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74–447—PDF 2011

S. HRG. 112–427 

PERSPECTIVES ON DEFICIT REDUCTION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

APRIL 13, 2011 

( 

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 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(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 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Blinder, Dr. Alan S., Gordon S. Rentschler memorial professor of economics 

and public affairs and co-director of the Center for Economic Policy Studies, 

Princeton University, and vice chairman for Promontory Interfinancial Network, Princeton, NJ ............................................................................................. 5 

Walker, Hon. David M., former U.S. Comptroller General, and founder and 

CEO, Comeback America Initiative, Bridgeport, CT ........................................ 7 

Foster, Dr. J.D., Norman B. Ture senior fellow in the economics of fiscal 

policy, The Heritage Foundation, Washington, DC ........................................... 9 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 37 

Blinder, Dr. Alan S.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 39 

Foster, Dr. J.D.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 43 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement with attachments ........................................................... 49 

Roberts, Hon. Pat: 

Prepared statement .......................................................................................... 53 

Walker, Hon. David M.: 

Testimony .......................................................................................................... 7 

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

Responses to questions from committee members ......................................... 68 

COMMUNICATION

Pallow, Tom .............................................................................................................. 73 

(III) 

(1) 

PERSPECTIVES ON DEFICIT REDUCTION 

WEDNESDAY, APRIL 13, 2011 

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 Rockefeller, Bingaman, Wyden, Schumer, Nelson, Carper, Cardin, Hatch, Grassley, Snowe, Ensign, Coburn, and 

Thune. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Lily 

Batchelder, Chief Tax Counsel; Alan Cohen, Senior Budget Analyst; Tom Klouda, Professional Staff Member, Social Security; and 

John Angell, Senior Advisor. Republican Staff: Chris Campbell, 

Staff Director; Mark Prater, Deputy Chief of Staff and Chief Tax 

Counsel; and Stephanie Carlton, Health Policy Advisor. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Henry Ford II once said, ‘‘What’s right about America is that, although we have a mess of problems, we have a great capacity, intellect, and resources to do something about them.’’ 

Enormous Federal budget deficits and the debt our country faces 

can certainly be called a mess. Identifying ways to reduce these 

deficits and eliminate the debt is the topic of our discussion. Addressing our deficits and debt is an economic issue, it is a national 

security issue, and it is a moral issue. 

Our deficits and debt threaten our future and the future of our 

children and grandchildren. I have long said that we have a moral 

obligation, when we leave this place, to leave it in as good a shape 

or better shape than we found it, but today our fiscal challenges 

prevent us from meeting that responsibility. 

And there are other concerns. U.S. debt could be recalled by foreign entities in times of economic or military conflict. This presents 

a significant national security problem. The nonpartisan, independent Congressional Budget Office estimates that this year the 

deficit will reach 9.8 percent of our entire economy. That is the 

second-largest deficit on record since World War II. 

One of the most significant factors behind our deficits is the recession. As our economy continues to recover, we will see improvements. By 2015, our deficits are expected to drop to approximately 

4.7 percent of GDP. But over the longer term, our deficits are proVerDate Nov 24 2008 21:26 Jun 12, 2012 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\74447.000 TIMD
2 

jected to continue increasing. They will likely reach more than 5 

percent by 2021, and debt held by the public will increase to about 

91 percent of our entire economy. 

We have to do better. Families in Montana and across the country expect us to do better, because that is what they have to do 

when their budgets are tight in their own lives. Whether it is saving for college or making payroll for their small business, Americans know they have to balance their books, and they know you 

can only put so much on the charge card. 

It is time for us to take a lesson from the family that has not 

taken a vacation in far too long, from the small business where everyone took a pay cut to prevent layoffs. It is time for us to get serious. Economists agree that we have to get the debt held by the 

public under control. That means deficits in the near term should 

be reduced to no more than 3 percent of GDP. To meet that goal, 

we must act. 

While we must be cautious during the present recovery, we 

should enact the legislation soon with a plan to reduce deficits as 

our economy grows stronger. That plan should not over-shoot deficit reduction targets, harm critical programs, or risk economic 

growth, but it also must be a plan we are committed to enact. 

As we consider our deficit reduction plans, we must keep several 

things in mind. First, everything must be on the table. Our deficit 

challenges are simply that significant. Second, we should not scapegoat Social Security. Social Security benefits are self-financed 

through the payroll taxes and the trust fund, and Social Security 

is not responsible for the deficits in the general fund. Third, any 

deficit reduction package should be balanced. In general, the package should not be tilted too much towards spending cuts or too 

much toward revenue increases. And fourth, spending cuts do not 

necessarily mean benefit cuts. We have to stretch our administrative dollars further and make our programs more efficient. 

The new health care law has already made some notable progress toward deficit reduction by addressing one of the largest drivers of our deficits, that is, rapidly rising health care costs. The law 

increases focus on prevention, it makes our system more efficient, 

and it cuts fraud, waste, and abuse significantly. These improvements—and there must be more—resulted in the most significant 

deficit reduction in more than a decade. According to CBO, the law 

will reduce the deficit by more than $230 billion in the first 10 

years of enactment, and by more than a trillion dollars in the decade that follows, that is, compared to what otherwise the law 

would be, and we must give this law time to work. 

The Finance Committee has jurisdiction over many of these programs that will figure prominently in this discussion. We oversee 

Social Security, Medicare, Medicaid, taxes, and many other programs. That is about 45 percent of total spending. Following today’s hearing, I intend to hold more hearings to give us the facts 

we will need as we move forward to address these paramount concerns. I look forward very much to hearing from our witnesses. 

They are very highly regarded experts in their field, and their guidance is going to mean a lot as we try to find a solution to this difficult problem. 

3 

* Please see Appendix, p. 51. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I appreciate 

you, and I want to thank you for kicking off the Finance Committee’s deficit reduction efforts this morning. 

As I prepared for this hearing, I thought of those two Chicagosavvy musicians, Joliet Jake and Elwood Blues. They were known 

as the Blues Brothers. Now, I have a chart depicting Jake and 

Elwood right over here. You can see, very handsome young men. 

Jake and Elwood would often challenge folks to state their blues. 

If they asked us here today to state our blues, I think every member of this panel would say we have those big deficit and debt 

blues. We would also say that those blues will not leave us any 

time soon. 

In recent months, President Obama has frequently discussed our 

Nation’s disturbing fiscal situation. He is right to do so. I am sure 

the President would say he has the big deficit and debt blues. Who 

would not have the blues? 

Our yearly deficits and accumulated debt hover like thunder 

clouds over the futures of our children and our grandchildren, and 

in Elaine’s and my case, even great-grandchildren. Although he is 

late to the table on this issue, President Obama has indicated once 

again that he seems to have finally recognized the frustration and 

anger of the American people over our loose fiscal policy. 

The President’s Fiscal Commission came out with a long-term 

deficit reduction plan, but the President made no commitment. It 

was a swing and a miss. Strike one. Then we all waited for the 

President’s budget to show some path to long-term deficit reduction 

and entitlement reform, but no commitment. It was a swing and 

a miss. Strike two. Then the White House lit up the Sunday show 

circuit with an expectation that the President will come to the 

plate and take another swing at a plan. 

Jake and Elwood captured the importance of bottom-line substance with the ‘‘sandwish’’ joke. A sandwish, by their definition, 

consisted of two slices of bread with no meat. The consumer of the 

sandwish was supposed to wish he or she had meat between the 

slices of bread. As we anticipate the President’s third swing at the 

deficit reduction plate, we hope it will not be a strike. Three strikes 

and you are out. We hope he will be delivering a sandwich and not 

a sandwish. A sandwish is a joke and not a meal. 

Some will say the only real deficit reduction game in town is one 

where we significantly raise taxes. The nonpartisan Congressional 

Budget Office tells us that the current tax system will yield everrising revenues. I have a second chart that illustrates this point. 

These are projected revenues from individual income taxes.* If you 

look at this chart, you will see that the individual income taxes 

grow as a share of Gross Domestic Product. The top line is the current law baseline. You can see that it springs upward. Revenues 

4 

* Please see Appendix, p. 52. 

grow dramatically under the President’s basic policy baseline. It is 

the center line. 

My friends on this side of the aisle probably will not be surprised 

by that data. What may shock my friends on the Democratic side 

is that current policy with this year’s rates and the AMT patch will 

yield a growing tax base as well. That is the bottom line. Those are 

the projected revenues from individual income taxes. 

That is right. If current tax policy stays in place, the nonpartisan 

CBO tells us the tax base individual income tax grows as a portion 

of the American economy. A shrinking revenue base is not driving 

the out-of-control deficits of the future. How could it? It is not 

shrinking. It is actually growing. For those who want to ignore the 

clear data showing that the individual income tax take grows, let 

us take a look at some numbers that also grow significantly. In this 

case, I am talking about Federal spending. 

Now, let me just point to Federal taxes and spending as a percentage of GDP. This is this particular chart now.* Looking from 

the bottom up, you can see that revenues come back. It is the bottom line in this chart. The top line shows the President’s budget 

spending line. As you can see, it stays very high. As a share of 

GDP, it is over 15 percent above the historic average. Spending is 

historically high, and it keeps growing. Someone used the word 

‘‘hysterically’’ high, but we will stick with historically high. Now, 

that is not restraint. It is not discipline. It is beside me how, when 

looking at this data, folks on the other side can argue that out-ofcontrol spending is not the problem. 

That, Mr. Chairman, is why we are here. We need to look at the 

origins and continuous causes of the unsustainable deficits and 

debt. This great old committee, the Senate Finance Committee, is 

where over half of spending originates. It is where almost all revenue policy rests. It is only proper that this committee air these 

issues out, so I am very grateful to you, Mr. Chairman, for being 

willing to do so. 

It is, however, all for naught if the President misses this opportunity and does not make a bold commitment to entitlement reform 

and deficit reduction. Hopefully it will not be a third strike, where 

we are left with the status quo. Hopefully the President will not 

deliver a sandwish. We have to hunker down, do the work, and rid 

ourselves of these spending-driven deficit and debt blues. I look forward to hearing these especially learned witnesses this morning. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

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

The CHAIRMAN. I would like to introduce our panel. The first witness is Dr. Alan Blinder, professor of economics and public affairs 

at Princeton University, and formerly Vice Chairman of the Board 

of Governors of the Federal Reserve system. Thank you for coming 

here, Professor. 

Second, the Honorable David Walker, founder and CEO of the 

Comeback America Initiative, and former U.S. Comptroller General. 

5 

And finally, Dr. J.D. Foster, senior fellow in the Economics of 

Fiscal Policy at The Heritage Foundation, and former Associate Director for Economic Policy at the Office of Management and Budget. 

Thank you all very much. Your statements will be in the record. 

Summarize for about 5, 6 minutes. I encourage you not to pull any 

punches. This debt limit is fast approaching, and we have to find 

some solutions here. 

Professor Blinder? 

STATEMENT OF DR. ALAN S. BLINDER, GORDON S. RENTSCHLER MEMORIAL PROFESSOR OF ECONOMICS AND PUBLIC AFFAIRS AND CO-DIRECTOR OF THE CENTER FOR ECONOMIC POLICY STUDIES, PRINCETON UNIVERSITY, AND 

VICE CHAIRMAN FOR PROMONTORY INTERFINANCIAL NETWORK, PRINCETON, NJ 

Dr. BLINDER. Mr. Chairman, Ranking Member Hatch, members 

of the committee, I would like to thank you for the opportunity to 

come here this morning and share my views with you about the 

budget deficit and the national debt. I really have only three points 

to make, and I am going to state them up front—and clearly, I 

hope—and then elaborate just a very little bit on each and hold to 

my 6-minute time limit. 

The CHAIRMAN. If you want to take a minute or two more—— 

Dr. BLINDER. I could have 7? Thank you, sir, very much. 

The CHAIRMAN. You are welcome. 

Senator HATCH. You can even have more. 

Dr. BLINDER. Look at this! 

The CHAIRMAN. Yes. Well, I am trying to figure out some way to 

say this. We have to exercise some restraint in this country, so 

there are limits. 

Dr. BLINDER. We have not put mandatory caps on, I see. 

The CHAIRMAN. Right. [Laughter.] 

Dr. BLINDER. So here are my three points. First, the short-term 

budget deficit, the very large number that Senator Hatch showed 

before, large as it is, is really not much of a problem. Indeed, I 

would say it is probably quite desirable, given the pallid state of 

our economy still. 

What gives me the deficit and debt blues is the government’s 

long-run deficit problem, which is huge and horrendous. It was entirely predictable, and indeed predicted 30 years ago, as Dave 

Walker reminds us, and really demands congressional action. As 

both of you Senators said, sooner would be much better than later. 

The third point is that no one—no one—should seriously consider 

letting the government hit the national debt limit. 

So let me take those three points up in turn. CBO now estimates 

that the fiscal 2011 deficit will be in the neighborhood of $1.4 trillion; the OMB estimate is higher. That is about 9.5 percent of GDP, 

which looks huge compared to the 40-year average of about 3 percent of GDP, which, as I think you were sort of obliquely suggesting, Senator Baucus, is a reasonable target. I want to make 

three very quick points about that 6.5-point gap. Why are we at 9.5 

instead of at 3 now? First, it is inherently temporary. In round 

numbers, the recession has added about 2 percent of GDP to the 

6 

deficit, and that part is going to naturally fade away as the economy gets better. 

About 1 percent of GDP comes from the Recovery Act, and that 

will certainly disappear on a schedule that you all know. Another 

1 percent comes from the wars we are fighting, and I certainly 

hope that will disappear, although who knows? Finally, another 2.5 

percent of GDP comes from the tax cut, et cetera package that Congress enacted last December. That one, as you all know, is scheduled to lapse at the end of 2012, but frankly, as a citizen and an 

economist, I am a little worried about that, 2012 being divisible by 

four. 

If you add up all of these temporary components, you get 6.5 percent of GDP. So in principle, Congress should be able to get the 

deficit back down to 3 percent of GDP pretty much without breaking a sweat. Yet as we saw last week, the House and the Senate 

almost closed the government over just a few billion dollars in discrepancy between the two parties. 

The second point. The economic recovery is mediocre at best, and 

unemployment remains very high. To me, those conditions describe 

a very bad time to put the economy on a diet, either with large 

spending cuts or with tax increases. 

Third, if we are facing any near-term financing problems—near 

term, I emphasize—they are invisible now. The capital markets 

now charge the U.S. Treasury a real interest rate of about 1 percent for 10-year money and strongly negative real interest rates for 

short-term money. That is extremely cheap financing. So there is 

no deficit crisis today, but of course we could create one by letting 

the government crash headlong into the national debt ceiling. 

I come now to the second point. Each year, Congress passes a 

budget. Well, most years Congress passes a budget that implies 

certain amounts of spending and receipts. The difference between 

those two numbers is the implied increase in the national debt over 

that fiscal year. Given the budget, it makes no sense whatsoever 

to place an additional lower limit on the amount of debt that the 

Treasury can issue, since Congress has just given instructions to 

go higher than that. 

Letting the debt limit bind is at one level comical because it simply defies the laws of arithmetic, but in a much more important 

level it is potentially dangerous if it robs the Treasury of the borrowing authority it needs to finance the government. We have 

enough problems right now and should not be shooting ourselves 

in the foot. 

So now let me turn to the most important point, which is the 

long-term budget problem. I am sure every member of this committee knows the U.S. Government is now on an unsustainable 

budget path that will drive the ratio of debt-to-GDP ever higher, 

just higher, higher, higher, without limit on the current path. That, 

of course, cannot happen. 

I want to emphasize that in my view the next 10 years are not 

where the problem really is. There is a problem in the next 10 

years, but it is puny compared to what comes after that. The CBO’s 

latest long-term projections show the deficit—as a share of GDP 

under their more realistic alternative scenario, they call it—falling 

from about 9.5 percent now to about 6.5 percent in 2020—which is 

7 

part of why I say it is not such a big problem for the next decade— 

but then soaring to 16 percent by 2035, after which it just keeps 

on growing. So it is not like it stops at 16 percent. That is not just 

unconscionable, it is actually impossible. That cannot possibly happen. 

So what is driving those numbers? Other than the inexorable 

logic of rising debt and rising interest payments, it is Social Security and health care, mostly the latter, exactly as you said, Mr. 

Chairman. For example, if you look at the primary deficit, excluding interest payments, Medicare and Medicaid account for about 85 

percent of the increase in the debt-to-GDP ratio between 2020 and 

2035, according to the CBO’s estimates. As Rabbi Hillel once said 

about the Golden Rule, ‘‘All the rest is commentary.’’ If we can get 

the 85 percent right, the 15 percent will take care of itself. 

The explosion of medical costs is, in turn, driven by two factors, 

and you know what they are: increasing longevity and rising relative prices for health care services. I do not think Congress wants 

people living shorter lives, so it is approximately true that if we 

can figure out how to bend the health care cost curve, as it is called 

here, enough we can fix the long-run deficit problem. If we cannot, 

we cannot. That is the 85 percent. 

Unfortunately, no one really knows how to do that. Some people 

believe that last year’s health care reform has the potential to do 

the job. After all, it does try, as you suggested, Mr. Chairman, just 

about every cost-control idea that anyone has ever suggested—almost all of them. Others are skeptical, however, that this will 

work. I do not pretend to know the answer. The most intelligent 

course of action, it seems to me, is to watch how the various costcontainment efforts play out over the next few years and then do 

more of whatever seems to work, and certainly not to repeal these 

cost-containment efforts before they have even had a chance to 

start. 

As I say this, I am painfully aware that cutting losers and riding 

winners is one of the hardest things for any government anywhere 

in the world to do, certainly including ours. Nonetheless, I think 

that you Senators should try to do that, and I wish you good luck. 

Thank you for listening. 

The CHAIRMAN. Very good. Thank you, Dr. Blinder. 

[The prepared statement of Dr. Blinder appears in the appendix.] 

The CHAIRMAN. Mr. Walker? 

STATEMENT OF HON. DAVID M. WALKER, FORMER U.S. COMPTROLLER GENERAL, AND FOUNDER AND CEO, COMEBACK 

AMERICA INITIATIVE, BRIDGEPORT, CT 

Mr. WALKER. Chairman Baucus, Senator Hatch, members of the 

Senate Finance Committee, thank you again for the opportunity to 

appear before you today. 

While the United States is an exceptional and great Nation, we 

have strayed from many of our founding principles and values that 

made us great. We must now restore our belief in, and commitment 

to, these principles and values in order to ensure that America remains great and that our future will be better than our past. 

Today’s public debt is about 65 percent of the economy and growing rapidly. In addition, if you add the debt that we owe Social SeVerDate Nov 24 2008 21:26 Jun 12, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\74447.000 TIMD
8 

curity and Medicare, which I believe you should, it is 95 percent 

and growing rapidly. Another way to look at debt is debt per capita, adjusted for inflation. When you do it on that basis you will 

see that our current level of debt per capita, adjusted for inflation, 

is double—over double—what it was at the end of World War II. 

In fact, if you look at our spending and revenues adjusted for inflation, we are actually spending at a 50-percent higher level per capita than at the height of World War II, and our deficits are actually 

higher than they were at the peak of World War II. 

Now, we got something for World War II. I am not so sure what 

we are getting for today’s deficits and debt. Today’s deficits and 

debt levels are a matter of growing public concern. However, as Dr. 

Blinder mentioned, they are driven largely by temporary factors. 

Therefore, the real risk is not today’s deficits and debt, it is what 

lies ahead. Clearly, we are talking about unsustainable deficits and 

debt going into the future. There is already evidence that market 

forces are beginning to show concern regarding future interest 

rates. 

For example, the Federal Reserve has been buying a majority of 

our new debt in recent months and is now the largest single holder 

of Federal debt. China and other foreign investors are buying 

short-term U.S. debt in order to hedge against future increases in 

interest rates and declines in the value of the dollar. In addition, 

PEMCO, the largest domestic holder of U.S. public debt for its investors, recently divested its holdings in U.S. Treasury securities. 

They did so not because of concern of default, they did so because 

they believe that current interest rates do not adequately compensate their investors for interest rate risk. 

The truth is, the Federal Reserve’s buying of our debt amounts 

to self-dealing, which would be prohibited in connection with pension and employee benefit plans. Importantly, the U.S. has the lowest average debt maturity of any major sovereign nation. In addition, we have very low interest rates by historical standards. 

Therefore, when—not if, when—interest rates rise, interest costs 

will rise dramatically. And what do we get? As we say in the 

South: ‘‘Shinola.’’ Nothing. Absolutely nothing. 

To help put things in perspective, for every 1 percent increase in 

interest rates, the U.S. incurs about $150 billion in interest costs 

based upon today’s gross debt levels. That is over 10 times what 

the United States spends in international affairs, which, rightly or 

wrongly, many Americans question. As I said, what do we get for 

that $150 billion? Nothing. 

Just last month, the Comeback America Initiative, which I 

founded and lead, and Stanford University’s Masters in Public Policy program, issued a Fiscal Responsibility Index. Australia is 

ranked number one, Greece is ranked 34, and the United States, 

embarrassingly, is ranked 28. We are not in a good neighborhood. 

We need to move on up. 

The fact is, if you look at that listing, though, you will see that 

number 2 New Zealand, number 4 Sweden, had their own problems 

in the 1990s. They made tough choices, and now they are number 

2 and number 4. And we ran a separate listing that, if the Congress and the President were able to agree on a set of fiscal reforms that have the same bottom line impact as the National Fiscal 

9 

Responsibility and Reform Commission—it does not have to be the 

same reforms, but the same bottom line impact—we would move 

from number 28 to number 8. We would have fiscal sustainability 

for 40-plus years, and we would be number 3 in the world in fiscal 

governance. 

Effectively addressing our structural deficits will require major 

transformational reforms in a range of areas, including Medicare, 

Medicaid, Social Security, health care programs, defense and other 

spending cuts that do not compromise national security, and comprehensive tax reform that achieves numerous objectives, including 

raising additional revenues as compared to historical levels as a 

percentage of GDP. In order to be able to be successful, I lay out 

several tests in my testimony, and I believe it is essential that they 

be met. 

If I can, let me transition and then close with the debt ceiling 

limit. We must raise the debt ceiling limit. It is a tactical nuclear 

weapon. Unlike the continuing resolution—if you do not have a 

continuing resolution, essential operations of government continue, 

Social Security checks continue to be paid—if you hit the debt ceiling limit, such is not the case. Let me remind you that Social Security is now in a negative cash flow position. It cannot stand on its 

own. So not only are essential operations threatened, Social Security benefits would not go out on time the first of the month following the month that you hit that. In addition to that, the confidence of the American people and the credibility of the United 

States in capital markets would be really threatened. 

So the question is not if we should raise the debt ceiling limit, 

but how much, and in exchange for what? In my testimony, I lay 

out a suggestion. It is time to learn from history and learn from 

others, and to bring back tough statutory budget controls beginning 

in 2013; give us time to recover, give us time to get unemployment 

down, with specific debt as a percentage of the economy targets, 

with automatic enforcement mechanisms. 

This would give Congress time to figure out what to do, to engage the American people with the facts, the truth, and the tough 

choices that have to be made, and, importantly, if it failed to act, 

things would happen. There would be transparent and facilitated 

accountability. 

In summary, we are a great Nation, arguably the greatest in the 

history of mankind. But we are not as great as we think we are, 

and we are not exempt from the laws of prudent finance. We will 

have a debt crisis in this country if we do not change course, and 

it could come within 2 to 3 years. I am hoping that we can do 

something soon to avoid that. 

Thank you very much. 

The CHAIRMAN. Thank you very much, Mr. Walker. 

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

The CHAIRMAN. Dr. Foster? 

STATEMENT OF DR. J.D. FOSTER, NORMAN B. TURE SENIOR 

FELLOW IN THE ECONOMICS OF FISCAL POLICY, THE HERITAGE FOUNDATION, WASHINGTON, DC 

Dr. FOSTER. Thank you, Mr. Chairman, Ranking Member Hatch, 

members of the committee. Thank you for the opportunity to testify 

10 

today. My name is J.D. Foster. I am the Norman B. Ture senior 

fellow in the economics of fiscal policy at The Heritage Foundation, 

and also, as a former staffer for two former members of this committee, it is a distinct honor and pleasure to be here before you. 

Senator HATCH. Which ones? 

Dr. FOSTER. Senator Bill Armstrong and Senator Steve Simms— 

Westerners, naturally. 

In 2007, the country was essentially at full employment. The Federal budget deficit ran to $162 billion; spending on the wars in 

Iraq, Afghanistan, and related activities totaled $174 billion. In 

short, but for the worst spending, the Nation ran a balanced budget in 2007 while collecting a normal share of revenue. Ten years 

later in 2017, under the budget President Obama submitted this 

past February, the country is again assumed to be at full employment, yet the projected budget deficit for 2017 is nearly $1 trillion, 

despite assuming a substantial reduction in war outlays and a substantial tax increase. From there, the deficit balloons as the entitlement wave crashes upon us. 

Above-normal revenues and high and rising deficits can only 

mean one thing: spending is the problem. The President’s budget 

released last February contained $2.2 trillion in magic asterisks 

and precious little else by way of detailed spending restraint. 

Last week, House Budget Committee chairman, Paul Ryan, revealed a path to prosperity, an expansive scope calling for sweeping 

change with real policies and CBO scoring. The Ryan plan has generated both heat and light in abundance, but what this committee, 

the Congress, the Nation, must realize is that the Ryan plan suggests the magnitude of the changes necessary to stabilize Federal 

finances. Critique parts or all if you will. In terms of magnitude, 

nothing less than the changes the Ryan plan proposes must and, 

however painful, will be enacted. 

The President is now coming forward with more substantive 

views on deficit reduction. One would have expected the budget to 

reflect his proposals 2 months ago. Clearly, in light of the credibility and sweep of the Ryan proposal, the President is now compelled to say something more. As Senator Hatch notes, we are hoping for a big, healthy, robust sandwich, not a sandwish. 

The recent budget deal is a start. It is, however, the other card, 

as they say in boxing, to the bigger events later this year: the 

budget resolution, debt limit, and funding for 2012. All those in 

and out of Congress who worry about budget deficits will have 

ample opportunity to meet the challenge and advance their own alternatives. We will see who walks the walk and who just talks the 

talk. 

The three key aspects to deficit reduction are growth, taxes, and 

spending. It is pretty simple. Growth is the necessary, but not sufficient, condition for deficit reduction. As to taxation, we have all 

heard that higher taxes must be part of the solution. Higher taxes, 

however, are inimical to the growth we need. Further, simply as a 

statement of arithmetic, it is not true that higher taxes must be 

part of the solution. As a statement of budget policy, it is not true. 

Taxes need not go higher and may go lower. When scientists describe the operation of established physical laws, these are statements of fact, that our fiscal policy is dangerous and unsustainable, 

11 

as the IMF reminds us once again, and can be demonstrated rigorously as factual to the extent any projection can be. The President’s 

own Deficit Commission achieved that, at least. 

However, asserting that taxes must go up to address the deficit 

is expressing a personal opinion, judgment, or policy preference; in 

my view, taxes should not be raised. On the contrary, we should 

be so successful at cutting spending that taxes may be reduced. 

This is my opinion, not the product of analysis. 

When any highly respected economist or budget expert tells you 

that taxes must be part of the deficit reduction or entitlement reform solution, their statement is not based on analysis. It cannot 

be. They are making a personal judgment about what ought to be. 

Being an economist does not make one’s opinion less valid, nor does 

it make it any more so. It is a fact: taxes need not go up. It is an 

opinion to argue the contrary. 

The only way a tax hike becomes inevitable is if we believe that 

higher taxes are inevitable. Understand, it is neither necessary nor 

sufficient. Understand that a tax increase is a policy choice. If you 

understand this, then higher taxes should—and I believe likely 

will—remain the choice not taken. Spending is the source of the 

deficit and the debt problem. Cutting spending should be the sole 

solution to the problem. 

Some have suggested these problems can only be addressed in a 

crisis, the presumption being that a crisis—and I agree with David 

Walker, one is coming—will allow radical changes to go forward, 

including unnecessarily and unwise tax hikes that could never survive normal public scrutiny. 

To this I say, semper paratus, semper vigilans: ever ready, ever 

vigilant. That which cannot prevail in the light and the calm will 

not pass under cover of darkness or crisis. The problem is too much 

spending, not a paucity of revenues. Taxpayers should not bear the 

punishment for Washington’s reluctance to cut spending. Senators, 

I urge you to focus on the problem and leave the taxpayers alone. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, sir. 

[The prepared statement of Dr. Foster appears in the appendix.] 

The CHAIRMAN. I would like to just ask you, Mr. Walker, to kind 

of flesh out some of the thoughts you had, some mechanisms that 

might be put in place in exchange for a debt limit increase. You 

mentioned, I think, maybe some tough controls and so forth. 

Mr. WALKER. Yes. 

The CHAIRMAN. What did you have in mind? I ask the question 

because, frankly, I am quite concerned about brinkmanship when 

we get close to the current debt limit. As you mention, I think it 

is a tactical nuclear bomb as opposed to problems we had in the 

CR. I am trying to figure out a way to give credibility to people 

around here. They are actually going to tackle the debt deficits. 

But in exchange for it, let us not play games with the debt limit 

ceiling. Some mechanism, something. Maybe it is a mechanism, 

maybe it is an over-arching limit on spending, maybe it is to 

achieve a certain percentage of GDP or something. But just your 

thoughts on how we kind of move ahead. 

Mr. WALKER. Sure. Thank you for the question, Senator. It is 

critically important that we raise the debt ceiling limit. At the 

12 

same point in time, I think it is also an opportunity to do something meaningful before the 2012 elections, and it may be the only 

opportunity that we have. Realistically, you are not going to have 

a congressional budget agreement this year between the House and 

the Senate based on where we are starting, so you are going to 

have to go through some type of process to determine top-line 2012 

spending. Hopefully it will happen a lot quicker and be less acrimonious than the last one. So the real key is the debt ceiling limit. 

In my view, Mr. Chairman, it is very, very clear that we are 

going to have to reform Medicare, Medicaid, another round of 

health care reform, Social Security reform, defense and other 

spending cuts and constraints that do not compromise security, and 

comprehensive tax reform that will accomplish a number of objectives, including raising additional revenues. 

Now, this committee has jurisdiction over most of the things that 

I just mentioned, and you are going to be critically important. 

While all those things have to be done, there is no way they can 

be done all at once. There is no way they could be done before the 

debt ceiling limit comes up, or even, frankly, I think, before the 

2012 election. 

Therefore, let us learn from history. If you look at the charts that 

are in my exhibits, you will see we lost our way about 30 years ago. 

About 30 years ago, we lost our way with regard to thrift, savings, 

limited debt, stewardship, investing in the future, for a variety of 

reasons. 

We regained our senses in the early 1990s through 2002, when 

President George Herbert Walker Bush, along with the Congress, 

and President William Jefferson Clinton, along with the Congress, 

did three things in common. (1) They supported tough statutory 

budget controls that restricted the ability to make new promises 

when we already made more promises than we could afford to 

keep; they had tough but realistic discretionary spending caps. 

(2) They did not expand entitlement programs. That is the most 

imprudent thing that you can do. And (3) they broke campaign 

promises when they saw they were imprudent. Three and zero, batting a thousand, they both deserve credit, one Republican, one 

Democrat. 

Fast forward. George W. Bush, a Republican, and President 

Obama, a Democrat: 0 for 3. It is a strike-out. But President 

Obama has a chance to change course, and you can help him. My 

view is, let us bring back tough statutory budget controls, not just 

pay-go rules, because pay-gos just keep you from making more 

promises. Not just tough, but realistic, discretionary spending caps 

that do not exempt defense. Because I can tell you, I was on the 

Defense Business Board as an ex officio member for 8 years. There 

is huge waste in defense that can be cut without compromising national security. The same thing for Homeland Security. 

What we really need to do is recognize the real threat: it is debt 

burdens. That means debt as a percentage of the economy. So let 

us impose some annual ‘‘debt as a percentage of the economy’’ targets starting September 30, 2013, which gives us time to engage 

the American people, to figure out what reforms we need to do, and 

to make installments. If you hit that target, great. You do not have 

to do anything. 

13 

But, if you do not, then there are automatic spending cuts, certain automatic freezes, and other actions on the mandatory side, 

and possibly temporary tax surcharges that would be a separate 

line item on a tax return, a deficit reduction surcharge, and an 

agreed-upon ratio. You could think possibly about the National 

Commission on Fiscal Responsibility and Reform’s work. They had 

roughly a 70/30 ratio, with 70 percent spending cuts, 30 percent 

revenue. 

My view is, we need to do something that is credible. Just having 

a goal without an enforcement mechanism will not be credible. In 

addition, while I agree with Dr. Foster that mathematically you 

can make something work, it is just spending cuts, you cannot 

make something work that will pass the House, the Senate, and 

get the President’s signature just with spending cuts. If you do not 

accomplish those three things, you have accomplished nothing. 

The CHAIRMAN. An alternative might be something like the Andrews Air Force Base model. What if that were a part of increasing 

the debt ceiling? We are going to do Andrews. 

Mr. WALKER. Here is my concern. Mr. Chairman, we have to 

make very dramatic and fundamental reforms. In order to be able 

to do that in a way that is acceptable to the American people, that 

will not involve significant political retribution for incumbents, we 

have to end up engaging in a meaningful citizen education engagement effort outside Washington’s Beltway. The Commission did 

great work, but it did nothing outside of Washington’s Beltway. Nobody has done more than I have on that—47 States. We have only 

three left. I am very in touch with where the American people are 

on this, and we need to do more. 

The CHAIRMAN. I have not seen you in Montana yet. Yes, you 

were in Montana. 

Mr. WALKER. I have been to Montana at your request. I have 

North Dakota, South Dakota, and Alaska to go. You do not go to 

those in the winter. I am in the process of working that out. 

The CHAIRMAN. Thank you very much. My time has expired. But 

I raised Andrews, in part, because I think there has to be buy-in 

by the President, and the leadership of both parties at the table, 

or else it is going to be very difficult to do. 

Mr. WALKER. I agree. 

The CHAIRMAN. My time is expired. Dr. Blinder, we will get to 

you. Thank you very much. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. I really appreciate this panel. I think you have all done a very, very good job of 

expressing your particular viewpoints. 

Let me ask this question for all three of you, and maybe each of 

you can answer. On January 1, 2013, a combination of the expiring 

tax rates and Obamacare will mean a significant hike in the top 

marginal rates on ordinary and capital income. On the ordinary income side, it will mean a hike somewhere between 17 and 24 percent. A lot of small businesses will be hit. In addition, selfemployed small business owners will face almost 1 extra percentage point because of the Obamacare and Medicare HI tax hike. 

Now, it is worse on capital gains and dividend income. In that 

case, the marginal rate hike would be almost 59 percent, if I have 

14 

it right. Now, Dr. Foster, I would just mention to you, I take it 

from your testimony you do not agree that this is a good short-term 

or long-term fiscal policy, and it would be interesting to see what 

you other folks think as well. 

The House liberal group, the Progressive Caucus, is proposing to 

basically subject all salary or small business income to the Social 

Security tax. This dramatic tax hike has been euphemistically described by many in the press as a change in the ‘‘earnings limit.’’ 

Some press reports are that the President is looking at this tax 

hike for his deficit reduction package. He proposed a version of it 

in the 2008 campaign. 

Now, I would like the panel to comment on the possibility of all 

these marginal rate hikes and the potential new tax hike advanced 

by House liberals. We hear my friends on the other side robotically 

describing Chairman Ryan’s budget as extreme. 

For folks who own small businesses, is a marginal tax rate hike 

of 52 percent on the ordinary income side not extreme? For folks 

who invest their money, is a marginal rate hike of almost 59 percent not extreme? Does it help to create an environment of growth? 

So, these are a bunch of questions, a bunch of thoughts that I 

would like you to discuss, if you will. 

Dr. Blinder, we will take you first. How is that? 

Dr. BLINDER. Thank you, Senator. I guess the starting point, to 

answer your question, is large, abrupt changes in the tax code are 

rarely good things. That is a general principle. In terms of moving 

the basic tax structure—I will come to some of those other things 

that you mentioned in a second—moving the basic tax structure 

back up to—this is the personal income tax structure—the rates 

that prevailed in the Clinton years, it is hard for me to make a 

case, looking at the history of those years, that those were ruinous 

tax rates. 

So I think that I am not worried at all about moving back to 

those kind of rates. Now, given what we have done to capital gains 

rates since then, there may be a case for more gradualism. The 

more you make a cliff—if the cliff stays, there is going to be a titanic increase in realizations before you jump off the cliff. You cannot avoid that entirely, but you could make it smaller than it would 

be if we did what you were just suggesting, Senator, on January 

1, 2013. 

On the need for more revenue, you mentioned in particular the 

Social Security earnings limit. I think there is a quite powerful argument on equity grounds—and of course it is all fundamentally 

based on the need for revenue—to raising the earnings ceiling so 

that it catches, again, the same share of earnings that it used to. 

Because of the tremendous disequalization of earnings, we are now 

capturing a smaller share of total earnings in the economy under 

the Social Security limit. 

I have not favored personally raising that limit to infinity, which 

I think is what you were alluding to. As you say, that would be an 

extremely large increase in marginal tax rates on a very large 

number of people. 

A last thought. My own favored way to raise revenue, and I will 

just state it without going into any elaboration—it seems inappropriate here—is carbon taxes, which can raise a lot of revenue and 

15 

I think, arguably, will stimulate the economy rather than depress 

it. But I will leave it at that. 

Mr. WALKER. Senator, you properly point out that small business 

is the engine of innovation, of economic growth, and of job production, and that most small businesses are not taxed in chapter C 

form. They are taxed through pass-through entities, they are taxed 

as individuals, either the partnership form or subchapter S corporation, or whatever. So you have to be concerned with what the 

impact will be on that. 

Look, in my view, the problems that we have are overwhelmingly 

spending problems, three to one. You might have solved this problem solely on the spending side 10 years ago; you cannot now. We 

are going to have to have revenues as a higher percentage of GDP 

than historically has been the case, which is 18.3. The question is, 

how do you get there? In my view, the tax system—and I am a certified public accountant, so I know more than most people about 

it—is an abomination. We need comprehensive, fundamental tax 

reform that focuses more on consumption-related approaches rather than income-related approaches. 

As far as the issue of Social Security, having been a trustee of 

Social Security and Medicare, one can make a compelling case to 

raise the taxable wage-based cap to address the issue that Dr. 

Blinder mentioned. I think it would make no sense whatsoever to 

eliminate the taxable wage-based cap. This is a social insurance 

program. It is not supposed to be a general revenue support program. It is already a progressive program. The people who end up 

making less get higher replacement rates. That would be a 12.4- 

percent tax increase, including on a lot of small business owners 

and upper middle income individuals. 

Dr. FOSTER. Senator, any or all of the tax hikes you suggest—— 

The CHAIRMAN. I am sorry. We are going to have to move on 

here. Your time has expired. 

Senator HATCH. If he could answer quickly, I would appreciate 

it. 

The CHAIRMAN. If you can keep it very short. 

Dr. FOSTER. I will, sir. 

The CHAIRMAN. There are a lot of Senators here who want to ask 

questions. 

Dr. FOSTER. Any or all of the tax hikes you suggest would be 

harmful to the economy, and it would not wait until 2013. Small 

businesses investing for next year would take it into account. We 

would see the economic effects next year. The higher tax rates 

would not be ruinous, as Alan Blinder suggests; however, they 

would be harmful, and growth is the key to deficit reduction. 

Thank you, sir. 

The CHAIRMAN. Thank you very much. 

Next, Senator Bingaman. 

Senator CARPER. Mr. Chairman, can I ask a unanimous consent 

request? I arrived at 9:55, and I have asked—— 

Senator BINGAMAN. No. I am glad to have Senator Carper go instead of me. 

Senator CARPER. If I could. Senator Wyden and Senator Ensign 

are very gracious to say that I could do that. 

The CHAIRMAN. They are both gracious. 

16 

Senator CARPER. Yes. I appreciate that, thanks. We have a markup in Homeland Security in about 5 minutes, and I need to be 

there. I appreciate it. 

The CHAIRMAN. Senator Carper? 

Senator CARPER. Thank you so much. 

I just want to comment to you, Dr. Blinder. I thought you said 

a great truth with respect to health care. You were talking about 

the health care legislation we passed. I will quote you. You said, 

‘‘The most intelligent course of action, it seems to me, is to watch 

how the various cost-containment efforts play out over the coming 

years and do more of whatever seems to work.’’ I think that is a 

great truth, and I am going to steal that, but initially I will quote 

you. 

One of the health economists looked at our legislation after we 

finished it and the President signed it into law. He said we took 

a whole bunch of different ideas for health care cost containment 

and threw them up against the wall. The idea is to see what sticks. 

There is plenty that we threw up against the wall: large purchasing pools, the ability for States to enter into interstate compacts to have multi-State purchasing pools to sell insurance across 

State lines, the stuff that Senator Ensign and I worked on to 

incentivize people to take personal responsibility for their own 

health care, menu labeling, starting later this year. 

Some of the major cost drivers for us are really weight and tobacco. Those are really the major cost drivers, and we tried to address those. To use and to harness information technology, to foster 

more electronic health registers where we can actually do coordinated care, creating these Accountable Care Organizations, and 

trying to focus on different approaches to literally let the States be 

laboratories of democracy, to reduce the incidence of defensive medicine, to reduce the incidents of medical malpractice lawsuits, and 

to get better health care outcomes—there is a lot in there, and I 

think your advice is actually very well taken. 

I want to thank Dave Walker for the great work that he did 

when he was our Comptroller General. One of the things that the 

GAO does for us is they provide for us, each year, a high-risk list, 

a high-risk list of parts of our government, whether it happens to 

be the Census or major weapon systems cost overruns—major 

weapon systems cost overruns last year: $402 billion. The cost of 

the Census between 2000 and 2010 more than doubled. 

Improper payments have climbed to $125 billion, not counting 

DoD or Homeland Security, or Medicare Part D. The post office is 

on track to run up a tally of about $230 billion in debt over the 

next 10 years if we leave them on auto-pilot, billions of dollars that 

we can save by unloading surplus properties that we do not need. 

IT projects are costing about $80 billion; about a quarter of that, 

a lot of people say, is largely wasted. Medicare and Medicaid— 

Medicare fraud alone, Attorney General Eric Holder says, is $60 

billion a year. I mean, there are all kinds of things that we can do, 

and we pull them right off the high-risk list that you helped to create all those years ago. 

One of the things we are doing in our Homeland Security and 

Government Affairs Subcommittee that I am privileged to chair is 

literally going down that list and looking at each one of these and 

17 

asking this question: how can we get better results for less money, 

or how can we get better results for not a whole lot more money? 

I thank you for giving us that list to shop. 

My hope is, when the President speaks this afternoon, that one 

of the things he will do is talk about the need to actually focus on 

getting better results for less money and trying to change the culture around here so that we can be less accused of having a culture 

of spend thrift and say we operate on a culture of thrift. So I want 

to thank you for helping us get on that path. 

I am a big fan of Erskine Bowles, a big fan of Alan Simpson, and 

a bunch of the people who worked on your commission, the Fiscal 

Commission. They gave us an approach that says, let us try to cut 

the deficit by about $4 trillion over 10 years, two-thirds on the 

spending side, about a third on the revenue side. They broaden the 

base, they lower the rates, and they put everything on the table: 

domestic discretionary, defense discretionary, entitlements, tax expenditures. That is their approach. 

Let me just ask each of you, and just start with you, Dr. Blinder. 

You have talked a little bit about this. Just speak specifically to 

the approach that they took in the Bowles-Simpson Commission. 

Dr. BLINDER. I would not want to take a quiz on every detail, but 

in broad swipes, I think the kind of two-thirds/one-third, or 30/70, 

or something is a reasonable number to shoot for. I think to get to 

a number like that, it is absolutely—well, as Dr. Foster said, it is 

not quite arithmetic, but with a little realism on top of the arithmetic it means you have to put everything on the table, including 

Social Security, including defense, including revenues to get to 

that. I think the kind of magnitude of total deficit reduction over 

the decade that Bowles and Simpson pointed to is a sensible target, 

and probably the kind of target the Congress will eventually set— 

and I would not like to guess how long eventually is. 

But the thing I want to emphasize is what I said in my testimony, that the really important part is the follow-on. Believe it or 

not, the big problem is not between now and 2021, it is what happens after 2021. That is the crucial thing. If Congress can be thinking about and actually doing something about that now structurally, that would be great. 

Senator CARPER. Thank you. You had just a quick response? 

Mr. WALKER. Very quickly. I think they did a very good job. I 

think that they recognized the difference between the short term 

and the structural. They recognized that everything has to be on 

the table. They weighted it more towards spending cuts, which I 

believe it should be. Then the question is, what is Congress going 

to do now? 

Senator CARPER. All right. Thank you. 

Dr. Foster? 

Dr. FOSTER. The important thing, in my view, is they are moving 

the conversation forward. We have a near-term problem, a 

medium-term problem, and an enormous long-term problem. They 

are keeping the conversation moving, and if nothing else, that was 

helpful. 

Senator CARPER. Good. Thank you so much. 

And to my colleagues who were very kind to yield, thank you so 

much. 

18 

The CHAIRMAN. Thank you, Senator. 

Senator Ensign, you are next. 

Senator ENSIGN. Thank you, Mr. Chairman. 

There are two different questions that I want to ask. One is on 

taxes. I want to start with Dr. Foster. Taxes, tax rates, obviously 

affect growth. You have made that point, I think, very effectively. 

But are all tax rates the same? 

Dr. FOSTER. Some tax rates are much more harmful to the economy than others. Top marginal tax rates are very harmful. Taxes 

on capital are especially harmful because they are effectively layered onto the taxes on labor that were charged in the first place. 

So some taxes are certainly more harmful than others. Those that 

choose between industries are particularly harmful versus the aggregate tax rate. 

Senator ENSIGN. If I could maybe get in writing from you kind 

of an analysis, and if any of you want to comment on that in writing afterward, because we do not have time to really go into it, I 

would really appreciate what you think the more harmful taxes are 

to growth in the economy and which ones would be more beneficial. 

If you believe in raising taxes, which would be more beneficial to 

cutting the deficit? 

Mr. Walker, I want to ask you about—you mentioned, we need 

to raise the debt ceiling, but you also said in 2 to 3 years we could 

be facing a debt crisis, which I think, if we do not do anything, is 

inevitable. It is almost a guarantee. I think, just looking at the 

numbers, there is almost no way to avoid that. 

Having said that, the debt crisis that we could face by not raising 

the debt ceiling, if we do not do anything with it, in other words, 

if we are not able to get anything for the debt ceiling raising, are 

we not just putting off the debt crisis for a couple of years? I realize 

how dangerous it is to potentially do that, but at the same time it 

is incredibly dangerous not to have these spending reforms put into 

place that you talked about. 

Mr. WALKER. Well, first, the debt ceiling limit is an arbitrary 

number. I mean, I do not know how people come up with these 

numbers each time, presumably to give enough room for a certain 

number of months. But you have to keep in mind, you are on a 

path where you are going to need to continue to raise it, even if 

you end up dramatically cutting spending. So you are going to have 

to raise the debt ceiling limit. 

Frankly, intellectually, I would say you ought to be going more 

towards debt-to-GDP targets with automatic enforcement mechanisms and get rid of the debt ceiling limit. I mean, that is a more 

intelligent approach, because the real issue is, how much debt as 

a percentage of the economy do you have? I firmly believe, Senator—— 

Senator ENSIGN. The only reason I would disagree with you on 

that is because there are—you talked about certain concepts. When 

you are in bad economic times, if you have had a normal debt-toGDP ratio, now you go down like we are going down now, now you 

have ended up in a crisis situation. It is just like businesses. Businesses for so long have been encouraged to take on debt. It is a way 

to grow, and things like that. 

19 

But you do have to have sound financial capital structures. By 

3 percent or whatever, I think you should strive for as low of a 

debt-to-GDP ratio as you possibly can and not just say, well, this 

is an acceptable limit. Because, if you just set that as an acceptable 

limit, we will shoot right up to that number all the time. 

Mr. WALKER. Well, to make it clear, Senator, I agree with you. 

What I am talking about—and as the National Fiscal Responsibility and Reform Commission suggested, as well as the PetersonPew Commission which I was on, and others—we are talking about 

getting to 70 percent of GDP by 2020, going down to 50 percent of 

GDP by 2035, and declining. All right? 

Senator ENSIGN. Right. 

Mr. WALKER. So I agree. But the point is, look, there will be a 

crisis if we have a stalemate on the debt ceiling limit. I believe it 

is possible to do something—you can get bipartisan support—that 

would increase the debt ceiling limit and yet do something meaningful that would send a signal to the markets and to the American 

people that we know we have been living beyond our means, we 

have to start making tough choices, and very, very importantly, 

this committee has jurisdiction over a significant majority of the 

issues that have to be addressed. You need to cover the normal legislative process, you need to engage the American people, and then 

we need to engage the American people beyond the Beltway. It is 

not just an inside Washington thing. 

Senator ENSIGN. The last point I would make on this, the debt 

ceiling—and you and I talked about this. This really is about saving the Republic. I mean, we literally have a chance of losing our 

Republic due to this debt. That is how big of an issue it is here. 

So the debt ceiling, all the debt ceiling debate is about, is about 

using it to make sure we put ourselves on a sustainable path, because everybody agrees that the path that we are currently on is 

unsustainable. 

You have been around the Congress long enough—we have all 

been around. If we do not have something as a kind of hammer almost to use, we will not get things done. That is why I think some 

have said that the debt ceiling is the thing to focus on right now 

to make sure we get some of these spending cuts under control. 

Dr. BLINDER. What you said about the unsustainability is exactly 

correct, Senator. The quickest and surest way that we could have 

a crisis in financing the U.S. debt is to hit the debt ceiling and 

throw doubts into the minds of investors that the U.S. Treasury 

will not make its debt service payment. That would bring it on 

really fast. 

The CHAIRMAN. Senator Bingaman? 

Senator BINGAMAN. Thank you all very much. One of the ideas 

that has been proposed by some of our colleagues to solve this problem, to deal with this problem, is to legislate spending limits, to essentially put in a limit which would be a certain percent of GDP 

as a spending limit going forward for the indefinite future. I think 

one of the proposals is that we would be at 20.6 percent. 

I think the Simpson-Bowles Commission also had a spending 

limit in there, maybe at 21 percent or something like that. They 

enforce that by saying that, if you want to exceed that, you have 

20 

to get two-thirds of the House and two-thirds of the Senate to agree 

to anything above that. 

These proposals, of course, do not address the issue of revenues 

at all, it is just spending. I would be interested in Dr. Blinder’s 

view first, and then the rest of you, as to whether you think this 

makes sense as a fix to our current problems. 

Dr. BLINDER. Well, I think it makes sense only as a last resort. 

You know the famous Churchill remark, ‘‘The Americans always do 

the right thing after they try everything else.’’ Hopefully we are not 

going to do that. I get very worried about anything that is indefinite. The world just changes a lot. 

I mean, just to take the example we are now living through, the 

pig and the python phenomenon, which was probably not predictable 70 years ago. We have this big cohort of people my age and 

a bit under who are going to start making huge claims on the Social Security system and, even more importantly, on the Medicare 

system. People in 1900 did not know about that. A rational government is going to make an allowance for that. 

There are also business cycle aspects. You have a big slump, 

spending goes up. So I am very wary of any mechanical formula 

such as that. I think we can do better. I think some of the things 

that David was just speaking about in terms of targets for the 

debt-to-GDP ratio that are not going to be immutable—we are not 

going to set it now for the next century—are a more sensible way 

if you need a mechanical restraint. If I had to choose between those 

two, I would not hesitate. 

Senator BINGAMAN. Yes, David. Go right ahead. 

Mr. WALKER. Sure. Senator, I think the question is, how reasonable and sustainable is the target? We have to keep in mind that 

10,000 people a day are eligible to retire under Social Security. Ten 

thousand a day. They will eventually be eligible to retire under 

Medicare. We budget on a cash flow basis, so that means we are 

just now starting to feel that. We will not feel the real tsunami of 

spending for several years into the future. 

So the question is, to what extent does the limit adequately consider demographic trends? Then secondly, to what extent does it 

adequately consider health care costs? Frankly, the Medicare Chief 

Actuary—and I used to be a trustee of Medicare—gave an adverse 

opinion on the Medicare trustees’ report—the first time in the history of the United States—and came up with a separate calculation 

of the estimated costs of the recent health care reform on Medicare, 

which was $12.3 trillion higher than CBO. 

Dr. FOSTER. Senator, spending caps and deficit targets are no 

way to budget. But unfortunately, we do not seem to be able to do 

it the proper way, so we have to fall back on these mechanisms. 

They do work on occasion. Ultimately what we have seen is that 

the discipline of budgeting has broken down, and has broken down 

for quite some time, so we obviously need something that enforces 

a budget discipline, whether it is a spending cap or deficit target. 

Those are both good solutions. 

I prefer the spending cap because it focuses the attention on 

where the problem is, on the spending. But the devil is in the details. How do you get there; how do you enforce it? The immutability of the targets is very important, so is what it takes to waive 

21 

them. These are not constitutional amendments. They traditionally 

now require 60 or 67 votes. That is a key issue. 

How hard is it to waive these targets? You do want them to be 

waivable because you may have another recession or some event, 

and it turns out the decision you made sometime a year or two or 

three past is no longer appropriate. On the other hand, you need 

something to guide the process, something more than just deciding 

what is right. So these sorts of targets turn out to be quite necessary. 

Senator BINGAMAN. Well, I would say requiring a two-thirds vote 

in both the House and the Senate to waive something makes it 

pretty unwaivable in this current circumstance, so I would just 

point that out. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Dr. BLINDER. Could I put in one more sentence on that? 

The CHAIRMAN. Yes. Sure. Go ahead. 

Dr. BLINDER. I wanted to say, before, Mr. Chairman, you mentioned the Andrews Air Force Base agreement. 

The CHAIRMAN. Yes. I was going to get back to that to give you 

a chance, but go ahead now. 

Dr. BLINDER. We put in—not we, you—quite sensible budget control measures at Andrews Air Force Base. They worked very well. 

I think they probably worked better than anyone in Congress actually thought they would work. Then around 2001—it was 2001, was 

it not—we took them off. 

Mr. WALKER. The end of 2002. If you look at the data, things 

have been totally out of control since 2002. 

Dr. BLINDER. It was a gigantic mistake, and I think we should 

go back to that. 

The CHAIRMAN. Thank you. 

Senator Wyden? 

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

Mr. Walker, one of the reasons you are respected on both sides 

of the aisle is your independence and your willingness to make 

calls on the merits. Given that, I was struck by your comment on 

the debt issue, that you thought you had to have a long-term approach that is socially equitable. The House of Representatives is 

working on a proposal that does not touch the military and does 

not touch corporate tax havens, and yet at the same time makes 

significant reductions for seniors and kids and education. Does that 

strike you as meeting your test of social equity, the kind of independent approach that is going to bring people together? 

Mr. WALKER. No. My view is, our problem is primarily a spending problem, three to one, if I had to give you something. My view 

is, to do something that makes sense, it needs to make economic 

sense, be socially equitable, be culturally acceptable, number one. 

Second, it must pass the math test. If we are trying to stabilize 

debt-to-GDP, if we are trying to balance the budget over a business 

cycle, then the math has to work. That is the new four-letter word 

in Washington. 

Third, you have to get a majority in the House, potentially 60 

votes in the Senate, and a presidential signature. What I would say 

22 

is, whatever you do, it needs to meet those three tests. If it does 

not meet those three tests, then we are hanging over a cliff. 

Senator WYDEN. I appreciate your answer. I think your response 

is going to carry a lot of weight because people around here know 

that you are independent. I asked the question for a specific reason. I want to see Democrats and Republicans come together. I 

think you have laid out some good principles, and you have made 

it clear now that you do not think what the House is working 

around is socially equitable by cutting programs for vulnerable 

folks and leaving alone corporate tax havens and the like. 

So let me ask you a question about growth as well. I think that 

we agree that, right at the heart of this, is making major changes 

in cutting spending, but I also think, as Erskine Bowles and Alan 

Simpson have said, you cannot cut your way out of this, you have 

to also have significant growth. 

Now, in 1986, when Democrats and Ronald Reagan got together, 

we created 6.3 million new jobs. Senator Coats and I have introduced a bipartisan bill that goes right to that same kind of model. 

As you know, the Bowles-Simpson Commission said they used that 

legislation as a model for their work. 

Is there any reason why we would not have, with that kind of 

1986 model—cleaning out the preferences, using that money to 

hold down rates for everybody and keep progressivity—that we 

would not have significant job growth again? Not enough to deal 

with the entire problem, but significant job growth again so that 

it could be one of the legs of this triangle that you described. 

Mr. WALKER. I think the type of reform approach that you are 

talking about for the income tax is clearly one of the essential elements of comprehensive tax reform. Second, one of the other reasons that I also talk about, let us focus on debt-to-GDP, is because 

that way you get credit if you grow the economy. 

Keep in mind, after World War II we had the highest debt-toGDP in the history of the country. The reason the debt-to-GDP 

came down was primarily due to economic growth. We did not pay 

off a dime of debt. Not a dime. But we had fiscal discipline, and 

we had economic growth. So by going debt-to-GDP, you also get 

credit for pro-growth policies if they actually manifest themselves. 

Senator WYDEN. I like the idea very much. I want to talk to colleagues who were involved in the tax reform effort. It is a way to 

factor in growth that is real. As you know, we have had this debate 

around here about dynamic scoring, static scoring, and the like. 

You are giving us a chance to do it in a way that is real. I very 

much appreciate your independence. I think, particularly when you 

look at that bill in the House, it does not meet the Walker test of 

being socially equitable. We have to also go to growth. As usual, 

you have given us some valuable ideas. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Cardin, you are next. 

Senator CARDIN. Thank you, Mr. Chairman. I really do appreciate the testimony of all of our witnesses. 

Mr. Walker, you refer back to the 1990s and the formula used 

by President George Herbert Walker Bush and President Clinton. 

And you are right, back then we were able to reduce spending, put 

23 

enforcement in, and raise revenues. But let me remind you, at the 

end of the day, the last chapter of that was passed only by Democrats. We do not have that luxury today. We need to come up with 

a proposal which Democrats and Republicans are going to be able 

to agree on. 

Here is the real issue I have. When you are talking about enforcement including revenues, you have my attention, because I 

think you need to have a fair way to get the budget into balance. 

I am very much with you as far as the danger this Nation faces. 

But the challenge we have, when you look at the Ryan budget, 

they make certain economic assumptions with tax cuts about the 

growth of our economy and the growth of our revenues, and I could 

make the exact same argument. If we could invest more in education, we could grow our economy and bring in more revenue. 

But the problem is, we have to be realistic as to a budget that 

is credible in reducing the deficit, and the only way we are going 

to get there is if we have credible plans to reduce spending, and 

also bring in the revenues that we need in order to balance the 

budget. We need a credible plan that gets us from where we are 

today in the short term and in the long term. 

We have talked about fundamental changes. I think the point 

that has been raised here today, I just really want to underscore. 

The debt limit debate makes no sense at all. For those who are trying to use it as leverage, we are going to have to be dealing with 

the debt ceiling for a long time to come. It makes no sense to what 

we are trying to achieve. 

So it seems to me you raise a very good point of why we do not 

look at a fundamental change right now in this part of the history 

of America and look at a limit of debt-to-GDP rather than a debt 

limit, understanding that it will take time to get to the level that 

we believe is appropriate. In the absence of reaching that limit, you 

have the enforcement mechanisms that you refer to, which include, 

I would very much argue—it is going to have to be balanced between spending and revenues. 

But that, it seems to me, would be serving our Nation by getting 

rid of an arcane limit that really has no economic purpose that I 

can see at all, that is being used strictly now for political purposes. 

Does that make sense if we look at those types of reforms? Does 

that meet your standard? Would that help us in dealing with those 

who are watching what is happening in America? 

Mr. WALKER. I think what matters is debt-to-GDP. That is what 

matters, and that we get it to a reasonable and sustainable level 

over a period of time. I think you need to have, as has been said 

by Dr. Foster and Dr. Blinder, a mechanism where, if we are at 

war, if you have a serious recession, you can waive it temporarily, 

if you will. You have to keep in mind, though, that we have not 

declared war since World War II. That is another issue, but we will 

not go there now. 

Senator CARDIN. And the second fundamental change—and I 

heard you say this, and I want to make sure it is understood—you 

basically do not believe we can save our current income tax in its 

current form, I take it. We need some fundamental changes. The 

political reality is, when we dealt with it last in 1986, it lasted 

24 

about 1 year before Congress added back special provisions and 

complexity. 

I heard you mention consumption taxes. I want to give you a 

chance to sort of talk a little bit more about that. 

Mr. WALKER. Sure. Look, I mean, I prefer that we move to some 

type of progressive consumption tax in lieu of our current tax system, if we could get there politically. Realistically, I do not think 

it is possible to get there in one fell swoop. But let me tell you the 

problems with our current tax system. I am a certified public accountant. Many years I prepared my own taxes. The top 1 percent 

of Americans have over $500,000 in taxable income. They pay an 

average tax rate of 18.8 percent. I do not make $500,000 a year, 

but all of mine is in wages. I pay a lot higher than 18.8 percent. 

In addition, I pay a 30-percent surtax because of the Alternative 

Minimum Tax. All right. The fact is, we need to dramatically reform our entire tax system. We have 47 percent of Americans who 

pay no income tax at all, and yet every express and enumerated 

responsibility envisioned by the Founding Fathers in the Constitution is funded solely or overwhelmingly by income taxes. Plus, 

wealthy people consume out of their wealth, not just their income. 

So I think we need to recognize those realities to engage in comprehensive reform, and that includes consumption taxes. 

Senator CARDIN. Let me just underscore, a progressive consumption tax. People do not think it can be done. It can be done. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Nelson? 

Senator NELSON. Thank you. This has been most illuminating. 

May I ask you, Mr. Walker, in your suggestion of debt-to-GDP 

ratio, that is what we target in on now. Do you have a particular 

number in mind? 

Mr. WALKER. Senator Nelson, what I would suggest is, you could 

look to the National Commission on Fiscal Responsibility and Reform, you could look to the Peterson-Pew Commission. There are 

several that are out there. Most of them basically try to get to 

about 70 percent of public debt-to-GDP by 2020, declining to about 

50 percent of debt-to-GDP by around 2035. Obviously, as has been 

said by Dr. Foster and Dr. Blinder, you need to have an out with 

the high bar in certain extraordinary circumstances, but I think 

those are reasonable targets. 

Senator NELSON. Would you trace for the committee what would 

be the result on the average American if we did not raise the debt 

ceiling? 

Mr. WALKER. Well first, unlike a continuing resolution where, if 

you hit that, all essential operations of the Federal Government 

continue; you lay off people temporarily, they may or may not get 

paid, but essential operations continue. Furthermore, Social Security benefits continue to be paid. Medicare payments continue to be 

paid, et cetera. All right. If you hit the debt ceiling limit, to my 

knowledge—and I have not researched this—you do not have that 

same exception. You have to keep in mind, we are spending $1.40 

for every dollar we are taking in, so in theory you would have to 

end up dramatically cutting expenses. 

25 

You have to figure out how you are going to do that, how you 

are going to cut that much that quickly. If you fail to do that, then 

even Social Security benefits, the timely payment of Social Security 

benefits, would be threatened because Social Security is now in 

negative cash flow. Not by much, but it is, and it is adding to the 

deficit. So, therefore, that means that the first of the month following the month that you hit the debt ceiling limit, Social Security 

benefits do not go out on time. Now, if you have 35 to 40-plus million Americans not getting their checks on time, I think that would 

be a problem. 

Senator NELSON. What does it mean to the functions of government, as you said—what we experienced last week, if we had to 

shut down the government, the emergency functions of government 

would continue. What does hitting the debt ceiling and not being 

able to continue borrowing to keep the functions of government 

mean to the national security apparatus? 

Mr. WALKER. Well, I have not studied, Senator, whether or not 

there is an exception as there is under the continuing resolution. 

I do not believe there is. That is something you may want to ask 

the Congressional Research Service to take a look at; they are very 

good at that stuff. 

As you know, under the CR, the military continues, FAA continues, a number of the essential things continue. You do not want 

to play chicken with the debt ceiling limit. On the other hand, I 

agree with what Senator Ensign said before. Something ought to 

be done that is substantive with regard to the structural deficits. 

That is why you need to negotiate it out now. You do not want to 

be in the situation like you were for the CR because that could 

have a serious adverse effect on confidence in the markets and 

credibility, as Dr. Blinder mentioned. 

Senator NELSON. If you were advising the President, what would 

be the best remarks for him to make today? What would you say, 

Mr. Walker, given everything that you have already testified here 

today about the practical politics? 

Mr. WALKER. Well, I would reiterate the difference between the 

short-term challenge and the structural challenge so the American 

people understand that. I would have him talk about the need to 

do something credible with regard to our structural deficits. Frankly, I think the approach that I have outlined here, that, let us move 

to some type of debt-to-GDP targets, let us engage the American 

people with the facts, the truth, the tough choices, are things that 

make sense. By the way, citizen education engagement is a page 

out of the 1998 Clinton effort on Social Security, which was the 

right way forward on that, which we ought to do. 

I would also have a lot more specific comments about his National Fiscal Responsibility and Reform Commission than he has 

made to date. I would note that everything has to be on the table 

and everybody has to be at the table in order to solve this problem, 

and I would reinforce that we may have conditions on raising the 

debt ceiling. We must raise the debt ceiling. We cannot play with 

a tactical nuclear weapon. 

The CHAIRMAN. Thank you, Senator. 

Senator Rockefeller? 

Senator ROCKEFELLER. Thank you, Mr. Chairman. 

26 

Dr. Blinder, I will just pick on you. Chairman Ryan came out 

with a budget for 2012. He proposed cutting corporate and individual tax rates from 35 to 25 percent, at a cost of more than $4 

trillion. Now, we have sort of been through that. I was stunned by 

that. You yourself wrote last July that the Recovery Act, which is 

castigated by so many Senators and in so many newspapers, that 

the Recovery Act held unemployment 1.5 percent lower than it 

would have been otherwise and added 2.7 million jobs to the economy. Yet, the infrastructure and low-income assistance programs 

that made the Recovery Act such a success, in this Senator’s view, 

and in your nationwide view, are the same programs that are on 

the chopping block now. 

So my first question to you is, do our current debt and deficit lev- els allow us the luxury of spending $4 trillion on tax cuts? 

Dr. BLINDER. I do not think so, Senator. I did not think so in the 

year 2001 when we enacted these. I mean, the tragedy of 2001 is 

that the budget picture looked very bright in the near term, but it 

was clear as can be—because after all we knew how many people 

were turning 65, more or less, and every year going forward from 

that—that we were in a very perilous fiscal position in the long 

term. 

Indeed, as David has emphasized, we have known this for 30 

years, so it was not a big secret. So we could not afford them then, 

and we certainly cannot afford them now. With every decade that 

passes, we can afford them less and less and less. So, while $4 trillion would not be enough to solve the entire long-run problem, it 

is a nice first step, I would have thought, and very substantially 

more progressive than the kinds of things that are in Chairman 

Ryan’s budget proposal. 

Senator ROCKEFELLER. Let me pursue that. Moody’s, as I believe 

is in your testimony, has sort of a list here of bang for the buck 

on fiscal stimulus. 

Dr. BLINDER. Yes. 

Senator ROCKEFELLER. There are, what, about 15 issues here, all 

of them important. The cut in corporate tax rate is 0.32 return on 

the dollar, making dividend capital gains tax cuts permanent is 

0.37, and making the Bush income tax cuts permanent is 0.32. 

Now, what I am really sort of leading up to here is, Mr. Walker 

has talked about, you cannot do what is not politically possible. 

What I am suggesting is that maybe we cannot solve this problem 

without changing the politically impossible. I do not know how that 

is done. I cannot, in my mind, get past that $4 trillion. It happened 

under Reagan, and deficits soared, jobs went down, jobs were not 

created. It does not work. Tax cuts for the wealthy do not create 

jobs. It does not do it. That is amply shown. 

But then you use the argument where you could only do what 

is politically possible. I am positing for the moment that we will 

not solve our problem unless we can change reactions, in this case 

on the Republican side, and some Democrats, about tax cuts for the 

wealthy, tax cuts—35 percent, 25 percent estate tax, all the rest of 

it. The estate tax, we fixed that to where it was, and it was $65 

billion more. 

The mind-set is that we can only do what is politically possible. 

The Republicans have set about—and quite successfully so far—to 

27 

create a situation where you cannot touch the tax cuts. You saw 

that with Obama’s behavior and the tax cut deal. We have to accept the tax cut because the Republicans will not do anything. As 

a result of that, yes, you can argue $900 billion, where about $600 

billion of that went to the middle-income and the poor, so we got 

something for it. 

But in the situation we are talking about here, debt/deficit, I do 

not think you can do this without behavioral change, and it has to 

come on behalf of the people who are successfully wedded and supportive to the proposition of not doing that. 

Mr. Walker? 

Mr. WALKER. First, I think by using the debt-to-GDP approach 

and coupling it with the increase in the debt ceiling limit, it will 

preserve the debate about, how do you achieve balance. You can 

end up engaging the American people with the facts, the truth, and 

the tough choices. You can go to the committees of jurisdiction with 

regard to tax reform, Medicare reform, Medicaid reform, Social Security reform, et cetera. You are not going to change their minds 

by the debt ceiling limit going up. 

And frankly, the American people need to be engaged to a much 

greater extent. So that is why I am saying, go with the default 

mechanism. The whole purpose of a default mechanism is to avoid 

the default, to make choices through the normal political process 

and the normal committee process to decide how to hit the targets. 

Only if you fail to do that does the default come in, but I think 

the default has to be equitable, too. That means more heavily 

weighted towards spending cuts, which is what the National Fiscal 

Responsibility and Reform Commission did, but some revenue element, in part because it has to be socially equitable, and in part 

because you want both sides to have a motivation to do something. 

Dr. BLINDER. If I could just answer the question very briefly. I 

mean, you raised a lot of things in the question. It is true that, 

other things being equal, a lower tax rate is better for the economy, 

on everything. Well, except on bad things that we want to get rid 

of. On anything good, if you lower the tax rate on it, that is better 

for the economy, other things being equal. But that kind of attitude 

completely ignores the fact that we have to finance the government 

somehow. 

So the notion that we can just cut and cut and cut and cut and 

that is going to be good for the economy because we are going to 

get a growth miracle, as you said, has been proven false many 

times. That does not falsify the idea that the economy is more efficient and better at lower taxes. It is, but there is the other side 

of the ledger. 

Now, on the enforcement mechanism, I think, first of all, 100 

Senators are going to be a lot better at figuring out what a sensible 

enforcement mechanism is than I am. But the one thing that I 

would urge on you is, if there is going to be an enforcement mechanism, it has to be something, when the bell rings, that both the 

Democrats and the Republicans hate, presumably for different reasons. So it has to have something that is totally unpalatable to Republicans and totally unpalatable to Democrats, and then you have 

the setting for Andrews Air Force Base. 

Senator ROCKEFELLER. Thank you. 

28 

The CHAIRMAN. Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. I am going to engage Dr. Foster, since Mr. Walker and Dr. Blinder have been most 

engaged. And here is what I would like to just talk about a little 

bit. I am not talking about ideology, where obviously one side is 

more adverse to revenue enhancement than another. But I think 

two issues have been confused: one is reducing the deficit, and one 

is shrinking the government. I am sure you believe in both. 

But my question is a very simple one, something that has been 

lost here, and that is that, if you are focused only on the deficit— 

and I like to say we are a blindfolded person and we are walking 

towards a cliff, and at some point we fall over the cliff. We may 

be 300 steps away or we may be 30 steps away, but no one wants 

to fall over the cliff. That deals with the deficit, not with the size 

of the government. 

So a whole lot of moderates and conservatives have said we need 

revenues. I have quotes here, which I will not read, from Bruce 

Bartlett, Alan Greenspan, McCain’s advisors in the campaign, and 

you name it, Hoagland, and all of these folks who are Republicans 

of one stripe or another. 

Do you disagree with the fundamental notion that, if our only 

goal is deficit—let us just leave aside our predilection for what size 

we want the government to be—that revenues can contribute 

equally to reducing that deficit as cuts? 

Now, Barack Obama would say, if you cut transportation, you 

are going to lose jobs, and the economy will shrink. You would say, 

if you are going to raise taxes—I do not agree with this on certain 

things—that the economy will shrink. But I am not talking about 

that. I am just talking, let us say we are close to the cliff and we 

have to deal with the deficit, because the credit markets look at the 

size of the deficit, not so much where it comes from. 

Do you disagree in any way with the proposition that, in terms 

of purely reducing the deficit, not related to how the government 

grows in reaction to it, that one dollar of revenue cuts is the same 

as a dollar of spending reduction? A dollar of revenue enhancement 

is the same as a dollar of spending reduction? 

Dr. FOSTER. The fact that we have to call them revenue enhancements tells us a lot about what is really going on. 

Senator SCHUMER. Taxes. 

Dr. FOSTER. But the way you expressed it at first was really excellent. You asked, can tax cuts contribute to deficit reduction? The 

key here is the verb ‘‘can.’’ Of course they can. 

Senator SCHUMER. I meant taxes. Yes. 

Dr. FOSTER. The question is, should they? 

Senator SCHUMER. No. I am talking about revenue increases. 

Dr. FOSTER. Did I say tax reductions? I am sorry. 

Senator SCHUMER. Yes. Tax increases. 

Dr. FOSTER. Tax increases can contribute to deficit reduction. 

Arithmetically, that is almost a fact unless you find such a terrible—— 

Senator SCHUMER. And equally, right? A dollar of tax increase 

and a dollar of spending cut, mathematically, do the same for deficit reduction. 

Dr. FOSTER. Except for the economic effects of the tax increase. 

29 

Senator SCHUMER. I understand that. That is where you and Dr. 

Blinder would argue, that is where this side and that side would 

argue. But what has happened here is that we have forgotten the 

fact that they are equal in terms of deficit reduction. In a sense, 

the argument of deficit reduction and shrinking governments have 

sort of merged, and they are not the same. 

Dr. FOSTER. They are not the same, but they are sure close. 

Senator SCHUMER. Why? 

Dr. FOSTER. Why? Because the reason we have a major deficit, 

as Senator Hatch’s earlier remarks pointed out, is we spend too 

much. We spend far more than we ever have. 

Senator SCHUMER. Part of the reason we have a deficit—— 

Dr. FOSTER. My colleagues have made the same point. 

Senator SCHUMER. Excuse me. Isn’t part of the reason we have 

the deficit we do because of the Bush tax cuts? 

Dr. FOSTER. Arithmetically, yes. 

Senator SCHUMER. All right. That is my point. I do not want to 

get into—— 

Dr. FOSTER. Another way to say that is, isn’t our failure to raise 

taxes on the American people the reason we have larger deficits? 

Yes. If you raised taxes you would have smaller deficits. 

Senator SCHUMER. All right. 

Dr. FOSTER. That does not make it the right policy, though. 

Senator SCHUMER. And if you cut spending, you would have 

smaller deficits. 

Dr. FOSTER. Yes, sir. 

Senator SCHUMER. And the two contribute equally. 

Dr. FOSTER. Arithmetically, they do. 

Senator SCHUMER. That is the only point I wanted you to make. 

Thank you. 

The CHAIRMAN. Thank you. 

Senator Grassley? He is gone. 

I would like to first congratulate you, Mr. Walker. Apparently 

the President, at 1:30 today, is going to suggest a debt-to-GDP trigger to get the deficits down, which you have been talking about. I 

think all of you have been talking about it. I think you, Dr. Blinder, said basically the same thing. 

But I just wanted to focus on what you think the most effective 

mechanism will be. Again, I am trying to find a way to separate 

the debt limit increase from getting our work done here. Mr. Walker talked about maybe a glide path of 1 percent every year or two, 

or something like that. 

I guess the enforcer would be—I have forgotten what the enforcer would be. He said, if we do not reach the target—then tell 

me again what the enforcer would be. I would also like Dr. Blinder 

to comment on that and try to figure out and see where you agree 

on what mechanism makes sense and where we can kind of bridge 

the gap, to the degree that you disagree. 

Mr. WALKER. Mr. Chairman, there are at least three elements: 

the first element is discretionary spending; the second element is 

mandatory spending; and the third element is revenues. On the 

discretionary spending, in my view, security should not be exempted. So whatever the default mechanism is should apply to all discretionary spending, in part because you want to avoid that. I 

30 

know that there are certain players who do not want to cut defense 

or security spending. Well, if we do our job, you can solve the problem. So I would not exempt defense and other security spending, 

and I know there is a huge amount of waste there. 

Second, mandatory spending. That is where the problem is. 

Sixty-eight percent of spending is mandatory spending. So I think 

you need to think about whether or not you want to do some things 

on the mandatory side. For example, do you want to have a temporary suspension of indexing, cost of living indexing, or some adjustment of that? Do you want to have a temporary change in subsidies for the well-off? 

We provide huge subsidies for middle-, upper-income, and even 

very wealthy people under Medicare who voluntarily sign up for 

Medicare Part B and Medicare Part D. That is not a tax. A tax is 

when you have no choice. We are providing huge subsidies there, 

so do you want to do something about that? 

Third, on the tax side, there are different ways you can get there. 

Again, I said if you look at the National Fiscal Responsibility and 

Reform Commission, there are roughly 2:1 spending cuts to revenues. My personal view, I would like to have it more on the spending side. But if you piggyback on that, then you have to think how 

you are going to make the revenue side work. 

One idea is, let us have a separate line item on the tax return: 

‘‘deficit reduction surcharge.’’ It should be temporary, so we could 

say ‘‘temporary deficit reduction surcharge,’’ pending making decisions on comprehensive tax reform, entitlement reform, other 

spending cuts and constraint. That would be transparent. That 

would be visible and facilitate accountability. But again, everybody 

should seek to avoid having—and by the way, you would have annual debt-to-GDP targets, so this would be something that would 

happen every year. 

Let me give you one last example. Let us say the target was 70 

percent of GDP. If you are 70 or less, no problem. If you are over 

70, then you monetize the difference, so you calculate what the difference is. It is that difference that would have to be subject to the 

default mechanism. 

The CHAIRMAN. I got you. I want to give Dr. Blinder at least 

equal time to you, Dr. Foster. 

Go ahead, Dr. Blinder. 

Dr. BLINDER. Well, I will be brief. I do not have a magic formula, 

but I want to reiterate—and just let me give you some examples. 

I am just thinking about this in real time. 

The CHAIRMAN. Sure. Right. 

Dr. BLINDER. You want something that is anathema to Republicans and anathema to Democrats. 

The CHAIRMAN. Right. 

Dr. BLINDER. And they are presumably going to be different 

things that kick in if you do not hit the target. Now, before I go 

further, all of you are better at thinking about that than I am. 

What it looks like to me as a citizen is the thing that is most 

anathema to the Republican Party now is raising the top bracket 

income tax rate, so that could be one piece, only if you fail. This 

is the Armageddon scenario. 

31 

Something about, you could cut Social Security benefits for all 

but the poor, or you could raise the payroll tax rate. Every Democrat would hate that idea. The principle is, you are trying to induce 

inter-party agreement by having everybody say, no, no, we cannot 

go there. Those are just two examples. There are probably better 

ones. As I say, you will be better at thinking about this than I am. 

The CHAIRMAN. All right. 

Dr. Foster, do you have some mechanisms here? 

Dr. FOSTER. There are a lot of different mechanisms, I think. 

The CHAIRMAN. Well, what do you recommend? 

Dr. FOSTER. My preference is spending caps that are very specific, that are enforced with clear rules for cutting spending. My 

preference would be to cut out national defense from that, but I am 

willing to accept the proposition that that would be part of the 

overall exercise because, as Mr. Walker pointed out, the point is 

not to trigger the caps. The point is not to trigger the enforcement 

mechanism. 

The point is to compel the Congress to budget and say, this is 

the amount we are allowed to spend, and we are going to make decisions to get us there. Leave that up to the American people and 

the American people’s reaction as to whether they like the result. 

That is what elections are for. 

The CHAIRMAN. Everybody talks about tax reform around here, 

whether it is corporate, individual, or what. Should that be revenueneutral, or as we go down that road should we have in mind the 

possibility that the business sector would like to cut taxes, a lot of 

others would like to increase revenue? Thoughts? 

Mr. WALKER. In the aggregate, when you do comprehensive tax 

reform—which is individual income tax reform, corporate income 

tax reform, whatever you are going to do on Social Security and 

whatever you are going to do on the consumption side, in the aggregate—my view is—and part of this, you will get through. If you 

get great tax policies, you will get better economic growth, which 

will generate more revenue. I think we need to close about threequarters of the gap through spending cuts and constraint, and 

about one-quarter through additional revenues. 

The CHAIRMAN. That is what the President is going to recommend at 1:30. 

Mr. WALKER. Well, then somebody has been listening. 

The CHAIRMAN. Yes. 

Dr. BLINDER. If I could say something about that, Senator. I 

think, given the perilous state of the budget, getting some new revenue from tax reform would be a very good way to do it. The tax 

code is a mess, as everybody said, both on the corporate and the 

individual side. 

On the other hand, when you think about the politics of this— 

and this is certainly the way the 1986 tax reform went—if you do 

not have some sweeteners to give back for the people who have to 

eat the things that do not taste very well, and you do that by either 

having it revenue-neutral or actually a revenue loser, it is very 

hard to get tax reform through. 

So, when I hear about comprehensive tax reform being part of 

the deficit reduction package, as someone who has always favored 

comprehensive tax reform—my favorite law that the Congress has 

32 

passed in the last 40 years is the 1986 tax reform, so do not get 

me wrong. I am completely, 100 percent in favor of it. But I think 

it is a distraction in the context of deficit reduction because I do 

not see how you get revenue out of it. 

The CHAIRMAN. Thank you. 

Senator Hatch? 

Senator HATCH. Mr. Walker, let me just make a note for the 

record. You have described the Debt Commission mix of deficit reduction of 70 percent spending restraint and 30 percent new revenues. Now, that ratio assumes the revenue baseline is an alternative to current policy. In other words, it assumes some tax increases from the sunset of the 2001 and 2003 tax relief plans in 

2013. Now, that is $1.6 trillion in revenue. That is a lot of new revenue. 

Let me just finish my comment. Now, my staff tells me that, 

when you substitute in the current policy baseline, the ratio of tax 

hikes and spending restraints is very roughly 50 percent apiece. I 

think it is actually 54 percent to 46 percent. I raise this matter 

simply to clarify how ambitious the Debt Commission report is on 

the revenue side, and I just wondered if you had a comment about 

that. 

Mr. WALKER. Senator, it depends upon what period of time as to 

what numbers you get. Let me just reiterate my personal view: it 

ought to be 3:1, spending to revenues. That is my personal view. 

I only point to the National Fiscal Responsibility and Reform Commission as one possible thing that you could go to. If you ask my 

personal recommendation, I would make it 3:1. 

Senator HATCH. I am not trying to find fault with you. I just 

wanted to mention that it is pretty optimistic on the revenue side. 

Let me just say this. This has been a terrific hearing. The three 

of you have done an excellent job, and you have had different 

points of view that have been very helpful to me, and I am sure 

to other members of the committee as well. So we appreciate the 

time that you have given to this, and I just want you to know that 

your time is not wasted, in my opinion. 

The CHAIRMAN. Senator Rockefeller? Thank you, Senator. 

Senator Rockefeller? 

Senator ROCKEFELLER. Thank you, Mr. Chairman. 

I am intrigued also. Like Senator Hatch, I think this has been 

really good. I missed the first part of it, and I apologize, but these 

are really thoughtful, good people here, and willing to go after the 

untouchable: only what will work is what everybody hates. It is a 

terrific concept, and it is really true in marriage, in life, and in 

budgeting. 

The CHAIRMAN. And in many ways, all three are the same. 

[Laughter.] 

Senator ROCKEFELLER. So that leads me on to something which 

has always bothered me, but which is really bad to talk about in 

States like my rural State, where the military is a way out to get 

a job. I totally believe you, Mr. Walker, when you talk about waste, 

fraud, and abuse, but let us say waste in the military. We will not 

touch it. We do not pay for any of our wars, cannot do it, it is unpatriotic to think about it. But let us just forget that last statement 

33 

for a moment and talk about the waste and the abuse. The total 

size of the military budget is about what? 

Mr. WALKER. Seven hundred billion dollars. 

Senator ROCKEFELLER. Seven hundred billion. Of that, would you think that as much as $50, $60 billion—— 

Mr. WALKER. Oh, easily you can deal with that. Well, first you 

have to realize you would have the conflicts that we have going on 

right now, you have Iraq, you have Afghanistan, whatever you 

want to call Libya. Those are going to be temporary, so ultimately 

they are going to come down at different time frames. 

But, even if you look at the base of the budget, believe it or not, 

Congress, by law tells the Pentagon that, when it is doing its quadrennial defense review and when it is trying to figure out what its 

‘‘requirements’’ are, it cannot consider cost. It is precluded from 

considering cost. That alone means that we end up starting a 

bunch of things that we cannot afford, we cannot sustain. 

Senator ROCKEFELLER. All right. That is very helpful. So for me, 

that puts defense on the table. 

Mr. WALKER. It should be. 

Senator ROCKEFELLER. It has to be on the table. Second, just a 

question, just because I want to hear it said more than once: we 

cannot do this and make it work, especially for the long term, without raising new revenues. Now, you can raise new revenues by 

thinking up new things, or you can do it by reducing existing exemptions, oil depletion, all that kind of stuff. Would the three of 

you agree that we cannot make this work without, obviously, the 

spending cuts, but also raising revenue, raising new revenue that 

we do not now have? 

Dr. BLINDER. I first want to agree with that, with the proviso 

that Dr. Foster’s statement about arithmetic at the beginning of his 

testimony is true. It is not mathematically impossible. I think it is 

socially and politically impossible, and highly undesirable, to try to 

do this with no additional revenue, and the Ryan budget is the example. That takes no revenue. 

Senator ROCKEFELLER. And especially at a time like now. 

Dr. BLINDER. And especially at a time like now. 

Senator ROCKEFELLER. But still there is the proposition that it 

has to happen, or rather the proposition that it cannot possibly 

happen, starting with Reagan and going on right through Bush and 

continuing, making things permanent. Either positively or negatively, you cannot continue that proposition. 

Dr. BLINDER. I think that is clear. I hear what you are saying. 

Continuing the proposition that we can just keep lowering taxes 

and lowering taxes and lowering taxes—we cannot just keep on 

doing that. 

Senator ROCKEFELLER. I thank you all. 

The CHAIRMAN. Senator, do you want to jump in some more? 

Senator THUNE. Thank you, Mr. Chairman. Thank you, gentlemen. Great to have you here. 

Let me just, if I might, ask a couple of questions regarding—I 

think there is some attention that has been already given this 

morning to the Ryan budget, but I guess I would ask General 

Walker, take away the feelings about the political feasibility and 

sort of the 3-step test that you set up in terms of something that 

34 

might work: do you believe that it addresses the long-term debt crisis and really gets us where we need to be going in terms of sustainability? 

Mr. WALKER. I think it is politically courageous. I think that it 

involves a number of transformational type of changes, some of 

which are meritorious. I know there have been some concerns that 

have been expressed about some of the assumptions underlying it 

that I think have to be looked at, but those would be my preliminary thoughts. 

Senator THUNE. Let me ask you all about the CLASS Act. The 

CLASS Act was a provision that was a part of the health care reform bill that passed last year. Even Secretary Sebelius has appeared in front of this committee and said it is totally unsustainable. That is what CBO has concluded, that it will add significantly to deficits. 

The Fiscal Commission actually recommended abolishing it or repealing it. I have a bill that would do the very same thing. It 

strikes me, at least, that when you are in a hole you should quit 

digging, and we are in a pretty deep hole. This is something that 

complicates, I think, the fiscal picture even more dramatically 

going forward. So tell me what your reaction is with regard to that 

legislation that passed as part of the health care reform bill and 

what we ought to be doing now to get it off the books. 

Mr. WALKER. It is fiscally irresponsible, fundamentally unsustainable, and I think you ought to consider repealing it. 

Senator THUNE. Does anybody have a different reaction to that? 

Oh, I am sorry. It was a long-term care piece of legislation, an entitlement program that was added to the health care bill. 

Dr. BLINDER. Yes. Well, I think that is the kind of mistake that 

was made with Medicare Part D. I mean, you need to have funding 

mechanisms for things like that. We should have done that with 

Medicare Part D, and I would say the same thing about this. 

Senator THUNE. As I was leaving—I had to go do something 

else—something Dr. Foster was mentioning in reaction to a response to a question from Senator Schumer had to do with sort of 

the moral equivalence of a dollar generated from revenue increases 

versus a dollar from spending cuts. 

I would ask you, just maybe if you could, to elaborate on that, 

because it strikes me, at least, that revenue increases—and if you 

look historically throughout the 40 or 50 years, we always were 

somewhere in that 18 to 19 percent of GDP, irrespective of what 

tax rates are. People find ways, they adjust their behavior and reaction to whatever the tax rates are at the time. 

I also believe that tax increases, of course, affect, I think, economic growth. So the question about how that bears on revenues, 

I would like you to elaborate a little bit on that because I am not 

so sure—when you were answering that question, you were saying 

a dollar of revenue increases or tax increases would be equivalent 

to a dollar of spending cuts, arithmetically. But could you provide 

some context or a little texture to that that would get more at the 

issue of how tax increases would bear on economic growth, and 

therefore long-term revenue? 

Dr. FOSTER. Thank you, Senator. I appreciate that opportunity. 

Arithmetically, one dollar of tax increase does equal one dollar of 

35 

spending reduction, but the comparison breaks down from that 

point forward. It is a lot more than just math: there is the economics; there is the politics, the concept of what is fair politically between conservatives, liberals, Republicans, Democrats; and then 

there is the question that Senator Schumer was trying to sort of 

set aside, I think, which is the size of government. 

The problem that we have before us is that government has 

grown dramatically, and it is expected to do so far more dramatically in the long run, as Dr. Blinder has pointed out. The problem 

is, in fact, the spending side. So, if that is where the problem is— 

not on the revenue side, because revenues will get back to their 

historical norm very quickly as the economy recovers, and in fact 

rise above the historical norm in the years that follow under current policy—the issue is not a shortfall of revenues, the issue is an 

excess of spending. If that is where the problem is, it strikes me 

as unfair to taxpayers—who are the real issue where it should be 

fair or not—it is unfair to taxpayers to ask them to pay more to 

solve a spending problem that Congress would otherwise have not 

solved. 

Senator THUNE. Just a quick reaction, if I might. Admiral Mike 

Mullen, Chairman of the Joint Chiefs of Staff, has said in testimony in front of the Senate that the greatest threat to America’s 

national security is our national debt. You have probably heard 

that, which I think is a pretty stunning statement coming from 

your top military leader. But the former Chairman of the Federal 

Reserve Board, Alan Greenspan, has said that he believes there is 

a 50-percent probability of a debt crisis in the next 2 to 3 years. 

Do you agree with that assessment? 

Mr. WALKER. I agree with both, and I have said it in 2007. 

Dr. BLINDER. I do not agree with either, actually. I think there 

is some probability of a crisis in the near term. The signs are not 

that it is happening. We are in some sense protected by the ‘‘you 

cannot beat something with nothing’’ principle. The people who 

would flee the dollar have to go somewhere else. So it could be, but 

I would certainly not handicap it at 50 percent. 

I do not think it is the biggest threat to our national security. 

I would not even attempt to decide which one was. If it got number 

two on Admiral Mullen’s list, I would probably just shake my head 

yes that that is right. I do not think it is the national debt. 

Dr. FOSTER. I think we are momentarily seduced by a variety of 

conditions in the global system. They are driving down interest 

rates and signaling to us that everything is all right, and we are 

being seduced by that. That is not going to last for long. When the 

crisis comes, no one knows. That it will come if we stay on our current path is a certainty. 

Mr. WALKER. Let me clarify if I can, Senator. I do not believe 

that the current national debt—I believe that our fiscal irresponsibility is the greatest threat to America’s future, which is the deficits and debt that lie ahead. That, I believe, is the number-one national security threat, not the current level of debt. 

Senator THUNE. All right. Very good. 

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

The CHAIRMAN. That concludes our hearing. I want to really 

thank you. This has been one of our better hearings, just because 

36 

you bring intelligence and common sense and urgency to this debate. Thank you so much. I have a hunch that we are going to be 

talking again. We have a lot more ahead of us before we solve this. 

Thank you, all three, very, very much. 

The hearing is adjourned. 

[Whereupon, at 12:03 p.m., the hearing was concluded.] 

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