```

[Joint House and Senate Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 114-550
 
                   FEDERAL DEBT: DIRECTION, DRIVERS,
                              AND DANGERS

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 8, 2016

                               __________

          Printed for the use of the Joint Economic Committee
          
          
          
          
          
          
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                        JOINT ECONOMIC COMMITTEE

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

SENATE                               HOUSE OF REPRESENTATIVES
Daniel Coats, Indiana, Chairman      Patrick J. Tiberi, Ohio, Vice 
Mike Lee, Utah                           Chairman
Tom Cotton, Arkansas                 Justin Amash, Michigan
Ben Sasse, Nebraska                  Erik Paulsen, Minnesota
Ted Cruz, Texas                      Richard L. Hanna, New York
Bill Cassidy, M.D., Louisiana        David Schweikert, Arizona
Amy Klobuchar, Minnesota             Glenn Grothman, Wisconsin
Robert P. Casey, Jr., Pennsylvania   Carolyn B. Maloney, New York, 
Martin Heinrich, New Mexico              Ranking
Gary C. Peters, Michigan             John Delaney, Maryland
                                     Alma S. Adams, Ph.D., North 
                                         Carolina
                                     Donald S. Beyer, Jr., Virginia

                    Brian Neale, Executive Director
                 Harry Gural, Democratic Staff Director
                 
                 
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Daniel Coats, Chairman, a U.S. Senator from Indiana.........     1
Hon. Carolyn B. Maloney, Ranking Member, a U.S. Representative 
  from New York..................................................     3

                               Witnesses

Hon. Mitchell E. Daniels, Jr., President, Purdue University, West 
  Lafayette, IN..................................................     6
Hon. Judd Gregg, Co-Chair, Campaign to Fix the Debt and Former 
  Chairman of the Senate Budget Committee, Washington, DC........     8
Hon. Alice M. Rivlin, Senior Fellow, Brookings Institution, 
  Washington, DC.................................................    10

                       Submissions for the Record

Prepared statement of Hon. Daniel Coats, Chairman, a U.S. Senator 
  from Indiana...................................................    30
Prepared statement of Hon. Carolyn B. Maloney, Ranking Member, a 
  U.S. Representative from New York..............................    31
    Chart titled ``Aging Population Will Drive Increase in 
      Spending on Social Security and Medicare''.................    33
    Chart titled ``Nondefense Discriminatory Spending Falling to 
      Historic Lows''............................................    34
    Chart titled ``Deficits Spiked Under Bush II; Dropped 
      Dramatically Under Obama''.................................    35
    Chart titled ``Public Investment Is Historically Low''.......    36
Bipartisan letter dated March 15, 2011, to President Obama 
  submitted by Chairman Coats....................................    37
Prepared statement of Hon. Mitchell E. Daniels, Jr...............    43
Prepared statement of Hon. Judd Gregg............................    44
Prepared statement of Hon. Alice M. Rivlin.......................    47
Questions for the Record for President Daniels Submitted by 
  Senator Tom Cotton.............................................    49
Questions for the Record for Senator Gregg Submitted by Senator 
  Tom Cotton.....................................................    50
Questions for the Record for Dr. Rivlin Submitted by Senator Tom 
  Cotton.........................................................    51
Questions for the Record for Dr. Rivlin Submitted by Vice 
  Chairman Patrick Tiberi........................................    52
Questions for the Record for Dr. Rivlin Submitted by Senator 
  Robert P. Casey, Jr............................................    52

                   FEDERAL DEBT: DIRECTION, DRIVERS,

                              AND DANGERS

                              ----------                              

                      THURSDAY, SEPTEMBER 8, 2016

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 9:30 a.m. in Room 
216 of the Hart Senate Office Building, the Honorable Dan 
Coats, Chairman, presiding.
    Representatives present: Paulsen, Maloney, Hanna, Delaney, 
Schweikert, Adams, Grothman, and Beyer.
    Senators present: Klobuchar, Lee, Casey, Cotton, Heinrich, 
and Peters.
    Staff present: Breann Almos, Ted Boll, Doug Branch, Whitney 
Daffner, Connie Foster, Harry Gural, Colleen Healy, Karin Hope, 
Matt Kaido, Brooks Keefer, Christina King, Yana Mayayera, and 
Brian Phillips.

   OPENING STATEMENT OF HON. DANIEL COATS, CHAIRMAN, A U.S. 
                      SENATOR FROM INDIANA

    Chairman Coats. The Committee will come to order. We 
welcome not only our witnesses but the guests who have shown up 
here today. I thank my colleagues for being here in the last 
few weeks of this Congress before adjourning for the election. 
There's an awful lot of things going on. I think members will 
be coming and going. But we are really pleased to be able to 
have this opportunity to have the three stellar witnesses 
before us.
    Over the summer, looking toward ending 34 years of public 
service, I was going through some--cleaning out some drawers, 
and I came across a press release that I had issued in--I hate 
to even mention the year--1982 when Senator Gregg and I were 
both members of the House of Representatives. And I started 
reading through it a little nostalgically. It was titled ``The 
Federal Deficit, Can It Be Controlled?'' And this was a message 
in August 16th of 1982. And in this message, I recognized the 
fact that it was necessary for us to address uncontrolled 
mandatory spending if we were ever going to get our budget and 
deficit and ever get to a point where our fiscal situation was 
under control since we had no ability statutorily on a 
budgetary basis on a year-to-year basis in addressing mandatory 
spending. I suggested that some reforms needed to be made or 
this needed to be addressed, or we would plunge into deficits 
year after year, which would put a burden on our debt limits 
and significant borrowing. I raised the point that at the time, 
mandatory spending on Medicare was an astonishing $46 billion a 
year. We are now looking at somewhere near or over $600 billion 
a year just for this one mandatory program alone. I won't even 
go into all the details on Social Security and Medicaid and 
other mandatory programs. So here we are in 2016, and despite 
numerous attempts over decades to address this issue, we are 
still talking about this as an issue, and obviously, it has 
come to the point where serious action needs to be taken before 
serious consequences set in.
    Now, it's no longer a question of if we need to do this. I 
think the question of when we should do it can be answered by--
10 years ago or 15 years ago or one year ago. But it's not 
being done, and it hasn't been done. CBO, on an annual basis, 
more than an annual basis, warns us of the coming fiscal 
catastrophe, and yet, it is discussed for a day or two on the 
floor of the House and floor of the Senate, and then we move on 
to the business of the day. I am not here to point fingers at 
either party. I'm here to basically say Congress has not 
achieved the will to take the necessary steps. Administrations, 
Republican and Democrat, have not been able to accomplish a 
coordinated effort on this. And the warnings are dire. We are 
all aware of the CBO warnings, but this is not just a 
conservative or not just a nonpartisan basis conclusion as to 
what is happening here. The Urban Institute, certainly not a 
conservative institute, has warned that in less than 10 years 
we will be at a point where 98.3 percent of all federal 
revenues are spent on interest entitlements, and on mandatory 
spending. That leaves one and a half or so percent for 
everything else the federal government does. So regardless of 
what your interest is, whether it's building roads, medical 
research, basic research, the arts, national defense, national 
security, FBI, CIA, given the threats that we have, no matter 
what your particular interest is, there will not be money to 
address it without going further and further and further into 
debt to pay for those functions. Clearly, that's unsustainable. 
It has national security implications. Former Joint Chief of 
Staff and Navy Admiral Michael Mullen rightfully noted that 
``the most significant threat to our national security is our 
debt.''
    So here we are. We have a stellar cast of witnesses this 
morning, which I will be introducing here shortly. But it's 
important to note that during election season or year after 
year after year, this thing keeps getting pushed away, pushed 
down. It will be the next president, the next Congress, we 
can't deal with it now, and we've been saying this for decades. 
The point of reckoning, the day of reckoning is coming. It 
seems to me that we're--there have basically only been two 
paths to successfully address this. One is extraordinary 
leadership, bipartisan leadership. Think back to 1983 when 
Ronald Reagan picked up the phone and called Tip O'Neill and 
said ``Tip, we have a problem with Social Security, and if we 
don't address it, we are in real trouble, and we need to take 
it above politics.'' And there standing outside of the White 
House was the President of the United States, the Senate 
Majority Leader, the Speaker of the House, and the leaders of 
the two political parties saying we're taking this out of 
politics, we're imposing this plan. We bought about 30 years of 
solvency for the Social Security program. We have not seen that 
since.
    Secondly, unfortunately, the alternative has been fiscal 
crisis. Think EU. Think Greece. This is unsustainable, and the 
markets will dictate where we go.
    There may be a third way, and I've introduced this morning 
a legislation that will impose a civilian BRAC, similar to the 
military BRAC, when it was impossible to close any of over a 
thousand bases that were no longer needed. They built many of 
them in World War II, and afterward, we finally turned it over 
to a nonpartisan commission that went through under some 
guidance and presented a proposal to the Congress for an up or 
down vote only. It has been an extraordinary success in terms 
of forcing, forcing action that has not been--had not been 
taken either by Congress or by administrations. And I won't go 
into the details of that, except we do have a model that may 
allow us an opportunity to address this significant problem.
    With that, let me turn to our ranking member, Congresswoman 
Maloney, for her opening statement, and then I will introduce 
the witnesses, and we look forward to your testimony.
    [The prepared statement of Chairman Coats appears in the 
Submissions for the Record on page 30.]

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, RANKING MEMBER, A 
               U.S. REPRESENTATIVE FROM NEW YORK

    Representative Maloney. I want to thank you for calling 
this important hearing and for sharing your perspective and 
your remembrances. I must say, in Dr. Rivlin's testimony, 
actually in all the panel's testimony, they shared your grave 
concern courage and urgency that this is something we have to 
come together and work together and solve.
    I want to note, we started with a moment of silence for 9/
11. It's the 15th anniversary. And after 9/11, I have never 
seen this Congress so united and determined. And we very 
quickly restructured our government. It was the largest 
restructuring since 1947 to make us more secure with increased 
intelligence and all kinds of ways to make us stronger. So when 
we come together, we can really make things happen in a 
positive way, and I hope that your legislation and that this 
hearing will move us a step forward to addressing it.
    We know from your testimony what to do. We just need the 
political will to work together and make it happen.
    I want to start my testimony talking about a number, and 
that's $19.5 trillion, the total nominal debt, and it's no 
question it's a great deal of money. But as both Senator Gregg 
and Dr. Rivlin write in their testimony, a far more important 
measure is public debt in relation to the size of the economy, 
the debt-to-GDP ratio. And right now, that is almost 75 percent 
of GDP. We can improve the debt-to-GDP ratio in two ways: by 
decreasing the debt and by increasing economic output. We must 
improve both halves of that equation, and let's talk about debt 
for a moment. The main driver of increasing debt is the aging 
U.S. population. Everyone who studied the debt issue from CAP 
on the left to Cato on the right says projected deficit growth 
is overwhelmingly the result of long-term trends, the aging 
U.S. population, and rising healthcare costs. The baby boomers 
are retiring, and it's having a huge impact.
    One fact tells much of the story. There are nearly two-and-
a-half times as many people age 65 and over today as 50 years 
ago. This means more and more Americans will be receiving 
Social Security and Medicare benefits. CBO projects that 
spending on Social Security and Medicare will increase as a 
share of GDP over the next decade, while all other program 
spending is on a track to decline, and that is illustrated on 
the chart over there.
    In fact, discretionary spending is nearing historic lows. 
Spending on nondefense discretionary programs as a share of GDP 
is projected to hit its lowest level on record in 2018.
    Some point a finger at President Obama for the increase in 
the national debt. This ignores the fact that it's 
overwhelmingly due to long-term trends and the legacy of the 
Great Recession that began on the prior president's watch.
    Conveniently, they also forget history. In the late 1990s, 
President Clinton presided over four straight years of budget 
surpluses, completely erasing the deficit. This allowed us to 
pay down a significant portion of our debt.
    President Bush inherited a surplus of $128 billion, or 1.2 
percent of GDP. But the surplus was spent on two tax cuts, 
which increased the debt by $1.5 trillion over 10 years, and 
then we were in two wars, Iraq and Afghanistan, and the 
projected cost is $4 to $6 trillion in the long term.
    And then we presided over the worst economic melt down 
since The Great Depression, which crippled the economy and sent 
the deficit soaring. In the end, Barack Obama inherited a 
deficit of nearly 10 percent of GDP and a very quickly rising 
debt.
    As Robert Bixby, head of the nonpartisan Concord Coalition 
put it, the debt ``would have exploded around 2009 to 2010, no 
matter who was president.''
    The reality is that the Obama Administration has helped dig 
us out from the Great Recession, and the deficit as a share of 
GDP fell by nearly three quarters, from nearly 10 percent to 
2.5 percent, and that's illustrated on the third chart that's 
up there.
    Now, I would like to turn to the second half of the 
equation, increasing economic output. And to do this, we need 
to invest in our nation's infrastructure, workforce, education, 
and competitiveness. However, nondefense government investment 
as a share of the economy is at the lowest level in more than 
50 years. In fact, we're not investing enough to maintain our 
existing infrastructure. And that's illustrated in chart 4.
    With interest rates at historic lows, it is the ideal time 
to borrow and invest in rebuilding our nation's infrastructure 
and fund the basic research that will drive the next generation 
of innovation. As Dr. Rivlin describes in her testimony, these 
investments will make our economy stronger and more productive. 
As economist Larry Summers has argued, not making these 
investments will place a significant burden on our children and 
grandchildren.
    History is instructive. Investing in broad-based economic 
growth was at the core of America's success in the decades 
after World War II, in the 1950s and 1960s. We invested in our 
people through the G.I. Bill, and our infrastructure, building 
the nation's interstate system, and it paid off. While publicly 
held debt more than tripled between 1945 and 1981, it fell by 
almost three quarters as a share of the economy.
    More recent history is also important to consider. 
Excessive austerity in the near term has been pursued in recent 
years, and it will slow economic growth and make it more 
difficult to bring down the debt-to-GDP ratio over time.
    Again, we need to address both sides of the equation. To 
tackle our debt, we need a balanced approach that mixes 
targeted spending cuts, reforms to social insurance programs, 
and revenue increases. And to grow the economy, we must invest 
in our infrastructure, education, and innovation.
    It is absolutely doable. We need to work on it, and we need 
to have the political will to get it done.
    Thank you, and I look very much forward to our 
distinguished panelists' testimony today.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 31.]
    Chairman Coats. Congresswoman Maloney, thank you very much 
for your opening statement. Let me now introduce our three 
witnesses, each of which carries the title honorable in front 
of their name. I see President Daniels questioning whether or 
not that applies to him. In his humble and soft spoken way, he 
will come back with a good quip about honorable.
    But having said that, the Honorable Mitchell Daniels, Jr., 
long-time friend and someone who has distinguished himself 
through an extraordinary career. A senior advisor to President 
Ronald Reagan, director of the Office of Management and Budget 
under George W. Bush, holding top management positions in the 
private sector in business. As governor of Indiana, President 
Daniels transformed our state's budget and turned deficits into 
surpluses within a year by cutting spending and without a tax 
increase. Governor Daniels left Indiana's governorship with a 
budget in surplus and its first ever AAA credit rating.
    Now he is the 12th president of Purdue University, a game 
changer in terms of education and extraordinary things also 
being done at that university under his leadership. Governor 
Daniels, we welcome you back here to testify before us, and we 
look forward to hearing about how the federal government can 
adopt some of the tools that you have acquired in these various 
roles.
    Next, the Honorable Senator Judd Gregg from the state of 
New Hampshire, long-time friend also, served together in the 
House and in the Senate. He did not ask for my advice for 
anything he did as governor in New Hampshire, which is probably 
a wise decision on his part. As Chairman of the Senate Budget 
Committee, he authored the Conrad-Gregg legislation in the 
Senate, which provided the groundwork for Simpson-Bowles. After 
his time in Congress, he's continued to push for deficit 
reduction efforts. He's spear headed bipartisan efforts to 
address this issue.
    And I want to take a moment here just to point out the fact 
that it is possible to achieve a bipartisan support for the 
kind of reforms necessary to put us in fiscal solvency. Back in 
March 15 of 2011, 64 United States Senators, 32 Republicans and 
32 Democrats, Senator Klobuchar and I signed this letter as 
members of this panel. Senator Lee has his signature on this 
letter. As you know, the magic number in the Senate is 60. We 
had 64, 32 Republicans, 32 Democrats. Senator Gregg 
substituting for former Senator Simpson came in with Erskine 
Bowles. We talked through the dire situation that we were in. 
And we made a commitment on a bipartisan basis with enough 
votes to achieve success in the United States Senate by 64, 32 
Republicans, 32 Democrats. I have all the signatures here, sent 
to the President of the United States saying we are willing to 
work for you in a bipartisan, nonpolitical basis to solve this 
particular problem.
    [The bipartisan letter dated March 15, 2011, to President 
Obama appears in the Submissions for the Record on page 37.]
    Unfortunately, we did not get a positive response back from 
the White House, and perhaps the best effort that I think was 
made to address this maybe in decades just fell by the wayside. 
And here we are in 2016, once again trying to look for ways to 
address an ever-growing problem. Senator Gregg played a major 
role in that effort, and we thank him for it.
    And finally, The Honorable Dr. Alice Rivlin, who has also 
been before our committee and a member of other committees, 
former director of the Congressional Budget Office, director of 
the Office of Management and Budget under President Clinton, 
vice chair of the Federal Reserve Board. She has cochaired the 
Bipartisan Policy Center's task force on debt reduction with 
former Senator Pete Domenici, now serves as a senior fellow at 
the Brookings institution and as a visiting professor at 
Georgetown University. We look forward to hearing from all 
three of you in terms of giving us some guidance.
    All of you who have been involved and know this issue 
deeply, we are at a point where we--the next president, I 
think, is going to be saddled with the obligation now as we are 
careening toward a situation that simply cannot be sustained. 
We need your advice, and we thank you for coming here.
    We will start with Governor Daniels and then have Senator 
Gregg and then Dr. Rivlin.

 STATEMENT OF HON. MITCHELL E. DANIELS, JR., PRESIDENT, PURDUE 
                 UNIVERSITY, WEST LAFAYETTE, IN

    President Daniels. Alphabetical order pays off again. I'm 
in the odd position--thank you, Mr. Chairman and the Committee.
    I am in the odd position of hoping that my comments are of 
little value to you because they're so obvious, but let's see. 
You know or you should that our deficits have been running at 
historically unprecedented levels, so much so that another half 
trillion dollars this year, bigger than any year in history 
before 2009, was met with a yawn or even by some somehow as a 
positive event.
    You know, or you should, that our national debt has reached 
a peacetime record, heading for territory where other nations 
have spiraled into default or into the loss of sovereignty as 
creditors use their leverage to dictate terms.
    You know, or you should, that public debt this large weighs 
heavily on economic growth, crowding out private investment and 
discouraging it through uncertainty, and that much faster 
growth than today's is the sine qua non of the greater revenues 
that will be necessary to meet federal obligations, let alone 
reduce our debt burdens.
    You know, or you should, that the unchecked explosion of 
entitlement spending, coupled with debt service, is squeezing 
every other federal activity, from the FBI to basic scientific 
research to our national parks to the defense on which the 
physical survival of the country depends.
    You know, or you should, that the whole problem is getting 
worse and fast. Even if reform began this morning, past over 
promising and demographic realities do mean that the 
entitlement monster is going to devour accelerating amounts of 
dollars, all of which are scheduled to be borrowed rather than 
funded honestly. You know, or you should, that we are kidding 
ourselves, in even the appalling estimates that I just referred 
to. The official projections are built on a pile of wishful 
assumptions, which repeated experience tells us are bogus. 
Productivity assumptions are too high, interest rate 
assumptions are too low, revenue too low, spending too high. As 
each of these is proven unduly rosy, more zeroes will be added 
to the bill we hand the young people of this country.
    So I leave to my more erudite colleagues the statistics. 
Let me, instead, offer an appeal on behalf of those young 
people, the ones I'm so lucky to live among at Purdue 
University, all their counterparts, and the new Americans not 
yet with us. The appeal is for a shift in national policy to 
the growth of the private, productive economy as our all-out, 
primary priority, calling all close ones and breaking all ties 
in its favor. And for decisive action soon at long last that 
begins the gradual moderation of unkeepable promises and 
unpayable debt loads, which will otherwise be dumped on coming 
generations.
    This, I suggest, is not only wiser fiscal and economic 
policy, but for the sake of public integrity and the survival 
literally of our free institutions.
    A national government that year after year borrows enormous 
sums and spends them not on genuine investment in the future 
but on current consumption, passing the bill down to others, 
pretending that the problem is smaller than it really is lacks 
not only good judgment, but integrity. It's not hyperbole to 
label such behavior immoral.
    For a long time, people have come to this Congress decrying 
the intergenerational injustice of this policy, but things keep 
getting worse, not better.
    A near decade of anemic economic performance, the weakest 
economic recovery on record, has eroded badly the economic 
optimism on which, more than any other factor, Americans' faith 
in a better tomorrow has rested. A near majority now believes 
that America's best days are behind us, and as this new 
pessimism has deepened, it's turned into an ugliness, a 
meanness, a new cynicism in our national life with a search for 
scapegoats on both left and right.
    For almost two-and-a-half centuries, Americans have argued 
about a lot of things but shared a resilient determination to 
be self-governing, to guard against tyranny at home and, on 
occasion, resist by force its spread elsewhere in the world. 
But lately, and rather suddenly, there are alarming signals of 
a different outlook. A record one in four young people say that 
democracy is a, ``bad way to run the country.'' And an even 
larger fraction of the citizenry would prefer an authoritarian 
leader who did not have to deal with the nuisance of elections. 
One in six are sympathetic to a military takeover, almost a 
threefold increase from two decades ago.
    If national leadership continues to allow our drift toward 
a Niagara of debt until solemn promises are broken, as they 
would then inevitably be, today's sense of betrayal will seem 
tame. When today's young Americans learn the extent of the debt 
burden we have left them, they may question the premises of our 
self-government, and with good reason. When tomorrow's older 
Americans finally understand how they've been actively misled 
about the nature and the reliability of our fundamental social 
welfare programs, it may be the last straw breaking the public 
confidence on which democracy itself depends.
    In fairness, a few members in each political party, many in 
this meeting room, have tried to address the coming crisis. To 
them, all thanks and credit. To those still in denial or even 
advocating steps that would make our debts even higher, please 
reconsider. Your careers may end happily before the reckoning. 
Your reelections may not be threatened by your inaction. But 
your consciences will be. You know this, or you should.
    [The prepared statement of Hon. Mitchell E. Daniels, Jr. 
appears in the Submissions for the Record on page 43.]
    Chairman Coats. President Daniels, thank you very much for 
a sobering but very truthful statement.
    Senator Gregg.

  STATEMENT OF HON. JUDD GREGG, CO-CHAIR, CAMPAIGN TO FIX THE 
   DEBT, AND FORMER CHAIRMAN OF THE SENATE BUDGET COMMITTEE, 
                         WASHINGTON, DC

    Senator Gregg. Thank you, Chairman and Ranking Member. 
Thank you for having us here. It's a great pleasure to serve on 
this panel to try to bring attention to this matter. And I 
second everything that Governor Daniels has said. And even 
before she says it, I will second everything Dr. Rivlin says.
    As Chairman of the Budget Committee and ranking member, I 
worked for 10 years on this issue, constantly. This is all 
we've tried to focus on. It was not a--Kent Conrad, who was 
Chairman and ranking member when I wasn't, we worked together, 
and we produced Simpson-Bowles. And why did we do that? Well, 
we came to the conclusion that these numbers are overwhelming. 
The policies behind getting these numbers under control are 
extremely difficult politically, because they involve very 
tough decisions. Reducing the rate of growth entitlements 
involves tough decisions. Reforming tax laws involves tough 
decisions. And we came to the conclusion that the standard 
political process was not able to function and do it.
    So we worked out what was Simpson-Bowles but was originally 
more of a BRAC approach. What I want to talk about today is the 
fact that I think you can't get where we need to go, which is 
to get our entitlement accounts under control and get our 
revenues reformed, unless you have a process which allows you 
to get there. And we don't have the process today. The budget 
process is dysfunctional. That's a generous term for it.
    So my view is we need a two-track approach. And granted, it 
is procedure, and that doesn't solve the problem. Leadership 
solves the problem. But you need the procedure to drive the 
decisions.
    The budget is structured to be a partisan document. Nobody 
on the minority ever votes on the majority budgets and nobody 
on the majority ever votes for the minority alternative. And 
the two sides duke it out in the Senate with message amendments 
that go late into the night and are almost embarrassing to the 
institution. Well, they are embarrassing to the institution.
    Secondly, the Budget Committee itself is viewed with some 
antipathy, to be kind, by the major committees that it affects, 
Finance in the Senate and Appropriations and also some of the 
authorization committees, because they see it as interference 
with their turf.
    So what should we do here? I happen to believe that we need 
to restructure the Budget Committee completely. I think it 
should be made up of the committees of jurisdiction which have 
the most stake in the game. It should be a third Appropriations 
members, a third Finance members in the Senate, and a third 
should come from the general membership, with the Chairman and 
ranking member chosen by the leadership of the respective 
parties.
    Secondly, I believe that the budget itself should be 
structured not around the line items and the appropriations-
centric approach which is taken today. It should be structured 
around obtaining goals of debt-to-deficit as a percentage of 
GDP, revenues as a percentage of GDP, and spending as a percent 
of GDP.
    Thirdly, you need to break out the big items which cross 
jurisdictional lines, like healthcare, and do them as a 
separate functioning item within the budget process so that 
it's very clear that when you're dealing with healthcare, 
you're dealing with healthcare, you're not dealing with 
committees which have a whole variety of jurisdictions.
    Fourth and most important, the Committee should be equal 
Republican and Democratic membership.
    Now, that is a--that seems like a term or an approach which 
would be totally antithetical to our present system. But if 
there is equal membership on the Committee, there will be a 
responsibility of both sides to produce a budget, and neither 
side can point to the other side for its failure.
    I also think the enforcement mechanisms have to be changed 
erratically. No appropriations bill should be allowed to the 
floor of the House or the Senate Appropriations, until there's 
a budget. And if there's a failure to get a budget, there 
should be a penalty, and it should be a 5 percent reduction in 
discretionary spending and a 5 percent increase in entitlement 
spending and a 5 percent increase in revenues collected under 
FICA in the hospital tax. And those types of penalties would be 
strict enough and onerous enough so that a budget would, in my 
opinion, be reached.
    The approach should also make it clear that bipartisanship 
is at the essence of this exercise, because all the big issues 
that confront us, especially Medicare, Social Security, and tax 
reform, cannot be resolved on a partisan basis. The American 
people will not accept partisan results on issues which affect 
them, because they consider it to be unfair. They need fairness 
on those big issues, and fairness in our system is defined by 
both sides participating.
    The second track has been mentioned and has been introduced 
by Senator Coats, which is a BRAC approach. This would be, I 
see, as a bridging exercise to when you actually got an 
appropriation and budget process and entitlement process which 
worked, but it would be an effective way to address it. It 
would be drawn up on the same lines as Simpson-Bowles. Simpson-
Bowles was a complete success, except for the fact it never got 
passed. Had it been actually a legislative vehicle versus a 
commission, we probably would be out of the woods right now on 
our deficit and debt issues.
    So I do think a BRAC approach makes a great deal of sense, 
and I congratulate Senator Coats for bringing it forward, and I 
would be happy to discuss it more specifically.
    [The prepared statement of Hon. Judd Gregg appears in the 
Submissions for the Record on page 44.]
    Chairman Coats. Senator Gregg, thank you very much.
    Dr. Rivlin.

  STATEMENT OF HON. ALICE M. RIVLIN, SENIOR FELLOW, BROOKINGS 
                  INSTITUTION, WASHINGTON, DC

    Dr. Rivlin. Thank you. I'm delighted to be back in front of 
this committee where civil bipartisan discourse is possible, 
which is very reassuring. You all know the debt is high in 
relation to the economy, and it's on track to rise continuously 
as far as we can see. Now, this is not an imminent crisis. It's 
a problem to be managed, and that makes it very difficult for 
our political process. It would be easier if something terrible 
were going to happen tomorrow because we don't take steps. We 
can handle this large debt now, but it's a threat to 
sustainable growth. We are counting on the faith of our 
creditors around the world, which may not last forever. A large 
debt will--debt-to-GDP ratio will restrict our ability to 
respond to future recessions or other emergencies. And we can't 
count on low interest rates forever. We will have a servicing 
problem on this debt we have already as interest rates 
inevitably rise.
    Now, what matters is the burden of the debt, the ratio of 
the debt to what our economy produces, the GDP. And we can 
reduce that burden either by growing the economy faster or by 
reducing the debt in the future, and we must do both 
simultaneously. It's very important for an economy with an 
aging workforce to invest heavily in the productivity, the 
future productivity of that workforce. Fortunately, we have 
plenty of opportunities to do that. We have neglected our 
infrastructure. We have neglected keeping the skills of the 
future workforce up to what's happening in technology. We have 
neglected science.
    So we need a major program of public investment, not a 
stimulus to create jobs quickly, but a long-term investment 
program to increase the productivity.
    But, we also need to reduce the future debt, and we must 
act on both now. The drivers, as everybody knows, of future 
debt are the entitlements programs, especially the healthcare 
ones, combined with a rising number of older people, and the 
failure of our inefficient tax system to produce enough 
revenues in a fair way to keep up with those added spending.
    And if you're going to reform Social Security, Medicare, 
Medicaid, and the tax system, you need a lot of lead time for 
any acceptable, sensible reform.
    So as the Chairman said, the time to start is 10 years ago. 
We didn't. So the time to start is now.
    Now, there are those who say we can't invest in improving 
productivity because we have this high debt, and others who say 
we must invest but we should not worry about the debt because 
interest rates are so low. I believe both are wrong. Growth 
alone won't get the debt burden coming down, although we do 
need, for many reasons, to grow the economy faster. And debt 
reduction takes a long lead time.
    So I agree strongly with what my colleagues on the panel 
have said. We need to do a serious restructuring of 
entitlements and taxes, and we need to start soon. It must be 
bipartisan. Neither party can do this alone. Any party that 
steps out to do these difficult things gets savaged by the 
other party, and it's happened time after time after time.
    So some form of bipartisan action with the leadership in 
the White House and the Congress as a part of the action has 
got to happen.
    Chairman Coats's bill sounds promising, and I am very taken 
with the restructuring of the process outlined by Senator 
Gregg. But the main bottom line is we need to do all of these 
things quickly. They must be done by a bipartisan process that 
actually produces action and not more gridlock.
    Thank you.
    [The prepared statement of Hon. Alice M. Rivlin appears in 
the Submissions for the Record on page 47.]
    Chairman Coats. Thank you. I think the panel would join me 
in selecting the three of you to be the first part of the BRAC 
commission that needs to be formed, because you each brought, I 
think, some very insightful policies and messages relative to 
our current situation here. But more importantly, all three of 
you have the experience necessary, I think, to fully understand 
where we are, how we got here, and what measures need to be 
taken to go forward, and each of you presented, I think, some 
very, very important points and interesting things.
    Let me just start briefly, and I want to turn to my 
colleagues here. President Daniels, you are nationally, if not 
internationally famous now for taking over a state that was in 
deficit, a government that was inefficient, a government that 
was in debt and had to borrow. You learned principles, I'm 
sure, as director of OMB, as an advisor to the president, 
through your private sector work and so forth.
    What principles were necessary--did you apply in order to 
take us from a deficit to a surplus and tough credit rating to 
a stellar credit rating and put us on the path to very 
significant growth taking place in our state? And are those 
principles applicable at the federal level? It was a state 
government. Obviously, there's some differences. You aren't 
saddled--you do have some mandatory payments that have to be 
made.
    But give us some insights into what we can do on the basis 
of what you've learned to make this government more effective 
and efficient without compromising the necessary things that 
government needs to do.
    President Daniels. Some lessons apply and some don't, 
Senator. I think the task is so much easier at a state level 
than the one that you face, and I would not--I would over claim 
the things we did, and I wouldn't equate them with the mention 
of the problems you're facing.
    There are some basic principles. You can subscribe to them 
or not. I said you would be amazed how much government you 
would never miss, and it's true. We all know, there's a very 
animated and committed and sincerely committed interest group 
behind every dollar in the federal budget. To them, it's the 
end of the world. To the rest of the country, they wouldn't 
notice. I would be astonished. So sometimes bold and quick 
action is--turns out not to have the deleterious consequences 
that some people fear.
    We were not saddled in our case with quite the problems 
that the federal government certainly has or that even other 
states have. We had an upside down budget. It's true, we did 
not have the pension overhang that now threatens some states. 
We are here today talking about trillions of federal debt, but 
there are several trillion dollars of unfunded liability 
sitting out on state books that sooner or later may be a 
problem for this--for some future Congress. We didn't have 
that.
    We also had a Medicaid system that had not yet devoured the 
rest of our discretionary budget, and we were able to move 
quickly to keep that under control. It's still down in the low 
to mid-teens as a percent of the Indiana state budget. Whereas, 
it's risen into the thirties, last I looked, in some states. 
Therefore, they don't have money for public education. They 
don't have money for infrastructure. A parallel problem to what 
you're facing here.
    I guess I--one lesson, I think, of application is you can 
do more than you think you can. And boldness and decisiveness 
can be rewarded. You can live to tell about it. I'm a fan of 
country music, and I like the probably apocryphal song if I 
shot you when I should have, I would be out of jail now. And I 
would encourage some Congress some day to act boldly and be 
rewarded.
    Chairman Coats. Thank you. I think some of us will steal 
that country western title, because it applies in a lot of 
instances.
    Senator Gregg, I know you've continued to be active in 
working with--on a bipartisan basis, in working with both the 
Senate and the House who have the responsibilities for budget 
reform.
    Can you give us what you can say relative to the 
possibility of achieving what you have laid out? It makes sense 
listening to it on a theoretical basis. But looking at it from 
a political standpoint, how easy is this going to be to be 
accomplished? I think there's probably agreement here that, as 
I mentioned in my opening statement, without bipartisan 
support, we're not going to get there.
    Senator Gregg. Thank you, Senator. As the Senator knows and 
everybody on this panel knows, moving from thought and ideas 
into execution in the legislative process is extremely 
difficult. And so the ideas that I've put out, I think, do make 
sense, obviously, or I wouldn't have mentioned them. But to 
translate them into actual legislation, it's a heavy lift.
    I will say this: I and former Senator Conrad had a chance 
to meet with the working committee of the budget, and I believe 
there are people who weren't on the Budget Committee who 
joined, and about 10 or 12 senators participated. It was 
entirely bipartisan, headed up by Senator Enzi and Senator 
Whitehouse and I was really impressed with the enthusiasm, 
energy, and dedication of that group to try to get budget 
reform in place, and they were listening to everything. I hope 
that group comes forward with a proposal. We suggested our 
ideas. The BRAC approach, which you've outlined, was discussed 
at some length, because I think it's a rational approach, and 
we came so close to do it under Simpson-Bowles. The original 
Simpson-Bowles was a BRAC concept. That's where we got it from.
    And so I do think the opportunity is there. It comes down 
to leadership, and I believe in the Senate at least--I haven't 
had a chance to deal with the House folks on this, but in the 
Senate at least there is a working group headed up by Senator 
Enzi and Senator Whitehouse trying to move in that direction, 
and clearly this committee deserves tremendous credit for it.
    Chairman Coats. Thank you. Lastly, Dr. Rivlin, I just want 
to pursue the point--I want to make sure I fully understood it. 
My understanding of what you were saying is that the effort 
here has to be inclusive in order to obtain both growth and 
success in a more efficient, effective use of taxpayer dollars 
for discretionary spending and incorporating the essential 
aspect of some type of entitlement reform.
    Am I correct there that all of these ought to be in 
parallel? Particularly, I'm thinking about tax reform, which 
hasn't been reformed, the tax code, since 1986, and is a 
massive effort, obviously, but so would entitlement reform be 
and the other aspects of this. So do you see this sort of 
following a dual or a triple path and wrapped into one major 
process?
    Dr. Rivlin. Yes. I think we have to do all of these things 
at once. Now, you don't have to do everything. Maybe you have 
stages of tax reform. But I don't think you can solve the long-
run budget problem on the spending side alone. We do have a lot 
more older people, and healthcare is expensive, and the notion 
that we are going to have to spend more over time to support 
older people means we're probably not going to cut the 
entitlements, even in the long-run future, back very far. So 
we're going to need some more revenues, but we need to raise 
them in a much more pro-growth and more efficient way. And 
these various commissions that we've talked about really 
thought that could be done, and I agree. But it has to be done 
altogether, the entitlements, the taxes, and the up front 
investment.
    Chairman Coats. Thank you. My time is more than expired.
    Congresswoman Maloney.
    Representative Maloney. Thank you so much, and thank you to 
all of you for your important statements about what an 
important problem and challenge this is. And I watched the 
debate last night. No one raised this issue, nor do I believe 
it was raised in any of the debates, nor do I believe it has 
ever been a question from the press to the candidates, nor has 
it been a platform or a talking point of candidates on what 
they would do to address this critical issue. And all of us 
that have been elected know that if the public isn't aware of 
it and if the public is not talking about it as a concern, it's 
very hard to move it.
    As you were discussing your proposal, which I loved, but I 
started getting a headache thinking about how would you pass 
this, having tried to do this. But I would invite any of you to 
comment on how we can bring this debate out into the public and 
elevate it.
    But specifically to Dr. Rivlin, in your testimony, you 
stress very much the need for long-term debt reduction and for 
economic growth and the importance of economic growth to really 
secure debt reduction in a healthy economy.
    And during the Clinton years, when you were a part of that 
economic team, we had four straight budget surpluses. And also, 
it was one of the--and there was a lot of investment and 
spending during that. But also, after World War II, in the 
1950s and 1960s, we had massive infrastructure and public 
expenditure in education. We had the envy of the world. We had 
the best infrastructure in the world. Now our infrastructure, 
we're not spending enough to maintain it. Our bridges are 
crumbling. The whole world has high-speed rail. We're woefully 
behind. I would like to ask you, Dr. Rivlin, a lot of people 
say we can't invest, this is an argument we have before 
Congress, infrastructure. I support it long term. I believe it 
brings innovation and efficiency and quality of life and good 
jobs. But a lot of people argue that we can't because our debt 
is too high. And what do you think about investing in 
infrastructure education research to help to strengthen our 
economy? And I invite anyone to comment on that. And also, 
during my lifetime, the best economy we ever had was the 
Clinton-Gingrich economy, which was very much a bipartisan 
effort that brought us 22 million jobs, reduced the deficit, 
erased it. It left us with a surplus and just a booming 
economy.
    Couldn't we make that happen again? Can we bring the same 
chemistry together if we could work together and have this 
bond?
    But it's a huge challenge when even the candidates aren't 
talking about what many in this room think is one of the most 
pressing issues of the decade and one of the most important 
decisions we could make for Homeland Security, economic 
security, economic growth, and prosperity for our people.
    So I invite everyone to respond, but I always--I am very 
pleased to see a woman with such a distinguished career. All of 
your careers are distinguished, but she has been a role model 
to me and a trailblazer, and I want to thank you, all of you 
for your distinguished careers.
    So Dr. Rivlin.
    Dr. Rivlin. Thank you very much. I agree that it's 
extremely important, as I said in my testimony, to invest in 
infrastructure and skills in science. I think all of those 
things go together. We have great opportunity because we've 
neglected these things. So the opportunity to do better is 
there. The contrast with the late 1990s is interesting. I, too, 
am proud of the bipartisan effort that I participated in, and 
it was a Clinton-Gingrich effort together.
    One of the things that made it easier was that the 
productivity growth was growing fast during that period, not 
quite as fast as right after World War II, which also helped 
with bringing the debt down, but pretty fast. And that helped 
us to get to a balanced budget. But we did not really take the 
long run view. We knew the baby boomers were going to retire, 
but it was a bit in the future, and we did not take on the 
reform of the entitlement programs or the reform of taxes that 
we need.
    So I think one can look back, perhaps, and feel that was a 
golden age, but it was a golden age with fewer problems.
    Representative Maloney. Any other comments.
    Senator Gregg. I think on the capital budget side, yes, 
infrastructure improvement is critical in a lot of different 
areas. But my view is that if you're going to do it, you should 
do it in a separate budget structure, and you should find 
sources to pay for it, because you can argue that it's one of 
the few areas where you can actually borrow and make sense 
because it's a capital investment. But we're already borrowing 
far too much in ordinary, daily expenses. So I would want to 
see it paid for.
    Representative Maloney. I agree with you. Most of the 
infrastructure we are financing in New York is paid for through 
fines and fees and other things.
    Senator Gregg. Things which are very difficult to do, like 
the gas tax, which hasn't been raised in a long time, and our 
road system reflects the fact that the highway fund is now 
invading the general fund, and therefore, you're borrowing to 
finance it.
    Representative Maloney. We have a continuing resolution 
coming up. We can try to stick it in there.
    Senator Gregg. I don't think that's going to happen. On the 
bigger issue of the 1990s versus today, I do think there is 
structural differences, and the structural differences were 
that we were in an Internet bubble boom. Are we in another 
bubble boom? We may actually be in an equities bubble boom now 
because the Fed is monetizing debt so quickly, and it's forcing 
people into the equity markets.
    But a lot of that economic growth was driven by a bubble, 
and I don't really think we want to revisit that.
    Representative Maloney. And Senator Gregg, do you think 
there should be a balanced budget amendment? And if not, what 
do you think our fiscal goal should be, aside from----
    Senator Gregg. I have always been supportive of the 
balanced budget amendment. But you're talking about putting 
something by the next eon of life cycle, political life cycle. 
To pass a balanced budget, as a constitutional amendment would 
take if you were even to get consensus around it, would take 
10, 15, 20 years. So our problem is gonna be honest long before 
we get a balanced budget amendment passed. I mean, I'm for it. 
It's a great talking point. It's a great political talking 
point. But substantively, it's not going to impact our problem, 
in my opinion.
    Representative Maloney. We have 43 seconds left. President 
Daniels, how can we elevate this argument to a national level 
where we build a consensus of national support.
    President Daniels. I am going to say a double amen, and 
thank you for both your comments which were very cheering to me 
Congresswoman.
    On the first question, as it happens I'm a member on the 
Commission of Presidential Debates. I've written all my federal 
commissioners and suggested one of the debates should be solely 
addressed to this subject, to the fiscal and the economic 
future of the country, but I'm not sure that's going to happen. 
I quite agree, it's very discouraging that we are having the 
one forum where this--where the public could learn things the 
public deserves to know. It's not the American people's fault 
that they don't understand the fix we're in and the possible, 
very practical ways we could work our way out of this. So I'm 
still hopeful that one way or another those coming debates will 
be one place where that happens.
    If I'm permitted, I do want to also agree, at least in 
large part, offer a thought on infrastructure, which is--which 
was a major part of our endeavors in Indiana. It was the theme 
of our second year as soon as we got the operational budget in 
shape. And the two thoughts I would suggest--by the way, CNBC 
recently rated our state's infrastructure number one in 
America. So it can be done.
    In addition to other thoughts already offered, here are 
two. One is, there's an ocean of private capital that would 
like to participate, especially at a time of incredible low 
yield and environment which we are at least temporarily in, and 
we ought to do much more than we have to invite that capital in 
the so-called public/private partnership mode. We can build a 
lot more, a lot faster, and by the way, a lot more efficiently 
and innovatively with their involvement.
    And related to that, it's almost comical how long it takes 
to build things, given the encrusted rules and regulations and 
obstacles which we have allowed. So if there's to be another--
if there's to be a national infrastructure program, I would 
recommend a sweeping exemption of its activities from a variety 
of acts, which right now, it takes years and years to do what 
we used to do in a month.
    Representative Maloney. My time has expired. Thank you.
    Chairman Coats. Thank you. Congressman Hanna.
    Representative Hanna. Thank you. Thank you all for being 
here. It seems to me--and Senator Gregg, we spoke earlier, you 
said that all of this was predictable. I would go a little 
further than that. Having been here for three terms, my sense 
is, as long as we can borrow more money to not deal with these 
issues, that's the easy solution. And it's a shame. All of 
this, in a way, is ironic, because as Dr. Rivlin said, at the 
very time we need to make investments in pre-K, people and 
assets and science and STEM and infrastructure, those things 
that grow our economy, the collision course that we are on is 
actually preventing us from doing that.
    You talked about funding honestly and funding the Highway 
Trust Fund honestly and how we might go about that. It seems to 
me that one of the things we've become incapable of doing is 
being honest with the American public about the trajectory that 
we are on and that it's always easier to give benefits than it 
is to take them away. And ultimately, we are trying to adjust 
them in a way that provides those benefits and costs less, but 
we're not really even doing that.
    I want to talk to you quickly about the debt ceiling, 
because I have always supported raising the debt ceiling, and I 
know a number of my colleagues take great pride in not 
supporting it. So I would like to have someone, perhaps Dr. 
Rivlin--what would happen if we didn't raise our debt ceiling?
    Dr. Rivlin. We would not be able to deliver on the 
commitments that the Congress has already made, and that is a 
very serious thing. I do not believe the debt ceiling is a 
proper weapon to force action, although I very much want action 
on the debt. But the debt ceiling is not a good tool for doing 
that, because it says the Congress has already passed all these 
appropriations and borrowed to finance them, and now we're not 
going to even pay the interest on the debt or deliver on our 
obligations. We can't do that.
    Representative Hanna. Senator Gregg.
    Senator Gregg. In the end, you have to pay the debt ceiling 
because otherwise the government can't function, and the effect 
of that would be catastrophic. The debt ceiling fights occur 
because it's one of the few forcing mechanisms that comes to 
Congress. Debt ceilings and vacations are the times when 
Congress wants to act.
    Representative Hanna. Someone also mentioned that there was 
no possibility of growing our way out of this, that our 
demographics are such that our bills are growing, not 
declining.
    Just for conjecture sake, what kind of growth rate would we 
need to stay on the path that we are on and not increase our 
debt?
    Senator Gregg. I don't have that off the top of my head, to 
be honest with you.
    Representative Hanna. Ms. Rivlin, do you have an idea.
    Dr. Rivlin. It would be, I don't know, 6, 7, 8 percent 
growth rate, which we're just not going to have.
    Representative Hanna. So clearly, we need to deal with 
this. It's a myth. And we can't do it through tax reform, which 
is something we desperately need and also we're not addressing.
    Dr. Rivlin. We need tax reform, but we also need 
entitlement reform.
    Representative Hanna. President Daniels, what do you think.
    President Daniels. Which question? I agree completely. I 
understand the frustration of people who haven't found another 
lever to force real attention to this issue. But anyone who has 
been in business understands the phrase no option, no problem, 
and there's not an option. You have to pay the bills that 
you've accumulated, and the consequences would not be 
acceptable.
    On the growth front, as I said, this ought to be something 
that everyone agrees on. In fact, the more you believe in a 
large, very active federal government, the more you need the 
growth of the private sector and the more wholehearted your 
support ought to be for policies that get us there. We can 
agree on the basic principle, first stop digging. Right now, 
we're digging, rather we are heaping barriers and burdens and 
costs on those who would invest and create jobs.
    Representative Hanna. So what you are really suggesting is 
we need to unleash the private economy.
    President Daniels. It's a start. There are real problems, 
and Alice is best to speak to them, but productivity is growing 
very slowly, if at all right now. You get growth out of 
productivity and population growth, and we don't have either. 
And there's no magic answer that I can find that will 
dramatically increase productivity, but clearly, these things 
that have been talked about all need to be pieces of it.
    Again, I think we have to make every single decision until 
further notice in favor of growth for all the reasons we're 
gathered here about today. It doesn't mean that other 
priorities, environmental protections and so forth, are not 
important. Of course, they are. But we've got a transcendent 
problem facing us, and we can't get out of the starting blocks 
with the policy mix we have today.
    Representative Hanna. Thank you. My time is expired.
    Senator Gregg. I know it's over the time, but you touched 
on something that is critical, and it hasn't been explored very 
much, which is the fact that the Fed is monetizing the debt. 
The implications of this though should be staggering. If you 
continue to pump billions and trillions of dollars into the 
system, at some point you've got to get inflation. Apples fall 
from trees. And as a very practical matter, when this happens, 
the acceleration of federal debt is going to be cataclysmic. 
And we may be the best horse in the glue factory today, but we 
won't be when that happens.
    Representative Hanna. Thank you very much.
    Chairman Coats. With that sobering analysis, I turn now to 
Senator Klobuchar.
    Senator Klobuchar. Thank you. I want to thank all of you, 
and especially welcome back, Senator Gregg. Thank you for your 
incredible work with this. I was a member of one of the groups 
that got the process in place for Simpson-Bowles. Obviously, 
we've been disappointed that we haven't been able to put all of 
this together. The sequester is just so focused on the spending 
cuts, which I think it's like a 4-to-1 ratio of spending to 
revenue, and a lot of the other reports that we've gotten out, 
Simpson-Bowles was 3-to-1, 2-to-1, depending on the version. 
Rivlin-Domenici was 1-to-1 with cuts to spending and revenue. 
So that to me has been one of the challenges in how we take 
this opportunity, because we've been governing from crisis 
through the downturn, and it's really hard to get this stuff 
done when you're in a crisis. Now we are governing from 
opportunity. The economy is stable. And this should be the time 
at which we go back and tackle this, especially with the 
enormous need for tax reform.
    So I would start with that with you, President Daniels. 
Since my in-laws met at a social dance class at Ball State and 
my husband was born in your State and went to IU law school, I 
have to ask you a question first.
    On the infrastructure front, Dr. Rivlin has pointed out, 
trying to combine this targeted investment in research or 
infrastructure. One of the ideas we've tossed around with the 
tax reform is to bring back some of that money oversees. The 
way the government looks at this, is that it won't save any 
money because we would be bringing the tax rate down whether we 
do it hopefully in the long term instead of just a one-shot 
deal. But we bring that money back, and then we invest part of 
that, if it's voluntarily brought back, in an infrastructure 
bank. Congressman Delaney and others have been working on this 
issue here. But can you talk about that and how you see that as 
one of the levers we can use to try to get infrastructure 
investment, but also tax reform overseas.
    President Daniels. I think it's a reasonable idea to 
consider. And I would say that a cardinal principle of one-time 
money is you only spend it on one-time things, and this would 
qualify, that is to say, capital investment. So the danger 
would be that Congress would approve repatriation of that money 
and then spend it on today, and we would be worse off than 
before.
    But if we had your direction, yes. I think there's some 
practical questions about infrastructure bank, but I think the 
idea of investing in infrastructure is important.
    One thing I would say, in addition to the two points I made 
earlier, that we really, if you want this thing to have any 
near-term effect--these investments are meant to benefit the 
nation over a longer term. But I hear a lot of people talk 
about it as a way to boost the economy in the near term. Well, 
there are two reasons that that's unlikely to happen, given the 
status quo. One is, only so many jobs are really involved. How 
many people in the room can drive a road grader. So there's 
that.
    Secondly, from having done an awful lot of this, this 
problem is not a small one. As I say, there are almost comical 
examples. Please read Philip Howard's work and others who have 
chronicled how incredibly tedious it is to get anything 
actually done.
    Senator Klobuchar. I understand. Though when the I-35W 
bridge collapsed in Minnesota, we built that highway in less 
than a year.
    President Daniels. We can do it if we want. I'll finish 
with one quick answer. We found revenue--construction in 
Indiana, a huge amount of money. We built a few small things 
just with our own money. Some of them were, as I called--
they're called bike trails, one-half the time and about one-
half the cost of the federal rule----
    Senator Klobuchar. Got it. I just want to go broadly to the 
debt here, Dr. Rivlin, Senator Gregg, this issue I brought up 
with the spending to revenue ratio. You talked about 
entitlements as a piece of it. When it comes to taxes, we talk 
about a lot of things. The capital gains change, the Buffet 
rule, some of these other things. But how do you think that we 
do this so that we bring in some revenue in addition to making 
the spending cuts.
    Dr. Rivlin. Well, I believe that both Simpson-Bowles and 
Domenici-Rivlin had the right idea on tax reform, broaden the 
base of both the individual and the corporate tax and lower the 
rates. You can make the individual code much more progressive 
if you phase down some of the tax expenditures that go very 
heavily to upper-income people. Particularly, I would change 
the mortgage deduction to a credit. You have to do that slowly 
over time, and I would phase down the exclusion of health 
benefits from income.
    Senator Klobuchar. Senator Gregg.
    Senator Gregg. I do believe that the deficit and the debt 
and the spending and revenue should be expressed in the budget 
process in terms of percent of GDP, and those should be your 
targets. You have to reach what they are. Simpson-Bowles, I 
think we went to 21 percent spending, 19.5 percent revenues, 
and we presumed a structural deficit that would stabilize at 
about 60 percent of GDP.
    Senator Klobuchar. This last thing is--put it on the record 
here, immigration reform. I once called Grover Norquist for 
this committee as my witness, just because he's so focused on 
that as a way of helping to bring down the debt. According to 
the CBO immigration reform could save $158 billion in 10 years, 
and in 20 years, immigration reform could save $685 billion, in 
that range. Just one more thing we could be doing. Thank you.
    Chairman Coats. Thank you, Senator.
    Senator Lee.
    Senator Lee. Thank you all for being here and for your 
testimony. I would like to start with you, President Daniels, 
if I could.
    Our current stock of debt will undoubtedly be a significant 
burden on future generations, but the extent of that burden, 
how significant it is, I think, really will depend on one 
critical factor, and that is whether even though we're 
accumulating debt, regardless of the fact that we're continuing 
to accumulate some debt, the real economy continues to be 
supported by a growing, productive capital stock. In other 
words, our own economic growth is crucial to how we weather 
this.
    But there's a lot of reason to be concerned about this, 
because as you're aware, I'm worried about the fact that not 
only are we driving up the government's debt with costly 
decisions in Washington, but the current regulatory environment 
seems to be dampening growth so that the debt burden on our 
kids is going to be heavy, is going to be that much heavier. 
And private investment has been falling recently, and that 
increases the risks as well.
    So you know, it's one thing to hand over--what's compared 
to a business, it's one thing to hand over a business to your 
kids with the corporate credit card maxed out, with a steady 
income stream and a growing income stream going into the 
business. That's one thing. But it's another thing to hand them 
that same credit card without a thriving, growing business.
    So I'm really hopeful that my children and other 
millennials understand this dynamic and understand the severity 
of the potential burden they could face.
    So I wanted to ask you, as a university president, as 
someone who works with and serves millennials, do you think the 
current generation, our current generation of college students, 
understands the urgency of the situation and the burden they 
will face? Is our current model for higher education adequately 
preparing students to face those challenges?
    President Daniels. Purdue University is.
    Senator Lee. Exactly, that goes without saying. Other than 
Purdue.
    President Daniels. No, I don't think they understand at all 
what awaits them. Even if we act decisively, I don't think they 
understand that. And as I said earlier, it bothers me that, as 
they've inevitably come to see it, that they will feel that we 
didn't serve them well and that they will suspect not just 
those of us who might have done something about it but the 
whole system, which somehow, as the skeptics of history have 
said, government by consent of the governed has inherent 
problems. As someone said, it's a lot easier to make promises 
than pay for them.
    So I do worry about that, and yet, I have to tell you, you 
would expect me to say this, I guess, but young people, at 
least those who make it to campuses like ours, are incredibly 
talented, incredibly purposeful. They're very innovative. 
They're going to devise ways to make our economy more 
productive that I'm not capable of envisioning. I have every 
confidence in that, but that doesn't lead me to a blind faith 
that the economy that they produce will be up to--will be able 
to sustain the burdens we've placed on them.
    Senator Lee. One of the things that I do worry about, about 
millennials and about all generations of Americans, for that 
matter, relates to what could happen in this sort of doomsday 
scenario that keeps me up late at night, the scenario in which 
we suddenly find that our interest rates return to their 
historical average. Even assuming there's no rebound, 
reflecting the fact that we've been significantly below that 
historical average for the past few years, even if there's no 
rebound, when the interest rates return to their historical 
average, what does that do to us? What practical consequence 
does that have for our government.
    President Daniels. Dr. Rivlin can give you the update, but 
last I checked on the sensitivities of this, every 1 percent 
above what we're expecting is about a trillion dollars over 10 
years. So if you return to normal, which would be a few percent 
over what's now projected, you can see how much you've added to 
the problem. As I said, there are a lot of assumptions in our 
forward forecasting that I think are too cheerful, and that's 
one of them.
    Senator Lee. I wish I had more time to explore this with 
Dr. Rivlin and Senator Gregg. But I thank you for being here, 
and I just add to that that our interest payment on our debt 
has been relatively stable in the last 20 years. It's been in 
the range of 200, 250 billion dollars a year or so, 
notwithstanding the fact that our actual debt has increased six 
or sevenfold during that time period. So the only reason our 
interest payment has remained more or less the same is we're in 
this odd valley where our interest rates are at all-time 
historic unnatural lows, and that scares me to death.
    Thank you.
    Chairman Coats. Thank you, Senator.
    Dr. Adams.
    Representative Adams. Thank you, Chairman Coats and Ranking 
Member Maloney, for hosting the hearing today on the national 
debt, and to our panelists, thank you very much for your 
testimony and for being here.
    This is a topic that's vitally important in preserving and 
protecting our national economy, but even more important as we 
operate within the larger global economy.
    I want to start my questions today by addressing the idea 
of spending cuts as a way to tackle our national debt. But in 
particular, I want to ask about whether there are spending cuts 
that would harm rather than help our debt burden and the 
economy.
    Dr. Rivlin, can you discuss the impact that additional 
spending cuts to federal investments in the near term would 
have on future economic growth and the long-term debt burden?
    Dr. Rivlin. Yes. I think we can't afford to cut productive 
investment. We have already cut discretionary--domestic 
discretionary spending below historic levels. Congresswoman 
Maloney put up a very nice chart earlier in the hearing that 
shows the real plunge in relation to the size of the economy of 
domestic discretionary spending, and that's where the 
investment mostly is. So we've cut already there, way below the 
Simpson-Bowles recommendation and the Domenici-Rivlin 
recommendation. So that's, in my opinion, not the place to cut.
    The place we need spending restraint is in the entitlement 
programs and in the future.
    Representative Adams. Thank you very much. So does it make 
sense to make major cuts to programs that help provide economic 
stability to our nation's low-income families and individuals, 
as well as specialized demographics such as students and small 
businesses, because of concerns about the long-term debt.
    Dr. Rivlin. No, I don't think that's the place to cut it, 
although some of that money can be better spent. We should be 
trying to do it as effectively as we possibly can. It's not 
sensible to have a rule that says no government spending can 
ever be cut, even if it goes for worthy purposes. We need to 
examine all of the spending.
    Representative Adams. So when I think of economic growth, I 
think of investments in infrastructure, support for our 
nation's small businesses, as well as tackling the student loan 
debt crisis that we have in our country. I had the distinct 
pleasure of serving on a college campus, small woman's college 
in Greensboro, North Carolina, Bennett College. So I'm very, 
very sympathetic and understand what students go through.
    But having arrived here at the Congress fairly recently, it 
appears to me that my colleagues on the other side of the aisle 
have a problem with actually supporting legislation that will 
provide critical funding and resources for these groups.
    So how important do you think it is to fund programs that, 
first of all, create jobs and opportunities, especially for new 
graduates, in order to stabilize our national debt as a share 
of the economy?
    Dr. Rivlin. Well, I'm for helping students get 
opportunities in many different ways. But I think that has to 
be an ongoing effort taken in the context of doing these hard 
things on taxes and entitlements to bring the future debt down. 
Because those students are the ones who are going to bear that 
future debt.
    Representative Adams. Thank you very much. I have some time 
to spare, and I yield back, Mr. Chair.
    Chairman Coats. Thank you, Doctor.
    Representative Schweikert.
    Representative Schweikert. Thank you, Mr. Chairman.
    Doctor, you won't remember this, but maybe 18, 20 years 
ago, you were doing some seminars here in D.C., and I sat 
through those. I still have my notes from some of those and you 
were actually very kind to me. But there's some observations, 
and one day I'm going to go find those notes and provide them 
to you.
    One of the things on some of the charts that were being 
provided was hey, here's what GDP is going to be over the next 
quarter century, here's what economic expansion, here's our 
world, our trade. And something went horribly wrong in the last 
10, 15 years, when we start to look at our productivity curve 
and even our GDP and so I have a sensation that many of the 
models that are built on right now--I've only been here five 
years, and five years ago, this was--right after we did 
sequestration, the world is going to come to the end, this 
year, we're going to have about $245 billion shortfall, and 
this year, we're going to have $590 billion shortfall.
    So the numbers in many ways are much worse than we tell 
each other, than we tell our constituents. Think of this. You 
know this. This year, every dime of nondefense discretionary is 
borrowed, and this is supposed to be one of the good years. How 
realistic is our modeling when, for almost a decade, we haven't 
come close to much of our GDP modeling?
    Dr. Rivlin. If you go back--I'm glad you have this nice 
memory of my seminar. But if you go back that far, certainly--
I'm not sure exactly what GDP protections were. Nobody can 
project GDP for a very long time. You have to do the best you 
can.
    What was not predicted was the crash of 2008, which, in my 
opinion, was totally avoidable, but it certainly wasn't 
anything that could be factored into models.
    But let me say one other thing. Not all the projections 
have turned out to be too rosy. One of the things that's rather 
heartening is that back when we were doing Simpson-Bowles, we 
were much more worried about the growth of healthcare spending 
in the future and the explosion of Medicare than we are now. 
There has been sometimes good things happen.
    Representative Schweikert. When we're charting that curve, 
as you've started to see, we're hitting now an inflection 
again, at least maybe temporary, but in the last 12, 18 months 
we see that inflection on some of that data.
    Dr. Rivlin. Yes. We're starting from a lower baseline, as 
the economists like to say.
    Representative Schweikert. In this next little bit, it may 
be more to my brothers and sisters on the panel. Some of our 
calculations, Social Security, disability, the trust fund is 
gone in about 40 months. Medicare, Medicare, the trust fund is 
gone, in my calculations, in about seven years, seven months. 
In my calculations, Social Security trust fund is empty 12, 13 
years. And you think about today we have, what, about $2.8 
trillion in that trust fund, and we're going to burn through 
that in 13 years, just the recapitalization of such huge trust 
funds.
    How do I get--and look, you've dealt with my kind for a 
very long time, you know that hold public office. But one of my 
greatest shocks here is the number of people that actually own 
calculators around this place. They don't do math here. We talk 
and talk. We define borrowing substantial portions of our 
budget as austerity. If you could do one thing, would it be 
walking in the door and saying here's an alternative--here's a 
reform of Medicare, is this an occasion where we've got to do 
everything all at once?
    Dr. Rivlin. Personally, I think we need to do everything, 
but if I had to do one thing up front and get it out of the 
way, it would be Social Security. It's not hard. It's not 
conceptually difficult. Tip O'Neill and Ronald Reagan did it. 
We can do it. It's a bipartisan conversation about known 
quantities.
    Representative Schweikert. To brothers and sisters around 
here, please take a look at the Reid Ribble bill. It has a few 
hiccups, but it is as close as I think we can get to a piece of 
legislation we can do today. It is written. That would deal 
with Social Security and if you're interested, within about 
three or four days, we're going to have a major rewrite that 
provides optionality in Medicare. Actually, in many ways, it's 
based on some of the work you've all done so you can stay in 
traditional or also have a more optionality model, and 
apparently, that really bends the curve. But you would be 
shocked how hard it is getting fellow members who talk about 
this to be willing to put their names on those pieces of 
legislation.
    With that, I yield back, Mr. Chairman. Thank you.
    Chairman Coats. According to our rules, those that arrive 
after our gavel we recognize in terms of our arrival and I've 
just been handed this note here. I'm told that Representative 
Beyer, that you could be next, but you can't, but you're next 
next. So Representative Grothman, you're on.
    Representative Grothman. Thank you very much. First, I want 
to make a brief statement in response to Representative Hanna. 
I believe it was him. I do not think the studies would show 
that government-funded preschool is necessarily helpful. But 
above all, I don't know how you can read the Constitution and 
say it's the federal government's business. And I think one of 
the problems we have around here is we should have a little bit 
more respect for the Constitution and the 10th Amendment and 
educate the public that there are certain things that may or 
may not be good, but if they are good, it's not the federal 
government's business. Until we do that, we're going to have a 
hard time getting a hand on things.
    First off, I'm going to lead off with Senator Gregg. I 
couldn't disagree with something you said more. I'm a freshman 
here, but one of the things that amazes me is that, despite the 
fact we have the majority in the Senate, we can almost do 
nothing in the Senate. By that, I mean the Republicans. The 
need to have 60 votes means, as a practical matter, everything 
we do in the Senate is bipartisan. Every appropriations bill is 
bipartisan. Other things, like the docks or the transportation 
bill, all of this stuff is bipartisan. It seems to me as 
freshman here, the way you get these bipartisan agreements is 
get everybody to spend more. That's what they do. When I was a 
state legislator in Wisconsin, we had the majority. We balanced 
our budget. We didn't have to get a bunch of, you know, free-
spending people all together and keep spending more and more 
and more.
    So I'm going to ask you to comment on your idea of what you 
mean more by bipartisan, or perhaps if we change things so that 
51 votes can get something out of the Senate, maybe that 
wouldn't be better. It seems to me on the face of it it's 
easier to get 51 voting than 60. And I think the fact that 
we've had to get 60 votes is the reason why we've had such 
bloated spending this millennium.
    Comment?
    Senator Gregg. I would suggest that on issues that involve 
all Americans, where pretty much everybody is affected, 
Medicare, Medicaid, Social Security, and tax reform, that if 
you push forward in a partisan way, at least 50 percent, maybe 
a little less, than the country is not going to be believe what 
you did is fair.
    The classic example of this is ObamaCare. It was pushed 
through on a partisan vote. It was brought on the floor of the 
Senate on a Saturday before Christmas. It was voted out on 
Christmas Eve. No substantive amendments were allowed. And from 
that day forward, there was absolutely no support from the 
Republican membership and from a large percentage of this 
country for that proposal. Had it been a bipartisan package, it 
probably would have been fundamentally better, and it would 
have had national support, and it probably would have saved 
much more money.
    I recognize that, as a conservative Republican, if I were 
in charge of the Senate with 51 votes, I would get a lot more 
through, but I may not be the majority in the Senate. So I 
might lose a lot of votes, and things would happen which 
weren't constructive.
    I happen to think that if you're going to do budgets and 
you're going to pass budgets on a partisan basis, the budget 
becomes irrelevant, because one side just basically is on 
opposition all the time on the budget. If you put the 
fingerprints of everybody on that budget, then everybody is 
vested in trying to do something and make it work.
    Representative Grothman. I think the three most significant 
bills that affect overall spending in the last year and a half, 
the omnibus bill, the dock fix, and the transportation bill all 
couldn't have been more bipartisan. And I think a good case can 
be made that all three moved us in the wrong direction. Maybe 
you had different experiences when you were here years ago.
    Now I'm going to switch to Dr. Rivlin. Over the weekend--
part of the answer to the budget deficit has to be to grow 
revenue, have a growing economy. Over the weekend, I ran into a 
CPA telling me about how his clients are working less so they 
get their ObamaCare subsidies, another poorly designed program 
to discourage people from working hard. Of course, the harder 
you work, the more you lose the subsidy. This is the way we do 
things around here. I don't care whether it's food stamps, low-
income housing. Pell Grants, everything is designed to 
encourage people not to work hard so they get more government 
money.
    You've been following this institution for a long time. To 
what degree do you feel our economy is not growing anywhere 
near as fast as it should be, because people are intentionally 
not working as hard as they can to get more government 
benefits, ObamaCare being the newest one.
    Dr. Rivlin. I don't agree with that. I don't think there's 
very many such people. I really don't. There may be a few. But 
I want to associate myself with Senator Gregg's remarks on, if 
ObamaCare, which was designed as a bipartisan bill and appeals 
to many Republicans in that it's using the private sector 
competition, if ObamaCare had been passed by a bipartisan 
majority, it would have been, I think, a rather similar bill 
but much more successful.
    Representative Grothman. You mean you don't believe that 
people are intentionally holding down their income to get their 
ObamaCare subsidies? You don't believe that.
    Dr. Rivlin. I do not believe that.
    Representative Grothman. Okay. There's part of our problem.
    Chairman Coats. Thank you, Congressman.
    Congressman Beyer, last but not least.
    Representative Beyer. Thank you, Mr. Chairman, very much.
    Senator Gregg, thank you so much for the idea on the plans 
reforming the way the budget works and the--it was very 
thoughtful, very constructive.
    I would like to follow up on one thing Mr. Schweikert was 
talking about, the challenges of dealing with entitlement 
reform. Everything that I think I know about how we move 
towards a balanced budget begins and ends with entitlement 
reform because of the overall structure. Mr. Schweikert 
mentioned the Reid Ribble bill. I'm not sure if this is the 
same as John Larson's Social Security 2100. I think both are 
very responsible approaches that make Social Security good 
through the year 2100 and bring the millennials back on board. 
But I'm very concerned about what we do about Medicare and 
Medicaid. Governor Daniels talked about Medicaid being 30, 35 
percent of some states' budgets. We have this dilemma that our 
pharmaceuticals keep getting better and better but also more 
expensive, our surgical approaches better and better but more 
expensive.
    When you look at the Ryan budget, not to be unfair to our 
speaker, but he essentially threw up his hands and said let's 
do block grants on one and vouchers on the other and see what 
happens, which probably is inevitably a formula for scarcity?
    What's the most responsible way to approach entitlement 
reform on Medicare and Medicaid?
    Senator Gregg. Healthcare is the essence of the issue which 
we're talking about. If we were able to manage our healthcare 
accounts in a responsible, fiscally affordable way, our deficit 
and debt issue would essentially be handled also.
    I would also like to see major tax reform along the lines 
of Reagan-Rostenkowski.
    And the problem with healthcare is that it is a massively 
complex matrix. It's a moving target all the time. It's not 
like Social Security which has four or five moving parts, we 
know how to fix them. Alice and I have been on innumerable 
commissions where we come to the same conclusion on how to do 
it. Simpson-Bowles had a great proposal.
    But healthcare is always going to move. You can't--there's 
no magic wand to deal with that. I think the essence, though, 
looking at it from 60,000 feet, are the proposals that are 
coming out today from groups like the Dartmouth Institute, 
which essentially say that instead of rewarding cost-plus 
healthcare, which is what we do today, we reward outcomes and 
value-based healthcare and we move towards a capitation system, 
so that essentially the work of delivering healthcare and 
whether you get paid in healthcare is tied to the outcomes you 
produce at the price you produce. And there have been studies 
after studies that have shown that the variation in price for 
the same procedures across this country is staggering. For 
example, it costs five times what it costs to do a full hip 
replacement in Florida for what it costs in Minnesota, but the 
outcomes aren't any better. In fact, they're probably worse.
    So there has to be the incentive of our Medicare and, to 
some extent, our Medicaid system which should be dealt with 
differently. It has to be to promote outcomes value-based 
healthcare and recognize that, no matter what you put in today, 
maybe three or four years from now, you're going to have to go 
back and take another look at it to see if it's working and 
producing the results you want.
    It's such a moving target and so complex.
    Representative Beyer. Thank you, Senator. Dr. Alice Rivlin, 
I'm impressed that the amount of money we spend on tax 
expenditures is greater than what we spend on Medicare or 
Medicaid or Social Security or nondefense discretionary. At 1.2 
trillion in tax expenditures, even half of that would close the 
budget deficit that we have on an annual basis right now.
    Is that the lowest hanging fruit for us.
    Dr. Rivlin. I think that tax expenditures are a very 
important part of tax reform. Not only are they large, but they 
are designed to go differentially to upper income people, so 
that sensible reforms of the major tax reform--major tax 
expenditures, mortgage interest, the exclusion of healthcare, 
and a couple of others, would help make our tax system more 
progressive at lower rates, and lower rates are important to 
growth. So I think we can do that.
    Representative Beyer. Thank you.
    Dr. Rivlin. If I can take one more second.
    Representative Beyer. Yes.
    Dr. Rivlin. I subscribe to Senator Gregg's emphasis on 
value-based reimbursement. I think we're making progress on 
Medicare. It's not hopeless.
    Representative Beyer. Good. Thank you. Mr. Chairman. I 
yield back.
    Chairman Coats. Well, I want to thank our members here, and 
I want to thank our witnesses, in particular. This has been one 
of the most substantive, meaningful hearings that this 
committee has held, at least under my chairmanship. I think we 
have successfully--and I know that my ranking member shares 
this thought, that it's hard to think of what three other 
people could have given us a better view, better analysis than 
what we have had from the three of you. So we are very grateful 
for that.
    What is somewhat discouraging is that here in an election 
year where this issue may be the most pressing issue that the 
next President of the United States is going to have to deal 
with, and the only thing I can think that may transcend this or 
equal this is a terrorist attack attached to some kind of 
weapon of mass destruction. But looking at it from the domestic 
policy side, I can't think of a more challenging issue that 
will face this next president, and yet in this presidential 
election year, this is not even being debated. This is not an 
issue that's being presented to the American people in any way 
except we're not making any changes anywhere, folks, so don't 
worry. If you're concerned about Social Security, we're going 
to give you more. If you're concerned about healthcare, don't 
worry, we're going to give you more, your retirement pay and so 
forth and so on. So that's very disturbing. I really hope and 
pray, I think, that the suggestions that have been made here 
today can be taken up by the Congress next year, because it's 
the only rational way to deal with this problem. It wasn't that 
long ago I was meeting with Christine Lagarde, former finance 
minister of France and now IMF director, and it was at the time 
of the situation in Europe where they had hit a financial 
crisis. And I asked the question, do you think the reforms that 
are being offered and imposed now in the European Union would 
have taken place without the crisis, and she said in all my 
years of experience, she said I'm sorry, but I have to say no, 
I don't believe it would. She said I've come to understand that 
the revolver needs to be at the temple of the politician with a 
finger on the trigger before they're willing to say no to 
anyone.
    There are rational, reasonable ways, if we can make our 
case to the American public, to address the situation. I 
encourage Dr. Rivlin by saying doomsday doesn't have to be 
tomorrow, and doomsday hopefully doesn't have to be a financial 
crisis. Christine Lagarde said and you will make terrible 
mistakes by rushing to judgment in terms of slashing this and 
slashing that and not doing it in a rational way.
    So that's the challenge before us. Hopefully this 
committee's hearing will help spark some--at least some debate 
on this, and hopefully, we can inject some of this. The ranking 
member and I have been talking about how--perhaps how we can 
encourage the debate commissions--and that suggestion was made 
by our witness here--to make this a key issue for the 
presidential election.
    So with thanks to my colleagues, thanks to our witnesses, 
the Committee adjourns.
    (Whereupon, at 11:13 a.m., the hearing was concluded.)

                       SUBMISSIONS FOR THE RECORD

   Prepared Statement of Hon. Daniel Coats, Chairman, Joint Economic 
                               Committee
    Over the summer, I was cleaning out some old documents, and I came 
across a press release from 1982, when I was a Member of the House for 
the 4th District of Indiana.
    Thirty-four years ago, I wrote about how we need to balance the 
federal budget, and how that cannot be done without slowing the growth 
of mandatory spending. I was alarmed at the rate of growth in mandatory 
programs and how Washington's autopilot-spending had allowed Medicare 
to grow to the point where it reached $46 billion.
    Yes, $46 billion.
    Sadly, that seems like pennies on the dollar today when we are 
projected to spend more than $588 billion this year on Medicare alone.
    Because previous Congresses and Presidents have failed to kick 
Washington's spending addiction, our debt is quickly approaching $20 
trillion, and as a share of our economy, is on a path to reach record-
level highs.
    In fact, the latest numbers from the Congressional Budget Office 
indicate that our gross federal debt is once again larger than the size 
of our economy.
    It is no longer a question of IF we will ever have to finally 
address our gargantuan debt, but when.
    In only 10 years, the cost of mandatory programs and interest on 
the debt will consume over 96 percent of all federal revenues. This is 
expected even though, on average, the federal government is expected to 
take a larger share of revenues each year for the next decade than it 
has over the past 50 years.
    This means that if we are going to be able to pay for other 
priorities, like national security and medical research, almost every 
bit of it will be on borrowed dollars.
    Without a strong economy or government finances, the nation and the 
American public's security is in danger.
    Former Chairman of the Joint Chiefs of Staff U.S. Navy Admiral 
Michael Mullen rightfully noted that ``The most significant threat to 
our national security is our debt . . . That's why it's so important 
that the economy move in the right direction, because the strength and 
support and the resources that our military uses are directly related 
to the health of our economy over time.''
    When Admiral Mullen made those remarks, our debt was around $13 
trillion and looming threats from ISIS didn't exist, so it stands to 
reason that our debt is an even larger security threat today.
    However, the ability to fund these basic programs will be further 
compromised because at around the same time--just a decade away--CBO 
expects that Medicare Part A, which pays for hospital services for 
millions of seniors, will be bankrupt.
    Shortly thereafter, the Social Security trust funds will be 
exhausted.
    By that time, the accumulation of an additional $8 trillion in debt 
will bring us over $28 trillion, which is nothing short of reckless.
    While this spending addiction is a bipartisan problem, President 
Obama has added more to the federal debt in less than 8 years than his 
43 predecessors combined did over 218 years.
    Whether it is this administration or the next, this Congress or the 
next, eventually our nation's fiscal day of reckoning will come.
    Just last month, CBO again stressed that such high levels of debt 
will increase the likelihood of a fiscal crisis in the United States, 
as lawmakers have less flexibility to respond to unexpected challenges.
    CBO also warned that the debt will directly harm the economy by 
reducing private capital and lowering productivity, while families will 
feel the very real consequences through lower wages.
    As dire as the situation is, we still have time to act.
    But, the real question is whether Congress is willing to act 
entirely on its own.
    In my years of serving in Congress, it seems that there is never a 
politically convenient time to address mandatory spending, so we 
continually kick the can down the road.
    I strongly believe that Congress needs a catalyst to force members 
and the President to take action before it's too late.
    Only twice in my career have I seen Congress actually step up to 
the plate and force itself to take politically painful major actions.
    The first is the 1983 agreement between Ronald Reagan and Congress 
to shore up Social Security. At the time, the Social Security program 
was facing bankruptcy, and President Reagan joined with a Democrat-
controlled Congress to put politics aside and take steps to shore up 
the program--actions which extended the life of the program for over 30 
years now.
    Unfortunately, we are once again approaching a crisis point in 
Social Security, as well as Medicare, and to date Congress and the 
Administration have proved unwilling to once again put politics aside 
and address the problem.
    The other example is the defense BRAC process, where an independent 
commission makes recommendations to improve the Department of Defense's 
efficiency.
    Given Congress' repeated failure to act on its own beyond these two 
limited examples, I recently introduced legislation that I believe will 
provide the ``push'' needed for Congress to make the tough decisions 
required to stabilize our finances.
    My bill, the Mandatory BRACC Act, would establish a civilian BRAC 
specifically for mandatory programs--the true drivers of our spending.
    This concept takes the best ideas from Defense BRAC, Simpson-
Bowles, Rivlin-Domenici, and others, and would create a panel of 
private sector experts to streamline mandatory programs and make them 
more efficient.
    The recommendations would then be put before Congress for an up-or-
down vote--without any procedural gimmicks or stall tactics.
    However, I believe Congress is still also capable of developing its 
own ideas to stabilize spending, as an alternative to the Commission's 
recommendation.
    This, along with a Balanced Budget Amendment, could prevent the 
upcoming debt implosion if we act soon.
    If we fail to act, our nation's ability to pay for essential 
government functions will be severely constrained, our economy will 
suffer, and our national security will be at risk.
    Today's hearing provides us with an opportunity to identify ways to 
achieve our bipartisan goal of a prosperous America.
    We have the privilege of hearing from distinguished experts on this 
topic, and I look forward to their testimony examining why and how we 
should solve our federal debt crisis.
                               __________
   Prepared Statement of Carolyn B. Maloney, Ranking Democrat, Joint 
                           Economic Committee
    Chairman Coats, thank you for calling today's hearing.
    I want to start with a number that's often talked about. And that's 
$19.5 trillion--the total nominal debt. No question, that's a lot of 
money.
    But, as both Senator Gregg and Dr. Rivlin write in their testimony, 
a far more important measure is public debt in relation to the size of 
the economy--the debt-to-GDP ratio. Right now that is about 75 percent 
of GDP.
    We can improve the debt-to-GDP ratio in two ways--by decreasing the 
debt and by increasing economic output.
    We must improve both halves of that equation. Let's look at the 
first--debt.
    The main driver of increasing debt is the aging U.S. population. 
Everyone who has studied the debt issue, from CAP on the left to Cato 
on the right, says projected deficit growth is overwhelmingly the 
result of long-term trends--the aging U.S. population and rising health 
care costs.
    One fact tells much of the story: there are nearly two and a half 
times as many people aged 65 and over today as 50 years ago. This means 
more and more Americans will be receiving Social Security and Medicare 
benefits.
    CBO projects that spending on Social Security and Medicare will 
increase as a share of GDP over the next decade, while all other 
program spending is on track to decline.
    In fact, discretionary spending is nearing historic lows. Spending 
on nondefense discretionary programs as a share of GDP is projected to 
hit its lowest level on record in 2018.
    Some point a finger at President Obama for the increase in the 
national debt. This ignores the fact that it is overwhelmingly due to 
long-term trends and the legacy of the Great Recession that began on 
the prior president's watch.
    Conveniently, they also forget history.
    In the late 1990s, President Bill Clinton presided over four 
straight years of budget surpluses, completely erasing the deficit. 
This allowed us to pay down a significant portion of our debt.
    President George W. Bush inherited a surplus of $128 billion, or 
1.2 percent of GDP.
    But he quickly squandered the surplus on two tax cuts, which 
increased the debt by $1.5 trillion over 10 years.
    Then he led the United States into wars in Iraq and Afghanistan, 
projected to cost $4 to 6 TRILLION dollars in the long term.
    Then he presided over the worst economic meltdown since the Great 
Depression, which crippled the economy and sent deficits soaring.
    In the end, George Bush left Barack Obama with a deficit of nearly 
10 percent of GDP and a rapidly rising debt.
    As Robert Bixby, head of the nonpartisan Concord Coalition put it--
the debt ``would have exploded'' around 2009 to 2010 ``no matter who 
was president.''
    The reality is that the Obama Administration has helped dig us out 
from the Great Recession, and the deficit as a share of GDP fell by 
nearly three-quarters, from nearly 10 percent to 2.5 percent.
    Now I'd like to turn to the second half of the equation--increasing 
economic output.
    To do this, we should invest in our nation's infrastructure, 
workforce, and competitiveness.
    However, nondefense government investment as a share of the economy 
is at its lowest level in more than 50 years.
    In fact, we are not investing enough to maintain our existing 
infrastructure.
    With interest rates at historic lows, it is the ideal time to 
borrow and invest in rebuilding our nation's infrastructure and fund 
the basic research that will drive the next generation of innovation.
    As Dr. Rivlin describes in her testimony, these investments will 
make our economy stronger and more productive. And as economist Larry 
Summers has argued, NOT making these investments will place a 
significant burden on our children and grandchildren.
    History is instructive. Investing in broad-based economic growth 
was at the core of America's success in the decades after World War II. 
We invested in our people through the GI Bill, and in our 
infrastructure, building the nation's interstate highway system.
    It paid off. While publicly held debt more than tripled between 
1945 and 1981, it fell by about three-quarters as a share of the 
economy.
    More recent history is also important to consider. Excessive 
austerity in the near term, as has been pursued in recent years, will 
slow economic growth and make it more difficult to bring down the debt-
to-GDP ratio over time.
    Again, we need to address both sides of the equation.
    To tackle our debt we need a balanced approach that mixes targeted 
spending cuts, reforms to social insurance programs and revenue 
increases.
    And to grow the economy, we must invest in infrastructure, 
education, and innovation.
    It's doable. It's up to us to do it.
    
    
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   Prepared Statement of Mitchell E. Daniels, Jr., President, Purdue 
  University, and Co-Chair, Committee for a Responsible Federal Budget
    My gratitude to the committee for the invitation to discuss our 
national debt and its implications for our nation's future. In my view, 
this issue transcends all the others before us; put another way, if we 
get this wrong, nothing we deal with successfully will matter very 
much.
    On receipt of the invitation, I started preparing another fact-
heavy, statistics-laden description of the problem, its near and long-
term effects on the economy and on the ability of the federal 
government to discharge its many legitimate duties. But I decided that 
was not a good use of my time or yours. First, my fellow panelists are 
far more expert and current on the details of today's fiscal picture. 
Second, you've heard it all before.
    You know, or you should, that our deficits have been running at 
historically unprecedented levels, so much so that another half 
trillion dollars this year, bigger than in any year in our history 
before 2009, was met with a yawn, or even by some, somehow, as a benign 
event.
    You know, or you should, that our national debt has reached a 
peacetime record, and is heading for territory where other nations have 
spiraled into default, or into the loss of sovereignty as creditors use 
their leverage to dictate terms.
    You know, or you should, that public debt this large weighs heavily 
on economic growth, crowding out private investment and discouraging it 
through uncertainty. And that much faster growth than today's is the 
sine qua non of the greater revenues that will be necessary to meet 
federal obligations, let alone reduce our debt burdens.
    You know, or you should, that the unchecked explosion of so-called 
entitlement spending, coupled with debt service, is squeezing every 
other federal activity, from the FBI to basic scientific research to 
our national parks to the defense on which the physical survival of the 
country depends.
    You know, or you should, that the whole problem is getting worse, 
and fast. Even if reform began today, past overpromising and 
demographic realities mean that the entitlement monster is going to 
devour accelerating amounts of additional dollars, all of which are 
scheduled to be borrowed rather than funded honestly.
    You know, or you should, that we are kidding ourselves--except that 
it's no joke--in even the appalling estimates I just referred to. The 
official projections of growing indebtedness are built on a pile of 
wishful assumptions which repeated experience tells us are bogus: 
productivity assumptions are too high, interest rate assumptions too 
low; growth too high, spending too low. As each of these is proven 
unduly rosy, more zeroes will be added to the bill we hand to the young 
people of this country.
    So, I will spare us all the statistics. Let me instead offer an 
appeal on behalf of those young people, the ones I am so lucky to live 
among at Purdue University, all their counterparts, and the new 
Americans not yet with us. The appeal is for a shift in national policy 
to the growth of the private, productive economy as our all-out, 
primary priority, calling all close ones and breaking all ties in its 
favor. And for decisive action soon, at long last, that begins the 
gradual moderation of unkeepable promises and unpayable debt loads 
which will otherwise be dumped on coming generations. This I suggest 
not only as wiser fiscal and economic policy, but for the sake of 
public integrity and the survival, literally, of our free institutions.
    A national government that, year after year, borrows enormous sums 
and spends them not on genuine investment in the future but on current 
consumption, passing the bill down to others, pretending that the 
problem is smaller than it really is, lacks not only good judgment but 
integrity. It is not hyperbole to label such behavior immoral. For a 
long time, people have come to this Congress decrying the 
intergenerational injustice of this policy, but things keep getting 
worse not better.
    A near-decade of anemic economic performance, the weakest recovery 
on record, has eroded badly the economic optimism on which, more than 
any other factor, Americans' faith in a better tomorrow has rested. A 
near majority now believes that America's best days are behind us.\1\ 
As this new pessimism has deepened, it has turned into an ugliness, a 
meanness, a new cynicism in our national life, with a search for 
scapegoats on both left and right.
---------------------------------------------------------------------------
    \1\ Rasmussen Reports (2015). ``Do America's Best Days Still Lie 
Ahead?''
---------------------------------------------------------------------------
    For almost two and a half centuries, Americans have argued 
strenuously about many things, but shared a resilient determination to 
be self-governing, to guard against tyranny at home and, on occasion, 
to resist by force its spread elsewhere in the world. But lately, and 
rather suddenly, there are alarming signals of a different outlook. A 
record 1 in 4 young people say that democracy is a ``bad way'' to run 
the country, and an even larger fraction of the citizenry would prefer 
an authoritarian leader who did not have to deal with the nuisance of 
elections. One in 6 are sympathetic to a military takeover, almost a 
three-fold increase from two decades ago.\2\
---------------------------------------------------------------------------
    \2\ Foa, Roberto Stefan, and Yascha Mounk. ``The Democratic 
Disconnect.'' Journal of Democracy 27.3 (2016): 5-17.
---------------------------------------------------------------------------
    If national leadership continues to allow our drift toward a 
Niagara of debt, until solemn promises are broken as they would then 
inevitably be, today's sense of betrayal will seem tame. When today's 
young Americans learn the extent of the debt burden we have left them, 
they may question the premises of our self-government, with good 
reason. When tomorrow's older Americans finally understand how they 
have been actively misled about the nature and the reliability of our 
fundamental social welfare programs, it may be the last straw breaking 
the public confidence on which democracy itself depends.
    In fairness, a few Members in each political party, some in this 
meeting room, have tried to address the coming crisis. To them, all 
thanks and credit. To those still in denial, or even advocating steps 
that would make our debts even higher, please reconsider. Your careers 
may end happily before the reckoning. Your reelections may not be 
threatened by your inaction. But your consciences should be. You know 
this, or you should.
                               __________
                Prepared Statement of Senator Judd Gregg
    Chairman Coats, Ranking Member Maloney, and Members of the 
Committee, thank you for inviting me here today to discuss the 
important topic of our national debt. The fiscal challenges we face are 
significant, and I appreciate the opportunity to discuss the types of 
solutions that can move us toward a healthier economy. I spent much of 
my career focused on addressing our nation's debt as Chairman and 
Ranking Member of the Senate Budget Committee and I now serve as Co-
Chairman of the nonpartisan Campaign to Fix the Debt.
    At $14 trillion, or over 75 percent of Gross Domestic Product 
(GDP), the national debt held by the public is currently near record 
levels. As a share of the economy, debt is higher than any time other 
than around World War II, and is nearly twice the 50-year historical 
average. Even more concerning, the aging of the population and 
continued growth in health costs are primary causes for the debt to 
indefinitely grow faster than the economy. As a result, the publicly 
held debt will continue to increase rapidly, reaching 86 percent of GDP 
in 2026 and exceeding the size of the economy by 2033. This is 
obviously not sustainable.
    Although deficits have declined by 70 percent in recent years--a 
point the current administration likes to point out--that decline 
followed a nearly 800 percent increase in deficits. Moreover, the 
temporary decline in deficits has ended, with the deficit expected to 
increase by more than one-third over last year to nearly $600 billion 
in fiscal year 2016. The Congressional Budget Office (CBO) projects 
that deficits will essentially continue to increase as far as the eye 
can see, exceeding $1 trillion by 2024 and continuing to rise from 
there.
    At the heart of our budget problem is the misalignment between the 
promises we have made and the revenues available to pay for them, 
promising more in benefits and other spending than we will collect in 
revenues. According to CBO, the growth in spending on Social Security 
and Medicare as the baby boom generation ages along with spending for 
interest on our debt will cause spending to grow from 20.7 percent of 
GDP in 2015 to 23.1 percent in 2026. Meanwhile, revenues will increase 
modestly from 18.2 percent of GDP today in 2015 to 18.5 percent of GDP 
in 2026. These trends will continue, with the gap between spending and 
revenues continuing to grow.
    The sooner we act to begin addressing the debt, the better. Yet 
there seems to be a near endless list of excuses for not doing anything 
to get our debt under control.
    At some point, unsustainable debt falls on the heads of a 
government that has created it and of the people who have elected the 
government's officials. In its recent budget update, CBO warned that 
``such high and rising debt would have serious negative consequences 
for the budget and the nation,'' including increased spending on 
interest, lower wages, reduced flexibility to deal with new crises or 
pursue new opportunities, and an increased risk of a fiscal crisis.
    People point out facts like this all the time. But they are 
ignored. Unfortunately, our children and our nation will pay a dear 
price for this indifference.
    The primary legislative action Washington has been able to muster 
in recent years is spending money we do not have to address issues that 
no one wants to pay for. Gridlock prevails in preventing changes to 
mandatory programs that will continue to grow on autopilot until 
lawmakers take action. It is of course much easier to borrow from our 
kid's futures than to pay for new spending and tax breaks, let alone 
reduce the deficits already in place.
    It is clear that Congress and the President must take action to 
bring spending commitments in line with revenues to address the growing 
national debt. The longer policymakers wait to take action the more 
difficult the choices will be, with less time to gradually phase-in 
changes and an increasingly larger magnitude of changes that will be 
required to put the country in a good fiscal place. The can should not 
be kicked down the road to avoid making difficult choices, particularly 
on entitlements. While Congress and the President have enacted limits 
on discretionary spending and higher taxes on upper income taxpayers, 
they have done virtually nothing to control the growth of entitlement 
spending that is the core driver of our debt.
    The primary reason that the congressional budget process is not 
functioning is that it requires difficult decisions to bring spending 
and revenues in line. This is something the Congress and the President 
are not good at.
    As a former elected official, I know how much we like to talk about 
good news: tax breaks, new spending initiatives, and preserving 
benefits. But we are far less interested in talking about the bad news 
and hard choices on the horizon as the federal debt continues on its 
unsustainable upward path. We don't see big constituencies for that 
kind of news and no special interests give you credit when you discuss 
it with voters.
    Policymakers and voters alike need to recognize that changes will 
be necessary in the years ahead as an aging population, rising health 
care costs, and a flawed tax system put more and more pressure on the 
federal budget. We need leaders to make the case to the public that 
everyone will benefit if we come together to make tough choices in all 
parts of the budget to put our nation on a fiscally sustainable course.
    The budget process as it is currently structured and implemented 
guarantees significant partisan and turf confrontations.
    The budget is the only major legislation that is produced purely 
along partisan lines by design. The majority party must write and pass 
a budget with essentially only its members supporting it. This 
guarantees significant systemic opposition to any budget by the 
minority. Consideration of the budget resolution on the floor of the 
Senate devolves into late-night ``vote-a-rama'' sessions where dozens 
of political messaging amendments geared to produce fodder for campaign 
commercials are considered, while there is little debate on the ways to 
address the real problems at hand: the long-term drivers of our debt. 
The highly politicized nature of the budget debate is not conducive to 
the bipartisan agreement necessary for major tax and entitlement 
reforms.
    Other committees, especially Finance and Appropriation in the 
Senate, view the Budget Committee and the budget resolution as a threat 
to their jurisdiction and areas of responsibility. Authorizing 
committees join forces with constituency groups to resist efforts to 
reduce spending on programs within their jurisdiction. The budget 
inevitably runs into and is often undermined by the need and desire of 
other committees to protect their ``turf.''
    Thus, the country often does not have a federal budget and even 
when it has had some semblance of a budget over the last decade or so, 
the budget has had little practical impact in enforcing discipline on 
federal spending or tax policy. Since 1998 there have been 10 fiscal 
years in which Congress has not approved a budget resolution. Even when 
budgets are adopted, they are often political documents that lawmakers 
never expect to implement or enforce. This is clearly an absence of 
budget enforcement and fiscal discipline that our country needs.
    The country's substantial long-term challenges underscore the 
problems with the budget process, as an increasing portion of the 
budget is on autopilot and continues to grow at an unsustainable rate 
that threatens long-term fiscal sustainability. In 1973, the last full 
fiscal year before the Budget Act was signed, Social Security and 
Medicare spending was 4.2 percent of GDP and tax expenditures, or 
spending through the tax code, were about 5 percent. In 2015 those 
numbers had jumped to 8.6 and 7.6 percent, respectively, each larger 
than the entire discretionary budget which equaled 6.6 percent of GDP.
    To address these challenges, we need a budget process that rewards 
setting goals and enforcing long-term debt stability. While budget 
process reform isn't a panacea, a budget process that makes it easier 
for Congress to be fiscally responsible can help spur further 
bipartisan action on the substantive policy changes needed to fix the 
debt.
    To fix this problem and actually have Congress produce budgets that 
are meaningful and effective, we need fundamental changes. The right 
budget process should provide a structure for policymakers to confront 
the trade-offs in the budget, make decisions, and reach consensus about 
priorities. It should also give policymakers useful information about 
the effects of legislation, encourage transparency and accountability 
in budget decisions, and include effective enforcement tools for the 
budget goals as Congress considers other legislation. Process reforms 
are not a substitute for the political will to make difficult 
decisions, but an improved framework could lead to more responsible 
decision making.
    The current form of the budget does make visible the core problems 
that it should address because it is too centered on appropriations and 
does not formally engage the debt problem. The budget has no 
comprehensive way to address major federal spending areas--like 
healthcare--that cut across multiple committees and involves both 
discretionary and entitlement spending. It is simply dysfunctional in 
its structure.
    In order to address these issues we need a new approach for 
developing the federal budget. The Budget Committee itself should be 
reconstituted with the senior members of committees most affected by 
the product. This would create a greater likelihood of agreement from 
these powerful committees and reduce the forces that are naturally at 
odds with the effort in producing and enforcing the budget. One-third 
of the Budget Committee should be from Appropriations, one-third from 
Finance/Ways and Means, and one-third from the general membership. The 
respective party leaders should choose the chairperson and ranking 
member from the general membership.
    The Budget Committee should be a bipartisan committee. It should 
have its membership divided equally between the parties with the 
chairperson being from the majority. This would require both parties to 
take responsibility for producing a budget or face blame for failing to 
do so. A truly bipartisan Budget Committee would also reduce 
partisanship in the execution and enforcement of the budget, 
significantly increasing the likelihood of reaching consensus on 
complex issues like entitlement and tax reform.
    The budget should be required to set short- and medium-term fiscal 
goals for the deficit and debt as a percentage of GDP. It should also 
set targets for spending and revenues as a percentage of GDP that are 
consistent with the fiscal goals for the debt and deficit. The budget 
should include reconciliation instructions and other enforcement 
mechanisms to meet the fiscal goals and spending and revenue targets in 
the resolution.
    No appropriation bills should move to the floor without a budget 
resolution. That prohibition should apply to omnibus appropriations. 
This would ensure that appropriations are considered in the context of 
an overall fiscal plan and it would give members of the Appropriations 
Committees an incentive to work toward agreement on a budget 
resolution.
    There should be consequences for failing to adopt a budget 
resolution. Spending on discretionary accounts and major entitlements 
should be reduced by 5 percent from the prior year and payroll taxes 
should be increased by 5 percent if no budget is passed. This would put 
pressure on the bipartisan committee and the entire Congress to produce 
and pass the budget resolution.
    There should be a separate budget item for the largest areas of 
federal entitlement spending and the Budget Committee should have 
authority to ensure that reforms are made in these programs to reach 
the spending goals necessary to achieve the target debt to GDP ratio. 
This new structure should cross committee lines of jurisdiction and 
engage all the affected committees in a single process of review.
    A budget process that coordinates spending on capital investments 
among all the committees of jurisdiction should be added. A capital 
budget must be accompanied by strong accounting rules that take into 
account capital asset depreciation as well as the value of new capital 
expenditures. A capital budget should not be used as an excuse to 
authorize additional borrowing for capital expenditures on top of 
current borrowing for consumption.
    The number of votes required to waive points of order for violating 
budget limits should vary depending on the size of the violation, with 
67 two-thirds majority votes required to waive large violations. Senate 
Budget Committee Chairman Mike Enzi put this idea forward in the 
outline of potential budget process reforms that he released in July. 
If the budget resolution is to be a meaningful document imposing fiscal 
discipline, it should also be harder to pass legislation that violates 
the budget than to pass legislation that complies with it. If Congress 
wishes to increase spending or reduce revenues relative to current law, 
it should account for the costs of doing so in the budget. Making it 
harder to waive significant Budget Act points of order will encourage 
Congress to honestly account for the costs of policy changes in the 
budget that it intends to later consider. At minimum, this would make 
it harder to pass budget-busting legislation that adds to the debt.
    Finally, Congress needs a process that allows it to work in a 
bipartisan and comprehensive manner on complex and politically charged 
problems like healthcare spending, entitlements, and major tax reform. 
An approach based on the Base Realignment and Closure (BRAC) Commission 
(BRACC) is a strong and effective option. All spending (discretionary 
and mandatory) and all tax policy should be reviewed, with the primary 
goal of putting the federal budget on a path to solvency by limiting 
the growth of the national debt. The approach, as with BRACC, must be 
bipartisan in nature and require an up-or-down vote on the entire 
package without amendments. Chairman Coats has introduced legislation 
based on the BRACC approach and so has Senator Joe Manchin. Budget 
Committee Chairman Enzi also included this concept as an option in his 
outline of potential budget reforms discussed by the Budget Committee.
    A budget process organized around these concepts would dramatically 
increase the likelihood that the largest government in the world, a 
government that is spending almost four trillion dollars a year, would 
actually have a functioning budget. It would provide a disciplined 
approach to spending and tax policy and increase the American people's 
confidence in their government.
    Such an event would be revolutionary, and it would also be a nice 
way to govern.
                               __________
   Prepared Statement of Alice M. Rivlin, Brookings Institution and 
                       Georgetown University \1\
---------------------------------------------------------------------------
    \1\ Alice M. Rivlin is a Senior Fellow in Economic Studies at the 
Brookings Institution and a Visiting Professor at Georgetown 
University. The views in this statement are strictly her own and do not 
necessarily reflect those of staff members, officers, and trustees of 
the Brookings Institution or Georgetown University.
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    Mr. Chairman and Members of the Committee:
    I am happy to be back testifying before the Joint Economic 
Committee, one of the few venues on Capitol Hill where serious 
bipartisan discussion of economic policy happens. The JEC deserves 
great credit for having the fortitude to refocus attention on the 
budget future and the national debt--major economic policy challenges 
that have dropped from sight in this contentious election.
    As the CBO has recently reminded us, our national debt is high in 
relation to the size of our economy and will likely rise faster than 
the economy can grow over the next several decades if budget policies 
are not changed. Debt held by public is about 74 percent of GDP and 
likely to rise to about 87 percent in 10 years and to keep rising after 
that.
    This rising debt burden is a particularly hard problem for our 
political system to handle because it is not a crisis. Nothing terrible 
will happen if we take no action this year or next. Investors here and 
around the world will continue to lend us all the money we need at low 
interest rates with touching confidence that they are buying the safest 
securities money can buy. Rather, the prospect of a rising debt burden 
is a serious problem that demands sensible management beginning now and 
continuing for the foreseeable future.
    What makes reducing the debt burden so challenging is that we need 
to tackle two aspects of the debt burden at the same time. We need 
policies that help grow the GDP faster and slow the growth of debt 
simultaneously. To grow faster we need a substantial sustained increase 
in public and private investment aimed at accelerating the growth of 
productivity and incomes in ways that benefit average workers and 
provide opportunities for those stuck in low-wage jobs. At the same 
time we need to adjust our tax and entitlement programs to reverse the 
growth in the ratio of debt to GDP. Winning broad public understanding 
and support of basic elements of this agenda will require the 
leadership of the both parties to work together, which would be 
difficult even in a less polarized atmosphere. The big uncertainty is 
whether our deeply broken political system is still up to the 
challenge.
    The American economy is the strongest in the world. It has shown 
great resilience in recent years and recovered much better than others 
from the devastation of the Great Recession. But with an aging 
population, slow productivity growth, lagging wages, and increasing 
inequality we cannot afford policy gridlock. We need aggressive 
economic policies to grow the economy faster and create more and 
better-paying jobs. We do not lack for opportunities to do this. In 
recent years we have neglected our public infrastructure, allowed 
roads, bridges, rail, and water systems to fall into disrepair. We have 
failed to modernize our airports and air traffic control systems to 
keep up with the volume of flights or to invest adequately in public 
health. We have failed to keep the skills of our workforce growing in 
step with changing technology and to prepare young workers, especially 
those from low-income families, for the jobs the economy requires. And 
we have reduced the flow of funding into basic research on which future 
technological progress depends.
    After years of neglect and under-investment, opportunities abound 
for public investment and public-private partnerships to increase 
future productivity growth and open new opportunities for current and 
future workers. We would be stupid and irresponsible not to take 
advantage of these opportunities to enhance the future productivity and 
income growth needed to keep the American economy strong and enhance 
American ability to be an effective world leader.
    These growth-enhancing investments will require substantial public 
resources over quite a long period. What is needed is a well-planned 
and executed program of investment in knowledge, skills, and basic 
infrastructure, not a short-term stimulus designed to create as many 
jobs as possible quickly. Even if part of this spending is offset by 
reducing lower priority spending or rising revenues--as it should be--a 
sufficiently aggressive investment program will likely increase the 
near-term deficit. It will create additional jobs and take some of the 
burden off the Federal Reserve and monetary policy, which has recently 
borne the sole policy responsibility for keeping the economic recovery 
from stalling.
    Opponents of undertaking a major productivity-increasing investment 
program argue that we can't afford the additional spending because 
government is already spending too much and the debt burden is already 
too high, so any additional spending must be fully ``paid for'' in the 
near-term. Proponents, by contrast, argue that we should borrow as much 
as we need for investment at current low interest rates and worry about 
the debt burden later. Both are wrong. Investment in future growth is 
essential to a prosperous future, but must be undertaken simultaneously 
with actions to reduce the growth of future debt. Faster growth alone 
will not reduce the debt to GDP ratio in a society that has already 
committed itself to benefits for a growing older population--benefits 
that will increase more rapidly than revenues even at hoped-for higher 
rates of GDP growth.
    Why can't we focus on investments now and worry about the debt 
problem later? The main reason is that the adjustments that we need to 
reduce the growth in entitlement spending and increase tax revenues in 
the future take time and must be well designed and phased in slowly. 
Moreover, unless a credible longer-run debt reduction plan is put in 
place, it will be impossible to build bipartisan support for the needed 
investments or to deal effectively with another recession when one 
occurs. Moreover, without enactment of a credible long-run deficit 
plan, our creditors may gradually--and understandably--lose their faith 
that the United States is a creditworthy nation. Then we would be faced 
with the far more serious problem of paying much higher interest rates 
on a larger debt.
    There are three necessary elements of a long-run debt reduction 
plan:

      Putting the Social Security program on sustainable track 
for the long run with some combination of higher revenues and 
reductions in benefits for higher earners.
      Gradually adjusting Medicare and Medicaid so that federal 
health spending is not rising faster than the economy is growing. 
Indeed, we should use these programs to transform the whole American 
health delivery system, so that total health spending no longer absorbs 
a growing portion of total resources.
      Adjusting our complex, inefficient tax system so that we 
raise more revenue in a more progressive and growth-friendly way and 
encourage the shift from fossil fuels to sustainable energy sources. 
Such a tax reform program could involve limiting or restructuring tax 
expenditures that differentially benefit high-income people in exchange 
for lower marginal income tax rates; corporate tax reform aimed at 
taxing a broader base at lower rates; a carbon tax that starts low, but 
rises predictably over time; and possibly a progressive consumption 
tax.

    You will notice that I do not believe that cutting discretionary 
spending further should be part of a long-run plan to reduce the debt 
burden. We need to work hard to increase the effectiveness of both 
domestic and defense spending (and we can argue about the balance 
between the two), but I believe that the Budget Control Act of 2011 cut 
discretionary spending too much. The investment program I outlined 
above would increase discretionary spending above the current caps.
    Reaching agreement on the politically sensitive changes necessary 
to reduce the debt burden will take bipartisan negotiation and strong 
leadership in the White House and Congress--leadership committed to 
working together to get the economy growing faster and the debt burden 
coming down. In a country with a Constitutional structure that requires 
consensus and compromise, there is no way that the needed changes in 
taxes and entitlements can be made without bipartisan cooperation and 
compromise.
    The major elements of such a plan closely resemble those of all the 
bipartisan plans seriously discussed in recent years--Simpson-Bowles, 
Domenici Rivlin, Obama-Boehner, the Super Committee, and the ``gangs'' 
of Six or Eight or whatever. The arithmetic of the budget drives all 
bipartisan problem-solvers to the same general conclusions and much of 
the staff work has already been done. However, I am not suggesting 
another grand bargain--at least not another attempt to wrap all these 
complex adjustments into a single piece of legislation to be voted on 
at once. That is too heavy a lift and would not produce the necessary 
buy-in. Instead, I am suggesting that the new Administration and 
Congressional leadership work out a general framework for investing in 
growth and getting the debt/GDP ratio coming down over time. Then the 
relevant committees can get to work on the major components (investment 
in infrastructure, skills, and knowledge; restoring Social Security 
solvency; reforming Medicare and Medicaid; and transforming the tax 
code). All this will be difficult and contentious and no-one will be 
fully satisfied with the result, but the point is to break out of 
gridlock and start working on constructive solutions.
    Thank you for listening. I would be happy to answer questions.
                               __________
Questions for the Record for President Daniels Submitted by Senator Tom 
                                 Cotton
    1. Mandatory Spending programs and interest payments are expected 
to grow in the years to come and consume increasing amounts of the 
federal budget. CBO projects by the year 2026 that 96% of revenues will 
be spent on mandatory programs and debt interest. How do you expect 
this to effect the primary responsibility of the federal government, 
which is funding our military and protecting our national security?

    Whether one prefers big government or limited government, a social 
welfare state or a market economy state, has nothing to do with the 
fact that no enterprise--not a family, a small business, or a modern 
nation-state--can survive, let alone thrive, while carrying the 
incredible debt burdens we are about to confront. This is not a matter 
of opinion based on a preference for limited government. It's a 
brutally objective fact of life.
    In the next 10 years, the United States will spend more on interest 
for its debt than it does for its military. And even as federal 
spending continues to grow, the average income for the American worker, 
who ultimately shoulders the burden of our spending spree, has 
essentially flat lined. All the appropriate and noble pursuits of our 
government are threatened by the debt burden amassed and continuing to 
grow--and the country will rely on a generation personally indebted by 
individual pursuit of a brighter future.

     The Wall Street Journal recently reported that there are roughly 7 
million men in prime working age (25-54) who are not holding paid jobs 
nor seeking work. The work rate for that age group is 84.4%--lower than 
in 1940, 86.4%, at the end of the Great Depression. How large of an 
impact do you believe this has on the federal deficit and how can 
Congress address the crisis of working-age Americans who have given up 
seeking employment?

    The percentage of Americans with a job is near the lowest in 
decades. One in five men of prime working age, and nearly half of all 
persons under 30, did not go to work today.
    We can't build a middle class out of government jobs paid for with 
borrowed dollars. In fact, it works the other way: a government as big 
and bossy as this one is maintained on the backs of the middle class, 
and those who hope to join it.
    Those punished most by the wrong turns in recent years are those 
unemployed or underemployed, and those so discouraged that they have 
abandoned the search for work altogether. And no-one has been more 
tragically harmed than the young people of this country, the first 
generation in memory to face a future less promising than their parents 
did.
    The routes back to an America of promise, and to a solvent America 
that can pay its bills and protect its vulnerable, start in the same 
place. The only way up for those suffering, and the only way out of the 
dead end of debt into which we have driven, is a private economy that 
begins to grow and create jobs, real jobs, at a much faster rate than 
today.
                               __________
  Questions for the Record for Senator Gregg Submitted by Senator Tom 
                                 Cotton
    1. Mandatory Spending programs and interest payments are expected 
to grow in the years to come and consume increasing amounts of the 
federal budget. CBO projects by the year 2026 that 96% of revenues will 
be spent on mandatory programs and debt interest. How do you expect 
this to affect the primary responsibility of the federal government, 
which is funding our military and protecting our national security?

    Answer: Admiral Mike Mullen, former Chairman of the Joint Chiefs of 
Staff, has said our debt is our greatest national security threat 
because it jeopardizes our ability to fund defense and undermines the 
economic security that is a critical part of national security. A 
nation with our current levels of unsustainable debt cannot hope to 
maintain military strength or influence in world affairs.
    As you noted, spending on mandatory programs and interest on the 
debt are consuming an increasing percentage of our budget. This will 
only accelerate as society ages and the interest rate we pay to service 
our debt normalizes. The vast majority of spending growth over the next 
decade is a result of rising costs for health care, Social Security, 
and interest on the debt. These three categories are responsible for 84 
percent of nominal spending growth over the next decade and 165 percent 
of spending growth as a share of GDP (with other budget categories 
shrinking). According to the CBO long-term outlook these three 
categories will consume every dollar of revenue raised by the federal 
government by 2038, with every dollar for defense or other spending 
financed by borrowing.
    Failure to address the growth of entitlement spending and our debt 
will make it harder for Congress to find the resources to fund the 
military, and will eventually squeeze out funding for other investments 
in the domestic discretionary side of the budget. A large and growing 
debt will also reduce the fiscal space available to respond to 
emergencies such as a major military conflict without risking a fiscal 
crisis. We are already seeing the negative effect of a budgetary 
squeeze with the sequester, which imposes deep cuts on defense and 
nondefense discretionary spending because of the failure of Congress to 
address the deficit in a responsible manner.
    Failing to address our debt will also threaten national security by 
harming economic security. U.S. national security in the 21st century 
rests upon both economic and military strength, for our military might 
and diplomatic muscle ultimately depend on a vibrant economy. Economic 
growth is the foundation of that strength, without which it cannot 
exist.
    Our strong economy is the core of our nation's foreign policy 
power. Unless we change course, our huge and growing debt will 
undermine our economic growth, our military strength, and our global 
leadership. Absent a new, sustainable fiscal outlook, America's 
standing in the world and its national security will surely, if perhaps 
slowly, decline. We must resolve our immediate crisis in a way that 
drives the completion of a comprehensive long-term fiscal plan which 
supports America's continuing economic strength and global leadership 
role.

    2. The Wall Street Journal recently reported that there are roughly 
7 million men in prime working age (25-54) who are not holding paid 
jobs nor seeking work. The work rate for that age group is 84.4%--lower 
than in 1940, 86.4%, at the end of the Great Depression. How large of 
an impact do you believe this has on the federal deficit, and how can 
Congress address the crisis of working-age Americans who have given up 
seeking employment?

    Answer: Since the Great Recession began in 2007 the employment rate 
for prime-age males has declined. But, as you note, that decline is 
part of a much longer-term fall in the share of men taking part in the 
workplace. The decline has been largest among less-educated men and 
larger among African Americans than among whites and Hispanics.
    The reduction in labor force participation by working-age men has a 
direct negative effect on the budget, both in terms of foregone taxes 
received by the government and additional government benefits, such as 
SNAP, paid out to some (though not all) of these nonworking 
individuals. The impact on revenues is particularly pronounced for 
entitlement trust funds that are funded by payroll taxes from workers. 
Declining labor force participation exacerbates the declining ratio of 
workers paying into Social Security and Medicare to the number of 
beneficiaries.
    Economic growth is essentially a function of how many people are 
working and how productive workers are. The decline in labor force 
participation limits the growth in the workforce which is necessary for 
a growing economy. Our economic output generally rises and falls with 
the number of Americans in the workforce. The more Americans who are 
working, the more wealth our society generates both in terms of GDP and 
in terms of tax revenue that can be used to pay for spending. But the 
larger cost is to these men, who lose the opportunity to become self-
sufficient, contributing members of their communities.
    There are a number of causes for falling male labor force 
participation. Employment rates for men have declined even after 
controlling for individuals who report being in school or college. And 
nearly one-quarter of unemployed men report not working in the previous 
year as well, making it less likely that they will re-enter the 
workforce and build a successful career.
    Disability benefit applications have also increased, with larger 
increases among less-educated individuals according the studies done by 
Mark Duggan and David Autor. Applications are increasingly based upon 
mental illnesses and musculoskeletal pain that are difficult to verify. 
Disability applications rise and fall with the unemployment rate, 
making it reasonable to conclude that fewer job opportunities for less-
skilled men have increased their likelihood of going on disability 
benefits. Once an individual begins receiving Social Security 
Disability Insurance benefits it is unlikely they will ever return to 
the labor force.
    One reason for falling labor force participation by prime-age males 
is the well-documented decline in demand and wages for less-skilled 
individuals. Many jobs that once allowed a high school graduate to earn 
a decent living often no longer exist. And for those who can find jobs, 
wages have stagnated. At the same time, there is also an element of 
choice in falling employment by prime-age males. A rising number of 
nonemployed males tell the Census Bureau's Current Population Survey 
that they don't want to find a job.
    In short, there are many reasons for the decline in labor force 
participation, and policy can only reasonably address some of them. But 
Congress could pursue a number of strategies designed to increase the 
rewards to work and encourage nonworking men to re-enter the labor 
force which would in turn improve economic growth and improve our 
budget outlook. For example, increasing enforcement of work 
requirements for SNAP benefits and other social transfer programs could 
reduce the incentive to not work.
    Targeted investments in education and job training, offset by 
reductions in spending for consumption, can help increase labor force 
participation by better preparing individuals for the workforce. 
Reforms to the Social Security Disability Insurance program that 
encourage individuals to remain in the workforce instead of going on 
SSDI, would help increase labor force participation. So would reforms 
that encourage SSDI recipients' return to work, such as those included 
in the Return to Work Act that you introduced with Senator Lee.
    Congress can also encourage individuals to return to the workforce 
by promoting economic growth through business tax reform and individual 
tax reform, especially addressing very high effective marginal rates at 
some point of the tax code.
                               __________
Questions for the Record for Dr. Rivlin Submitted by Senator Tom Cotton
    1. Mandatory Spending programs and interest payments are expected 
to grow in the years to come and consume increasing amounts of the 
federal budget. CBO projects by the year 2026 that 96% of revenues will 
be spent on mandatory programs and debt interest. How do you expect 
this to effect the primary responsibility of the federal government, 
which is funding our military and protecting our national security?

    The projected growth of mandatory spending and interest payments is 
indeed a serious challenge. If policies are not changed discretionary 
spending (including defense) will be squeezed to dangerous levels, and 
deficits will rise rapidly. In my opinion we need to restrain the 
growth of mandatory spending, especially health care spending, and 
increase revenues from a more pro-growth tax system. If we can do both, 
interest payments will fall, and economic growth will pick up!

    2. The Wall Street Journal recently reported that there are roughly 
7 million men in prime working age (25-54) who are not holding paid 
jobs nor seeking work. The work rate for that age group is 84.4%--lower 
than in 1940, 86.4%, at the end of the Great Depression. How large of 
an impact do you believe this has on the federal deficit and how can 
Congress address the crisis of working-age Americans who have given up 
seeking employment?

    I agree that low labor force participation among ``working-age'' 
men is a threat to prosperity. There are probably multiple reasons, 
including lack of well-paying jobs, reduced incentives to work in 
multiple-earner families, etc. We need to find out more about who is 
not working and why and then make a big effort to induce more potential 
workers to join the labor force and stay in it. The focus should not 
just be on prime-age males. We have lower female labor-force 
participation rates than many advanced countries. We also need to find 
ways of keeping older workers employed at suitable jobs.
                               __________
  Questions for the Record for Dr. Rivlin Submitted by Vice Chairman 
                             Patrick Tiberi
    CBO estimates that Medicare outlays will double over the next 
decade. By 2026, net of offsetting receipts, outlays for the Social 
Security program, and major health care programs will grow at an 
average annual rate of 6.0 percent. Those programs account for 63 
percent of the total increase in CBO's projected federal outlays 
between 2016 and 2026.
    Having social safety net programs available to help the elderly and 
the sick is vitally important. Yet such programs are not free, nor are 
funding solutions so simple. We cannot just ``raise taxes,'' because 
that would harm our sputtering economy. Our approach to funding these 
programs must account for how the economy will respond. Namely, to fund 
the programs, we need to pursue a fiscal policy that encourages private 
sector fixed investment and other components critical for economic 
growth.
    In your testimony before this Committee, you recommend reforms to 
Social Security first and Medicare/Medicaid second.
    Would you agree that responsible budgeting dictates that we focus 
on these largest two cost contributors first?

    Yes, but we also need tax reform to raise more revenue from a more 
pro-growth tax system. A rapidly growing older population will require 
addition spending for Social Security, Medicare, and Medicaid. We need 
to retrain that growth (primarily by making health care delivery less 
wasteful) and raise more revenues at the same time.

    Would you also agree that the Social Security program is relatively 
easy to fix--at least compared to Medicare--and therefore should be the 
first priority?

    Yes.

    Also according to CBO, outlays for Social Security will total 4.9 
percent of GDP in 2017, rising to 6.0 percent of GDP in 2026; and 
outlays for Medicare rise from 3.1 percent of GDP to 4.0 percent in 
2026. It is further projected that the average annual growth rate for 
real GDP will hover around 2 percent over the next decade.
    If annual economic growth were a full percentage point--or even a 
meager half percentage point higher--how beneficial would that be 
toward both funding Social Security and Medicare programs and 
stabilizing their GDP percentages?

    Higher growth is highly desirable, because it reduces the burden of 
public spending generally on taxpayers. However, if higher growth 
generates higher wages, which one would expect, it will not help the 
Social Security Trust Fund much, because higher wages mean both more 
payroll tax revenues and higher benefits for future retirees.

    To accelerate economic growth, in your testimony you emphasize 
infrastructure and public investment and mention corporate tax reform, 
though not regulatory reform.
    Would you agree that the fastest way to get a jump in economic 
growth is lower tax rates, especially the corporate tax rate, and 
reduce federal regulation of the private economy?

    Yes, we need to design smarter regulations that accomplish the 
goals with much less drag on growth.
                               __________
Questions for the Record for Dr. Rivlin Submitted by Senator Robert P. 
                               Casey, Jr.
    (1) Dr. Rivlin, I think we share the belief that we must work 
toward creating an economy that ensures all Americans have a fair 
shot--one where workers can find jobs that pay family sustaining wages. 
Can you discuss how wage stagnation can create drag on economic growth, 
and how overall wage growth can help economic growth?

    Yes, higher wages will stimulate demand for products and services 
and create incentives for hiring and business investment--a virtuous 
circle as long as inflation does not appear on the horizon.

    (2) Dr. Rivlin, I believe one of the most critical long-term 
investments we can make is early childhood education. I like to say 
that when children learn earlier in life they earn more later. We need 
to start concerted investments today to ensure we are producing the 
type of workforce we need 10, 20, and 30 years down the road. 
Reflecting on your time in federal service and your time working on 
debt reduction, do you think spending on early childhood education is a 
worthwhile investment and one which warrants increased spending? Can 
you discuss your views on ensuring our workforce remains competitive, 
particularly as we see rapid changes in the demands on our workforce, 
many of which may accelerate over time?

    Yes, I think the evidence is mounting that good quality education 
and nurturing pays off creating healthier, higher-functioning adults 
with greater opportunities, especially in low-income neighborhoods.
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