care. Not an expense of a generation ago, so I gave it a

100-percent increase. And taxes. Because her paycheck is taxed at

the margin, her first dollar of earnings is taxed at the margin for

the last dollar that he had earned, if both of them are in the workforce, or vice versa if you want to play it on margins, taxes have

also gone up about 25 percent for this median-earning family.

So the short version. I will just summarize by saying this. If you

take a look on page 9, it is sort of the money shot of what has happened to the median-earning American family. A generation ago,

that family earned less money. That is, if you take a look at these

numbers, they had roughly about $42,000. About half of it was

8

committed to big fixed expenses—mortgage, health insurance,

transportation and taxes—that they had to pay.

Today’s two-income median-earning family is earning a lot more

money. Take a look at the numbers. Gosh, they have gotten up in

the $70,000, $78,000 range that they are making here. But threequarters of that money is now committed to five fixed expenses: the

mortgage, health insurance, car payment, child care so that they

can earn that income, and taxes. They now have only a quarter of

their income left over to pay for every other expense they need:

clothing, food, savings, flexibility if anything goes wrong.

So I will stop there, but I will stop by saying, if we want to understand what is happening to middle-class American families, it

is right here in the numbers in a generation. Incomes have been

flat. Families have coped by sending more people into the workforce, which works for families that have been able to do that, but

does not work for families that have only one parent or that want

to keep a parent at home with small children. And all around

them, expenses have moved up.

The expenses that have moved up are not for the stuff you can

easily cut out. You cannot sell off a bedroom when you are out of

work for a while. You cannot cut back on health insurance for 6

months and expect to survive economically.

So, families have been caught in this enormous squeeze. They

have tried individually to cope by sending more people into the

workforce, by cutting their expenses in consumption, and yet they

are trapped. I am delighted that you are talking about these issues.

If I can be helpful, I will answer questions later.

The CHAIRMAN. I might say, Ms. Warren, you have been very

helpful. That is very illuminating testimony. Thank you so very,

very much.

[The prepared statement of Ms. Warren appears in the appendix.]

The CHAIRMAN. Ms. Blackburn?

STATEMENT OF SARAH BLACKBURN, SOCIAL WORKER,

BILLINGS CLINIC, BILLINGS, MT

Ms. BLACKBURN. Thank you, Senator Baucus and members of the

Senate Finance Committee, for the opportunity to testify both personally and professionally on an issue that is very important to me,

to a great many people in Montana, and to the rest of the country.

For lack of a better term, I refer to this issue as the middle-class

crunch.

As you know, wages in our country have remained stagnant,

while cost of living has increased exponentially. When we start out,

we consider building a life and shooting for the American dream

as an adventure. We attend college, graduate, marry, find a job,

and begin our families.

My husband and I married 24 years ago, hoping to raise successful, educated children much like ourselves. For brevity’s sake, I will

not take you through the years of diaper changes, skinned knees

and broken hearts.

After high school graduation, college was the next step for our

oldest, who attended Montana State University in Bozeman for 2

9

years. The value of higher education is priceless, but the cost of

higher education is next to impossible.

In-State tuition makes no difference to those of us who have

worked so hard for so many years to provide the same opportunity

to our children that our parents did. Prices have risen to the point

that we can no longer even consider paying for everything involving the starting of a new life for our children. The prices of housing, books, et cetera are sky high. Extra-curricular activities are

out of the question.

We have had to dip into our savings and our retirement to pay

the price of providing our daughter the education she has earned.

We have since had to move her to a college in Wyoming that allows

substantial discounts to surrounding States. Sadly, our son will pay

the price as well. Education has become a luxury of the wealthy.

As a social worker for the Billings Clinic in Montana, I and my

colleagues across the country have far too often seen the toll that

a catastrophic illness takes on our families. No matter that many

of them have excellent insurance; the cost of medications with copays can be counted in the thousands.

One story I know of through a colleague is that of a 16-year-old

girl with cancer being treated in Missouri. Her family has insurance through the University of Missouri Columbia but is unable to

afford the medication to quell her nausea because the 20 percent

co-pay for 20 tablets is $1,200.

Another example of the problem is a 6-year-old girl in Montana

who was unable to take a medication for her cancer, as the medication was experimental and the insurance would not pay for it. The

cost of the medication was staggering and would have had to be

paid out of pocket. Her parents, who are hard-working and selfemployed, could not afford the cost. Their daughter has since died.

Hundreds of families across the United States are required to

travel outside their areas for treatment, as resources are not available. Children in Montana diagnosed with cancer and other lifethreatening diseases must travel to Denver, Seattle, Phoenix, Salt

Lake City, or other large areas with the appropriate medical services. Insurance does not cover the cost of wear and tear to vehicles,

gas, lodging, or meals.

The majority of our families do not qualify for government programs, as they make too much money. Yet, once faced with the

added expenses of such a situation, they find themselves getting

further and further behind. They must rely heavily on charitable

organizations just to keep their heads above water.

At our clinic, we have a fund which we have tapped into in order

to help our patients make car payments, house payments, and simply to put food on their family’s tables.

Those children diagnosed with such chronic illnesses as diabetes

are also affected. Even with insurance, the necessary supplies, meters, and often unexpected hospitalizations can become tremendous

financial burdens.

Many of our parents with healthy children have to forego routine

medical care for them as the parents, who are self-employed, cannot afford the cost of insurance, yet do not qualify for Medicaid or

SCHIP. These children are going without medications that would

10

aid them in focusing better at school or that would clear up a bacterial infection far sooner than letting it run its course.

In summary, we as middle-class citizens are no longer finding

that, to get a good education, work hard, and pay our taxes is as

much the American dream as it used to be. With the rising cost of

education and health care, and wages staying the same, it is becoming more and more difficult to maintain a lifestyle commensurate with our education and work ethic.

Thank you.

The CHAIRMAN. Thank you very much, Ms. Blackburn.

[The prepared statement of Ms. Blackburn appears in the appendix.]

The CHAIRMAN. Mr. Hodge?

STATEMENT OF SCOTT HODGE, PRESIDENT,

TAX FOUNDATION, WASHINGTON, DC

Mr. HODGE. Thank you, Mr. Chairman and members of the committee. It is an honor to testify today about this very important

topic.

Like Professor Warren, I have a series of charts that are in a

handout that is available for the committee.

The CHAIRMAN. Sure. Do you want to refer to them in your testimony?

Mr. HODGE. I will.

The CHAIRMAN. Sure.

Mr. HODGE. But they are available as you follow along.

The CHAIRMAN. Sure.

Mr. HODGE. Before we think about how to help middle-class

working families, we need to understand that today’s middle class

is not our father’s middle class. If we focus too much on the median

taxpayer, we will get a false picture of today’s middle class and our

policy prescriptions will likely be mistargeted.

You may be surprised if you listen to the media, but June and

Ward Cleaver, the stereotypical middle-income family of the 1960s,

have retired and they have been replaced by a new middle-income

taxpayer. That comes from the cast of the popular TV show,

‘‘Friends.’’

In 1960, there were twice as many married couples in the statistical middle as there were single taxpayers. Today, that ratio has

completely flipped. There are now twice as many singles in the statistical middle as there are married couples. Phoebe and Joey have

replaced June and Ward.

Today’s working couples with children now populate the top 40

percent of taxpayers. Why? Because more than 65 percent of those

working couples are dual-income. They also tend to be collegeeducated, they are older, they are business owners, they live in

high-cost, high-tax urban areas.

Taxes—Federal, State and local—are some of the chief sources of

anxiety facing these new middle class, but dual-income, families;

AMT and property taxes are most in the news these days.

Phoebe and Joey are not immune. When singles get married,

they move from the statistical middle to the top simply by saying

‘‘I do.’’ Today’s working families look rich compared to the 44 million tax filers who have no income tax liability after taking credits

11

and deductions. Simply said, a family of four earning about $40,000

would likely pay no income taxes whatsoever, and many will often

get the Earned Income Tax Credit.

A new Tax Foundation study shows that today’s higher-income

working households are not only shouldering their own tax burden,

but they are shouldering the tax burden for millions of their fellow

Americans.

We find that the government is redistributing more than $1 trillion from the top 40 percent of households to the bottom 60 percent. What that means is, the majority of American households

today receive more in government spending than they pay in taxes.

At the bottom, the bottom 20 percent receive $31,000 more in

government spending than they pay in taxes, and the middle—the

forgotten middle—receive $6,400 more in government spending

than it pays in taxes.

The top 20 percent pay more than $48,000 more in taxes than

they get in government spending. I think the fact that a majority

of Americans are now receiving more in government spending than

they pay in taxes ought to be a great concern for all of us. I think

that it could lead to, and be, the seeds of social conflict, and it undermines the fabric of democracy to have a majority of Americans

as consumers of government and not payors.

I think we can actually do more for working families by doing

less for them. The current tax base is so carved up right now. Trying to achieve more social policy through the tax code will be like

pushing on a string; neither the IRS nor the tax system are functioning very well right now.

Professor Warren has written that many of the consumer products that we use today—cars, appliances, clothing, and food—are

better and cheaper than they were a generation ago, but the items

that families are having a hard time paying for today—health care,

education, and housing—are the three areas where government has

been most involved over the past 3 decades.

Our efforts to use the tax policy to help these sectors of the economy have produced not only a byzantine tax system, but have actually created economic distortions that are hurting today’s working

families.

To wrap it up, the vast majority of Americans see themselves as

middle-class. A recent Tax Foundation poll showed 80 percent of

respondents thought that they were in the middle class; only 2 percent thought that they were actually upper class.

Americans see the term ‘‘middle class’’ as a value system, not a

point on the income scale. The way to help middle-class working

families, whether they work in Manhattan, in Billings, or even

Davenport, IA, is to implement policies that make all Americans

richer, not tax those at the top to bring them back down to the

middle. Our attempts to achieve and promote equality should not

lead to mediocrity.

And, as I point out in my extensive testimony, greatly simplifying the tax code while cutting tax rates across the board will

boost economic growth, boost incomes, and, interestingly enough,

boost the progressivity of our fiscal system. This is an outcome that

should have broad-based bipartisan support.

12

Thank you very much, Mr. Chairman. I appreciate the opportunity and will happily answer any questions that you might have

today.

The CHAIRMAN. You bet. Thank you very, very much.

[The prepared statement of Mr. Hodge appears in the appendix.]

The CHAIRMAN. I see Senator Grassley has arrived. I will let him

get settled a little bit.

Before we turn to Senator Grassley, I will turn to Senator

Bunning.

Senator BUNNING. You have already questioned?

The CHAIRMAN. I will let you go ahead first.

Senator BUNNING. Well, I have a statement I would like to put

into the record.

The CHAIRMAN. All right.

Senator BUNNING. Thank you.

[The prepared statement of Senator Bunning appears in the appendix.]

Senator BUNNING. Mr. Burtless, in your written testimony you

noted that Americans across the income distribution levels have derived notable benefits from the recent tax cuts. You further noted

that, for many middle-class families, President Bush’s tax cuts may

have made the difference between suffering a loss and experiencing

a gain in spendable income.

Would it be fair to conclude from your testimony that reversing

those cuts, something that will happen in the year 2011 if Congress

continues on its present course, will have a detrimental effect on

working families?

Mr. BURTLESS. The working families that derived benefits from

those tax cuts will have to pay higher taxes. That is true. They will

have less spendable income. I agree.

Senator BUNNING. To Mr. Hodge or Mr. Burtless, can you clarify

for the committee who is rich and who is middle-class? What difference would allowing the Bush tax cuts to expire have on the

middle class? So I want your definition of who is rich and who is

middle-class, because we are having trouble up here deciding.

Mr. HODGE. Well, I clearly think that the term ‘‘middle class’’ is

a value system and not a point on the income scale. A person who

is distinctly middle-income in Manhattan, earning $150,000 a year,

would clearly be rich if they were in Mississippi, Kentucky, or

other areas in which the cost of living is much lower.

So the unfortunate thing about the tax system is that it is not

adjusted for the cost of living. So that family earning $150,000 in

Manhattan is taxed as if they were wealthy, living in Davenport,

IA. So we need to consider the facts and the wonderful differences

in America and not try to just hone in on the statistical middle or

some sort of an average. There is no average in America.

Senator BUNNING. But you have not answered my question.

Maybe Mr. Burtless could answer it. The reason I say that is, you

have not taken into consideration the cost of raising 5, 8, or 10 children. That could make a major difference in whether someone is

middle-class or whether you can afford to send that child to college.

I believe that was brought out very clearly by our third witness.

Go ahead.

13

Mr. BURTLESS. Defining who is in the middle class is not a matter of theology. As we have already heard, about 80 percent of the

population considers itself middle-class, and I think that is probably a good thing. Many people who have very low incomes and

many people who have very high incomes consider themselves

‘‘middle-class.’’

In thinking about tax legislation, however, I do think it makes

sense to just talk about where in the distribution of income you

would like to place more burden and less burden rather than getting into, I think, a fruitless discussion about which person in the

United States is in the middle class and which person in the

United States——

Senator BUNNING. That is what our brilliant Congress did when

they put the Alternative Minimum Tax in. We were going to nail

those people who were not paying taxes, and those corporations. All

of a sudden, that Alternative Minimum Tax is hitting families in

the $50,000, $60,000 range.

Believe me, I have a daughter and son-in-law around the $70,000

range, joint incomes, who are now paying Alternative Minimum

Tax. That is completely outrageous as far as this committee is concerned.

We think that the Alternative Minimum Tax was never, ever intended to do some of the things that it is doing today. So middleincome people are being affected by that, where in fact they were

never supposed to be.

Do you have a solution to that?

Mr. BURTLESS. Look, I am not an expert on tax policy.

Senator BUNNING. All right. Some of us up here are not either.

Mr. BURTLESS. Some people make the argument that, because of

its dramatic simplicity, the Alternative Minimum Tax actually offers a simple blueprint for the tax code. It has less complication in

it than the regular tax system does. I do not have enough knowledge to subscribe to that view or to say it is wrong. I just do not

know what the answer is.

The CHAIRMAN. Thank you, Senator.

Senator BUNNING. Thank you very much.

The CHAIRMAN. Frankly, the subject of this hearing is an extraordinarily important issue that this country should spend a lot more

time addressing. That is, the plight of middle-income Americans is

getting tougher, and tougher, and tougher.

Mr. Burtless’s poll data shows that the middle-income class is a

lot worse off, and I think it is very important. I also think that Ms.

Warren’s testimony comparing the 1970s with today, what that

family went through then compared to today, basically outlines the

problems that the middle class is facing.

For me, ‘‘middle-class’’ is basically the three quintiles. You provide income at five different levels, you take one, two, three, four,

according to income levels. The middle three is probably the middle

class, which is a bit large.

I mean, it is very difficult to come up with a better definition,

but I just say the second, third, and fourth quintiles are probably

middle-class. The bottom certainly is not, and the top is not, but

those three in the middle are.

14

The data I think that is coming through, not only today but by

others, is just devastating. Americans are just having a tough time

today compared with an earlier time in our history. The question

is, what can be done about it?

I would like, Ms. Warren, for you to describe a little bit about

bankruptcies. You have some data and some studies. What happens? How many people have to go into bankruptcy? I suppose it

is primarily due to health care costs.

There may be other reasons too, but just kind of tell us what

happens. How many bankruptcies, family bankruptcies, are there,

personal bankruptcies, and why does that occur? If you would just

kind of go through the steps. How in the heck do people get out

of it?

Ms. WARREN. Well, Senator, the first place we start is, it is an

appropriate question when we are doing a conversation about what

is happening economically to the middle class, because at least it

is measured by whether or not they have been homeowners, whether or not they have gone to college, whether or not they have occupations. In the upper 80 percent of occupational prestige scores, the

people who filed bankruptcy, by and large are solidly middle-class.

They are moms and dads.

Indeed, a child in America, up until we had our recent dramatic

changes in filing rates with the change in law, was more likely in

any given year in the 2000s to live through her parents’ bankruptcy than to live through her parents’ divorce. So, as common as

divorce has become for children, bankruptcy is more common.

The picture of bankruptcy and who files for bankruptcy are the

economic issues we are talking about here. Ninety percent of all

bankruptcies can be accounted for by just three factors: job loss,

some kind of income interruption—and by the way, I should point

out, dual-earning families are more likely to end up in bankruptcy

than single-earning families—and medical problems.

The CHAIRMAN. And that is because their incomes are lower.

Ms. WARREN. They are more vulnerable. It now takes, instead of

52 paychecks to make the mortgage payment, 104 paychecks to

make the mortgage payment. It just doubles the odds that one or

the other of you loses a job and the whole thing comes unwound

in a hurry.

Medical problems and family break-up, death, or divorce, or he

takes off or she dies—those three account for more than 90 percent

of the filings. A majority of families have two out of three that have

hit them, and a substantial number, all three.

About half of all the families that file for bankruptcy do file in

the aftermath of a serious medical problem. What is really stunning about this is, 75 percent of those families have some form of

health insurance at the onset of the illness or accident that ultimately triggers their bankruptcy.

So what we are watching here is, we are watching families, the

kind of data we have talked about. When everything is going right,

they are right at the margin. There is no savings, there is a modest

amount of debt, they are barely making it one paycheck to the next

paycheck, sometimes borrowing, sometimes getting a tiny little bit

ahead.

15

And then an illness hits, and it can be the wage earner, the principal wage earner, either mom or dad. It can be a child who gets

sick, and someone has to take off work to take care of them. Grandma falls and breaks a hip. The combination of medical debts and

loss of income and the other expenses associated with illness, driving to get medical care, that combination up-ends the family.

I will tell a very short story about one of the people who showed

up in our sample who was very typical. He worked for a big delivery company, and on a weekend was playing touch football and tore

up his knee. As he fell, he said he heard it.

As his friends took him in, he said, not to worry, I am insured,

I have good insurance, as they carried him off the field to great

cheers. And sure enough, when the surgeon said it was going to

take surgery to fix this, medical insurance is going to cover this.

But he ended up having to pay 20 percent of his hospital stay. He

had to pay all of the drugs himself.

It turned out that his health insurance did not cover crutches

and other supplies, and no rehabilitation. So if he wanted to walk

again without a limp, he had to pay for 12 weeks of rehab himself.

And he was out of work for 3 months.

The combination took a steadily employed, hardworking, play-bythe-rules sort of individual and, within a year, landed him in bankruptcy court. The best bankruptcy can do for him is help wipe out

the old debts. Whether he will ever recover his old life or not, we

just do not know. All that from just falling and breaking a knee.

The CHAIRMAN. Well, thank you very much. My time has expired.

Senator Grassley?

Senator GRASSLEY. I am going to put my statement in the record

and go to questions with Mr. Hodge.

[The prepared statement of Senator Grassley appears in the appendix.]

Senator GRASSLEY. In your testimony you state that our government’s attempt to use tax policy to promote certain sectors of the

economy over others has not only produced a byzantine tax system,

but it has also created economic distortions in the very areas we

have tried to help, such as housing, health care, and education. It

is as simple as wanting you to give us an elaboration of that statement.

Mr. HODGE. I think most economists are agreed, Senator, that

the way in which we provide health care in America through the

taxpayer exclusion for employers has distorted the market in the

health care arena. It has taken patients out of the role of being the

customers, the consumers, and actually put their employers in that

role as the customer.

So, the person paying the bills, the party paying the bills—the

employer—and the doctor negotiate over the quality and cost of the

care. Until we can change the dynamic there away from putting

employers in the driver’s seat and putting patients in the driver’s

seat, we are going to have these economic distortions.

We see a similar case in education, where out of good intent our

efforts to both subsidize students and offer them various tax credits

actually get capitalized into the cost of a college degree. Universities have no incentive to lower costs or be competitive because

16

they know that somebody else is helping the student pay or they

are taking a tax credit. So, if you have a $3,000 tax credit, that gets factored into the

cost of a college education, much like a tax credit for buying a hybrid vehicle gets subsidized into the cost of the hybrid vehicle. I

think we need to take a step back and understand that our best

efforts in some of these cases have actually produced results that

we do not want.

Another big instance is the tax deduction for State and local

taxes paid. About 65 percent of those people who take the State

and local tax deduction earn more than $100,000 a year, so our efforts there to help the so-called ‘‘middle class’’ are actually helping

upper-income people.

It is also allowing State and local governments to raise their

taxes—and property taxes in particular—exorbitantly, which then

ends up putting people in AMT, so we have this vicious cycle. I

think we need to re-think the tax policy.

If we simplify the tax system dramatically, take away these exclusions but lower tax rates, we will bring some rationality back

into those marketplaces, and eventually these middle-class families

will be much, much better off.

Senator GRASSLEY. All right.

Then my next question is to Mr. Burtless, but I would ask Mr.

Hodge to pay attention and would ask for your thoughts.

In recent years, Congress has attempted to address the marriage

penalty by doubling the standard deduction and tax brackets for

married couples relative to single individuals.

In your testimony, Mr. Burtless, you point out that economists

often attempt to adjust income for difference in family size by dividing household income by the square root of the number of persons in the household.

While there may be some statistical elegance to the approach, I

suspect most Americans would find it rather odd to suggest that

a family of four making $40,000 does not equal $10,000 per person,

but rather, under the square root method, equals $20,000 per person.

When thinking about different ways to address the marriage

penalty, and perhaps even geographical differences in cost of living,

what do you think would be the best approach?

Mr. BURTLESS. I agree, everybody would consider the square root

of the number of people in a household to be a very odd adjustment. It is just a crude way to do it. There are other ways to make

adjustments. But with regard to the marriage penalty, I always

thought that Congress, in the early 1980s, hit upon a pretty smart

idea.

I think that, in calculating the income tax, if I recall this—I repeat, I am not a tax expert—I think that they allowed the lowerearning spouse to just subtract 10 percent or 15 percent of the

wages from the amount that was included in taxable income. It

means that the initial tax paid by the second earner in the family

is then subject to a lower tax than it would be if it was the last

dollar earned by the primary earner in the household.

This is not a very complicated thing. I think it was tax reform

in 1986 that did away with it, probably for good reasons. You will

17

remember, in 1986 we greatly simplified the tax code in many

other ways, and so it was probably a defensible thing to do.

But we now have, as people have mentioned, a lot more complications, even for ordinary taxpayers, so maybe making this little

revision so that we go back to taxing the second earner more lightly than we tax the first one for their earnings would make some

sense.

Senator GRASSLEY. Mr. Hodge, my time is about out, so make the

answer short so we do not bother other colleagues here.

Mr. HODGE. It clearly makes no sense to take two people who say

‘‘I do’’ at a much higher rate than they would when they were single. While Congress has done, I think, a marvelous job in helping

some of the lower-income married couples by doubling the bracket,

the 15-percent bracket, for instance, it is not helping some of the

upper-income families.

So you have two mid-level professionals, each earning about

$60,000 a year, who get thrust into those higher brackets, and they

are not helped quite as much through the marriage penalty relief.

I think we ought to consider raising that all the way up the income

scale.

Virginia, for instance, I think, allows people to figure out their

incomes, their tax, in two different ways, whether they were single

or married.

Senator GRASSLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Lincoln, you are up.

Senator LINCOLN. Well, thank you, Mr. Chairman. A special

thanks to you and Senator Grassley for calling this hearing today.

I have to say, I feel very clearly in the box here, having, for 3

weeks now, tried to get an appointment with the pediatrician and

was able to beg, borrow and steal to get there early this morning

so I could be here for a vote at work, and having to rush my child

to school and go through all those motions. But then I stopped to

think, I actually do have insurance. There are a lot of mothers who

do not, working mothers, working families that do not have insurance.

I think that that is one of the issues, obviously, that you have

brought up in the example that you used, Ms. Warren, in terms of

both having insurance, but having good insurance as well that really will make the difference of being able to help you mitigate your

risk over the time that you are suffering and to be able to stay

afloat.

One of the things I have been working on is the ability to try to

put a large dent in those 46 million Americans who are uninsured,

and the best way that I have seen to put the largest dent in that

is to try to provide health coverage and health insurance to small

business owners, their employees, and self-employed.

The easiest and most comprehensive way I have found to do that

would be to try to give them exactly what I have, and that is, put

them in a risk pool, just like I am put into a risk pool of Federal

employees, to give them better coverage at a lower cost.

If we combined all 22, 23 million small business owners, their

employees, as well as self-employed individuals, we could create a

pretty phenomenal pool and operate a plan through the Office of

18

Personnel Management, just very similar to what we do, in giving

those people that kind of health insurance.

We are certainly looking at the opportunities of how we provide

the tax incentives to encourage both the small businesses to be involved in it, as well as the individuals, in a way that will encourage

that.

But in looking at Ms. Warren’s comment, there is less frivolous

spending today, and fixed expenses—particularly housing, health

insurance, education—are critical. The Chairman had a wonderful

hearing about the issues of education and trying to save for education, and how we do that.

Do we combine the programs and the tax incentives that exist,

along with the grant programs and others to be able to access that?

Because I have to say myself, finding the additional dollars on a

monthly or yearly basis to put aside for what I think college is

going to cost in 8 years from now is tough, and we are a 2-income

family. So, it is interesting to see what people are going through

and witnessing the challenges that they face.

I guess one of the questions, I would say, the three that you list,

Ms. Warren, housing, health insurance, and education, seem to be

the most paramount on our minds. I would just ask any of you all

which of those you think would be probably the most immediate

that would have the most impact in terms of helping the middle

class.

The other would be, in the housing initiative, we are also seeing

a tremendous amount of individuals suffering from the mortgage

crisis that we are going through, which is not going away. As those

things mature, we will have probably a consistent 3 more years of

mortgage crisis on our hands in the ability of these middle-class

families to be able to either talk to and visit with their mortgage

companies, to be able to refinance those deals, or whether they do

end up having to go into bankruptcy or deal with those kinds of

issues from that perspective.

But that would be my question, really. Of those three things,

which do you think would have the most immediate impact on the

middle class, housing and mortgages, health care and health insurance, or education help that we can provide them?

Ms. WARREN. Senator, I will make two quick points, if I can. The

first one is something we have not talked about, and that is the

importance of credit practices.

Senator LINCOLN. Financial literacy.

Ms. WARREN. It can really have an effect on these middle-income

economic issues. And I will just point out two quick ones. We are

on target for about 2 million families to lose their homes over the

next year and a half on products that were sold to them, people

who made enormous profits off them in the first 18 months, profits

that they knew in many cases were going to cost these people their

homes.

The CHAIRMAN. Are you talking about subprime loans? What are

you talking about?

Ms. WARREN. I am talking about what we are calling subprime.

But let us keep in mind, this is not always about trying to get

home mortgages to people who are poor. This was about calling

people and refinancing people out of home mortgages that they

19

could afford and putting them into home mortgages that they knew

they could not afford.

This was about people who could have afforded to borrow $200,000 and buy a modest house with it being talked into borrowing $500,000 and being completely wiped out in the 25th month

when their 228s readjusted. So there is a lot of room for relief for

the middle class that has nothing to do with spending another dollar of taxpayer money. It has to do with having rules that are fair

and safe for middle-class families.

Now, that is not responsive to your point, so I will try to say

really fast an important point about education. When we talk about

what it is to educate a child in America today, let us just remember

what it was like a generation ago.

A generation ago, parents believed 12 years of education was

what a child needed. If you look back at the old Gallup polls, what

will determine a child’s success after high school is the good work

ethic. Right? College was on the list, but it was not at the top of

the list.

Today, more parents believe that the moon shot landing was

faked than believe that a child can make it in America without a

college diploma. We have moved into a world in a single generation

where college is the absolute bare minimum ticket to maybe make

a place in the middle class.

At the same time, we have gone from 4 percent of American children back in the 1970s in early childhood education programs to

well over half of all children, moving up toward about 70, 80 percent of all preschoolers, 3- and 4-year-olds. Who is paying for that?

Parents are paying for it.

So let me just point out to you what has happened. The government, State governments and Federal Government combined, a

generation ago, combined 100 percent of what most families in the

middle class believed were the educational needs of their children—12 years in 1970 in what most families believed were very

good schools. Families could afford to buy homes wherever they

could afford them and then send their kids to the school down the

street, and they knew they would be all right.

Today that has changed in two fundamental ways. Families no

longer believe they can buy the homes they can afford and safely

send their children to school, so they are buying up, up, up the ladder. That is why they are paying more on mortgages, to try to get

into decent school districts. And, more importantly, the number of

years in education has stretched from 12 to 18, but going from 100

percent paid by the taxpayer—that is, all of us provide this education for the children—now shrunk to two-thirds of the cost.

The rest of us have to bear individually the cost of sending our

children to preschool, which is now regarded as essential, and the

cost of sending them to college. We have taken something that was

once a public responsibility and provided for the public generously

and well, and we have turned it into something that does not work

well for the public, and we have shrunk the coverage. It simply

does not cover what it takes to be middle-class in America today.

Sorry for going on.

Senator LINCOLN. No. But I am a believer in education, too. I see

what it did for me.

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Ms. WARREN. Me, too.

Senator LINCOLN. Thank you.

The CHAIRMAN. Senator Stabenow?

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

Thank you to all of you. To Ms. Warren, thank you for your eloquence on this. As you were speaking, I could not help but have

my own life flash in front of me, growing up in a small rural community in northern Michigan where I decided to go to college. I will

not tell you the date, but I decided to go to college and went down

to Michigan State University.

Most of my friends were going down to Lansing, the same area,

to work at General Motors and made very, very good money, health

care, pensions, raised their families. They all thought I was crazy

because I was going into debt to go to college.

But now it is a very different picture for my friends who, in their

50s, are losing their jobs, they are seeing lower income, health care

costs going up, pensions threatened. It is a very different world. So

I do appreciate, Mr. Chairman, your holding this hearing on a very,

very important topic.

Let me first say that I think we have seen a lot of interesting

trends in the last decade, and you have spoken to them this morning. But when you look at the numbers, on the one hand, real GDP

has increased 37 percent, real corporate profits have increased over

60 percent, real S&P 500 increased 49 percent, but real wages have

gone down. So that is the question.

When we look at gas prices going up, which yesterday we were, an average, in Michigan, of $3.15 a gallon. Then we look at Exxon

posting the largest corporate profits in history last year and the

same again this quarter; there is a disparity here. No wonder people are so concerned and feel like nobody is listening and they are

squeezed on all sides.

The truth is, in the past in America when we have seen corporate numbers like this, and GDP, and S&P 500, we would be

celebrating it, because, when the stock market went up, that meant

everybody’s standard of living went up.

Today it is different than that. The difference between the CEO

and what happens when you walk out onto the plant floor or when

you walk out into the business, it is a very different world that you

spoke about today.

When we look at the fact that, not only are salaries not going up,

and in many cases going down, we see a more productive workforce, but they are not seeing better pay as a result of that productivity. Their health care, education, training, housing, all of those

things are going down and there is a huge gap, 250 times more

that the CEO is making than the average person working, working

very, very hard.

So you have gone through all the numbers, but I think it paints

a very different picture than when we just look at the corporate

profits end of things. And in my home State we have seen median

income drop 11 percent in the last 5 years, and we are pretty proud

people in Michigan, people who work very hard.

So I have a question, Mr. Hodge, for you, based on your testimony. One of the things you said in your written testimony was

that lowering corporate taxes would change the trend. I do not see

21

where that is the answer at this point, particularly in a world

where capital can easily go overseas.

My question is, how do we keep the capital in America for American jobs and American businesses? When we are focusing on tax

policy in a world where the Internet or your cell phone would jump

any barrier that somebody would put up, it seems to me we have

to be much more vigilant about making sure there are incentives

here at home rather than to drop corporate tax rates and then have

those go overseas to lower-wage countries or places where they do

not have to pay for health care, pensions, or environmental standards where you can breathe the air and drink the water.

So I question that whole approach, and I guess I would ask you,

how do we really address creating jobs in America and American

businesses? And I do not mean that we do not obviously have a

global economy, but it is our job to make sure that the people who

are working hard every day and face what you have already talked

about have a job and can really raise their family and have the

American dream. That is not rhetoric, that is a reality for too many

people who are worried about what is happening in this country.

Mr. HODGE. Senator, I think one of the things that Congress

needs to think about is what incentives we are creating for shipping jobs, capital, labor, and investment overseas. One of the

things that is driving that is the fact that the United States has

the second-highest overall corporate tax rate among industrialized

countries.

In fact, when you add to our 35-percent Federal corporate tax

rate the State and local tax rates—Michigan, for instance. General

Motors pays a higher corporate tax rate, when they are profitable,

than they would if they were in Sweden, Germany, France, anywhere else in the world.

Senator STABENOW. If I could just interrupt to say, they also pay

over $1,500 per vehicle on health care. If you were to ask them

what they would like us to address, it would be the cost of health

care.

Mr. HODGE. Well, we can address that as well. I think that if we

had a choice-based system such as the Federal Employees Health

Benefits system that would be available for all of us, that would

certainly drive down health care costs, not only for General Motors

but for all of us.

But cutting the corporate tax rate will make America more competitive. There is nothing more mobile today than capital, and capital is seeking out lower-cost places to do business.

Ireland, for instance, has a 12.5 percent corporate tax rate.

American businesses are investing like crazy there. Why? Because

the returns on that investment are higher because of those lower

taxes. Where are the jobs going? They are going to Ireland. In fact,

Irish expatriots are coming back to Ireland because that is where

the jobs are.

We need to do the same. We need to realize that we are in a

global marketplace and every other country on earth is cutting

their corporate tax rates to be more competitive, and we are simply

standing still, falling behind. Our corporate tax rate is 10 percentage points higher than the European average today.

22

Senator STABENOW. Mr. Chairman, I know that my time is up.

I would just simply say that we have cut top income rates. We have

seen a tax-cutting strategy now for a couple of decades and real

wages are down 20 percent, folks in America are squeezed more

than ever, and so I hope we will have broader debate.

Thank you.

The CHAIRMAN. Thank you very much.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus, for

holding this hearing. Thank you to the witnesses for your excellent

testimony this morning.

I have two questions, one about savings—increased savings—and

the other about education. For you, Elizabeth and Sarah, my question is about education and what it is that we can do in this Congress to help make the American dream of access to higher education a greater reality for middle-class Americans.

In my family, I am a first-generation college graduate, along with

seven other of my siblings. It was because of programs like the Pell

grant and the Perkins programs and others that people like myself

had an opportunity to do something that my parents, proud Americans and veterans of this country, were never able to have. I think

that American dream is being lost on a lot of people.

I would like your number-one specific recommendation as to

what it is we can do, and you will have about a minute each to answer that question.

To Gary and Scott, my question to you is in terms of savings.

You know the statistics. Twenty-five years ago, 10 percent of the

money that was being earned by Americans was going into savings.

Today we are actually in a negative savings position among Americans.

What is it that we can do in terms of the Finance Committee and

our tax code to try to incentivize people to change that reality of

this negative savings rate? So why do we not take the education

question first. You will have about a minute each, and then we will

take the tax question.

Sarah?

Ms. BLACKBURN. Senator, I do not propose to be an expert on

making recommendations. All I know is that the cost of education

in Montana is very, very high. We, as my testimony indicated, had

to move our daughter to a college in Wyoming that provided substantial discounts for the surrounding States.

We just find it very, very difficult to pay into the education, although it is essential for my daughter and for my son. He is going

to have to pay the price too because we are not going to be able

to afford to send two kids to college. So, it is just a very difficult

thing. We have had to dip into our savings and into our retirement

to pay for her college. I wish I had a recommendation to give you.

Senator SALAZAR. And your story, I think, Sarah, could be told

a million-fold over this country.

Ms. BLACKBURN. I think it could, too.

Senator SALAZAR. Elizabeth?

Ms. WARREN. Thank you, Senator. I would say, I think the Federal Government could make adequate loans available directly

through the government to pay the cost of books, tuition, and fees,

23

and I would make it room and board for the State university system for any student who wanted to go to college.

Then what I would do is, I would offer a year of forgiveness for

each year of loans if people wanted to go into public service for a

period of time after graduation. It is like the GI bill. Get your 4

years in college and then spend your 4 years in the military, in foreign service, in Teach for America. We have lots of places where

we could use these bright young people.

Senator SALAZAR. Have you written up that proposal and figured

out how much it would cost?

Ms. WARREN. Yes, sir, I have. It is actually being scored now,

Senator.

Senator SALAZAR. Can you get me a copy of that?

The CHAIRMAN. We would be very interested in that.

Ms. WARREN. I would be delighted.

The CHAIRMAN. Very interested in that. Very interested.

Senator SALAZAR. I appreciate that very, very much, Elizabeth.

And on the savings question and the tax issue, Gary, what is

your response to that question?

Mr. BURTLESS. It is true, saving out of personal income has declined a lot and private saving——

Senator SALAZAR. Now, we know that fact. We know that as a

fact. So, therefore, what do we do about it?

Mr. BURTLESS. But let me point out that Congress and administrations since the early 1980s have done many things to reduce the

tax that people pay on saving. We have created many kinds of retirement savings accounts so that essentially people do not pay

taxes on the capital income that they derive from those accounts

until the point at which they start withdrawing, which is a big incentive to save.

So I think I would just tell you, looking at tax incentives as a

way to address this is something that Congress always does, but

it is very doubtful that it works.

Senator SALAZAR. What works?

Mr. BURTLESS. We have much lower savings in spite of much bigger incentives.

Senator SALAZAR. What does work?

Mr. BURTLESS. Well, one reason that saving has declined is because the assets of people who do a lot of saving have appreciated

a great deal in value. So if you want to raise saving, I mean, it is

a very terrible thing to say, but the value of the assets that people

already own may have to go down.

The ratio of wealth to income in the United States at given ages,

among 45-year-olds, has not changed much in spite of the big reduction in savings. It is an amazing fact that the appreciation of

assets has made up for the drop in the saving rate.

Senator SALAZAR. Thank you, Mr. Burtless. I am out of my time,

but I want to give Scott 10, 15 seconds to respond to the question.

Mr. HODGE. Very quickly, the savings rate does not include

things like 401(k)s, stocks, and so forth. America’s savings patterns

are changing. We are no longer putting money in passbook savings

accounts. We are becoming a Nation of investors, and we need to

take that into account.

24

On the tax side, however, I would encourage us to look at how

we are taxing savings and what penalties that is creating on people, or even putting money into a passbook savings accounts, you

are likely to get taxed on that. I think if we taxed savings less, we

would get more of it.

Senator SALAZAR. So your proposal would be to look at taxing

savings less.

Mr. HODGE. Yes. But look more broadly at what savings is. It is

no longer just sticking money in a bank in a passbook savings account. Saving is coming in all kinds of different ways, whether it

is mutual funds, 401(k)s, and other things. We need to remove the

taxes on those to relieve people of that pressure not to save.

Senator SALAZAR. Thank you. My time is up. Thank you, Mr.

Chairman.

The CHAIRMAN. Thank you. Thank you, Senator.

Ms. Blackburn, I would like you to please just give us a couple

of examples, in your experience, of what people have gone through.

You have, for over 25 years, been working with an awful lot of people. In all the work that you do, you have seen a lot of people in

trying to help them out. Just give us a couple representative examples that give us a sense of what people are coping with and what

they are doing.

Ms. BLACKBURN. Sure. Just a couple of weeks ago, I spoke with

two people who, sadly, had the same diagnosis in their child, which

is a very rare diagnosis, a child being born without a left ventricle.

One family, three kids.

Then they have this baby who needs immediate surgery being,

actually, Life Flighted to a center further away from home. They

eventually had to declare bankruptcy because they had $2 million

worth of medical expenses incurred. Both hardworking folk and

paying their taxes and everything, and they just eventually could

not maintain their household.

Another one, where actually the baby has not been born but they

know that they have to get things in place for when the baby is

going to be born, because they are not going to be able to afford

having such a child with this kind of a disability. Not only do they

need to have continued surgeries throughout their childhood, they

eventually will need heart transplants. So those are just a couple

of examples.

We have kids across the country who are diagnosed with cancer.

That is my primary practice at Pediatrics in Billings, is through

oncology. Folks who have really, really good health insurance, yet

are looking at huge bills for travel, and for lodging, and for meals,

and for child care, and these are things that are not covered by insurance. So, these are catastrophic examples.

With chronic diseases such as childhood diabetes, there is the

same thing. They are looking at, out-of-pocket, every single year,

$2,000 to $5,000 a year for out-of-pocket expenses.

Technology has changed to the point where the insurance companies are not keeping up with this either. They are not paying for

pumps. Pumps cost anywhere from $2,000 to $2,500. So they are

talking about—insulin has gone up. The price of insulin has gone

up.

25

The testing strips are $1 apiece. Kids are needing to check their

diabetes anywhere between 4 and 8 times a day, and at a dollar

a shot it gets to be a lot of out-of-pocket expenses. So, that is something that we see. I work for the pediatrician in our area who sees

more than 300 kids a year who have pediatric diabetes.

The CHAIRMAN. I appreciate that. We have our work cut out for

us here as a country.

Ms. Warren, I was also struck by your chart on page 4 about

debt. What is that? Twelve percent of income goes to—if you could

explain that chart. The trend is quite alarming.

Ms. WARREN. Is that one not a stunner?

The CHAIRMAN. It is. And a deeper question is, what in the world

is going to turn that trend around? And pretty soon that trend is

going to reach some kind of a breaking point, it would seem to me.

Ms. WARREN. Yes. What we are really talking about here is the

amount that families carry in short-term, high-interest debt, largely credit card debt, and that the typical family is carrying at any

given time. This is the revolving debt.

This is not how much you put on your charge and pay off at the

end of the month. This is the part that is revolving from month to

month. It has gone from being a little over 1 percent of annual income to up around 12 percent.

What is happening is that families who carry credit card debt are

carrying about 2 months’ worth of income in their credit card debt,

which in turn means they have picked up an additional expense,

somewhere in the neighborhood of about $1,400 in interest and fees

that does not go to groceries, does not go to new shoes, does not

go to paying down the mortgage, does not go to savings. What it

goes to is just to pay off interest to keep that mountain of debt rolling on forward without paying down a single dollar of it.

Now, part of that is because many American families are just

having trouble holding it together. As my daddy used to say, they

have 26 days’ worth of income and 30 days worth of month, so debt

becomes the way you do that last little part.

For another group of families, it is because we have no effective

social safety net in the United States today for many kinds of

things that go wrong. They turn inward, and so they put down that

credit card in order to be able to pay for these expenses for the

strips for the child, for diabetes, and to be able to pick up the additional costs, the gasoline when you have to travel 200 miles to take

a child somewhere.

So for some, the debt is part of building a personal safety net,

if we want to call it that. They are going to have to pay it back

at 19-percent interest. And for a third group, frankly, it is because

they have gotten into credit products that have tricked and trapped

them and ended up costing them additional money.

So people who could afford to borrow at 9.9 percent and put $2,000 on their credit cards—credit card companies are amazing in

the United States. They are the only ones that, after you buy their

product—that is, borrow at 9.9 percent—you can meet all the terms

of the contract and they can change the price 2 months later to

29.9 percent.

So some people get caught, and that can put you into late fees

and over-limit fees. For some people, the reason we see these debt

26

loads is that they had a manageable amount of debt and their

creditors just began——

The CHAIRMAN. But given your studies and the thought you have

given the subject, it seems to me that this trend is going to continue.

Ms. WARREN. Yes.

The CHAIRMAN. What is it going to take to turn that trend

around, to stop that trend? That is not very healthy.

Ms. WARREN. Senator, it is not very healthy. It is a ticking time

bomb in the middle class, because it means that every other problem that we talk about here today—stagnant incomes, rising housing costs, the rising health care costs—every American family that

is carrying debt is more vulnerable to everything else that goes

wrong.

If we could change just one thing, if we could roll the clock back

to 1970 and have these families have 11 percent of their income

put away in savings and only have very tiny debt loads, they would

be very much more able to withstand the shocks and bumps and

things that go wrong. But as it is now, we have turned that exactly

on its head.

This is the number that scares me most about American families,

that they have pre-spent income they have not yet earned, and

they have no prospects for increasing their earnings enough to be

able to cover that debt load.

The CHAIRMAN. And I assume—perhaps I am incorrect—that

since 1970 to the current date, that is a trend upwards rather than

a big jump in 1 year that then stayed static across.

Ms. WARREN. Actually, Senator, I do not want to make it worse

than it is. It is not just a trend upwards, it is a trend upward that

is showing acceleration.

The CHAIRMAN. Accelerating.

Ms. WARREN. Yes.

The CHAIRMAN. All right.

Senator Bunning?

Senator BUNNING. Thank you.

The CHAIRMAN. You are welcome.

Senator BUNNING. Let me go back to the educational part. My

older brother, myself, and my younger brother were the first college

graduates in our family. That is a while back. But let us go back

to the 1970s, because I have nine children, and I had the responsibility of trying to see that they got educated. None of them were

under the GI bill. They were all eligible to go to college because

they all made it through high school. I did not look to the Federal

Government to pay for any of that. I looked to have enough income,

or tried to have enough income, to help those nine children through

college.

So I made a deal with my kids. I said, I will take care of your

tuition, books, and your housing for 4 years. Anything you want to

do after that, you are on your own. We had seven graduates from

college. Two partly went, then got married while they were in college. But I was not looking for a handout from the Federal Government.

I want to tell you, the colleges my children went to were not inexpensive. Some were out of State. I will tell you about the last

27

five. We discovered that they had to go in-State because in-State

tuition was a lot less expensive. I do not know what Montana inState tuition is, but in Kentucky it is around $6,000 per student

per year for tuition. That is not counting books and extras.

So you can imagine, with three in college, three in high school,

and three in grade school, there was a considerable amount of expense. We also found out that the Federal Government had a program that allowed them to go and borrow money to help out.

Now, if they wanted to do that, that was fine, but that was only

fine after they got the first 4 years in. Now, not all of my children

finished college in 4 years. That is not unusual nowadays. Some

take 5, some take 6. But what I am trying to tell you is, the mindset in those days was that you were responsible for educating your

children to the best extent possible.

Now, I had a brother, an older brother whom I talked about, who

made a deal with his kids and said, I will give you $500 for each

semester you go to college. Somehow you have to scrape and scramble and make ends meet if you are going to finish college. Now, all

five of his children finished college. One played in the band. One

did this. One did that. They borrowed money and they paid off

their student loans. So when did this become the responsibility of

the Federal Government, or for that matter the State government?

Now, in Georgia it is completely different because, if you want

to go to college in Georgia and you are a Georgian, the State government will pay for it if you keep a B average in college. They will

pay for your entire education, higher education. That is not the

same in other States.

So I am trying to get to the mind-set where we are now having

the Federal Government responsible for paying for education. You,

Ms. Warren, said it is the primary concern of the mothers and fathers of students because they know the income differences if you

do not go to college than if you are a drop-out in high school or you

just finished high school.

So when did the mind-set or when did it come into being that

the Federal Government was responsible for educating all of our

children?

Ms. WARREN. Senator, I would start by saying that I do not think

we are talking about handouts here. I went to public schools from

first grade through twelfth grade and I never thought I got a handout. That was the education——

Senator BUNNING. No. That is in the constitution in Kentucky.

Ms. WARREN. And I will point out that at that time, when I graduated from high school, most Americans believed that was it. The

State had just offered me all of the education I needed to be middle-class. That has changed dramatically in a generation, but we

have not expanded. We have expanded the amount of education we

think you need, but we have not expanded the amount of education

that we collectively are willing to offer our children.

I will also point out that a program that I was talking about, like

Service Pays, is not about children expecting to be born into families where they are going to have enough wealth that someone else

could pay for their college, but what it is about, is about students

who would like to be able to pay for college——

28

Senator BUNNING. Public service, and all those things. I agree

with that.

Ms. WARREN. Public service. But without the government to

stand behind that and to make that loan money available and to

be willing to forgive that loan money when students get their college education and then go out and work collectively on behalf of

all of us, whether they are in the military, whether they are in domestic programs, that is a way to say to America’s children, yes,

you need education, but unlike a generation ago where we will pay

for all of it, you have to take care of it yourself, but here is the

mechanism for doing that.

You can borrow the money from us, from the Federal Government, and then if you want to work you can be paid off, and at 26

you can be a college graduate, you could have 4 years of experience,

and you could have no debt. Now you are ready to launch into the

middle class. I think it is an investment in our young people that

we——

Senator BUNNING. Does anybody else have a thought about that?

Mr. BURTLESS. The gains from attending college have gone way

up. This is pretty well-known. I think some people even mentioned

it this morning. The cost of college, if you are a poor student in the

United States, if you come from a low-income family, is also very

low.

I know, I was from a poor family and went to a very expensive

college, and they gave me a free education to go to college. Many

colleges still do that. At Harvard, I think you are considered poor

if your family has less than $60,000 in income, in which case Harvard gives you a free education.

Now, of course, you have to be good enough to get into that college or into some other institution around the country. You have

to be good enough to qualify to be in the university that offers this

kind of aid. So if you are poor, actually, the cost that you face is

low if you disregard the cost of giving up earned income while you

are in college.

The mystery is why, facing this cost schedule, so many youngsters from low-income families pass up the opportunity to go to college.

Senator BUNNING. But is that because the parents are not insisting and understand the fact——

Mr. BURTLESS. Undoubtedly that is true. If you are a child in a

low-income family, your parents have less persuasive power to get

you to do the things that will help you to become much better off

when you are 35 years old. Better-off parents like myself, we have

a lot of influence to get our children to study hard and persuade

them to invest in hard work to get into college.

Given the fact that the pay-off to go to college has gone up so

much, one of the mysteries for the United States is, why has the

fraction of youngsters attending college and completing college by

the time they are 30 years old risen so much less over the last 20

years than it has in other rich countries? Korea has more youngsters reaching age 30 with a college diploma than the United

States does, and Korea is a relatively poor country.

The CHAIRMAN. Wait. I am sorry. What is the answer to your

own question? What do you think?

29

Mr. BURTLESS. I think it is that parents of youngsters from

lower-income families do not have the influence on their kids that

more affluent parents do to get them to work hard and strive to

go to college. That is, I think, the basic answer.

The other answer is that many people think the price of going

to college is the posted price. When you read about the price of

going to Harvard, for example, most people mention that it is

$40,000 or $44,000 a year. (You might know; I do not know exactly

what it is.) And so that seems like a Mt. Everest to many parents

and youngsters in the United States.

What very few people seem to add is, ‘‘Oh, by the way, if you are

from a household that has less than $60,000 in income, Harvard

waives those costs. It is free.’’ The same is true if you go to Berkeley and other great institutions around the country. These very demanding places make available positions for people with limited

means and poor backgrounds. I speak from experience as somebody

who benefitted from that favoritism.

Senator BUNNING. Well, I understand the benefits. I hope that

some of the parents of our young people are better able to influence

their decision and make available those things that are available

now to get to college and get through it. Thank you.

The CHAIRMAN. Thank you, Senator.

Mr. Hodge, do you agree or do you not, generally, with the other

three panelists who are basically saying that the so-called middleincome in America feel squeezed, that they are having a tougher

time perhaps than, say, 20, 30 years ago? The data certainly shows

that. That is, the polls show that. Do you generally agree or not?

That is my first question.

Mr. HODGE. Well, Senator, I think that we are——

The CHAIRMAN. I am not getting into solutions, prescriptions, but

just the general proposition.

Mr. HODGE. No. I think we are a bit like the eight blind men trying to describe the elephant, and a lot of us are using the same

data to draw different conclusions. I think that the middle class is

doing a whole lot better than it did 30, 40 years ago.

If we want to go back to the 1970s before mom entered the workplace, before the Women’s Lib movement I think wonderfully

brought more and more women into the professional workplace,

that will equalize incomes. If we want to go back to a time, my

grandfather’s era, in which everyone was high school educated and

they were all equal, that would equalize incomes in the United

States as well.

We are much better off today because the typical upper-income

middle-class working family, the dual-income couple, they are college educated. They are typically older. We are seeing the top end

of the baby boom generation right now hitting their peak earnings

potential. No one is factoring that into any of these calculations on

income disparities.

We are working better jobs. Yes, we are working longer. We have

costs that are more challenging, day care, which my mom did not

have because she stayed at home. We only had one car back then;

we have two cars today. But all these things are improvements. We

are living in much, much larger homes than we did before.

30

The CHAIRMAN. I do not want to put words in your mouth. So basically you think the middle class is doing pretty well?

Mr. HODGE. Well, the one thing the middle class was not paying

30 years ago is the AMT. They were not paying property taxes that

were spiraling out of control.

The CHAIRMAN. I’ve got you. All right.

I would like anybody to respond to Mr. Hodge if anybody wants

to on his basic assertion that things are pretty good.

Ms. WARREN. Well, I would just say, let us look at that dualearning college educated couple. I have the data here. They are

spending three-quarters of that new higher salary to cover the

same basic expenses that that one-income family 30 years ago covered with half of their income.

Mr. HODGE. But as you argue in your book, that family is competing against other dual-income working families to buy their way

into the better school districts, and that if we had something like

universal school choice we would relieve some of that pressure by

allowing people to live where they want to live, but still be able to

send their kids to the better schools. Choice, the fact that we do

not have choice today, is part of the problem.

The CHAIRMAN. All right. All right. Good.

Ms. Warren, go ahead, briefly.

Ms. WARREN. The only question I was raising, you said the middle class is better off because they are earning more money as

dual-income couples. All I am pointing out is, the economic data do

not bear that out. They show families who, after they account for

their basic fixed expenses, have less cash left over than their oneincome counterparts had a generation ago.

That means they have put more people into the workforce, they

are working harder than ever before, they are struggling to try to

get children into pediatricians’ appointments at 7:30 in the morning so they can still get to work on time, and at the end of the

month they actually have less money than a generation ago had.

The CHAIRMAN. I want to get past this argument, because I tend

to agree with the three basically. I think it is tough. It is tough for

an awful lot of hardworking families. It is very tough.

Mr. BURTLESS. May I make one point?

The CHAIRMAN. Yes. Sure.

Mr. BURTLESS. I think that the elephant in the room, of course,

is the medical care system. That has come up over and over among

things that people have said this morning. On the one hand, the

medical care system can deal with things today that it could not

deal with 30 years ago. We heard about the terrible position faced

by people whose children have some terrible illness.

Well, when I grew up, if you were 12 years old and you got leukemia, you died. Now your parents get a very big bill if you have

terrible insurance. Now, think of those two outcomes. Which is

preferable? You have a living child, but you have huge medical

bills. So that is the difficulty in thinking about this problem from

the point of view of American living standards.

The parent whose 12-year-old is stricken by leukemia who has a

healthy 21-year-old child 9 years later is better off, in spite of the

fact that they may have gone through bankruptcy.

31

The CHAIRMAN. That is an interesting assertion. It is also true

that we spend much more per capita on health care in America

than do other countries.

Mr. BURTLESS. Absolutely.

The CHAIRMAN. And we are not more healthy.

Mr. BURTLESS. I agree. I think our medical insurance system is

terrible. I completely agree. This is the challenge here. We have a

misbegotten health insurance system. It is the single-biggest threat

to financial security for the country’s working-age population.

Everybody knows, even if you have a good health insurance plan

right now, you are a job dismissal or a serious illness away from

not being able to afford medical care. That is a terrible way to run

a health insurance system. No other rich country does it. And this

is a horrible threat looming over the heads of middle-income families.

We have heard stories about how some families deal with it. It

is a terrible problem for these people. And to pretend otherwise, to

say that, no, the middle class has no problems because average income statistics for the country as a whole have shown that there

is a rise in real incomes, I think completely loses sight of this

human side of making ends meet in this country.

Mr. HODGE. Well, Mr. Burtless, I acknowledge that these families are having trouble purchasing certain things, but they are

things in which the government has been most involved in trying

to micromanage these mini economies, being health care, housing,

and education. You cannot deny the fact that health care costs are

rising out of control because there is not a competitive marketplace. People are one paycheck away from——

Mr. BURTLESS. Excuse me. I can certainly deny it, and I do.

The CHAIRMAN. Yes. I am sorry, I do not want to get into an argument here between you two witnesses. This is getting a little out

of hand here. I appreciate each of you giving your personal views,

and that is why you are here. I deeply appreciate that.

But I tend to think that we have a problem here, a real problem

in this country. I am trying to figure out what we do about it. The

problem I am facing right now is, anything we do here, this year

and next, or let us say this year in this committee, is really only

on the margin. A lot of folks are almost dying from a thousand

cuts. Anything we do here, maybe we can put a Band-Aid on a little bit here, a little bit there.

The solution is really some paradigm shift in this country. I do

not know what that paradigm shift is, but it is going to have to

be here at some time or this problem is not going to get better, it

is going to get worse. I think a major part of it is our health care

system. That is clearly part of it. There are a lot of other parts, too.

Housing has been talked about here, education.

A lot of this is caused by globalization, too. The world is so complex, and globalization has caused a lot of angst in this country and

a lot of dislocations in this country, and this country tends to deal

not as well with the dislocations of globalization than, say, do other

industrialized countries. Certainly in Europe that is the case.

This has been a very helpful hearing. Very helpful. There was a

lot of very, very good testimony here from all of you. I encourage

you, when you leave, if you would keep thinking of what the followVerDate 11-MAY-2000 15:36 Feb 05, 2009 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 46362.000 SFIN1 PsN: SFIN1
32

up might be. Ms. Warren, you had a very interesting idea on service, with education, paying it back with service, kind of a GI bill,

if you will. But I encourage you to give us ideas. Keep giving us

ideas, because this is a big problem and we are going to have to

collectively deal with it very, very aggressively.

Thank you very much. I appreciate it. The hearing is adjourned.

[Whereupon, at 11:50 a.m., the hearing was concluded.]

(33)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

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COMMUNICATIONS

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Æ