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+
+ - FISCAL CHALLENGES AND THE ECONOMY IN THE LONG TERM
+
+[House Hearing, 110 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+ FISCAL CHALLENGES AND THE
+ ECONOMY IN THE LONG TERM
+
+=======================================================================
+
+ HEARING
+
+ before the
+
+ COMMITTEE ON THE BUDGET
+ HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TENTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ HEARING HELD IN WASHINGTON, DC, FEBRUARY 28, 2007
+
+ __________
+
+ Serial No. 110-10
+
+ __________
+
+ Printed for the use of the Committee on the Budget
+
+
+ Available on the Internet:
+ http://www.gpoaccess.gov/congress/house/budget/index.html
+
+
+ ______
+
+ U.S. GOVERNMENT PRINTING OFFICE
+33-754 WASHINGTON : 2007
+_____________________________________________________________________________
+For Sale by the Superintendent of Documents, U.S. Government Printing Office
+Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
+Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
+
+ COMMITTEE ON THE BUDGET
+
+ JOHN M. SPRATT, Jr., South Carolina, Chairman
+ROSA L. DeLAURO, Connecticut, PAUL RYAN, Wisconsin,
+CHET EDWARDS, Texas Ranking Minority Member
+JIM COOPER, Tennessee J. GRESHAM BARRETT, South Carolina
+THOMAS H. ALLEN, Maine JO BONNER, Alabama
+ALLYSON Y. SCHWARTZ, Pennsylvania SCOTT GARRETT, New Jersey
+MARCY KAPTUR, Ohio THADDEUS G. McCOTTER, Michigan
+XAVIER BECERRA, California MARIO DIAZ-BALART, Florida
+LLOYD DOGGETT, Texas JEB HENSARLING, Texas
+EARL BLUMENAUER, Oregon DANIEL E. LUNGREN, California
+MARION BERRY, Arkansas MICHAEL K. SIMPSON, Idaho
+ALLEN BOYD, Florida PATRICK T. McHENRY, North Carolina
+JAMES P. McGOVERN, Massachusetts CONNIE MACK, Florida
+BETTY SUTTON, Ohio K. MICHAEL CONAWAY, Texas
+ROBERT E. ANDREWS, New Jersey JOHN CAMPBELL, California
+ROBERT C. ``BOBBY'' SCOTT, Virginia PATRICK J. TIBERI, Ohio
+BOB ETHERIDGE, North Carolina JON C. PORTER, Nevada
+DARLENE HOOLEY, Oregon RODNEY ALEXANDER, Louisiana
+BRIAN BAIRD, Washington ADRIAN SMITH, Nebraska
+DENNIS MOORE, Kansas
+TIMOTHY H. BISHOP, New York
+[Vacancy]
+
+ Professional Staff
+
+ Thomas S. Kahn, Staff Director and Chief Counsel
+ James T. Bates, Minority Chief of Staff
+
+
+ C O N T E N T S
+
+ Page
+Hearing held in Washington, DC, February 28, 2007................ 1
+Statement of:
+ Hon. John M. Spratt, Jr., Chairman, House Committee on the
+ Budget..................................................... 1
+ Hon. Paul Ryan, a Representative in Congress from the State
+ of Wisconsin............................................... 2
+ Hon. Ben S. Bernanke, Chairman, Board of Governors, Federal
+ Reserve System............................................. 5
+ Prepared statement of.................................... 10
+ Response to Ms. Kaptur regarding the fees paid to Wall
+ Street firms for underwriting Treasury debt............ 31
+
+
+ FISCAL CHALLENGES AND THE
+ ECONOMY IN THE LONG TERM
+
+ ----------
+
+
+ WEDNESDAY, FEBRUARY 28, 2007
+
+ House of Representatives,
+ Committee on the Budget,
+ Washington, DC.
+ The committee met, pursuant to call, at 10:00 a.m., in room
+210, Cannon House Office Building, Hon. John M. Spratt, Jr.
+(Chairman of the committee) presiding.
+ The Committee met, pursuant to call, at 10:00 p.m., in room
+210, Cannon House Office Building, Hon. John M. Spratt, Jr.
+(Chairman of the committee) presiding.
+ Present: Representatives Spratt, Cooper, Allen, Schwartz,
+Kaptur, Becerra, Doggett, Blumenaur, Berry, McGovern, Andrews,
+Scott, Etheridge, Hooley, Moore, Bishop, Ryan, Barrett, Bonner,
+Garrett, Hensarling, McHenry, Campbell Tiberi, Alexander,
+Smith.
+ Chairman Spratt. The hearing will come to order.
+ I am pleased today to welcome the Federal Reserve Chairman,
+Dr. Ben Bernanke, to the first appearance he has made before
+the House Budget Committee for a hearing on fiscal challenges
+and the economy over the long term.
+ I am pleased for many reasons not least of which is the
+fact that Dr. Bernanke is from Dillon, South Carolina, which is
+in my congressional district.
+ So I claim among other things the value of having his
+presence here today but also the bragging rights for what he
+has accomplished at the Fed where over a year's time, he has
+won high marks for his short hand at the helm.
+ Despite historically high budget deficits, interest rates
+and inflation are relatively low and our economy has been
+growing at a fairly good clip or healthy pace even if that rate
+has been slowing down recently.
+ Six years ago, we were in surplus. Our budget was in
+surplus and black for the first time in 30 years, not just in
+the year 2000, but in 1998 and 1999 as well. As a result, the
+federal government paid down nearly $400 billion of debt held
+by the public.
+ And President Bush came to office with an advantage that
+few Presidents have enjoyed, a budget in balance and surplus by
+$236 billion a year before he took office and in balance that
+year, 2000, without including the Social Security Trust Fund.
+ As a consequence, a number of members took up a new idea
+that had a corny name, lock box, but has a serious substantive
+core to it. Basically the idea was that we would quit using the
+Social Security surplus to buy up new Treasury debt and instead
+use it to buy down outstanding Treasury debt.
+ The idea was that if we pursued this policy diligently,
+religiously, by 2020 or thereabouts, when 77 million baby
+boomers begin claiming their Social Security and Medicare
+benefits, Treasury would be less encumbered by public debt,
+more solvent, and thus better able to meet the claims of the
+baby boomers.
+ And by buying down existing Treasury debt, we would add to
+national savings, roll the cost of capital, and make the
+economy more productive and free us from dependence on foreign
+capital.
+ After all, one way to make entitlements more affordable,
+this will make our people more productive, and that was part of
+the idea behind the so-called lock box.
+ We said to the President when he began to unveil his
+proposal, which took a different turn and he was relying upon
+projected surpluses of $5.6 trillion, that while we may be
+sitting on an island of surpluses, we were surrounded by a sea
+of debt, long-term debt, and that should be taken into account
+now that we have the wherewithal to begin doing something about
+the problem.
+ The President, however, took a different path. He proposed
+a budget that over time included tax cuts close to $2 trillion.
+The numbers that were projected in 2001 did not obtain. They
+were seriously wide of the mark.
+ And so six years and $3 trillion in debt later, we find
+ourselves on a path that is described everywhere as
+unsustainable, deficit down a bit, down to $248 billion last
+year. That is good news.
+ But, Dr. Bernanke, you warn in your testimony that this
+could very well be the lull before the storm. We are glad to
+have you here today to help us understand the perils of the
+path we are now taking and how we can employ the federal
+budget, which constitutes 20 percent of our GDP, to shore up
+our shortfall in savings and to move our economy and our
+country back towards long-term solvency.
+ We look forward to your testimony, and we appreciate your
+coming today.
+ Before turning to you for your statement, though, I would
+like to recognize Mr. Ryan, our Ranking Member, for a statement
+of his own.
+ Mr. Ryan. I thank the Chairman for yielding, and I am
+pleased to have Chairman Bernanke here today. It is nice to
+have you with us.
+ I just wanted to quickly go on the area where the Chairman
+went to. If you could call up chart one, please.
+
+
+ Mr. Ryan. We are here to discuss in the Budget Committee
+how we balance the budget, and that is a very important and
+worthy goal. But if we simply just balance the budget without
+addressing the underlying fundamentals of our budget issues, it
+will be a temporary thing. If we do not balance the budget
+without actually addressing the systemic spending problems
+underneath our budget, that is the problem that we are
+experiencing.
+ If you take a look at entitlement spending under the Bush
+Administration, under the Clinton Administration, under
+Republican Presidents, Democrat Presidents, Republican
+Congresses, Democratic Congresses, we have had this problem in
+front of us for quite some time.
+ As you can see, all other spending is getting crowded out
+and we are piling on interest and entitlement spending. And we
+are going to hear a lot of talk about the tax cuts as perhaps
+the route to fix and balance the budget.
+ But if we balance the budget without addressing the
+underlying, unsustainable growth rates of entitlement spending,
+we will only balance the budget temporarily and go quickly back
+into deficits because of the growth of entitlements.
+ If you go to chart two, please.
+
+
+ Mr. Ryan. This chart, I think, does a good job of
+illustrating the situation we have in front of us. This looks
+at spending in relation to tax revenues, which shows us in two
+ways.
+ First, if we keep the current tax laws in place just as
+they are, current tax rates, current child tax credit, current
+marriage penalty relief, and so on, that is the lower line, the
+blue line.
+ If we allow all those tax cuts to go away at the end of the
+decade as they are scheduled to expire, meaning a tax hike of
+$153 billion in 2011, tax hike of $254 billion in 2012, and
+larger amounts thereon after, that is the red line. These
+automatic tax increases are insumed in CBO's current law
+baseline.
+ Notice that either way, with or without the tax cuts,
+making them permanent or allowing them to expire, they do not
+come anywhere close to balancing the budget over the long run.
+They are quickly outpaced by the spending that we are on auto
+pilot right now with our entitlement programs.
+ So clearly what we face is an immense problem of spending.
+This is the problem right at hand right now and it is not going
+away.
+ Members of both sides of the aisle are going to debate
+about how just to accomplish and address these challenges. But
+I think it is very important that as we look at the performance
+of our economy, as we look at whether or not high tax rates on
+capital, high tax rates on families and businesses is the right
+way to go to a balanced budget or not, even if we go down the
+route of letting all the tax cuts expire, it does not come
+anywhere close to solving our fiscal problems, which is
+unsustainable entitlements.
+ And that is the issue that I think we ought to be
+addressing, and that is the issue I would love to get your
+opinions on, Chairman Bernanke.
+ Also, I will just simply say we had an interesting day in
+the stock market yesterday with the precipitous drop. I know
+all of us are very concerned about that, and I think we would
+love to get your reflections should you care to share them with
+us on that point as well.
+ And with that, I would like to yield back the balance of my
+time. Thank you, Chairman.
+ Chairman Spratt. Thank you, Mr. Ryan.
+ Dr. Bernanke, thank you again for coming.
+ Before proceeding, let me ask unanimous consent that all
+members be allowed to submit an opening statement for the
+record at this point.
+ In addition, Dr. Bernanke, we will be glad to make your
+statement a part of the record so that you can summarize parts
+of it if you please.
+ The floor is yours. Thank you again for coming.
+
+ STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS,
+ FEDERAL RESERVE SYSTEM
+
+ Mr. Bernanke. Thank you.
+ Chairman Spratt, Representative Ryan, and other members of
+the Committee, I am pleased to be here to offer my views on the
+federal budget and related issues.
+ At the outset, I should underscore that I speak only for
+myself and not for my colleagues necessarily at the Federal
+Reserve.
+ My testimony will focus on the long-term budget outlook and
+will draw on the most recent set of long-term projections from
+the Congressional Budget Office issued in December 2005.
+ The CBO constructed its projections based on the
+assumptions that real gross domestic product would rise about
+three and a half percent per year in 2005 and 2006 and at the
+rate of 2.9 percent per anum from 2007 to 2015.
+ The growth projections through 2015 were in turn based on
+the assumptions that trend labor force growth will average 0.8
+percent per year and that trend labor productivity growth in
+the nonforeign business sector will average 2.4 percent per
+year.
+ The CBO has since updated those assumptions for the
+purposes of other analyses, but the revisions were not large
+enough to materially alter the broad contours of the fiscal
+outlook.
+ As to the longer-term outlook, the CBO assumed that the
+growth rate of real GDP will average about two percent per year
+starting around 2020. While such projections are subject to
+considerable uncertainty, the CBO's assumptions provide a
+sensible and useful starting point for assessing the budget
+situation over the long run.
+ Before discussing the longer-run outlook, I will comment on
+recent budget developments. As you know, the deficit in the
+unified federal budget declined for a second year in fiscal
+year 2006, falling to $248 billion from $318 billion in fiscal
+2005.
+ So far in fiscal 2007, solid growth in receipts, especially
+in collections of personal and corporate income taxes, has held
+the deficit somewhat below year earlier levels. Of course, a
+good deal of uncertainty still surrounds the budget outcome for
+the year as a whole.
+ Federal government outlays in fiscal 2006 were 20.3 percent
+of nominal gross domestic product. Receipts were 18.4 percent
+of GDP and the deficit, the difference of the two, was 1.9
+percent of GDP. These percentages are close to their averages
+since 1960.
+ The on budget deficit, which differs from the unified
+budget deficit, primarily and excluding receipts and payments
+of the Social Security system, was $434 billion or 3.3 percent
+of GDP in fiscal 2006.
+ As of the end of fiscal 2006, federal government debt held
+by the public, which includes holdings by the Federal Reserve,
+but excludes those by the Social Security and other trust
+funds, amounted to 37 percent of one year's GDP.
+ Official projections suggest that the unified budget
+deficit may stabilize or moderate further over the next few
+years. Unfortunately, we are experiencing what seems likely to
+be the calm before the storm. In particular, spending on
+entitlement programs will begin to climb quickly during the
+next decade.
+ In fiscal 2006, federal spending for Social Security,
+Medicare, and Medicaid together totaled about 40 percent of
+federal expenditures or eight and a half percent of GDP.
+ In the medium-term projections released by the CBO in
+January, these outlays increase to ten and three-quarters
+percent of GDP by 2017, an increase of about two percentage
+points of GDP in little more than a decade. And they will
+likely continue to rise sharply relative to GDP in the years
+after that.
+ As I will discuss, these rising entitlement obligations
+will put enormous pressure on the federal budget in coming
+years.
+ The large projected increases in future entitlement
+spending have two principal sources. First, like many other
+industrial countries, the United States has entered what is
+likely to be a long period of demographic transition. The
+result, both of the reduction in fertility that followed the
+post World War II baby boom and of ongoing increases in life
+expectancy.
+ Longer life expectancies are certainly to be welcomed, but
+they are likely to lead to longer periods of retirement in the
+future even as the growth rate of the workforce declines.
+ As a consequence of these demographic trends, the number of
+people of retirement age will grow relative both to the
+population as a whole and to the number of potential workers.
+ Currently people 65 years and older make up about 12
+percent of the U.S. population, and there are about five people
+between the ages of 20 and 65 for each person 65 and older.
+ According to the intermediate projections of the Social
+Security Trustees, in 2030, Americans 65 and older will
+constitute about 19 percent of the U.S. population and the
+ratio of those between the ages of 20 and 64 to those 65 and
+older will have fallen to about three.
+ Although the retirement of the baby boomers will be an
+important milestone in the demographic transition, the oldest
+baby boomers will be eligible for Social Security benefits
+starting next year.
+ The change in the nation's demographic structure is not
+just a temporary phenomenon related to the large relative size
+of the baby boom generation. Rather, if the U.S. fertility rate
+remains close to current levels and life expectancies continue
+to rise as demographers generally expect, the U.S. population
+will continue to grow older even after the baby boom generation
+has passed from the scene.
+ If current law is maintained, that aging of the U.S.
+population will lead to sustained increases in federal
+entitlement spending on programs that benefit older Americans,
+such as Social Security and Medicare.
+ The second cause of rising entitlement spending is the
+expected continued increase in medical costs per beneficiary.
+Projections of future medical costs are fraught with
+uncertainty. But history suggests that without significant
+changes in policy, these costs are likely to continue to rise
+more quickly than incomes, at least for the foreseeable future.
+ Together with the aging of the population, ongoing
+increases in medical costs will lead to a rapid expansion of
+Medicare and Medicaid expenditures.
+ Long-range projections prepared by the CBO vividly portray
+the potential effects on the budget of an aging population and
+rapidly rising healthcare costs.
+ The CBO has developed projections for a variety of
+alternative scenarios based on different assumptions about the
+evolution of spending and taxes. The scenarios produce a wide
+range of possible budget outcomes reflecting the substantial
+uncertainty that attends long-range budget projections.
+ However, the outcomes that appear most likely in the
+absence of policy changes involve rising budget deficits and
+increases in the amount of federal debt outstanding to
+unprecedented levels.
+ For example, one plausible scenario is based on the
+assumptions that federal retirement and health spending will
+follow the CBO's intermediate projection, defense spending will
+drift down over time as a percentage of GDP, other noninterest
+spending will grow roughly in line with GDP, and federal
+revenues will remain close to their historical share of GDP,
+that is about where they are today.
+ Under these assumptions, the CBO calculates that by 2030,
+the federal budget deficit will approach nine percent of GDP,
+more than four times greater as a share of GDP than the deficit
+in the fiscal year 2006.
+ A particularly worrisome aspect of this projection and
+similar ones is the implied evolution of the national debt and
+the associated interest payments to government bond holders.
+ Minor details aside, the federal debt held by the public
+increases each year by the amount of that year's unified
+deficit. Consequently, scenarios that project large deficits
+also project rapid growth in the outstanding government debt.
+ The higher levels of debt in turn imply increased
+expenditures on interest payments to bond holders which
+exacerbate the deficit problem still further.
+ Thus, a vicious cycle may develop in which large deficits
+lead to rapid growth in debt and interest payments which in
+turn adds to the subsequent deficits.
+ According to the CBO projection that I have been
+discussing, interest payments on the government's debt will
+reach four and a half percent of GDP in 2013, nearly three
+times their current size relative to national output.
+ Under this scenario, the ratio of federal debt held by the
+public to GDP would climb from 37 percent to roughly 100
+percent in 2030 and would continue to grow exponentially after
+that.
+ The only time in U.S. history that the debt to GDP ratio
+has been in the neighborhood of 100 percent was during World
+War II. People at that time understood the situation to be
+temporary and expected deficits and the debt to GDP ratio to
+fall rapidly after the war as, in fact, they did.
+ In contrast, under the scenario I have been discussing, the
+debt to GDP ratio would rise far into the future at an
+accelerating rate. Ultimately this expansion of debt would
+spark a fiscal crisis which could be addressed only by very
+sharp spending cuts or tax increases or both.
+ The CBO projections by design ignore the adverse effects
+that such high deficits would likely have on economic growth.
+But if government debt and deficits were actually to grow at
+the pace envisioned by the CBO's scenario, the effects on the
+U.S. economy would be severe.
+ High rates of government borrowing would drain funds away
+from capital formation and thus slow the growth of real incomes
+and living standards over time.
+ Some fraction of the additional debt that would likely be
+financed abroad would lessen the negative influence on domestic
+investment. However, the necessity of paying interest on the
+foreign held debt would leave a smaller portion of our nature's
+future output available for domestic consumption.
+ Moreover, uncertainty about the ultimate resolution of the
+fiscal imbalances would reduce the confidence of consumers,
+businesses, and investors in the U.S. economy with adverse
+implications for investment and growth.
+ To some extent, strong economic growth can help to mitigate
+budgetary pressures and all else being equal, fiscal policies
+that are supportive of growth would be beneficial.
+ Unfortunately, economic growth alone is unlikely to solve
+the nation's impending fiscal problems. Economic growth leads
+to higher wages and profits and thus increases in tax receipts.
+But higher wages also imply increased Social Security benefits
+as those benefits are tied to wages.
+ Higher incomes also tend to increase the demand for medical
+services so that indirectly higher incomes may also increase
+federal health expenditures.
+ Increased rates of immigration could raise growth by
+raising the growth rate of the labor force. However, economists
+who have looked at the issue have found that even a doubling in
+the rate of immigration into the United States from about one
+million to two million immigrants per year would not
+significantly reduce the federal government's fiscal imbalance.
+ The prospect of growing fiscal imbalances and their
+economic consequences also raises essential questions of
+intergenerational fairness. As I have noted, because of
+increasing life expectancy and the decline in fertility, the
+number of retirees that each worker will have to support in the
+future, either directly or indirectly, through taxes paid to
+support government programs will rise significantly.
+ To the extent that federal budgetary policies inhibit
+capital formation and our increases net liabilities to
+foreigners, future generations of Americans will bear a growing
+burden of the debt and experience slower growth in per capita
+incomes than would otherwise have been the case.
+ An important element in ensuring that we leave behind a
+stronger economy than we inherited as in virtually all previous
+generations in this country will be to move over time towards
+fiscal policies that are sustainable, efficient, and equitable
+across generations.
+ Policies that promote private as well as public saving
+would also help us to leave a productive economy to our
+children and grandchildren. In addition, we should explore ways
+to make the labor market as accommodating as possible to older
+people who wish to continue working as many will as longevity
+increases and health improves.
+ Addressing the country's fiscal problems will take
+persistence and a willingness to make difficult choices. In the
+end, the fundamental decision that the Congress, the
+Administration, and the American people must confront is how
+large a share of the nation's economic resources to devote to
+federal government programs, including transfer programs, such
+as Social Security, Medicare, and Medicaid.
+ Crucially, whatever size of the government is chosen, tax
+rates must ultimately be set at a level sufficient to achieve
+an appropriate balance of spending and revenues in the long
+run.
+ Thus, members of the Congress who put special emphasis on
+keeping tax rates low must accept that low tax rates can be
+sustained only if outlays, including those and entitlements,
+are kept low as well.
+ Likewise, members who favor a more expansive role of the
+government, including relatively more generous benefits
+payments, must recognize the burden imposed by the additional
+taxes needed to pay for the higher spending, a burden that
+includes not only the resources transferred from the private
+sector but also any adverse economic incentives associated with
+higher tax rates.
+ Achieving fiscal sustainability will require sustained
+efforts and attention over many years. As an aid in charting
+the way forward, the Congress may find it useful to set some
+benchmarks against which to gauge progress towards key
+budgetary objectives.
+ Because no single statistic fully describes the fiscal
+situation, the most effective approach would likely involve
+monitoring a number of fiscal indicators, each of which
+captures a different aspect of the budget and its economic
+impact.
+ The unified budget deficit projected forward a certain
+number of years is an important measure that is already
+included in the congressional budgeting process. However, the
+unified budget deficit does not fully capture the fiscal
+situation and its effect on the economy for at least two
+reasons.
+ First, the budget deficit by itself does not measure the
+quantity of resources that the government is taking from the
+private sector. An economy in which the government budget is
+balanced but in which government spending equals 20 percent of
+GDP is very different from one in which the government's budget
+is balanced but its spending is 40 percent of GDP as the latter
+economy has both higher tax rates and a greater role for the
+government.
+ Monitoring current and prospective levels of total
+government outlays relative to GDP or a similar indicator would
+help the Congress to ensure that the overall size of the
+government relative to the economy is consistent with members'
+views and preferences.
+ Second, the annual budget deficit reflects only near-term
+financing needs and does not capture long-term fiscal
+imbalances. As the most difficult long-term budgetary issues
+are associated with the growth of entitlement spending, a
+comprehensive approach to budgeting would include close
+attention to measures of the long-term solvency of entitlement
+programs, such as long horizon present values of unfunded
+liabilities for Social Security and Medicare.
+ To summarize, because of demographic changes and rising
+medical costs, federal expenditures for entitlement programs
+are projected to rise sharply over the next few decades.
+Dealing with the resulting fiscal strains will pose difficult
+choices for the Congress, the Administration, and the American
+people.
+ However, if early and meaningful action is not taken, the
+U.S. economy could be seriously weakened with future
+generations bearing much of the cost.
+ The decisions the Congress will face will not be easy or
+simple, but the benefits of placing the budget on a path that
+is both sustainable and meets the nation's long-run needs would
+be substantial.
+ Thank you again for allowing me to comment on these
+important issues, and I would be glad to take your questions.
+Thank you again.
+ [The prepared statement of Ben S. Bernanke follows:]
+
+ Prepared Statement of Hon. Ben S. Bernanke, Chairman, Board of
+ Governors of the Federal Reserve System
+
+ Chairman Spratt, Representative Ryan, and other members of the
+Committee, I am pleased to be here to offer my views on the federal
+budget and related issues. At the outset, I should underscore that I
+speak only for myself and not necessarily for my colleagues at the
+Federal Reserve.
+ My testimony will focus on the long-term budget outlook and will
+draw on the most recent set of long-term budget projections from the
+Congressional Budget Office (CBO), issued in December 2005. The CBO
+constructed its projections based on the assumptions that real gross
+domestic product (GDP) would rise about 3\1/2\ percent per year in 2005
+and 2006 and at a rate of 2.9 per cent per annum from 2007 through
+2015. The growth projections through 2015 were in turn based on the
+assumptions that trend labor force growth will average 0.8 percent per
+year and that trend labor productivity growth in the nonfarm business
+sector will average 2.4 percent per year. The CBO has since updated
+those assumptions for the purposes of other analyses, but the revisions
+were not large enough to materially alter the broad contours of the
+fiscal outlook.\1\ As for the longer-term outlook, the CBO assumed that
+the growth rate of real GDP will average about 2 percent per year
+starting around 2020. While such projections are subject to
+considerable uncertainty, the CBO's assumptions provide a sensible and
+useful starting point for assessing the budget situation over the
+longer run.
+ Before discussing that longer-run outlook, I will comment on recent
+budget developments. As you know, the deficit in the unified federal
+budget declined for a second year in fiscal year 2006, falling to $248
+billion from $318 billion in fiscal 2005. So far in fiscal 2007, solid
+growth in receipts, especially in collections of personal and corporate
+income taxes, has held the deficit somewhat below year-earlier levels.
+Of course, a good deal of uncertainty still surrounds the budget
+outcome for the year as a whole. Federal government outlays in fiscal
+2006 were 20.3 percent of nominal gross domestic product (GDP),
+receipts were 18.4 percent of GDP, and the deficit (equal to the
+difference of the two) was 1.9 percent of GDP. These percentages are
+close to their averages since 1960. The on-budget deficit, which
+differs from the unified budget deficit primarily in excluding receipts
+and payments of the Social Security system, was $434 billion, or 3.3
+percent of GDP, in fiscal 2006.\2\ As of the end of fiscal 2006,
+federal government debt held by the public, which includes holdings by
+the Federal Reserve but excludes those by the Social Security and other
+trust funds, amounted to 37 percent of one year's GDP.
+ Official projections suggest that the unified budget deficit may
+stabilize or moderate further over the next few years. Unfortunately,
+we are experiencing what seems likely to be the calm before the storm.
+In particular, spending on entitlement programs will begin to climb
+quickly during the next decade. In fiscal 2006, federal spending for
+Social Security, Medicare, and Medicaid together totaled about 40
+percent of federal expenditures, or 8\1/2\ percent of GDP.\3\ In the
+medium-term projections released by the CBO in January, these outlays
+increase to 10\3/4\ percent of GDP by 2017, an increase of about 2
+percentage points of GDP in little more than a decade, and they will
+likely continue to rise sharply relative to GDP in the years after
+that. As I will discuss, these rising entitlement obligations will put
+enormous pressure on the federal budget in coming years.
+ The large projected increases in future entitlement spending have
+two principal sources. First, like many other industrial countries, the
+United States has entered what is likely to be a long period of
+demographic transition, the result both of the reduction in fertility
+that followed the post-World War II baby boom and of ongoing increases
+in life expectancy. Longer life expectancies are certainly to be
+welcomed. But they are likely to lead to longer periods of retirement
+in the future, even as the growth rate of the workforce declines. As a
+consequence of the demographic trends, the number of people of
+retirement age will grow relative both to the population as a whole and
+to the number of potential workers. Currently, people 65 years and
+older make up about 12 percent of the U.S. population, and there are
+about five people between the ages of 20 and 64 for each person 65 and
+older. According to the intermediate projections of the Social Security
+Trustees, in 2030 Americans 65 and older will constitute about 19
+percent of the U.S. population, and the ratio of those between the ages
+of 20 and 64 to those 65 and older will have fallen to about 3.
+ Although the retirement of the baby boomers will be an important
+milestone in the demographic transition--the oldest baby boomers will
+be eligible for Social Security benefits starting next year--the change
+in the nation's demographic structure is not just a temporary
+phenomenon related to the large relative size of the baby-boom
+generation. Rather, if the U.S. fertility rate remains close to current
+levels and life expectancies continue to rise, as demographers
+generally expect, the U.S. population will continue to grow older, even
+after the baby-boom generation has passed from the scene. If current
+law is maintained, that aging of the U.S. population will lead to
+sustained increases in federal entitlement spending on programs that
+benefit older Americans, such as Social Security and Medicare.
+ The second cause of rising entitlement spending is the expected
+continued increase in medical costs per beneficiary. Projections of
+future medical costs are fraught with uncertainty, but history suggests
+that--without significant changes in policy--these costs are likely to
+continue to rise more quickly than incomes, at least for the
+foreseeable future. Together with the aging of the population, ongoing
+increases in medical costs will lead to a rapid expansion of Medicare
+and Medicaid expenditures.
+ Long-range projections prepared by the CBO vividly portray the
+potential effects on the budget of an aging population and rapidly
+rising health care costs. The CBO has developed projections for a
+variety of alternative scenarios, based on different assumptions about
+the evolution of spending and taxes. The scenarios produce a wide range
+of possible budget outcomes, reflecting the substantial uncertainty
+that attends long-range budget projections.\4\ However, the outcomes
+that appear most likely, in the absence of policy changes, involve
+rising budget deficits and increases in the amount of federal debt
+outstanding to unprecedented levels. For example, one plausible
+scenario is based on the assumptions that (1) federal retirement and
+health spending will follow the CBO's intermediate projection; (2)
+defense spending will drift down over time as a percentage of GDP; (3)
+other non-interest spending will grow roughly in line with GDP; and (4)
+federal revenues will remain close to their historical share of GDP--
+that is, about where they are today.\5\ Under these assumptions, the
+CBO calculates that, by 2030, the federal budget deficit will approach
+9 percent of GDP--more than four times greater as a share of GDP than
+the deficit in fiscal year 2006.
+ A particularly worrisome aspect of this projection and similar ones
+is the implied evolution of the national debt and the associated
+interest payments to government bondholders. Minor details aside, the
+federal debt held by the public increases each year by the amount of
+that year's unified deficit. Consequently, scenarios that project large
+deficits also project rapid growth in the outstanding government debt.
+The higher levels of debt in turn imply increased expenditures on
+interest payments to bondholders, which exacerbate the deficit problem
+still further. Thus, a vicious cycle may develop in which large
+deficits lead to rapid growth in debt and interest payments, which in
+turn adds to subsequent deficits. According to the CBO projection that
+I have been discussing, interest payments on the government's debt will
+reach 4\1/2\ percent of GDP in 2030, nearly three times their current
+size relative to national output. Under this scenario, the ratio of
+federal debt held by the public to GDP would climb from 37 percent
+currently to roughly 100 percent in 2030 and would continue to grow
+exponentially after that. The only time in U.S. history that the debt-
+to-GDP ratio has been in the neighborhood of 100 percent was during
+World War II. People at that time understood the situation to be
+temporary and expected deficits and the debt-to-GDP ratio to fall
+rapidly after the war, as in fact they did. In contrast, under the
+scenario I have been discussing, the debt-to-GDP ratio would rise far
+into the future at an accelerating rate. Ultimately, this expansion of
+debt would spark a fiscal crisis, which could be addressed only by very
+sharp spending cuts or tax increases, or both.\6\
+ The CBO projections, by design, ignore the adverse effects that
+such high deficits would likely have on economic growth. But if
+government debt and deficits were actually to grow at the pace
+envisioned by the CBO's scenario, the effects on the U.S. economy would
+be severe. High rates of government borrowing would drain funds away
+from private capital formation and thus slow the growth of real incomes
+and living standards over time. Some fraction of the additional debt
+would likely be financed abroad, which would lessen the negative
+influence on domestic investment; however, the necessity of paying
+interest on the foreign-held debt would leave a smaller portion of our
+nation's future output available for domestic consumption. Moreover,
+uncertainty about the ultimate resolution of the fiscal imbalances
+would reduce the confidence of consumers, businesses, and investors in
+the U.S. economy, with adverse implications for investment and growth.
+ To some extent, strong economic growth can help to mitigate
+budgetary pressures, and all else being equal, fiscal policies that are
+supportive of growth would be beneficial. Unfortunately, economic
+growth alone is unlikely to solve the nation's impending fiscal
+problems. Economic growth leads to higher wages and profits and thus
+increases tax receipts, but higher wages also imply increased Social
+Security benefits, as those benefits are tied to wages. Higher incomes
+also tend to increase the demand for medical services so that,
+indirectly, higher incomes may also increase federal health
+expenditures. Increased rates of immigration could raise growth by
+raising the growth rate of the labor force. However, economists who
+have looked at the issue have found that even a doubling in the rate of
+immigration to the United States, from about 1 million to 2 million
+immigrants per year, would not significantly reduce the federal
+government's fiscal imbalance.\7\
+ The prospect of growing fiscal imbalances and their economic
+consequences also raises essential questions of intergenerational
+fairness.\8\ As I have noted, because of increasing life expectancy and
+the decline in fertility, the number of retirees that each worker will
+have to support in the future--either directly or indirectly through
+taxes paid to support government programs--will rise significantly. To
+the extent that federal budgetary policies inhibit capital formation
+and increase our net liabilities to foreigners, future generations of
+Americans will bear a growing burden of the debt and experience slower
+growth in per-capita incomes than would otherwise have been the case.
+ An important element in ensuring that we leave behind a stronger
+economy than we inherited, as did virtually all previous generations in
+this country, will be to move over time toward fiscal policies that are
+sustainable, efficient, and equitable across generations. Policies that
+promote private as well as public saving would also help us leave a
+more productive economy to our children and grandchildren. In addition,
+we should explore ways to make the labor market as accommodating as
+possible to older people who wish to continue working, as many will as
+longevity increases and health improves.
+ Addressing the country's fiscal problems will take persistence and
+a willingness to make difficult choices. In the end, the fundamental
+decision that the Congress, the Administration, and the American people
+must confront is how large a share of the nation's economic resources
+to devote to federal government programs, including transfer programs
+such as Social Security, Medicare, and Medicaid. Crucially, whatever
+size of government is chosen, tax rates must ultimately be set at a
+level sufficient to achieve an appropriate balance of spending and
+revenues in the long run. Thus, members of the Congress who put special
+emphasis on keeping tax rates low must accept that low tax rates can be
+sustained only if outlays, including those on entitlements, are kept
+low as well. Likewise, members who favor a more expansive role of the
+government, including relatively more-generous benefits payments, must
+recognize the burden imposed by the additional taxes needed to pay for
+the higher spending, a burden that includes not only the resources
+transferred from the private sector but also any adverse economic
+incentives associated with higher tax rates.
+ Achieving fiscal sustainability will require sustained efforts and
+attention over many years. As an aid in charting the way forward, the
+Congress may find it useful to set some benchmarks against which to
+gauge progress toward key budgetary objectives. Because no single
+statistic fully describes the fiscal situation, the most effective
+approach would likely involve monitoring a number of fiscal indicators,
+each of which captures a different aspect of the budget and its
+economic impact. The unified budget deficit, projected forward a
+certain number of years, is an important measure that is already
+included in the congressional budgeting process. However, the unified
+budget deficit does not fully capture the fiscal situation and its
+effect on the economy, for at least two reasons.
+ First, the budget deficit by itself does not measure the quantity
+of resources that the government is taking from the private sector. An
+economy in which the government budget is balanced but in which
+government spending equals 20 percent of GDP is very different from one
+in which the government's budget is balanced but its spending is 40
+percent of GDP, as the latter economy has both higher tax rates and a
+greater role for the government. Monitoring current and prospective
+levels of total government outlays relative to GDP or a similar
+indicator would help the Congress ensure that the overall size of the
+government relative to the economy is consistent with members' views
+and preferences.
+ Second, the annual budget deficit reflects only near-term financing
+needs and does not capture long-term fiscal imbalances. As the most
+difficult long-term budgetary issues are associated with the growth of
+entitlement spending, a comprehensive approach to budgeting would
+include close attention to measures of the long-term solvency of
+entitlement programs, such as long-horizon present values of unfunded
+liabilities for Social Security and Medicare.
+ To summarize, because of demographic changes and rising medical
+costs, federal expenditures for entitlement programs are projected to
+rise sharply over the next few decades. Dealing with the resulting
+fiscal strains will pose difficult choices for the Congress, the
+Administration, and the American people. However, if early and
+meaningful action is not taken, the U.S. economy could be seriously
+weakened, with future generations bearing much of the cost. The
+decisions the Congress will face will not be easy or simple, but the
+benefits of placing the budget on a path that is both sustainable and
+meets the nation's long-run needs would be substantial.
+ Thank you again for allowing me to comment on these important
+issues. I would be glad to take your questions.
+
+ ENDNOTES
+
+ \1\ According to the latest estimates of the Bureau of Economic
+Analysis (BEA), real GDP growth was 3.2 percent in 2005 and 3.4 percent
+in 2006, both figures stated on an annual-average basis. The figure for
+2006 is the BEA's ``advance'' estimate; a revised estimate is scheduled
+for release today.
+ \2\ Excluding the operations of both Social Security and Medicare
+Part A, the budget deficit in fiscal year 2006 was $459 billion, or 3.5
+percent of GDP. Like Social Security, Medicare Part A pays benefits out
+of, and receives a dedicated stream of revenues into, a trust fund.
+ \3\ Net of Medicare premiums paid by beneficiaries and amounts paid
+by states from savings on Medicaid prescription drug costs, these
+outlays were equal to 8 percent of GDP.
+ \4\ For example, in 2030, five of the six scenarios imply deficits
+ranging from 1\1/2\ percent of GDP to nearly 14 percent of GDP; a sixth
+scenario is capable of producing a surplus, but it relies on the
+confluence of a very favorable set of assumptions.
+ \5\ For more information about this scenario, see the description
+of Scenario 2 in Congressional Budget Office (2005), The Long-Term
+Budget Outlook, December, pp. 5-13 and 48-49, www.cbo.gov/ftpdocs/69xx/
+doc6982/12-15-LongTermOutlook.pdf. Consistent with the assumptions used
+by the Medicare trustees, the CBO's intermediate projections for
+Medicare and Medicaid are based on the assumption that, over the long
+run, per beneficiary health expenditures will increase at a rate that
+is 1 percentage point per year greater than the growth rate of per
+capita GDP. Over the past twenty-five years, however, per beneficiary
+Medicare spending has actually exceeded per capita GDP growth by about
+2\1/2\ percentage points per year. Thus, a significant slowing in the
+growth of medical costs per beneficiary will be needed to keep
+expenditures close to those projected in this scenario.
+ \6\ To give a sense of the magnitudes involved, suppose--for the
+sake of illustration only--that the deficit projected for 2030 in the
+CBO scenario were to be eliminated entirely in that year, half through
+reductions in discretionary spending and half through increases in non-
+payroll taxes. (Of course, in reality the fiscal adjustment would
+likely not occur in one year, but this hypothetical example is useful
+for showing the magnitude of the problem.) This fiscal adjustment would
+involve a cut in discretionary spending (including defense) of nearly
+80 percent (relative to its baseline level) and a rise in non-payroll
+taxes of more than 35 percent. The need for such painful measures could
+be diminished by beginning the process of fiscal adjustment much
+earlier, thereby avoiding some of the buildup in outstanding debt and
+the associated interest burden.
+ \7\ CBO (2005), The Long-Term Budget Outlook, p. 3.
+ \8\ I discussed this issue in Ben S. Bernanke (2006), ``The Coming
+Demographic Transition: Will We Treat Future Generations Fairly?'',
+speech delivered before the Washington Economic Club, Washington,
+October 4, www.federalreserve.gov/boarddocs/speeches/2006/20061004/
+default.htm.
+
+ Chairman Spratt. Dr. Bernanke, you will receive questions
+on this subject anyway, so I will give you the opportunity to
+take the first pitch.
+ Yesterday, we had severe disruption in the stock markets.
+Would you care to make any statement or reflection upon what
+happened yesterday and whether or not it has any connection to
+our fiscal situation?
+ Mr. Bernanke. There did not seem to be any single trigger
+of the market correction we saw yesterday. I do not think it
+would be useful for me to try to parse the movement into the
+components associated with different pieces of news or pieces
+of information.
+ I will say that the Federal Reserve in collaboration with
+the President's Working Group has been closely monitoring the
+markets. They seem to be working well and normally.
+ We have also, of course, been closely monitoring the
+economy, looking at new data and trying to evaluate their
+implications for the forecast.
+ And my view is that taking all the new data into account
+that there is really no material change in our expectations for
+the U.S. economy since I last reported to Congress a couple
+weeks ago in the Humphrey Hawkins hearings.
+ Chairman Spratt. Do you expect the growth rate in the
+economy to decline slightly?
+ Mr. Bernanke. We are looking for moderate growth in the
+U.S. economy going forward. And I would add parenthetically
+that the downward revision of the fourth quarter GDP numbers we
+got this morning is actually more consistent with our overall
+view of the economy than were the original numbers.
+ So we expect moderate growth going forward. We believe that
+if the housing sector begins to stabilize and if some of the
+inventory corrections are still going on and manufacturing
+begins to be completed that there is a reasonable possibility
+that we will see some strengthening of the economy sometime
+during the middle of the year.
+ Chairman Spratt. Turning now to a different topic. We have
+difficulty explaining to the American public why the deficit is
+such a serious matter. You just touched upon and every
+eloquently touched upon the intergenerational equity aspects of
+the problem.
+ But we do not see or feel the effects of it now, and that
+is even more true for the long-term debt, which is substantial.
+When it is discounted back to present value, you can understand
+it in those terms. But, nevertheless, we do not see the
+consequences of it.
+ Traditionally it was believed that the federal government
+would, by running large deficits, crowd out private borrowers
+in the credit markets and run up interest rates. We have not
+seen any unusual increase in relative interest rates, and that
+appears to be a result of the fact that we are financing a lot
+of our debt with foreigners.
+ Is that a correct perception and, if so, what are the
+consequences of being reliant for financing the federal
+government on foreign capital markets?
+ Mr. Bernanke. Mr. Chairman, in the short run, budget
+deficits tend to reduce national saving. And that leads to two
+possible outcomes. One is that domestic investment will fall
+accordingly along with saving. The other possibility is that
+investment will be maintained, but in order to finance that
+investment, we have to borrow essentially abroad, which results
+in a large current account deficit.
+ In recent years, it seems more of the latter has been
+happening. We have been borrowing abroad to finance domestic
+investment, and so we have seen not a very significant increase
+in real interest rates. In fact, real interest rates are
+generally low around the world.
+ But what we have seen on the other side of the equation, we
+have seen large increases in our foreign debt and in our
+current account deficit.
+ Looking forward to the longer run, I guess the analogy I
+would make here is that this is sort of like a snowball rolling
+down the hill. It is already a pretty big snowball, but it is
+going to get a lot bigger a lot faster, and we have an
+opportunity now to try and prevent that cumulative process that
+will go on if we do not take some action.
+ In particular, because deficits feed into debt which feed
+into deficits, this could really get out of control over a long
+period of time, and it would have very significant consequences
+for capital formation and for foreign debt and for the
+financial security of Americans, particularly the next
+generation who will be saddled with this growing debt.
+ So it is a very significant problem. The real consequences
+will be felt to a greater degree over time and more so a few
+years from now than today, but it is that very fact that we
+have the opportunity to move today that we can perhaps put
+ourselves on a better path and avoid what would have to be much
+more severe and draconian responses ten, fifteen, or twenty
+years down the road.
+ Chairman Spratt. One reason we resort to foreign borrowing
+is that we have at the present time a dismally, abysmally low
+savings rate ourselves in the United States.
+ What do you think we should do to improve to shore up the
+savings rate in the United States?
+ Mr. Bernanke. Well, that is a challenging question.
+Certainly improving budget balance both at the federal and, to
+some extent also, of course, at the state and local levels.
+ Chairman Spratt. Because that by itself is dis-saving. If
+you correct that, that in itself----
+ Mr. Bernanke. That is correct.
+ Chairman Spratt [continuing]. Corrects part of the problem.
+ Mr. Bernanke. So the borrowing to finance deficits, if you
+think of it is as being taken out of the pool of saving done by
+the private sector, leaving less left over for capital
+investment. So one way to add to national saving is to try to
+reduce deficits as much as possible.
+ The other is, of course, to try and increase saving in the
+private sector. And we have in our country relatively low, in
+fact currently negative, household saving rates.
+ There is quite a debate among economists about how best to
+increase those saving rates. I would just point to one
+direction that was included in the recent pension bill that the
+Congress passed and the President signed which is to allow opt
+out 401k programs among employers.
+ We have a lot of evidence that people, if they are required
+to opt out of a savings program, that the inertia will win out
+and they will save more. And that is really one of the ways in
+which we probably could increase saving at the private level.
+ Beyond that, there are a number of possibilities, including
+tax policies, including financial literacy and others, which I
+can discuss in more detail. I am sure there will be questions.
+But we do not really have a silver bullet for household saving,
+and we should, I think, though, try to encourage it as much as
+possible.
+ Chairman Spratt. One final question from me. You made a
+speech recently in which you addressed a concern. To some
+extent, you touched upon it today when you discussed the
+intergenerational equity of deficits. You were concerned about
+the disparities in income in our economy.
+ To what extent is this a problem for the economy itself,
+for the country, and what would you recommend that we do about
+that? Are you recommending more progressive tax policies or----
+ Mr. Bernanke. Mr. Chairman----
+ Chairman Spratt [continuing]. What do we need to do to
+address that problem, and how severe is the problem in your
+estimation?
+ Mr. Bernanke. Mr. Chairman, this is not a new issue. We
+have seen increasing income inequality in the United States for
+at least three decades and, according to some measures, maybe
+four or five decades.
+ In my speech, I discussed a number of possible sources of
+that increase in inequality. I think one of the most important
+is technology which is increasing the returns to higher
+education. So people who have more education or greater skills
+are seeing much higher incomes relative to those with less
+education and lower skills. And that is generating greater
+inequality in the economy.
+ I think this is an important problem both because we do not
+want to see excessive inequality and we do not want to see
+people at the lower end of the ladder not enjoying, you know,
+some of the benefits of our economic growth.
+ I think it is also a problem because in order to continue
+to grow, we need to have public buy-in to a continued open and
+flexible economy. And I am afraid that if people begin to feel
+that the economy is not benefiting them, then they will, you
+know, resist the flexibility and dynamism that is so important
+to our economic growth.
+ I think the most likely approach for arresting this trend,
+the most beneficial approach would be to strengthen our
+educational and training systems as much as possible and to
+encourage people to get the skills they need to earn higher
+incomes.
+ Chairman Spratt. Thank you very much.
+ Mr. Ryan.
+ Mr. Ryan. Thank you, Mr. Chairman and Mr. Chairman.
+ Some people believe that yesterday's market corrections are
+due to a liquidity crunch and they compare it to the
+corrections in 1987 and 1998.
+ Do you believe or agree that there is a liquidity problem
+in the world today?
+ Mr. Bernanke. No, I do not think so.
+ Mr. Ryan. Some also have been pointing to a concern about
+subprime lending. And just yesterday, Freddie Mac said that it
+would tighten its lending standards.
+ It seems to some of us that this is a small part of the
+market and unlikely to cause major problems, but I would be
+curious about your take on that.
+ Mr. Bernanke. There certainly have been some concerns
+raised about the health of the subprime sector. We have seen
+increasing rate of default. We have seen financial distress on
+the part of lenders. And so that is a concern.
+ We are monitoring that situation very carefully, and it was
+one of the factors, I think, which has contributed to some
+unease about the economy, about the market.
+ Our assessment, though, while this is a very important
+problem and an issue obviously for many people who are facing
+foreclosure, our assessment is that there is not much
+indication at this point that subprime mortgage issues have
+spread into the broader mortgage market, which still seems to
+be healthy, and the lending side of that still seems to be
+healthy.
+ So it is a concern. But at this point, we do not see it as
+being a broad financial concern or a major factor in assessing
+the course of the economy.
+ Mr. Ryan. I want to ask a question about sort of fed
+governance. For the 1960s and the 1970s, the fed and central
+banks around the world really sort of used a Phillip's curve to
+dictate monetary policy. And it seems that the evidence, which
+obviously is lagging and takes a while to build up, has come in
+and has more or less clearly debunked the Phillip's curve as a
+primary driver of monetary policy. And there seems to be a
+growing body of evidence that unemployment and inflation are
+not nearly as linked as the Phillip's curve would suggest.
+ Do you agree with that, and do you believe that commodity
+prices are a better indicator of inflation and of inflationary
+expectations?
+ Mr. Bernanke. It is true that the empirical evidence
+suggests that the link is looser, that there is less
+responsiveness of inflation to employment conditions than there
+perhaps may have been in past decades.
+ My own view is that we should take a very eclectic approach
+in thinking about inflation. I look at the state of the economy
+and try to assess whether demand is exceeding supply in some
+sense, whether the financial conditions are promoting growth
+and demand which is greater than the productive capacity of the
+economy. But I also look at a wide variety of indicators
+including commodity prices, including financial indicators like
+bond rates and inflation compensation.
+ I do not think we can rely on any single indicator,
+particularly one like the natural rate of unemployment concept.
+It is very difficult to know if--even if there is such a
+relationship, it is very difficult to assess in real time where
+that number might be.
+ And so we really have no alternative but to look at, you
+know, many indicators, including the one you mentioned, to try
+to assess where inflation is going.
+ Mr. Ryan. In the past in your academic career, you seem to
+be a fan of inflation targeting. We have seen other countries,
+obviously much smaller economies, test inflation targeting with
+some great degrees of success, it seems.
+ What is your current impression of inflation targeting?
+ Mr. Bernanke. Well, I should say that I view inflation
+objectives and the like as being part of the communication tool
+kit that a central bank may have to try to explain to the
+markets and to the public what its approach is, what its plans
+are, and how it sees the economy.
+ We are currently in the Federal Open Market Committee
+conducting a zero-based review of our communications policies,
+looking at, among them, numerical objectives for inflation, but
+many other approaches as well, to try to provide more
+information to the public about our plans and our approach.
+ So in terms of the specifics, I think I would leave that
+open because our Committee has not yet decided, you know, what
+approaches we want to take.
+ The one thing I would say is that there is certainly a
+strong conviction that maintaining low and stable inflation is
+not--this goes back to the first part of your question--is not
+something that reduces employment and growth. To the contrary,
+an economy that has low and stable inflation is going to grow
+faster and have more stability than one in which inflation is
+high and unstable. We learned that in the 1970s and it has
+become increasingly evident in the last couple of decades.
+ So whether or not we have an explicit target or not, it is
+very important for the Federal Reserve to maintain low and
+stable inflation.
+ Mr. Ryan. I totally agree with that. I would just simply
+encourage, and I have one quick last question.
+ As you continue these deliberations on your communications
+toolbox, that the more explicit expectations that the market
+can see, the better and more stable the market horizon and
+investment horizons are for investors and for the economy. So
+to the extent that you can be more explicit about that, that is
+all to the good, I think.
+ One last final question. There is going to be a lot of talk
+this year about whether or not to raise taxes. And you are
+seeing a lot of speculation as to whether or not Congress is
+going to affirmatively allow some tax cuts to expire, such as
+the growth tax cuts, dividends, cap gains, top marginal income
+tax rates, things like that.
+ Is there a chance that this discussion itself could have a
+negative impact on the market? And we have also had surging
+revenues. Would you care to comment on that as well?
+ And then I yield.
+ Mr. Bernanke. Congressman, as you know, the Federal Reserve
+is nonpartisan. And I talk about many, many issues. I realize
+some of them are very broad. But I do think it is important for
+me, and this is something that is going to be relevant to
+today's discussion, I think it is important for me not to
+implicitly or explicitly endorse any spending or tax program
+for or against.
+ So I hope you will understand if I do not make an
+assessment of that.
+ Mr. Ryan. All right. Thank you.
+ Chairman Spratt. Mr. Cooper.
+ Mr. Cooper. Thank you, Mr. Chairman.
+ And thank you, Chairman Bernanke, for your excellent
+testimony.
+ On page nine, you say, ``A comprehensive approach to
+budgeting would include close attention to measures of the
+long-term solvency of entitlement programs, such as the long
+horizon present values of unfunded liabilities for Social
+Security and Medicare.''
+ Last year, this Committee passed unanimously--in fact, it
+was the only unanimous thing the Committee did--my amendment
+that would encourage us to look not only at the unified budget
+deficit but also at, for example, accrual measures of our
+fiscal position so that we would have better perspective on
+where we are. So this Committee has been trying to focus on a
+broader set of measures.
+ It worries me, though, that we are in the situation of the
+average American who does not know they have high blood sugar
+levels, which means possible diabetes, because in this country,
+there is sadly, tragically for many people, a seven-year delay
+between onset of high blood sugar and then actual diagnosis of
+the disease, because, as Chairman Spratt noted, there are no
+symptoms. You cannot tell that you have high blood sugar.
+ The average American just looking at the unified budget
+deficit cannot tell we have got a major problem. That is why we
+need broader measures, so that we might be encouraged to take
+action.
+ Several of us have been working on those measures, for
+example, highlighting the Treasury Department's financial
+report of the United States, which uses accrual accounting and
+which shows that the deficit last year was not 1.9 percent of
+GDP. It was closer to three or four percent of GDP.
+ But even that measure does not take into account some of
+the most important programs that we have in this country like
+Social Security and Medicare.
+ So in your testimony, you mentioned the unfunded
+liabilities of Social Security and Medicare. Does that mean
+that you count these as liabilities?
+ Mr. Bernanke. Let me first start by agreeing with your
+basic thrust that the unified budget deficit has its value
+because it says some things about the current economy, but it
+is not a full measure of the fiscal obligations that are being
+taken on.
+ As I am sure you know, the Advisory Board to the Treasury
+has promoted this accrual accounting approach to the deficit,
+and that gives you the bigger number you mentioned. And what
+they have done there is they have included not only the current
+spending, but they have, you know, taken on board the accrual
+of obligations to future pensions for federal government
+workers and veterans and the like, and those are legal
+obligations that any private company would include as part of
+its liability assessment in a given year.
+ The FASB is currently looking at whether to include a
+measure of the accrued liabilities to Social Security and
+Medicare as part of a broader measure yet of the accrual-based
+deficit and there they are confronting exactly, I think, the
+issue that you are talking about.
+ First of all, projecting those liabilities, of course, is
+difficult, but that does not stop accountants usually from
+trying to incorporate them.
+ The other question is whether or not there are legal
+liabilities in the sense that, of course, Congress can and has
+in the past changed benefit schedules from what had originally
+been planned. And so in that sense, perhaps these are not
+liabilities in the strict legal sense of the word. And that is
+part of the reason why they have not been incorporated in these
+accrual measures.
+ But I would say that there certainly is a sense that if
+there is no change in policy that automatically we will be
+incurring these large entitlement costs and our short-term
+unified budget deficit does not in any way reflect the fact
+that as we move along, we are getting older, and those
+obligations, at least implicit obligations, are getting larger
+and larger.
+ Mr. Cooper. Thank you.
+ In my short time remaining, it seems to me to be the
+biggest single disconnect in all of American politics, the fact
+that all of us on both sides of the aisle praise these programs
+and promise benefits. And, yet, when you actually look at the
+budget of the United States and the common deficit measure,
+these entire programs are largely excluded, ignored.
+ So not only are these unfunded obligations or liabilities,
+they are also largely uncounted obligations. And in order for
+us to have a chance of delivering the benefits that we
+promised, we are going to have to start counting them. That is
+why I am so strong an advocate for these broader measures, so
+that we have a chance to fulfill the promises that all of us
+have made to our constituents.
+ But I thank you for your great service and your steady hand
+at the fed.
+ Mr. Bernanke. Thank you.
+ Chairman Spratt. Mr. Barrett.
+ Mr. Barrett. Thank you, Mr. Chairman.
+ Chairman, thank you for being with us today. I am going to
+throw three questions at you and then give you all the time to
+answer them.
+ Number one, savings. I know other countries do this, but we
+lose a lot of savings time between zero and 18 or zero, date of
+birth, and when they enter the job market.
+ Would it not be a smart thing to do to set up some type of
+personal retirement account through incentives or whatever that
+would allow members, citizens to start some type of savings,
+give breaks if they add to it along? Something to think about
+there.
+ Number two, in your testimony, right at the end, you say if
+early--talking about entitlement spending, by the way--if early
+and meaningful action is not taken, the U.S. economy could be
+seriously weakened, and you go on. Of course, I know you are
+talking about Medicare and Medicaid.
+ Can we continue, question two, can we continue down the
+road of doing a little bit here and a little bit there? Are you
+talking about major course adjustments and do you not think or
+do you think that we need some type of overall national road
+map to say, hey, these are problems, we cannot do hit-and-miss
+operations anymore, we need a national goal that all of us can
+buy into and work on?
+ Last one, there is a direct correlation, I know you know,
+between the tax burdens and economic growth. Some people seem
+to think the average level is about 35 percent all government
+levels.
+ How close are we to that level right now when we look at
+state, local, federal, the whole nine yards? It is all yours.
+ Mr. Bernanke. Thank you.
+ On savings for young people, obviously it would be great to
+get young people saving. There have been some proposals. Again,
+I am not going to try to address very specific proposals. But
+there have been proposals about giving money to children, you
+know, creating an account at the time that they are born.
+ I think it is a problem that kids do not know enough about
+saving. They do not know enough about money in general. The
+Federal Reserve is very interested in financial literacy,
+teaching that in the schools, trying to get kids involved in
+saving and understanding that. I do not have a magic bullet
+again, but I think that starting young and trying to broaden
+the base.
+ You know, there is a certain part of our population where
+these financial matters are just second nature, you know, but
+many people who do not really get exposed to them and find them
+difficult and mysterious and to their detriment. And to the
+extent that we could help people learn about how to save, how
+to budget, we are doing a great service.
+ On the size of the entitlements, these are very large
+deficits. It is hard to find good ways to measure it. The
+trustees have the present value of the infinite horizon deficit
+for Medicare at about $72 trillion, to give you an idea of the
+enormous amount of money that is.
+ That does not include the fact that we already have a
+baseline level of finance in the budget for Medicare. If you
+take that out, it is still about $54 trillion. So these are
+enormous amounts of money.
+ It is important, I think, to note that the Medicare part is
+probably four or five times as big as the Social Security part.
+So as difficult as it has been to address Social Security,
+Medicare is a bigger problem.
+ And I do think we are going to have to, you know, think
+hard about the structure of those programs. And in the case of
+Medicare, think also about the healthcare sector more generally
+and the cost that it is creating.
+ It was implicit in my comment about looking at multiple
+indicators that to the extent that Congress can look beyond the
+next couple of years and perhaps have some kind of plan or some
+kind of, you know, benchmarks moving forward that that might be
+quite useful.
+ In particular, this is just going to get harder politically
+because you are going to get to the point where you will be
+affecting the benefits of people who are, you know, close to
+retirement. If you make changes now that take place decades in
+the future, you know, you will not be affecting anybody's
+benefits who are either retired or close to retirement. And you
+can phase them in gradually. You can give people time to plan.
+So I think working well in advance is a much better way to deal
+with this.
+ On taxes, the federal share of GDP and revenues is about 18
+and a half percent. For state and local governments, it is nine
+to ten percent. So we are somewhere in the 27, 28 percent range
+right now.
+ I do not know if there is a magic number where economic
+growth is affected, but it is true that on the revenue side,
+that higher taxes do have disincentive effects and do have some
+adverse effects on the economy. And the question, of course,
+you always have to ask is whether the spending programs have
+enough benefits to outweigh those costs to the economy.
+ Mr. Barrett. Thank you.
+ Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Allen.
+ Mr. Allen. Mr. Chairman, thank you for being here. I have a
+quick comment and then I want to pursue this same line.
+ You conclude your testimony by saying decisions the
+Congress will face will not be easy or simple, but the benefits
+of placing the budget on a path that is both sustainable and
+meets the nation's long-run needs would be substantial.
+ It seems to me we were once on a path, though not perfect
+and not likely to grapple with all the problems of Medicare and
+Medicaid, it was a lot closer to that goal than we are today.
+And that was the last four years of the 1990s when we were
+running surpluses and in much better fiscal condition than we
+are today. And I think the policies that drove us in the 1990s
+are worth looking at again.
+ But my question really goes back to these healthcare
+issues. This is the Budget Committee. We deal with the federal
+budget. But you just said that with respect to Medicare, we
+need to look at healthcare more generally.
+ And most of the health policy experts I know would say that
+the cost drivers in Medicare and Medicaid are pretty much the
+cost drivers in the private commercial system as well, and that
+if you look at other countries, we have essentially, you know,
+one of the least cost-effective systems in the developed world.
+ So the question is probably, how much does it matter
+whether we pay for healthcare through the public sector or the
+private sector?
+ Imagine this. Imagine that we could take care of our small
+businesses who are having trouble providing coverage, to help
+Ford and GM and other large businesses that are finding it hard
+to compete in the global economy, suppose we develop a simpler
+healthcare system which covered more people but held down the
+cost.
+ If more of that were paid through the public sector, would
+it make--and I am not asking you to evaluate a particular
+plan--but would it make any real difference, because if you had
+a cheaper system with essentially more money available in the
+private sector for investment but more of the healthcare sector
+being taken care of through the public programs, you would wind
+up with a more cost-efficient system overall but a little
+larger public component.
+ Do you have any reason to think that would have a material
+effect, positive or negative, on our global competitiveness?
+ Mr. Bernanke. Congressman, I have many views about the
+healthcare sector, and I hope you do not expect me to give them
+all----
+ Mr. Allen. I do not. I do not.
+ Mr. Bernanke [continuing]. In a minute or two. We have a
+very good healthcare system. Let me just say that. And we have
+the most technologically-advanced system in the world. And on
+average, we get our money's worth in the sense that studies
+have shown that the benefits in terms of reduced mortality from
+heart attacks and so on, you know, that the cost, you know, is
+justified.
+ Having said that, I think we could be much more efficient.
+I think we could get more or less the same health benefits at
+lower cost. And there are a number of issues there. There is
+health IT. There is transparency. There is a whole variety of
+things that we could probably do.
+ One of the issues that is important, I think, is that our
+system promotes perhaps overuse of insurance by some people. I
+mean, we have some people with no insurance and we have some
+people who have first dollar insurance. And first dollar
+insurance has the problem that no one cares about the cost. It
+is going to generate higher cost and people are going to use
+high technology solutions which may not be essentially
+necessary.
+ So I think there are ways that we could go about making the
+system more efficient, reducing costs, and rationalizing the
+healthcare system overall. And I think independent of the
+fiscal situation, that is just very important to do and we
+should be trying to do that.
+ In terms of the government's role, you can point to a few
+things like potentially reduced administrative costs. I would
+raise the concern about a system where the middle class person
+pays taxes for services received by middle class people because
+by doing that, you are raising the tax burden, the overall tax
+burden, and, therefore, the marginal tax rate. And that is
+going to have incentive effects and efficiency effects on the
+economy.
+ So I think in terms of the efficiency impact, I think you
+are better off focusing on those with lower incomes and those
+who are sick who need more help and not necessarily using taxes
+to pay for the average person's healthcare.
+ Chairman Spratt. Mr. Garrett.
+ Mr. Garrett. Thank you. Thank you, Mr. Chairman and Mr.
+Chairman.
+ Your testimony is much like testimony of other experts that
+we have had before this Committee in the last month and a half,
+and that is it is all ominous and discouraging. I am sure well-
+intended though. Ominous in the sense of the problem that lays
+before us and that is not just a short-term, but it is a long-
+term one.
+ And in dealing with the problem, it seems very basic then
+that you either have to address--some of your suggestions are
+on the spending side of the equation or very simply on the
+revenue side of the equation.
+ And so I am just going to take one little narrow approach
+just for a minute here. If we look in part to the revenue side
+of the equation, there are some from both sides of the aisle,
+mainly I will say the other side of the aisle, that suggest
+that we solve that problem by raising our taxes. And I am not
+going to give you a specific tax right here.
+ But basic economic thought would be, correct me if I am
+wrong, that if we raise taxes on one sector, for example, the
+business sector, at the end of the day, businesses do not, in
+essence, pay taxes. It is the consumer who ends up buying that
+product that ends up actually paying that tax, whether that is
+a rich consumer or poor consumer.
+ Is that a correct basic economic thought of how taxes get
+flowed down to the bottom line?
+ Mr. Bernanke. Businesses are not people. Corporations are
+fictional people but not real people. And somebody, either the
+shareholders, the customers, the workers, or somebody, is going
+to bear the ultimate burden, the ultimate incidence of taxes.
+ Mr. Garrett. One of the questions here was with regard to
+the housing market and the huge effect that it plays. And on
+the subprime market, there was a question already. And
+somewhere I have here an article that talks about that. Well,
+the headline in this paper was ``U.S. Mortgage Crisis Goes Into
+A Meltdown.''
+ And they had the head of the Pacific Capital said the
+sector was in an unstoppable meltdown that is, ``It is a self-
+perpetuating spiral. As subprime companies tighten lending,
+they create even more defaults.''
+ And one of the Governors of the Board, Governor Susan
+Schmidt Bies, stated that although she did not see much total
+large impact, she did say that there are ``hidden problems
+caused by sellers pulling property off the market. The
+percentage of homes where nobody is living in them is at a
+record level so the potential for inventory correction is still
+very high,'' she said.
+ With that all being said, is there an additional problem
+that we could see if we took action now looking at either that
+market or the overall market and said to address these
+mandatory problems, Social Security, et cetera, besides just
+the ones you talked about, to address that problem from a
+revenue side, we are going to raise taxes at least on that
+sector? Could that exacerbate the problem on the housing
+sector?
+ Mr. Bernanke. I would have to know more about what taxes
+you have in mind. If you raise taxes on housing, you would
+reduce the price of housing generally speaking.
+ I guess I would just want to respond to your initial
+comments and say that we are concerned about the subprime
+mortgage sector. We are watching it very carefully. We think
+there has been some bad underwriting in that sector.
+ We have attempted to provide some guidance to lenders about
+proper procedures for underwriting and disclosing subprime
+loans. And we are going to provide additional guidance, I
+believe soon. So that is a significant problem. And there are
+obviously some financial losses associated with it.
+ But as Governor Bies said and as I said earlier, so far,
+there seems to be no indication that those problems are
+spreading either into the broader financial markets or that
+they are having significant effects on housing or housing
+demand in the broader economy. But we will be watching that
+obviously very carefully.
+ Mr. Garrett. Okay. And my last question is on that sector.
+If we were to impose a tax just on the--not the middle class,
+but the first time entering market in the housing market,
+specifically those markets that is where the securities are
+picked up through the GSEs, and that is where the market goes
+into, the mortgages going into, if we were to place a tax on
+that sector of the market where we are already having problems,
+such as a tax on the mortgages, could that exacerbate the
+problem then?
+ Mr. Bernanke. If there is a tax on the new home buyer or on
+mortgage interest, naturally it would affect behavior.
+ Mr. Garrett. And, again, whether it is directly on me the
+borrower going to the bank and have a tax just on me or the
+overall GSE, wherever you place the tax, that eventually----
+ Mr. Bernanke. I see. If you are talking about the GSE
+situation, I understand. I think it would depend. I think there
+is an interesting and serious question about, as I mentioned
+before, the incidence of a tax on a business goes to lots of
+different people. It goes to shareholders. It goes to workers.
+It goes to customers and so on.
+ And so I think one of the important questions in addressing
+the issue you are talking about would be what is the incidence
+of that tax. Is it mostly on the shareholders? Would it affect
+the cost of mortgages? Would it affect something else? So I
+think that is the question one would have to address.
+ Mr. Garrett. Okay. So I have 53 seconds left. I will try to
+pin that down a little bit more.
+ At the end of the day, even if initially the burden is
+placed on the shareholders, that leads to the natural
+inclination of people not to want to invest so heavily in that
+company or entity no matter which one it is. And eventually
+that raises the cost of doing business for that particular
+entity. They may have to borrow at other rates, at higher
+levels.
+ So eventually, although the shareholders may actually pay
+the cost today, that corporation ends up having to bear the
+burden itself. But as you said, they do not bear burdens. They
+pass it on to somebody else. So today the shareholder pays it.
+ But eventually if higher interest rates that they have to
+charge again goes down to the ultimate user, and that is the
+consumer; is that not correct?
+ Mr. Bernanke. Well, in the case of the GSEs, as you know,
+although there is no official government guarantee behind the
+GSEs, there is a perception in the market that there is such a
+guarantee. And as a result, the interest rate at which GSEs
+borrow is just a little bit above the Treasury rate.
+ I would think that until such time as there is a change in
+the views of the financial market about this implicit
+government guarantee that that interest that GSEs pay will
+continue to be pretty close to the Treasury rate.
+ Mr. Garrett. Interesting. Thank you.
+ Chairman Spratt. Ms. Schwartz.
+ Ms. Schwartz. Thank you, Mr. Chairman, and appreciate the
+opportunity to follow-up.
+ Some of my colleagues on both sides of the aisle have
+talked about the concern about household debt and the
+relationship to the housing market. And I think that for many
+Americans, they sort of do not necessarily see the cumulative
+effect of each household increasingly borrowing to meet basic
+obligations. I mean, sort of meeting the pattern that the
+federal government is doing the same thing. You know, we are
+borrowing to meet basic obligations.
+ What is happening, and I wanted you to comment? You talked
+a bit about both risky behavior and maybe some of the subprime
+market. But even more middle class folks are now using the one
+big asset they have, maybe the only real long-term asset they
+have, their home, to borrow against in order to continue
+spending.
+ Now, some of them may be outside of their control a little
+bit in terms of meeting basic obligations, healthcare costs,
+obviously other kinds of costs that they have.
+ But could you speak really a little bit more specifically
+about how you see either the risky behavior on the part of
+lenders or maybe the risky behavior on the part of borrowers,
+and this is really every-day Americans who are trying to meet
+their obligations, who have stopped saving and are not only
+using all their dollars that they have to meet obligations, but
+are now refinancing their homes, they are consolidating credit
+card debt and other kinds of debt, maybe even educational debt,
+to borrow against, as I say, that one asset, which is seeing an
+increase?
+ Now, of course, the bubble is over in housing. We may not
+actually see the house even be worth it in the future. So they
+are borrowing against their only asset.
+ And to what point does that put that family at greater risk
+long term in not planning for a downturn personally, but also
+the effect it has more broadly on the economy not being able to
+access that capital that used to be put into savings
+potentially, either for themselves or so it would be available
+in the marketplace?
+ Mr. Bernanke. Congresswoman, that is a very interesting
+question. With respect to an individual family, it would depend
+a lot on their individual financial circumstances. There are
+people who have owned their homes for a long time and they have
+quite a bit of equity in the home. And in that case, it
+probably makes sense to consolidate debt and to pay for college
+and so on from home equity. It is an important part of wealth.
+ There are others who have very little equity share and they
+are putting themselves in a situation where they are not able
+to refinance and they could end up losing their home. So it
+depends very much on the individual circumstance.
+ I think, you know, it is good that markets have become more
+sophisticated and more flexible so that people do have the
+flexibility to use money from their home under, you know,
+appropriate circumstances. But it does probably contribute to a
+lower saving rate, at least over short periods of time.
+ The increases in people's wealth associated with higher
+house prices or higher stock prices are not counted as part of
+the national saving rate or individual household saving. So
+when you do have a run-up in house prices, for example, and
+people let their houses do their saving for them, then that is
+one reason why the current saving out of current income is low,
+and that has the consequence that we talked about before, that
+we have to then borrow for new investment. We have to borrow
+from abroad or pay higher interest rates.
+ So my expectation, I mean, one effect potentially of the
+flattening out of prices in the housing market may be if people
+are therefore less able to use extracted equity, they may
+actually begin to save more out of current income. And that is
+one reason to think that saving out of current income may rise
+a bit over the next couple of years.
+ Ms. Schwartz. Is there more that we could do, either we,
+you or we could do in helping to have most Americans understand
+that in a way?
+ Now, some of what you are suggesting might just be market-
+driven people understand they cannot borrow against their
+house, but we are doing the same thing. We are sort of by
+example, federal government is borrowing to meet obligations.
+ We are suggesting and there is a lot of market out there
+that is suggesting consolidate your debt. Again, that may be a
+good thing. But over time, individual families are not
+protecting themselves and there will be a consequence to them.
+ And could you be more specific in the few seconds left
+about what else we could be doing either by example or to
+educate the American family about how that may not be the best
+even if the market is telling them they can do it?
+ Mr. Bernanke. Well, there is one important difference
+between the hypothetical family than the U.S. government. The
+hypothetical family is borrowing against an actual asset that
+they have. I mean, household wealth is still rising on net, net
+of debt. So it is not that the households are drawing down
+their debt in that sense.
+ Ms. Schwartz. But it is a point well taken. The government
+is actually borrowing against----
+ Mr. Bernanke. We are borrowing against future taxes
+essentially.
+ Ms. Schwartz. And we are borrowing mostly from foreign
+governments at this point.
+ Mr. Bernanke. Well, not directly, but indirectly, yes. On
+the individual family, I am again a strong advocate
+particularly for lower-income families, helping them through
+counseling, training, financial literacy, and so on, to
+understand better, you know, the complexities of finance,
+personal finance, so that they can live better lives in terms
+of saving and acquiring assets.
+ Ms. Schwartz. And then we should learn by example from
+them.
+ Mr. Bernanke. Yes, ma'am.
+ Ms. Schwartz. Thank you.
+ Chairman Spratt. Mr. Hensarling.
+ Mr. Hensarling. Thank you, Mr. Chairman. And thank you for
+holding this hearing which I believe is probably one of the
+most important hearings we may have this year.
+ Chairman Bernanke, welcome. It is good to see you again.
+ If I could have chart number two pulled up please.
+ Mr. Hensarling. Chairman, on page two of your testimony,
+you used the phrase that we are experiencing what seems likely
+to be the calm before the storm. You allude to the growth in
+the three major entitlement programs and relate that to a
+percentage of GDP.
+ As I understand it, you were referring to CBO analysis and
+in that analysis, I believe you show that in 2006, Social
+Security, Medicare, and Medicaid totaled about 40 percent of
+federal expenditures or eight and a half percent of GDP, soon
+to increase to ten and three-quarters of GDP by 2017.
+ And eye-balling spending under CBO analysis over the long
+term, it appears that the budget will grow from roughly 20
+percent of GDP if we do not reform current spending trends to
+roughly 30 percent by 2037 and approaching 40 percent, almost
+double, in about 40 years. I do not know if that is one or two
+generations.
+ My first question is, and I believe your numbers are based
+on CBO analysis, to the extent that you have looked at other
+analyses from OMB, from GAO, from Treasury, everybody who is in
+charge in the federal government of looking at long-term
+spending trends, is this an accurate analysis? Is there any
+significant disagreement of thought on these long-term spending
+trends?
+ Mr. Bernanke. There is always some uncertainty because of
+just the difficulties of projecting far into the future. We are
+quite confident about the demographics. We know how that is
+going.
+ One issue which creates some uncertainty is how quickly
+medical costs are going to rise. The standard assumption, which
+is in the CBO analysis that I presented and is also in the
+Medicare Trustee's analysis, is that costs per beneficiary are
+going to grow at one percent faster than incomes, which
+creates, you know, higher and higher cost and is a big part of
+this.
+ Now, you could think of that as being pessimistic or
+optimistic. It is actually optimistic in the sense that
+historically, the last 25 years, the so-called excess cost
+growth has been about two and a half percent, much higher. So
+we are going to have to get some efficiencies in terms of our
+medical sector just to get down to that one percent cost
+growth.
+ Mr. Hensarling. Using the CBO analysis on page five of your
+testimony, you have a footnote here. Assuming that we were
+agreed that we wish to balance the budget and it had to be done
+in one fell swoop, you allude to an analysis that if we took
+half the burden from tax increases and half from spending
+reductions that we would be looking at an 80 percent decrease,
+I believe, in discretionary spending relative to the baseline
+and an increase in nonpayroll taxes of 35 percent.
+ So would that seem to suggest that if we follow that model
+in one generation----
+ Mr. Bernanke. He actually did it.
+ Mr. Hensarling [continuing]. For all intents and purposes,
+we would have to increase taxes, nonpayroll taxes 35 percent
+just to have a federal government that consists of little
+besides Medicare, Medicaid, and Social Security? There may be
+no border patrol. There may be no U.S. Marines. There may be no
+Department of Education.
+ Mr. Bernanke. Congressman, if I may, the simple arithmetic,
+in 2030, according to projections, the entitlement programs by
+themselves will be about 15 percent of GDP and interest on the
+national debt will be about four percent of GDP. So you add
+those things together, you are already above the 18 and a half
+percent of GDP which we are currently receiving in revenues.
+ So if you wanted to balance the budget in that case without
+either changing entitlements or raising taxes, as you point
+out, you would have to eliminate the Defense Department and
+everything else that the government does.
+ Mr. Hensarling. My time is about to run out. I would like
+to try to slip in one more question. Alluding to this chart up
+here, the debate in Congress today tends to be between that
+blue line and red line debating the wisdom of previous tax
+relief over the last few years.
+ Again, this is a CBO analysis. But to some extent, does
+that tend to suggest that we are debating how to mop up six
+inches of water in the stateroom of the Captain of the Titanic
+when we should be focused upon the gaping hole in the hull of
+the ship?
+ Mr. Bernanke. I do not want to downplay the importance of
+near-term decisions that you are going to make both in terms of
+spending decisions and how to structure the tax code, how high
+taxes should be. Those are important decisions that are going
+to affect how our economy performs. And they are going to
+affect the near-term deficits as well.
+ But I think what that picture tells you is that, you know,
+you should probably think hard about going to the heart of the
+problem, and the heart of the problem is are the entitlement
+programs and those--you are not going to solve this problem by
+small budget cuts or small tax changes. You do have to think
+about these large obligations and, you know, how you want to
+deal with them.
+ Mr. Hensarling. Thank you.
+ Chairman Spratt. Ms. Kaptur.
+ Ms. Kaptur. Thank you, Mr. Chairman, very much.
+ Welcome, Chairman Dr. Bernanke. Glad to have you here.
+ Mr. Bernanke. Thank you.
+ Ms. Kaptur. The first two items I want to mention would
+just be a reporting back from your staff to the Committee. I
+would like your staff to provide a complete list to us of which
+Wall Street firms are earning fees off the sale of the array of
+U.S. debt securities, to provide a list of which firms from
+2000 to the present, and the amount that each has been paid
+annually by U.S. taxpayers for conducting those transactions.
+That is the first request.
+ Number two, based on your testimony, in order to help to
+create a savings consciousness in our country, particularly
+among the young, I would invite your cooperation and
+suggestions on how to create and promote a public debt postal
+savings stamp program to sell the debt to our own citizens,
+including our youth in small denominations, as the Japanese
+have done through their postal savings stamp system and
+Franklin Roosevelt created in this country during the 1930s. I
+would value your suggestions there.
+ I wanted to make a comment and then ask two questions. The
+basic theme that runs through my comment is that our capital
+markets have to be held accountable in solving some of the
+problems that we face in this nation and that our economy is in
+unchartered waters.
+ As you say, we have very high debt levels. Our public debt,
+according to your testimony, amounts to 37 percent of one
+year's GDP. And if you add to that the fact that the trade
+deficit knocks off an additional point off that GDP, that is
+well over half of the growth that does not benefit economic
+investment in this country.
+ Our middle class is shrinking. I used to say that these
+conditions were resulting in the middle class running hard to
+stay in place. I now say the middle class is running harder but
+falling behind as reflected in their rising debt levels and net
+negative savings.
+ Factory workers in my district are working six days a week,
+ten hours a day, week after week, month after month, and we
+still see the hemorrhage of jobs. They are being told the
+reason for their predicament is that they are in a knowledge
+economy and they are falling behind because they are not smart
+enough or that the problem in your testimony is, well, the fact
+is we got too many people getting older. I beg to disagree.
+ I think what is happening is that capital investors have
+figured out how to make egregious profits by outsourcing jobs
+to very undemocratic places and then reimporting those goods
+here because our trade policy is snuffing out jobs and we have
+a tax policy that rewards it.
+ And we do not have a redistributed income policy that helps
+our people to keep up in view of what is going on. ExxonMobile,
+I guess, is my key example of where we are out of whack, out of
+sync.
+ So my two questions are, what do you think might happen to
+the market for U.S. debt securities if a foreign buyer like
+China or Japan were to sell off a significant portion of their
+holdings of U.S. debt securities?
+ And, number two, nearly 95 percent of recent issues of U.S.
+debt instruments have been purchased by foreign buyers. Why are
+they the purchasers rather than American investors?
+ Mr. Bernanke. Well, on the first question, I should first
+point out that it is not in the interest of China or Japan to
+dump treasuries on the market. They themselves would suffer
+capital losses from doing that.
+ I do think if there were--and I should be very clear, I
+have no information or expectation this is going to happen--but
+if there were significant sales by foreign central banks, for
+example, that there would be some short-run effect on the
+market in terms of the currency and interest rates probably.
+ I think the longer-term effect would be somewhat less
+because the market would adjust. It is a liquid market. And the
+holdings of, say, China of U.S. debt securities, including both
+public and nonpublic, is only about five percent of the total
+credit market outstanding.
+ So obviously we are watching that very carefully. I do not
+see that as a major threat to our financial system or our
+economy.
+ I am sorry. The second question was?
+ Ms. Kaptur. The second question is nearly 95 percent of
+recent issues of U.S. debt instruments have been purchased by
+foreign buyers. Why are they the purchasers rather than
+American investors?
+ Mr. Bernanke. Well, a couple of reasons. One, as we talked
+about before, is that Americans are not saving that much, and
+you have to save in order to buy assets. And so that is part of
+the problem.
+ The other is interestingly that Americans seem to have a
+stronger preference for equities and riskier investments than
+particularly foreign central banks. So at the time foreigners
+have been acquiring fixed income instruments like Treasury debt
+or GSE debt, a lot of American investors have been purchasing
+either domestic or foreign equity which pays a higher return,
+but is also riskier.
+ So there is a bit of diversification going on in both
+directions for investors. But, again, the low rate of saving is
+also a contributor to that.
+ Ms. Kaptur. Doctor, could I just ask you on the first two
+requests I had for data on providing a list of those brokerage
+firms, can you provide that to the record?
+ Mr. Bernanke. I am not certain that we can, but we will do
+our best.
+ [The information requested follows:]
+
+ Board of Governors of the Federal Reserve System,
+ Washington, DC, March 30, 2007.
+Hon. Marcy Kaptur,
+House of Representatives, Washington, DC.
+ Dear Congresswoman: I am responding to a question that you posed
+during my testimony before the House Budget Committee on February 28.
+You asked for information regarding the fees paid to Wall Street firms
+for underwriting Treasury debt.
+ On further consideration following the hearing, it seemed to me
+that your question could be based on a misunderstanding of the
+Treasury's approach to issuing debt. Treasury debt is not issued
+through a process in which the underwriting firms earn specified fees
+for assisting with Treasury's debt placement. Rather, the Treasury
+issues marketable debt through a public auction process in which the
+highest bidders are awarded the securities being issued. (Some small
+investors also bid to receive securities at the interest rate set by
+the auction.) Such auctions are open not only to the twenty-one primary
+dealers firm but to all potential buyers, including other dealers,
+banks and other depository institutions, insurance companies, pension
+funds, mutual and hedge funds, and foreign investors. These auctions,
+like virtually all aspects of the Treasury securities markets, are
+highly competitive and transparent. The auction process helps ensure
+that the Treasury issues debt at the lowest possible cost to the
+taxpayer over time.
+ I hope this information is helpful. Please let me know if I can be
+of further assistance.
+ Sincerely,
+ Ben S. Bernanke,
+ Chairman.
+
+ Ms. Kaptur. And the fees that are being paid. Who would
+have that if the Federal Reserve----
+ Mr. Bernanke. We deal directly with so-called primary
+dealers who are brokers who deal in the Treasury securities and
+will have some information. We collect some information about
+their operations and their income and so on. And we will check
+to see what we have and we will be in touch with your staff.
+ Ms. Kaptur. Thank you.
+ I mean, you would expect to see Cantor Fitzgerald on that
+list; would you not? You would expect to see Goldman Sachs on
+that list; would you not?
+ Mr. Bernanke. Yes.
+ Ms. Kaptur. All right. We would be very interested in the
+fees.
+ And then secondly, on the question on the postal saving
+stamp program, could you perhaps provide a framework in which
+to suggest how that might be reinstituted in this country?
+ Mr. Bernanke. Well, I am eager, as I said before, to try
+and promote saving behavior among young people, and there are
+many ways to do that. Making saving more accessible, making
+acquisition of assets more accessible would be one step in that
+direction. And, you know, I think it is worth looking at.
+ Ms. Kaptur. Thank you.
+ Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Campbell.
+ Mr. Campbell. Thank you, Mr. Chairman.
+ Thank you, Dr. Bernanke.
+ I have a couple of economic questions, then one relative to
+the savings. First on the economic question, as you stated,
+spending currently is 20.3 percent of GDP which is roughly
+equivalent to the average since 1960.
+ If as part of curing this long-term problem that government
+spending as a percent of GDP went up, what impact would that
+have on economic growth?
+ Mr. Bernanke. If government spending as a share of GDP went
+up primarily in order to finance transfer payments, that is
+entitlement programs, and taxes would have to go up a
+comparable amount in order to have long-term budget balance,
+then depending on the nature of the taxes, presumably it would
+tend to create a dead-weight burden. It would tend to slow
+economic growth.
+ Mr. Campbell. You have eloquently pointed out the problem
+of our snowball of accumulating spending and debt. If, big if,
+political if, we were to arrest that and basically balance the
+budget going forward, does carrying the existing national debt
+that we have, if we were to carry that over time, how big a
+drag is that on the economy and how big a problem is that, if
+we were not adding to it?
+ Mr. Bernanke. If we were not adding to it, I think it would
+be a good stable situation. The 37 percent ratio of debt
+outstanding to GDP is actually lower than most other countries.
+Japan has a ratio of over 100 percent, for example.
+ So if we were staying at this point, it would be fine. The
+problem is that prospectively with the entitlements coming down
+the road, we are looking to go well over 100 percent in the
+next 25 years.
+ Mr. Campbell. Right. But carrying that forward is not the
+great economic disaster if it is does not continue?
+ Mr. Bernanke. No. No. I would say that the current level of
+debt, if there were no entitlement problem, which is an
+enormous if, would be not necessarily a problem. But it is the
+prospective increases that are a concern.
+ Mr. Campbell. So putting those two questions together, if
+we were able to balance the budget, arrest the increase in
+debt, and keep the government spending and revenues at roughly
+the same kind of level that they are at today and have been
+historically, that would be a pretty good economic situation in
+terms of the government's contribution?
+ Mr. Bernanke. Given what we are seeing in terms of the
+potential liabilities for entitlements, it would be an enormous
+improvement over the current situation.
+ Mr. Campbell. The last question I have is relative to the
+savings and net worth. Now, I am from California. And as you
+mentioned, net worths are rising. Savings have not been.
+ It seems to me that people are consciously making the
+decision to put their net worth increase in places other than
+traditional savings as measured by the Fed or whomever, whether
+that be in the value of their house, equity in their house, or
+some other nonfinancial asset or whether that be in some
+retirement thing or stocks or some other financial asset.
+ And I would suggest that people are making those decisions
+because they believe that financially it is smarter to put
+their net worth in those sorts of assets rather than in
+traditional savings.
+ So my question to you is, why is the savings rate a problem
+if you agree, and maybe you do not, that that increase in net
+worth is not going into savings because people are making a
+rational economic decision which improves their financial
+stability or certainly they believe improves their net worth
+over time?
+ Mr. Bernanke. To a large extent, it is a rational decision.
+If your stocks and your home value are going up a lot, then
+there is less need from your personal family perspective to
+save out of your current income.
+ I would just add parenthetically that what some people do
+is take money out of their home, for example, in order to
+invest it in other assets so as to diversify to some extent
+their overall portfolio.
+ From the national perspective, though, the problem is that
+increases in the value of homes, for example, do not constitute
+funds that are available to make new investments, for example,
+in capital equipment and so on.
+ And so in order to maintain our investment rate which
+includes construction of new homes as well as business capital
+investment, we have been forced to go abroad to the tune of
+about six, seven percent of GDP to finance that out of current
+flows of savings.
+ So from the individual family perspective, it is not
+irrational. I would----
+ Mr. Campbell. Well, if I can then insert my last question
+before my time runs out, then are we not seeing here a
+disconnect between an individual family perspective making
+something that is perhaps best for them but may not be best
+from a national perspective and, if so, what could we do to
+align those two?
+ Mr. Bernanke. Well, I would note first of all that the
+family with lots of equity that is making rational financial
+decisions, that is one group of people. That is not everybody.
+There are obviously some people who would be well served to
+increase their saving, increase their assets, be better off
+financially.
+ And the second comment I would make is that, apropos to the
+subject of this hearing, that a big negative influence on the
+national saving rate is budget deficits at the federal, state,
+and local level. And one very direct way to begin to increase
+national saving and in particular to create more resources
+available for current investment, current home construction is
+for the budget deficits to be reduced or for surpluses to
+increase.
+ Mr. Campbell. Thank you, Dr. Bernanke.
+ And thank you, Mr. Chairman.
+ Mr. Becerra.
+ Mr. Doggett.
+ Mr. Doggett. Thank you. Thank you for being with us.
+ In your recent address in Omaha, you endorsed boosting
+national investment in education and training and cited
+specifically the work of the Federal Reserve Bank of
+Minneapolis and its findings of the higher returns from pre-
+kindergarten programs and other early childhood efforts and how
+that can help us achieve lower rates of social problems like
+teenage pregnancy and welfare dependency.
+ Why do you recommend investing in pre-k and does it appear
+to be one of the public policies with the best return?
+ Mr. Bernanke. Well, I was referring to some very active
+research that has been done at the Federal Reserve Bank of
+Minneapolis and some policy work that is being done in
+Minnesota as well. And I was citing the research by Jim
+Heckman, who is a Nobel Prize winner, and others that this is a
+high return activity from a social perspective and from an
+individual perspective as well.
+ So I do think it is definitely a direction that might well
+we pay attention from the Congress.
+ Mr. Doggett. Thank you.
+ I am trying to balance this hearing and one that is
+happening at the same time in Ways and Means concerning climate
+change. And as you are well aware, an increasing number of
+responsible businesses are urging that we address the troubling
+increase in global temperatures, and fewer and fewer fit within
+that shrinking breed of climate change deniers.
+ Do you believe that the dynamic economy that you have
+described can absorb the cost of reasonable measures to address
+global warming and perhaps even expand clean energy and energy
+efficiency as a growth industry for our country?
+ Mr. Bernanke. Well, let me say first obviously that I am
+not a scientist and I do not have an independent opinion about
+the magnitude of the problem, and I think very importantly I do
+not have an independent opinion about how severe or how large
+the effort would have to be if we were try to reduce emissions
+to levels of 20 years ago. I would imagine it would be a fairly
+significant cost associated with doing that.
+ So I hope that the scientists and the economists will get
+together and try and think together about, first of all, you
+know, how much effort is needed, how fast in terms of what
+makes sense for both the climate and for the economy.
+ And secondly, I think very importantly that, to the extent
+we agree, that we need to do something that we try to do it in
+ways that will minimize the impact on the economy. One way to
+do that, which is consistent with what you were saying, is
+government support for basic technology. I think that there are
+incentives for firms to develop applied technology. But at the
+basic research level, the government can provide some help,
+some resources.
+ And secondly, if, and, again, I am making no judgments
+about whether this should be done or not, if Congress were to
+decide to go forward with some kind of program, trying to use
+some mechanism like a cap and trade or market-based system that
+equalizes the cost of any given amount of carbon reduction
+across firms, across industries could allow a given amount of
+carbon reduction at lower cost. And obviously we should always
+be looking for ways to reduce the cost of achieving any
+particular environmental objective.
+ Mr. Doggett. So a reasonable cap and trade system that
+tries to rely on the marketplace to address these issues is one
+approach that you think we should consider?
+ Mr. Bernanke. I think relative, for example, to an approach
+that prescribes how much each particular company, each industry
+has to do that this would provide, again if Congress decides to
+go in this direction, it would allow a given amount of emission
+reduction to take place at lower overall cost to the economy.
+ Mr. Doggett. One last one. Some of the questions I have
+heard here this morning seem to suggest that we do not need to
+worry about revenues or tax shelters or tax savings or whether
+corporations are paying their fair share, that all we need to
+be concerned about is that grandma's Social Security check is
+too big.
+ And without minimizing our need to focus on entitlements
+and 2030, you are certainly not saying that as we look over the
+next few years of the budget we are developing that we do not
+need to consider both the revenue side as well as the
+expenditure side?
+ Mr. Bernanke. No. It is the Congress' responsibility to
+look at all the options, and I am not going to take one side or
+the other, but I think that you should definitely consider all
+options and try to balance the costs and benefits of both sets
+of approaches.
+ Mr. Doggett. Thank you for your testimony and your
+important service.
+ Chairman Spratt. Mr. Smith from Nebraska.
+ Mr. Tiberi.
+ Mr. Tiberi. Thank you, Mr. Chairman.
+ Chairman, can you tell us a little bit about your thoughts
+on, when we have seen the economic growth over the past several
+years higher than most economists have projected, when you look
+at that, what are your thoughts in terms of behavior? And you
+have talked about behavior with respect to our tax policy. What
+are your thoughts on how the cut in the capital gains tax and
+dividends have impacted that growth?
+ Mr. Bernanke. It is frankly hard to assess the effects of
+one specific tax over a short period of time. From a longer-
+term perspective and looking strictly at the efficiency side of
+it, public finance economists generally, I would say, support
+keeping taxes on capital low because of the implications for
+saving and investments and other effects that might have.
+ But as always, you know, the Congress has to balance that
+against the revenue and progressivity aspects of the tax code
+as well.
+ Mr. Tiberi. But a general belief would be that keeping
+taxes on capital gains and dividends would encourage more
+savings and investment.
+ Mr. Bernanke. That would be, I think, the view of most
+public finance economists, yes.
+ Mr. Tiberi. Thank you.
+ Again, thinking about economic growth, we have seen
+probably or I have seen, let me say, over the last year a bit
+of a backlash with respect to America's trade policy, with
+statements made by some that America's trade policy,
+international trade policy has been negative to economic growth
+in America.
+ Can you share your thoughts on how international trade
+impacts our economic growth?
+ Mr. Bernanke. I think that trade is very positive for
+growth. If you look around the world, countries that are open
+and actively trading show higher growth rates than those that
+are less open. So I think that for the economy as a whole,
+trade provides very substantial benefits.
+ Like new technologies, it also creates a certain amount of
+disruption and that is the kind of concern that would be useful
+to address in order to preserve the political support for open
+trade and capital flows, which I do believe are very beneficial
+to our economy both in the short run and the long run.
+ Mr. Tiberi. So in the long run, and I do not want to put
+words in your mouth, you believe that a trade policy which
+encourages fair trade between the United States and other
+countries abroad can be helpful to a broadening middle class?
+ Mr. Bernanke. I do believe that it will provide broad
+benefits for the economy. Again, one of the problems here is
+that, like many things, that the benefits of trade are
+sometimes widely spread and, therefore, not quite so evident as
+the obvious costs of a shutdown of a mill or a factory.
+ And so we have to weigh those costs and benefits and in
+particular to again provide political support for continued
+integration with the world economy, continued openness. I do
+think we have to, you know, not ignore the dislocations that
+take place in particular communities, particular industries.
+ Mr. Tiberi. One final question, Mr. Chairman. Following up
+on Mr. Campbell's point about the savings rate, it appears to
+me that a family that rather than puts money in a savings
+account but quickly pays off their 30-year mortgage and has
+equity in a home, the current formula is not showing that
+positive benefit from that family's perspective of paying off a
+home. Yet, if they had not paid off the home and put that money
+in a savings account, it would have shown a different picture.
+ What can we do to paint a more accurate picture of
+America's savings?
+ Mr. Bernanke. Well, actually, the increase in the value of
+the home due to a rising real estate market, for example, would
+show up in the Federal Reserve's measures of household wealth.
+So we do capture it in wealth measures as opposed to savings
+measures.
+ The example you gave of paying down the mortgage, if I put
+something aside from my paycheck in order to pay down the
+mortgage, that, in fact, gets captured as saving because that
+is part of current income which is not being consumed. It is
+being used to pay down debt. That would be part of saving.
+ Mr. Tiberi. Thank you.
+ Thank you, Mr. Chairman.
+ Chairman Spratt. Ms. Hooley.
+ Ms. Hooley. Thank you, Mr. Chair, for being here today.
+ I just want to follow-up on a couple of questions. One was
+we were talking about capital gains tax cuts, whether that is
+increased savings or not.
+ Do we have any proof that that is increased savings? Do we
+know that that has had an impact on savings?
+ Mr. Bernanke. Well, as I said, it is difficult to assess
+the effects of one small part of the tax package over a short
+period of time. Economists have looked at this and their
+concern is that when you tax capital income at a too high a
+rate that that will have effects over a long period of time
+because they really distort the decision about how much to
+consume today and how much to save, say, for retirement.
+ So there is sort of a theoretical case for this. But,
+frankly, you know, for a specific tax cut over a short period
+of time, it is hard to make an absolutely convincing empirical
+case.
+ Ms. Hooley. You said in a recent speech that the income of
+the top 90th percentile has grown over the last 27 years by 34
+percent whereas if you are at the 10th percentile, it has grown
+four percent.
+ How do we close that gap?
+ Mr. Bernanke. I think there are a few things that could be
+done, but I think by far the most important is to create a
+broader base of skills and knowledge and education.
+ There was earlier discussion about manufacturing. So it is
+true that as manufacturing industries have become much more
+productive that the number of assembly line workers has
+dropped. So that type of reasonably well-paying job for
+relatively low educated people is no longer available.
+ At the same time, though, the demand for high skilled
+workers in manufacturing who have not necessarily college
+degrees but who know how to operate complex equipment and so on
+has been soaring. In fact, manufacturers cannot find enough
+people with the kinds of skills they need.
+ So, again, I am not an education expert and I am afraid I
+cannot give you a long list of detailed recommendations, but I
+think broadly speaking what the issue is is helping those who
+have been left behind to acquire the skills they need to earn
+good wages in what is becoming a more and more technologically
+sophisticated economy.
+ Ms. Hooley. Well, as I see our economy changing, I see the
+need for more training and retraining of our workers as time
+goes on. And, yet, I look at the budget that was given to us
+and it has billion dollar cuts in employment and training
+programs. And I think that is where we make a mistake when we
+do not put money into that retraining program. I think our
+economy is better off when we do that.
+ Would you agree with that?
+ Mr. Bernanke. One of the tough challenges with both
+education and training programs is being effective and doing a
+good job. And so if the budget involves a reallocation from
+some types of training activities to others, for example, I
+think it would be very important not just to look at the total
+dollar number but to see are we using programs that are known
+to work and that are effective because the total dollar input
+is not as important as what is the output on the other side in
+terms of skills acquired.
+ Ms. Hooley. I am going to ask you a question that has not
+been asked, and that was if you were in a class of fifth
+graders, how would you explain to them the consequences of our
+national debt and deficit and how that is going to impact their
+lives, and what happens when they do not have a savings? So
+what would you say to that fifth grade class?
+ Mr. Bernanke. I would say that our economy needs machines
+and new factories and new buildings and so on in order for us
+to have a strong and growing economy. If the government does
+not cover all those expenses, it has to take out the money that
+would otherwise be used to build those machines, those
+factories, those office buildings, all those things that make
+the economy strong, and give them the opportunities when they
+grow up to have well-paying, productive jobs. That probably
+would not work for a fifth grader, but that is about as close
+as I can get.
+ Ms. Hooley. That is okay. Thank you for your time.
+ Chairman Spratt. Mr. Alexander.
+ Mr. Alexander. Thank you, sir.
+ Mr. Chairman, good morning still.
+ One of the ladies earlier said something about a stamp
+program under the Roosevelt's Administration to help stimulate
+growth. But is it not true that President Roosevelt used some
+of the Social Security funds to finance the new deal?
+ Mr. Bernanke. Well, Social Security was tiny. It was just
+beginning essentially in the 1930s.
+ Mr. Alexander. Well, it was tiny, but the pay-outs were
+tiny, but----
+ Mr. Bernanke. Well, it is true that the Social Security has
+always been primarily a pay-as-you-go system which means that
+the payroll taxes that are collected have not been invested in
+real capital. They have either gone into holding government
+debt or otherwise been used on benefits.
+ Mr. Alexander. Okay. When we are talking about the
+entitlement programs, a lot more money coming out of those
+programs today than it has been in the past and, of course, a
+lot more money going into those programs.
+ But on a percentage basis, how much difference is it today
+percentage going in and percentage coming out than it was 20
+years ago?
+ Mr. Bernanke. I might not have your question exactly right.
+In terms of the flow of in and out, currently, as you know, the
+Social Security system is running a surplus, even forgetting
+about interest on the trust fund. The total benefits being paid
+are about four and a quarter percent of GDP and the total
+payroll taxes being collected are about five percent of GDP.
+ So that is three-quarters of a percent GDP contribution to
+the unified budget deficit not counting the interest being
+earned on the trust fund. So the Social Security fund is still
+in surplus now and is reducing the unified budget deficit.
+ Mr. Alexander. Okay. Going back a long way, I think 1965 is
+when President Johnson signed Medicare into law.
+ Mr. Bernanke. Right.
+ Mr. Alexander. At that time, I could have bought absolutely
+the best car on the lot for $4,000. And today we have a system
+that is spending that much or more for medical devices,
+motorized wheelchairs or whatever, and I am not arguing that
+there is not a need for it, but I am just leading up to a
+question.
+ The amount of money that is being spent withdrawing from
+those entitlement programs now, how much of it is a decision by
+bureaucrats versus Congress? I mean, I do not know if it was a
+congressional act that said, okay, we will now start buying
+fancier wheelchairs for people that need it.
+ Mr. Bernanke. Well, going back to history, there has been a
+big increase in the size of the entitlements even up to now.
+The total entitlement spending in the mid 1960s was about three
+percent of GDP and now it is greater than eight, eight to nine
+percent of GDP. So there has been a big increase.
+ The Congress is ultimately responsible, of course, for the
+spending plans. In some cases, they are put on somewhat
+automatic pilot, which is why they are called mandatory
+programs.
+ For example, the formula for calculating initial and
+subsequent Social Security benefits is in the law and then
+whatever wages and prices do, that determines how much the
+benefits actually are.
+ And similarly some of the medical expenditure is not
+directly controlled. It is set by the rules that Congress has
+created for defining those benefits. So there is an annual
+appropriation for the total spending on entitlements.
+ Mr. Alexander. In other words, you are saying oftentimes
+the spending is not necessarily something advocated by
+Congress, it is just something that Congress did not stop when
+they had an opportunity to?
+ Mr. Bernanke. Well, Congress created the structure and the
+rules and that is the consequence of those rules.
+ Mr. Alexander. Thank you.
+ Chairman Spratt. Thank you, sir.
+ Mr. Berry is not here.
+ Mr. Moore.
+ Mr. Moore. Thank you, Mr. Chairman.
+ Chairman Bernanke, thank you for being here today and for
+your service to our country.
+ I printed off just before I came over here from the U.S.
+Treasury web site a document that shows major foreign holders
+of Treasury securities of our country, and it shows Japan as of
+December 2006 held $644 billion; China, mainland China, $349
+billion; United Kingdom, $239 billion; and even Mexico had $34
+billion in holdings for a total--I did not read off all the
+countries--but for a total, according to this document, of
+$2,223,000,000,000. Does that sound correct, sir?
+ Mr. Bernanke. I think that is the total of international
+reserves. There might be more in private hands.
+ Mr. Moore. Okay. But I am talking about----
+ Mr. Bernanke. That sounds about right.
+ Mr. Moore. Okay. And I heard your answer to Ms. Kaptur's
+question about what if these countries that hold our debt
+decided they did not want to hold it anymore for whatever
+reason, because of our deficits, because of our trade deficits
+or budget deficits or trade deficits, and decided they wanted
+to not hold these anymore.
+ And I heard you say I do not think that will happen, and I
+hope you are right. But sometimes we are not right. Sometimes
+we are wrong.
+ And if these foreign countries decided for whatever reason
+they did not want to hold our debt in the future, what would be
+the impact? What would you expect to be the impact in this
+country?
+ Mr. Bernanke. Well, it would be disruptive in the debt
+markets in the short run. It would cause, for example, an
+increase in interest rates.
+ As I said before, I think in the longer term, the effects
+would be somewhat less because besides the Treasury debt, there
+is many other forms of corporate and GSE and other debt that is
+available as part of this broad fixed interest market.
+ I think it should be noted that the Federal Reserve could
+be of assistance in that situation. If interest rates went up
+and slowed U.S. economic growth, for example, the Federal
+Reserve could respond by using monetary policy and that would
+have some benefits.
+ I want to make a distinction that the foreign central banks
+acquire U.S. assets because we do have very deep and liquid,
+safe financial markets and they find it in their own benefit to
+do so, not because they are doing us any kind of favor.
+ Mr. Moore. I understand.
+ Mr. Bernanke. And as I said, I think that they will be
+willing to hold that for some time. In the scenarios I have
+described, though, where 20, 25 years from now the debt and the
+deficits are so big as to create a tremendous burden, then the
+willingness of foreigners or even our domestic citizens at that
+point to hold government debt at reasonable interest rates
+would certainly be much affected.
+ Mr. Moore. I understand. I just wanted to point out,
+though, that sometimes we are incorrect in our assessments and
+the Administration, in fact, projected that between 2001 and
+2004, there would be a $1.28 trillion surplus which, in fact,
+turned out to be an $850 billion deficit.
+ So sometimes with the best intentions in the world and
+trying to be completely straight, we just are in error in our
+assessment; is that not correct?
+ Mr. Bernanke. Yes, sir.
+ Mr. Moore. Another question then, and I have got just a
+minute and a half left. What would you think, Chairman
+Bernanke, about--well, you said that the Social Security fund
+is still in surplus now, correct?
+ Mr. Bernanke. The current flow of payroll taxes collected
+is still higher than the benefits being paid out.
+ Mr. Moore. Right. What would you think about establishing a
+true Social Security Trust Fund, one that could not be used for
+any purpose except what it was intended for and that is to pay
+Social Security benefits?
+ Mr. Bernanke. So currently we are shooting for a budget
+balance that includes the Social Security system.
+ Mr. Moore. Yes, sir.
+ Mr. Bernanke. If we were able to shoot for a budget balance
+that did not include the Social Security system and, therefore,
+was essentially buying down Treasury debt with that surplus,
+then clearly that would be putting our long-term fiscal
+situation on a stronger footing.
+ Mr. Moore. We talk about a Social Security Trust Fund. In
+fact, in the real sense, the legal sense of the word, there is
+not one because we spend Social Security money for a lot of
+other things, some good things and some things people might
+have questions about, is that not correct, even though we still
+do have as a government the liability and the obligation to
+make good on the Social Security money that was supposed to be
+in that fund; is that not correct?
+ Mr. Bernanke. Well, the $2 trillion Social Security Trust
+Fund is an asset of the Social Security system and affects the
+benefits profile, for example, going forward. But the $2
+trillion Social Security Trust Fund is not an asset of the
+government as a whole because every dollar that is owed Social
+Security is a dollar that the government has to raise. So it is
+correct that from the government's perspective or from
+society's perspective, it does not reflect any real assets like
+capital or equipment.
+ Mr. Moore. Thank you, sir.
+ Chairman Spratt. Mr. McHenry.
+ Mr. McHenry. Thank you, Mr. Chairman.
+ Great to be with two of my neighbors to the south, Chairman
+Spratt from South Carolina and Chairman Bernanke from South
+Carolina. It is a pleasure to be with you all.
+ I wanted to follow-up on Mr. Tiberi's question about
+unlocking the potential of capital and the free movement of
+capital by reducing capital gains tax rates.
+ At the time we reduced the capital gains tax rate for
+individuals, we did not reduce the corporate capital gains tax
+rate, which now stands at 35 percent.
+ In terms of unlocking the potential of capital to move
+freely and to see its highest and best use, would it be
+appropriate to look at that, reducing the corporate capital
+gains tax rate?
+ Mr. Bernanke. Well, specifically one of the advantages of,
+again from specifically an efficiency perspective, of keeping
+the dividend tax rate low is that it allows firms to pay out
+dividends without tax penalty and that money then gets
+recirculated in the capital markets and may find better uses
+than if it is in some sense trapped in the corporation. So that
+is one of the benefits from an efficiency perspective of low
+dividend tax rates.
+ Mr. McHenry. But in terms of corporate capital gains.
+ Mr. Bernanke. Corporate capital gains are a part of the
+return to savings, return to investment. And for some of the
+reasons I gave earlier, economists tend to argue that moving
+towards taxing consumption and leaving saving to accumulate,
+not distorting saving decisions through taxes on saving
+behavior, leads to higher income in the longer run.
+ Mr. McHenry. All right. Chairman, you also spoke about
+whatever the size the government is chosen to be, tax rates
+must ultimately be set at a level sufficient to achieve an
+appropriate balance of spending and revenues in the long run.
+ I know you have spoken about this before. But in terms of
+entitlement reform, at what point does our inaction as a
+Congress have a negative effect on the economy, meaning our
+inaction to achieve entitlement reform? At what point does that
+actually become a drag? Is that 2008?
+ Mr. Bernanke. I do not think there is a magic point. But
+the further this goes without any action, the bigger the
+current deficits are going to get which is going to draw
+capital out of more productive uses like capital investment or,
+alternatively, increase our obligations to foreigners. And,
+moreover, the further along we get, the harder and more painful
+it is going to be to try and adjust the budget in order to stop
+the accumulation of debt.
+ So it is really a two-sided aspect which is that it is true
+that we are not feeling a lot of pain at the moment from
+deficits, which makes it harder, I understand, politically to
+take action, because the benefits and costs of this are further
+down the road.
+ On the other hand, as I said, by acting now, we can at
+lower cost and with greater notice, we can make changes to
+programs that will take effect ten, fifteen, twenty, twenty-
+five years from now. And in that respect, we can do what we
+need to do or you can do what you need to do without immediate
+impact or without affecting those people who are already
+retired, who are near retirement, and who would perhaps
+justifiably feel that they were not getting what they had been
+promised if you were to affect their benefits.
+ Mr. McHenry. I know there are a number of discussions going
+on in the Congress right now about entitlement reform and, in
+essence, creating a commission to look at all the entitlement
+programs, all the mandatory spending programs, to look at ways
+to reform them.
+ And I wanted to ask you if you would be willing to comment
+on those ideas for maybe a BRAC like, BRAC style commission to
+review policy prescriptions and have that sent back to the
+Congress for a simple up or down vote.
+ Mr. Bernanke. I am reluctant to endorse or comment on
+specific budgetary measures or similar measures as you
+describe. However, I do think that trying to focus Congress on
+the longer term and emphasizing the urgency of beginning to
+take action is highly desirable and whatever methods achieve
+that objective would be very good to undertake.
+ Mr. McHenry. Thank you, Chairman.
+ Chairman Spratt. Mr. Berry.
+ Mr. Berry. Thank you, Mr. Chairman.
+ Thank you, Mr. Chairman, for being here.
+ The United States Congress almost all the time is in this
+debate about taxes and tax cuts are good and tax increases are
+bad and so on and so forth. And I think we all agree that the
+lower the taxes can be, the better it is.
+ Now, you have already said here today, I believe, that they
+need to be the same. Whatever your revenues are, they need to
+be the same as your expenditures.
+ Does the impact of a tax cut change if you make that policy
+change and it results in tax reductions, but to offset the loss
+of revenue, you borrow the money?
+ Mr. Bernanke. Because taxes and spending have to be
+commensurate in the long run, if you cut taxes and lose revenue
+through that tax cut and you do not make any adjustments on the
+spending side, then that tax cut will essentially have to be
+temporary. It will eventually have to come back up in order to
+finance the spending.
+ So in order to get the incentive benefits of a tax cut, you
+also have to look on the spending side and be willing to make
+equal cuts in spending.
+ Mr. Berry. We have heard from any number of people that
+sometimes these tax cuts do result in an improved economy and
+sometimes they do not. Would you agree with that?
+ Mr. Bernanke. Not all tax cuts are created equal. Some are
+more effective than others. And, again, tax cuts that are
+accompanied by spending restraint would be more effective than
+those which are not.
+ Mr. Berry. And we have also heard over and over again, and
+I think it is obviously true, that Medicare and Social Security
+as they are structured today are unsustainable, that we have
+got a train wreck waiting to happen out there. It is not going
+to happen tomorrow, but it is a very serious matter to this
+country.
+ Would this nation be better off without those programs?
+ Mr. Bernanke. I do not think anyone is seriously advocating
+eliminating those programs. I think the question is trying to
+look at how they work and make some judgments about are there
+ways that the cost can be reduced and, if not, and let me just
+say, if not, then making the tough decisions to raise taxes on
+the other side.
+ I mean, the main decision which Congress has to make is how
+big is the government going to be. And all I am saying is the
+laws of arithmetic have to apply. If you just decide to have a
+larger government, which is not illegitimate, you could well
+believe that the social services and the other benefits of
+government spending are worth it, then that is fine, but you
+just have to be willing to accept the higher taxes and the
+implications that might have for economic growth.
+ Mr. Berry. But right now we are really not facing up to
+that and we are just kind of whistling past the graveyard.
+ Mr. Bernanke. Yes, sir.
+ Mr. Berry. And hoping that the tooth fairy comes and bails
+us out of this deal. Is that a correct assessment? I know that
+is mine, not yours, and I would not expect you to assign
+yourself to what I just said.
+ Mr. Bernanke. I do not know about the metaphors there, Mr.
+Congressman, but I do think that Congress does, and I realize,
+as I said several times, this is not an easy task by any means,
+but Congress does need to begin to address these long-run
+fiscal imbalances.
+ Mr. Berry. Thank you, sir.
+ Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Andrews.
+ Mr. Andrews. Thank you, Mr. Chairman.
+ And thank you, Mr. Chairman, for your very edifying
+testimony. I wish every member would read it. I think it is
+very, very edifying.
+ You describe our budgetary situation as the calm before the
+storm and I think you very correctly identified the storm as
+being severe consequences for the economy if capital pools are
+drained, if the price of capital rises, if we continue a policy
+of borrowing our way to an illusionary prosperity.
+ One of the matrix that you discuss as a way of measuring
+our progress toward avoiding that storm or preparing for that
+storm is the idea of the measurement of the long-term solvency
+of entitlement programs, such as the long horizon present
+values of unfunded liabilities for Social Security and
+Medicare.
+ Do you think that there are benchmarks that the markets are
+going to express and manifest as to which benchmarks we have to
+hit on that issue? I will ask you the question another way.
+ My understanding is we are adding each year to the present
+value of those unfunded liabilities by failing to take action
+on entitlement reform, and we are also adding to it by failing
+to put away Social Security surpluses which could be saved for
+those forthcoming problems.
+ Do you think that the market will manifest a benchmark
+where if the unfunded liability grows too large and the time
+before the storm starts grows too short that the markets will
+begin to punish us with higher long-term interest rates and, if
+so, what would you think those benchmarks are both in terms of
+size of the unfunded liability and distance from the storm?
+ Mr. Bernanke. I think it would be hard to give you exact
+numbers. Thus far, the Treasury market has very willingly
+financed the government. Real interest rates are low. They have
+not come up much.
+ I would think that concerns would begin to mount if the
+government got to the point where it was coming closer to one
+of these snowball situations where the accumulation of interest
+on the debt was adding to the deficit which was adding to the
+debt.
+ If that looked to be something that was inevitable and that
+it was becoming increasingly unlikely that the Congress was
+going to be able to address that, and, again, the closer you
+get to that, the harder it is, then I think capital markets
+would become concerned about it.
+ Mr. Andrews. We, as you know, deal in five-year budget
+windows in the resolutions that the Committee addresses.
+ Could you give us a perspective as to what the markets
+would regard as a successful five-year project that would
+either reduce the unfunded liabilities or at least let their
+rate of growth slow? Is there a target we should be shooting at
+in the five-year window?
+ Mr. Bernanke. Well, as I indicated, you need multiple
+indicators, and I am not sure that the five-year window
+sufficiently captures the long-run imbalances. So it would be
+interesting to look at projections as we saw on the screen a
+while ago of the imbalance at ten, fifteen, twenty years down
+the road and steps that move in the direction of ensuring that
+those imbalances are being closed. And I think just moving in
+the right direction is important.
+ Mr. Andrews. Assuming that we were able to enact a budget
+resolution that during the five-year window stop the process of
+using the Social Security surplus and began to bank it or save
+it toward reducing this future unfunded liability by making it
+funded, would you regard that as a positive development?
+ Mr. Bernanke. I think it would be extraordinarily difficult
+to move that far on budget surplus in a few years, within five
+years and----
+ Mr. Andrews. But if it were, would it be a positive
+development?
+ Mr. Bernanke. Well, the Federal Reserve would have to
+offset the short-term spending effects of that with lower
+interest rates. But that would be----
+ Mr. Andrews. So you promised us lower interest rates if we
+do that? Is that what I just heard?
+ Mr. Bernanke. If you do that, we will do our best. But what
+we would do is we would respond in such a way as to try and
+keep the economy at full employment.
+ Mr. Andrews. I understand.
+ Mr. Bernanke. But I think if you can demonstrate a plan
+that seems plausible and make a down payment on it, if I may
+say so, that would be certainly the right direction. It would
+be reassuring.
+ Mr. Andrews. I think one of the imperative projects of this
+Committee is to define plausibility, and we need your input on
+that and those of other leaders.
+ And I thank you very much for your testimony and for
+answering my questions.
+ Mr. Bernanke. Thank you.
+ Mr. Andrews. Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Etheridge.
+ Mr. Etheridge. Thank you, Mr. Chairman.
+ Chairman, thank you for being here this morning and thank
+you for your time. This is an important issue and you have got
+a tough job. We appreciate the job you do.
+ Let me ask you a question. You touched on this in different
+ways and all of us sort of struggle with our own family incomes
+and what our debt ratio is to our assets, et cetera. But my
+question is, do deficits matter at the federal level?
+ Mr. Bernanke. Yes, they matter because they are part of the
+process by which debt builds up, and that debt burden is going
+to affect our children and grandchildren in two different ways.
+ First of all, it is going to be actually a debt that they
+have to do something about paying off, number one. But, number
+two, it is going to drain capital from the construction of new
+machines, new factories, and the like, or increase our debt to
+foreigners so that when that time comes to pay off that
+interest, they are going to have a less vibrant economy, you
+know, to earn income from in order to do it.
+ So debt does matter because it is the process of
+accumulation of debt which creates the burden for the next
+generation.
+ Mr. Etheridge. Thank you. I happen to agree. I just asked
+that question because Vice President Cheney has stated that
+deficits do not matter. And it is obvious they do not with some
+of the spending, but let me move to another question.
+ You were quoted earlier saying, and you touched on this a
+little earlier today, and you had said earlier this month
+really that policies that focus on education, job training, and
+skills and that facilitate job search and job mobility seem to
+me to be promising means by moving toward that goal, talking
+about expanding the economy, et cetera, making it bigger,
+making the pie much larger.
+ I assume you still stand by that statement.
+ Mr. Bernanke. Yes, sir.
+ Mr. Etheridge. Thank you.
+ I ask that question because, just so you will know, in my
+previous life, I was in business. Prior to that, I was State
+Superintendent of Schools for a few years. And I happen to
+believe that if you are going to make the pie larger as we look
+out with all the challenges or projections, we can change those
+projections by changing output, educational levels and
+productivity of workers and the value added of each worker to
+that, because you have been saying that.
+ Mr. Bernanke. It will add to growth and it will also create
+more opportunities for people across the income spectrum.
+ Mr. Etheridge. Change those dynamics. And I look at the
+budget that we are dealing with that the Administration sent
+over, and there are a whole lot of gaps as relates to job
+training and education and those investments that I think are
+long-term investments as we look at the out years.
+ And I would be interested again in your comments and any
+thoughts you could help us with as we are dealing with that
+because it seems to me that if you really want to change the
+dynamics, it is an investment versus and expenditure, and you
+invest in the future and you spend for today.
+ And I think your comments have indicated previously that if
+you invest in education today and monitor it and measure it,
+that will give you a reward down the road if you do it right.
+ Mr. Bernanke. If you do it right. I mean, the only caveat I
+would add is that the total budget line is not the only
+indicator of the commitment or the effort. It also has to be in
+programs that have shown to produce a good result.
+ Mr. Etheridge. Well, let me just give you a couple examples
+before we get to your comments because I think it is important.
+ If we go back to World War II, the GI Bill was an
+investment. And men and women who were coming home and we know
+the results of that.
+ In the 1960s with the Sputnik, we got frightened. We put
+the ``National Defense Act'' in place, and the results of that
+was an infusion of capital that excited young men and women
+about a goal of going to the moon and it turned into a
+tremendous economic boom for this country. And we led the world
+in a host of ways.
+ We really need, I think, that kind of vision once again for
+our young people to challenge them academically to generate the
+kind of growth in opportunities we need.
+ And I think budgets are more than just numbers and figures.
+I think they are moral documents that speak to our visions, our
+hope for the future.
+ Mr. Bernanke. I agree that a strong commitment to helping
+young people realize their potential is extremely important.
+There are many ways to address that. People disagree about the
+right way to do it. And I urge Congress to have a healthy
+debate about how best to foster learning, education, and skills
+among our whole population.
+ Mr. Etheridge. Thank you. And thank you for your time.
+ Thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Chairman, if you will indulge, Mr.
+Cooper has a question he would like to ask also, if you have
+the time. Thank you very much.
+ Mr. Cooper.
+ Mr. Cooper. Thank you again for your testimony.
+ You say toward the close of your testimony that if early
+and meaningful action is not taken implied by Congress, U.S.
+economy could be seriously weakened and future generations
+bearing must of the cost.
+ Our problem here is lighting a fire under some of our
+colleagues to get the tough decisions made. So one of the
+pieces of data that I have been using came from last summer's
+``Wall Street Journal.'' It was on page C6. It was from
+Standard & Poors, a leading credit rating agency.
+ And they projected, they did not predict, but they
+projected that the U.S. Treasury bond itself would lose its
+triple A credit rating if current trends continued by the year
+2012.
+ Then they went on to project that by the year 2025, the
+U.S. Treasury bond would achieve junk bond status below
+investment grade. And that has been one of the more tangible
+warning signs because most folks kind of heard of S&P and
+think, well, gosh, that is not Democratic, that is not
+Republican, that is credit markets. And everyone has a sense
+that U.S. Treasury bond is the most important, most liquid
+instrument in the world.
+ So the prospect that we are literally destroying America's
+credit today by our inaction has helped light a few small
+fires, but still not enough to get folks going. So I
+appreciated your response to Rob Andrews' questions.
+ We, if we were to follow the President's budget, would be
+using $1.3 trillion worth of alleged Social Security surpluses
+to mask the true size of the deficit, because when the
+President brags that he is going to achieve a surplus in year
+five that he does not tell you that he would be doing that by
+borrowing that year about 230 or 40 billion dollars from Social
+Security.
+ So that really, if you look at all of our programs,
+including Social Security, we are still going to have a deficit
+in year five.
+ So how do we get a greater sense of urgency here? You are
+doing all that you can, but what can we be doing to get this
+problem solved early as you suggest?
+ Mr. Bernanke. I think you need to consult with your
+colleagues and try to think about a plan. I think one of the--
+and, again, I am reluctant to get into congressional process of
+which I am certainly not an expert--but a good bit of the
+budgetary planning is about the relatively short run, and the
+question is whether Congress can define some matrix or
+benchmarks for progress on the long-term imbalance issue. If
+that were possible and if there were some will in Congress to
+try to meet those benchmarks, that would be a step in the right
+direction.
+ You are right. That is somewhat difficult because so far,
+the effects of the deficits are not evident to the average
+American. I mean, the average American does not know about the
+current account deficit and those sorts of things.
+ But, again, I think it is also an opportunity because we
+have enough lead time that we can make changes in programs that
+will not take effect until people who are now in their thirties
+and forties are approaching retirement and give them plenty of
+time to plan and adjust to those changes.
+ Mr. Cooper. I thank you, Mr. Chairman.
+ Chairman Spratt. Mr. Becerra.
+ Mr. Becerra. Thank you, Mr. Chairman.
+ Mr. Chairman, thank you for being patient and wading
+through the different questions that we have all asked you.
+ I want to go back to something that I know you have talked
+about quite a bit today and in other days and that is how
+deficits do matter.
+ And I think to underscore that, it is important to point
+out that this year, we are paying something close to the size
+of the identified deficit of $240 billion simply in interest
+payments on the national debt, which means we are getting
+nothing out of those $240 billion or so in payments on money we
+owe.
+ But I wanted to highlight and talk to you a little bit
+about what I think is not being explored well by all of us in
+government, certainly to the detriment of the American people,
+and that is the fact that while the President identifies our
+budget deficit for 2007 as being $244 billion, if it were not
+for the fact that we are using all the monies that we are
+collecting in the Social Security Trust Fund, all the extra
+dollars that are not being spent today for benefits to the
+Social Security recipients, the actual size of the deficit
+would be closer to $435 billion because there is about $190
+billion in excess money that you today, I today, and every
+American who got up today to go to work is paying in the FICA
+tax for our Social Security and Medicare contributions.
+ I think it is unfortunate, and I think the Chairman tried
+to focus on this as well, that the American people do not quite
+understand what is going on and do not quite grasp why deficits
+do matter and what the consequences could be, not so much to us
+today, but to our children in the future.
+ And I am wondering if you can just comment a bit. This year
+in 2007, there are about $190 billion in surplus dollars in
+Social Security that you and I and everyone in America who
+works is contributing to the system with the expectation that
+it will be around when we retire. Next year, that amount rises
+to over $200 billion in surplus money. In 2009, it is about
+$218 billion estimated. In 2010, $230 billion. In 2011, $246
+billion. In 2012, $255 billion in surplus monies in Social
+Security.
+ Each one of those amounts of surplus in each of those
+years, the President has in his budget that he has presented to
+us consumed every single cent of those monies, over a trillion
+dollars, in something other than Social Security. And you have
+mentioned how we need to have some fiscal discipline, how we
+have to get these deficits down. Is it wise for us--here is the
+question--is it wise for us knowing that we will have this
+liability, whether it is legal or otherwise, to the American
+people who today are contributing in FICA taxes for the Social
+Security benefits in the future, is it wise for us to not do
+more to explain to the American people that the size of the
+deficits are not 244 billion as the President identifies in his
+budget, but really $434 billion because we are masking the size
+of the deficit by using Social Security monies that ultimately,
+I think you and I would agree, we must commit to spend on
+Social Security in the future?
+ Mr. Bernanke. Well, first, the unified budget deficit
+concept, which is what you are talking about, has been in use
+for a while. It is not a brand new thing. But you are right. It
+does have the property that essentially the surplus from each
+year is payroll taxes being used for other purposes.
+ I do not know how effective it would be, but I think
+probably some Americans do think that Social Security is like a
+401k plan and that their contributions are being invested in
+real assets, which is, of course, not the case except in the
+very narrow sense that the trust fund has these IOUs in it. So
+I do think that would be something worth pointing out.
+ And I guess I could go even further and just note, as we
+had discussed earlier, that beyond the on budget deficit, which
+is what you are talking about, there is also the accrual
+deficit which adds to that the accrued obligations to, say,
+federal employee pensions and the like. And beyond that, it is
+the money that we are essentially owing each year as we get
+closer and closer to the demographic crunch.
+ So there are multiple measures of this. And I agree that
+the unified budget deficit is in some sense the least revealing
+in terms of long-term obligations.
+ Mr. Becerra. And, Mr. Chairman, I would guarantee you that
+most Americans would say to you so you are using those monies
+that we are contributing extra to Social Security to help us
+take care of our troops, to make sure they are well armed, or
+to make sure that Katrina victims are being addressed or taken
+care of in New Orleans. I think they would say fine, that is a
+good investment.
+ But I wonder if most Americans would say that helping pay
+for the President's tax cuts which have benefitted very few of
+the majority of Americans who got up to work today because most
+of those tax cuts are directed towards folks who are probably
+in your income bracket and my income bracket and the upper
+echelons of our wealth, if the American public would say, well,
+that is really where I want to see my $190 billion in surplus
+Social Security funds going, recognizing that today we have got
+a budget deficit that is bigger than the whole $190 billion
+that Social Security is contributing to this budget.
+ And I think if we did a better job, all of us, in our
+respective roles of educating the public on the money that is
+out there, I think they would guide us in some good decisions
+and these long-term decisions that we have to make to try to
+corral these deficits that are growing very large and the
+entitlement spending that we have to at some point address as
+well.
+ So I thank you for being patient and being here and look
+forward to seeing you again at some point in the future.
+ Thank you, Mr. Chairman. I yield back.
+ Chairman Spratt. Thank you, Mr. Becerra.
+ Mr. Chairman, you have been forthcoming as well as
+forebearing and we appreciate the efforts you have made to help
+eliminate the problems that line our path. They are daunting
+challenges, but they definitely need to be addressed. And you
+have helped issue a sobering call to action.
+ Thank you very much for your testimony today. We very much
+appreciate it.
+ Mr. Bernanke. Thank you, Mr. Chairman.
+ [Whereupon, at 12:25 p.m., the Committee was adjourned.]
+
+
+
+