[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
LIFTING THE CRUSHING BURDEN OF DEBT
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 10, 2011
__________
Serial No. 112-6
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas PAUL TONKO, New York
TODD C. YOUNG, Indiana KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, March 10, 2011................... 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 3
Prepared statement of.................................... 4
Douglas Holtz-Eakin, president, American Action Forum........ 5
Prepared statement of.................................... 7
Carmen M. Reinhart, Dennis Weatherstone senior fellow,
Peterson Institute for International Economics............. 13
Prepared statement of.................................... 14
Maya MacGuineas, president, Committee for a Responsible
Federal Budget, the New America Foundation................. 16
Prepared statement of.................................... 18
Response to question submitted........................... 73
John D. Podesta, president and CEO, Center for American
Progress Action Fund....................................... 21
Prepared statement of.................................... 23
Response to question submitted........................... 74
Hon. Marcy Kaptur, a Representative in Congress from the
State of Ohio, submission for the record:
Biographies and reported sources of private funding of
witnesses.............................................. 72
Hon. Michael M. Honda, a Representative in Congress from the
State of California, questions submitted for the record.... 73
LIFTING THE CRUSHING BURDEN OF DEBT
----------
THURSDAY, MARCH 10, 2011
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. Paul Ryan, [Chairman of
the Committee] presiding.
Present: Representatives Ryan, Campbell, Calvert, Price,
McClintock, Stutzman, Lankford, Ribble, Flores, Mulvaney,
Huelskamp, Young, Rokita, Woodall, Van Hollen, Schwartz,
Kaptur, Blumenauer, Pascrell, Ryan of Ohio, Moore, Castor,
Shuler, Tonko, and Bass.
Chairman Ryan. Let me just say, I am excited about this
impressive list of witnesses we have. We have well-known, well-
regarded witnesses on this issue. So I am really excited about
getting into these details, and I am looking forward to this
hearing. I will start with a brief opening statement then turn
it over to my friend, Mr. Van Hollen.
This is an important hearing, basically on the future of
our country. We here in Congress have our differences over how
to solve our most urgent fiscal challenges, but I don't think
that there is any serious debate over the urgency of these
challenges. I doubt anyone here would dispute the fact that if
we fail to act, we are inviting a debt crisis with potentially
catastrophic consequences. Those seeking to cling to our
unsustainable status quo are, quite frankly, putting us at the
greatest risk.
Erskine Bowles, the Co-Chair of the Fiscal Commission,
former Chief of Staff to former President Clinton, I think said
it best, quote, The era of deficit denial is over. The failure
to address the structural drivers of our debt has been a
bipartisan failure over the years, yet the gusher of government
spending and the creation of new, open-ended health care
entitlements turned a fiscal challenge into a fiscal crisis.
The White House appears to acknowledge the problem, but
seems determined to avoid tackling the problem. The latest
budget proposal from the Obama Administration not only fails to
address the drivers of our debt, but accelerates us down our
unsustainable path. It would impose growth-killing tax
increases and lock in Washington's reckless spending spree. Its
claimed savings amount to little more than slogans and budget
gimmicks. The status quo which the President's budget commits
us to threatens not only our livelihoods, but ultimately our
way of life. We must work together to lift this crushing burden
of our debt.
The good news is this: We still have time to address the
drivers of our debt and save our nation from bankruptcy.
We have several witnesses; we have experts today who will
help us get our arms around the problem. I appreciate your
testifying today before this committee on the difficulty and
about the climb we have ahead of us. This is going to be a
difficult climb. Our country is facing perhaps the greatest
economic challenge in the history of our nation. But we do know
that we can fix this. We do have time, and we can make this
climb. The question is whether we have the political resolve to
do that.
So the stakes of this challenge are no less than the unique
American legacy of bequeathing to our children and
grandchildren a better America; that is basically the legacy of
this country. Each generation confronts its challenges in front
of it, whether it is depression, world wars, or whatnot, so
that their kids are better off. We know this. We know what is
coming. The question is: Are we going to do what is necessary
to prevent that from happening?
The way I look at it is, the worst experience that I have
had in Congress was TARP. And I think most of us would probably
agree with this. That is an economic crisis that caught us by
surprise. We had all these meetings with the Federal Reserve
Chair and the Treasury Secretary, talking about a deflationary
spiral, a depression, bank failures were coming, and caught
everybody by surprise. And I always ask people, What if your
President and your member of Congress knew what was coming, saw
it ahead of time, knew what they needed to do to prevent it
from happening, but chose, instead, not to do anything about it
because it was bad politics? Think about that.
This debt crisis is the most predictable economic crisis we
have had in the history of our country. And if we actually
don't do anything to prevent it from happening, shame on us.
And this is the moment of truth. We have got to start talking
about this stuff. And I hope that we can get there. I believe
we can. Ultimately, the parties are going to have to come
together to fix this problem, and I for one believe that the
key is to go after spending. Spending is the driver of it. And
if we do this, then our kids will have a better future. Then we
will preserve the American legacy of leaving the next
generation better off.
With that, I want to yield to my friend, the Ranking
Member, Mr. Van Hollen.
[The prepared statement of Paul Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Welcome all, to this important hearing on the future of our
country.
We here in Congress have our differences over how to solve our most
urgent fiscal challenges.
But I don't think there is any serious debate over the urgency of
these challenges.
I doubt anyone here would dispute the fact that, if we fail to act,
we are inviting a debt crisis with potentially catastrophic
consequences.
Those seeking to cling to our unsustainable status quo are, quite
frankly, putting us at the greatest risk.
Erskine Bowles, the co-chairman of the President's fiscal
commission, said it best: ``The era of deficit denial is over.''
The failure to address the structural drivers of our debt has been
a bipartisan failure over the years, yet the gusher of government
spending and the creation of new open-ended health care entitlements
turned a fiscal challenge into a fiscal crisis.
The White House appears to acknowledge the problem, but seems
determined to avoid tackling it.
The latest budget proposal from the Obama Administration not only
fails to address the drivers of our debt, but accelerates us down our
unsustainable path. It would impose growth-killing tax hikes and lock
in Washington's reckless spending spree. Its claimed savings amount to
little more than slogans and budget gimmicks.
The status quo, which the President's budget commits us to,
threatens not only our livelihoods, but also our way of life. We must
work together to lift this crushing burden of debt.
The good news is this: We still have time to address the drivers of
our debt and save our nation from bankruptcy.
We have several expert witnesses here today who will help us get
our arms around the problem. I appreciate your testifying today before
this committee on the difficulty of the climb ahead and the
consequences of inaction.
It will be difficult, but it is a climb we must make.
The stakes in this challenge are no less than the unique American
legacy of bequeathing to our children a more prosperous nation than the
one we inherited.
With that, I will yield to Ranking Member Van Hollen for an opening
statement.
Mr. Van Hollen. Thank you, Mr. Chairman. And I want to join
Chairman Ryan in welcoming our distinguished witnesses today. I
am very pleased we are having a hearing on this important
subject, and I think we can all agree that the long-term debt
trajectory is unsustainable and unacceptable. And I believe we
all agree that it is important to come together now, as the
Chairman said, to develop and enact a sensible plan to reduce
that debt in a steady and a predictable fashion. We should have
a healthy discussion on what such a plan would look like.
What we should not be doing is taking actions that would
hamper our fragile economic recovery. While last month's jobs
numbers were promising, millions of Americans remain out of
work. Enacting measures that would slow down job growth would
not only impose additional and unnecessary economic pain on
American families, it will harm the goal of deficit reduction.
That is why the House Republican plan to make additional, deep,
and immediate cuts in various investments in order to hit an
arbitrary number is such a mistake.
Say what you will about Goldman Sachs, they know a little
bit about the impact of investments, and their analysts predict
that the House Republican plan will cost 700,000 Americans
their jobs. Mark Zandy of Moody's Analytics, who, like Mr.
Holtz-Eakin, was an advisor to the presidential campaign of
Senator John McCain, reached a similar conclusion, as did the
Economic Policy Institute.
Now, I see in Mr. Holtz-Eakin's testimony that you dispute
some of those figures, and we can discuss them, but I would
point out that the Chairman of the Federal Reserve, Ben
Bernanke, testified just very recently that slashing the budget
that way would, quote, Translate into a couple hundred thousand
jobs, so it is not trivial, unquote. In fact, that would wipe
out all the job gains from just last month. So the question is
this: Whether the number of jobs lost is 200,000 or 700,000,
why in the world would we be doing anything right now to cost
thousands of Americans their jobs? That is a reckless and
senseless approach that does virtually nothing to address long-
term debt. And that is why the bipartisan fiscal commission
that was charged with reducing our deficits specifically warned
against that action right now.
Yesterday, the members of this committee had an opportunity
to meet with Erskine Bowles and Alan Simpson. Here's what the
bipartisan commission wrote in its report, quote, In order to
avoid shocking the fragile economy, the commission recommends
waiting until 2012 to begin enacting programmatic spending
cuts, and waiting until fiscal year 2013 before making large
nominal cuts, unquote. That is also what Bowles and Simpson
said in their testimony before the Senate Budget Committee the
other day, and that is what the bipartisan Rivlin-Domenici
Commission recommended. They issued a similar warning.
So, Mr. Chairman, I am glad that, today, we are going to
take a more comprehensive look at the budget situation, rather
than focus only on the 12 percent sliver of the budget that
includes critical investments in education, in scientific
research and innovation, and transportation and energy
infrastructure: investments that are critical to growing jobs
in America, and winning in the competitive global marketplace.
As the bipartisan commission observed, a serious debt
reduction plan will require a combination of spending cuts in
discretionary and mandatory programs, as well as revenue
increases. So I hope, Mr. Chairman, that this will provide an
opportunity to take a, a serious and comprehensive look, rather
than what many of us see as a short-term approach to hit an
arbitrary number that will cost Americans their jobs. Thank
you.
[The prepared statement of Chris Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
House Committee on the Budget
I join Chairman Ryan in welcoming our witnesses today. I am pleased
we are having a hearing on this important subject. We all agree that
our current long term debt trajectory in unsustainable and
unacceptable. And I believe we all agree that it is important to come
together now to develop and enact a sensible plan to reduce that debt
in a steady and predictable manner. We should have a healthy discussion
on what such a plan would look like.
What we should not do is take actions that would hamper our fragile
economy recovery. While last month's jobs numbers were promising,
millions of Americans remain out of work. Enacting measures that would
slow down job growth will not only impose additional and unnecessary
economic pain on American families; it will harm the goal of deficit
reduction.
That is why the House Republican plan to make additional deep and
immediate cuts in various investments in order to hit an arbitrary
number is such a mistake. Say what you will about Goldman Sachs, they
know a little bit about the impact of investments, and their analysts
predict the House Republican plan will cost 700,000 Americans their
jobs. Mark Zandi of Moody's Analytics, who like Dr. Holtz-Eakin was an
advisor to the presidential campaign of Senator John McCain, reached a
similar conclusion, as did the Economic Policy Institute. Now I see
that Dr. Holtz-Eakin disputes these figures in his testimony. But the
Chairman of the Federal Reserve, Ben Bernanke, testified last week that
slashing the budget that way ``would translate into a couple hundred
thousand jobs. So, it's not trivial.'' That would wipe out all the job
gains from last month. So the question is this: Whether the number of
jobs lost is 200,000 or 700,000, why in the world would we be doing
anything now that would cost Americans their jobs? That is a reckless
and senseless approach that does virtually nothing to address the long
term debt. And that is why the bipartisan Fiscal Commission that was
charged with reducing our deficits specifically warned against such
action. Yesterday, members of this Committee met with the co-chairs of
the Commission, Erskine Bowles and Alan Simpson. Here is what the bi-
partisan Commission wrote in its report: ``In order to avoid shocking
the fragile economy, the Commission recommends waiting until 2012 to
begin enacting programmatic spending cuts, and waiting until fiscal
year 2013 before making large nominal cuts.'' That is also what Bowles
and Simpson said in their testimony before the Senate Budget Committee
last week. The bipartisan Rivlin-Dominici commission issued a similar
warning.
So I am glad that today we will take a more comprehensive look at
what it will take to seriously tackle deficits and the debt rather than
focus only on the 12% sliver of the budget that includes critical
investments in education, scientific research and innovation, and
transportation and energy infrastructure--investments that are critical
to growing jobs in America and winning in the competitive global
marketplace. As the bi-partisan Fiscal Commission observed, a serious
debt reduction plan will require a combination of spending cuts in
discretionary and mandatory programs as well as revenue increases.
I will close with this observation. In his recent testimony here,
Jack Lew, the Director of the Office of Management and Budget, pointed
out that when he had last appeared before this Committee as President
Clinton's Budget Director, we were projecting a $5.6 trillion surplus.
Today, we have with us John Podesta, who was Chief of Staff to
President Clinton at that time. When President Obama was sworn in 8
years after Bill Clinton left office, he inherited a record annual
deficit of $1.3 trillion and an economy in total freefall with more
than 700,000 Americans losing their jobs every month. I make this
observation to make this point--during the intervening eight years of
the Bush Administration, some terrible decisions were made that wreaked
havoc on the fiscal stability of our nation. If we are going to chart a
fiscally responsible course, we are going to have to do many things,
including reversing some of those fiscally reckless actions.
Chairman Ryan. Thank you, Mr. Van Hollen. I would simply
just ask the witnesses, in the interest of time, because we
have lots of members who have questions, if you could keep your
opening remarks to five minutes, paraphrase your statements,
and your written statements will be included in the record. I
think we are just going to go left to right, right? So, Mr.
Holtz-Eakin, why don't we start with you and then we will go on
down the line.
STATEMENTS OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION
FORUM; CARMEN REINHART, DENNIS WEATHERSTONE SENIOR FELLOW,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS; MAYA
MACGUINEAS, COMMITTEE FOR A RESPONSIBLE FEDERAL BUDGET AT THE
NEW AMERICA FOUNDATION; AND JOHN PODESTA, PRESIDENT AND CEO,
CENTER FOR AMERICAN PROGRESS ACTION FUND
STATEMENT OF DOUGLAS HOLTZ-EAKIN
Mr. Holtz-Eakin. Chairman Ryan and Ranking Member Van
Hollen, members of the committee, thank you for the privilege
of being here today. You have my written statement, I will be
brief; I will make three points.
First is to echo the remarks of the Chairman about the
seriousness of the situation, and the implications of the
outlook for rising debt.
Second is to concur that the problem is spending, by almost
any metric that has got to be the focus.
And the third is to address the concerns of the Ranking
Member about the implications of cutting spending for near-term
economic growth and jobs.
Everyone has a different way of saying this, but I believe
we are at a juncture when America's prosperity and freedom is
at stake. As I said in my testimony, there is a good news
version of continuing down our current path. And in the good
news version, massive federal borrowing is displacing
investments in workers, in equipment, in innovation,
productivity stagnates, wages don't grow, and we don't see the
standard of living rise for a prolonged period, but we somehow
muddle through and leave our children a diminished economy and,
as the Pentagon folks would say, A diminished ability to
project our values on the globe. That has been the core of our
ability to protect our freedoms. That is the good news version.
The bad news version is one in which we actually get
something that is 2008 or worse. We get a cataclysm in
financial markets, we see sharp freezes in credit, main street
economy collapses, and in the aftermath of that we still have
the same problem to fix. So it is unacceptable, in my view, to
continue down the path.
We have to change direction. We have lots of indicators
that this is coming. Carmen's much more versed in the
implications of rising debt to GDP levels, but ours is much too
high. Moody's has put out an advisory on how they rate
sovereign debt; and if you just take their technical criteria
at face value, we are on track to be downgraded as a sovereign
borrower in a matter of three or four years. And we have seen
the borrowing around the globe.
So this is literally, as the Chairman of this Commission
called it, a moment of truth, and a time to stop deferring the
tough decisions that are necessary to get us on the right
track. Those decisions are about spending. As the Congressional
Budget Office's long-term budget outlook has said, again, and
again, and again, for a decade, if you look at current policy
in the United States, current law, spending rises under current
law, above any sensible metric of the potential to tax. It
rises to 35 percent of GDP or higher. It is driven by, largely,
the entitlement programs, and especially the health programs.
There is one, and only one, solution to that problem. You will
not grow your way out of it, you will not tax your way out of
it, you simply must modify those programs; entitlement reform
is at the heart of getting this right. And we have done very
little, in recent years, to do that. We wasted the decade we
had before the baby boomers started to retire; they are now
retiring. We went the wrong direction with the Medicare
Modernization Act and Affordable Care Act, to add more health
programs, not fix the ones we had. And now we are both out of
time, and in the financial crisis, we have lost our cushion.
The GDP has gone up by 20 percentage points.
The time is now to control spending. Now there are these
concerns that somehow this is going to be bad for the economy,
and I want to close with that. If you are a businessman in the
United States right now, you are an international business
trying to figure out where to locate, and you look at a country
where the good news scenario is a future of higher interest
rates, or higher taxes, or both, and the bad news scenario is a
future that has a financial crisis followed by higher interest
rates, higher taxes, or both. Why would you locate in that
country, or why would you expand in that country? Why is that a
good thing for the economic outlook? It is simply not.
So fixing that problem, undertaking control of the debt, is
the single most pro-growth policy that Congress and the
administration could undertake. And that will be at the heart
of getting the economy going again, now, and in the future.
The kinds of studies we have seen, from Goldman Sachs and
the man I made famous, Mark Zandy, have, at their heart,
several problems.
Problem number one is that they get the magnitudes all
wrong. The Congressional Budget Office estimates that out of
HR-1, we would see a reduction of $9 billion in actual outlays
in fiscal year 2011 from that bill, in a $14 to $15 trillion
economy, this is peanuts; it will do nothing, with all due
respect to the other economists.
Second is that not all outlays are purchases of goods and
services. They make that mistake. A lot of them are transfer
payments. And if you look around the globe at the evidence that
has been accumulated, the successful strategy for growing and
fixing a fiscal problem is to keep taxes low and cut transfer
payments and government payrolls. That is the strategy that
works; this is part and parcel of that strategy.
The third, and most importantly, the analyses are devoid of
any capacity to change the outlook of individuals in the
economy. They rule out anything that has to do with sentiment
and optimism, and they, thus, rule out the very reason you are
doing this. You couldn't possibly get another answer. So they
are stacked against finding a beneficial conclusion. And I find
it ironic that they are called Keynesian analysis, because John
Maynard Keynes was a very sophisticated student of human
nature, and put animal spirits and optimism at the heart of his
economic theories. And so I disagree with the bottom line those
analyses have. Thank you, Mr. Chairman. I look forward to your
questions.
[The prepared statement of Douglas Holtz-Eakin follows:]
Prepared Statement of Douglas Holtz-Eakin, President,
American Action Forum*
Chairman Ryan, Ranking Member Van Hollen and Members of the
Committee thank you for the privilege of appearing today. In this short
statement, I wish to make the following points:
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* The opinions expressed herein are mine alone and do not represent
the position of the American Action Forum. I am grateful to Sam
Batkins, Ike Brannon, Cameron Smith and Matt Thoman for assistance.
The outlook for deficits and debt threatens the Nation's
prosperity and freedom. Changing the fiscal course should be our top
national priority.
Controlling the growth of future federal spending should
be the central objective of policymakers in pursing this goal.
Effectively controlling spending, reducing deficits, and
eliminating future debt accumulation can aid near-term economic growth.
Let me discuss each in turn.
THE THREAT OF FUTURE DEBT
The Fiscal Outlook. The federal government faces enormous budgetary
difficulties, largely due to long-term pension, health, and other
spending promises coupled with recent programmatic expansions. The
core, long-term issue has been outlined in successive versions of the
Congressional Budget Office's (CBO's) Long-Term Budget Outlook.\1\ In
broad terms, over the next 30 years, the inexorable dynamics of current
law will raise federal outlays from an historic norm of about 20
percent of Gross Domestic Product (GDP) to anywhere from 30 to 40
percent of GDP. Any attempt to keep taxes at their post-war norm of 18
percent of GDP will generate an unmanageable federal debt spiral.
\1\ Congressional Budget Office. 2010. The Long-Term Budget
Outlook. Pub. No. 4130. http://www.cbo.gov/ftpdocs/115xx/doc11579/06-
30-LTBO.pdf
---------------------------------------------------------------------------
This depiction of the federal budgetary future and its diagnosis
and prescription has all remained unchanged for at least a decade.
Despite this, action (in the right direction) has yet to be seen.
Those were the good old days. In the past several years, the
outlook has worsened significantly.
Over the next ten years, according to the Congressional Budget
Office's (CBO's) analysis of the President's Budgetary Proposals for
Fiscal Year 2011,\2\ the deficit will never fall below $700 billion.
Ten years from now, in 2020, the deficit will be 5.6 percent of GDP,
roughly $1.3 trillion, of which over $900 billion will be devoted to
servicing debt on previous borrowing.
As a result of the spending binge, in 2020 public debt will have
more than doubled from its 2008 level to 90 percent of GDP and will
continue its upward trajectory.
---------------------------------------------------------------------------
\2\ Congressional Budget Office. 2010. An Analysis of the
President's Budgetary Proposals for Fiscal Year 2011. Pub. No. 4111.
http://www.cbo.gov/ftpdocs/112xx/doc11280/03-24-apb.pdf
---------------------------------------------------------------------------
The President has now released his budget for Fiscal Year 2012.
While CBO has yet to have the opportunity to provide a non-partisan
look its implications, my reading of the budget is that it is largely
replicates the previous year's outlook.
The ``Bad News'' Future under Massive Debt Accumulation. A United
States fiscal crisis is now a threatening reality. It wasn't always so,
even though--as noted above--the Congressional Budget Office has long
published a pessimistic Long-Term Budget Outlook. Despite these gloomy
forecasts, nobody seemed to care. Bond markets were quiescent. Voters
were indifferent. And politicians were positively in denial that the
``spend now, worry later'' era would ever end.
Those days have passed. Now Greece, Portugal, Spain, Ireland, and
even Britain are under the scrutiny of skeptical financial markets. And
there are signs that the U.S. is next. The federal government ran a
fiscal 2010 deficit of $1.3 trillion--nearly 9 percent of GDP, as
spending reached nearly 24 percent of GDP and receipts fell below 15
percent of GDP.
What happened? First, the U.S. frittered away its lead time. It was
widely recognized that the crunch would only arrive when the baby
boomers began to retire. Guess what? The very first official baby
boomer already chose to retire early at age 62, and the number of
retirees will rise as the years progress. Crunch time has arrived and
nothing was done in the interim to solve the basic spending problem--
indeed the passage of the Medicare prescription drug bill in 2003 made
it worse.
Second, the events of the financial crisis and recession used up
the federal government's cushion. In 2008, debt outstanding was only 40
percent of GDP. Already it is over 60 percent and rising rapidly.
Third, active steps continue to make the problem worse. The
Affordable Care Act ``reform'' adds two new entitlement programs for
insurance subsidies and long-term care insurance without fixing the
existing problems in Social Security, Medicare, and Medicaid.
Financial markets no longer can comfort themselves with the fact
that the United States has time and flexibility to get its fiscal act
together. Time passed, wiggle room vanished, and the only actions taken
thus far have made matters worse.
As noted above, in 2020 public debt will have more than doubled
from its 2008 level to 90 percent of GDP and will continue its upward
trajectory. Traditionally, a debt-to-GDP ratio of 90 percent or more is
associated with the risk of a sovereign debt crisis.
Indeed, there are warning signs even before the debt rises to those
levels. As outlined in a recent report,\3\ the credit rating agency
Moody's looks at the fraction of federal revenues dedicated to paying
interest as a key metric for retaining a triple-A rating. Specifically,
the large, creditworthy sovereign borrowers are expected to devote less
than 10 percent of their revenues to paying interest. Moody's grants
the U.S. extra wiggle room based on its judgment that the U.S. has a
strong ability to repair its condition after a bad shock. The upshot:
no downgrade until interest equals 14 percent of revenues.
---------------------------------------------------------------------------
\3\ Moody's determines debt reversibility from a ratio of interest
payments to revenue on a base of 10 percent. Wider margins are awarded
to various governments to indicate the additional ``benefit of the
doubt'' Moody's awards. The US finds itself on the upper end at 14
percent. The ratios are ``illustrative and are not hard triggers for
rating decisions.'' See: Aaa Sovereign Monitor Quarterly Monitor No. 3.
Moody's Investor Service. March 2010.
---------------------------------------------------------------------------
This is small comfort as the 2011 Obama Administration budget
targets 2015 as the year when the federal government crosses the
threshold and reaches 14.8 percent. Moreover, the plan is not merely to
flirt with a modest deterioration in credit-worthiness. In 2020, the
ratio reaches 20.1 percent.
Perhaps even more troubling, much of this borrowing comes from
international lending sources, including sovereign lenders like China
that do not share our core values.
For Main Street America, the ``bad news'' version of the fiscal
crisis occurs when international lenders revolt over the outlook for
debt and cut off U.S. access to international credit. In an eerie
reprise of the recent financial crisis, the credit freeze would drag
down business activity and household spending. The resulting deep
recession would be exacerbated by the inability of the federal
government's automatic stabilizers--unemployment insurance, lower
taxes, etc.--to operate freely.
Worse, the crisis would arrive without the U.S. having fixed the
fundamental problems. Getting spending under control in a crisis will
be much more painful than a thoughtful, pro-active approach. In a
crisis, there will be a greater pressure to resort to damaging tax
increases. The upshot will be a threat to the ability of the United
States to bequeath to future generations a standard of living greater
than experienced at the present.
Future generations will find their freedoms diminished as well. The
ability of the United States to project its values around the globe is
fundamentally dependent upon its large, robust economy. Its diminished
state will have security repercussions, as will the need to negotiate
with less-than-friendly international lenders.
The ``Good News'' Future under Massive Debt Accumulation. Some will
argue that it is unrealistic to anticipate a cataclysmic financial
market upheaval for the United States. Perhaps so. But an alternative
future that simply skirts the major crisis would likely entail
piecemeal revenue increases and spending cuts--just enough to keep an
explosion from occurring. Under this ``good news'' version, the debt
would continue to edge northward--perhaps at times slowed by modest and
ineffectual ``reforms''--and borrowing costs in the United States would
remain elevated.
Profitable innovation and investment will flow elsewhere in the
global economy. As U.S. productivity growth suffers, wage growth
stagnates, and standards of living stall. With little economic
advancement prior to tax, and a very large tax burden from the debt,
the next generation will inherit a standard of living inferior to that
bequeathed to this one.
CONTROLLING SPENDING TO REDUCE DEFICITS AND DEBT
The policy problem facing the United States is that spending rises
above any reasonable metric of taxation for the indefinite future.
Period. There is a mini-industry devoted to producing alternative
numerical estimates of this mismatch, but the diagnosis of the basic
problem is not complicated. The diagnosis leads as well to the
prescription for action. Over the long-term, the budget problem is
primarily a spending problem and correcting it requires reductions in
the growth of large mandatory spending programs and the appetite for
federal outlays, in general.
As an example, using the President's 2011 Budget, the CBO projects
that over the next decade the economy will fully recover and revenues
in 2020 will be 19.6 percent of GDP--over $300 billion more than the
historic norm of 18 percent. Instead, the problem is spending. Federal
outlays in 2020 are expected to be 25.2 percent of GDP--about $1.2
trillion higher than the 20 percent that has been business as usual in
the postwar era.
Just as some would mistakenly believe that the federal government
can easily ``tax its way out'' of this budgetary box there is an
equally misguided notion in other quarters that it can ``grow its way
out.'' The pace of spending growth simply must be reduced.
The Need for Rapid Action. The potential for a U.S. fiscal crisis
is rising each day. This, it makes sense to quickly adopt reductions in
annual discretionary spending to reduce future deficits. Discretionary
spending is appealing as a starting point because it is the spending
most easily and quickly modified by Congress. Any successful strategy
will likely be built on three pillars:
Rolling back spending to the ``normal'' funding levels
preceding the financial crisis in 2008 and economic downturn;
Adhering to a disciplined vision for a small, contained
government. Such a vision would provide a demarcation between those
things the government is uniquely equipped to undertake and those that
are best not funded and left to the private sector; and
Relying on strict oversight to defund those programs that
do not effectively meet the government's service obligations.
At the same time, mandatory spending programs cannot be left to
evolve as dictated by current law. It is equally important to quickly
undertake entitlement reform. To see the need for urgency, consider
first Social Security.
Social Security contributes to the current deficit. At present,
Social Security is running a modest cash-flow deficit, increasing the
overall shortfall. As the years progress, these Social Security
deficits will become increasingly larger. They are central to the
deficit outlook. More importantly, the stream of future outlays is
heavily driven by demography. In particular, if the future benefits of
the baby boom generation are exempted from reform, either by design or
a failure to move quickly, then the outlay ``problem'' will have been
effectively exempted from reform. This would be a fundamental policy
failure.
For this reasons, an immediate reform and improvement in the
outlook for entitlement spending would send a valuable signal to credit
markets and improve the economic outlook.
Naturally, it would be desirable to focus on the larger future
growth in outlays associated with Medicare, Medicaid, and the Patient
Protection and Affordable Care Act (ACA). These share the demographic
pressures that drive Social Security, but include the inexorable
increase in health care spending per person in the United States. From
a policy perspective, it would be desirable to replace the ACA with
reforms that raised the efficiency of health care spending and slowed
the growth of per capita health care outlays. At the centerpiece of
such reforms would be reforms to the Medicare and Medicaid programs.
However, in the absence of a political consensus to revisit the ACA,
Medicare and Medicaid reforms will remain paralyzed and the most
promising area for bipartisan entitlement reform is Social Security.
The Role for Tax Policy. While it will not be possible or desirable
to rely on pure revenue increases to address the looming debt
explosion, there is a role for improved tax policy to support economic
growth. What is needed now is a tax policy that has incentives for
businesses and entrepreneurs to locate in America and spend at a faster
rate on innovation, workers, repairs, and new plants and equipment.
The place to start is the corporate income tax, which harms our
international competitiveness in two important ways. First, the 35
percent rate is far too high: when combined with state-level taxes,
American corporations face the highest tax rates among our developed
competitors.\4\ The rate should be reduced to 25 percent or lower.
---------------------------------------------------------------------------
\4\ Some defend the high corporate tax rate by arguing that the
effective corporate tax rate is much lower. This misses an important
point. Every country's effective tax rate is also lower than its
statutory rate. A recent study by two economists at the University of
Calgary (http://www.cato.org/pubs/tbb/tbb--64.pdf) concludes that the
marginal tax rate in the U.S on new investment is 34.6 percent, higher
than any other country in the OECD.
---------------------------------------------------------------------------
Second, the United States remains the only developed country to tax
corporations based on their worldwide earnings. Our competitors follow
a territorial approach in which, say, a German corporation pays taxes
to Germany only on its earnings in Germany, to the U.S. only on its
earnings here, and so forth. If we were to adopt the territorial
approach, we would place our firms on a level playing field with their
competitors.
Proponents of the worldwide approach argue that because it doesn't
let American firms enjoy lower taxes when they invest abroad, it gives
them no incentive to send jobs overseas. Imagine two Ohio firms, they
say: one invests $100 million in Ohio, the other $100 million in
Brazil. The worldwide approach treats the profits on these two
investments equally, wisely giving the company that invests in Brazil
no advantage over its competitor.
But this line of reasoning ignores three points. First, because
firms all over the world will pay lower taxes than the two Ohio
companies, the likeliest outcome of the scenario is that both firms
will fail, unable to compete effectively with global rivals. Second,
when American multinational firms invest and expand employment abroad,
they tend also to invest and expand employment in the United States. In
the end, healthy, competitive firms grow and expand, while
uncompetitive firms do not, meaning that our goal should be to make
sure that American companies don't end up overtaxed, uncompetitive, and
eventually out of business. And finally, because the U.S. is the
holdout using a worldwide approach, it is at a disadvantage as the
location for the headquarters of large, global firms. As the U.S. loses
the headquarters, it will lose as well the employment, research and
manufacturing that typically is located nearby.
The corporate tax should be reformed further. At present, companies
must depreciate their capital purchases over time. Instead, they should
be allowed to deduct immediately the full cost of all investments,
which would provide a dramatic incentive for spending. We should also
consider phasing out the tax-deductibility of the interest that
companies pay on their borrowing. Because this interest is deductible
and the companies' own dividends are not, firms have an incentive to
borrow excessively. Removing that incentive--making a firm's tax
liability dependent not on its financial decisions but on its real
economic profitability--would discourage financial engineering and
focus corporations on their core mission.
A more competitive corporate-tax system would be a good start in
our effort to encourage private-sector growth. But a lot of private-
sector economic activity in the U.S. isn't affected by the corporate
tax at all. Activity that takes place in sole proprietorships,
partnerships, and other ``pass-through entities''--organizations whose
income is treated solely as that of their investors or owners--is
instead affected by the individual income tax. Congress' Joint
Committee on Taxation projects that in 2011, $1 trillion in business
income will be reported on individual income-tax returns.
It's important to note that nearly half of that $1 trillion--$470
billion--will be reported on returns that face the top two income-tax
rates. A conservative estimate is that more than 20 million workers
would be employed by firms directly affected by those two tax rates.
Tax reform should avoid higher marginal tax rates in favor of lower
rates and a broader base. Marginal tax rates and the taxation of
dividends and capital gains directly affect companies' decisions about
innovation, investment, and savings.
Americans--from homeowners to small businesspeople to the millions
of unemployed--are in desperate need of faster and prolonged economic
growth. Congress should therefore evaluate tax proposals based on
whether they're likely to trigger and support that growth. Tax policy
can play a key role in spurring an economic recovery--but not without
sustained reform of both the corporate and individual income-tax
systems.
THE ECONOMICS OF SPENDING CONTROL
The top issue facing Americans is the need for robust job growth.
According to the National Bureau of Economic Research the recession
began in December 2007. Their data show that there were 142.0 million
jobs in December of 2007--the average of payroll and household survey
data. In June 2009, NBER's date for the end of the recession, the same
method showed 135.3 million jobs, for a total job loss of 6.7 million
attributed to the recession. These numbers are quite close to those
using the Bureau of Labor Statistics non-farm payroll data, which
showed a loss of 6.8 million.
There are glimmers of promise. Since December 2009, 945,000 payroll
employment jobs have been added. However at the same time, there are
14.5 million unemployed persons in the economy and many more
discouraged workers. Since the start of the recession the labor force
has fallen by nearly 500,000.
For these reasons, the current unemployment rate of 8.9 percent
likely understates the real duress. Using the BLS alternative
unemployment rate (U-6), one finds that unemployed, underutilized and
discouraged workers are 15.9 percent of the total. As evidence of the
difficulties, the number of long-term unemployed (27 weeks or more) is
currently 5.9 million and accounts for 43.9 percent of all unemployed
persons.
The fiscal future outlined above represents a direct impediment to
job creation and growth. The United States is courting downgrade as a
sovereign borrower and a commensurate increase in borrowing costs. In a
world characterized by financial market volatility stemming from
Ireland, Greece, Portugal, and other locations this raises the
possibility that the United States could find itself facing a financial
crisis. Any sharp rise in interest rates would have dramatically
negative economic impacts; even worse an actual liquidity panic would
replicate (or worse) the experience of the fall of 2008.
Alternatively, businesses, entrepreneurs and investors perceive the
future deficits as an implicit promise of higher taxes, higher interest
rates, or both. For any employer contemplating locating in the United
States or expansion of existing facilities and payrolls, rudimentary
business planning reveals this to be an extremely unpalatable
environment.
In short, cutting spending is a pro-growth policy move at this
juncture. As summarized by a recent American Action Forum the research
indicates that the best strategy to both grow and eliminate deficits is
to keep taxes low and reduce public employee costs and transfer
payments.\5\
---------------------------------------------------------------------------
\5\ See http://americanactionforum.org/news/repairing-fiscal-hole-
how-and-why-spending-cuts-trump-tax-increases
---------------------------------------------------------------------------
Keynesian Arguments and Reducing Spending. Recent analyses of H.R.
1, the continuing resolution that called for $61 billion in reduced
federal spending, by Goldman Sachs\6\ and Economy.com\7\ have been
touted by some as evidence that it is not feasible to engage in
spending reductions. I believe these arguments miss several key points.
---------------------------------------------------------------------------
\6\ http://blogs.abcnews.com/thenote/2011/02/goldman-sachs-house-
spending-cuts-will-hurt-economic-growth.html
\7\ Zandi, Mark. 2011. A Federal Shutdown Could Derail the
Recovery. Moody's Analytics. http://www.economy.com/dismal/article--
free.asp?cid=197630&src=wp
---------------------------------------------------------------------------
The first thing to note is that while Members are aware that a
reduction of $61 billion in budget authority does not translate into an
immediate $61 billion cut in outlays, many analysts appear to not
understand these budgetary facts. Indeed, on average, a $1 cut would
translate into only 52 cents during the current fiscal year.
To generate their estimates, Goldman Sachs assumed outlay
reductions of $15 billion in the 2nd quarter and $30 billion in the 3rd
quarter of calendar 2011. Naively interpreted, this could produce
noticeable impacts on quarter-to-quarter GDP growth. But this is a
misleading and highly overstated estimate of the likely impact because:
The CBO estimates an outlay reduction of only $9 billion
in fiscal 2011, or an impact of at most 0.3 percentage points;
The calculation assumes full dollar-for-dollar reduction
in GDP as spending declines. This is too large, especially because;
Not all outlay reductions are actual cuts in the purchases
of goods and services to contribute to measured GDP. Instead, some are
transfers payments to states or individuals that will have a more muted
impact. Indeed, while FY 2010 showed outlays of $3,456 billion on a
budget basis, the National Income and Product Accounts\8\ showed under
30 percent ($1,030 billion) as consumption purchases;
---------------------------------------------------------------------------
\8\ Congressional Budget Office. 2011. CBO's Projections of Federal
Receipts and Expenditures in the Framework of the National Income and
Product Accounts. Pub. No. 4250.
---------------------------------------------------------------------------
Not all of the budget authority cuts are from new
spending. Instead, some are rescissions of the authority for spending
that never occurred and might never occur; and
Most importantly this is a static calculation that assumes
no beneficial offset in private sector spending because of the improved
budget outlook and prospect of lower future taxes and interest rates.
Put differently, the criticisms ignore the rationale for making these
beneficial cuts to begin with: to clear the way for private sector jobs
and growth.
A different way to make the last point is to note that these
``Keynesian'' arguments invoke a sterile, mechanical view of his
economic views. In fact, Lord Keynes placed considerable importance on
the role of expectations and optimism regarding the economic
environment--so-called ``animal spirits''. Policies that enhance the
willingness and desirability of businesses to invest fit neatly in to
his view of business cycles and economic growth.
Importantly, recent movements in indexes of economic confidence
ranging from small businesses, to CEOs, to households have shown
considerable improvement (See Table).
MEASURES OF ECONOMIC CONFIDENCE
----------------------------------------------------------------------------------------------------------------
Sept
Jul '10 Aug '10 '10 Oct '10 Nov '10 Dec '10 Jan '11 Feb '11
----------------------------------------------------------------------------------------------------------------
NFIB Small Business Optimism Index\1\... 88.1 88.8 89 91.7 93.2 92.6 94.1 NA
Chief Executive CEO Confidence Index\2\. 4.7 5 4.9 5.1 5.8 5.8 6.3 6.4
Reuters/Michigan Survey of Consumer 67.8 68.9 68.2 67.7 71.6 74.5 74.2 77.5
Sentiment\3\...........................
----------------------------------------------------------------------------------------------------------------
\1\ http://www.nfib.com/Portals/0/PDF/sbet/sbet201102.pdf
\2\ http://www.chiefexecutive.net/ME2/Audiences/Default.asp?AudID=328DCF73ACA1493ABBD34BF8AB37D74A
\3\ https://customers.reuters.com/community/university/
No definitive explanation of month-to-month movements in measures
of confidence will emerge from this hearing. However, I find it
supportive of the basic argument that confidence improved markedly as
the election and Congressional debate shifted toward control of future
spending, deficits, and debt.
Two final aspects of the recent, Keynesian-based opposition to
controlling spending are perplexing. Often those who make the claim
that a $61 billion cut in spending will endanger the recovery are
equally willing to argue that tax increases are needed to close the
deficit. However, in a Keynesian model tax increases and transfer
decreases enter in exactly the same manner. If the latter endanger the
recovery, so must the former!
More importantly, entitlement reform--the repeal of the Affordable
Care Act, Medicare reform, Medicaid reform, or Social Security reform--
is likely to have no immediate impact on federal outlays. Instead, they
are commitments in the present to reduced spending in the future. By
construction, they can have no negative, Keynesian impacts on recovery.
Instead, they carry only beneficial impacts on the expectations of
employers and other market participants.
CONCLUSION
At this juncture, the United States needs a keen focus on enhancing
the rate of economic growth. Workers and economy as a whole will
benefit from pro-growth policies. Central aspects of a pro-jobs and
growth agenda are controlling federal spending growth; eliminating the
potential for debt accumulation that generates a fiscal crisis, or
higher taxes and interest rates; and improved tax policy.
I look forward to answering your questions.
STATEMENT OF CARMEN REINHART
Chairman Ryan. Thank you. Ms. Reinhart.
Ms. Reinhart. Thank you, Chairman Ryan, and other members
of the committee, for this opportunity.
Chairman Ryan. Please pull your mic right in front of you.
Ms. Reinhart. The first part I would like to address is
just put where we are a little bit in historic perspective, and
then talk about the growth implications of where we are. As
regard to where we are, historically, I would like to highlight
that whether you look at gross debt, gross debt right now is 94
percent of GDP, the peak debt in 1946 was 121. But let's move
on.
Let's look at what the Federal Reserve, the flow of funds
include debts of the State and local government, and also
federal enterprises, which now include Fannie and Freddie. That
ratio of debt to GDPS of the third quarter is 122 percent,
which surpasses the peak that we established in 1945.
Let me highlight that hidden debts are a big issue. And
what do I mean by hidden debts? I mean contingent liabilities,
and not just of the Social Security variety. There are huge
contingent liabilities in the financial industry that we have
to be aware of. If you don't think contingent liabilities
matter, think of Ireland.
Let me proceed, very quickly, by saying that the march from
financial crisis, to high public debt, to a public debt crisis,
is the one that we are seeing unfolding in Europe. And that is
what one could call debt with drama. And it is not over, and it
has consequences for the U.S. Spain was downgraded overnight.
The presumption that we are exempt from that pattern is a
dangerous one, I would point out. It can happen.
But let's not go there just yet. Let's talk about where we
are now and implications for growth. I have done work with Ken
Rogoff that did a very simple exercise that looked at various
levels of debt, and how it related to growth. We have found
that years in which growth that is above 90 percent of GDP,
median growth rates are about one percentage point lower. And
this is based on post-war analysis. It includes 44 economies;
it is robust, whether you look at emerging markets, whether you
look at advanced economies alone, whether you look at the post-
war, whether you look at longer periods. In effect, I want to
highlight that the ECB and the IMF have done subsequent studies
which actually clarify some of the areas, because our analysis,
we do not pretend to do causality in our analysis. But the
subsequent studies have taken that issue up. And there are two
findings worth highlighting.
One is there is a strong negative causal relationship from
high debt to lower growth. And secondly, those studies suggest,
particularly the ECB study, which is for 12 European economies,
ours is much broader, does suggest that the debt levels, the
thresholds in which we placed at 90 percent, may be, actually,
somewhat lower in the vicinity of 70 to 80 percent.
The bottom line is we have passed those thresholds, I
think, without talking about drama, or default, or anything
like that. I think the growth consequences are in the here and
now.
Let me say something in what time I have left, that the
contingent liability issue is a huge one. Right now, states
also have what we call in the IMF ``below the line financing.''
This is financing through arrears. Illinois, of course: six
billion. None of these things are embedded in those debt
figures, which are in the public domain. By the way, all the
analysis that we have done, all this data is in the public
domain.
So, without any melodrama, the debt numbers are
considerably worse than the official estimate because we do
have a lot of off balance sheet items that we need to be
thinking about.
Let me conclude, then, on the same note as my testimony
about a year ago before your Senate counterparts. At that time,
I cautioned, it was premature to start cutting, because I was
concerned about a frail recovery from a very severe financial
crisis. But we are now, 2001, the crisis began in the summer of
2007, the clock has been running.
Let me conclude, then, the sooner our political leadership
reconciles itself to accepting adjustment, the lower the risk
of truly paralyzing debt problems down the road. Although most
governments still enjoy strong access to financial markets at
very low interest rates, market discipline can come without
warning. Countries that have not laid the groundwork for
adjustment will regret it. This time is not different.
[The prepared statement of Carmen M. Reinhart follows:]
Prepared Statement of Carmen M. Reinhart, Dennis Weatherstone Senior
Fellow, Peterson Institute for International Economics
Thank your, Chairman Ryan and the other members of the Committee
for the opportunity to comment on the U.S. economy and the risks for
the federal budget and debt. I am currently Dennis Weatherstone Senior
Fellow at the Peterson Institute for International Economics. I suspect
that I was invited to this hearing titled Lifting the Crushing Burden
of Debt because, for more than a decade, my research has focused on
various types of financial crises, including their fiscal implications
and other economic consequences. Specifically, some of this work has
focused on the historical and international evidence on the links
between public debt and economic growth.
The march from financial crisis to high public indebtedness to
sovereign default or restructuring is usually marked by episodes of
drama, punctuated by periods of high volatility in financial markets,
rising credit spreads, and rating downgrades. This historic pattern is
unfolding in several European countries at present. That situation is
far from resolved and remains a source of uncertainty for the United
States and the rest of the world. However, the economic effects of high
public indebtedness are not limited to turmoil in financial markets.
Quite often, a build-up of public debt often does not trigger
expectation of imminent sovereign default and the associated climb in
funding costs. But in the background, a serious public debt overhang
may cast a shadow on economic growth over the longer term, even when
the sovereign's solvency is not called into question.
In a paper written over a year ago with my coauthor Ken Rogoff from
Harvard University, we examined the contemporaneous connection between
debt and growth. I summarize here some of the main findings of that
paper and as well as our recent related work and relevant studies from
the IMF and European Central Bank.
Our analysis was based on newly-compiled data on forty-four
countries spanning about two hundred years. This amounts to 3,700
annual observations and covers a wide range of political systems,
institutions, exchange rate arrangements, and historic circumstances.
The annual observations were grouped into four categories, according to
the ratio of gross central government debt-to GDP during that
particular year: years when debt-to-GDP levels were below 30 percent;
30 to 60 percent; 60 to 90 percent; and above 90 percent. Recent
observations in that top bracket come from Belgium, Greece, Italy, and
Japan.
The main finding of that study is that the relationship between
government debt and real GDP growth is weak for debt/GDP ratios below
90 percent of GDP. Above the threshold of 90 percent, however, median
growth rates fall by one percent, and average growth falls considerably
more. The threshold for public debt is similar in advanced and emerging
economies and applies for both the post World War II period and as far
back as the data permit (often well into the 1800s).
DEBT THRESHOLDS: THE 90 PERCENT BENCHMARK
Mapping a vague concept, such as ``high debt'' or ``over-valued''
exchange rates to a workable definition for interpreting the existing
facts and informing the discussion requires making arbitrary judgments
about where to draw lines. In the case of debt, it turns out that
drawing the line at 90 percent was critical one detecting a difference
in growth performance.
A hint about how important is that cutoff comes from the fact that
countries rarely allow themselves to enter that high-debt range.
Pooling the debt/GDP data for the advanced economies over the post-
World War II period reveals that the median public debt/GDP ratio was
36.4. Fully three-quarters of the observations were below the 60
percent criteria in the Maastricht treaty governing the European Union.
About 92 percent of the observations fall below the 90 percent
threshold. If debt levels above 90 percent are indeed as benign as some
suggest, one has to explain why they are avoided so often over the long
sweep of history. (Generations of politicians must have been
overlooking proverbial money on the street).
We do not pretend to argue that growth will be normal at 89 percent
and subpar at 91 percent debt/GDP, any more than a car crash is
unlikely at 54 mph and near certain at 56 mph. However, mapping the
theoretical notion of ``vulnerability regions'' to bad outcomes by
necessity involves defining thresholds, just as traffic signs in the
U.S. usually specify 55 mph. Subsequent work suggests that we were
generous in putting the threshold so high. An analysis at the European
Central Bank, for instance, presents evidence that the negative impact
of debt on growth may start at a lower 70-80 percent threshold for
European countries.
DEBT AND GROWTH CAUSALITY
Our analysis looked at contemporaneous relationships between
average and median growth and inflation rates and debt. Temporal
causality tests are not part of the analysis. But where do we place the
evidence on causality? For low-to-moderate levels of debt there may or
may not be one. For high levels of debt, the evidence suggests
causality runs in both directions.
Our analysis of the aftermath of financial crisis presents
compelling evidence for both advanced and emerging markets on the
fiscal impacts of the recessions associated with banking crises. There
is little room to doubt that severe economic downturns, irrespective
whether their origins was a financial crisis or not, will, in most
instances, lead to higher debt/GDP levels contemporaneously and or with
a lag. There is, of course, a vast literature on cyclically-adjusted
fiscal deficits making exactly this point.
A unilateral causal pattern from growth to debt, however, does not
accord with the evidence. Public debt surges are associated with a
higher incidence of debt crises. In the current context, even a cursory
reading of the recent turmoil in Greece and other European countries
can be importantly traced to the adverse impacts of high levels of
government debt (or potentially guaranteed debt) on county risk and
economic outcomes.
There is scant evidence to suggest that high debt has little impact
on growth. Kumar and Woo (2010) highlight in cross-country analysis
that debt levels have negative consequences for subsequent growth, even
after controlling for other standard determinants in growth equations.
For a dozen European countries a study from the European Central Bank
(Chechrita and Rother, 2010) provides further evidence of negative
causality from debt to growth.
I will conclude on the same note of my testimony of about a year
ago before your Senate counterparts. The sooner our political
leadership reconciles itself to accepting adjustment, the lower the
risks of truly paralyzing debt problems down the road. Although most
governments still enjoy strong access to financial markets at very low
interest rates, market discipline can come without warning. Countries
that have not laid the groundwork for adjustment will regret it.
This time is not different.
STATEMENT OF MAYA MACGUINEAS
Chairman Ryan. Thank you. Ms. MacGuineas.
Ms. MacGuineas. Thank you. Chairman Ryan, Congressman Van
Hollen, members of the committee, thank you for having me here
today. You all know better than most the tremendous threats the
United States faces due to our high debt load. In my written
testimony, I go over a number of the numbers, including a
realistic baseline that we put out that shows the problem is
worse than you often see it looking at current assumptions.
Bottom line, our debt is unsustainable. Interest payments
will be nearly $950 billion by the end of the decade, more than
all domestic discretionary spending on its current path. And if
we do not make changes, we will, at some point, face a fiscal
crisis.
The solution is a multi-year, comprehensive fiscal plan
that tackles each area of the budget. And the sooner we enact
such a plan, the better. We face two paths. Under one, fiscal
consolidation is used as part of an economic strategy that also
includes preserving, and, in many cases, increasing, productive
investments, and a sound safety net, and also fundamentally
reforming our tax code to enhance competitiveness. The economy,
the U.S. standard of living, and our well-being would benefit
from having taken thoughtful preemptive actions.
On the other course, we delay due to the difficult policy
choices and the political stalemate, and it causes the debt to
continue to grow, which pushes up interest rates and payments,
squeezes out our important priorities, chokes off economic
growth, and it affects working families, and ultimately, it
leads us to a vicious debt spiral which damages the entire
economy, and the country. And under that scenario, we still
have to make the same difficult spending and tax choices we
face now, but they would be much larger and more painful.
So I will dig a little bit deeper into some of the areas
that are threatened by high debt levels. There are five major
ones: economic, budget, fiscal, psychological, and inter-
generational. In terms of the economy, increased federal
borrowing and debt will eventually crowd out private investment
and lead to a smaller capital stock, lower incomes, a lower
standard of living, and a lowering of our global
competitiveness.
In terms of the budget, higher debt levels necessitate
higher interest payments--which crowd out room for other
spending priorities--and tax cuts. This will make our current
battle over limited resources seem easy when compared to what
we would be facing in the future.
The fiscal risk is that higher debt levels lead to reduced
budget flexibility as interest payments grow to consume larger
portions of the federal budget, and they compromise our ability
to respond to future crises and opportunities as they come
along. High debt levels are also psychologically damaging,
contributing to business and household uncertainty, and harming
our willingness to invest in ways that would spur the recovery.
They also make planning difficult.
And I will just talk about one policy challenge. We know,
in no uncertain terms, that changes need to be made to Social
Security. We know that the sooner they are made, the better.
And yet, for years and years of delay, it means that we are not
letting current retirees, workers, or taxpayers know what the
future holds for the program and its sustainability; and thus,
they cannot plan accordingly. It is a terrible disservice to
all participants of Social Security. The same level of
uncertainty, of course, is there with regard to other needed
policy changes that affect business owners, students, and
normal families trying to plan for their future.
So finally, high debt levels not only threaten current
standards of living, but the well-being of future generations.
Higher borrowing today pushes the costs onto our children and
grandchildren. So basically, we should just look our kids in
the eye and say, Sorry we wanted to spend more today, and we
didn't want to pay for it, so we are passing the bills onto
you.
Ultimately, if changes are not made, the country will
experience some kind of a fiscal crisis. And under such a
scenario, creditors would demand spending or tax changes to set
the new fiscal course. We would be doing it on their terms, not
our own. No one knows exactly when this will happen, what it
will look like, or what will set it off, but we know this: that
the problem will not fix itself, and that without changes there
will be some kind of painful crisis. It will be the worst of
all worlds in terms of what it does to our economy, and all of
our policy priorities.
So, in terms of a solution, I believe we need to adopt a
multi-year, comprehensive budget plan to put the country on a
glide path to stabilize the debt at a sustainable level. We
probably want to bring the debt back down to around 60 percent
of GDP over a decade, still significantly higher than our
historical levels of below 40 percent, and then continue on
that path to get us closer to historical levels.
While the debt threat is serious, it is also an opportunity
to restructure our budget and tax system. In order to be
competitive down the road, we must strengthen critical
investments. By shifting our budget from a consumption-oriented
to an investment-oriented budget, we could lay a new foundation
for growth. Entitlement reform must be at the center of any
turnaround plan. The largest programs in our budget that are
growing faster than the economy: Social Security, Medicare, and
Medicaid, must be reformed.
Finally, our tax code is simply a mess. There is over a
trillion dollars of tax expenditures, which are truly more like
spending programs in disguise. And we should look at reducing,
if not eliminating, many of them, so that we can reduce tax
rates, and more effectively encourage work and investment,
while also helping to fuel growth and reduce deficits.
So while the policy choices involved in tackling and
controlling the debt are not easy, they are far easier than
what we will face if we continue to delay. It is our hope that
we will spend this year developing specific options for
tackling the debt, discussing the trade-offs, making the
necessary compromises, and ultimately passing a multi-year plan
to change course. This will reassure markets, provide families
and businesses with the stability they need, and set us on a
course for a much brighter economic future. Continuing to delay
is obviously a very risky strategy. So thanks again for having
me today.
[The prepared statement of Maya MacGuineas follows:]
Prepared Statement of Maya MacGuineas, President, Committee for a
Responsible Federal Budget, the New America Foundation
Chairman Ryan, Congressman Van Hollen, Members of the Committee,
thank you for inviting me here today to discuss the problems presented
by our large and growing federal debt.
I am Maya MacGuineas, president of the bipartisan Committee for a
Responsible Federal Budget and the director of the Fiscal Policy
Program at the New America Foundation. I am also a member of the
Peterson-Pew Commission on Budget Reform, which recently released two
reports--Red Ink Rising and Getting Back in the Black, which focus on
the need to adopt multi-year budgetary targets and automatic triggers
to help improve the budget process, and which we believe can be a
helpful part of fixing our budgetary challenges.
You all know better than most, the tremendous threats the United
States' debt situation poses. Not only is our debt higher than it has
ever been in the post-war period as a percentage of our economy, we are
on track to continue adding to this debt indefinitely.
This year, public debt--the amount the U.S. government owes to
domestic and foreign investors, and ignoring sums that the government
owes to itself via intergovernmental accounts--is set to grow from $9.0
trillion, or 62 percent of GDP at the end of last year to $10.4
trillion, or 69 percent of GDP at the end of this year, according to
the most recent projections from the Congressional Budget Office. By
the end of the 10-year period, the debt will have grown to an
astronomical $18.3 trillion, or 77 percent of GDP. Interest payments
will be nearly $800 billion in that last year, or more than all
domestic discretionary spending.
Yet even these assumptions are probably too optimistic. The
Committee for a Responsible Federal Budget recently released its
``Realistic Baseline'', which includes more realistic assumptions about
future tax and spending policies than the current law assumptions CBO
is directed to follow.\1\ Our baseline shows deficits growing to over
$1.3 trillion, or 5.7 percent of GDP by the end of the ten-year window;
debt growing to $21.8 trillion, or 91.5 percent of GDP; and interest
payments reaching $947 billion in that final year.
---------------------------------------------------------------------------
\1\ Projections based on CRFB Realistic Baseline, which assumes the
2001/2003/2010 tax cuts are fully extended, war costs slowly decline,
scheduled reductions to Medicare payments to physicians continue to be
waived for remainder of the decade. After 2021, projections follow CBO
Alternative Fiscal Scenario, except that revenues are allowed to rise
slowly.
FIGURE 1.--CRFB REALISTIC BASELINE
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 10-Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
BILLIONS OF DOLLARS
Net Interest.............................. $264 $329 $406 $484 $569 $652 $727 $800 $880 $947 $6,058
Deficits.................................. $1,103 $896 $821 $870 $1,006 $1,000 $1,037 $1,170 $1,267 $1,347 $10,516
Debt...................................... $11,601 $12,581 $13,479 $14,427 $15,507 $16,596 $17,726 $18,990 $20,353 $21,798 N/A
--------------------------------------------------------------------------------------------------------------------------------------------------------
PERCENT OF GDP
Net Interest.............................. 1.7% 2.0% 2.4% 2.7% 3.0% 3.3% 3.5% 3.7% 3.9% 4.0% 3.0%
Deficits.................................. 7.0% 5.5% 4.8% 4.8% 5.3% 5.0% 5.0% 5.4% 5.6% 5.7% 5.4%
Debt...................................... 73.9% 76.7% 78.1% 79.3% 81.0% 82.8% 84.7% 86.9% 89.2% 91.5% N/A
Memorandum:
CBO Baseline Interest.................... 1.7% 2.0% 2.3% 2.5% 2.8% 3.0% 3.1% 3.2% 3.3% 3.3% 2.8%
CBO Baseline Deficits.................... 7.0% 4.3% 3.1% 3.0% 3.4% 3.1% 2.9% 3.2% 3.2% 3.2% 3.6%
CBO Baseline Debt........................ 73.9% 75.5% 75.3% 74.9% 75.0% 75.2% 75.3% 75.8% 76.2% 76.7% N/A
--------------------------------------------------------------------------------------------------------------------------------------------------------
I believe it is highly unlikely we would even make it to that point
without experiencing some type of a fiscal crisis.
Under realistic assumptions, debt will continue to grow throughout
and beyond the decade, rising to over 100 percent of the economy in the
mid-2020s, to over 200 percent in the 2040s, and eventually to over 500
percent by 2080. Driving the growth in debt will be the aging of the
U.S. population, rising health care costs, and of course, spiraling
interest costs.
Clearly, no country could sustain debt levels at such heights
without destroying economic growth, eliminating vital investments, and
slashing standards of living. But even at heightened levels of debt,
like those the U.S. is currently experiencing in the short-term and
increasingly into the medium- and long-terms, the economy and society
at large can suffer.
The solution to all of the risks of higher debt is a multi-year,
comprehensive fiscal plan that tackles each area of the budget. The
sooner we enact such a plan, the better.
We face two paths. Under one, fiscal consolidation is used as part
of an economic strategy that also includes preserving--and in many
cases, increasing--productive public investments and a sound safety net
and fundamentally reforming our tax code to enhance competitiveness.
The economy and U.S. standard of living would benefit from having taken
thoughtful preemptive actions. Under the other, we delay due to the
difficult policy choices and political stalemate, which causes the debt
to continue to grow, pushing up interest rates and payments, squeezing
out more important priorities, choking off economic growth and
affecting working families, and ultimately leading to a vicious debt
spiral, which damages the entire economy and country. And under that
scenario we still have to make the same difficult spending and tax
choices we face now--but they would have to be larger and more painful.
I'd like to dig a little deeper into the problems caused by high
debt levels:
1. Economic: Many noted economists and respected organizations,
including the International Monetary Found (IMF) and the Congressional
Budget Office (CBO), have conducted analyses on the effects of
heightened debt on interest rates; inflation; incentives for workers,
businesses, and investors; and economic growth in general. They have
found that higher levels of debt do not bode well for continued
economic strength or living standards.
Increased federal borrowing and debt would eventually crowd out
private investment in potentially more productive ventures via higher
interest rates for government debt. Down the road, the nation would
face a smaller capital stock. This need not be the case if increased
federal borrowing was directed toward investments on public capital
with returns greater than or equal to returns on forgone private
investments.\2\ Examples of such investments could include
infrastructure, research and development, and education. However, the
U.S. budget is primarily a consumption oriented budget, with spending
on health care and retirement costs far out stripping investments, and
oftentimes, our public investments are not well-directed.
---------------------------------------------------------------------------
\2\ Other complicating factors are that larger budget deficits tend
to increase private savings, for several reasons, and can help increase
foreign investment, both of which can mitigate the negative effects of
increased borrowing. However, CBO states that, overall, these factors
do not reverse the conclusion that increased borrowing would crowd out
private investment.
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A smaller capital stock down the road would eventually cause
incomes to fall, making future generations worse off. Lower incomes
would reduce people's incentives to work. The combined effects of a
lower capital stock and labor supply would harm economic output in the
long-term and decreases U.S. global competitiveness.
Economists Carmen Reinhart, who is here today, and Ken Rogoff of
Harvard University have estimated that debt levels of roughly 90
percent of the economy--looking at a broader measure of debt, which
incorporates debts the government owes to itself--are correlated with
lower annual economic growth of about 1 percentage point.\3\ Likewise,
economists at the IMF have estimated that a 10 percentage point
increase in debt lowers potential output growth by 0.15 percentage
point in advanced economies.\4\
---------------------------------------------------------------------------
\3\ Reinhart and Rogoff. Growth in a Time of Debt, January 2010.
\4\ Kumar and Woo, Public Debt and Growth, July 2010.
---------------------------------------------------------------------------
Higher debt can also contribute to higher inflation, whereby
deficits add too much to aggregate demand in a given time frame, lead
monetary authorities to try to reduce the real value of debt by
printing more money (often referred to as ``monetizing'' the debt), or
lead some people to believe that monetary authorities could
deliberately increase inflation.\5\ Such outcomes would have obvious
negative implications for business and investor confidence and economic
growth, as well as many savers in society--in particular, the elderly.
---------------------------------------------------------------------------
\5\ Sargent and Wallace (1981), Barro (1995), Cochrane (2010),
cited in Kumar and Woo.
---------------------------------------------------------------------------
2. Budget: Higher debt levels necessitate higher interest payments
on existing debt. Last year, interest payments on our $9 trillion debt
totaled $197 billion. By 2021, however, interest payments are projected
to jump fourfold to $792 billion, according to CBO. If policymakers
enact legislation that increases deficits and debt over the next ten
years, interest payments will also increase by even larger factors. All
of these scenarios assume rather favorable interest rates. As interest
payments rise, they will squeeze out room for other spending priorities
and tax cuts. This will make the current battle over limited resources
seem easy when compared to what is looming in the future.
3. Fiscal: Higher debt levels lead to reduced budget flexibility as
interest payments grow to consume larger and larger portions of the
federal budget, and compromise our ability to respond to future crises
and opportunities.
Policymakers would have limited resources to respond to unforeseen
events, such as wars, humanitarian crises, and economic downturns. In
2008, public debt stood at about 40 percent of the economy, affording
us the fiscal space to significantly increase spending and cut taxes to
support an economic turnaround. Larger debt would have hindered such
efforts, and threatens our ability to respond to the next emergency. By
nature, these budgetary costs are unpredictable, both in timing and in
magnitude. Living at our fiscal limits is an immensely dangerous way to
operate the government given the many uncertainties the nation faces.
4. Psychological: Uncertainty surrounding the country's fiscal path
is eroding confidence among businesses and individuals. They don't know
what spending and tax policies to expect in the future, and thus cannot
plan accordingly. If businesses and individuals do not know what
spending cuts and/or tax increases they might face in the future, or
even if the country might face a fiscal crisis of some form or another,
they will be less willing to make longer-term investment decisions in
our economy. As the economic recovery continues to lag, uncertainty
contributes to the problem of how to encourage businesses to be the
engine of growth.
A lack of confidence or certainty can stem not only from economic
expectations, but also from policy uncertainty. Whether large spending
cuts or tax increases, uncertainty over which spending programs
lawmakers might eliminate or which taxes they might create or increase
are not optimal for growth.
Just as one example, we know in no uncertain terms that changes
need to be made to Social Security. We know that the sooner they are
made, the better. And yet the years and years of delay means that
current retirees, workers, and taxpayers, don't know what changes will
be made to make the program sustainable, and thus, cannot plan
accordingly. It is a terrible disservice to all participants of Social
Security. The same level of uncertainty with regard to other needed
policy changes affects business owners, students, and normal families
trying to plan for their futures.
5. Intergenerational: Higher debt levels not only threaten current
standards of living, but the wellbeing of future generations of
Americans. Higher borrowing today pushes the costs onto our children
and grandchildren. Each generation of Americans has passed on improved
opportunities and standards of living to the next generation. But for
the first time, our fiscal course threatens to burden our children and
grandchildren with enormous debt and reduced opportunities for the
future, as well as a lack of fiscal flexibility as we lock them into
certain programs and large interest burdens.
Basically we should all just look our kids in the eye and say,
sorry, we wanted to spend a lot but not pay for it, so we are passing
the bills onto you. Good luck with that.
A FISCAL CRISIS
Ultimately, if changes are not made, the country will experience
some type of fiscal crisis. Under such a scenario, creditors would
demand spending and/or tax changes to set a new fiscal course. No one
knows exactly when this will happen, what it will look like, or what
will set it off. But we know this problem will not fix itself and that
without changes, there will be a fiscal crisis.
A year ago, we held a conference on what a tipping point might look
like. At this cheery gathering economists and budget experts in
attendance noted that a crisis could take many forms, including
scenarios ranging from a gradual rise in interest rates and slowing of
economic growth, to a rapid crisis where investors pull the plug on an
economy--with triggering events ranging from a credit rating warning,
to state budget problems, to a totally unforeseen factor. There was
general concern that markets were underestimating how soon such a
crisis might hit, and that the greatest risk was that our economy is
already negatively affected by high debt levels, and that a crisis
could hit in the next few years.
Under an abrupt fiscal crisis scenario, the U.S. would not have the
luxury of spreading fiscal adjustment out among a larger group of
federal spending programs or taxes, or across more generations.
Investors would force immediate spending cuts and/or tax increases,
threatening our ability to protect the programs on which the most
vulnerable in society rely. A fiscal crisis would surely exacerbate all
the negative economic, fiscal, psychological, and intergenerational
effects of high debt.
For older generations, a fiscal crisis would hurt job security and
incomes, and threaten retirement security if federal spending on
retirement programs or taxes had to be altered abruptly. For younger
generations, a crisis would also threaten job opportunities, incomes,
and affordability of big ticket items. Workers would have to expect to
work much longer than their parents and grandparents' generations.
We can never be sure when we might confront such a scenario, but we
know for sure that we would ultimately face some type of crisis. It is
far better to make fiscal changes on our accord than have markets force
changes on us.\6\
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\6\ CRFB, Fiscal Turnarounds: International Success Stories,
February 2010.
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THE SOLUTION: A FISCAL PLAN
We need to adopt a multi-year, comprehensive budget plan to put the
country on a glide path to stabilize the debt at a sustainable level.
We probably want to bring the debt down to around 60 percent of GDP
over a decade--still significantly higher than the historic average of
below 40 percent, and continue on a path that leads us back down closer
to historical averages beyond that.
All areas of the budget should be on the table. Spending caps on
discretionary portions of the budget--including both defense and non-
defense programs--, entitlement reform, and fundamental tax reform are
critical for tackling the magnitude of future deficits.
The debt threat is serious, but it is also an opportunity to
restructure our budget and tax system for the 21st century. In order to
be competitive down the road, we must strengthen critical investments
in infrastructure, high value research and development, and education.
By shifting our budget from one based more on consumption to
investment, we can lay a new foundation for growth.
Entitlement reform must be at the center of any turnaround plan.
The largest programs in our budget that are growing faster than the
economy--Social Security, Medicare, and Medicaid--must be reformed.
Their open-ended growth is already squeezing out other parts of the
budget, threatens to push up tax rates to truly damaging levels, and
their automatic nature removes the critical oversight and evaluation
processes that should be a central part of budgeting.
And finally, our tax code is simply a massive mess. It is littered
with over 250 special credits, deductions, exemptions, and exclusions
that cost us nearly $1.1 trillion a year. These ``tax expenditures''
are truly just spending by another name. By reducing, if not
eliminating, many of them, we can reduce tax rates to more effectively
encourage work and investment, while also helping to reduce deficits.
Fundamental tax reform is key in turning our fiscal situation around
and strengthening our economic well-being.
A comprehensive fiscal plan that stabilizes debt and then reduces
it thereafter must be center to any economic recovery and growth
strategy. The economy and private investment would become unburdened by
debt, the country would have the budget flexibility to respond to
emergencies and to invest in critical areas for long-term prosperity,
investors would remain confident in our ability to repay our debts, and
businesses and consumers would have certainty over future spending cuts
and tax changes. Most importantly, we would be handing down even better
opportunities to the next generation.
While the policy choices involved in tackling our out of control
debt are not easy, they are far easier than what we will face if we
continue to delay. It is our hope that we will spend this year
developing specific options for tackling the debt, discussing the
trade-offs, making the necessary compromises, and ultimately passing a
multi-year plan to change course. This will reassure markets, provide
families and businesses with the stability they need, and set us on a
course for a much brighter economic future. Continuing to delay is a
very risky strategy.
Thank you to the Committee for all your work on this and the
opportunity to appear here today.
STATEMENT OF JOHN PODESTA
Chairman Ryan. Thank you. Mr. Podesta.
Mr. Podesta. Thank you, Mr. Chairman, and Mr. Van Hollen,
members of the committee, thanks for inviting me back to the
committee. Mr. Chairman, you will be surprised to know that I
agree with your goal in your opening statement. I, of course,
disagree a little bit with the analysis of how we got here, so
let me just start there and do it very briefly.
I was fortunate, as you know, to serve as President
Clinton's Chief of Staff. When our administration came to a
close, the budget outlook was very different than it is today.
Although President Clinton did inherit a budget deficit of 4.6
percent of GDP and growing, by 1998 we had a balanced budget.
We left the incoming administration with a balance sheet that
was $236 billion in the black, the largest surplus since 1948.
And CBO projected that by 2008, the federal government would
essentially be debt-free on the policies then in place. By the
time President Obama was sworn in, the deficit had already
reached $1.2 trillion, a remarkable swing of 11 percent of GDP
since our administration left office.
How did we get from record surpluses to record deficits?
First, deep tax cuts especially for high earners in 2001 and
2003 dramatically affected the federal balance sheet. The wars
in Iraq and Afghanistan, and a major new entitlement program,
Medicare Part D, were enacted without being paid for. The
predictable result was a swift return to massive deficits and a
growing debt. By 2007, instead of being nearly debt-free, the
federal government's publicly held debt had nearly doubled.
Second, near the end of President Bush's second term, the
onset of the Great Recession made a bad fiscal situation worse.
Tax revenues plummeted, and this is the point where I disagree
with you, Mr. Chairman. In fiscal year 2009, they dropped to
their lowest level since 1950, where they have stayed. In fact,
decline in tax revenues between 2008 and 2009 were four times
larger than the new spending passed during President Obama's
first year in office. We are left with a serious mid-term
deficit problem, as well as an acute deficit and debt outlook,
and on that, I agree with the panelists.
The only way to improve our long-term budget outlook is to
combine fiscal discipline, as we did in the 1990s, with
policies that create robust economic growth. So while we must
reduce wasteful spending and take bold steps toward fiscal
balance, both today and in the long run, it is also clear that
sudden drastic spending cuts to government programs to keep the
wheels of our economy turning will cost jobs, stall the fragile
economic recovery, and that is why we both supported at cap
[spelled phonetically], targeted investments, but have also
listed specific cuts.
We look for savings in every part of the budget because it
is impossible to balance the budget by cutting non-security
discretionary spending alone. Not only is this one area of
spending decidedly not the source of our deficit problems, it
is also home to the most important public investments that are
fundamental to our future economic growth. And it adds, as Mr.
Van Hollen noted, at less than 15 percent of the budget, there
are just not enough non-security discretionary dollars to fill
the budget gap.
Rather than limiting the spending discussion to one part of
the budget, we should broaden it to include mandatory spending,
defense spending, government efficiency improvements, and
especially tax expenditures, as Ms. MacGuineas noted. Every
year we are spending twice as much on tax expenditures, more
than a trillion dollars, as we do on non-security discretionary
spending. Yet many of these tax expenditures are wasteful
giveaways. They provide the biggest tax breaks to those who
need them the least. They are subject to much less scrutiny and
oversight than spending. And some are so specific and targeted
on such a few number of people, that I think it is fair to call
them tax earmarks.
Finally, new revenue absolutely must be part of the
solution. There is little hope for deficit reduction, no matter
what the size in spending cuts, without looking to revenue side
of the ledger. With so many challenges facing our country
today, we have to continue to invest in infrastructure, in
clean energy, and science, and innovation, and education, to
keep our economy competitive, to support the middle class, to
create jobs, and to get wages growing again.
As I go into in some detail in my written testimony,
limiting federal revenue to the historical average, or some
level slightly above that, is going to be insufficient to
address the challenges of the day. In fact, the last time the
historic level of revenue would have actually balanced the
budget was in 1966. And both the country and the budget looked
quite a bit different 45 years later, after we passed Medicaid
and Medicare in particular.
So I urge the committee to scrutinize and realize savings
from every part of the budget, including in entitlements
alongside strategic investments in revenue. We have identified
specific cuts in non-security discretionary spending, in
unneeded Pentagon spending, in wasteful tax expenditures, in
mandatory spending, in restrained health care costs, in
addition to targeted revenue increases.
Our plan, and hopefully I think, the blueprint for this
committee that you will put forward soon would bring the budget
into primary balance where federal revenues equal program
spending by 2015. I hope that you can meet that mark, and put
us on a firm footing to fully balance the budget in the future.
It enforces fiscal discipline through the proven mechanisms of
hard but realistic discretionary caps, and a real and
comprehensive PAYGO system. And will bring the budget closer to
balance without the weighing or reversing the fragile economy
we have fostered over the past two years. So, again, thank you,
and I look forward to your questions.
[The prepared statement of John D. Podesta follows:]
Prepared Statement of John D. Podesta, President and CEO,
Center for American Progress Action Fund
Chairman Ryan, Ranking Member Van Hollen, and members of the
committee, thank you for the opportunity to testify concerning
America's deficit and debt challenges.
The broad contours of our long-term deficit challenge are well-
known. Over the next several years, the eye-catching deficits during
the Great Recession will subside, but deficits will not disappear. Over
time, if nothing is done, those deficits will widen, causing us to take
on an unsustainable debt burden, and forcing us to put an ever-
increasing share of our national income toward servicing that debt,
rather than making important investments in our economy and our people.
This is clearly a future we must avoid.
But our long-term deficit dilemma is not, as is so often claimed,
purely a ``spending problem.'' There is no question that current
projections of federal spending are alarming and clearly unsustainable.
It is not the case, however, that all federal spending is contributing
equally to that trajectory. In fact, most federal spending is actually
expected to remain steady or even fall, as a share of the economy, over
the next 10 years and beyond. The exception, however, is federal health
spending, and to a much smaller degree, Social Security. This suggests
that, far from being a ``spending problem,'' what the United States
actually faces is an aging population, and a ``rising cost of health
care'' problem.
That is why it is so important that Congress and the administration
work diligently to implement the cost containment strategies and
delivery reforms that were part of the Affordable Care Act. These
reforms, along with the rest of the bill's provisions, are projected to
reduce the deficit by more than $230 billion over the next 10 years and
begin to restrain the growth in health care spending.
We also have a problem on the other side of the balance sheet.
While rising health care costs and an aging population will combine to
drive up government spending, at the same time a stubborn devotion to a
tax code riddled with inefficiencies and loopholes will ensure that the
country takes on ever more debt to pay for even the most basic of
public services. Those who would limit federal revenue to the
``historical average'' of 18 percent of gross domestic product are
ignoring an important, inescapable reality: The challenges we face
today and will face in the future are different from those we faced 50
years ago.
They are also ignoring the simple fact that this historical average
level of revenue has always been inadequate, even by historical
standards. In 45 out of the past 50 years, the federal budget was in
the red. I am proud to have served as chief of staff to President Bill
Clinton, who oversaw three of those five elusive budget surpluses. The
last time that 18 percent of GDP in revenue would have been sufficient
to balance the budget was 1966. The budget and the country looked quite
a bit different 45 years ago than they do today.
Forty-five years ago, Medicare and Medicaid had just passed and
total federal health care spending was less than 0.3 percent of GDP. We
spent about one-fourth as much on veterans' hospitals and medical care,
in real dollars, as we do today. We spent about one-tenth as much on
law enforcement. There was no school breakfast program, no Children's
Health Insurance Program, no Transportation Safety Administration, to
name a few. These programs and services arose to meet new needs, like
the need for greater airport safety, or as ways to address enduring
problems like childhood and elderly poverty.
The underlying demographics of the country have also shifted
dramatically and will continue to do so. In 1966, just 9 percent of the
population was over the age of 64. Today, 13 percent of the population
is. By 2030, that proportion is expected to rise to almost 20 percent.
How could we realistically expect to meet the needs of a population in
which one out of every five people is a senior citizen using revenue
levels from a time when less than 1 out of every 10 was? Remember, too,
that programs like Social Security, Medicare, and Medicaid have been
remarkably successful. In 1966, nearly 30 percent of all senior
citizens lived in poverty. Today less than 10 percent do. Unless we
decide, as a society, that we no longer have a responsibility to ensure
a secure retirement and adequate health care for all older Americans,
that we would be willing to go back to the senior poverty levels of the
early 1960s, then we will, necessarily, be required to spend more over
the next several decades than we have over the past several.
Higher spending to meet new challenges is clearly nothing new.
Neither is raising more revenue. Citing the postwar average of federal
revenue makes it appear as if that level of revenue was constant during
that period. It was not. In the 1950s, average annual federal revenue
totaled 17.2 percent of GDP, but then increased in every subsequent
decade of the 20th century. In fiscal year 2000, revenue peaked at 20.6
percent of GDP. Far from being constant or stable at 18 percent, there
is a clear pattern of higher revenue in each new decade. The pattern
held for five straight decades, and it was only broken by the massive
tax cuts implemented by President George W. Bush.
Even slightly higher levels of revenue--the chairman, for example,
has suggested 19 percent of GDP as a target--have been and would
continue to be inadequate. Only five times in the past 40 years would
19 percent of GDP be sufficient to balance the budget. And that is
before taking account of the major demographic and health care cost
challenges we are now facing.
Unfortunately, there is no magic level of revenue or spending that
will balance the budget now and forever. Fundamentally, we need to make
budget decisions based on our current and future circumstances, not on
our past ones. We must grapple with the real underlying causes, and
offer real and specific solutions, to address our growing federal debt.
The Center for American Progress, since our founding eight years
ago, has been consistent in calling for a national effort to address
these long-term challenges. When we began, the fiscal discipline of the
Clinton administration had been recently abandoned in favor of massive
tax cuts skewed heavily toward the wealthy. These were enacted during a
time of war with its attendant spending increases. Adding to the fiscal
damage was a new domestic entitlement program, Medicare Part D, which
was passed without adequate funding. The predictable result was a
return to large deficits and an unprecedented run-up of debt. This was
the fiscal situation before the onslaught of the Great Recession, which
itself had a dramatic effect on the nation's bottom line. The combined
effect of the recession and the poor fiscal stewardship prior to it was
to pull our long-term deficit problems closer toward us and create an
intermediate deficit problem to go along with the long-term one.
Over the past few years, the Center for American Progress has
offered several specific plans for spending cuts and revenue increases
that would put the country on a path back toward fiscal stability. We
have also been glad to see others start producing similar plans that,
importantly, have started to be as specific and detailed as ours. There
appears to be a growing recognition of something that we have long
believed: Once you get past political rhetoric, solving the deficit
problem is going to be extremely difficult. There are simply no easy
answers or magic bullets. Solving this problem will require careful
consideration of all the options, a fair weighing of the costs and
benefits, and compromise.
There is one additional prerequisite to achieving our shared goal
of a more sustainable federal budget: a strong and growing economy. We
should not labor under the illusion that we can grow our way out of our
budget woes. But neither should we ignore the fact that without a
strong economy, solving our fiscal problem will go from being merely
very difficult to being truly impossible. Given this reality, we
strongly believe that every care must be taken in the near term not to
disrupt the fragile recovery. While we strongly believe in getting the
budget back to full balance eventually, our initial steps must be
measured.
The shock of vastly constrained government spending, in the
immediate, would have undeniably deleterious effects on the wider
economy. Analysts from Goldman Sachs recently estimated that the cuts
contained in H.R. 1 would slice 1.5 to 2 points from economic growth in
the second and third quarters of this year. Moody's chief economist
Mark Zandi estimated that the cuts in the House bill would lead to a
loss of about 700,000 jobs. Federal Reserve Chairman Ben Bernanke
agreed that H.R. 1 would result in a ``couple of hundred thousand
jobs'' lost.
Though estimates clearly vary on the magnitude, there is wide
consensus on the general impact. And given the crucial moment that we
now find ourselves in--with private sector job growth just beginning to
expand--it would be counterproductive to deliberately undertake
contractionary policies of this magnitude in the near term.
Instead, we should be focusing on putting in place policies that
will bring the federal deficit down to sustainable levels in the medium
term and full balance over the long term. During normal economic times,
there is no good reason to take on debt to pay for the ordinary, day-
to-day operations of the federal government. There is no need, however,
to try to solve the entire budget deficit at one enormous stroke.
Steady, clear, step-by-step progress toward the eventual goal is both
more likely to ultimately produce success and has the great advantage
of requiring less dramatic change in the intermediate period.
Eventually, balancing the budget is going to require some difficult
spending cuts and tax increases that neither Republicans nor Democrats,
nor the American public for that matter, seem ready to embrace. We
commend the efforts of the bipartisan group of senators who are even
now trying to develop a framework for solving our long-term budget
problems. We are hopeful that their effort, building on the general
framework of the Bowles-Simpson proposal, will yield results that will
be acceptable to both parties and both chambers of Congress. But even
if it proves impossible to achieve a consensus right now on all the
elements of a long-term deficit budget plan, that does not absolve us
of the responsibility to start down the path toward fiscal
sustainability. That is why we should also agree to adopt an
intermediate goal somewhere between here and full balance.
We suggest a path to put the federal budget into primary balance by
2015 as that intermediate goal. Primary balance is when total
government revenues equal total government expenditures, with the
exception of net interest payments on the debt. This equates to a
deficit of about 3 percent of GDP. At that level of deficits, publicly
held debt, as a share of GDP, ceases to rise. Getting to primary
balance by 2015 will not be easy. With the deficit currently standing
at just under 10 percent of GDP, reducing it all the way down to 3
percent will require not just a restored economy but some substantial
policy changes.
Nevertheless, we can reach primary balance without the kind of
dramatic, fundamental shifts in public services and the tax code that
will likely be required to achieve full balance. And by doing so, we
will stabilize the debt-to-GDP ratio, demonstrate our resolve, and buy
ourselves some much-needed fiscal breathing room.
There are four basic steps that we must take over the next several
years to reach that intermediate goal. First, Congress and the
executive branch should focus intently on making government work more
effectively, more productively, and more efficiently. Don't
misunderstand. Eliminating so-called, ``waste, fraud, and abuse,'' will
not, by itself, solve our deficit problems. Not even close. Nor is it a
simple matter to even determine what constitutes wasteful spending.
Improving the productivity of the government, and identifying and
rooting out inefficiency, will take a serious commitment and effort.
The recent report from the General Accounting Office that identified
dozens of areas of potential duplication in the federal government is a
good starting point.
The real work of figuring out exactly which programs and services
are successful and which are not begins now. At the Center for American
Progress we have an entire project that we call Doing What Works, which
is devoted this effort. Our premise is that the American people deserve
a government in which every tax dollar is spent wisely, every program
is held to clear standards, and everyone is accountable for achieving
goals in an efficient manner. We believe that these efforts also have
the potential to save billions, perhaps even hundreds of billions.
We've already identified the potential for up to $16 billion in annual
savings from modernizing government informational technology systems
and another $40 billion from federal contracting and procurement
reforms.
Though improving government efficiency and rooting out waste will
save money, we cannot pretend that it will dramatically alter the
trajectory of government spending. To do that, we need to take a hard
look at all parts of the federal budget and not merely limit our
attention to one small sliver. The recent focus on nonsecurity
discretionary spending is badly misplaced. Nonsecurity discretionary
spending makes up less than 15 percent of the entire budget, and it is
actually projected to decline over time. These are not the programs and
services that are driving up our long-term deficits.
On the contrary, this category is home to most of the vital
investments that are the keys to our future economic growth: education,
transportation and infrastructure, science and technology research, and
services that foster competiveness and innovation. H.R. 1 would cut all
of these substantially including $1 billion from Head Start, which
would force 200,000 children out of the program; $700 million from
grants to local school districts; and $500 million from teacher quality
grants. It would slash $6 billion from science and technology research
including reductions to the National Science Foundation, the National
Laboratories, and more than third from the National Institute of
Standards and Technology. It would even cut the Small Business
Administration and the International Trade Administration--offices that
seek to bolster American businesses and American exports.
The misguided limitation of spending cuts to just this one category
forces these kinds of cuts to investments that are fundamental to our
future economic growth. Not only will these cuts cause job losses right
away, but they will drag down our economy for years to come.
And despite the name of the category, we also end up cutting a
variety of services designed to keep every American safe as they go
about their daily lives. H.R. 1 would mean cuts to meat inspections, to
the Centers for Disease Control and Prevention, to poison control
centers, to law enforcement grants to cities and towns, to the Consumer
Product Safety Commission, and to the Federal Aviation Administration.
Meat inspections and poison control are not the reason we face a budget
deficit. But they are fundamental services that the American people
expect out of their government.
By concentrating only on this one category of spending, we ignore
the potential for savings in all other parts of the budget. The
Department of Defense, for example, is certainly not immune from waste
and excess. Over the past several years, the Center for
American Progress has released several reports detailing specific
savings that could be had from the Pentagon's budget without weakening
our national defense.
There is also no reason to exempt mandatory programs from scrutiny.
The Center for American Progress has identified several programs that
could be streamlined or scaled back. For instance, in a time of
exceedingly high commodity prices and high net farm income, should we
continue paying high direct agriculture subsidies? The Government
Accountability Office recently reported that billions of dollars are
wasted in improper payments in Medicare. Restricting our attention to
nonsecurity discretionary spending leaves these inefficiencies in place
and leaves savings on the table.
Similarly, we should not ignore those spending programs that
operate through the tax code. These tax expenditures are economically
equivalent to their direct spending counterparts, but they are
generally subject to less scrutiny and evaluation. Some of them are so
specific and target such a tiny number of people or industries that
they are best thought of as ``tax earmarks.'' A balanced approach to
cuts should include close examination of all spending programs,
including tax expenditures, to make sure they are achieving their goals
efficiently and effectively. The days of hiding special spending
programs deep in the bowels of the tax code have to come to an end.
We also need to return to the successful budget processes of the
1990s, which will help ensure that any steps taken in the coming years
to restrain the deficit are not undermined by future Congresses. These
processes include statutory PAY-GO, which the 111th Congress
successfully reinstated, as well as meaningful caps on both defense and
nondefense discretionary spending, enforced through sequestration. The
lesson of the 1990s is that caps such as these can work, so long as
they are not arbitrary or punitive. Successful budget enforcement
processes should also include congressional rules that make it
difficult to pass legislation that would increase the deficit. The
Senate has such rules, and in the previous Congress, so too did the
House. Unfortunately, the current House leadership has chosen to
abandon those rules in favor of something they call ``Cut-Go,'' whereby
spending increases must be offset by spending cuts, but tax cuts do not
need to be offset at all. This is a recipe for fiscal disaster.
Allowing tax cuts to not be paid for will inevitably result in massive
deficits, as President Bush's economic policies convincingly and
repeatedly proved.
We must remember that the word ``deficit'' is not a synonym for
``spending.'' The deficit is actually a product of a mismatch between
spending and revenue. While improving government efficiency and
subjecting all parts of the federal budget to close scrutiny will help
in addressing one half of the deficit equation, we simply cannot afford
to ignore the other side of the balance sheet.
This year, for the third year in a row, federal revenues will be at
their lowest level, as a share of GDP, in nearly 60 years. While the
effects of the recession explain much of the dramatic drop in revenues,
the other culprit is repeated tax cuts. Going forward, the obvious
first step must be to jettison the bonus tax cuts for the wealthy put
in place under President Bush. During the last decade and before the
Great Recession, average income for the richest 1 percent grew by more
than 20 percent, while at the same time median household income
actually fell. Those at the top also weathered the recent economic
storm far better than the middle class, and they are recovering faster
as well.
The enormous tax cuts bestowed on the very rich in 2001 and 2003
were a mistake then, as they were an important contributor to the
unnecessary deficits of 2002 through 2007. Maintaining them is an $800
billion mistake now.
In our plan for reaching primary balance, we also recommend
implementing a millionaires' surtax. This would be 2 percent on
adjusted gross income over $1 million and an additional 3 percent on
AGI over $10 million. This surtax would raise about $30 billion a year.
Ideas like these should be part of the discussion, not least because a
tax on millionaires is, as evidenced by a recent Wall Street Journal
poll, the single most popular way to reduce the deficit.
Balancing the budget and reducing our debt burden is going to
require making hard choices. But by approaching the issue in a balanced
and measured way, it does not have to mean sacrificing our future
economic prosperity or a robust safety net for the vulnerable. If we
dedicate ourselves to scouring the government for efficiencies, to
subjecting the entire federal budget to scrutiny, not just one sliver
of it, and to raising the revenue that the 21st century requires of us,
then we will be able to balance the budget and leave the next
generation with a fiscal inheritance that we can be proud of.
Chairman Ryan. Thank you. First, let me just start off. You
know, we obviously don't agree on everything, but I want to
thank you for having been a member of the fiscal commission.
Your think tank, Center for American Progress, actually gave us
ideas. You know, you actually did a lot of work and a lot of
research and you are contributing to the debate, and for that,
I thank you. And some of them, believe it or not, I agree with.
So, thank you for that.
I want to bring up the chart on the bond markets.
I want to ask the economists, and there is a lot of members
here, so give me the five minute deal, is that all right? So,
let's do that for ourselves, because I want to get to people.
This is what the, PIMCO calls the ring of fire. This is
rating our countries in this very dangerous debt zone. And the
U.S.A. is right up there with France, Italy, Japan, Greece,
Ireland, the U.K., Spain. Ms. Reinhart, do you see it this way?
I understand PIMCO, which gives us this chart, dumped their
Treasury bills in their major bond fund the other day. I am
very worried this thing is starting to accelerate. And Doug,
because you are an economist as well, what does this look like?
What does a debt crisis look like? I mean, everybody says, debt
crisis is coming. What does that mean, exactly? What form does
it take place? What does it look like? And I am going to have
to ask you the question which I know no one likes to answer:
How much time do you think we actually have? I hear speculation
from bond traders and economists. What is your speculation? And
then I want to get to the non-economists. Not that that is a
bad thing, but go ahead.
Ms. Reinhart. [inaudible] was, was using some of our data.
So, that tells you something about highlighting some of the
same problems I was in my remarks. In terms of the timing: I
tried to reiterate that you don't know when bond markets will
turn, but I think the perception that we have, a five nice year
window in which we can do things, we can wait for oil prices to
be in the right place, is not in the cards.
How do debt crises build up? They build up with a lot of
hidden debts, and if they were not hidden, we would know about
it. That is part of the problem. When you see the build-up of a
debt crisis coming, you also see build-up of arrears, which we
are seeing, certainly, at the municipal level; we are seeing it
at the state and local level. We see now, then, also, that the
closer you get to surpassing any historic benchmark, which we
have already done, when we take into account state enterprises,
the closer you move to a downgrade.
Japan, which is a lender to the rest of the world, has
already been downgraded several times. You don't get to a debt
crisis with very predictable, unless you are shut out of the
credit market, like Argentina was; we are not Argentina. But
where we see it is in these hidden debts in which contingent
liabilities continue to build up. The bottom line is that at
the current pace, we do not have a five year window in which we
can wait for the right opportunity.
Chairman Ryan. Dr. Holtz-Eakin.
Mr. Holtz-Eakin. I concur with this analysis. The
horizontal axis is what I talk about, prosperity, right? The
more you public debt you have, you are crowding out the ability
of people to get educations and do investments; so as you go
out that way, you are imperiling your prosperity. As you go
down the vertical axis and you are borrowing from abroad, that
is, that is our freedoms. We are not going to negotiate with
our bankers. And some of our bankers don't share our values. So
that analysis is right.
What would it look like when it hits? Well, you know, you
would see a spike overnight in Treasury borrowing costs. We
have an enormous amount of Treasury financing this very short-
term right now, and so essentially we are borrowing at teaser
rates. They would bounce right up, we would have to refinance
at much higher rates that would flow right through into every
mortgage, every car loan, every interest rate in the economy,
and you would see just a collapse in the economy.
So it would be a very painful, very shocking experience.
And we have been through something like that. We don't want to
do it again.
The last thing I would say is, people always want to say
that the U.S. is different. You know, we are not being
disciplined by bond markets, we are exempt, and I want to echo,
you just can't believe that. I mean, Rudy Penner, who was the
former director of the CBO, always says, We are the best-
looking horse in the glue factory, and that doesn't mean we
won't turn out to be glue. And it is very important that we not
even test the notion that, somehow, as the world's largest
economy or its reserve currency, we are exempt. We control our
future. The indicators say trouble arrives soon, within five
years, so let's not go there, and let's not find out if we
really are different.
Chairman Ryan. Let me ask the two, because I want to be
respectful of time, if neither political party, if neither the
House, the Senate, or the administration proposes in the next
year or two to fix this problem, does that send the signals to
the credit markets that the Americans are done? That the
Americans don't have this figured out, that the Americans
aren't serious? And does that, therefore, accelerate a debt
crisis?
Mr. Holtz-Eakin. In my opinion, yes. I am terribly worried
about this.
Chairman Ryan. I mean just showing political leadership
buys us time. Is that your assessment?
Mr. Holtz-Eakin. Absolutely. I want to echo what Maya said
in her opening remarks. Fiscal security. A, it is the right
thing to do for everyone now and in the future. B, it is
analytically not hard. C, it sends the right message to bond
markets: that we are willing to take the country in a different
direction. Do it, and do it tomorrow.
Ms. MacGuineas. I am going to first give a non-economist
answer to your economics question. But when you are walking on
thin ice, right, lots of things can cause it to crack. And so
we are at risk for so many things right now, whether it is
sovereign debt contagion, or something that goes wrong in the
States, any of these landmines in the budget, the contingent
liabilities that are there. PIMCO, when they start to get out
of Treasuries, that sends major signals. Right? Everybody on
Wall Street is looking; everybody around the world is looking
at this right now. So suddenly, anything can make a change
very, very quickly.
And the bottom line is even though our bond markets have
looked like there is not a problem, and people keep saying,
Look, rates are so low, what are you worrying about? As soon as
you start to see the problem in the markets, it is too late to
do this on our own terms. There is no excuse for not getting
ahead of a crisis which you know is coming your way.
In terms of policy and politics, we know the policies are
incredibly difficult, and we also know what is involved in
them, and we can do it. And I encourage, you know, as many
roadmaps, let's get them out there, as possible. We need to get
to specifics. We are now past the point of just talking about
this is a problem, and kind of worrying about it. We need to
know we get the specifics on the table and figure out how to
fix the problem, and we need to do enough this year, hopefully
a comprehensive plan, but enough to make markets more confident
in the political process.
When I talk to folks from Wall Street, and someone who runs
the Committee for the Responsible Federal Budget, Wall Street
people didn't used to care, really. It wasn't like the people
who called all the time. And they do now. The markets are
paying a whole lot of attention, and they really are worried
about our political process in all of this.
So, I think there is no question that, particularly with
the Fiscal Commission having come out with a solution, that if
this all dies on the vine and nothing happens politically, the
next two years is not okay. We can't delay until after the
election; something has to happen before then to reassure
markets, other countries, and everybody who is watching this,
that we have the political ability to face up to these
problems.
Chairman Ryan. I know we have gone over, but John, I do not
want to stifle you, so please, go ahead.
Mr. Podesta. Well, Mr. Chairman, I would note that I am
more used to the fire than the ellipses on that chart. But I
would say this: This is the year where we have to show, on a
bipartisan basis, a determination to stop our debt from going
up. And that has to be in the midterm. I suggested 2015, you
may have a different year in mind, but I think if we can do
that on a bipartisan basis and lock that in, get on a path so
that our debt does not continue to grow, and then we could
begin the tough path of bringing it down, bringing the debt
down, hopefully getting on a path back to balance. We would
have accomplished a lot. And that is going to require a
balanced plan, and as I said in my opening comments, it can't
just be in one narrow part of the budget. It is going to have
to work across the entire federal budget.
Chairman Ryan. Thank you. Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman. I want to join the
Chairman in thanking all of you for your testimony. And, as I
said in my opening remarks, this is a very important hearing.
And I agree that we need to come together on a bipartisan basis
now, to come up with a plan that shows we are going to reduce
the deficits and debt in a predictable, sustained manner. So I
think there is agreement on that.
As I said in my opening remarks, also, I do think it is
risky to do anything that could weaken the economy during this
very fragile time. And Chairman of the Federal Reserve, of
course, Mr. Holtz-Eakin is the guy who is supposed to be expert
in interpreting the animal spirits, in fact, every time he
makes a comment, he has got to be thinking of the confidence
levels. And when he says that he thinks that a reduction of the
magnitude we are talking about in the Republican plan, in the
time period that we are, would cost a couple hundred thousand
jobs, and makes the point it is not insignificant. I do think,
when we are measuring confidence in the economy in part by the
month-to-month job numbers, if we start to see any dip in that
it is a big problem for confidence; it is also a big problem
for the people who have lost their jobs.
But here is what I would like to focus on for a minute. I
want to accept the premise, absolutely accept the premise that,
in order to get the deficit and debt down, we have got to
reduce spending. We are going to have to reduce spending in
discretionary programs, and we are going to have to do it in
mandatory programs. So let's accept that premise, for many of
the reasons we have talked about here. And we should come up
with a plan to do that now.
But I do want to pick up on some of the remarks that Mr.
Podesta made. Because it is absolutely true that when he and
the Clinton Administration left office, they left with large
projected surpluses, and now when President Obama was sworn in
he inherited a $1.3 trillion deficit. The day he put his hand
on the Bible, he had already had a record deficit for that
year.
So, if I could start with you, Mr. Holtz-Eakin. Because
when you left the Bush Administration and went to become the
Director of the Congressional Budget Office, there were many
who wanted you to do analysis that showed that the Bush tax
cuts in 2001, at that time, actually paid for themselves. And
you rejected that analysis. And as recently as last August,
August 2010 you stated, and I am quoting, I have never been in
the camp that believes that, quote, `tax cuts pay for
themselves,' unquote, there is no serious evidence to support
that. I assume it is safe to say that you hold that same
opinion today that you did in August.
Mr. Holtz-Eakin. Yes.
Mr. Van Hollen. Okay. Now, so on pages two and three of
your testimony, you say that, for the past eight years, nine
years, we have frittered away our time without addressing the
problem. And you list three things that made the problem worse.
Three things. You mentioned the financial crisis: no dispute
there. You mentioned the prescription drug bill that was signed
by President Bush, that was not paid for: no dispute there,
that makes things worse. You mentioned the Affordable Care Act;
I am not going to get into a big debate about that, other than
to say, we have had this discussion in this committee, the CBO
scored that it is 2010 in deficit reduction, and a trillion
over 20 years, we throw that in.
No mention of, of the wars that we didn't pay for, and
continue to pay interest on. But most importantly, as Mr.
Podesta pointed out, no mention of the 2001 and 2003 tax cuts
during the Bush Administration, which, of course, your former
boss, Senator McCain, voted against, because of his concern
about the impact on the deficit.
Now, in today's CBA, they just issued in January, they
estimate that if you continue all the tax cuts--I am not
proposing that we stop all the tax cuts, but just make the
point here, they say in their analysis, if you were to return
to moving from Clinton era tax rates to the Bush tax rates, we
are adding $3 trillion to the deficit over the next 10 years,
if you include the debt service: two and a half trillion
dollars just because of the tax cuts, another half trillion
dollars debt service.
So, my question is this: You have a reputation as a
straight shooter. Seriously, now, how can you have testimony
that doesn't even address the revenue side? And again, I
understand we have got to get it, there is no dispute. This
hearing is entitled, Lifting the Crushing Burden of Debt.
Mr. Holtz-Eakin. Right.
Mr. Van Hollen. How can you not even address that issue in
your testimony?
Mr. Holtz-Eakin. Right. Because I am not interested in
relitigating history. I think the central problem we face is
that, if you look forward 10 years, using the President's
budget, or, or any other projection, those projections have the
following character: They say, we are out of Iraq and
Afghanistan; the financial crisis is a distant memory; we are
back to full employment; and we are raising revenue that is
well above historic norms, 19, 20 percent of GDP, and despite
that we have enormous deficits, trillions of dollars, much of
which is interest on previous debt, and so it is the future
accumulation of debt, driven by that characteristic that
concerns me. And at the heart of that is spending issues. And
the additions to spending that have been most threatening have
been those in the health area. We did the Medicare
Modernization Act, and we did the Affordable Care Act. So that
is how I got to that conclusion, it is very straightforward.
Mr. Van Hollen. Well, let me just to follow up on that. And
again, I am accepting the premise that we have got to deal with
the spending side. What I find interesting is that even when
you were at CBO, and you issued these reports, you showed that
the consequences of going from the Clinton era tax rates to the
Bush era tax rates had serious consequences on the deficit. And
I just point out, in 2004, when you were here in a non-partisan
capacity, testifying and making comments on the budget, you
said, you weighed these two things. You weighed the positive
aspects of the tax cuts, and then you counterbalanced that with
the concerns with respect to the deficit.
And here is what you said. I am quoting: The cumulative
corrosive impacts of sustained deficits in the face of a full
appointment economy, would unbalance, make the extension of the
tax cuts a, quote, `modestly negative policy choice'?
Now, that was at a time when projected deficits and debt
were a lot lower than they are now. And so we have the Fiscal
Commission. The Fiscal Commission said we have got to look at
these tax expenditures. By the way, the Fiscal Commission's
baseline, the baseline assumes that we return, with respect to
the high-income individuals, assumes that we return to the
Clinton era tax cuts.
So, I guess my question is that, we are not disputing that
spending is part of it. What accounts for this total reversal
from 2004, when that was a, a modestly negative choice. In
other words, continuing them, even though the projected
deficits and debt were not as bad, and today.
Mr. Holtz-Eakin. So, I don't remember the context; I was
probably asked. I believe that it is important to identify the
top priorities. And those are on the spending side, I won't
repeat that. The second point, which I think, the Fiscal
Commission has said very clearly, is that should it be the case
that, collectively, we decide we are going to raise more
revenue: the route is tax reform. Our tax system is deeply
broken. I have a long discussion in my written testimony; I
encourage you to read it. Simply raising tax rates, going back
to the, to the Clinton era tax rates, is not a good solution to
raising more revenue.
And the third thing I would say, a personal opinion in my
judgment, is I am deeply concerned about the following
phenomenon: We have a rising projection of spending that is
undisputed. And we have this concern that the international
community is going to just cut us off, and we will have a
fiscal calamity. Well, suppose you raise taxes a little to run
off concerns out there in the bond markets, but you don't deal
with the spending problem. Well, everyone calms down for a
couple years. You go forward, same problem arises, you bounce
tax rates up a little bit, problem goes away for a little
while. You go a couple more years, you bounce taxes up again.
Pretty soon, you are jacking taxes up right along that
projected spending route, and that takes you to 30, 40 percent
of GDP. And you will, you don't have to be a crazy
[unintelligible] setter, you will kill the economy.
So, I am just trying to lobby, in an undisguised fashion,
for, A, good tax policy; I am all for that. But B, dealing with
the fact that if you don't control spending, you are going to
have enormously higher taxes come, one way or another, and that
is a bad thing.
Chairman Ryan. Thank you. Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman, and thank you,
panelists. Let me try and summarize what I think I heard a
little bit from all four of you, and, frankly, from the
Chairman and Ranking Member, too, that there is some
disagreement as to how we got here, and that there is some
disagreement on the weighting of the different elements of the
solution. But that there is no disagreement that the solution
has to involve basically all of the above: has to involve
mandatory spending, discretionary spending, tax reform, and the
revenue side, in one form or another. And that there is no
disagreement that we are heading towards a debt crisis which,
when the Chairman asked his question, What does it look like? I
think I heard you all pretty much say, It looks really ugly.
And maybe, this is my words, not yours, but maybe like
September, October of 2008, only a lot worse. And that it is
probably coming--we have five years or less to solve the
problem. Did I misstate anything?
Okay. If that is the case, that we are facing a really
ugly, ugly economic scenario, for anything that any of us in
this room care about, and we have five years or less to deal
with it. And the entitlements, mandatory spending, have to be
part of the solution because they are such a large chunk of
spending. Can we solve this without reducing costs of Social
Security, Medicare, Medicaid, and the other entitlements,
within the next five years? In other words, not changing things
that might affect five years, or 10 years, or 15 years out, but
reducing the costs of those programs within the next five
years. And whoever wants to comment on that can comment. Yes.
Mr. Holtz-Eakin. If I could, I mean, there are two kinds of
urgency involved. Number one is the urgency I think we have
conveyed about the debt crisis and the fact that reducing
spending is going to have to be a comprehensive effort, so that
would include the entitlement programs. The second urgency I
try to describe this way: think of Social Security. I am 53
years old. I am the trailing edge of the baby boom generation.
It has been conventional in Social Security reform proposals to
exempt those in, for good reasons, or near retirement. And 55
has been the industry standard for near retirement. If we
continue to do that, that means you have two years before I get
grandfathered. If you grandfather me, you grandfather the baby
boom, which means you have grandfathered the problem.
So yes, in the next five years, it is absolutely essential
that we move, and move quickly.
Mr. Campbell. Okay. Other comments on it, Mr. Podesta, did
you, go ahead, oh sorry.
Ms. Reinhart. Very briefly on the five years. I think there
is a second scenario that I would like to put on the table,
which is death by a thousand cuts. And it is still death. And
that doesn't involve a big blowout crisis, but a stalling. And
so, my own view is that when it comes to the budget we really
should leave no stone unturned because of the orders of
magnitude. And the need to act quickly, I think, is in my view,
imperative. But your point about no stone unturned is, I think,
called for, by the order of magnitude.
Lastly, let me say that the prospect of a delay does not
necessarily mean that we are going to have a crisis tomorrow.
And I don't know whether I am more worried about not having a
crisis tomorrow or muddling through, in Japanese style, for the
next 10 years.
Mr. Campbell. Thank you. Mr. Podesta.
Mr. Podesta. Mr. Campbell, I think the big numbers really,
are on the health care side, and particularly in Medicare. So I
think that continuing and accelerating, the President has some
ideas in his current budget, on how to do that. Cost
containment, on the health care side, both in the public
programs and in the overall health care system, including in
the private sector system, by changing the way we deliver
health care, and reducing the overall costs. It is really, I
think, the thing that is the most needed and it is going to do
the most to contain the big surge in the projections that Mr.
Holtz-Eakin talked about.
I don't think anybody anticipates that tax rates are going
to climb to those levels. They never have, they never will. But
they need to be consistent with the commitments we have at a
time by 2020, 20 percent of our population is going to be over
65. And, as I noted in my testimony, in 1965 when Medicare and
Medicaid was passed, nine percent was over 65. We are going to
have to have revenue to do that, but we are going to have to
have deep restraint.
With respect to Social Security, just very briefly, I don't
think, in the short term, it really compounds this problem. It
is a solvable problem. We have thrown out a full-blown plan to
get to 75 years, at my center, have thrown out a full-blown
plan to get to 75 years of actuarial integrity, and strengthen
the bottom, restrain the top. It has some near-term effect on
the deficit and debt, but not much.
Chairman Ryan. Thank you. Ms. Schwartz.
Ms. Schwartz. Thank you, Mr. Chairman. And thank you,
panelists. I think, pretty much, we have all talked. And I want
to thank some of you, particularly, for the important work that
you have done in helping to put out very clear ideas out there,
about how we can, and must, reduce this deficit.
Let me just disagree, if I may, with the previous question,
at least as a beginning premise that there is disagreement
about how we got here. I think, except possibly for the first
speaker, there has been pretty clear agreement about how we got
here. The only reason to go back over that at all is that we
don't repeat negative history, that we don't actually believe
that tax cuts pay for themselves, which there is some agreement
on. Or that it doesn't matter if we actually have two, three
trillion dollars of unpaid-for war, or tax cut, or additional
health benefits. I mean, it is really clear. I think all of you
would agree, you are all nodding, that in fact the way we got
here was, and the way this President inherited an enormous
deficit, and a terrible recession that reduced revenues, were
expenditures that were not paid for by the previous
administration.
I know the other side doesn't want to hear that, but that
is the reality. So we have inherited that problem. Tax cuts of
a trillion dollars for the wealthiest two percent of Americans,
that they want to continue unpaid for. The Part D prescription
drug benefit for Medicare, which was the largest growth in the
entitlement of Medicare: a trillion dollars, unpaid for; they
don't want to talk about. We think we ought to do Part D, but
we ought to pay for it. And, and of course the wars that cost
us a trillion dollars.
So I think we have agreement on that. And we also have
agreement that we have to tackle spending. And that includes
the current year, which we have already offered and passed $50
billion this current year, almost $50 billion in cuts. So the
issue really is going forward. Can we, and this is going to be
a debate that is pretty clear, so they all want to know what
your answer is. Can we solve the problem, the serious, serious
problem of the debt this country is in, and the cost of the
interest payments on that debt, simply by tackling twelve
percent of our budget on spending cuts in non-defense
discretionary?
That is, so far, the only action that the other side has
taken, is to say we have got to have dramatic cuts in twelve
percent of our budget. Not defense. Not on the tax side, tax
expenditures, apparently, are not expenditures, as far as the
other side is concerned. That is serious from our point of
view. So my two questions are: Is it true that we can actually
tackle this problem long-term by simply, and it is a big deal,
cutting education, cutting infrastructure, cutting investments
that the government makes today, in a fragile economy? Will
that get us there.
And secondly, my question is: What if, in fact, we do
nothing on investments for the future? Mr. Ryan talks a lot
about investments for our children. We all make investments for
our children; it is usually called education, helping them go
to college, helping them be able to be prepared. What if our
nation does nothing? What if the other side continues to reject
the President's proposal that we not only cut, but we make
investments for the future so we can grow economically in a
global marketplace, that we can be economically competitive?
Can we be the great country that we have always been,
economically and politically, if in fact, we do nothing about
investments for our future, to grow the economy?
So my questions are simple, and I am going to start with
Maya, because you, I think, were very clear in articulating the
importance of everything being on the table: tax expenditures,
and spending, includes DOD, and making the investments. And I
would like Mr. Podesta, also, to speak. So Ms. MacGuineas.
Ms. MacGuineas. Great. Thank you. I mean certainly when we
think about where we have come from there is so many
contributing problems to where we are, right? We ran deficits
for a decade when we should have been running surpluses. You
want to balance the budget over the business cycle, or
something like that. So we came into this problem in a weakened
fiscal state. We then were hit with a terrible economic
downturn which caused us to enlarge our deficits, both because
of the economy and the policy responses.
And now, the biggest problem that we face has always been
there: the long-term spending problem fueled by health care and
aging, which was a long-term problem, we delayed taking action,
it is now at our doorstep. So we sort of are getting hit with
all the fiscal problems you could have.
Ms. Schwartz. I only, I only have a couple seconds left,
but I wanted John Podesta to answer as well.
Ms. MacGuineas. Okay, well then let me quickly just agree
with you in terms of investments, that absolutely, we should
not be shortchanging the piece of our investment budget. We
should expand this discussion beyond the twelve percent of the
budget to the entire budget. But I also think we want to think
about reorienting our budget. Because so much is focused on
consumption; we need to think about retargeting inefficient
spending and spending on consumption, and move it towards
investment so those dollars are better spent in a time of
fiscal austerity.
Mr. Campbell [presiding]. Okay. Next. Mr. Calvert.
Ms. Schwartz. Thank you.
Mr. Calvert. Thank you. And I am an optimist by nature, but
being on this committee, it is difficult.
You know, we talk about revenue and, of course, spending
and I would remind the gentle lady that we may have cut $60
billion, but the United States Senate has not determined yet
that we are cutting anything. So as Mr. Rayburn used to say,
Our friends on the other side are our adversaries. The Senate
is the enemy. So that is where we are at. I think we can all
agree with that.
One thing I was looking at on the chart, the ring of fire:
Italy, Japan, France, Ireland, U.K., Greece, and of course
U.S.A. in the middle. One thing that you notice, or at least I
notice on that chart, is that the one thing that U.S. has
different than the rest of these countries is we have
resources. And I look at the chart, the countries outside that
chart, for the most part, Norway, the Netherlands, and
Australia have resources. And the United States, you know, we
are a country that puts extension cords out everywhere, you
know, into the Middle East, and our friends in Canada and
Mexico. And we extract resources from them, rather than from
ourselves. And we have significant resources within our own
country, and certainly in Alaska and in the upper State.
If, in fact, we are talking about revenues, and I just had
a hearing the other day, I am an appropriator, I confess. But
we were having a meeting the other day about the former MMS
left $50 billion on the table in not collecting revenues from
metal resource extraction. If, in fact, the United States went
out after its own resources, extracting those resources, and
the revenue that brings to the country, and obviously, national
security benefits and the rest, don't you think that would be a
significant part of turning this country around? I know the
entitlement spending part is the biggest issue that we have got
to deal with. But when you say everything is on the table,
don't you think when we are paying $4 a gallon for gasoline,
that that is a tax? That every consumer out there right now is
paying a considerable tax because we don't face up to the
problems in our own country, and developing our own resources?
So with that, I will just leave it to the committee.
Mr. Podesta. Well Mr. Calvert, I think that you put your
finger on something that is really quite important, which is
the interrelationship between our dependence on oil and the
fact that 50 percent of our trade deficit comes from importing
oil, and the ability to move to a different kind of energy base
in this country, and what that would do for the economy. How it
would spur innovation, job growth, and business formation.
I think the biggest place to look right now, in that
regard, is both, clean technology, the kinds of things that are
going to make the economy more efficient, including in the
building sector as well as in the transportation sector; and
then utilizing the vast resources we have of natural gas that
are available to us, need to be done in a smart way. The New
York Times has been writing a bunch of articles about what is
happening in Pennsylvania right now. They need to be done in a
smart way, but if we could move more of our transportation
fleet to natural gas it would have a dramatic impact, I think,
on our transportation sector, in particular.
And the problem with keeping, down the track, of just
drilling for oil even in the Gulf, which you know, I think we
need to do, is that it just keeps that dependence alive on
foreign oil, which is at 60 percent now. So I think we need a
comprehensive strategy to use all the resources that we have in
our country.
Mr. Calvert. I agree on all the above, I agree with you.
Let's kind of move across here.
Mr. Holtz-Eakin. I think two points. I mean, number one, I
don't know the numbers on the receipts that would flow into the
Treasury if we had greater exploration and extraction. I doubt
it solves the problem.
Mr. Calvert. I am not saying that it solves the problem.
Mr. Holtz-Eakin. We have to be realistic. The second thing
is that, in the end, our current account deficit is the
difference between how much we save and how much we invest. And
while, if we don't change how much we save and we don't change
our investment, we can change the nature of our energy
portfolio dramatically. We will just change the composition of
our trade deficit. It will still be there. So we have to change
the fundamentals. And our biggest problem with our saving is
our federal budget deficit.
Mr. Calvert. Well I would just make the point, if folks
back home are spending four bucks for gas, they don't have a
lot of money to save even for a pizza and a beer on the
weekend. Thank you.
Mr. Holtz-Eakin. The last thing to remember on this, and I
know that time is up, is that if you are going to change the
energy portfolio, that is costly. And we are coming out of a
recession; and to change our energy portfolio dramatically is
not a benefit, it is a cost. It might be worth it, we can have
that debate. But let's be clear, it is a cost.
Mr. Campbell. Thank you, Mr. Holtz, I am going to try and
be a little ruthless on the time so we make sure we get to
everybody. Mr. Blumenauer.
Mr. Blumenauer. Thank you. Although I would note that if we
drain America dry of our oil it goes into a global pool. We
only consume 20 percent of it; it is kind of goofy that we
consume 20 percent of it. But it is a global price. And to the
extent to which it drives anything down, most of the benefit
will flow through the Chinese, to the Japanese, to the
Europeans. I don't know that we are going to get anywhere on
that. But I want to come back to gas prices in a moment.
But, again, the more I sit on this committee, and listen to
witnesses like that, the more optimistic I get. Because having
had a chance to look at various ups and downs in the government
process over the last 40 years from all different levels, we
end up affirming Churchill's aphorism that, You can rely on
Americans to do the right thing after they have exhausted every
possibility. I think we are reaching that point now on the
federal level, and it is of a greater magnitude. But it seems
to me that the whole issue underlying this is how we do
business.
And I actually think there is a lot of agreement that is
coming forward. I think there is an opportunity; I feel guilty
for being away from a Ways and Means meeting right now where we
are talking about tax reform. And I think there is an
opportunity to change that system. I think there is a dramatic
opportunity, in this Congress, to change how we subsidize
agriculture in this country to help more farmers and ranchers,
and spend less money doing it, with less market distortion. And
I think there is bipartisan interest in pursuing that.
And I agree, Social Security, any 10 people around a Rotary
Club table could, in 30 minutes and a website, can come up with
three alternatives that are largely going to represent what we
will ultimately do. I hope, and I agree with Ms. MacGuineas,
let's get to some specifics.
And I would like to focus on one specific. Because for over
50 years, there has been an agreement in this country, going
back to President Eisenhower, about a self-supporting trust
fund for infrastructure investment. And that always, to this
point, has been bipartisan. Ronald Reagan, in 1982, when
economic times were tough, supported a five cent increase in
the gas tax, a user fee that helped us move forward. Yesterday
we had lunch with Senator Simpson, Mr. Bowles, and they had
proposed a significant and periodic increase in the gas tax to
be able to deal with both problems with that, and the fact that
we are draining the general fund to prop up something that has
been sub-supporting to this point.
We have record unemployment in the construction industry.
We have infrastructure in every one of our communities that is
falling apart, for roads, transit, and water. Isn't this an
area where we could move forward with a tax increase or user
fee that actually has broad support? This panel, in a prior
hearing, had people from the Chamber of Commerce, AAA, and
construction unions come in and testify in support of an
increase. Is that part of a solution that might get us moving
in this direction, put people to work, protect the budget
deficit, and maybe even reduce some dependence on foreign oil
at some point?
Anybody want to take that on the panel?
Mr. Holtz-Eakin. So I will be brief. I mean, there was a
report that came out of the bipartisan policy center from a
commission that I served on two years on transportation reform.
And I would encourage everyone to look at that. What it says
pretty clearly is, number one; we have to reform the
transportation programs, because we have never identified, what
is really the federal role. We know that, in principle,
infrastructure is important, but we have never decided what is
the appropriate role for the federal government.
We have a hundred programs over there, and we proposed
creating four. And then you have to finance them effectively.
And I completely agree with that. One thing to note is that
many people believe the gas tax itself is obsolete, and that we
need to go to an alternative.
Ms. Reinhart. Let me just point out that I think we have to
be very discriminating and very clear about how we define
infrastructure. Japan spent a massive amount on infrastructure
in an effort to prop up the economy, and I am not an expert in
that area, but it has to be very focused on productivity
enhancements.
Ms. MacGuineas. Yes, I agree with so much of what you said.
I think we need to focus far more on investment spending than
consumption spending, and this is one of the more important
areas. Second, we need to tax more the things we want less of,
like pollution, through energy taxes, not the things we want
more of, like work and saving. Third, I think the commission's
proposal on how to not spend more than the tax raises, and to
increase the tax to cover our highway costs and other
transportation costs is a very good idea.
Fourth, I do think we have to make sure that what we do in
terms of investment we do very well. We don't want to run the
risk of suddenly calling everything investment, you know, farm
subsidies, that is investment, and suddenly it loses all
credibility. We want to do investment that really has
productive payoffs.
Finally, I want to increase investment spending, and I
also, on the tax side want to do some, I would call,
sweeteners. I want to lower the corporate tax rate. These are
the things that I think should be part of a broad,
comprehensive deal, as sweeteners, to help move them forward. I
would be worried to do them on their own.
Mr. Campbell. All right, thank you. Have to cut off now,
and go to Dr. Price of Georgia.
Mr. Price. Thank you, Mr. Chairman. I want to thank the
panelists as well. And I think there is a remarkable unanimity,
as has been discussed, the need to address the spending side in
both discretionary and entitlement, automatic spending, and how
we get there is the challenge. It seems that every one of these
comments in this committee starts with some finger pointing at
the other side, and I would just remind my friends on the other
side of the aisle that the Budget Committee's responsibility is
to come up with a budget to provide direction for the country.
And in the last Congress, of course, there was no budget. So as
we grapple with these challenges, I think it is important to
remember that.
I would also point out, and I don't know if we can bring up
S6, but it is the deficit record by President. And, here it is.
And you kind of bop along there for, for, with some deficits in
the 200 to $400 billion range, and under a Democrat president
and Republican Congress, we balanced the budget appropriately
and had some surpluses. And then you see what has happened
under the current administration. I think all of us can look at
that, certainly the American people look at that and say, What
the heck is going on?
In terms of, I don't know if we could put up S2, which is
the tidal wave of debt that is coming, and the red chart here,
the red line here that you can see, it increases
astronomically, and clearly unsustainable. And then, finally,
the issue that I want to get the panel to weigh in on is
something that hasn't yet been talked about to a significant
degree, and that is the issue of short-term debt and interest
rates.
All of the presumptions, candidly, on both sides, have low
interest rates. If interest rates increase any significant
degree at all, then it blows up the models that all of us have.
So I would ask you each if you would comment on the
consequences of any increase in interest rates, and what, if
anything, we are able to do about that.
And then, also, if you can touch on short-term debt, the
chart that I had wanted to refer to has a significant increase
in the short-term debt, the debt that comes due within a year
to three years. And we are up in the 60 percent, or pushing the
60 percent range on that. What are the consequences of that? Is
there anything that we can do about that? So if I could ask you
to address interest rates and short-term debt, please.
Mr. Holtz-Eakin. I will just be real brief. I mentioned
this in my remarks, we have moved to very short-term financing,
it is like financing on a teaser rate. And if we get a sharp
spike, we are going to have to roll over a big fraction of
Treasuries at much higher interest rates; that is going to feed
through the budget, it is going to feed through all the
interest rates in the economy, whether they are mortgages, or
car loans, or anything else. So, we are exposed, both in terms
of a financial management point of view, and also an economic
point of view.
Mr. Price. And anything that we can do, I would ask to
address that issue, as a Congress.
Ms. Reinhart. Let me say that a characteristic, when
Chairman Ryan asked, of what a crisis looks like, in the run-up
to debt crisis, in the run-up to severe financial crisis, you
see the rise of short-term debt, in total debt. That is
worrisome. What has been done? Some of the stuff that was done
was quite out of the picture now. In 1951, we actually had a
debt conversion, called the Treasury-Federal Reserve Accord,
which took marketable medium to short-term debt and converted
it to 29-year bonds. Now we don't call that a restructuring or
a default because an interest rate sweetener was offered. But
it was, of course, under very different circumstances.
But what I am suggesting is that if we are faced with a
sudden rise in interest rates, we may see a return of what is
called financial repression. And captive audiences, like
pension funds and financial institutions would be targets. It
has happened.
Mr. Price. Maya.
Ms. MacGuineas. CBO recently, a couple years ago, I guess,
did a great study on this showing the massive costs that are
affiliated, I think it was at the request of Congressman Ryan,
the massive costs that are affiliated with increases in
interest rates. Obviously we are highly vulnerable to that; if
you look at where we are right now. It is like a credit card
teaser rate, right, it is luring us in, we are borrowing more,
Look, rates are low, we can keep borrowing. When those rates go
up, we are incredibly vulnerable.
There is another issue which I don't know exactly what to
make of it, but when QE2 ends this summer, nobody knows exactly
how that is going to play out. We don't know whether it is the
flow or stock of debt that is going to have an effect. But we
are more vulnerable than we would have been.
Third, you asked what we could do, and you made the first
point. Stop finger-pointing and come up with specific
solutions. It is the only thing we can do to be less vulnerable
to the upward tick in interest rates.
Mr. Price. Great. John.
Mr. Podesta. Well, I basically agree with Maya's points. I
think that they, right now we don't see that spike in interest
rates, but we are vulnerable to it. And I think we need to
ensure, as I think Mr. Bernanke and the Fed have tried to
ensure, that this recovery gets roots, that jobs begin to grow,
that is the most important thing to, I think, solve both the
debt crisis and the jobs crisis and the economic crisis, over
the long term.
But I think the one thing that Congress could do is, you
know, we are now repeating ourselves, is to come up with a
framework in which the debt stops growing. And I think if you
could do that on a bipartisan basis over the next couple of
years, that would, I think, settle these markets down.
Mr. Price. Within the five year window. Thank you.
Mr. Campbell. Thank you, Mr.Podesta; Mr. Pascrell of New
Jersey.
Mr. Pascrell. Thank you, Mr. Chairman. You know, I agree
with my friend from Georgia that we can't point fingers. I
would rather put it a different way, we need to put things in
context. We need to put things in context so we understand. You
know, sometimes I get the impression in this committee, and
other committees that deal with the budget, spending, and
revenue, that we are involved in a gigantic science project.
And all science projects turn out very positive. They all do.
But, you know, we can have brilliant results, it will have very
little positive impact on the people we represent in reality.
See, I read a story this morning about a quadriplegic guy
from New Jersey. His parents are fighting insurance companies
over denial of 24 hour care. So, you know, we are not simply
dealing in a numbers project here. We are dealing with human
beings. And we have to deal with the numbers, there is no
question about it. But those numbers need to be placed in
context so we have a Gestalt, an overview of what really is
happening.
We are all to blame, and we are all to gain. There is no
one party that caused this mess. I think we all should agree on
that; that is a good starter. But I look at reports, for
instance, from the SMP indexes in the year ending December 10,
health care costs covered by commercial insurance rose by 7.75
percent, as measured by the SMP health care economic commercial
index.
Medicare claim costs associated with hospital and
professional services for patients covered under Medicaid
increased at a more modest 3.27 percent rate, over the ending,
as of December, as measured by the, the SMP.
So, health care reform is important in the, quote unquote
entitlement, or, better known, a sure objective, Obamacare,
when you take a look at it; it is interesting. One third of
that entire document talks about the budget, we need to put
that budget together, dealt with Medicare and Medicaid. If we
read the bill, all 975 pages, because our 2,200 page document
was rejected, so that we really accepted the Senate version.
According to the CBO, the Affordable Health Care Act
reduced deficits by $210 billion over 10 years, and by more
than one trillion over 20 years, the most significant deficit
reduction since 1997, the Balanced Budget Act, which I proudly,
and some of us may have voted for.
So, Mr. Podesta, I have always enjoyed working with you
because you are a pretty straight shooter, I think Mr. Ryan is
a straight shooter, Chris is a straight shooter. But when you
put things in context, we might come out with different
answers, I think. We have been attacked, on our side, with
accusations that neither we nor the President has come forward
with proposals for entitlement reform, which we say, if we are
going to look at everything in the budget, that is one of the
things we will have to look at. We certainly need to look at
it. I reject the claim.
Last Congress, we passed the Patient Protection Affordable
Care Act. As I said, one third of it is devoted, if you read
it, if you get a chance, in the document, I can list 17 places,
Mr. Chairman, and the Ranking Member. Seventeen places. The
first step of entitlement reform was received with attack ads
claiming 500 billion in benefit cuts to seniors in death
panels. I heard somebody mention death panels yesterday.
To date the only action this majority has taken at
entitlement reform is repealing the reforms. So Mr. Podesta,
are you familiar with the roadmap?
Mr. Podesta. Yes, Mr. Pascrell.
Mr. Pascrell. Mr. Podesta, are you familiar with how it
proposes to control costs in Medicare?
Mr. Podesta. It basically voucherizes Medicare.
Mr. Pascrell. I am sorry?
Mr. Podesta. It creates a voucher in Medicare. It
essentially shifts costs from the federal government onto
recipients.
Mr. Campbell. Mr. Pascrell, your time has expired.
Mr. Pascrell. Can I finish my sentence, my question?
Mr. Campbell. Okay. But he won't be able to answer. I am
just trying to get everybody a chance.
Mr. Pascrell. Thank you. Has the cost of health care risen,
as compared to inflation? That is what we are concerned about.
And what happens in the voucher system is you never, ever, ever
catch up.
Mr. Campbell. Thank you, Mr. Pascrell.
Mr. Pascrell. So let's be, put everything on the table in
context, Mr. Chairman. Thank you.
Mr. Campbell. Time has expired. Thank you, Mr. Pascrell.
Mr. McClintock of California.
Mr. McClintock. Well, Professor Reinhart, you mentioned
that there has been one other time in our history when we had
proportional debt. I am hoping that history offers us some lab
notes. How did we get out of that? And we have also had several
other spikes right after the Assumption Act in 1792; we
suddenly had 35 percent debt. We were able to finance the War
of 1812, and the Louisiana Purchase, and pay off all of that
debt by 1830. What lessons can history offer us?
Ms. Reinhart. Okay. Let me be very brief. One thing that
makes the situation of more concern than the end of World War
II, which was our last really big debt spike, is private debt.
At the end of World War II we were lean and mean. Households
and firms, financial and non-financial, were lean and mean. So
it was exclusively a public debt issue. But public debt now is
much more broadly defined. We have a lot of contingent
liabilities.
But how did we get out of World War II, well, making cuts
after war was a lot easier. But let me also say, I mentioned
the issue of financial repression. That was actually a tax, but
it was a tax that was never legislated. We kept interest rates
very low through a lot of financial regulation. We created a
lot of markets in the financial industry for holding government
debt. That was a factor. We also ran balanced budgets for an
extended period of time.
So you had the post-war reductions, which were somewhat
more obvious than they are today.
Mr. McClintock. About $85 billion.
Ms. Reinhart. Indeed. There was a series of balanced
budgets, even some surpluses. And there was a lot of financial
repression; do not underestimate the power of that. It amounts
to about three percent in revenues, meaning lower interest
costs and actual liquidation of debt. That is how we got out of
debt out of World War II.
Mr. McClintock. So we had repressed demand, plus dramatic
reductions in spending.
Ms. Reinhart. Indeed.
Mr. McClintock. And then actually produced balanced
budgets. Which gets me to the next question, and that is, we
talk about taxes and deficits as if they are opposite things.
Aren't they really the same thing? Isn't the deficit is simply
a future tax? Aren't those merely the two ways that we finance
spending? And isn't spending the principle?
Ms. Reinhart. And this is now seat of the pants because I
have not tested this empirically, as I have other things, but
one of the reasons why we find high levels of debt cause low
growth, or associate it with low growth, has to do with
anticipated future uncertainty, either of lower benefits or
higher tax liabilities.
Mr. McClintock. So, to borrow from the Clinton
Administration, with obvious apologies, it is the ``spending,
stupid.''
Ms. Reinhart. The point I am trying to make is that the
last time we were in this, we really did touch all bases. We
had severe, or sharp spending cuts.
Mr. McClintock. If I may, I am going to need to go to Mr.
Podesta for a moment. Mr. Podesta, you mentioned that the state
of the economy at the outset of the Clinton Administration, we
were running huge deficits; we were in some economic
difficulty. The Clinton Administration ended up reducing
federal spending by a full four percent of GDP, which is
miraculous, produced the only four surpluses that we have had
in the last 40 years. It approved the biggest capital gains tax
cut in U.S. history, it tackled entitlement spending with
welfare reform. We were doing pretty well at the end of that
administration, as you pointed out.
Mr. Podesta. Well, I agree with that, Congressman. I think
that was a combination. We did increase revenues in 1993, and
painfully, because it led to, at least in part, losing both
Houses of Congress in 1994, but they did increase revenues. But
he did restrain spending over the whole period of time, and
that resulted in an economy that produced 10 times as many
jobs, much stronger wage growth.
Mr. McClintock. Cut spending four percent. Now, George W.
Bush takes office, and ends up increasing federal spending by a
full two percent of GDP. He approved the biggest increase in
entitlement spending since the Great Society, he embarked on
massive stimulus spending, and as we all know, the condition of
the economy and the budget wasn't so hot at the end of that
experiment. So my question is why do we keep employing policies
that we know don't work, and instead go back to those policies
that your administration employed, by reducing spending, that
the Truman Administration employed, that the Reagan
Administration employed, all of which were marked by
substantial economic progress and advancement.
Mr. Campbell. Just to remind members, the five minutes
includes the answer time.
Mr. Podesta. Well, I will send you a note on that,
Congressman.
Mr. Campbell. All right. Mr. Tonko of New York.
Mr. Tonko. Thank you, Mr. Chair. Mr. Chair, I know that we
have colleagues here from both sides of the aisle that share my
appreciation for American history, and I would like to use my
time here today to explore a few elements of our shared past.
Mr. Holtz-Eakin, certainly you were the director of the
Congressional Budget Office from 2003 to 2005. The CBO, as we
know, is a non-partisan institution. So I would like to
highlight some of your non-partisan observations from that
time, as I think they were insightful and fair, and have real
meaning, I think, for the debate that we have here today.
This is a, a Washington Post article from January 27 of
2004, and CBO's annual budget report had just come out, under
your direction, showing that the Bush Administration had asked
for more than $1 trillion, had added more than $1 trillion to
the deficit in just six months, and that that government debt
could more than double if President Bush succeeded in making
his tax cuts permanent. According to this article, you noted at
that time that the massive deficits that would result from
extending the Bush tax cuts, which were grossly skewed to favor
the wealthy would, and I quote, lower national savings, reduce
economic productivity, and ultimately, ultimately, curtail
economic growth. Is that accurate?
Mr. Holtz-Eakin. That is what I said, yes, absolutely, and
I continue to worry about deficits; that is the implication to
have.
Mr. Tonko. This is a Washington Post article from one year
later, on January 27, of 2005. You were still at CBO, and due
to the rising cost of the wars in Iraq and Afghanistan, the tax
cuts for the wealthy, and a prescription drug plan that wasn't
paid for, things were looking worse. You are quoted in this
article in saying, again, and I quote, We are doing a little
bit worse over the long term, and it is largely due to policy,
policy changes. Could you tell me, is that quote accurate? And
which political party was in charge of the White House, the
House of Representatives, and the Senate at the time?
Mr. Holtz-Eakin. I have no reason to believe it is not
accurate, and Republicans controlled both Houses of Congress
and the White House.
Mr. Tonko. Finally, this is an op-ed that you posted
through your organization, the American Action Forum, just two
weeks ago. And it reads, There has been talk that the House
would pursue a series of short-term, two-week CRs, instead of a
full-year CR. There could be no greater management nightmare
than the inability to plan for more than two weeks at a time.
And my point is that I agree with you on that point, certainly.
And though we may not agree on everything, I think you have
offered this chamber very sound advice in the past.
I was not here in 2004 and 2005, but I cannot help but
think that if our leaders would have listened to you then, we
might not be in the place we are in right now. Today our fiscal
challenges are so great that the Republican leadership in our
House is proposing calling for cuts to programs that range from
preschool literacy programs, to senior health benefits. And
yet, we still refuse to look at the policies that really got us
here. And two wars on the credit card, the deregulation of Wall
Street, and tax cuts for billionaires, simply didn't appear to
be the formula for success.
No matter how many times we say it, the Koch Brothers are
not a small business, and I do not believe they need taxpayer
dollars to fund union-busting campaigns in Wisconsin. I don't
believe it any more than I believe that if we are going to give
oil companies bigger subsidies, they will someday become
charitable institutions that won't gouge my constituents at the
pump, and bring in record profits in the midst of the Middle
East crisis.
Tax cuts for the wealthiest two percent of Americans were a
bill of goods sold to us on the promise that they would create
jobs, but even before the financial meltdown, they failed, at a
cost of trillions of dollars. If we are going to spend that
kind of money, America should be better for it. But while CEO
pay doubles and triples throughout the decades, the purchasing
power of the minimum wage has declined by nearly 10 percent.
Where is that American? Where is that fair?
According to the CIA, the United States ranks 42nd globally
in income and equality, putting us in the same range as Uganda,
Nicaragua, and Iran. We cannot move forward this way and hope
to compete economically with numbers like that. And we just
need to address, I think, the inequitable treatment in our
situation which has really seen a growth, exponentially, in the
top one percent of wealth in this country and its income
availability. And how can we go forward without strengthening a
middle class in this country? It just confuses me economically,
and irritates me programmatically. Thank you.
Chairman Ryan [presiding]. Thank you. Mr. Ribble.
Mr. Ribble. Thank you, Mr. Chairman. I have been listening,
somewhat entertained here this morning, but disappointed in
several ways with some of the hyperbole with massive tax cuts
and all this kind of stuff, and how our deficit is because of
massive tax cuts. And that revenue after the tax cuts in 2003,
by OMB's numbers, went up in the next five years by 100
billion, 371 billion, 624 billion, 785 billion, 801 billion,
and in 2010, after the global meltdown overnight, over 2003
numbers after the tax cuts, up 400 billion.
So, revenue is a difficult thing to really project what is
going to happen, quite frankly. I have run my own business for
30 years. When we do budgeting I realize that a cut in spending
is a direct savings, and something I can control 100 percent. I
can choose whether to spend the money, or not to spend the
money. I have the choice. I cannot choose whether a customer
will buy from me, whether my business will grow. I can plan and
strategize and try to do those things. And in the broad
economic sense, addressing this strictly on the revenue side is
nearly impossible. Not that it shouldn't be done, not that we
shouldn't include that. But I do know that on the spending side
we do have lots of control. And a dollar not spent is a dollar
saved.
I actually have a question for Ms. MacGuineas. I
appreciated your testimony a lot, and I want to give you a few
minutes here to expound a little bit on something that I have
talked about for about the last six months, and that is the
psychology of the American consumer and the American business
owner. You address it a little bit.
We have a psychological problem in this country and it
relates to and affects economic growth, don't we? And could you
talk a little bit about that? You didn't have enough time in
your comments to do that.
Ms. MacGuineas. Great. Thank you for the opportunity,
because I do think that the lack of certainty that surrounds
businesses and households is certainly a factor in keeping the
economic recovery from moving forward as much as we want it to.
And if you look at, sort of, the ideal model for fiscal
consolidation, and how to deal with the fact that we are also
coming out of a very weak economy, most people have said that
what we want to do is put in place a multi-year plan that
doesn't have to phase in so quickly, because you can still
leave some time for the recovery to take hold. So you wouldn't
have to have tax increases or spending cuts very, very early
on. We recommended starting them next year. As long as that
plan was credible, and so that markets believed that that plan
was going to be implemented.
I think that plan, to be credible, would have to be
bipartisan, it would have to be put in statute, and it would
have to come with budgetary triggers, so if those changes
weren't made, that changes would come automatically. That would
allow households to know what is going to happen. Importantly,
because of all the capital on their balance sheets right now
that would allow businesses to know what is going to happen.
If you look at part of the model in London, when they are,
in England, going through their consolidation efforts, they
have hoped that businesses would, kind of, be the drivers of
growth, and fuel the recovery. There haven't been as many
policies to help enable that, so you want to surround that with
policies that allow businesses to help be an engine of growth
in this recovery. We can't look to government to spend our way
out of this, or households, who are over-indebted, to spend our
way out of this. We do want businesses to be the engine of
growth. None of that works in place, in terms of reassuring
markets, letting households know what to expect, in terms of
tax and spending policies, or having businesses invest in the
longer term, unless we put in place policies that are credible,
and likely to stay in place, and will put us on a glide path to
something stable.
Mr. Ribble. How long have you been studying this topic, and
this whole issue of economics here, as it relates to this
budget crisis? Been a few years?
Ms. MacGuineas. It has been a few years. We haven't made
that much progress.
Mr. Ribble. Do you think that, that the Congress has acted
credibly in the past? Are there examples that we can point to
that might help us?
Ms. MacGuineas. I mean, sure, the budget deals that we had
in '90, and '93, and '97, all of those are different models,
when we fixed Social Security, they were all different models
for people coming together. There were a number of factors that
made them work. You need leadership, you need real leadership.
You need an understanding in the public of the problems and a
commitment to fixing them. You do need bipartisan cooperation
for anything that is hard, otherwise there is going to be
immediate pressure to take back whatever policy changes you
have put in place. And I do think that public component is
actually quite important. You need people to understand.
Remember there was the Ross Perot moment; it kind of
changed the whole world, right? But you need people to
understand why this is something that you do for the country.
And the narrative really has to be that this is part of a
successful growth strategy. It is not just all about, you know,
we are the eat your spinach crowd, it is not all doom and gloom
though; it is about part of building a long term economic
growth strategy in the country. And I think that has to be told
to people, and then they are willing to step up to the plate
and make those changes.
Mr. Ribble. That psychology will change, then, won't it?
Ms. MacGuineas. Absolutely.
Mr. Ribble. Okay. Thank you very much, and I yield back.
Mr. Chairman.
Chairman Ryan. Ms. Bass.
Ms. Bass. Thank you. Ms. MacGuineas, I wanted to ask you a
couple of questions. If I heard you right, I think you said, a
few minutes ago in your presentation, that several events could
tip us over the edge, seriously increase the crisis. And one of
those events could be something going wrong in the states. And
I really wondered, given what is happening in the states, what
you meant by that, considering so many of the states are in
such a deep crisis. California, a couple of years ago, had a
budget of $110 billion: budget now is $83 billion, and we are
facing a $23 billion deficit with no real clear way out of it.
They are attempting a balanced approach in California,
hopefully it will be voted on in the next week. But I wanted to
know what you meant. What else could go wrong in the states
that you are referring to?
Ms. MacGuineas. Well, there is certainly the situation that
states may not be able to pay what they owe on their debt, and
that this could be the beginning of a cycle of markets losing
faith in the ability of the U.S. to make good on all of its
commitments. There are also the structural problems in the
states, which are a result of the economy. And then there are
also the long-term problems, that we are all aware of, but
their pensions and their health care commitments, which are
obviously unsustainable. And again, much like what is going on
at the federal level, this is a problem that we need to get out
ahead of. This is a problem where they, these reforms need to
take place in advance so that the states don't bump up against
their limits.
Just one final problem with the states that we have been
seeing is that the information, the data on the states is very,
very poor. You can't make an apples to apples comparison of
fiscal positions of various states. And so, transparency is a
piece of all of this. We need to understand the fiscal well-
being of the federal government and the states, and right now
we don't have the information to do that.
Ms. Bass. Thank you. One other question. It seems as
though, in several of your comments, that you were supportive
of a balanced approach to us getting out of this crisis. And,
on the revenue side, which I think we spend an awful lot of
time talking about the spending side, and I would agree we
certainly need to pay very careful attention to that, and rein
in spending, but I don't think a whole lot is said on the
revenue side. And it seemed as though, you talked about tax
reform, and I know I have certainly attempted that in my time
in California, and that is very big, very difficult to get to.
So I would see that as a long term, and something that we
definitely need to do. But in the short term, in terms of
revenue, what suggestions would you have? And would you
include, maybe closing some tax loopholes as part of it?
Ms. MacGuineas. Yes. I actually think that the answer to
that question, what you would do in the short term, closing
those tax loopholes, is in many ways the right start for the
long term fundamental reforms, too. I think the fiscal
commission put out a really, really smart structure, which
said, let us show you how much we can bring rates down
aggressively by clearing out all the trillion dollars in tax
expenditures from the base.
Now, realistically, they are not all going to be cleared
out. But, once you start funneling them back, and you say,
well, we want part of this to still be there, or we want all of
this to still be there, you bring up rates accordingly, and you
actually have the cost of these. So we haven't had a budget for
tax expenditures, they have been like mandatory spending, on
automatic pilot. This creates a sense of the tradeoffs, and it
certainly starts the, the right direction for fundamental tax
reform, which is broaden that rate base as much as possible,
bring rates down. And I believe you need to use a piece of that
revenue to close the fiscal gap. And because tax expenditures
are so big, there is actually plenty to do on both sides. So I
think the framework by the fiscal commission is immensely
helpful.
Ms. Bass. Thank you. We attempted the broadening in
California, too, and everywhere you talk about broadening.
Ms. MacGuineas. Somebody likes that tax break, of course.
Ms. Bass. Exactly, it is so difficult. But in my remaining
time, Mr. Podesta, you mentioned that health care spending was
one of the drivers. And I wanted to know if, in the last few
seconds, if you could give us your opinion as to whether or not
the Affordable Care Act begins to address some of the concerns
you raised around health care spending.
Mr. Podesta. Well, Mr. Pascrell went through a list of the
items in which there is restraint in the Affordable Care Act
that begins to move that cost curve down. The CBO, as has been
noted, estimates that it has some savings in the, in the near-
term budget window, but over a trillion dollars in the second
20 years, which is really where the money is.
I think that the other place to look is to the CMS
actuarial report from last summer, which indicated that health
care spending would, would rise just slightly in the United
States, by .2 percent, but include coverage for 32 million
people. So I think that, at that point, the trend line is going
down, whereas if you repealed health care, the trend line would
continue to rocket up, as it has been for the last decade. So
it is really important, I think, to be able to fulfill the
authorities that are included in the Affordable Care Act,
including the IPAB, the demonstration projects, changed the way
we deliver health care, get on with trying to put more emphasis
on primary care, try to get more errors, as the administration
is currently doing, out of the system, so that we, across the
board, in both the public programs, and in private sector
health care, we begin to reduce the cost, which is extremely
expensive, and not producing the results that we need.
Chairman Ryan. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman. My colleague raises
the issue of the balanced approach, which is something that we
have been talking about as a committee, both within our party,
and in a bipartisan basis. I think you have started to see in
some of the discussion today that a lot of us agree that, in
fact, I think Mr. Van Hollen actually said that we agree that
we need to have some spending cuts. What is the right balance?
I will put that question to each of you, very briefly. What is
the right balance between spending cuts and revenue
enhancements, to use a euphemism? Is it 50-50, is it 80-20, is
it 110 with tax cuts? What is the right balance? Has anybody
given that any thought? Let us go right to left because Mr.
Podesta always gets left off at the end, and I am always good
with starting on the right hand start of things.
Mr. Podesta. Thank you. I think that the right balance is
probably in the arena of 50-50. I think that the Simpson-Bowles
was two-thirds, one-third. I am looking more at the near term,
at the course of the next five years; it is probably in the
range of 50-50. Over the long term, particularly as we get
these health care costs under control, it shifts, and begins to
probably look more like two-thirds, one-third. Two-thirds on
the spending restraint side, one third on the revenue side.
Ms. MacGuineas. Great question. When you think about
balance, two things complicate it; baselines, what baseline are
you using, and how you allocate interest. I look at this as,
actually, you could solve the problem on the spending side
alone, but nobody wants to. There is not a politician who is
talking about what you would have to do to current retirees. So
we might as well get realistic, that revenues have to be part
of it. And I think one of the keys is that that has to be
combined with very serious structural reforms to entitlements.
And there has to be an understanding that those revenues are
going to close the fiscal gap, not to funnel into new spending.
And then I think we can start being more realistic about that.
I don't think 50-50 is the right balance. I think, if you
look at the problem, it is a spending problem, if you look at
where the growth in the budget is, and compare it to historical
averages. But since no one is willing to close it completely on
the spending side, I think you start at, maybe, 80-20, and you
end up at, maybe two to one. And you, you do what you have to
do to get it done. But the problem is a spending problem, and
both are going to have to be on the table for the solution.
Ms. Reinhart. Two-thirds, one-third. And I say that on the
basis of, simply, demographics. And this is not a short-run
issue, but a medium-term issue. And a lot of our problems have
to do with an aging population; this effects both the health
and the social security side.
Mr. Holtz-Eakin. I don't think you should frame the
question that way. I really don't. I think we get lost in a, in
a debate over whether the number is eight or nine, we lose our
way. We need to rethink the government budget from top to
bottom, identify those things the government can and should do,
their traditional roles, fund them effectively, and, and build
a vision for growth and opportunity, and articulate that. And
there is nothing right now that is going to produce growth or
opportunity. Congresses of both parties have a long history of
spending tons very ineffectively and not funding them
adequately. That has got to change. Spend the money
effectively; fund it adequately. And let us, let us get started
fast.
Mr. Mulvaney. And here is why I asked the question, and I
appreciate that. But, if you look at it historically, no one
has ever been able to turn this type of situation around on a
50-50 basis. It simply has never happened. And if you look at
it historically, Ms. Reinhart, maybe you can speak to this, Mr.
Holtz-Eakin, really, that the folks who do this successfully
are the folks who are more down in the 80-20 range. In fact, of
the successful fiscal consolidations in the last several years,
there is actually more evidence that 110 percent worth of cuts
in spending, with tax reductions, because it leads to what you
have just described, which is the opportunity for growth and
economic development, that that is the model that we use.
Mr. Holtz-Eakin. I want to concur with that. I mean, that
is the, that is the international evidence. Successful growth
and consolidation episodes are grounded on keeping taxes down
and cutting kinds of spending, government payrolls and transfer
programs. Those are the, those are the heart of those things, I
completely concur. I just think if you want to go to the
American people and say, We are going to cut X dollars, that is
not a very compelling story. What you need to do is explain to
them, This is important for the opportunities that our children
will have. These are the roles we have assigned for our
government. We are going to do that, and this is how it adds
up.
Mr. Mulvaney. Mr. Podesta.
Mr. Podesta. Congressman, that might be true, if you are
starting from a very high revenue base, but as I noted in my
testimony, we are starting from a historically low revenue
base. We are at 15 percent of GDP in collections. That hasn't
happened since 1950. We have a lot bigger government than we
had in 1950. And so if you begin, particularly with the notion
that we are going to go further down the revenue stream from
there, and begin to think you are going to be able to make that
up on the spending side, it is just not realistic.
Under President Reagan, our average spending was 21, 22
percent of GDP. How are we going to get down to that 15 percent
rate that is currently the base that we are looking at? Mr.
Holtz-Eakin said that the Obama budget gets to 19.6 percent. It
does, but on the basis of a bunch of policies which I don't
think he supports. So I think that we have got to have some
balance here, on mandatories, on discretionary, including
defense, as well as with respect to revenue. And I think, if
you look at the '93 balanced budget, I think it was about 60-40
cuts versus revenue. So I think we are in similar places, but
you have to start from the premise that revenue is at a very
low base right now.
Chairman Ryan. Mr. Shuler.
Mr. Shuler. Thank you Mr. Chairman. I would like to thank
the Chairman and the Ranking Member, put a great panel
together. Here is the ironic thing about it, four non-elected
officials could probably sit down and come up with a plan that,
that would, the American people would agree with.
Unfortunately, and I will say this on both sides, the maturity
level is not there from the United States Congress yet. We are
still playing politics with the future of the next generation.
And at some point in time we are going to have to stop that,
because time is of the essence. I look around the room; there
are not many moderates on this committee. There is very few of
us. I would, I would ask each of you: is there a policy out
that is available now for us to review, that you think would be
acceptable to the American people? I am not asking, would it be
acceptable to the Congress, because we are not there yet.
Mr. Holtz-Eakin. I think you could do a lot worse than to
start with what Bowles and Simpson came up with. That
commission did a remarkably good job of examining the problem
and proposing solutions. And I am deeply disappointed that it
has been left on a shelf, and in the dustbin. We really need to
take this problem on.
Mr. Shuler. Dr. Reinhart.
Ms. Reinhart. I really would like to echo that. It is in
the spirit of starting afresh, we are here where we are, and
maximizing the options. Bowles-Simpson is a good starting
point.
Mr. Shuler. Ms. MacGuineas.
Ms. MacGuineas. Bowles-Simpson is a great starting point. I
mean, they gave us exactly what we need. They gave us good
policies, they found where good political compromises are. It
is a commission report, so it gives you all the political cover
to get behind it, and say what they are all saying, we don't
like every part of it, but it is a good way to start the
discussion. You can see what is going on in the Senate, and it
is a very productive discussion that is moving forward.
This is what the country needs. It saves $4 trillion over
10 years. I think anything less than that is probably
insufficient. And so I wouldn't see why anybody would walk away
from this opportunity to start the discussion there.
Mr. Shuler. Mr. Podesta.
Mr. Podesta. I just want to add one note of caution. I
think, actually, there is a lot of agreement, to some extent,
on the panel, on the long-run. One note of caution is, to the
extent that, it is what Ms. Bass said, to the extent that
moving forward requires a complete revision of the tax code, I
am for that. We should get rid of a lot of the junk in the tax
code and get rates down. I am for that. But the process of
producing that is going to be very, very difficult. And we
can't wait for that to be done before we begin to tackle these
midterm deficit problems, so that we get the debt stabilized.
So if it has to be in two bites, I can live with that. And
I think the first bite, I think we also mostly agree on, you
have got to go after mandatory, you have got to go after
discretionary, and restrain it. I am for putting defense on the
table, because I think there is a lot of waste in the defense
budget, you could save some money there. And I think,
particularly going after these tax expenditures, and getting
rid of these loopholes that really don't produce much,
economically for the country, you could get a balanced package,
and get bipartisan support for it.
Mr. Shuler. Well I certainly hope, and I am very optimistic
that we can come to a conclusion. At some point in time, we are
going to have to be grown-ups about this. And the next
generation will look at us, and wonder if we made the right
decision. And if we lose our elections, if all of us lose our
elections in 2012 because we made the right decision for the
next generation, then that is good for us, and that is good for
the American people. Because, 10 years from now, they will say
that we will be the best Congress to have ever served.
So I am pleading, I have heard all the back and forth, and
unfortunately, most of the, the higher-ranking, up on the top
tier, on both sides, continue their political debate and
posturing, because it is easy for them to get reelected. And I
want to see us start working together across the aisle to make
this work for the American people, and for our next generation.
I yield back.
Chairman Ryan. Thank you. Mr. Huelskamp.
Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the
opportunity to ask a few questions, and as a member of the
freshman class, I know there is a lot of finger pointing in
this room, but there are some members here that shouldn't be
pointed at. I am not saying anybody is, but just to point out,
that is the lead-in to one of my questions. And that would be,
throughout the last 20 years of Congress, there have been all
kinds of balanced budget mechanisms; we are going to solve
that.
We can sit here and talk about tough decisions and making
those, and I guess the question would be for Mr. Holtz-Eakin,
what mechanisms would you say are necessary in order to make a
deal secure in future years? Because I would say folks in my
district have no confidence, in either the Congress or the
President, to actually implement, and to maintain. And I would
agree, I think multiple congresses, multiple presidents that
haven't balanced that, didn't care to balance it. And so what
kind of mechanisms would you suggest are necessary for
implementation?
Mr. Holtz-Eakin. I have a couple of observations. The
first, and the one that I think is most important, is there are
no budgetary mechanisms, PAYGO rules, discretionary spending
caps, or anything of that sort, that are a substitute for the
Congress having the political will to do this, and agreeing it
has to be done. Because any Congress can circumvent rules, and
does on a regular basis.
So, rules are not the solution; deciding to solve the
problem is the top priority. Having done that, you can then
agree on some sort of fiscal goal. I actually don't care deeply
which one. Whether it is debt to GDP, spending targets,
anything that gives you a way to identify that you are off
track; we agreed to do this, but we are off track, you get a
warning signal, and gives you a way to say no, Yes, we would
like to do that, but the larger priority is our kids and the
growth of this economy, we are not going to do that, we have
this limit that we can't bust. That is what you need.
And there is no magic to the particular flavors. You have
to have an agreement to do it, you have to have identifiers you
are not doing it, and you have to have a way to say no.
Mr. Huelskamp. Would the rest of the panel agree with that
assessment? In short response?
Ms. MacGuineas. I would just jump in, because we ran a
commission called Peterson-Pew Commission for two years that
focused on budget process. And we recommended a set of
budgetary targets, so everybody knows what you are trying to
get to, triggers, so that if you don't get there they would
enforce them and move you back on track, and help keep you on
track, and transparency. So the three T's: targets, triggers,
and transparency.
But the bottom line is, it won't force anybody to do
anything they don't want to do, but it will give you political
cover if you do want to do the right thing, and it gives you
the way to say no. So I think that framework is really
important to help move us in that direction and keep us on
track.
Mr. Podesta. What did produce a balanced budget and a
surplus were hard budget caps on the discretionary side, and a
real PAYGO that covered both mandatory and revenue. And so, I
think, if you go back and look at history, it is worth at least
attempting to say, that worked before, why don't we try it
again?
Mr. Huelskamp. Yeah, and I appreciate that, historically.
But we are at such historically high levels, and I don't know
how you could implement that. I mean, you lock in trillion
dollar deficits, as the President's indicated, sustainable
deficits forever. So, Carmen?
Ms. Reinhart. Simply put, in this environment, debt
targets. Taking into account that Europe has blown Maastricht,
but having credible debt targets would be a useful starting
point.
Mr. Huelskamp. I didn't hear anyone mention though, and I
come from state-level, where we have a mandatory balanced
budget requirement unlike some other states; no one mentioned a
balanced budget amendment, those kind of things, which would
be, there would be no legislative way around that, is there
opposition to that from any of these members here that believe
they don't work, or would not work at the federal level?
Mr. Holtz-Eakin. That is a fiscal rule, and would have the
same benefits that, that I mentioned for others. Getting there
is going to be awfully hard. We are so far from balanced. And
so, I am all for a balanced budget, but I encourage you first
to tell me how we are going to get there.
Mr. Huelskamp. Well, that, that was the requirement for the
panel members today.
Mr. Holtz-Eakin. I have my plan.
Mr. Huelskamp. The follow-up question I would have, in
reference to that is, and quickly, for each of you, I just have
a few seconds left. How many years do we have, and it might
have been asked already, counts to five years, I have heard
less years, I am going to be listening very closely. How many
years do we have, quickly?
Mr. Holtz-Eakin. We don't know; pretend you have none.
Ms. Reinhart. Great answer.
Ms. MacGuineas. It is a great answer. I am worried, because
I have heard the number five around today. And I think that
that is too optimistic, chances are that is too optimistic.
There are a lot of people who believe that the risk is it could
be in the next year or two.
Mr. Podesta. I think you have this year to lock in a
bipartisan agreement to stop the debt from going up.
Mr. Huelskamp. All right. I look forward to help from the
Senate, and from the administration. Thank you.
Mr. Lankford [presiding]. Great. Thank you, Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Mr. Chairman. We had a meeting
yesterday with Mr. Bowles and Senator Simpson, and I have got
to say it was very sobering, to just sit with them for an
extended period of time, and kind of embody the real gravity of
the problem here. I know Mr. Van Hollen has said this, as well
as others in the Democratic Caucus, I think, and to Mr.
Podesta's point that he just made, I believe that this needs to
happen in the next year because if it doesn't, we are going to
get into a political year, which we are already actually into
the presidential election, already, as the media is portraying
it. And, so that whole year will be wasted.
And now we are two years down the line, and all of you are
saying, act like it is happening now, which I think we need to
do. So just from this perch here, I think we need to drop the
rhetoric on both sides and come to an agreement. I think it is
important, it has been noted here, President Reagan raised
taxes eleven different times, gas, tax, and others. So we are
not going to get there from here. We have got to get ourselves
in a position where we all agree that the wealthiest, as the
Bowles-Simpson proposal has, the wealthiest are going to have
to pay more. Because the larger issue for them with investments
and business creation, are going to be the credit markets.
And so I think most of them would be willing to pay an
extra 30, 40, 50, $100,000 a year, if you are making millions
of dollars, if they know that business activity is going to
increase. And I think we have got to talk about all of this in
that context as well. And also, to make the point that there
are tradeoffs here, when we ask the wealthiest to pay a little
bit more, what are those programs, what is that money going
into? It is going into Pell grants, it is going into job
retraining, it is going into research, it is going into things
that are going to yield us all a lot of economic activity, as
we see China investing hundreds of billions of dollars into
clean energy. And I am from a steel district, in Youngstown,
Ohio, and Ms. Kaptur is from Toledo, where they are generating
solar panel industry.
We are starting to lose the solar panel industry to China.
So we are going to reduce our dependence on foreign oil, and
then we are going to become dependent on China for our
batteries, our solar panels, and everything else. So these
investments have to be made, and we have got to ask everybody
to participate. And remember that George Herbert Walker Bush
lost his election, as Mr. Shuler was just talking about,
because he raised taxes because he had to. And that led to Mr.
Podesta and crew coming in, and President Clinton, and that
leading to enormous economic activity, 20 million new jobs.
One point, and then one question I will let everybody kind
of take a bite at, that I wanted to make. The point has been
made, and we talked about animal, animal spirits, and my friend
Mr. Ribble was talking about psychology, we have a
psychological problem. We have a psychological problem in the
market because wages have been stagnant for 30 years. This is
not psychological; it is a real problem that we have. In the
last 10 years we have lost wages. And in Ohio we are going to
see tuition increases because of the economic collapse, we are
going to see a lot of cuts, we are going to see more burden
placed on families. And so, if we don't address the issue of
wages, and Paul Krugman's column just talked about this in the
last day or so, about the high-growth jobs in the recovery
aren't coming. It is the low-growth jobs that are expanding
now.
So we have got a real issue, if we are going to continue to
have this economic instability and political instability if we
don't address the issue of wages in the United States, and
health care and other things fit into that.
So, my time is out, Mr. Podesta, if you could just comment
on this, and if there is time, we could just work our way down,
about the top tax rates. There has been a lot of talk about,
those are the people who create jobs. I know you guys, when you
came in in '93 made that decision, raised the top tax rate.
Mr. Podesta. Yes raised the top tax rate, the top two
percent.
Mr. Ryan of Ohio. How did that play out, and how would all
of you guys see that playing out as a big diminishment in
economic growth?
Mr. Podesta. Again, you can't make a direct comparison, but
GDP growth was twice as strong during Clinton as it was under
Bush. Business investment was much stronger under Clinton than
it was under Bush, with a 39.6, you know, top tax rate. And so
this idea that just by merely cutting the top tax rate we are
going to eliminate investment and the economy is going to tank,
I think it is just not borne out by history. I think you need a
balanced program, one that does exactly what you are
suggesting: invests in human capital in science and technology,
in the things that power the economy forward. And that is what
is going to get wages growing again.
And the only thing I would disagree with you about, Mr.
Ryan, is that wages did grow in the 1990s, and they grew
substantially in the middle and at the bottom during the 1995
to 2000 period.
Mr. Lankford. I wish we had time to get all the other
responses. Mr. Young.
Mr. Young. Thanks so much to all of our panelists, I really
appreciate you being here today. I am going to focus my
question on, if time permits, the role of the U.S. dollar in
the world, its current position as the world's reserve
currency, how that might be threatened, and the implications
thereof.
Before I get into that, though, I would like your thoughts
on, what I typically discuss in southern Indiana, as I mix with
my constituents, and try and inform them on this issue, get
their thoughts and concerns. And one of the things that I try
and do is bring it down to the human level. Individual persons
and businesses and families, and I thought you might be able to
add some additional texture to that overall portrait.
What will things look like if the doomsday scenario, if the
debt crisis does in fact play out, if the United States suffers
from a Greece, or Japan-like, situation, where either they have
to go through a lost decade themselves, or instead, there is a
sudden response by the markets as a result of a lack of a
credible plan to bring down our debt to GDP ratio.
Some of the things I emphasize are the increase in our
interest rates for our treasury instruments, which redounds to
an increase in interest rates for all manner of different loans
and credit instruments that will impact individuals that I
serve. An increase in taxes, perhaps an immediate increase,
required to calm the credit markets. An immediate decrease in
spending, in a non-deliberative and, frankly inhumane way; it
is inhumane, not because our efforts wouldn't be well-
intentioned to calm the credit markets, it would be inhumane
because we failed to act now, when we could put in place a
smooth trajectory, a gradual mechanism to get our debt under
control, one that would maintain our social insurance programs
for the least fortunate. It would also result, this doomsday
scenario, I anticipate, in a decrease in investment, in
physical capital, in human capital, all these things that help
us enjoy those higher-paying jobs that Mr. Ryan was just
lamenting are not as abundant as they once were. Can someone
speak to that overall private human impact that we might
experience?
Mr. Holtz-Eakin. I am not the place people usually go for
humanizing events. But I think you have captured the mechanics
of the collapse pretty well. But it will be far more
devastating than that, because in that collapse, you will have
panic. You think back to 2008, there was palpable panic among
individuals, among policymakers, and when people are panicky,
and seeing their social services, you know, rendered, you lose
a sense of social cohesion. So I believe that there is a lot
more at stake here than the economics of it. I believe our
social cohesion is, and will be tested, if we fail to address
this. And we will, in those moments, also pull back on
commitments we have made around the globe. You know, we will
bring back the troops from those bases, we will cut off our
ground forces in different ways, and we will be more exposed
and less of a leader in liberty than we want to be. And I think
those are all very damaging things.
Ms. Reinhart. I would say, at the very human level, one
thing we have to, at some point, start to face, is that the
past 10 years were not a good indicator of the next 10.
Households have negative equity. That some, many households
have negative equity, that is something that has to be dealt
with. Households have a debt overhang. Those are issues that
were not issues 10 years ago, that we have to think about. I
would like to think that, sort of a gradualist approach to debt
reduction is more likely. It is, historically, it hasn't worked
out that way.
Let me conclude with a commentary on the dollar. One of the
things that is actually, actually helping us be more gradualist
than we otherwise could be, is that people, notably central
banks from all over the world, willing to hold U.S. Treasury
securities. But that is also a dangerous proposition. Without
gloom and doom, it involves a level of vulnerability that we
didn't have 20 years ago.
Mr. Podesta. Congressman, you know, I think you can go too
far with this. I think that, we are not Greece. The United
States is not Greece. We have a pretty darn strong set of
fundamentals and basics in this country, including the best
workforce in the world, the most liquid capital markets, the
most innovation, the highest levels of science and technology.
But I think what will happen is we will get further away, for
many, many people, from the American dream, the ability to
really make their children's lives better than theirs, to
succeed in their own right. And that is what we have got to be
worried about, that is why we have got to take the steps now, I
think, to get on a better path.
Mr. Young. Thank you all.
Mr. Lankford. Thank you, thank you as well. Ms. Castor.
Ms. Castor. Thank you very much, and thanks to the panel
for all of your expert advice and involvement in this critical
issue. Back home, when folks focus on the debt and deficit, I
think they do appreciate that President Obama named a national
commission of fiscal responsibility and reform. But if he has
seen some of the polling across the country, they, they rank
the debt and deficit very high as a problem, and then you say,
but they don't want any cuts on anything. So we really need to
find something to pull us on that glide path with a
comprehensive plan. And the one that seems to get a little
traction at home is tax reform, and lowering the rates.
And then you have got to begin this dialogue about,
especially, the tax expenditures, I think. Because when you are
talking about the tax code, it has got to be holistic. And I
want you all to be specific. You can go back to the commission
on fiscal responsibility and reform and highlight your
favorites, but give us the targets for these tax earmarks, and
tax expenditures, especially the ones that have been built up
over the years by high-paid lobbyists; people know it, they
know it at home.
Give us those, your best targets, so that we can reduce the
overall tax rates for the average hardworking American. I would
like to hear from each of you on this.
Ms. MacGuineas. Well, I will say, I think people are going
to want to understand two important things. And one is, do you
have a plan? And two, is it fair? And that is going to help
people be willing to sacrifice. I think they need to feel that
if they make these sacrifices themselves, it will not lead to
not fixing the problem, but it will lead to an actual fix.
In terms of tax expenditures, you are putting out a tough
question there, but I am sure we will all give you pretty
similar answers. There are two big ones that need to be
reformed: the health care exclusion, the home mortgage interest
deduction. That is the bottom line, every policy analyst on
both sides of the aisle knows that these are not good policies,
and that is, the core of really thinking about tax reform. And
people can choose to go after them and try to demagogue them,
or people can talk about the benefits of a better tax system
that is not regressive, that has more oversight, that leads to
lower rates, and is part of a fiscal fix. And these tax breaks
and others have to be reformed.
Mr. Podesta. Well, Ms. Castor, I think they fall into two
big categories. Maya mentioned one, which is on the personal
income tax side: the exclusion and home interest deductions.
And, particularly on second homes, you could go after that
fairly easily, I think. But I think there is a lot in the code
on the business side that would strike people back home as,
what I would describe as, you know, tax exclusions that they
think of, tax expenditures that are really narrow, they are
focused on a very small number of businesses.
I guess my favorite still remains the tax breaks to the oil
and gas industry. The top five oil companies have made $931
billion in profits in the last 10 years. Do they really need
additional incentives to continue to produce what they are
producing in their business? I don't think so. And it is a
waste of money, and I think people are getting gouged at the
pump right now, and they would understand why that level of
support to an industry that doesn't need it could be withdrawn,
in a time when we have high deficits.
Ms. Reinhart. I would like to point out that,
realistically, I think there is broad agreement that we need
higher savings and that interest deduction on housing is
something that should go. But let us look at the housing
market. The housing market is in an all-time, historic slump.
The timing for that is probably problematic. So it really goes
back to my two-thirds and one-third. I do really think that one
has to go back to, I would like to be told by the doctor that I
can lose weight and eat just as much. But I really do think
that the expenditures side, particularly in light of
demographics, is unavoidable.
Mr. Holtz-Eakin. Briefly, I think we have to educate the
American people on the reality of the tax code. For the
majority of Americans, the biggest tax they pay is the payroll
tax. So if you talk about tax reform to them, there is nothing
to do. A minority of Americans are now paying the income tax,
and it needs to be radically reformed to reflect the reality.
Go to the President's panel from a couple years ago, the
growth investment tax plan, adopt it tomorrow. Way better than
anything we have got.
Ms. Castor. I am not even familiar with what that is.
Mr. Holtz-Eakin. I would encourage you to become familiar.
Mortgage interest, the health exclusion; those have been on the
table for years. Congress has never touched them. You should go
do exactly what Bowles-Simpson did with the corporate tax. You
should go to a territorial system with a low rate, because, in
the end it is the American worker who is paying that tax.
Companies don't pay taxes, people do. And the workers are
getting hurt by the uncompetitiveness.
Ms. Castor. Thank you.
Mr. Lankford. Thank you. Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman. And I want to thank
the panel for joining us today. And except for the rock-
throwing back and forth, it has been a fairly-informed panel,
and I apologize, I am sorry that you had to put up with the
rock-throwing. I am not going to throw any rocks. I am going to
ask a couple of questions for you. We have got a couple of
alternatives out there. We have got this, that is supposed to
be winning the future. You have got the Bowles-Simpson
Commission that I think did some really good work. Looking at
the Bowles-Simpson plan, and I would like each of you to limit
your answers to about 15 or 20 seconds, what would you do to
make the Bowles-Simpson plan better? We all said that is a good
place to start. What would you do to make it better? So let us
start on the right with Mr. Podesta.
Mr. Podesta. Well, I think that, I noted earlier, that we
think that Social Security reform could be tackled, but I think
the way they tackled it is wrong. And I think there is a way to
protect people at the bottom in Social Security and still get
that 75 years of actuarial integrity and that is where I would
probably start.
Mr. Flores. Okay.
Ms. MacGuineas. I think it is a terrific plan, I think the
main thing that needs to be filled out is how you would live
within the health care budget that they proposed. So in the
decade when you would start controlling health care cost to GDP
plus one, we need to figure out structures that are going to
fill that in. And I actually think, on Social Security, we use
too much of the revenue to funnel into Social Security, and I
would use that more on investments, and bring benefits down for
the well-off in Social Security a little bit more aggressively.
Mr. Flores. Okay. So greater means-testing. Ms. Reinhart?
Ms. Reinhart. I think we need to be a little more
aggressive on Social Security benefits.
Mr. Flores. Okay. Mr. Holtz-Eakin?
Mr. Holtz-Eakin. I am going to echo those, I think the
biggest hole though is, we really took a pass, a serious pass
on health programs. And those are the problem going forward, so
you have to take those on.
Mr. Flores. You talked about health programs, but it seems
to me like Medicare is the biggest issue, that is the biggest
gaping wound that we have in our future financial security.
Mr. Holtz-Eakin. I believe that if you look at Medicare,
Medicaid, and the Affordable Care Act collectively they are the
threat.
Mr. Flores. Okay, thank you. Looks like I have some more
time, so I am going to ask you another question. This hasn't
been brought up. One of the things that I have seen, I was a
CEO of a small company, and one of the things that I felt, and
that people are feeling today, is the impact of regulation on
the economy. We haven't touched that, and that is not going to
be in the budget, but I think it is an important component of
what is restraining the economy. And so I would like each of
you just, again, 10, 15 seconds, do you think that our
regulatory zeal today is hurting our economic potential? Let us
start on the left.
Mr. Holtz-Eakin. Absolutely. A chief indicator of
regulatory activity is federal register pages, and last year we
set a record, exceeding even when the Bush Administration set
up the Department of Homeland Security, I never thought we
would beat that. And that is before we see the implementation
of the Affordable Care Act, before we see the Dodd-Frank common
line and before the EPA rolls out its boilers and other
foremeasure rules. So we are in the midst of a massive
regulatory push.
Mr. Flores. That is a terrifying metric. Ms. Reinhart.
Ms. Reinhart. I alluded to this in my earlier remarks; I
think we are going to see even more heavy-handed regulation. It
won't be called financial repression, it will come under the
guise of prudential regulation, but I think we will, and
pension funds will be importantly affected.
Mr. Flores. But is it or is it not hurting us, in terms of
economic potential?
Ms. Reinhart. The historic experience has been that
financial repression is not conducive to growth.
Mr. Flores. Okay. Ms. MacGuineas.
Ms. MacGuineas. Yes, I certainly agree with that point, and
I think we need to do everything we can to enhance
competitiveness, both by lowering the corporate tax rate in a
revenue-neutral way, and dealing with regulations. And I think
that principle, that businesses don't pay taxes, people pay
taxes is very important. I also, however, have a real belief
that the income and equality problems that we have are real.
And so, while I would try to bring down burdens on businesses,
I am perfectly comfortable with a more progressive tax code
that reflects people who are doing well also contributing at
the personal level, and letting businesses thrive and be an
engine of growth.
Mr. Flores. Okay. So, by having a more moderate regulatory
scheme, I am assuming, partially.
Ms. MacGuineas. That is one of the necessary components for
increasing competitiveness.
Mr. Flores. Right, good. Mr. Podesta.
Mr. Podesta. I think one, I think one of the history
lessons of the past couple of years is that, if you take the
argument too far, regulatory laxity produces really disastrous
results. And the failure to regulate the financial sector led
to a meltdown that is being felt today in every community
across America. So you have got to find the right balance. I
think that the new executive order that the President signed at
the beginning of the year to try to find that right balance,
get rid of regulations that are not producing the results that
they are seeking to achieve, while you push forward with smart
regulation is where the country needs to be.
Mr. Flores. One last question, as I am about to run out of
time. Ms. Reinhart, I really appreciate your work that you have
done to talk about the impact on GDP versus debt levels. My
question is this; inside the President's budget this year, it
has some GDP growth assumptions based on what I consider to be
a fairly high debt level. It doesn't even talk about actuarial
unfunded liabilities. What do you think about the economic
assumptions of, basically, four percent GDP growth in this?
Ms. Reinhart. In one word, improbable.
Mr. Flores. Okay.
Mr. Lankford. One word is perfect for the timing.
Mr. Flores. Thank you.
Mr. Lankford. Mrs. Moore.
Ms. Moore. Thank you so much, Mr. Chairman. And thank you
very much for appearing today. I am really proud to see women
as experts in economics, and so I really appreciate your being
here. Everything has been asked, except that everybody hasn't
asked it. So forgive me if I am asking some of the same kinds
of questions. I want to get right into the discussion of some
of the Bowles-Simpson's recommendations, and to really flesh
out this whole thing about entitlements. You know, it has
become such a buzz word; we have got to reform entitlements.
In my understanding, I am glad there was already a
discussion about some of the tax expenditures. But farm
subsidies, and as you pointed out, Mr. Holtz-Eakin, the
prescription drug program where we did not ask pharmaceutical
companies, at all, to lower their prices, or to negotiate with
them, as being one of the problems. And you also pointed out,
Mr. Holtz-Eakin, that the problem was the cost curve in health
care, period, at least I thought, not being curved. Not so much
a problem with, as I think Mr. Podesta pointed out, that when
Medicare and Medicaid came into effect, just like three-tenths
of one percent of federal spending on health care. But this
unsustainable growth.
So I want you all to comment on the problem with
entitlements and mandatory spending as being something other
than Social Security. I don't think that that is the driver of
the debt, I think it is these mortgage interest deduction tax
expenditures, which are mandatory spending, farm subsidies, is
that correct? People are using this entitlement thing, and
people are interpreting it as Social Security, and that is not
correct, am I correct about that?
Mr. Holtz-Eakin. It is not just Social Security, but Social
Security is certainly part of the problem. Running a cash flow
deficit right now and those cash flow deficits will rise with
time, and the program is on track to deliver to the next
generation, 22 percent across the board cuts, that is
unconscionable.
Ms. Moore. Okay, so let others answer, please.
Ms. MacGuineas. Well, entitlements are all programs of
mandatory spending that don't go through a normal
appropriations authorization process.
Ms. Moore. Like the mortgage interest deduction, for
something, it goes to Oprah.
Ms. MacGuineas. That is right, I would completely agree,
that tax expenditures are very much like entitlements in their
automatic nature, and that we should be budgeting for all.
Ms. Moore. So when we talk about it, I am just saying, we
need to not just hone in and say Social Security.
Ms. MacGuineas. No, I think we hone in on the ones that are
the biggest drivers of growth, though, which are the ones that
are related to aging and health care. So Social Security,
Medicare, and Medicaid are the most problematic, but the way we
budget, we need to look at all of these things on a regular
basis.
Ms. Moore. Let me get Mr. Podesta to answer this question,
and then let me move on.
Mr. Podesta. Well, I think you are exactly right,
Congresswoman, that the mandatory spending is broader, I think,
with respect to health care. That is a challenge of delivering
better health care at a lower cost across the board, not just
in the federal programs. That is where we really need to, I
think, spend our time and attention, which will have impact on
the federal programs, I think as one of the previous members
pointed out, the inflation in the federal programs is actually
lower than it is on the private sector. So we need to produce
that result.
Ms. Moore. I didn't understand, for example, why Mr. Holtz-
Eakin, said we ought to get rid of the American Care Act, but
then he agreed we need to slow the growth in the private health
care. I just didn't understand how that could be done. And Mr.
Podesta, I want you to comment on his testimony.
Mr. Podesta. Well Doug and I have debated this for a long
time, I think that the drivers in the bill will restrain the
growth of health care spending, and I think, if you repeal it,
as the CBO indicated, you are going to have both a negative
effect on the overall federal budget deficit, and a negative
effect on health care spending.
Ms. Moore. Thank you, Mr. Podesta. I do have 50 seconds
left. I turned on the news today, and thank God they weren't
talking about Charlie Sheen or Lindsay Lohan but they mentioned
that there were, you know, 199 new billionaires during this
whole worldwide recession. And so I guess I wanted to ask you,
I didn't vote for the extension of the Bush-era tax cuts, even
the ones that benefit the lower-income people, because I see
that they benefit wealthy people six times as much as they do
higher-income people. How does inequality fit in with some of
our deficit problems? There won't be people to consume, for
example. Mr. Podesta.
Mr. Podesta. Inequality; I think that if judged by history,
when we have a thriving middle class, when we have people at
the bottom who are getting into the middle class, that produces
a stronger economy overall, stronger receipts, it actually has
an effect on the budget, so I think we very much should be
concerned about it.
Ms. Moore. Thank you so much. This is a great panel. Thank
you Mr. Chair.
Mr. Podesta. Thank you.
Mr. Lankford. Thank you. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman, and thank you to the
panel for being here today; I really enjoyed the conversation
today. The title of the hearing today is Lifting the Crushing
Burden of Debt and I guess what I have heard a lot of today is,
we need to control spending, we need to possibly raise revenue
through tax increases, and I want to start with Mr. Podesta. In
your testimony, we are all talking just recently, here in the
House, about where do we start cutting debt? And on page six of
your testimony, you mention the shock of asset-constrained
government spending in the immediate would have an undeniable
effect on our wider economy. Our Moody's chief economist says
that it could lead to a loss of about 700,000 jobs, and then
Chairman Bernanke agrees that it could result in a couple of
hundred thousand jobs, and then you mention that there is wide
consensus on the general impact.
Mr. Podesta. Except for Mr. Holtz-Eakin.
Mr. Stutzman. Well this is what I want to ask, is what kind
of job loss are we looking at?
Mr. Podesta. Well I think that virtually everybody who has
taken a look at this, Doug is an exception, has said that there
will be some loss of jobs, and there is a range of forecasts
there. And I think that the general direction is clear, and
that is why I am not saying that we shouldn't restrain non-
defense discretionary spending. We call for specific cuts to do
so. But the deep cuts that are included in HR 1, I think, would
have a negative effect in the very near term, and my other beef
is that you don't go after any of the other components. You are
narrowly focused on 12 percent of the budget. So those things
will have an impact in the short term.
Mr. Stutzman. Are these primarily public or private jobs?
Mr. Podesta. I think they are on both sides of the ledger,
mostly in the private sector.
Mr. Stutzman. This is what concerns me, and I give the
Clinton administration a lot of credit for the way that they
handled the situation throughout the 90s. There were tax
increases right at the beginning, there were tax cuts at the
end, and I believe that Republicans, when they were in charge
were in the early part of this last decade, failed, and that
there should have been better control in spending. And I think
that we need to go into this very disciplined, and my concern
is when we start--we are only talking about $6 to $60 billion
in cuts right now, and when we go out and we hear the rhetoric
saying, Well we are going to lose up to 700,000 jobs, that puts
fear in the American people. That puts fear in Congress. We
don't want to do that. And if we can't even cut $6 to $60
billion right now in the near term, I don't see the political
will long-term, ever. And I guess that is my concern, at some
point this type of rhetoric needs to stop, because I think the
American economy is more resilient than this.
Mr. Podesta. Well so far, it has been partly because of the
deep financial shock from the recession, it has been less
resilient than I think a lot of people would have predicted.
But it is coming back, the private sector is producing jobs,
almost a million jobs produced last year, we need to make sure
that keeps going, I think. That is key, I think, to create the
circumstances under which you actually can get the deficit down
because it takes money out of the unemployment insurance
system, et cetera. And it will increase revenues.
Mr. Stutzman. Okay, really quick, I just want to ask this
question of the entire panel, and answer is as long as we have
time. My question is what is a predictable and sustained rate
of debt to GDP?
Ms. MacGuineas. Well we have recommended that it be brought
back down to 60 percent of GDP within a decade, but that it
needs to go back to historical levels of below 40 percent to
maintain fiscal flexibility.
Ms. Reinhart. The median debt-to-GDP in the advanced
economies has actually been 36 percent post-World War II. We
are a long range from there. I think 60 is a good starting
point.
Mr. Holtz-Eakin. I concur.
Mr. Stutzman. Okay. I think that again, we need to start
looking at our, we need to control spending first before we
even discuss, and I like what Erskine Bowles and Simpson did
propose, I think that is a great starting point in the
dialogue, but until we start controlling our own spending, and
I think this sort of fear put into not only Congress.
Ms. MacGuineas. One quick question which is, while I think
there is some problems with HR 1, that it is probably too
large, too small a part of the budget, and a little bit too
early, we are starting to control spending, and that is going
to have large positive fiscal effects, the fact that we are
talking about cuts. And even though it will have some negative
effect in the short run, what these studies don't show is that
it will have positive gains over a longer period, to make these
fiscal improvements. And that is what we need to emphasize.
Mr. Stutzman. Thank you.
Mr. Lankford. Thank you. The gentlelady from Ohio is
recognized.
Ms. Kaptur. Thank you, Mr. Chairman. Welcome to the
panelists, I am sorry I had two, actually three concurrent
hearings, so I came late and I have read your testimonies. The
housing sector's continued demise, with 26.5 percent of the
American people being underwater on their mortgages and in my
district, 37.5, continues to be a serious damper on recovery.
Ohio, Wisconsin, where we see people mobilizing in the state
capitals, are in deep trouble because their property taxes have
not been paid in at the normal rate, and with the large numbers
of foreclosures, school systems and state governments just
simply can't keep up. And therefore the solution I see them
proposing out there, at least those governors is, Well, get rid
of teachers, get rid of police, rather than solve the
fundamental problem, which is recovery in the housing sector.
Now a few Wall Street banks took us down this very
dangerous road, and they threw our economy into a very deep
ditch, and what I see happening is that the six big ones that
remain, that now control two-thirds of the banking system of
this country; Citigroup, J.P. Morgan Chase, Wells Fargo,
Goldman Sachs, Morgan Stanley, and Bank of America are making
extraordinary profits, $55 billion just last year for those
six. This year, Bank of America is going to get a $666 million
refund, and those six institutions have paid a net effective
tax rate of 11 percent when businesses in my district are
paying a 35 percent rate. I am thinking, what is fair about
this? Wait a minute; we are not addressing the housing problem.
Not one prosecution, not one. And the housing sector continues
to deteriorate, and they are running away with the money, and
they control two-thirds of the banking system in this country.
I call that a great crime. Now I notice a number of you
actually have ties to Wall Street, and I am going to place this
in the record. Mr. Holtz-Eakin, the Board of Directors for
American Action Forum, does it still include Robert Steele?
He is gone. Okay. He had been a former executive of Goldman
Sachs when he served on your board. You personally were a
senior staff economist for President Bush at the Council of
Economic Advisers, am I correct on that?
Mr. Holtz-Eakin. That is correct.
Ms. Kaptur. Correct and Mr. Bush never submitted one single
balanced budget to this Congress, because I served during those
years. I am not saying you don't have a lot to contribute to
the conversation, but let us look at the record. Now Ms.
Reinhart, you are a fellow at the Peterson Institute, and you
had been the chief economist, am I correct? For the investment
bank of Bear Stearns back in the 1980s. And the Peterson
Institute receives major contributions from Mr. Peterson, and
he had been the former chairman and CEO of Lehman Brothers. Am
I correct in that? Is my information correct?
And he co-founded the private equity firm of Blackstone
Group. I am just saying, the influences on Congress, where we
get our opinion from, we have many new members. It is important
to know who is giving us information and who isn't. Ms.
MacGuineas, you are with the Committee for a Responsible
Federal Budget.
Mr. Peterson also contributes money to the Committee for
the Responsible Federal Budget, am I right on that, Ms.
MacGuineas? Yes, I think that is really important to place on
the record. And Mr. Podesta, you were the chief of staff to the
only president that ever gave us a balanced budget in my whole
career here, so it seems to me you have got something to
contribute to the conversation here. But my fundamental
question is, in the housing sector, we lack a solution as a
country, and that is pulling us down coast to coast. You really
haven't addressed it in your testimonies to any great extent.
The fact that it is missing is of great concern for me. Should
it be?
Ms. Reinhart. It certainly should. One of the things I have
been saying for many years now, since the crisis began, is that
we should move forward to write down bad loans. The problem of
having mortgages with negative equity is a serious one, and it
is time to start having financial institutions price those
loans closer to market. Until we do get rid of that debt
overhang and those zombie loans, they were called zombie loans
when they were in Japan, we will have a very weak housing
market.
Ms. Kaptur. You know, by the way, that the majority of
those asset-backed securities, the mortgage-backed securities,
were traded through Cancun? I don't know if people on the
committee know that. Any comments about why that might have
been done? You know it is a tax haven? Goldman Sachs and the
companies that did that made a whole lot of money. Nobody has
done a single thing about it. Thank you, Mr. Chairman.
Mr. Lankford. The gentleman from Georgia, Mr. Woodall, is
recognized.
Mr. Woodall. Thank you, Mr. Chairman. I want to inherently
I associate myself with my friends on the left because I think
they bring a lot of value. I want to disassociate myself with
Ms. Kaptur's comments and tell you how much I appreciate you
being here, in particular Mr. Podesta and Ms. MacGuineas. You
all invested time in us at the bipartisan freshman retreat, and
I remember those sessions well. We had a particular amount of
fun on the chief of staff session; you all gave us a lot of
good stories, and I don't know where we go as freshman if folks
aren't willing to come and invest in us like this. I tell folks
regularly that the best part of my job is really smart people
who want to come by and make me smarter. And I certainly
appreciate the willingness to engage and do that as the last
fellow who generally gets to ask questions here in the Ws,
folks are often anxious to depart, but I just had a couple of
things on my mind.
Everybody talks a lot about tax expenditures. I wish there
were more of my colleagues left, I actually have the only bill
in Congress that eliminates all corporate tax expenditures. I
am a big believer that those are spending measures. It is the
Fair Tax Bill, it actually abolishes the corporate tax rate
altogether, because I believe, as you all have said, that only
consumers pay taxes, whether it is the shareholders or whether
it is the employees or whether it is the purchaser, it is only
us at the end of the day that pay those taxes, and I would have
welcomed more support for going after those tax expenditures,
but let us talk about the regulation side again, and we started
down that with Mr. Flores a little bit earlier.
Do you think that is coming? Because I saw an editorial in
the Wall Street Journal, I think it was in January, that had a
giant spike in the cost of compliance with reg.s back in '92,
as the Clean Air Act was coming online, and then it dropped
down and was fairly level throughout the '90s and the early
part of this decade, but the last four years, we had spiked
back up to those 2000, or that 1992 level and even gone 25
percent higher in 2010. If we can agree that tax expenditures
are just the same as spending and ought to have the same amount
of oversight on them, can we also say that about regulation,
that we ought to consider each and every reg. with the same
critical process that we consider each spending bill and each
tax bill?
Mr. Holtz-Eakin. I believe so, yes. I mean, these are the
same as taxes. Just as you remit tax payments, you have
compliance costs, you have to spend money, and in the same way
that taxes can cause a business not to hire one more person,
not to make the last investment, regulation can have the
exactly the same influence in economic activity. And so I am
concerned about the pace at which new regulations are being
rolled out for two reasons. One, the overall economic burden
might not be matched by benefits. I mean, these things aren't
done gratuitously. There is a reason regulations show up. But I
am worried that we have gone too far. And the second is that
rapid rule-making is generally bad rule-making. The Affordable
Care Act and the Dodd-Frank Bill both share a characteristic of
what I think are unrealistic rule-making deadlines that will
produce bad regulation in the end.
Mr. Woodall. We talked a little bit about income
inequality, that is something that concerns me as well, though
it concerns me more that if it comes from a place of
productivity, inequality. And I actually think of what we are
doing on the tax code and the reg. side of things as creating
productivity inequality among American citizens. It doesn't
trouble me if we have income inequality if it is in line with
what one produces and contributes. Can anybody point me to any
studies, information where I can educate myself about whether
we have seen a change in productivity inequality as we have
seen a change of income inequality?
Mr. Podesta. Mr. Woodall, I would be happy to try to get
you something for the record. I think the one thing that is
characteristic really, of the recent period of economic history
is that productivity gains in the economy have not been shared
by the entire workforce of the enterprises that are making
those productivity gains, the way they had been in previous
decades and particularly in the post-World War II period. So we
have a lot of productivity in the economy, most of the revenue
from that, most of the gains from that, have gone to the top,
and that has been a change and that has led to the deep income
inequality that was commented on earlier.
Mr. Woodall. And let me use my last 10 seconds to say, as
much as I value the Gingrich-Clinton years, and I do, I view
those as very productive years, I look back at what we did with
Medicare reform, where we are still kicking the doc fix and the
SGR down the road, what are we now? Twelve years later, 15
years later, and so as scary as it is to do things today, to do
things now, to do things immediately, I have seen what happens
when we put something on the list for three years from now, and
I appreciate folks being willing to do things today. Thank you
all for being here.
Mr. Lankford. Thank you. The Hoosier from Indiana, Mr.
Rokita.
Mr. Rokita. Thank you, Mr. Chair. Only place where Hoosiers
are from, really. Unless I am missing some of my constituents I
need to get to. Thank you for your leadership, Mr. Chair. I
want to put some things on the record, and for nothing else, I
appreciate today's discussion. I appreciate you all coming, I
appreciate what Mr. Ryan from Ohio said, I appreciate even what
Mr. Pascrell said earlier, and I also enjoy Congresswoman
Kaptur. We have been able to have some excellent conversations
in the short time that we have known each other, maybe with
today's issue aside. But even with today, I know that what you
say comes from a genuine concern.
What I saw that was disingenuous, Mr. Chairman, on this
committee today are comments from Ms. Schwartz. And they are
almost so silly that I risk using time to refute them, but I
think the record deserves it. To say that what we are dealing
with here in terms of a $14 trillion debt, in terms of $100
trillion in promises made to future generations, is somehow the
fault of the last administration, that is her words, is
ridiculous. And then to further compound that problem by saying
the only thing that this current Congress has done is propose
$61 billion in cuts, really puts salt in the wounds. Her party
can't even get to $61 billion in cuts, and I agree with her
that it is only 12 percent, that discretionary spending is only
12 percent of the budget. Can't even get there. And that is why
Mr. Ryan's comments, Ms. Kaptur's, and Mr. Pascrell's, even,
are so important. We need to get there. To make sure we have a
full picture for the record, Mr. Podesta, I just want to ask
you a few direct questions before I get onto some other ones,
and hope they have direct answers. And I hope you would agree
with them.
The years that President Clinton, and I appreciate his
leadership, because he led on the budget--in the years that we
had a balanced budget, which party controlled Congress in each
one of those years?
Mr. Podesta. In 1998, 1999, 2000, and I would probably put
2001 in that as well, the Republican Party led the Congress.
Mr. Rokita. That is what I wanted to know. I will get to
some other questions here now, reclaiming my time. And under
the Constitution, is it not the Congress' job to control the
purse strings? To create and pass a budget is one of our core
constitutional duties.
Mr. Podesta. I would hope so.
Mr. Rokita. Okay, right. And wasn't Ms. Schwartz's party in
the last Congress that failed to do that?
Mr. Podesta. Well, Ms. Schwartz's party passed a continuing
resolution that funded the government.
Mr. Rokita. That is what I thought, okay. Just want to make
sure we have that full picture there. As much as I appreciate
Mr. Clinton's leadership, it takes two to tango, especially
when it comes to a budget, in this case, a Congress that is
also willing to lead. And that is what we need now, and that is
what we are trying to do now.
Mr. Podesta. You know what? I agree with you.
Mr. Rokita. Thank you. Can you put the cartoon slide up, if
you can, please? The one with the ship and the submarine? Let
me get to that question. As they are putting that up, let us
talk about the way in which the growing U.S. debt could impact
America's status as a world power, as well as its freedom to
act. According to the CBO's long-term budget projections, U.S.
interest payments on the debt will begin to exceed our yearly
defense spending in 2022, and then double in 2037. Can a
country that borrows this much maintain its economic and
military power and diplomatic leverage over the long run?
Mr. Holtz-Eakin. I clearly expressed my concern about that.
I don't believe so.
Mr. Rokita. Okay, thank you. Ms. Reinhart.
Ms. Reinhart. All we have to do is look at the loss of the
British Empire.
Mr. Rokita. Okay, thank you. Maya.
Ms. MacGuineas. Our influence in the world is clearly
already on the decline, and I will just quote a friend of mine,
former member of Congress Tanner, who always says, We have an
agreement that we would protect Taiwan. If China were to
attack, the problem is we would have to go and borrow the money
from China. That is just not the position we want to be in.
Mr. Rokita. I laugh so I don't cry. John?
Mr. Podesta. I agree.
Mr. Rokita. Final thing, just to put all your comments in
context, I just want to ask you a basic one real quick. Art
Laffer's curve, does it have validity or not when it comes to
the tax issues you brought up?
Mr. Holtz-Eakin. It is correct in principle, but we have
never been over the top of it.
Ms. Reinhart. I concur.
Ms. MacGuineas. It is not relevant to where we are in the
tax rates right now.
Mr. Rokita. John?
Mr. Podesta. Well, I again reference back to the last
couple decades of history, and I think it would probably be a
bad place to begin this conversation.
Mr. Rokita. Thank you all very much. I yield back.
Mr. Lankford. Thank you, and I yield to myself the five
minutes that remain here as the final person doing the
questioning. Yesterday we had the privilege of having a joint
session of Congress and the prime minister of Australia; she
came and spoke to Congress and to all of us as American people.
And one of the interesting things she kept coming back to was
this clear statement, that she believed as a child watching us
land on the moon, Those are Americans and they can do anything.
And there is this sense that is rising up that I sense from
Americans, saying we have got to take on the big, difficult
thing of our time, and that is our debt. And it has been very
interesting to be able to hear your comments on it, and to
especially hear you say, this is not something that can be done
five years from now. This is something that has to be done
right now. So I appreciate your comments and all of your work,
and for you coming here and spending so much time with us and
letting us get a chance to ask you some random questions with
it.
Knowing that, we are fully aware you can't just shut the
government down for a couple years and say we are not going to
spend money on anything. This conversation that is happening
between investing while we are also trying to cut the debt. We
understand we have to do infrastructure projects; there are
things that still need to be able to continue on. What would
you recommend as a balance, or as a thought that you have
clearly between this balance between investing, and also we
have got to get aggressive in cutting the debt.
Mr. Holtz-Eakin. I think the key is to recognize that the
budget at the moment is structured so that the legacy programs
of our past, the Medicare's, the Medicaid's, the Social
Securities, are going to crush our ability to invest in the
future. They are literally just pushing out any ability to do
discretionary spending. And if you are going to let your past
crush your future, you are going nowhere as a nation. So you
have got to fix that.
Mr. Lankford. Any comments from anyone on that?
Mr. Podesta. Yes, Congressman. You know, this is where the
rubber hits the road. Because this is where the tough choices
need to get made. And I think that we know what produces
productivity in the economy, we have seen it in the past,
investments in education, and building human capital in giving
people the skills they need to succeed in science and
technology, those produce strong results. So we have to find a
way to pay for those. And the issue around health care and
particularly Social Security, I come back to what I said in my
prepared statement, which is in the early 1960s, nearly 30
percent of elderly Americans lived in poverty. Today less than
10 percent do. So we can't abandon that commitment; we have got
to find a way to produce health care in a way that is going to
produce good results at a lower cost.
Mr. Lankford. Right. And I don't hear a lot of people
trying to abandon that commitment. The question becomes how do
we do that? Because currently we are trying to make life in
this generation easier by making it harder on the next
generation, and it is progressively getting closer and closer
to this generation making it much tougher, based on putting the
hard decisions off, putting it off, putting it off.
Mr. Podesta. I agree with that.
Mr. Lankford. Let me bring up just some process things to
you as well, just for perspective. Since 1921, the President
has submitted a budget to Congress, which I understand since
1922 has been dead on arrival each year when it comes, but just
this perpetual process of the President setting out the wish
list, both parties, and then Congress trying to work through
the process on that. Is there a benefit to setting some harder
caps on it a year before, that Congress is able to send to the
President, You can submit a budget no larger than, please work
with your agencies and submit a budget that fits under this
criteria, and that allows the Executive Branch and the
Legislative Branch then that next year to work on a budget,
knowing that we are all dealing with the same numbers.
Ms. MacGuineas. I would say that right now, given where we
are in our budget challenges, what we should really be thinking
about is multi-year budgeting. And we need to have a fiscal
path that would bring us to stabilizing the debt at a
sustainable level and then below over more time, and I think
the way to do that is multi-year budgeting, and I think you
have to put hard caps and triggers in the budget. Again, budget
process will never fix this problem alone, but it needs to be
there to strengthen whatever policy deals people came up with
so we can stay on track over the multi years it will take to
get us back to a place of fiscal health.
Mr. Lankford. Thank you. Other comments on that?
Mr. Podesta. I agree with that, I just had one note, which
is that in the 1980s, after Gramm-Rudman-Hollings passed, the
caps were set at an unrealistically low level, and therefore
they were continuously blown through and Congress set them
aside. I think they have to be realistic, but I think having
hard caps that can be enforced is really the trajectory on the
discretionary side, and as I said earlier, I think you have to
have the same kind of discipline through a strong PAYGO
mechanism on mandatory and the revenue side.
Mr. Lankford. Terrific. Thank you all for coming and for
being a part of this, I really appreciate it. You worked right
through lunch, I am sure you had a long day of preparing
yesterday and then a trip to be able to get over here and come
through security and everything that you did today, so I
appreciate very much your time and for being here and investing
in the future of our country. With that this budget hearing is
adjourned.
[Additional submission from Ms. Kaptur follows:]
Submission of Hon. Marcy Kaptur, a Representative in Congress
From the State of Ohio
BIOGRAPHIES AND REPORTED SOURCES OF PRIVATE FUNDING OF WITNESSES
Douglas J. ``Doug'' Holtz-Eakin--President of the American Action Forum
In early 2010, Mr. Holtz-Eakin became president of the conservative
American Action Forum.
According to the New York Times, the Board of Directors for the
American Action Forum includes Robert K. Steel, a former executive of
Wachovia and Goldman Sachs. A major contributor is believed to be
Kenneth G. Langone, a founder of Home Depot and a former director of
the New York Stock Exchange.
1. Appointed to the Financial Crisis Inquiry Commission in 2009
2. Chief Economic Policy Adviser to U.S. Senator John McCain's 2008
presidential campaign
3. Senior Staff Economist for President George H. Bush's Council on
Economic Advisors.
4. Director of the Congressional Budget Office, from 2003--2005
5. Visiting Fellow at the Peterson Institute, from 2007--2008
6. Former academic appointments at Princeton and Columbia
Universities. He later received tenure at Syracuse University.
Carmen M. Reinhart, Ph.D.--Fellow at the Peterson Institute for
International Economics
Reinhart is also a researcher at the National Bureau of Economic
Research and the Centre for Economic Policy Research and a member of
the Congressional Budget Office Panel of Economic Advisers and Council
on Foreign Relations.
The Peterson's Institute receives major contributions from Peter G.
Peterson and his wife. Mr. Peterson is a former Chairman and CEO of
Lehman Brothers, and he co-founded the private equity firm the
Blackstone Group. In 2009, he reportedly gave the Peterson Institute
$8.5 million.
1. Formerly a professor of economics at the University of Maryland
2. Chief Economist and Vice President at the investment bank Bear
Stearns in the 1980s.
3. Also spent several years at the International Monetary Fund.
Maya MacGuineas--President of the Committee for Responsible Federal
Budget
She has served as the group's President since 2003.
Ms. MacGuineas' organization reportedly receives major funding from
billionaire Pete Peterson. (Peterson, who also provided contributions
to the Peterson Institute for International Economics, was Chairman and
CEO of Bell & Howell, from 1963 to 1971. From 1973 to 1984, he was
Chairman and CEO of Lehman Brothers. In 1985 he co-founded the private
equity firm, the Blackstone Group. He also served as Secretary of
Commerce under Nixon.)
1. Served on The Washington Post editorial board, in the Spring of
2009, covering economic and fiscal policy, and writing extensively on
the health care reform debate
2. Social Security Adviser to the McCain Presidential Campaign.
(She claims to be nonpartisan)
3. Worked at the Brookings Institution and the Concord Coalition
4. Worked on Wall Street (Firms Unknown)
John Podesta--President and CEO of the Center for American Progress
Major individual donors include to the Center for American Progress
include Peter Lewis (Ohio based Chairman of Progressive Insurance),
Steve Bing (New York Real Estate Developer and liberal philanthropist),
George Soros, and Herbert M. Sandler.
1. Co-chairman of the Obama-Biden Transition Project, and visiting
Professor of Law at Georgetown University
2. Assistant to the President, Deputy Chief of Staff, and White
House Chief of Staff during the Clinton Administration
3. In 1988, Podesta founded with his brother, Tony, Podesta
Associates, Inc., a Washington, D.C., ``government relations and public
affairs'' lobbying firm. Now known as the Podesta Group, the firm ``has
been retained by some of the biggest corporations in the country,
including Wal-Mart, BP and Lockheed Martin.''
4. Podesta held positions on Capitol Hill, including Counselor to
Democratic Leader Senator Thomas Daschle (1995--1996); Chief Counsel
for the Senate Agriculture Committee (1987--1988); Chief Minority
Counsel for the Senate Judiciary Subcommittees on Patents, Copyrights,
and Trademarks; Security and Terrorism; and Regulatory Reform; and
Counsel on the Majority Staff of the Senate Judiciary Committee (1979--
1981).
5. Podesta worked as a trial attorney for the Department of
Justice's Honors Program in the Land and Natural Resources Division
(1976--1977), and as a Special Assistant to the Director of ACTION, the
Federal volunteer agency (1978--1979).
[Questions for the record and their responses follow:]
Questions for the Record Submitted by Hon. Michael M. Honda, a
Representative in Congress From the State of California
Ms. Reinhart: Economists contend that mandatory spending will drive
the impending fiscal crisis. Because of this, would you agree that it
is impossible to bring our debt and deficit crisis in line through a
plan that solely cuts non-defense discretionary spending?*
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*Editor's Note: As of publication deadline, the committee has
received no response from the witness.
Ms. MacGuiness: You testified today about the psychological aspects
of the debt crisis. As I understand it, you are suggesting that as long
as we pass a credible plan that brings our debt-to-GDP level to
sustainable levels in a reasonable amount of time, it will create
enough certainty in the bond markets to stave off disaster and allow us
the time to implement that plan. Is that correct?
Since we agree that the Republican spending bill, HR 1, is not a
credible plan and therefore is not an effective way to calm bond
markets and delay the onset of a major fiscal meltdown, there seems to
be no reason to pass this legislation--legislation that hundreds of
notable economists including Goldman Sachs, Mark Zandi and Ben Bernanke
believe will cost hundreds of thousands of jobs and endanger our
economic recovery.
We know there is a better way.
Mr. Podesta: You outline an alternative, credible plan. The plan
has a number of features including reducing spending and increasing
revenue. It also, however, includes strategic investments in education,
transportation, infrastructure, and R&D, all areas slashed in HR 1.
Please explain to the Committee why these kinds of investments are a
key component of any credible long-term plan to put our fiscal house in
order.
Ms. MacGuineas' Response to Mr. Honda's Question for the Record
You testified today about the psychological aspects of the debt
crisis. As I understand it, you are suggesting that as long as we pass
a credible plan that brings our debt-to-GDP level to sustainable levels
in a reasonable amount of time, it will create enough certainty in the
bond markets to stave off disaster and allow us the time to implement
that plan. Is that correct?
Yes, that is correct. I believe that we cannot completely backload
a plan or it will appear that politicians are merely pushing all the
hard choices into the future. But if we adopt a credible multi-year
plan we can buy ourselves some time and don't need to implement major
policy changes this year when they are more likely to disrupt the
economic recovery. It is worth noting that whenever we start fiscal
consolidation, it is likely to have short-term negative affects on
growth, but it will be extremely beneficial in the long-term compared
to doing nothing.
But any plan will have to be credible. I think that means being
bipartisan, so one party does not try to undo it, statutory, and
coupled with triggers so that if changes do not occur, automatic
changes will.
I believe the best approach is a comprehensive, multi-year plan
that includes cuts to domestic discretionary spending, as the House
Republicans are pushing--though I would prefer to wait another year or
two for ones this large--but also changes to defense, entitlements and
revenues. But it is important that those who oppose the cuts in
domestic discretionary spending go on record on the comprehensive
budgetary changes they do support-not just argue against those they
oppose.
Mr. Podesta's Response to Mr. Honda's Question for the Record
Of course, deficit reduction is going to have be a mix of spending
restraint and new revenue. But we cannot ignore a third crucial
ingredient: strong economic growth.
There is a broad consensus that overall investment levels are key
driver of future economic growth and prosperity. Public investment
drives technological innovation and productivity growth, builds a
strong workforce through education and job training, and helps new
industries like clean energy to grow. Often, it induces the private
sector to invest as well: a 2003 study of 17 economically developed
countries found that for every dollar of public investment in research
and development, private firms spent about 70 cents more thanks to new
opportunities created by government investment. And it supports and
expands the American middle class, who can take advantage of better
education and employment opportunities to start a business or pursue an
invention, move up in the workforce, and give their children a better
life.
Moreover, while other countries are investing in the technology,
infrastructure, and education systems of the future, net U.S.
investment is currently at its lowest level since World War II. We need
to invest to stay competitive in the global economy, and we are already
falling behind.
While our budget problems are too big and too complicated to simply
``grow our way out of,'' without robust economic growth, we can never
hope to solve them. Public investment is critical to getting our
economy back on track and spurring strong, sustained and broadly shared
prosperity. Deficit reduction and renewed public investment need not be
mutually exclusive. On the contrary, strong public investment must be
made alongside targeted deficit reduction to create jobs, encourage
private investment, and help grow our economy back to health.
[Whereupon, at 12:56 p.m., the committee adjourned subject
to the call of the Chair]