[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]






                PERSPECTIVES ON RENEWING STATUTORY PAYGO

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JULY 25, 2007

                               __________

                           Serial No. 110-16

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
       http://www.gpoaccess.gov/congress/house/budget/index.html










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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
JIM COOPER, Tennessee                J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine               JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania    SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
ROBERT E. ANDREWS, New Jersey        JOHN CAMPBELL, California
ROBERT C. ``BOBBY'' SCOTT, Virginia  PATRICK J. TIBERI, Ohio
BOB ETHERIDGE, North Carolina        JON C. PORTER, Nevada
DARLENE HOOLEY, Oregon               RODNEY ALEXANDER, Louisiana
BRIAN BAIRD, Washington              ADRIAN SMITH, Nebraska
DENNIS MOORE, Kansas                 [Vacancy]
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
[Vacancy]

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                James T. Bates, Minority Chief of Staff

























                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, July 25, 2007....................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     2
    Peter R. Orszag, Director, Congressional Budget Office (CBO).     6
        Prepared statement of....................................     8
    David M. Walker, Comptroller General of the United States....    21
        Prepared statement of....................................    25
    Robert Greenstein, executive director, Center on Budget and 
      Policy Priorities..........................................    73
        Prepared statement of....................................    75
    Hon. Patrick J. Toomey, president, Club for Growth, former 
      Congressman from the State of Pennsylvania.................    82
        Prepared statement of....................................    84
    Robert L. Bixby, executive director, the Concord Coalition...    86
        Prepared statement of....................................    89
    Maya C. MacGuineas, president, Committee for a Responsible 
      Federal Budget.............................................    97
        Prepared statement of....................................    98



























 
                        PERSPECTIVES ON RENEWING
                            STATUTORY PAYGO

                              ----------                              


                        WEDNESDAY, JULY 25, 2007

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. John M. Spratt, Jr. 
[Chairman of the committee] presiding.
    Present: Representatives Spratt, Edwards, Cooper, Schwartz, 
Kaptur, Becerra, Doggett, Blumenauer, Berry, Boyd, Sutton, 
Etheridge, Baird, Bishop, Ryan, Barrett, Bonner, Garrett, 
Conaway, Campbell, Tiberi, Porter, Alexander, and Smith.
    Chairman Spratt. Because we have got several witnesses and 
several members who need to leave around ten-thirty to eleven 
o'clock and the sooner we get going, the more we will be able 
to cover this morning.
    This morning's hearing is about perspectives on renewing 
statutory PAYGO and we have a most distinguished set of 
witnesses. Our first panel consists of Peter Orszag, Director 
of Congressional Budget Office, and David Walker who is the 
Comptroller General.
    Our second panel consists of Bob Bixby, Executive Director 
of the Concord Coalition; Bob Greenstein, Executive Director of 
the Center on Budget and Policy Priorities; Maya MacGuineas, 
President of the Committee for a Responsible Federal Budget; 
and our former colleague, Pat Toomey, President and CEO of the 
Club for Growth.
    Ever since its enactment in 1990, we have been supporters 
on our side of statutory PAYGO and since its expiration in 
2002, we have been committed to renewing it. Quite simply, the 
4ecord shows that it works.
    When statutory PAYGO was on the books in the 1990s, it 
helped us convert chronic deficits into record surpluses. But 
after it was allowed to expire in 2002 and large tax cuts and 
offsets were passed along with large increases in mandatory 
spending such as for prescriptions, record budget deficits 
returned.
    At the beginning of this Congress, one of the first steps 
we took was to make PAYGO part of the House rules, a step we 
could take immediately because it did not require negotiation 
with the Senate or approval by the President.
    The House PAYGO rule requires that every bill affecting 
mandatory spending or revenues be deficit neutral. This rule 
has been in force consistently and followed since its adoption 
in January despite predictions when it passed that the House 
would honor it in the breach.
    The budget conference report for 2008 adopted this spring 
established a similar PAYGO rule in the Senate and expressed 
the sense of Congress that the statutory version of PAYGO be 
renewed as an additional measure, a backup measure, if you 
will, for fiscal discipline.
    At least one bill extending statutory PAYGO has been 
introduced in this Congress, H.R. 2685, introduced by Mr. Hill 
and cosponsored by Budget Committee members Mr. Berry, Mr. 
Boyd, Mr. Cooper, and Mr. Moore.
    Before turning to our witnesses for testimony, I want to 
turn to our Ranking Member, Mr. Ryan, for his opening 
statement.
    Mr. Ryan.
    Mr. Ryan. Thank you, Chairman, and welcome the gentlemen 
here today. It is nice to have you guys with us again.
    The concept of PAYGO seems like an enforcement tool that no 
one could object to. As the proponents put it, it simply says 
that any new spending Congress adopts has to be paid for. That 
sounds reasonable enough. But as is true with a lot of things, 
this subject is a little more complicated than it first might 
appear.
    I have made no secret of my concerns with the PAYGO rule 
adopted by the House this year and I will note those concerns 
again right here.
    This year, the Majority passed its version of PAYGO 
ostensibly as a key means for Congress to control the budget. 
Shortly after that, this Committee began to hold hearings, most 
of which focused on the largest economic and budgetary problems 
that Congress faces, and that PAYGO does not touch the project 
growth of entitlement spending under current law.
    We have two of the nation's foremost experts on that topic 
sitting right before us today. As both of our expert witnesses 
today have repeatedly warned, the current rate of entitlement 
spending is already out of control. It cannot be sustained 
either by the budget or by the economy.
    If you could pull up chart one, please.


    
    
    You can see from this chart there in the green the 
currently projected growth of entitlements. PAYGO does not even 
apply to any of that. It applies only to new legislation and 
new spending increases. It does not touch the underlying 
problem. Only real fundamental reform can do that.
    PAYGO was never meant to be a substitute for real budget 
and policy decisions. And in that regard, the Majority's budget 
this year is a real disappointment. It does nothing to address 
this massive entitlement growth, but even worse, it makes $190 
billion worth of new spending promises in what the budget calls 
reserve funds without any offsets identified. That is not 
budgeting. That is relying on somebody else to budget. And in 
all likelihood, that someone else is going to be the taxpayers.
    Also, this year is the first time Congress has adopted 
PAYGO without also adopting caps on appropriations. 
Appropriations still make up a large part of the budget, about 
a third. And as you can see from the chart and if the Majority 
is serious about spending control, it has got to look at ways 
to control all of Congress' spending. The blue part is the 
discretionary side.
    That said, I will be the first to admit that we Republicans 
have not always been on the side of the budget angels either. 
We, too, spent more than we should have. And I want to be clear 
about that, but we also made efforts to correct that. We put 
tight limits on nonsecurity appropriations and we took the 
first steps to reform our massive entitlement programs, saving 
$40 billion for taxpayers in the process.
    We managed to do those two things even though there was no 
PAYGO and no discretionary caps. We just made the tough choices 
and passed the necessary measures.
    Finally, no budget enforcement rule or law can work if 
Congress does not take it seriously. And there are certain 
indications that that is the case with PAYGO. We have seen 
evidence of this in the Education Bill which claimed that 
Congress would cut student loan interest rates in half over the 
next five years, then in year six, suddenly raise them right 
back up to the current level, clearly a gimmick to make the 
bill appear to comply with PAYGO.
    The SCHIP Bill that the Senate just passed employed a 
similar gimmick intended to mask the true cost of the bill and 
circumvent the PAYGO rules to the tune of $40 billion according 
to the CBO. But since the Farm Bill is slated for the floor 
this week, let us use that as an example of how PAYGO is 
working so far.
    And if you could bring up chart number two, I would 
appreciate that.



    This chart summarizes just the Farm Bill as reported by the 
Agriculture Committee. It is a gross cost, a gross spending 
increase of 14.2 billion over ten years. Now, let us look at 
how this spending increase is supposedly paid for.
    First, there is $8.5 billion in real spending cuts. These 
are legitimate and CBO has scored them as legitimate savings. 
Then there are $4.7 billion worth of timing shifts. These are 
quote, unquote savings the Agriculture Committee claims from 
delaying direct payments, counter cyclical payments, and 
payment to crop insurers, and making early collections of crop 
insurance premiums.
    But even as the Director of CBO has written, quote, all of 
those outlays will ultimately occur in subsequent years, end 
quote. In other words, they are not real savings.
    Third, the bill as reported takes credit for about 400 
million in savings from provisions aimed at detecting 
fraudulent payments. But under CBO's usual guidelines, these 
savings would not be counted, but CBO says in its cost estimate 
for the bill that it was directed to give the Agriculture 
Committee credit for them.
    So the bottom line is that if you give the Agriculture 
Committee credit only for the legitimate spending cuts and not 
for the timing shifts or the nonscoreable offsets, their bill 
still increases spending by $5.7 billion over ten years. But, 
again, this is just for the bill as reported.
    We keep hearing that the Majority also plans to double the 
spending increases in the bill and turn to other committees to 
find offsets for additional increases. We do not know for sure 
what those offsets are or where they are coming from. Are they 
tax increases or fees or what? More importantly, are they real? 
All this makes me wonder how serious we all are about the PAYGO 
commitment.
    Now, having said all this, I should also add that I have 
long supported process reforms and many of us here at this 
table have worked at that to make the budget more transparent 
and accountable. I believe that process can be used to create 
incentives for controlling spending and I believe we can do 
this on a bipartisan basis.
    I think the Majority has made good strides on earmark 
reform in the beginning of the year. Went backwards a little 
bit on that, but I think after we had some episodes on the 
floor, the Majority has come back to making the earmark reform 
transparent.
    Also, there are a lot of ideas we have had before that were 
bipartisan. The line item veto passed out of this Committee 
with a bipartisan vote last year passes on the floor with a big 
bipartisan vote, yet we seem to be having a hard time getting 
it scheduled for a hearing, a markup, or even floor 
consideration.
    The Blue Dogs have given us good ideas. They have given us 
a lot of good ideas that many Republicans agreed to. These 
include setting aside funds for emergencies which we did in the 
last Congress which was eliminated in this Congress. We have 
had votes here in this Committee on our markup of the budget 
resolution trying to incorporate some of the good Blue Dogs' 
ideas that were offered in the last Congresses only to see them 
shut down.
    So my appeal here is let us get back to working together to 
bring real reform to the budget process so we can do this on a 
bipartisan basis. The only way we are ever going to get the 
budget under control is to stop pretending that there is an 
easy, magic fix out there and to get down to actually doing the 
work that we know must be done. And I certainly hope Congress 
achieves that realization sooner rather than later.
    And I thank the Chairman for his long indulgence.
    Chairman Spratt. Thank you, Mr. Ryan.
    In the interest of time and proceeding with our witnesses, 
let us go straight to Dr. Orszag.
    Dr. Orszag, I believe we have your testimony and we will 
simply make your testimony and David Walker's testimony part of 
the record so that each of you can summarize your statement as 
you see fit. But the floor is yours.

  STATEMENTS OF PETER ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
  OFFICE; DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED 
                             STATES

                   STATEMENT OF PETER ORSZAG

    Mr. Orszag. Thank you very much, Mr. Chairman, Congressman 
Ryan, members of the Committee. Thank you for the opportunity 
to testify this morning.
    In my oral remarks, I would like to highlight four points. 
First, the BEA, that is the Budget Enforcement Act's PAYGO 
requirement helped to enforce multi-year fiscal goals and 
prevent fiscal deterioration during much of the time it was in 
effect. When the budgetary situation and policy priorities 
changed, however, the PAYGO requirement and discretionary 
spending caps were often superseded or ignored.
    Part of PAYGO's influence, moreover, may be more apparent 
than real in that any set of rules tends to encourage efforts 
to design policy changes in a manner that meets only the strict 
letter of the requirement. The bottom line is that rules can 
definitely help to enforce fiscal discipline and CBO believes 
that they did do so in the 1990s, but they are not a panacea.
    Second, even if PAYGO rules were fully successful in 
achieving their objective, that is offsetting the budgetary 
impact of policy changes, they would succeed only in preventing 
further deterioration of the long-term fiscal imbalance that 
exists under current policies. The nation faces a very 
substantial long-term fiscal challenge under those sets of 
policies and PAYGO rules do not address that underlying 
problem.
    This chart which I have shown you before and I will 
continue to show you at every opportunity highlights the basic 
problem. If healthcare costs continue to grow at the same rate 
over the next four decades as they did over the past four 
decades, Medicare and Medicaid will grow from four and a half 
percent of the economy today to 20 percent of the economy by 
2050. That is the entire size of the federal government today.
    There are significant opportunities to constrain healthcare 
costs over the long term without harming health and that is the 
central long-term fiscal challenge facing the United States.
    These crucial fiscal issues are not directly addressed by 
PAYGO rules and indeed many steps that hold the potential to 
reduce spending over the long term, for example, investing in 
comparative effectiveness research to examine what works and 
what does not in healthcare, actually entails short-term costs 
that would need to be offset under the PAYGO rules.
    Third, both the House and Senate already have nonstatutory 
PAYGO rules in place. One striking way in which the House rules 
differ from the previous statutory PAYGO requirement and from 
the Senate rule is that it applies to each separate House bill 
rather than to a broader collection of legislative proposals. 
Consequently, it does not allow savings from prior bills to 
cover the cost of a pending bill.
    Relative to the current rules in the House and the Senate, 
reinstating a statutory PAYGO requirement might provide a more 
permanent structure and would make possible enforcement 
mechanisms like sequestration that cannot be established under 
House and Senate rules.
    Finally, policy makers may also want to consider how budget 
rules affect the long-term budget picture. Even within the BEA 
PAYGO structure, only medium-term effects on the budget were 
captured and the long-term effects were sometimes quite 
different.
    Revisiting the issue of a statutory PAYGO requirement might 
provide an opportunity to consider rules governing long-term 
budgetary effects such as the one currently embodied in the 
Senate PAYGO rule.
    On that note, I wanted to let the Committee know that CBO 
will be devoting increasing resources to such long-term budget 
effects, especially in the critical area of healthcare.
    Later this year, we will be releasing an updated long-term 
budget outlook and we intend to release a long-term budget 
outlook on an annual basis thereafter to provide this Committee 
and the rest of the Congress with the information that you need 
to tackle these long-term budget challenges.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Peter Orszag follows:]


    
    
    Chairman Spratt. Thank you very much, Dr. Orszag.
    Mr. Walker.

                  STATEMENT OF DAVID M. WALKER

    Mr. Walker. Thank you, Mr. Chairman, Ranking Member Ryan. 
Thank you for putting the entire statement in the record. It is 
good to be here today.
    I would like to use a few slides to make a few key points 
so then we can go to Q and A. First slide, please.
    I think it is important to look back and learn from the 
past as we try to prepare to create a better future. As you can 
see here, since 1962, mandatory spending has grown dramatically 
and discretionary spending continues to be squeezed and is 
expected to continue to be squeezed.
    Interestingly, if you go back to 1797, the end of the 
second term of President George Washington, you will find that 
all the major functions of government in 1797 are now in 
discretionary spending. So what the major functions of 
governments were at the beginning of our Republic are now 
getting squeezed, national defense, homeland security, judicial 
system, Legislative Branch, Executive Office of the President, 
foreign affairs, Attorney General, et cetera.
    Next, please.
    In January of 2001 when I testified before the Senate and 
the House, we had fiscal sustainability for 40 plus years. We 
were expected to pay off the national debt and, therefore, you 
can look and see that there was no projection for any net 
interest payments going forward because we were projected to 
pay off the national debt. For a variety of reasons, we have 
changed paths. Here is the latest baseline future simulation. 
Next chart, please.
    This is based upon the CBO baseline extended and CBO does a 
great job. We work together on a very complementary basis. But, 
frankly, CBO has certain restrictions placed on them as to what 
they have to assume for their baseline assumptions.
    For example, that all tax cuts will expire, that 
discretionary spending will grow by the rate of inflation for a 
period of time, that AMT will not be fixed. And so, therefore, 
if you look at this, things really look better than they really 
are.
    Next, please.
    This represents an alternative fiscal future based upon a 
more realistic set of assumptions. One of the assumptions is 
that over the longer term that the U.S. taxes at historical tax 
levels, about 18.4 percent of GDP, it assumes that we do not 
reform Social Security and Medicare and it assumes that 
discretionary spending over the longer term grows by the rate 
of the economy.
    As you can see, this is a clearly unacceptable fiscal 
future. The largest growing expense is interest on the rising 
national debt. And by the way, the model which drives this 
blows up in the 2040s.
    Next, please.
    Or crashes stated differently. If you look at the path that 
we are on, the big three programs, Social Security, Medicare, 
and Medicaid are set to consume 100 percent of the historical 
levels of taxation of the federal government by the mid 2040s.
    Next, please.
    This is an alternative way of looking at what the deficit 
looks like going forward under the baseline and alternative 
simulation.
    Next, please.
    Last week for the first time in history, GAO issued a 
fiscal simulation for state and local governments in the 
aggregate. And this shows with the red line that when you look 
at the federal surplus or deficit, it is only a portion of the 
problem because state and local governments starting in about 
2017, which, by the way, is the year that Social Security 
surplus turns negative and we go to a deficit for Social 
Security on a cash flow basis, they start having serious 
problems that grow over time driven primarily by healthcare. 
Healthcare is driving the federal deficit, it is driving state 
deficits, and it is driving the undercutting of the U.S. 
competitiveness from a business standpoint. So healthcare is 
the big challenge.
    Next, please.
    You know, PAYGO rules, which I will touch on in a second, 
are one positive step, I believe, that could help us to get on 
a more prudent and sustainable path, but they are only one of 
many that are necessary.
    One of the things that we need to do is we need to improve 
transparency and enhance accountability with regard to where we 
are financially and where we are headed fiscally. We need to 
recognize that the United States is going to last more than ten 
years and move beyond the flat earth theory for budget analysis 
and to recognize that our real problems are not the next five 
years or ten years. They are not short-term deficits. They are 
long-range, growing structural deficits and related debt 
burdens that could swamp our ship of state.
    This represents a summary of something that we sent up to 
this Committee and others for consideration to enhance 
transparency and accounting and budgeting. This is a beginning, 
not an end. This is a follow-up to my testimony in January 
earlier this year. We are working with CBO and OMB and others 
to try to be able to address their comments and concerns.
    I am confident that we will be able to do that over a 
period of time, but I think it is important that we recognize 
that in addition to controls, we need more transparency because 
that is going to be necessary in order to not just deal with 
discretionary spending but also to deal with mandatory and the 
revenue side.
    Now, on the PAYGO, if I can. When I appeared before the 
Committee, I noted as I have before that GAO believes that it 
is important to consider reestablishing statutory PAYGO rules 
on both sides of the ledger, on both the spending side and the 
tax side of the ledger.
    As I have said before, we need to learn from the first rule 
of holes and that is when you are in a hole, the first thing 
you have to do is stop digging. Discretionary caps and PAYGO 
are designed to stop the digging, but there are at least two 
reasons to impose PAYGO on both direct spending and the revenue 
side of the budget.
    The first is obvious. Both affect the bottom line. It is 
the net of revenues and expenditures that affect the bottom 
line.
    The second is just as important, but not as obvious, and 
that is if you only apply PAYGO on one side of the ledger, then 
what is likely to occur over time is an increase of back-door 
spending in the form of tax preferences.
    Tax preferences or tax expenditures represent back-door 
spending. They are largely off the radar screen. They are not 
part of the normal budget appropriations process. They are not 
part of the annual financial report of the U.S. government. 
They cost us 800 to $900 billion a year in foregone revenue. 
They need more transparency and they should not be off the 
radar screen.
    They also are like mandatory spending in which they are not 
subject to periodic review. They are not subject to periodic 
reauthorization. They are in the base and they are assumed to 
continue. It would be very unfortunate if the restoration of 
the PAYGO rule were to lead to an increase in the portion of 
our financial situation that is on automatic pilot and, 
therefore, reduce transparency and control.
    As has been mentioned by Peter, PAYGO makes a lot of sense, 
but we need other budget controls. And, furthermore, we also 
are going to need to reform entitlement programs as well as 
engage in comprehensive tax reform in order to put our fiscal 
house in order.
    In closing, our fiscal clock is ticking and time is working 
against us. For the sake of our country, our children, our 
grandchildren, we need to start to act because our future is at 
risk. And if we want to keep America great, we are going to 
have to start making some tough choices. And the longer we 
wait, the more dramatic the changes are going to have to be, 
the less transition time, and the higher level of risk that we 
might face some crisis which does not necessarily promote sound 
decision making.
    Thank you.
    [The prepared statement of David M. Walker follows:]
    
    
    
    Chairman Spratt. In light of the fact that Mr. Cooper and 
Mr. Moore and Mr. Boyd have a bill and I believe Mr. Berry is 
also a cosponsor, I would like to turn first to them. I will be 
the clean-up hitter today and put my questions off until last 
and let Mr. Cooper lead the questions and make any opening 
statement he cares to make about their legislation.
    Mr. Cooper. Thank you so much, Mr. Chairman, for holding 
this important hearing. We Blue Dogs strongly believe that 
statutory PAYGO is necessary.
    We appreciate the fact that we have rules-based PAYGO today 
in the House and the Senate, but we would like to go that extra 
step, so I want to pay particular tribute not only to the lead 
sponsor of the bill, Baron Hill, but also to the Blue Dog 
leadership, much of whom are present here today, our leader, 
Allen Boyd; our policy Chairman, Dennis Moore; Marion Berry, an 
invaluable voice on all subjects.
    But we want to make sure that people on the Committee 
realize this is open to all to cosponsor and help. We would 
particularly invite our friends across the aisle.
    I need not remind you that statutory PAYGO was put in place 
in the Administration of the first President Bush. It worked 
well for twelve years until it was allowed to expire. And none 
other than Alan Greenspan has testified before this Committee 
that it would be the single most important reform that we could 
undertake to renew statutory PAYGO.
    It is not perfect. Several of the flaws have been pointed 
out. Our excellent witnesses have done that as have folks like 
Paul Ryan on the other side of the aisle. But it is one of the 
best places we can possibly start.
    I hope that we can move forward together and heed the dire 
warnings of the panelists. Sometimes in a hearing like this, it 
is tempting to just assume it is the same old, same old, but 
they have talked about some of the most grave threats that have 
ever faced the United States of America.
    I would like to particularly invite my colleagues to 
welcome the fiscal wake-up tour led by Comptroller General 
Walker to your district. They came to Nashville, Tennessee last 
week. They have had an astonishing effect on educating and 
informing the people of our area on the real fiscal problems 
that our nation faces.
    I see Bob Bixby back there with the Concord Coalition. 
Heritage was represented, the Brookings Institute. It is an 
amazing transformative effect on your district. So please take 
advantage of it.
    I would like to end by focusing on the fact that every day 
in this job, we face challenges. We faced one with the Ag Bill. 
I hope that we will heed on a bipartisan basis the warning that 
Paul Ryan gave us when he pointed out that the bill may well be 
$5.7 billion short. So we face a moral test to how we are going 
to meet that.
    Do we put the interest of America first or of a particular 
industry? And I would be the first to rant it is a vitally 
important industry for our nation, but America is even more 
important and we will face that challenge just in the next 24, 
48 hours.
    So there is no point in partisanship here. There is no 
point in finger pointing. We all have to work on this together 
for every bill to pull America out of the ditch. So I would 
like to thank the witnesses and particularly thank the Blue 
Dogs for their remarkable record of fiscal leadership. We can 
do better. We all can do better, but statutory PAYGO is a great 
place to start.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Cooper.
    Mr. Ryan.
    Mr. Ryan. Let me just pick up where my friend left off. 
Look, when Republicans had the Majority, we did timing shifts, 
too, and a lot of us decried them. So I am not trying to sit 
here and say that, you know, we are so much better than you 
guys are.
    Congress has fallen down on the job on all of these things. 
But since each of us are going to have to take this vote 
probably Friday, I think, on final passage on the Farm Bill, 
Dr. Orszag, I want to go through this with you.
    I have seen timing shifts in the appropriation bills that, 
you know, rank up in the millions, but it seems to me the 
timing shift in this bill is about 4.7 billion, about 5.7 
total.
    You sent a letter to us about the size of these timing 
shifts. Could you go through the offsets that are really just 
timing shifts in this bill and the direct scoring that are in 
the Farm Bill and give us a sense of what I tried to get 
through in my opening statement about the Farm Bill?
    I mean, the whole point of the question here is, yes, we 
have PAYGO and you can comply with it on paper technically 
speaking or you can really comply with it in spirit and 
actually reduce spending to pay for priorities.
    And I want to get to whether or not that is being the case 
here with the bill we are all going to vote on in a day or two. 
And could you elaborate on that, please?
    Mr. Orszag. Sure. CBO estimates that roughly $4.7 billion 
is shifted out of the budget window through 2017 through 
changes in advanced payments on various different farm programs 
and through speeding up the collection of funds that would 
otherwise be collected after 2017. So that $4.7 billion number 
that you cited is consistent with and I am sure based on CBO 
analysis.
    In addition to that, there is an estimated $375 million 
that would be collected from efforts to detect fraud in crop 
insurance programs. Traditionally under score keeping rule 14, 
those savings would not be scored. But after consultation with 
the House Budget Committee, we were directed to include those 
savings in the CBO estimate that you have received.
    Mr. Ryan. Well, let me move on to that and look at some of 
the other bills that are coming down the pike. For example, the 
Student Loan Bill, that already passed. That reduced interest 
rates on loan but only temporarily. After four and a half 
years, they would return to their current level allowing 
Congress to basically say on paper that the bill was offset 
when in reality, the cost would skyrocket and the offsets would 
not equal their interest deductions if they were made 
permanent.
    I think we have a similar instance in the SCHIP Bill that 
passed the Senate. Did that bill not show a rapid decline in 
SCHIP funding and eligibility for children in the out years to 
show that it would comply within their budget window?
    Mr. Orszag. Yes. The funding in the back five years is 
significantly reduced relative to the front five.
    Mr. Ryan. And so the policy assumption in that SCHIP Bill 
is that we are going to kick all these children off of health 
insurance in the last five years, in the second five-year 
window; is that correct?
    Mr. Orszag. The Senate finance mark involves significantly 
lower funding than a continuation of the first five years would 
imply.
    Chairman Spratt. Let me just make clear. You said the 
Senate?
    Mr. Orszag. Yes, I did.
    Chairman Spratt. Okay.
    Mr. Ryan. So we can all comply with PAYGO on paper 
technically speaking, but the question is, are we actually 
really doing it? And I think the question goes to statutorily. 
We have a difference of opinion on how exactly to do that. But 
is it true that if you put a mandatory program increase in an 
appropriations bill that PAYGO does not apply to that?
    Mr. Orszag. This has been the subject of some discussion. 
My understanding at this point is that a CHIMP, that is a 
change in a mandatory program on an appropriations bill--yeah, 
I had to learn all this kind of lingo--is now supposed to be 
offset, but there is some ambiguity about the handling of that 
kind of situation.
    Mr. Ryan. Was it offset in the Iraq War Supplemental Bill?
    Mr. Orszag. I will have to get back to you with the details 
of that, that supplemental in particular.
    Mr. Ryan. Sure.
    General Walker.
    Mr. Walker. Mr. Ryan, let me just note that when you are 
talking about PAYGO provisions, especially if you are talking 
about statutory provisions, one of the questions you have to 
address is who is going to blow the whistle when people may be 
complying in form but not substance. This is a very, very 
important point and I think that you really need to consider 
that. Who is in a position to blow the whistle and that is 
something that I think you need to focus on.
    Mr. Ryan. I thank you. That is kind of what we are trying 
to do here right now.
    There are many questions. I am trying to comply with the 
five-minute rule here, so I assume I have used all that up. So 
I will yield. Thank you.
    Chairman Spratt. Mr. Edwards.
    Mr. Edwards. Mr. Chairman, thank you very much.
    Let me first begin by responding as I have in the past to 
some of the comments made by my colleague, Mr. Ryan. He said 
the Democratic budget is, quote, a disappointment. Let me say 
what I think was a disappointment to the American people was a 
partisan Republican plan, budget plan for twelve years in which 
the Republicans controlled this House, that once combined with 
a Republican in the White House resulted in a free lunch 
philosophy of tax cuts that resulted in taking the largest 
surpluses in American history and turning them into the largest 
deficits in American history.
    I would also point out that it was his colleagues in this 
House, not Democrats, who passed the largest increase in the 
Medicare entitlement program in the history of Medicare. Those 
votes coming from the same folks now who are telling us how we 
should reform entitlement spending and keep it under control.
    Mr. Ryan. Would the gentleman care to yield on that point?
    Mr. Edwards. I will be happy to discuss it if I have time 
at the end of my comments. The gentleman has had quite a bit of 
time to discuss.
    He then, I thought it was interesting, criticized the 
Democratic plan for temporarily trying to help students get 
lower cost on student loans. If that is a gimmick, then I would 
suggest the trillion dollar tax cuts that were written 
purposely to be temporary must be the mother of all gimmicks. 
So I hope we would at least be consistent in our definition of 
what a gimmick is.
    And then, finally, he said let us get back to working 
together and I do welcome that. I would genuinely welcome that. 
But for the facts and the record, let me point out that for 
twelve years, Republican control in the House, Republican 
budgets were passed on an overwhelmingly partisan basis with 
very little, if any, input from Democrats in the Congress.
    So the implication that let us get back to the way it used 
to be, it sure was not that way during the twelve years of 
Republican control. If we can find common ground now on 
entitlement reform or other things, Mr. Ryan, I would welcome 
that.
    Dr. Orszag, let me ask you a question. In your judgment 
based on your analysis, had it not been for the tax cuts passed 
during the Bush Administration, would we have a federal 
balanced budget in fiscal year 2007?
    Mr. Orszag. Mr. Edwards, we responded to a letter from Mr. 
Spratt on that question and noted that there are no current 
estimates of the revenue impact from the tax legislation. 
However, if you combined original Joint Committee on Taxation 
scores for that revenue legislation with an estimated 
macroeconomic impact from a variety of models, one gets a 
budgetary impact on the range of about $200 billion which is 
slightly higher than what we expect the budget deficit to be 
this year.
    Mr. Edwards. So if I could summarize that, basically that 
analysis making the assumptions you make says that if it were 
not for the Republican tax cuts that were passed without Pay As 
You Go, more or less under the free lunch rule, passed tax cuts 
and we do not have to pay for them, if it had not been for 
those tax cuts, we would have a balanced budget today.
    The real debate on the PAYGO is that Republicans, some of 
them in Congress, not so much in the hinterlands of our 
country, Republicans in Congress are saying Pay As You Go 
should only apply to spending, not to tax cuts. They seem to 
imply that somebody can cut taxes dramatically and not have an 
impact on the deficit which factually is dead wrong and history 
has certainly proven that in the 1980s and again in this 
decade.
    Dr. Orszag, may I ask you specifically if you cut taxes by 
one dollar on the American people, is there any credible 
evidence to suggest that you bring in an extra dollar in 
federal revenue to make up for that tax cut?
    Mr. Orszag. No. There is evidence that you offset perhaps 
some of the costs. It depends exactly what kind of tax cut it 
is and it depends on how it is financed. But a full offset, 
that is the notion that tax cuts pay for themselves, is not 
supported by serious analytical work.
    Mr. Edwards. Not supported by serious analytical work. 
Thank you for that.
    In fact, I think some CBO serious analytical work said in 
some cases, tax cuts at the very best, most optimistic 
assumption might bring back 20 to 25 cents for every dollar 
lost in revenue.
    And it actually went further to say that when tax cuts, as 
these Republican tax cuts have been paid for by borrowing money 
from the Chinese and Japanese and other foreign countries, that 
actually tax cuts actually harm the economy and reduce federal 
revenues.
    Is that not correct that the CBO has said that tax cuts in 
some cases when paid for by borrowed money could actually hurt 
the economy and economic growth?
    Mr. Orszag. That is correct, but that is also a reflection 
of a variety of studies, not just CBO's own studies.
    Mr. Edwards. Thank you very much.
    Chairman Spratt. Mr. Conaway.
    Mr. Conaway. I thank the Chairman for this.
    I am now in my third year on this Committee and certain 
scripts never change. And, you know, it is both sides. There 
seems to be a whole lot more interest in whacking each other 
over things that are in the past and really we cannot go back 
and unwind or change. But, yet, we seem to enjoy and revel in 
that, but it seems to be counterproductive.
    Back on the tax cuts, is there a top rate of tax that we 
could say does begin to become counterproductive? In other 
words, those charts show basically 20 percent of GDP as a 
constant. Can we, in fact, raise taxes and continue to enjoy 
standards of living increases and opportunities at a 50 percent 
of GDP number? Either guy, David or Peter.
    Mr. Walker. That would have serious adverse consequences on 
economic growth, on disposable income, on our competitiveness 
from a global standpoint. I think, you know, the message is 
clear and compelling. The math does not come close to working.
    We are going to have to have additional revenues, about 
18.4 percent of GDP over the longer term. The sooner that 
Congress acts, the lower the level of taxation can be. You are 
going to get the most out of entitlement reform. You are going 
to get something out of imposing these budget controls and 
reprioritizing discretionary spending, but you are going to 
have to get more than 18.4 percent of GDP.
    And, frankly, what is going on right now is taxation 
without representation. What is going on right now is we are 
deferring huge tax increases absent meaningful reforms that our 
grand kids----
    Mr. Conaway. Let me challenge you a little bit there. So 
the only way to fix this wreck is to raise taxes to 50 percent?
    Mr. Walker. No. Absolutely not. Let me be clear. I think 
there is a multi-pronged approach. One, reimpose tough and 
meaningful budget controls including statutory PAYGO rules that 
apply on both sides of the ledger to slow the bleeding or stop 
the bleeding.
    Secondly, to reprioritize the base of discretionary 
spending, a lot of which is not very effective.
    Thirdly, reform entitlement programs and, fourthly, engage 
in tax reform, all those.
    Mr. Orszag. And if I can just add, I think in addition to 
PAYGO rules to avoiding making the problem worse, by far the 
most important thing to start tackling is the rate at which 
healthcare costs grow, period. And we are not investing enough 
in analyzing options and exploring policy choices that will 
help bend that curve.
    If there is anything else that we could possibly do during 
your time in Congress, during my tenure at CBO, if we start to 
bend that curve, we are going to leave future generations 
substantially better off than anything else that we could do.
    Mr. Conaway. And is there a way to raise taxes to do that, 
to fix that?
    Mr. Orszag. It is clear that we are on a path that 
ultimately----
    Mr. Conaway. No, no, no. Can you fix healthcare costs curve 
by raising taxes? No. What you have to do----
    Mr. Orszag. That is on the spending side.
    Mr. Conaway. I understand that. But every solution coming 
from many of our folks is that let us just raise taxes, let us 
just raise taxes. And I want to challenge that.
    You have just said that that is a spending issue. 
Healthcare costs is a spending issue and so we have to deal 
meaningfully with the rate of growth of those costs and that 
spending in order to make this work.
    This is not a hundred percent guarantee either way. I mean, 
neither side has the answer. We cannot cut spending enough to 
do it and you guys cannot raise taxes enough to do it. And so 
we have got to figure out some way to make it work.
    Mr. Walker. The President did put something on the table 
that I do not think the Congress took seriously enough, quite 
frankly. There is no way you can solve this problem with taxes 
alone. That would be counterproductive. All right?
    But the President put two things on the table in his last 
budget submission that relate to revenues, that relate to 
healthcare. First, that we need to change the tax treatment of 
the fact that most individuals do not pay income tax or payroll 
tax on employer-provided and paid healthcare. Number one tax 
preference growing very rapidly.
    And, secondly, we need to look at whether or not the 
subsidies for Medicare, whether or not well-off individuals 
ought to be paying more for Medicare than they are right now. I 
think it is inevitable we are going to have to do those two 
things. You need to do a lot more than that to get the cost 
curve under control. It is inevitable you are going to have to 
do that.
    Mr. Conaway. Let me ask one quick one, David. You mentioned 
who is the whistle blower in this deal. Would enhanced recision 
be helpful or is that just a figment of all of our imagination?
    Mr. Walker. I think there is a middle ground. You know, 
obviously line item veto is, you know, a problem from a 
constitutional standpoint because of the change in power. 
However, expedited line item recision that only requires a 
majority vote by the Congress to override, I think, has 
potential and should be seriously considered.
    Chairman Spratt. Mr. Doggett of Texas.
    Mr. Doggett. Thank you very much.
    Dr. Walker, you indicated in your testimony that as bad as 
things are right now, it was not that long ago when they were 
significantly better. I believe your testimony was that in 
January of '01 when you testified, and which I think happened 
to coincide with President Bush taking the oath of office, that 
we had fiscal sustainability for 40 years; is that correct?
    Mr. Walker. That is correct.
    Mr. Doggett. And you said for a variety of reasons, we have 
changed that. I took Mr. Ryan's statement to be essentially 
that since that time, Republicans have dug us into such a 
budget hole that statutory PAYGO alone will not solve the 
problem and I agree with him. I think we need that and we need 
more.
    The suggestion by Mr. Conaway that we cannot go back and 
undo all that has been done and that this is all in the past is 
true to a point. It is just that some of that thinking from the 
past continues to persist today that we can continue to cut 
taxes and even though the studies are widespread that that will 
not generate more revenue than it costs us, that we can 
continue to do that.
    I am interested particularly, since I serve on the Ways and 
Means Committee, in the comments that you mentioned about tax 
preferences is back-door spending because they are not only 
back-door spending, but they are usually a very blunt 
instrument to accomplish what they are set out to do. And I 
have supported many of them and I have questioned many of them.
    But if you take something like how to address the problem 
of uninsured children--my State, as you know, Dr. Walker, is 
right at the top in not caring for its children and providing 
them access to healthcare. And the suggestion that you can 
cover more of them with a tax credit, but it is a very 
inefficient and cost ineffective way to try to get more poor 
children of the working poor covered versus dealing with it 
with a direct expenditure.
    There has been a tendency in recent years with all the 
hullabaloo over tax cuts as a solution to every problem to 
think that if you can cut taxes for them enough that you can 
solve that and any other problem.
    What do you think is the most effective way to address the 
problem of the 800 to 900 billion that you say we are losing in 
revenue through tax preferences, back-door spending? Both of 
you, I would welcome your comments.
    Mr. Walker. We have a number of recommendations in that 
transparency in accounting and budgeting proposal that I 
mentioned before which is a beginning and we are engaging in 
discussions with CBO and OMB and a number of members on the 
Hill on that.
    Part of it is that we need to have more transparency over 
this. For example, we ought to have included in the financial 
statements of the government, we ought to have it included in 
budget documents how much money we are talking about. What are 
these, how much do they cost us. We ought to have a mechanism 
to try to periodically reevaluate these preferences to 
understand whether or not they are making a difference or not 
and who is benefitting from them.
    And let me give you a perfect example. We spend a lot of 
money on tax preferences for savings. Most of them do not work. 
America has a negative savings rate.
    Mr. Doggett. Are we not spending more money on retirement 
tax credits than we get in retirement savings from those 
credits?
    Mr. Walker. I cannot talk at that level because you are 
talking about a subset of overall savings. What I can tell you 
is, and part as you know for retirement savings, that is a 
timing difference. You do recapture revenues in the future when 
people end up getting their payments out. So it is a little bit 
more complicated than that.
    But what we do know is we spend a lot of money on current 
tax preferences, but the household savings rate in America for 
the last two years was negative.
    Mr. Doggett. Dr. Orszag.
    Mr. Orszag. Let me make a couple comments. First, there are 
a variety of tax expenditures that are devoted to policy 
objectives that seem inconsistent with other things that the 
Congress is simultaneously trying to do. So that is one set of 
issues that may warrant attention.
    Even for those that are aimed at objectives that the 
Congress seems dedicated to, promoting retirement saving, 
promoting health insurance, et cetera, the current design has 
several inefficiencies associated with it. Most prominently, 
tax expenditures are provided in the form of a deduction or 
exclusion and that means that for a lot of tax filing units 
that do not owe income taxes, they are not of any benefit.
    And from a narrow economic efficiency perspective, if you 
are going to be providing an incentive for health insurance or 
retirement, unless you know that high-income households are 
more responsive to that incentive or generate larger benefits 
when they do respond, it does not make sense from a narrow 
economic efficiency perspective to have anything other than 
basically a flat incentive.
    Mr. Doggett. Mr. Chairman, may I just ask one other follow-
up on this?
    Dr. Walker, you told Mr. Ryan that the big question was who 
will blow the whistle to ensure PAYGO is enforced. Who do you 
think should blow the whistle? How should it be done?
    Mr. Walker. Well, it depends. One, I do not want to compete 
with CBO and there are a number of things that CBO has the 
ability to do right now within its authority and you could give 
them more authority potentially.
    But I did hear one word that Peter mentioned. He said he 
was directed, CBO was directed to do certain things. I think, 
you know, one of the things you have to think about is that you 
have to make sure that, depending on how this is structured, 
that you have parties that are independent of the process and 
that are not subject to being directed because in the analysis, 
Peter is exactly right. It is not just a matter of whether or 
not it complies in form. It is a matter of whether it complies 
in substance. And that involves taking some risk. You know, a 
lot of times, people do not want to hear that it is okay in 
form but not in substance.
    Chairman Spratt. Let me clarify what directed means. In 
every case where CBO was called to give us their judgment as to 
potential savings from potential proposals, we asked them only 
to include the savings in the baseline when they themselves 
determined that those savings could be validated.
    For example, the USDA presented in its budget request an 
estimation that data mining and other fiscal disciplines 
applying to crop insurance would yield as much as $650 million 
in savings over a period of five years. That would have helped 
greatly in meeting our PAYGO requirements for the Farm Bill at 
that point in time. The CBO would only score it at $125 
million.
    There were other issues that I could go through. But in 
every case where they gave us a number that they thought was a 
valid savings number, then we, when necessary, asked or 
directed that it be included, but we did not direct them to do 
anything that they did not determine themselves. I can see how 
the word directed would give rise to that, but that is the way 
the processes work.
    Mr. Orszag. Mr. Chairman, if I could just add one further 
comment along that note. On score keeping rule 14 and other 
rules governing, rule 14 and rule 3 in particular, there are 
questions that I know that the Budget Committee may want to 
revisit and that CBO could help the Committee revisit in terms 
of the operation of those rules.
    So the most immediate example that was presented involved a 
rule that to many budget observers has some shortcomings 
associated with it.
    Chairman Spratt. Thank you.
    We will now turn to Mr. Alexander of Louisiana. Okay.
    Mr. Smith of Nebraska. Not here.
    Mr. Campbell of California.
    Mr. Campbell. Thank you, Mr. Chairman.
    A couple of things about which there appears to be no 
dispute. One is that we have a big problem with entitlement 
spending, that that is the biggest long-term problem that we 
face and we have to do something about it or we will have the 
fiscal train wreck, crash, explosion, whatever it was you 
called it, Mr. Comptroller General, and that PAYGO statutory or 
rules based is not going to cure that because it simply, as you 
said, stops you digging the hole, but does not get you out of 
the hole.
    Given those facts and the purpose of the PAYGO or any PAYGO 
like this is to set a structure that prevents us, Congress, 
from creating more deficit. Given all those facts, does it not 
make sense or what are your thoughts on that PAYGO, if it is an 
inaccurate structure, that we look at an adequate structure to 
deal with this thing over the long term, something like a 
spending limit because if we continue to increase spending at 
or above the growth of economy, we will never do anything but 
increase our deficit unless we perpetually increase taxes?
    But if we hold spending long term below the growth in the 
economy or even at the growth in the economy or even marginally 
above the growth in the economy, that we will eventually get 
around this thing and would that not create a structure that 
would require us, which, frankly, we are going to need to do, 
require ourselves to make the tough decisions that will get us 
out of this hole? And I ask that for both of you.
    Mr. Orszag. I guess I have some concerns or reservations 
about that approach as opposed to one that tackles the 
underlining drivers of the costs themselves. So in other 
examples, you know, for physician payments, the Congress tried 
to set an overall cap, the sustainable growth rate formula. 
What happened was, because you did not then tackle the 
underlining driver of the cost affecting physicians, every 
year, the cap gets lifted. I think it would be much better to 
spend time again investing in figuring out what is going to 
help bend those curves than trying to somehow artificially put 
a cap on top of it.
    Mr. Campbell. Dr. Orszag, if I may, the idea is that, yes, 
I absolutely agree with you. You have to deal with some of 
these fundamental things. But these are tough things for us to 
deal with, for political bodies to do.
    And what we need is the external discipline. I often use as 
an example that people know they should save for their 
retirement, but it is hard to do. There is stuff you want to 
spend on it now.
    So what do you do? You have your employer take it out of 
your paycheck so you never have the opportunity to see it. You 
need that external discipline to do what you know is right.
    And what I am suggesting and what you are saying, Dr. 
Orszag, is that these are things we know are right, that an 
overall mandatory and discretionary spending limit would force 
us to do those things.
    Mr. Walker. Let me come back. First, the real problem is 
mandatory spending and you need to figure out a way to be able 
to periodically reconsider those. They are on auto pilot right 
now. They continue to grow. They are outside the budget 
process, et cetera.
    One way you could do it is to put a hard cap on. Another 
way you could do it is to say we are going to have periodic 
reconsideration and there may be certain things that were going 
to happen no matter based on the passage of time.
    And if certain triggers are hit with regard to total 
spending, we might accelerate that reconsideration because 
things were going worse than we thought that forces 
reconsideration at least. And you may or may not pass 
legislation, but it forces it.
    Now, on a cap, I personally believe that in the long term 
to solve our healthcare problem, we are going to have to do 
four things.
    One, figure out a way to provide basic and essential 
healthcare services to everybody. Basic and essential, I choose 
those words carefully.
    Secondly, impose a cap on healthcare spending by the 
federal government.
    Mr. Campbell. Aren't those two things in conflict?
    Mr. Walker. No. No. Absolutely not. We could provide basic 
and essential cheaper than what we are doing now, all right, 
over the longer term.
    A cap on what the federal government spends because only 
the federal government can print money and mortgage the future 
of the country with impunity as of present point in time.
    And, thirdly, to move to evidence-based quality standards 
and, fourthly, to improve personal responsibility and 
accountability.
    So I think there is a role for caps in certain regards, but 
I think there is a lot of things that you can do in the interim 
before you get to that.
    Mr. Campbell. Dr. Orszag, in my final ten seconds, anything 
else you have to say on the idea of a spending limit?
    Mr. Orszag. I think the history of imposing strict limits, 
whether it is on the deficit under the predecessor to the 
``Budget Enforcement Act'' or under the sustainable growth rate 
formula, just imposing sort of a blunt cap tends to simply 
engender efforts to get around it. And it would be better to 
get at the underlining drivers of the cost, not that it would 
necessarily be harmful, but it is not particularly productive.
    Chairman Spratt. Mr. Berry.
    Mr. Campbell. I yield back. Thank you.
    Mr. Berry. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I thank you all for being here.
    General Walker, we certainly appreciate you and the message 
you have carried across the country to try to convince as many 
people as possible that we cannot keep doing what we are doing 
and we are going to have to change our ways. That is my simple 
way of describing what I think you have been doing and I 
applaud your effort for doing that.
    I am curious as to how that is received. When I try to do 
that, the Rotary Club does not like it and then they would just 
rather not hear about it. And I am curious as to how you have 
been received around the country. I know you have gotten some 
good Editorial Board reviews and things like that.
    Mr. Walker. So far, we have been to 21 states, plus the 
District of Columbia. By the end of this year, we will be to at 
least half the states in the union and have other ones 
scheduled after that.
    Initially the reaction that we got was people were shocked 
and appalled as to what the situation was. They had no idea 
that it was as bad as it was. Now what we are seeing is more 
people are aware that we have a serious problem and it is 
getting worse with the passage of time. And now they are saying 
what are we going to do about it. I mean, what is a possible 
way forward, if you will.
    You know, candidly what we are trying to do, meaning the 
participants in the official wake-up tour, Concord, Brookings, 
Heritage, and myself, are trying to make sure that the next 
President, whomever he or she might be, no matter which party 
they might be affiliated with, makes fiscal responsibility and 
intergenerational equity one of their top three priorities. And 
my personal view is if they do not, we are in trouble.
    And by the way, healthcare is a big subset of that. I mean, 
healthcare is the biggest driver. It is not the only one, but 
it is by far the biggest one.
    Mr. Berry. It has been said here this morning and I have 
heard it said many other times in some cases, you know, nobody 
has the answer. I refuse to believe that. I came here in 1993 
and worked in the Clinton White House. If I am not mistaken, 
Peter, you were there too.
    Mr. Orszag. I was.
    Mr. Berry. And my response to that is we did it. I do not 
know if our situation then is as bad as it is now, but it was 
pretty doggone bad and we cut 20 percent of the federal 
workforce and we made some really tough decisions. And I refuse 
to believe that we cannot only cut spending, get control of 
healthcare costs, and provide better healthcare for the 
American people all at the same time.
    So, you know, I think that this is a doable deal. I think 
it is something we have to do. And I applaud both of you for 
addressing this. I think PAYGO is good. I support it. And at 
the same time, I hold no illusions that that solves all our 
problems.
    We have got a lot of tough decisions to make, but we are 
going to have to make them and make them soon, at least that is 
my opinion. I am not asking you to associate yourselves with 
that remark. You will get in enough trouble along the line 
without having to associate yourself with me.
    But I thank you for being here and I appreciate the work 
that you do.
    Mr. Walker. If I could mention real quickly, Mr. Berry, 
PAYGO is definitely something that in my view should be adopted 
on both sides of the ledger. It is not a panacea, but it does 
not do anything by itself to deal with the $50 trillion hole 
that we are in. And so while it would help us, we have got to 
focus on that 50 trillion of which 32 trillion plus is Medicare 
alone.
    Mr. Berry. Well, the only time I do not like PAYGO is when 
they score my bills too high.
    Mr. Orszag. Yes. I have been experiencing a lot of this 
sort of cognitive dissonance over scoring.
    Chairman Spratt. Mr. Tiberi.
    Mr. Tiberi. Thank you, Mr. Chairman, for having this 
hearing.
    And thank you, Mr. Walker, for what you are doing around 
the country. You came to central Ohio earlier this year and my 
dad was quite impressed with your presentation. My dad and mom 
came to America for a better life, for the hope and promise of 
the American dream. My dad did not have a credit card until he 
was 60 years old. He is still living in good health and retired 
today.
    And he was a big fan of a guy whose portrait is in this 
room, John Casik, a former Chairman of this Committee, who 
talked a little bit about fiscal discipline when he was a 
member of Congress.
    And what my dad does not understand from his--my dad is a 
Reagan Democrat, I guess. He does not understand all the talk 
above the room up here when we talk about spending in 
Washington, D.C. And let me give you an example, Mr. Walker, 
that I would like you to comment on.
    PAYGO, my dad is for PAYGO. You pay as you go literally, 
everything, everything. You pay as you go in a household. And 
he was shocked to find out this year, this year when I gave a 
speech somewhere and said that the Democrat budget provides for 
$81 billion over last year of discretionary spending, over last 
year, $6 billion in an omnibus, $17 billion in nonwar emergency 
spending, all not subject to PAYGO. He scratched his head and 
he said, well, that is not PAYGO. That is fake PAYGO. I do not 
understand that.
    And it is something that I have talked about at meetings as 
well. In the context of this large debate, we often hear here 
that keeping more of your own money is a bad thing.
    At the same time, when you have every year, literally every 
year, we spend more than the previous year as a government. 
Government is set up to spend more money. And if we try to slow 
the growth of government, not cut it, but just slow the growth 
of government, that is always a bad thing.
    So in the context of your message long term, if we have a 
PAYGO system in place, would not the best type of PAYGO system 
be one that former Chairman Casik advocated and the fact that 
it would be one that applies to discretionary spending, which 
this one does not, discretionary caps, which this does not, 
emergency spending that cannot be simply avoided with a point 
of order.
    Bottom line, PAYGO applies to everything because as you 
have said better than anybody out on the talking circuit, the 
thing that is really going to kill us is not the $81 billion 
over last year in discretionary spending even though to my dad, 
that seems like a lot of money. It is the mandatory spending 
that is on auto pilot.
    And the budget that this Committee adopted earlier this 
year does nothing with respect to the mandatory spending that 
is on auto pilot with respect to reconciliation of what you 
pointed out were the healthcare costs.
    Is that not truly something that we should more focus on 
rather than have this talk about, what, you know, some have 
talked about in the halls outside of this room is that you are 
going to have to double the tax that--you have not said this--
double the taxation that Americans pay for my daughter to make 
sure that she has healthcare, Medicare, and Social Security 
when she is ready to retire?
    Mr. Walker. Well, several things. First, you know, clearly 
there are debates from time to time about what are true 
emergencies and, therefore, might not be subject to the rules.
    I understand your point that the PAYGO only applies to 
discretionary and that discretionary is not the major part of 
the problem. The major part of the problem is mandatory.
    Mr. Tiberi. It does not apply to discretionary. It only 
applies to new mandatory; is that correct, Mr. Chairman?
    Mr. Walker. Right. In other words, what you are proposing 
is we also need spending caps in addition to PAYGO, but you are 
talking about a spending cap that is beyond just discretionary 
is what I hear you saying.
    Mr. Tiberi. For everything.
    Mr. Walker. Yeah. I understand what you are saying. Let me 
tell you one of the concerns that I have about that. I think 
that we need to do better than PAYGO on everything and the 
reason I say that is that back-loads action. We need to reform 
Social Security and Medicare now. All right?
    And what I am concerned about is I do not want to give a 
false sense of security that if we achieve PAYGO on the short 
term on those programs that we do not have a problem that we 
need to solve because in reality, the $50 trillion hole that we 
are in goes up two to three trillion minimum every year due to 
the passage of time because of demographics, healthcare costs, 
compounding interest, et cetera.
    And so, you know, my view is that we need to reimpose tough 
budget controls of which PAYGO is one, tougher than we had in 
the early 1990s because we are in worse shape in the longer 
term, and we need to start engaging in reexamining tax 
preferences and entitlement and other mandatory spending. We 
need to start now and I do not know that we do it on a max 
PAYGO rule.
    Mr. Tiberi. Thank you.
    Chairman Spratt. Let us bear in mind that the next year, 
the increase in the base defense budget is at 48 to $50 billion 
and the supplemental increase which is included with the fiscal 
year 2008 defense budget is $142 billion additional.
    If you add a cap on discretionary spending, you would still 
have to accommodate that or begin to truncate spending 
substantially for Iraq and Afghanistan.
    Mr. Boyd.
    Mr. Boyd. Thank you very much, Mr. Chairman. And first I 
want to start by thanking you and, of course, Mr. Ryan for 
accommodating this hearing. We think it is very important.
    And I also want to thank Director Orszag and General 
Walker. You guys are great. General Walker, there is nobody 
with a louder bullhorn on these issues than you in the last 
number of years. And we are very grateful to you.
    Mr. Chairman, I have been listening with a great deal of 
interest and I hear some things that I like. I hear a few 
things I do not like. But I want to first start by applauding 
Paul Ryan not for all that he said but certainly the way he 
wound up.
    And you said let us get back to working together, and echo 
the comments of Mr. Conaway, too, and I do this an effort to 
show you that there are people in this room that want to work 
in a bipartisan way.
    As I remind you that the first PAYGO measure was passed by 
a Democratic Congress and signed into law by a Republican 
President, George Herbert Walker Bush, in 1990. Democratic 
Congress, Republican President.
    It was extended in the 1990s by a Republican Congress, in 
1997, I think it was, and signed into law by a Democratic 
President, Bill Clinton.
    In April 2001, President Bush declared his support for two-
sided PAYGO in his fiscal 2002 budget request to Congress.
    Now, there are many in this Congress, Mr. Chairman, who 
would prefer a one-sided PAYGO. Some would want PAYGO to only 
apply to taxes and not to spending. Others would want it to 
only apply to spending and not taxes. But the only way PAYGO 
works, as these gentlemen will tell you, is to have it two-
sided.
    I have heard a lot about what has happened in the last few 
months about budgeting, timing shifts, expiration of policies 
before the budget window is completed so that you do not break 
the bank or exceed spending limits. I have heard a lot about 
CIMPs.
    I want to tell you, Mr. Chairman, the last six years, most 
of all of those gimmicks have been used up. There are not many 
left to use.
    So my plea to you before my question is that we do need to 
work together, Mr. Ryan, Mr. Conaway, and others. And if we are 
going to get this done, the only way we are going to get it 
done is working together.
    Mandatory spending has to be dealt with. These gentlemen, 
everybody here knows that.
    Mr. Tiberi, I would remind you that all the things that you 
said are so important. We had it in the statute until 2002 when 
they expired. I do not need to remind you about the details of 
how that happened, who let it happen.
    So my question simply is this to the gentlemen at the 
table. This is a complicated issue. It is politics wrapped all 
around it, partisan politics. Is PAYGO, statutory PAYGO a good 
start for getting us back on to a path of fiscal sanity?
    Mr. Orszag. PAYGO helps to avoid fiscal deterioration and 
statutory PAYGO opens up possibilities that a rules-based PAYGO 
does not have, like sequestration, for example.
    Mr. Boyd. Including discretionary spending caps and 
statutory PAYGO?
    Mr. Orszag. You could incorporate discretionary spending 
caps into a PAYGO system broadly like the ``Budget Enforcement 
Act'' did.
    Mr. Walker. Yes, it is a good start, but it is just a 
start. We need to do more.
    Mr. Boyd. Thank you, Mr. Chairman. I yield back the balance 
of my time.
    Chairman Spratt. Thank you, Mr. Boyd.
    Mr. Porter.
    Mr. Porter. Thank you, Mr. Chairman.
    And, gentleman, appreciate your testimony. And not to 
belabor this point, but appreciate but what you are both doing 
very, very much.
    General, you mentioned in the four steps of success of 
healthcare and one of those was figuring coverage of basic and 
central for everyone. Can you expand upon that for a moment, 
please?
    Mr. Walker. Yes. I will give you one potential conceptual 
framework. If you look at what are basic and essential services 
that people need versus unlimited healthcare that people want, 
especially if somebody else is willing to pay for it, then I 
think you can find that there are certain key elements.
    First, inoculations against infectious diseases, certain 
wellness services that make sense not only individually but 
also collectively for society.
    Secondly, protection against financial ruin due to 
unexpected catastrophic illness. Financial ruin varies based 
upon your means and catastrophic illness obviously is 
unexpected, could occur at any time during your life, while 
avoiding heroic measures. Heroic measures involve being able to 
just throw technology or whatever at it where there is no real 
meaningful chance to improve or extend the quality of life or 
life expectancy period.
    And, thirdly, guaranteed access to additional healthcare if 
you want, but you will pay for it. You will pay for it either 
as part of your compensation through your employer or you will 
pay for it otherwise out of your pocket. That is the need.
    There are a lot of things we are doing right now that go 
well beyond need and we do not have adequate incentives, 
transparency, and accountability mechanisms to control cost. 
And we need to recognize that reality.
    Mr. Porter. So the basic and essentials, and I think I 
follow what you are saying, how should that be provided?
    Mr. Walker. One possible way to provide that is recognize 
that the largest risk pool and financing mechanism that exists 
in the country is the federal government to where ultimately 
you would redefine division of responsibilities for healthcare 
between the federal government, other levels of government, 
employers, and individuals, and you would have to phase into 
this over a number of years.
    So in some cases, it would mean the federal government 
would be providing something to people it is not now, for 
example, the uninsured, but on the other hand, over time, it 
means we would not be providing as much as we are in certain 
segments of society now.
    I think the last thing we need to keep in mind is there is 
a difference between whether or not you are covered by a 
program and how much you ought to pay for it. One of the things 
we need to be thinking more, as I mentioned to Mr. Conaway, we 
need to be thinking about it is one thing if you are covered by 
Medicare, it is another as to how much you ought to pay for it. 
You know, the taxpayers for Part B and Part D pay 75 percent of 
the cost.
    Should the taxpayers subsidize, should our kids and grand 
kids subsidize 75 percent of the cost for everybody no matter 
what their means is? I would debate that.
    Mr. Porter. Thank you very much. Again, appreciate both you 
and what you are doing. Thank you.
    Chairman Spratt. Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman, and let me thank 
you for holding this hearing and the Ranking Member too.
    You know, we can talk all day about how we got here. Most 
of us know what happened. And I think Mr. Boyd covered it 
pretty well. There were those who decided that they would 
rather get off of PAYGO and spend and not have to pay the bill. 
And then now they are the ones who want to talk about how we do 
it.
    The truth is, I think, and I want to hear your comment, you 
touched on it already, I think you have covered it. You said we 
need PAYGO on both sides of the ledger, on the spending side as 
well as the tax side. And I happen to agree.
    There has been a lot of comment on the Farm Bill here and 
let me, since I sit on that Committee, I think it is 
appropriate I have something to say because when that bill 
comes to the floor, it will be deficit neutral. We have an 
obligation to do that as a Committee.
    And the real issues gets between the mandatory and the 
discretionary piece of most of these issues. And this is a 
five-year piece of legislation. There are those who would like 
to take rural America back to the wood shed for the free 
spending of some folks who are not a part of rural America. And 
if we take it out of rural America, it has been my experience 
over the years, if rural America falters, the rest of us follow 
pretty quickly behind. Our food and fiber is in trouble.
    But my question to you, to both of you, and I thank you for 
what you are doing, and, Mr. Walker, let me thank you for 
taking the message across America. I think it needs a third 
party. We saw that in the early 1990s what happened and I think 
it is important we continue to do that because your leadership 
is so critical.
    But I think it is important to get some messages out. No 
matter how hard we work, one individual can discredit an awful 
lot of what we are going to do. And let me give an example.
    The Vice President of the United States said deficits do 
not matter. And a lot of people listened to that and they think 
that is really true. I happen to believe deficits matter. I 
think every American does. But if they think they are going to 
get something and it does not make any difference, and I 
appreciate your comments as relates to deficits in the general 
sense, you have touched on it, because PAYGO in light of the 
explosion of the foreign debt that is now flowing into this 
country to some extent is helping keep our interest rates down 
because people are investing in America.
    At some point, if we do not get our house in order, that is 
not going to happen and we will hit the sunami of rising 
interest rates, the lack of investment in foreign dollars, and 
escalating tax increases.
    I would appreciate both of your comments on that because I 
think that could be the worst of all worlds and we have not 
touched on that. We have gone around it, but we have not 
touched it directly.
    Mr. Orszag. Deficits matter a lot.
    Mr. Walker.
    Mr. Walker. Yeah. I will expand a little. You are correct. 
The Vice President did say that and the question is, what did 
he mean. Did he mean that they did not matter politically or 
did he mean that they did not matter economically? Did he mean 
that the deficits at the levels that we were running then were 
not a problem? Who knows? You will have to ask him.
    Here is the bottom line.
    Mr. Porter. They both matter.
    Mr. Walker. Structural deficits matter, especially when 
they are large and growing. But it is not just the deficits. It 
is the accumulated debt and related burdens associated with 
those deficits.
    Part of the problem we have right now is our current level 
of deficits are not a big problem. But what is the big problem 
is where we are headed. We are headed into uncharted territory.
    Now, in fairness, the Administration's position on deficits 
has changed dramatically in the last year and a half, maybe in 
part due to fiscal wake-up and other efforts. I do not know. 
Now the President says deficits matter. We need to balance the 
budget within five years, although he is just talking the 
unified budget, not operating.
    And we need to make a down payment on the $50 trillion 
imbalance and he proposed about $8 trillion worth of down 
payments in part due to the things I talked about before, 
changes in how we tax or how we give tax preferences for 
employer-provided healthcare and income-related premiums for 
Medicare, if you will, you know.
    So we also need to keep in mind foreign debt. The biggest 
risk we face is that since we are relying upon foreign 
investors to finance our excess consumption to an extent that 
we have never relied upon them before, if they decide that they 
do not want to continue to finance our debt at the same rates 
that they have, interest rates will go up and when interest 
rates go up, that will have a compounding effect.
    And, by the way, our simulations do not assume any rise in 
interest rates.
    Chairman Spratt. Ms. Schwartz of Pennsylvania.
    Ms. Schwartz. Thank you, Mr. Chairman, and appreciate the 
last couple of comments that were made because I would like to 
bring this back.
    There was a lot of discussion about how we might tackle the 
long-term dilemma about healthcare costs and some of the 
mandatory programs.
    But really this hearing is supposed to be about our fiscal 
honesty in the way we do budgeting. So I would like to bring it 
back to that if we can. I think the last couple speakers tried 
to do that.
    What we are trying to do here is to make sure that we are 
very clear that we will not spend any money in the budget that 
we cannot find. And we refer to it as PAYGO, but, you know, I 
do not know if anybody is listening, but if anybody is 
listening, they may not know what that means.
    I mean, simply we want to live within our means and have a 
balanced budget and figure out how to start paying down our 
debt and deal with our long-term fiscal dilemmas.
    Now, the first step we are saying is that we have to 
recognize where we are and begin to work on the rule, under the 
rule, and that is what we are trying to do is to not spend any 
money in this next year, next five years that we cannot find. 
So that means that we are trying to be really fiscally 
disciplined when we are dealing with that.
    And I am on the Ways and Means Committee, as well as on 
Budget, so we are given the task of finding those dollars 
within the budget. We are doing it under a Medicare Bill that 
we are going to be marking up in a couple of days to find money 
within Medicare, shift it around in the ways that we think will 
make a bigger difference.
    So the question we have before us is do we set it into law, 
one, and, two, the other side of the aisle is saying they only 
want PAYGO rules. They only want to live within our means under 
expenditures. They do not want to count taxes so that if we cut 
taxes, they do not want to count.
    Now, if they can be simple answers, I would appreciate 
that. Is it not true that our expenditures in the last six 
years under President Bush have gone up?
    Mr. Orszag. Yes.
    Ms. Schwartz. And they have gone up even----
    Mr. Walker. Yes.
    Ms. Schwartz [continuing]. Past inflation?
    Mr. Orszag. Yes.
    Ms. Schwartz. So when the other side says why have we not 
reined in our spending, we have had six years when they had a 
chance. They were completely in charge. President Bush, 
Republican House, Republican Senate, did they rein in spending? 
Maybe that has emotion to it and I am not supposed to do that. 
It did increase----
    Mr. Orszag. Spending has increased.
    Ms. Schwartz. Thank you. Okay.
    And in some cases, fairly significantly in discretionary 
funding, and I am not even talking about war funding or 
emergency funding? I am talking about under our budget.
    Mr. Orszag. Nondefense discretionary spending is now higher 
as a share of GDP than it was in 2000.
    Ms. Schwartz. Right. The number I got was discretionary 
outlays under the current Administration over the last six 
years, outlay average annual rate grew by 9.4 percent. Does 
that sound about right?
    Mr. Orszag. It seems plausible. I do not have the exact 
figure.
    Ms. Schwartz. Okay. And discretionary budget appropriations 
under again President Bush was 8.5 percent. Under President 
Clinton, just by example, is three percent. So that sounds 
about right?
    Mr. Walker. I remember some benchmark data going back to 
past administrations and as I recall, Lyndon Johnson's was the 
only Administration up until about a year ago where spending 
increased at a more rapid pace. But you do need to break that 
down between how much of it is defense versus nondefense, how 
much of it is structural, how much of it deals with emergencies 
such as the Global War on Terrorism, et cetera.
    Ms. Schwartz. The point I am making is that we are really 
trying to do it differently. We are saying that we are not 
going to spend money that we cannot find, that we cannot 
identify in another way.
    But let me just say quickly, I only have a short amount of 
time, you have said this already, but at the same time, not 
only do we see an increase in spending, we did see a dramatic 
cut in taxes. So what that means is it is less money coming in 
to spend than going out and we are spending more going out, 
right? And that has resulted in major new debt. You have talked 
about that quite a bit, General Walker----
    Mr. Walker. Correct.
    Ms. Schwartz [continuing]. About the significant amount of 
money we are now spending just in interest payments on debt. So 
we are creating new debt. We have spent more money and we are 
cutting taxes.
    The point we are trying to make here today, and I really 
just will close by asking you to agree or disagree, that if we 
are going to get serious going forward, that we need to apply 
these simple budget rules not only to spending, which we are 
trying to do, but also to tax policy. And if we do not do that, 
we will not ever be able to tackle both short-term and long-
term fiscal discipline and fiscal sanity as was referred to.
    Mr. Orszag. If the purpose of PAYGO is to avoid fiscal 
deterioration, there is no differentiation between mandatory 
spending and revenue that would seem to be justified.
    Mr. Walker. I agree. It needs to be on both sides of the 
ledger or else it is not going to be effective.
    Ms. Schwartz. Thank you.
    Chairman Spratt. Mr. Garrett.
    Mr. Garrett. Thank you, gentlemen.
    First of all, with regard to your fiscal sanity tour, I 
welcome you to come to our great State of New Jersey who is 
about to start selling off assets to meet its debt and if you 
join us with your information that you have, it would be 
helpful.
    Secondly, I would like to go back and compliment the words 
of Mr. Boyd and Mr. Ryan who outside the room saying anything 
we do here has to be done jointly bipartisan if we ever thought 
we are going to try to get this under control.
    And, finally, also, I see Mr. Berry is not here right now, 
but to agree with him and his comment about being in the local 
rotary or what have you. A lot of times when you go home, the 
people do not want to hear some of what you are probably 
testifying to when you go about in the community. I can tell 
you not only do they not want to hear it back at home in the 
rotary, they do not want to hear it here as well.
    My main thrust is going to be with regard to mandatory 
spending which is what we are here talking about today. But 
even trying to do the proverbial drop in the water savings, I 
am one of those guys who goes down to the floor every so often 
and tries to make a drop in a bucket savings with regard to the 
discretionary side on discretionary spending with earmarks or 
what have you.
    And I am sure you follow this closely or at a distance and 
realize that the majority of those times, any one of those 
infinitesimal small percentages do not get saved as well and 
therein lies the dilemma on the discretionary side. The problem 
is even larger, of course, on the mandatory side.
    And chart one just shows projected spending growth under 
current law. Looking at that chart, how much of that chart then 
comes under PAYGO right now under the current rules?
    Mr. Orszag. None of it.
    Mr. Garrett. And so there----
    Mr. Orszag. But discretionary is not covered by the PAYGO 
rule.
    Mr. Garrett. There you go. Well, how much of the--okay.
    Mr. Orszag. The mandatory spending that you are showing 
there to the extent that it is the baseline spending level is 
not covered by PAYGO. It is only changes off of that that would 
be covered by PAYGO.
    Mr. Garrett. Exactly. And so as a percentage over that 
whole chart that we are looking at, how much is it that is 
really covered under current PAYGO rules then?
    Mr. Orszag. Again, to the extent that is the baseline, it 
is not covered by PAYGO period.
    Mr. Garrett. Basically not. And therein lies the underlying 
problem that we are facing going forward in these areas. I 
think it was Mr. Tiberi who was making the point that we do see 
increases, Ms. Schwartz says as well, each year. But those 
increases can come even if we do not do anything, correct?
    Mr. Orszag. Well, again, as Mr. Walker and I both 
emphasized, PAYGO is intended to make sure that problem does 
not get worse, but it does not address that problem itself.
    Mr. Garrett. Right. And it makes sure it does not get worse 
on new programs, but it does not do anything as far as making 
sure the problem does not get worse with existing mandatory 
programs?
    Mr. Orszag. That is correct.
    Mr. Garrett. And so if we really want to try to get our 
arms around this, do we not have to go down that road and 
make--I think you said this, but I do not want to put words in 
your mouth--if we really want to get our arms around this, have 
PAYGO apply simply to everything?
    Mr. Orszag. Well, that final step is one that I am not sure 
about. You know, it is up to the Congress to decide how you 
want to tackle this underlying problem.
    Again, I think the key thing is to get under the hood of, 
in particular, baseline spending and see what is driving that 
and how can we take cost out, especially in healthcare, without 
harming health. I think there are very substantial 
opportunities there that are difficult to capture but that are 
possible to capture and having the Congress devote more 
attention to that issue is the best way of making sure that 
that----
    Mr. Garrett. Right.
    Mr. Orszag [continuing]. Increase is leveled.
    Mr. Garrett. And I will let you answer that. And the way 
that Congress does that, I know we have done it in the past a 
little bit, is through reconciliation, right, Mr. Walker?
    Mr. Walker. Right. But what we have said is PAYGO rules on 
both sides of the ledger.
    Mr. Garrett. Right.
    Mr. Walker. Mandatory reconsideration triggers, so you 
will--it is not a cap, but forces reconsideration of mandatory 
spending programs and tax preferences when they reach certain 
triggers because you are correct. You know, the PAYGO rule by 
itself does not deal with the base. And the base is the 
problem. We want to try to stop the bleeding, but that does not 
solve our $50 trillion problem.
    Mr. Garrett. But for practical purposes as far as 
procedurally, the way we would get to that reconsideration, as 
you call it, is through our mechanism of reconciliation; is 
that correct? I mean, do we have any other----
    Mr. Walker. De facto, okay? But on your reconciliation, you 
are not reconciling mandatory programs.
    Mr. Orszag. Well, you could. I mean----
    Mr. Walker. But we could.
    Mr. Garrett. I mean, you could, but you are not----
    Mr. Orszag. In fact, that is what it is designed to do.
    Mr. Garrett. Yeah. That is what it was put there for, is it 
not, and that would be the only way to do what you are telling 
us we need to do?
    Mr. Walker. Maybe under the current procedure. I think 
there are other ways you could look at it going forward.
    Mr. Garrett. Thank you. Appreciate it.
    Chairman Spratt. Mr. Moore.
    Let me stop here and say I know that both of you are under 
time constraints. And, General Walker, if you need to leave and 
you want to substitute one of your staff in your place.
    Mr. Walker. Thank you. I have to leave within about five, 
ten minutes.
    Chairman Spratt. Peter, you have got to go?
    Mr. Orszag. I think we are okay for now. Until otherwise 
notified, I will remain at your disposal.
    Chairman Spratt. Okay. Mr. Moore.
    Thank you.
    Mr. Moore. I apologize. I had to leave for just about half 
an hour, 45 minutes, so I missed this discussion. And I 
apologize if I am asking a question that has already been 
asked.
    But there was an article in Congress Daily yesterday that 
says that the headline is CBO tax cuts prevent a deficit 
reduction. Are you familiar with that, Dr. Orszag?
    Mr. Orszag. I am certainly familiar with the letter upon 
which that story was based.
    Mr. Moore. In fact, you wrote the letter, I believe; is 
that correct?
    Mr. Orszag. I did indeed, yeah.
    Mr. Moore. All right. And just the first paragraph says a 
new analysis by the nonpartisan CBO, Congressional Budget 
Office, found that projected budget deficits would have been 
largely wiped out and possibly turned into surpluses had it not 
been for President Bush's 2001 and 2003 tax cuts. Is that a 
fair report of what your letter said?
    Mr. Orszag. Again, what we found is that the tax cuts 
reduced revenue by about $200 billion this year and that is 
slightly higher than our projected deficit for the year.
    Mr. Moore. All right. Are all tax cuts created equally?
    Mr. Orszag. No.
    Mr. Moore. In terms of economic stimulus?
    Mr. Orszag. No.
    Mr. Moore. All right. And I was at the White House about 
four or four and a half months ago, I think, as a leader of a 
group called Lid'l Commission. In fact, I said, Mr. President, 
we need to find ways to work together, so I appreciate the 
invitation here.
    And when we were leaving, he said, you know what you said 
there about working together, we can. The President is saying 
this to me. He says probably not on tax cuts, but in other 
areas. And I said, Mr. President, even on tax cuts, it does not 
have to be all or nothing.
    For example, you have asked for total repeal of estate tax. 
I have a bill that would increase the exemption to three and a 
half million dollars a person. I said that would cover 99 
percent of the estates in this country and the small businesses 
and family farms you talk about. And he said to me, you know, 
Dennis, maybe we could find some areas to work together on tax 
cuts.
    And what I am saying here is, again, does it have to be all 
or nothing when it comes to repeal of the estate tax?
    Mr. Orszag. Certainly that is a policy choice and it need 
not be all or nothing.
    Mr. Moore. And I am not asking you to make a policy 
decision, but that is going to cost billions and billions of 
dollars in lost revenues; is that correct?
    Mr. Walker. That is correct. But it is not just an issue of 
the numbers and they are important. I think the other thing you 
have to think about is what would American society look like 50 
to 100 years from now if you eliminated the estate tax.
    Mr. Moore. Yes. Thank you very much to both of you and I 
appreciate your candor here.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Baird.
    Mr. Baird. Thank you very much, gentlemen. Thanks for the 
fiscal wake-up tour.
    Mr. Walker, I understand Mr. Orszag addressed this, but I 
would like to hear your very succinct comment. Did the tax cuts 
that we have seen over the last number of years pay for 
themselves?
    Mr. Walker. Absolutely not. Very few tax cuts pay for 
themselves.
    Mr. Baird. We can quote you on that as absolutely not?
    Mr. Walker. Absolutely not.
    Mr. Baird. So that the----
    Mr. Orszag. Absolutely they can quote you as saying 
absolutely not.
    Mr. Walker. Absolutely you can quote me as saying 
absolutely not.
    Mr. Baird. So if we have seen a decline in the deficit, the 
decline in the deficit is not a direct result of the tax cuts?
    Mr. Walker. As Dr. Orszag had said before, some tax cuts, 
you recapture part of the costs of some tax cuts, but the type 
that we have seen recently, they do not pay for themselves. And 
that is primarily due to economic growth which is why we are 
seeing revenues go up.
    I think what it is important for you to understand is if we 
have any inflation at all, if we have any economic growth at 
all, revenues are going to go up if you do nothing. The 
question is, are they higher than otherwise they would have 
been had the action not been taken.
    Mr. Baird. And the answer to that question is?
    Mr. Walker. They do not pay for themselves, so, no, they 
are not higher than they otherwise would have been had the 
action not been taken.
    Mr. Baird. Thank you.
    Mr. Orszag. If I could just add very briefly, it is 
important to realize that the revenue as a share of GDP 
resurgence that we have seen is concentrated very 
disproportionately in the corporate income tax, not in the 
individual income tax. Most of the policy changes that occurred 
were in the individual income tax.
    Of the 1.9 percentage increase in revenue as a share of GDP 
between 2003 and 2006, 1.5 percentage points, the vast majority 
are attributable to the corporate income tax. Corporate profits 
are significantly up and that is bringing in more revenue.
    Mr. Baird. I profoundly wish every talk radio host in 
America could hear what you two gentlemen just said so we get 
over this nonsense that taxes were cut, revenues have gone up, 
deficit has gone down, ergo it was because of the tax cuts.
    Second question. We heard our friends on the other side 
talk about mandatory spending. We have got to deal with 
mandatory spending.
    What do you think will be the estimated increase in the 
long-term deficit or the deficit spending of this country due 
to the Medicare Prescription Drug Bill that we passed a few 
years ago? How much did that add to the deficit of the debt?
    Mr. Walker. The estimated discount at present value of cost 
of that bill for the next 75 years is $8 trillion. In other 
words, you would have to have $8 trillion today invested at 
treasury rates to close the gap between what premiums are 
expected to bring in and what costs are expected to be. And 
that is worse for more than 75, but----
    Mr. Baird. I have heard it said by folks who supported that 
bill, gee, there was a lot of consternation when we passed it, 
but now 75 percent of seniors who participate think it is a 
pretty good deal. Sure, because they are passing $8 trillion of 
debt on to their kids to pay for the short-term apparent 
discount in the drugs. Is that a fair portrayal possibly?
    Mr. Walker. When 75 percent of the costs for most people 
are paid for by future generations, it sounds like a pretty 
good deal for today's generation, but not a good deal for 
tomorrow's.
    Mr. Baird. Would a constructive reform dealing with the 
Social Security debt over the long haul be to actually start 
making our deficit figures be, deficit figures including 
borrowing from Social Security, would that at least help us be 
honest in our budgeting?
    Mr. Walker. I believe that we ought to modify our financial 
reporting to be able to show what the operating deficit is and 
the operating deficit excludes the Social Security surplus 
because if you take, for example, OMB's latest projection for 
this year, $205 billion deficit, you got to add another 175 to 
180 billion on top of that which is the amount of the Social 
Security surplus we are spending.
    You know, my view is that one thing is for sure. We are 
going to deliver on those bonds and we took the people's money. 
We spent the people's money. And I think we need to reconsider 
the accounting treatment at least as it relates to the current 
Social Security surplus and accumulated related debt.
    Mr. Baird. Thank you very much.
    You mentioned triggers for mandatory spending. I 100 
percent agree with that. We also have revenue triggers. In 
other words, if the deficit reaches a certain level, then there 
are automatic revenue triggers.
    Mr. Walker. Well, I think we need to have triggers for tax 
preferences, okay, which is another form of mandatory, back-
door spending, if you will. So when tax preferences ended up 
costing us more than we think they are going to cost, then that 
would cause a, you know, fundamental reconsideration of those.
    Mr. Baird. One final question. You mentioned the issue of 
foreign debt. I greatly am concerned about that as well. There 
is a lot of talk in this Congress now about forcing the Chinese 
to revalue their RNB. It seems to me that may have a 
significant impact on their willingness to carry some of our 
debt.
    Any thoughts on that very briefly?
    Mr. Orszag. I guess I have two thoughts. I know this topic 
came up on the foreign debt hearing that this Committee held a 
couple months ago. We are running a risk. It is unclear how big 
a risk it is, but we are running a risk by relying on foreign 
financing of the current account deficit and that requires 
continued willingness of foreign investors to invest in U.S. 
dollar assets.
    I do not think anyone can tell you, the smartest guy on 
Wall Street or the smartest financier on Wall Street cannot 
tell you what exactly could trigger a collapse in confidence 
that would undermine the willingness of foreign investors to 
invest in the United States. There are such financiers who are 
worried about that risk. But we are running some risk and what 
exactly would trigger a potential collapse is unclear. But if 
that were to occur, the consequences could be quite severe.
    Mr. Walker. Let me remind you what happened in 1954 when 
NASIR took over the Suez Canal and the UK and France and Israel 
did not like it and wanted to take steps to challenge that. And 
the U.S. was the biggest holder of UK debt and was supporting 
the pound. A call was made from very high up in the United 
States to the UK to ask them to reconsider their action. That 
was an ally.
    It is fundamentally imprudent to rely upon foreign 
investors to the extent that we are today because they hold 
more of our nation's mortgage. They will have more influence on 
us. We will have less influence of them. Debt payments go 
overseas to benefit them, not to benefit us. And we are 
increasingly at risk.
    Now, there are some synergies, there is some commonality of 
interest between us and the Chinese and others. And, frankly, 
we are lucky they are willing to lend us their money because we 
have a savings deficit. So we should be thankful for that. But 
we need to recognize the structural problem and start to deal 
with it.
    Mr. Orszag. If I could just add to that. People have noted 
that there is an incentive for foreign investors to continue 
investing in the United States, but it is unprecedented for the 
world's leading economic power to be saving only one or two 
percent of its national income.
    And many observers have, therefore, noted that effectively 
we are in a dysfunctional relationship with the rest of the 
world. And the thing about dysfunctional relationships is they 
can go on longer than you expect, but then end faster than you 
think. And the same risk obtains in our large current account 
deficit.
    Mr. Baird. It is interesting how a psychologist can agree 
with an economist in that observation.
    Mr. Orszag. There you go.
    Mr. Baird. I thank you, sir.
    Mr. Walker. Mr. Chairman, if we have one more member, I 
will try to take a question from that member, but I have got to 
go.
    Chairman Spratt. We understand.
    Ms. Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman.
    Gentlemen, welcome. I guess I am the member.
    Mr. Walker. You are a very important member.
    Ms. Kaptur. I wanted to thank you. I wanted to ask about 
the value of the dollar versus the euro. I have noticed a 
gravitation of investment to the euro away from the dollar. 
Have you noted the same trend?
    Mr. Orszag. There has been some increased share of official 
reserves, for example, held by foreign governments in nondollar 
assets including in the euro. And that is one of the trends, 
one of the issues for the longer term is we have frankly 
benefited from the fact that foreign central banks and others 
have used the dollar as their sort of medium of exchange and 
invested their assets in dollar-based assets.
    If that were to shift, and it is not always guaranteed that 
the dollar will be the dominant international asset, if that 
were to shift, that is one of the things that could cause a set 
of events that would be difficult to control.
    Ms. Kaptur. I was very surprised that the market was 
jittery this week with the statement of only one mortgage 
company about the assets, the mortgages that it held. I thought 
the drop yesterday was, I think, a reflection of the risk you 
are talking about, that statements by one CEO from one company 
apparently caused that blip yesterday.
    Would you agree that it was rather unusual that one 
company's statement could cause such a reaction in the market?
    Mr. Orszag. I think there clearly are elevated concerns 
about the housing market and the subprime market in particular. 
And in that context, like in other contexts like our current 
account deficit where there is an underlying concern, a 
specific comment or set of comments can generate a 
disproportionate response.
    Mr. Walker. If I could mention real quickly, I think I am 
very concerned about the decline of the dollar to the extent 
that it has declined and whether or not that might be a leading 
indicator of increasing concern with regard to our long-term 
outlook. You know, there are competing potential currencies now 
that could be used as reserve currencies.
    One of the things that we need to keep in mind and one of 
the reasons that oil prices are as high as they are right now 
is because oil transactions in crude are denominated in 
dollars. And if the dollar is not worth as much, you have to 
charge more dollars in order to have the same purchasing power.
    And so, I mean, we are increasing our risk and there are 
other alternatives available.
    Ms. Kaptur. I have been following the price of gold also. 
That has been going up progressively, has it not, while the 
dollar has been going down? Am I reading the numbers correctly?
    Mr. Walker. That is not unusual. Yes, it has been going up. 
But that is not unusual, you know, for that relationship to 
exist.
    Ms. Kaptur. I wanted to ask. We are focused on the U.S. 
government's budget and we have heard what you have said about 
healthcare and the necessity of increasing savings and so 
forth. But we are looking at the government's share of spending 
in this economy which has hovered around what, 19, 20, 21, 22 
percent, somewhere in there?
    Mr. Walker. A little over 20 percent.
    Ms. Kaptur. For quite a long time. I mean, it varies and it 
is such a massive budget that it, you know, can vary by 
hundreds of billions of dollars.
    But I see one of the real problems is that if you think 
about a ship and it is going into rough waters, there are those 
people who are battening down the hatches and securing the 
chairs on deck. I sometimes feel Congress is doing that and 
nobody is paying attention to who is down in the engine room 
and at the controls of the direction in which the ship is 
headed. And I think that is where we fail as a country.
    And if one looks at the total economy, it is not performing 
at the level of GDP that it needs to in order to provide the 
bounce that would normally be there for spending, be it private 
or public. And I have been noting with greater trepidation the 
amount of trade deficit this country is racking up which is 
knocking off quite a significant amount off of our GDP 
annually, more and more and more.
    Do you gentlemen have any knowledge of that or wish to 
comment on that as the trade deficit is a drag on the growth of 
overall GDP which inhibits our ability to spend inside this 
economy?
    Mr. Orszag. Two quick comments. One is the current account 
and trade deficits are a reflection of our very low saving rate 
which does impose a long-term economic burden or sort of 
constraint on economic growth.
    The second thing is I do think that there is, you were 
touching upon it in some of your comments, a disconnect between 
macroeconomic performance and the experience that many American 
families are having in part because there has been a marked 
increase in income concentration, so a significant amount of 
macroeconomic performance has accrued to a small percentage of 
the population.
    And, secondly, a phenomenon that has received too little 
attention is that there is a significant amount of income and 
earnings volatility that typical families face. For example, 
CBO has found that one-seventh of American workers experience a 
50 percent decline or more each year in their annual earnings. 
So families seeing that kind of volatility and sluggish real 
income growth in significant parts of the income distribution 
may not be paying as much attention to what is happening to 
overall GDP growth.
    Ms. Kaptur. Dr. Orszag, could I just ask, is that one-
seventh----
    Chairman Spratt. No. We have got to go because we are going 
to have votes in about ten or fifteen minutes. And I will let 
you lead off with the next panel if that is okay.
    Ms. Kaptur. Is that one-seventh atypical? Is it getting 
more?
    Mr. Orszag. On that question, just very briefly, that looks 
like it has been roughly flat since 1980. There may be other 
measures that are somewhat high, but basically I think it is 
high and it has been high for a while.
    Mr. Walker. Two things, Mr. Chairman. Number one, we have 
four deficits, a budget deficit, a balance of payments of 
deficits, a savings deficit, and a leadership deficit.
    Last thing, this document which I will leave several copies 
is a document we issued in September of 2005 that talks about 
the growth of tax expenditures, the importance of getting them 
on the radar screen, and the importance of subjecting them to 
some type of budget control and discipline as well.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you both for your testimony, for 
your forbearance, and for always the excellent advice you give 
us. Dr. Orszag, thank you. General Walker, thank you both for 
coming.
    Now, let us have our next panel up as quickly as we can. We 
are sorry, but it is in the nature trying to plan anything in 
this institution. We do have some votes coming up on the floor. 
Could be in ten minutes. I am not sure. I hope it will be a bit 
longer.
    Bob Greenstein, we will give you the honor of going first.
    We welcome to the next panel Robert Greenstein who is the 
Executive Director of the Center on Budget and Policy 
Priorities; Robert Bixby who is the Executive Director of the 
Concord Coalition; Maya MacGuineas who is the President of the 
Committee for a Responsible Budget; and our old colleague, Pat 
Toomey. Thank you for coming, all of you, and we will start 
with Mr. Greenstein.

STATEMENTS OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON 
 BUDGET AND POLICY PRIORITIES; PAT TOOMEY, PRESIDENT AND CEO, 
 CLUB FOR GROWTH; ROBERT L. BIXBY, EXECUTIVE DIRECTOR, CONCORD 
    COALITION; MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A 
                  RESPONSIBLE FEDERAL BUDGET;

                 STATEMENT OF ROBERT GREENSTEIN

    Mr. Greenstein. Thank you, Mr. Chairman.
    Chairman Spratt. Let me say we will make your statements 
part of the record. You can summarize and to the extent you can 
talk about the rule itself and making it statutory as opposed 
to having it part of the House rules and any kind of technical 
implications, I think that would be useful to us.
    Mr. Greenstein. Thank you.
    Let me cover several points. Try and do it very quickly. 
First, adherence to the PAYGO principle is important because, 
as you know, we face a very serious long-term problem that we 
cannot afford to make worse.
    The Center on Budget has developed long-term budget 
projections, drawing heavily on CBO projections. Like others, 
they show current policies are not sustainable.
    We find that expenditures for all items other than 
Medicare, Medicaid, Social Security, and interest payments on 
the debt are actually expected to shrink as a share of GDP in 
coming decades, but that projected increases in cost for 
Medicare, Medicaid, and Social Security will swamp the 
improvements in the rest of the budget and produce deficits if 
we remain on the current policy course of about 12 percent of 
GDP by 2050 and debt in the vicinity of about 115 percent of 
GDP.
    Now, I should note that those projections I just mentioned 
assume compliance with PAYGO on both sides of the ledger.
    If, for example, one assumes that the tax cuts enacted in 
2001 and 2003 are made permanent without offsets, but that any 
entitlement increases are paid for, then the deficit by 2050 is 
expected to equal about 20 percent of GDP and the debt about 
230 percent of GDP, about double what it would be if the tax 
cuts--are any tax cuts that are expended are paid for.
    [Slide]
    Mr. Greenstein. The key reason for this is simply, and the 
first slide, if it can be put up, show this, the key reason for 
this is simply that the increase in deficits that the extending 
the tax cuts without paying for them would cause would trigger 
increased interest costs that would compound over time and make 
the debt spiral much worse.
    In other words, under current policies even with strict 
adherence to PAYGO, deficits and debt are projected to rise to 
dangerous levels. Without PAYGO or with PAYGO limited to the 
spending side, deficits and debt are likely to explode.
    Looked at another way, eventually Congress is going to have 
to fill the budget hole because it cannot allow a debt 
explosion to occur and adherence to PAYGO is necessary to keep 
the eventual deficit reduction packages from being so huge that 
they consist of draconian budget cuts or confiscatory tax 
increases.
    Point number two, PAYGO was highly effective in the 1990s. 
The record shows that Congress paid for virtually all of the 
entitlement increases and tax cuts up to 1999 including 
extending of expiring measures on both the tax cut and spending 
side of the ledger.
    I would note that PAYGO was established and maintained in 
the 1990s on a bipartisan basis that started with an agreement 
between a Republican President and a Democratic Congress. It 
was ratified and extended in 1997 by a Democratic President and 
a Republican Congress.
    A third point is PAYGO is not intended to prevent program 
expansions or tax cuts. It simply says if a tax cut or a 
program expansion is worth having, it is worth paying for. 
There are numerous examples.
    In 1997, you paid for the establishment of the SCHIP 
Program and a major package of tax cuts by a series of savings 
measures, particularly in Medicare provider payments.
    Similarly in the Higher Education Bill recently passed on 
the House floor, the Pay as you Go rule did not prevent you 
from cutting the interest rate students pay on loans. It 
required simply that it be paid for.
    And to those members who are concerned about unmet needs in 
the country, I would only say that if we do not have a PAYGO 
rule, I think eventually we will end up with cuts so deep that 
unmet needs will increase, not shrink.
    My fourth point I do not have time to cover in the oral 
testimony. It is explained in full in the testimony. And I am 
happy to answer questions on it. It is simply that it is not 
the case that the PAYGO rules would be biased in favor of 
entitlements and against tax cuts. There is much 
misunderstanding on that. Happy to answer questions on that. 
Testimony explains it in full. I cannot do it in three 
sentences.
    My last point is about tax cuts and the economy, it is 
sometimes said that we cannot, should not require tax cuts to 
be paid for because that would damage the economy. Now, there 
is agreement, Mr. Chairman, among mainstream economists that 
well-designed tax cuts can have some positive, although 
relatively modest, long-term effects on the economy, but there 
is also agreement among mainstream economic analysts that any 
potential positive effects of lower tax rates are swamped by 
the negative effects of persistent large deficits.
    Several years ago, CBO found that a ten percent across the 
board income tax rate cut if deficit financed could reduce 
economic output. The Joint Tax Committee and the Congressional 
Research Service have both issued an analysis finding the tax 
rate cuts that are deficit financed are likely to reduce 
economic growth over the long run.
    And last year, the Administration issued a study designed 
to tout the importance of making its tax cuts permanent. That 
study found relatively small but some positive long-term 
economic gain from doing so, but that study found the economic 
gain, the Administration's own study, only if the cost of 
making its tax cuts permanent was offset.
    In other words, the conclusion is clear that whatever long-
term economic benefits tax cuts may offer, they are only 
realized in the long term if the cost of the tax cuts is 
offset, that is if it is consistent with PAYGO discipline.
    The potential for some economic benefit from well-designed 
tax cuts if they are paid for offers support for the principle 
that tax cuts along with entitlement expansions should be 
subject to PAYGO rather than for the argument that tax cuts 
should be exempt.
    Lastly, let me briefly comment on your question of does it 
add to have this in statute in addition to having it in the 
rule. I believe it does and in one particular way. If PAYGO is 
only a rule, then it is not that difficult for a new Congress 
to wipe away the rule. If it is in statute, you would need to 
pass another statute to repeal it. And that would require most 
likely 60 votes in the Senate and a signature by the President.
    So establishing PAYGO in statute makes PAYGO much more 
stable and long lasting than only having it in a rule that may 
only apply in a particular Congress.
    Thank you.
    [The prepared statement of Robert Greenstein follows:]

Prepared Statement of Robert Greenstein, Executive Director, Center on 
                      Budget and Policy Priorities

    Chairman Spratt, Congressman Ryan, and members of the Committee, I 
appreciate the opportunity to appear hear today to explain why I think 
the pay-as-you-go discipline is important and appropriate, and why 
establishing a statutory pay-as-you-go rule to reinforce Congressional 
rules is a sound idea.
    My testimony will cover the following:
     Adherence to the pay-as-you-go principle is important 
because we face an extremely serious long-term budget problem and 
cannot afford to make that problem worse through entitlement increases 
or tax cuts that are deficit financed, rather than offset;
     The pay-as-you-go rule proved in the 1990s to be a highly 
effective tool to help restore fiscal responsibility;
     Pay-as-you-go does not prevent Congress and the President 
from enacting program expansions or tax cuts; it simply requires that 
the costs of those actions be paid for;
     Pay-as-you-go is not biased in favor of entitlement 
expansions and against tax cuts;
     There is not a valid argument for exempting tax cuts from 
pay-as-you-go on the grounds that requiring the cost of tax cuts to be 
paid for will hurt the economy;
     Establishing a statutory pay-as-you-go procedure backed up 
by sequestration will not produce a dramatic improvement compared with 
the current Congressional pay-as-you-go rules, but it will help to 
highlight and reinforce the importance of pay-as-you-go and, in 
particular, make it harder for a future Congress to quietly back away 
from pay-as-you-go.
    Let me address each of these points in more detail.
    Pay-as-you-go is Vital Because of the Long-term Fiscal Problem 
Facing the Nation
    As the members of this Committee know all too well, there are many 
disagreements about the budget--disagreements about the appropriate 
level of taxes and spending, about priorities among federal programs, 
and about the kinds of tax and entitlement reform that would be 
appropriate. But virtually all budget analysts agree on one thing: the 
federal budget is unsustainable under a continuation of current 
policies. The looming retirement of large numbers of baby boomers and--
more importantly--the continuing rapid growth in the cost of providing 
health care throughout the U.S. health care system will cause federal 
expenditures to rise more rapidly than revenues in coming decades. If 
changes in policies are not made to slow the growth of expenditures 
(which will primarily entail slowing the growth in health care costs), 
to increase revenues, or to do a combination of the two, federal 
deficits and debt will soar in coming decades to levels that will cause 
serious damage to the economy.
    The Congressional Budget Office has reached this conclusion.\1\ So 
has the Government Accountability Office.\2\ So has the Bush 
Administration.\3\
    The Center on Budget and Policy Priorities has developed its own 
set of long-term budget projections (drawing heavily on projections 
produced by CBO), which, like other projections, show that current 
policies are not sustainable.\4\
    We find that expenditures for all items other than Medicare, Social 
Security, and Medicaid (excluding interest payments on the debt) are 
actually expected to shrink by 3.9 percent of GDP between now and 2050. 
But projected increases in costs for Medicare, Medicaid, and Social 
Security--driven by increases in health care costs system-wide and the 
aging of the population--will swamp the contraction in the rest of the 
budget, result in huge increases in interest payments, and produce 
deficits of approximately 12 percent of GDP by 2050 and debt in the 
vicinity of 115 percent of GDP, which would be the highest level of 
debt in the nation's history. (Note: the key factor is the expected 
growth in health care costs per person throughout the U.S. health care 
system, in the private and public sectors alike, which drives up costs 
for Medicare and Medicaid. For the past 30 years, per-beneficiary costs 
have grown at virtually the same rate in Medicare and Medicaid as in 
private-sector health care, a development this is expected to 
continue.)
    These projections assume that Congress and the President comply 
with the pay-as-you-go rule, and that discretionary spending grows at 
the rate of inflation and population, thereby declining somewhat 
relative to the size of the economy. That means these projections rest 
on an assumption that any increases in entitlement program 
expenditures, such as for expansion of the SCHIP program, will be paid 
for by reductions in other entitlements or increases in revenues. It 
also means that these projections assume that tax cuts relative to 
current law (including extensions of tax cuts enacted in 2001 and 
2003), will be paid for by increases in other taxes or reductions in 
entitlement spending.\5\
    If, however, one assumes instead that the tax cuts enacted in 2001 
and 2003 are made permanent without offsets (while maintaining all of 
the other assumptions, including that no entitlement expansions are 
enacted without being paid for), the deficit in 2050 is projected to 
equal about 20 percent of GDP, and the debt would total approximately 
230 percent of GDP, or twice what the size the debt will be if those 
tax cuts that are extended are paid for. A key reason the deficit and 
debt levels would be so much higher if the tax cuts were made permanent 
without their costs being offset is that the increase in deficits that 
the tax cuts cause would trigger increased interest costs that would 
compound over time and make the debt spiral markedly worse. This is the 
case even though our projections do not assume that interest rates 
would rise; if they do (as is likely), the situation would be even 
worse.
    In other words, under current policies, even with strict adherence 
to the pay-as-you-go rule, deficits and debt are projected to rise to 
dangerous levels. Without pay-as-you-go policies, deficits and debt are 
likely to explode.
    It is a cliche to say that when you find yourself in a hole, the 
first thing you should do is to stop digging, but it is a cliche that 
offers sound advice. We are in a hole. We eventually are going to have 
to start filling that hole in (by slowing the overall growth of 
programs--primarily by slowing the growth in the system-wide cost of 
providing health care--and by increasing revenues). But in the 
meantime, we should not dig the hole even deeper.
    Looked at another way, eventually Congress simply will have to fill 
the budget hole, since it cannot allow a debt explosion to occur. 
Hence, the figures presented here show the projected amount of deficit 
reduction that Congress will need to enact in the future. Adherence to 
the pay-as-you-go rule is necessary to keep the eventual deficit 
reduction packages from being packages of enormous magnitude that 
consist of draconian cuts in basic programs and services or 
confiscatory tax increases. Every violation of pay-as-you-go will 
require an offsetting program cut or tax increase to be enacted later. 
A key reason to adhere to pay-as-you-go is to limit to some extent the 
amount of extraordinarily heavy lifting that future Congresses will 
have to do.
    The laws of budgeting and economics mean that program increases or 
tax cuts eventually must be paid for. The pay-as-you-go rule 
essentially says that since this is so, it is only fair that a Congress 
that desires a program increase or a tax cut also should find the 
offset.
         pay-as-you-go was a highly effective tool in the 1990s
    The pay-as-you-go approach proved very effective in the 1990s, when 
a statutory rule was in effect, along with a Senate procedural rule. 
Congress paid for all of its entitlement increases and tax cuts, 
including the extension of expiring measures such as the ``tax 
extenders.'' Along with a vibrant economy (which was likely helped by 
the federal government's commitment to fiscal discipline), pay-as-you-
go helped lead to the first federal budget surpluses in nearly 30 
years. Pay-as-you-go discipline was adhered to without deviation until 
surpluses reemerged.
    In a very real sense, we are in a deeper hole now than we were in 
1990, when the original pay-as-you-go rule was enacted. Although the 
deficit is smaller now than it was then, we are much closer to the 
point where rising health care costs and demographics will cause 
deficits and debt to escalate sharply. Reestablishing and abiding by 
the pay-as-you-go rule is a very important first step in beginning to 
deal with that long-term problem.
    It is important to note that the pay-as-you-go rule was established 
and maintained in the 1990s with bipartisan support. The original rule 
grew out of an agreement between a Republican President (the first 
President Bush) and a Democratic Congress. The rule was ratified and 
extended in 1997 by a Democratic President (Bill Clinton) and a 
Republican Congress. Concern over growing deficits motivated a 
significant number of members from both parties to support adoption or 
extension of the pay-as-you-go rule. As noted, the pay-as-you-go 
statute was adhered to without exception until 1999, when budget 
surpluses reappeared and seemed to be growing rapidly.\6\
    Support for the rule did not reflect agreement on budget 
priorities--and did not need to. In both 1990 and 1997, many 
Republicans feared that Democrats would try to enact significant 
increases in entitlement programs, while many Democrats feared that 
Republicans would try to enact large tax cuts. The pay-as-you-go rule 
allowed each side to make sure that the other side could not move ahead 
with its priorities without paying for them.
     pay-as-you-go does not prevent program expansions or tax cuts
    Pay-as-you-go is not intended to--and does not--prevent entitlement 
expansions or tax cuts. Rather, it is intended to force proponents of 
entitlement expansions and tax cuts to find ways to offset the cost of 
their proposals. In the 1990s, it certainly prevented enactment of 
various spending increases and tax cuts that members of Congress 
concluded were not worth paying for, but it did not keep other, higher-
priority entitlement expansions or tax cuts from being enacted. This 
was vividly illustrated in 1997, when entitlement cuts in the Balanced 
Budget Act of 1997 offset the cost of establishing the SCHIP program in 
that Act as well as the cost of tax cuts included in the Taxpayer 
Relief Act of 1997.
    We also see in this new Congress that pay-as-you-go does not 
prevent action on priorities; it simply means that proponents have to 
find ways to pay for those priorities. We saw this at work in the 
higher education bill that the House recently passed. The pay-as-you-go 
rule did not prevent that bill from cutting the interest rate that 
students have to pay on subsidized loans, but did require that 
proponents of that policy change find ways to offset the cost. 
Similarly, the pay-as-you-go rule will not prevent Congress from 
extending alternative minimum tax relief this year, but will force the 
tax-writing committees to search for ways to offset the cost of that 
relief. Pay-as-you-go certainly makes it harder to take action to meet 
various priorities, but the payoff of not adding to the long-term 
deficit problem is worth making proponents of such actions work harder. 
If the proposed program expansion or tax cut is really worth enacting, 
it is worth paying for.
    It is also important for proponents of program expansions to 
realize that adding to deficits now by enacting unpaid-for program 
expansions or tax cuts will increase the magnitude of the program cuts 
and tax increases that will be needed in coming years to bring 
exploding deficits under control. Thus, failing to abide by pay-as-you-
go now will make it harder to sustain key programs and meet vital needs 
in the future.
 pay-as-you-go is not biased in favor of spending and against tax cuts
    Despite the fact that the pay-as-you-go rule applies equally to 
entitlement expansions and tax cuts, the Administration and some others 
have argued that entitlement expansions are favored under the pay-as-
you-go rules because entitlements and revenues are treated differently 
in the budget baseline used in determining the cost of legislation. For 
instance, Office of Management and Budget Director Rob Portman 
concluded last year that there is a bias in the baseline rules for 
spending and against tax relief ``Because we assume that programs go 
out indefinitely on the spending side. * * * Whereas on the tax side, 
we assume the tax relief would not continue.''
    Careful examination shows, however, that this argument is not 
valid. The general baseline rules treat temporary provisions of the tax 
code exactly the same as temporary provisions of entitlement programs. 
Moreover, a special rule dealing with the few cases where an entire 
entitlement program expires (such as SCHIP) does not give an advantage 
to those programs either.\7\
    The general baseline rule for projecting the cost of entitlement 
programs (direct spending) and revenues (receipts) is set forth in 
section 257(a) of the Balanced Budget and Emergency Deficit Control Act 
of 1985, as amended.\8\ The Act states that the projections of 
entitlement spending and revenues are to be based on the assumption 
that ``Laws providing or creating direct spending and receipts are 
assumed to operate in the manner specified in those laws for each such 
year. * * *''
    When CBO or OMB analysts prepare a baseline projection of revenues 
for the next five or 10 years, they base their projection of revenues 
in each year on the provisions of the tax code that would be in effect 
in that year. That means they would take into account the fact that the 
2001 tax legislation reduced most income tax rates through 2010, but 
provided for those rates to return to prior levels after 2010. Thus, 
legislation that changed current law to extend the lower rates beyond 
2010 would be charged with the costs of lowering the rates in those 
years.
    In general, the CBO analysts do the same thing when they project 
expenditures for entitlement programs; they take into account the 
provisions governing each program that would be in effect in each year 
under current law. For instance, since Congress has extended Medicaid's 
Transitional Medical Assistance (TMA) provisions only through September 
30, 2007, the baseline projections of Medicaid expenditures assume that 
the TMA provisions will expire on that date. Legislation to extend the 
TMA provisions beyond that date would be charged with the cost of the 
estimated increase in spending that results from extending those 
provisions. Neither the baseline nor the CBO scoring rules provide an 
advantage to the legislation to extend an expiring entitlement 
provision over legislation extend an expiring tax provision.
    There is a special baseline rule that applies in the relatively few 
instances where Congress has decided that an entire mandatory program 
should be reexamined periodically and, to make sure the reexamination 
occurs, has provided that the entire program (as opposed to certain 
provisions of the program) will expire if legislation to extend the 
program is not enacted. For instance, the SCHIP program is scheduled to 
expire at the end of this year, which has led the current Congress to 
reevaluate the program. In cases where entire programs expire under 
current law, the baseline rules provide that projections of spending 
for those programs should assume that the laws governing those programs 
will be extended as in effect at the time of expiration.\9\
    There is no similar rule in the case of taxes because the tax code 
does not comprise a collection of separate programs, and neither the 
entire tax code nor the entire personal income tax is slated to 
expire.\10\ A temporary change in a provision within the tax code, such 
as a temporary provision lowering a particular tax rate, is analogous 
to the temporary extension of Medicaid's TMA provision, which is 
assumed to expire in the baseline just as the temporary reductions in 
certain tax rates are. Under current law, income tax rates will change 
in 2011, but the income tax itself will not expire.
    Most importantly, the expiring entitlement programs that are 
assumed to continue in the baseline receive no overall advantage 
relative to expiring tax-cut provisions. When estimating the costs of 
legislation that would establish or extend an entire entitlement 
program that is assumed to continue in the baseline, CBO scores the 
cost of that legislation for every year of the 10-year ``budget 
window.'' Congress can not make the cost of that legislation appear 
smaller by scheduling the new program to expire after a few years; CBO 
will score the costs in every year regardless. In contrast, legislation 
that schedules a tax-cut provision to expire is scored only for the 
cost of the tax cut in the years it is in effect. If both the program 
and the tax-cut provision are extended, the end result is the same. The 
full costs of both the program and the tax cut over the whole period 
are scored, although the full costs of the program are scored up front 
when it is established, while part of the cost of the tax cut is scored 
when it is first enacted and the rest is scored when the tax cut is 
extended.
    To understand how this works, consider the following simple 
example. A new entitlement program and a tax provision are enacted at 
the same time. Each is scheduled to expire after two years, each is 
estimated to cost $5 billion over five years if extended ($2 billion in 
the first two years and $3 billion over the last three years), and each 
is then extended for three more years in later legislation.
     If the entitlement program is assumed to continue in the 
baseline, the original legislation establishing the program will be 
scored as costing $5 billion over five years, even though the program 
is slated to expire after two years. The subsequent legislation 
extending the program will be scored as having no cost.
     The original legislation containing the tax-cut provision 
will be scored as costing only $2 billion, while the subsequent 
legislation extending the provision will then be scored as costing $3 
billion over the following three years.
     Thus, the new entitlement program and the tax-cut 
provision will each be scored as costing $5 billion over five years. 
The new entitlement program gained no advantage from the baseline 
assumption that it would be continued.
    If proponents of the tax cuts believe that being charged with the 
cost of the tax cut in two installments is disadvantageous--even though 
the total cost is no greater than if the tax cuts had been treated as 
permanent in the baseline and the original legislation had been scored 
on that basis--they can avoid that outcome by making the tax-cut 
provisions permanent to start with. In recent years, tax-cut proponents 
often have purposely opted for the installment approach, because they 
concluded that doing so would be to their strategic advantage. 
Sunsetting a tax cut after a few years can make the cost appear lower 
when the tax cut is first considered, making it possible to pass larger 
tax cuts than would otherwise be possible.\11\ Once the larger tax cut 
has been passed, its proponents then argue that it must be extended to 
avoid subjecting the public to a ``tax increase.''
requiring the cost of tax cuts to be offset will not damage the economy
    The argument that not extending expiring tax cuts will damage the 
economy, or that enacting other new tax cuts will boost the economy, is 
used by some to argue that the pay-as-you-go rule should not apply to 
tax cuts. In its most extreme form, the argument is that applying the 
pay-as-you-go rule to tax cuts does not make sense because tax cuts pay 
for themselves--that is, that tax cuts boost the economy so much that 
revenues are higher than they would have been without the tax cuts.
    In reality, tax cuts do not have such magical effects. There is 
agreement among mainstream economists that tax cuts generally have 
relatively modest long-term effects on the economy--other factors are 
much more important in determining the performance of the economy--and 
that, even under the best of circumstances, they do not boost the 
economy enough to come remotely close to paying for themselves.
    Perhaps most importantly, mainstream economic analysis shows that 
the potential negative effects on the economy of higher tax rates (or 
the potential positive effects of lower tax rates) are smaller than the 
negative effects of allowing persistent, large deficits. This point was 
underscored in a recent response by the Congressional Budget Office to 
questions posed by Senate Budget Committee ranking Member Judd Gregg 
(R-NH) about the effects of raising taxes or cutting spending to 
achieve a sustainable long-term fiscal path. CBO explained:
    ``Differences in the economic effects of alternative policies to 
achieve a sustainable budget in the long run are generally modest in 
comparison to the costs of allowing deficits to grow to unsustainable 
levels. In particular, the difference between acting to address 
projected deficits (by either reducing spending or raising revenues) 
and failing to do so is generally much larger than the implications of 
taking one approach to reducing the deficit compared with another.'' 
\12\
    This is consistent with CBO's earlier finding that, if deficit 
financed, a 10-percent across-the-board cut in income tax rates could 
potentially reduce economic output.\13\ It is also consistent with the 
a letter CBO sent to Chairman Spratt last week on the cost of the 2001 
and 2003 tax cuts, which concluded that ``at this point in time 
(several years after enactment), * * * the overall impact of the tax 
legislation [on the economy] is likely to be modest. * * *'' and that, 
when that impact is taken into account, the actual cost of the tax cuts 
is likely to be about the same as the official cost estimates made at 
the time of the tax cuts' enactment (which did not take economic 
feedback effects into account).\14\ Similarly, in an analysis of the 
effects of reductions in individual and corporate tax rates that are 
deficit financed, the Joint Committee on Taxation found that: ``Growth 
effects eventually become negative without offsetting fiscal policy 
[i.e. without offsets] for each of the proposals, because accumulating 
Federal government debt crowds out private investment.'' \15\ And, in 
an analysis of the argument that the tax cuts enacted in 2001 and 2003 
cost less than was estimated at the time of enactment because they 
boost economic growth, the Congressional Research Service concluded in 
a September 2006 report that, ``at the current time, as the stimulus 
effects have faded and the effects of added debt service has grown, the 
2001-2004 tax cuts are probably costing more than expected.'' \16\
    Even the Bush administration has concluded that the long-term 
economic effect of the tax cuts will be quite small if they are made 
permanent. A Treasury Department study found that making the 2001 and 
2003 tax cuts permanent would increase the size of the economy over the 
long run (i.e., after many years) by only 0.7 percent--and that even 
this small growth increment would occur only if the tax cuts were paid 
for in full by unspecified cuts in government programs.\17\
    As an indication of how modest a long-term increase in the economy 
of 0.7 percent would be, if it took 20 years for the increase to fully 
manifest itself (Treasury officials indicated it would take 
significantly more than 10 years but were not more specific than that), 
this would mean an increase in the average annual growth rate for 20 
years of four-one hundredths of one percent--such as 3.04 percent 
instead of 3.0 percent. Such an effect is so small as to be barely 
perceptible. Moreover, after the 20 years (or whatever length of time 
it would take for the 0.7 percent increase to show up), annual growth 
rates would return to their normal level--that is, they would be no 
higher than if the tax cuts had been allowed to expire.
    Congressional and executive branch economic experts are not the 
only ones to reach the conclusion that deficit-financed tax cuts are 
unlikely to substantially boost long run economic growth. University of 
California economist Alan Auerbach, a noted expert in fiscal policy, 
simulated the economic effects of the 2001 reductions in marginal tax 
rates, increase in the child tax credit, ``marriage penalty relief,'' 
and AMT relief under various financing assumptions. He found that the 
only scenario under which the tax cuts increased the size of the 
capital stock and thus increased long-run economic output was one in 
which they were fully paid for with spending cuts at the time they were 
enacted. Auerbach concluded that ``whatever its benefits, the tax cut 
[enacted in 2001] does not offer the promise of enhancing savings and 
expanding output in the long run.'' \18\
    The clear conclusion is that whatever long-term economic benefits 
tax cuts might offer, those benefits will only be realized if the cost 
of the tax cuts is offset--that is, if enactment of the tax cuts is 
consistent with pay-as-you-go discipline. The potential for economic 
benefits from tax cuts if they are paid for offers support for the 
principle that tax cuts should be subject to pay-as-you-go, rather than 
for the argument that tax cuts should be exempt from such fiscal 
discipline.
enacting a statutory pay-as-you-go rule would help promote adherence to 
                             pay-as-you-go
    Finally, I would like to briefly discuss why enacting a statutory 
pay-as-you-go rule would be helpful. The House and the Senate have 
already taken the most important step toward establishing pay-as-you-go 
discipline by imposing rules that prohibit consideration of legislation 
that would increase entitlement spending or cut taxes if the costs of 
those actions are not offset. Establishing a statutory pay-as-you-go 
rule backed up by sequestration would not dramatically enhance the 
effectiveness of those rules. (Congress could include a waiver of the 
statutory pay-as-you-go requirement in future legislation, just as it 
can waive its own rules to consider legislation that violates pay-as-
you-go.)
    Nevertheless, enacting a statutory pay-as-you-go rule could add 
force to the Congressional rules by emphasizing the importance of 
adherence to pay-as-you-go and, in particular, by making it harder for 
future Congresses to quietly back away from adherence to pay-as-you-go. 
Once pay-as-you-go was written into law, it could be removed from the 
law (before its scheduled expiration date if there were one) or set 
aside on a case-by-case basis only by enactment of a statute that would 
require the assent of the President and, most likely, support from a 
supermajority in the Senate to become law. A statutory pay-as-you-go 
requirement also could have the virtue of improving the budgeting 
culture in Executive Branch agencies by reinforcing the idea that, when 
entitlement expansions or tax cuts are discussed, a key question should 
be ``how will the costs be paid for?''
                               conclusion
    Enactment of a statutory pay-as-you-go rule would be highly 
desirable. But whether a statutory rule is established or not, what is 
of most importance is that Congress maintain a commitment to adhere to 
pay-as-you-go discipline even when living by that rule is not easy. 
Given the bleak long-term fiscal outlook for the nation, we cannot 
afford for Congress to do otherwise.
                                endnotes
    \1\ ``The Long-Term Budget Outlook,'' Congressional Budget Office, 
December 2005.
    \2\ ``The Nation's Long-Term Fiscal Outlook: April 2007 Update,'' 
Government Accountability Office, April 2007.
    \3\ ``Mid-Session Review of the Budget of the United States: Fiscal 
Year 2008,'' Office of Management and Budget, July 11, 2007, p. 6.
    \4\ Richard Kogan, Matt Fiedler, Aviva Aron-Dine, and James Horney, 
``The Long-Term Fiscal Outlook is Bleak: Restoring Fiscal 
Sustainability Will Require Major Changes to Programs, Revenues, and 
the Nation's Health Care System,'' Center on Budget and Policy 
Priorities, January 29, 2007.
    \5\ The projections do assume that current relief from the 
Alternative Minimum Tax will be extended without offsets, because the 
AMT would practically replace the regular income tax by 2050 if the 
relief were not extended.
    \6\ During the 1990s, every entitlement increase and tax cut was 
paid for. The only exception occurred in 1993, at a time when 
unemployment remained high, when the final six-month continuation of 
``extended unemployment benefits'' was declared an emergency by both 
Congress and the President and for that reason was not subject to the 
PAYGO statute.
    \7\ For a more detailed discussion of this issue, see James Horney 
and Richard Kogan, ``Key Argument Against Applying Pay-As-You-Go to Tax 
Cuts Does Not Withstand Scrutiny,'' Center on Budget and Policy 
Priorities, March 22, 2007.
    \8\ The current rules were essentially established in the Budget 
Enforcement Act of 1990, which amended the Balanced Budget Act, and are 
often called the ``BEA'' baseline rules.
    \9\ The special rule only applies to programs that cost more than 
$50 million a year, and applies to a program established after 1997 
only if he House and Senate Budget Committees have determined at the 
time of enactment that the programs should be assumed to continue.
    \10\ There is a special rule that says that expiring excise taxes 
that are dedicated to a trust fund should be assumed to continue. This 
could be viewed as one case where a set of taxes constitute a program. 
More importantly, these taxes fund highway and transit programs that 
expire under current law but are assumed to continue in the baseline.
    \11\ Sunsetting 2001 tax cuts that were intended to be permanent 
was one of a number of gimmicks used in a process that former Ways and 
Means Committee Chairman Bill Thomas described as an effort ``to get a 
pound and a half of sugar in a one-pound bag.'' From ``News Conference 
with Representative Bill Thomas, Chairman of the House Ways and Means 
Committee,'' Federal News Service Transcript, March 15, 2001.
    \12\ Congressional Budget Office, ``Financing Projected Spending in 
the Long Run,'' attachment to letter to Senator Judd Gregg, July 9, 
2007, p. 1.
    \13\ Congressional Budget Office, ``Analyzing the Economic and 
Budgetary Effects of a 10 Percent Cut in Income Tax Rates,'' December 
1, 2005.
    \14\ CBO estimated that the cost of the 2001 and 2003 tax cuts, 
incorporating economic feedback effects, is roughly $195 billion to 
$215 billion (including debt-service costs), compared with the official 
estimate (without feedback effects) of $211 billion. Letter of July 20, 
2007, from Peter R. Orszag, Director of the Congressional Budget 
Office, to House Budget Committee Chairman John M. Spratt, Jr.
    \15\ Joint Committee on Taxation, ``Macroeconomic Analysis of 
Various Proposals to Provide $500 Billion in Tax Relief,'' JCX-4-05, 
March 1, 2005.
    \16\ Jane G. Gravelle, ``Revenue Feedback from the 2001-2003 Tax 
Cuts,'' Congressional Research Service, September 27, 2006.
    \17\ Department of Treasury, ``A Dynamic Analysis of Permanent 
Extension of the President's Tax Relief,'' July 25, 2006. For a more 
detailed discussion of the Treasury study, see Jason Furman, ``Treasury 
Dynamic Analysis Refutes Claims by Supporters of the Tax Cuts,'' Center 
on Budget and Policy Priorities, revised August 24, 2006.
    \18\ Alan J. Auerbach, ``The Bush Tax Cuts and National Saving,'' 
National Tax Journal, September 2002.



    Chairman Spratt. Thank you, Mr. Greenstein.
    Let us go to our old colleague, Mr. Toomey.

                    STATEMENT OF PAT TOOMEY

    Mr. Toomey. Thank you very much, Mr. Chairman, Ranking 
Member Ryan. I certainly do appreciate the invitation to be 
here and present what I suspect will be the sole contrary view. 
Being in a very small minority, it is nothing new to me. So I 
appreciate this opportunity.
    Let me say that, and I will try to be brief about this, 
supporters of PAYGO have long argued that these rules are 
necessary to reduce the federal deficit. And at the outset, let 
me acknowledge that reducing the deficit is certainly a well-
intentioned objective and not something that we at Club for 
Growth are in disagreement about.
    That said, however, subjecting tax cuts to the PAYGO rule 
as this proposal does may over time actually take us farther 
away from this goal rather than bringing us closer to it and in 
the process, it could do great harm to the American prosperity.
    Subjecting tax cuts to the PAYGO rules will not only sound 
the death now for future tax cuts but will also result very 
soon, in fact, in the largest tax increase in American history. 
The resulting tax hike will not go unnoticed by the American 
economy and a reasonably likely economic downturn that could 
result could very well lead to a decline in federal tax 
revenues which would in turn, of course, lead to large 
deficits.
    Now, opponents of the tax cuts have often resisted the 
inextricable connection between constructive lower taxes, 
especially marginal tax rates, and economic growth, but even a 
brief look at the economic benefits that have occurred since 
the 2003 tax cuts suggests that any rule that precludes their 
extension and instead forces a reversion to the prior higher 
rates is quite likely to have an effect of inhibiting economic 
growth.
    A simple comparison of statistics before and after is very 
informative. In the two years before the 2003 tax relief, 
American workers lost 2.7 million jobs. During the two years 
afterwards, the American economy gained 4.3 million jobs. Today 
we have over eight million new jobs since August of 2003 and 
the economy continues to create new jobs today.
    GDP growth prior, in 2001, for instance, 1.1 percent. Two 
years after the tax cuts, GDP growth was 3.8 percent. At the 
time of the 2003 tax cuts, unemployment was 6.1 percent. Two 
years later, at 5.1. Today at about four and a half.
    Prior to the tax relief, business investment had declined 
for eight straight quarters. After the tax relief, it increased 
for 15 straight quarters and continues to climb today. And 
since the 2003 tax cuts, equity markets in general, the Dow 
Jones Industrial Average in particular, has increased nearly 80 
percent.
    We think it is very unlikely that this is all a big 
coincidence. Clearly the 2003 tax cuts played a role in this 
increased economic growth in this country, but the story does 
not end there. The increased economic growth over time does, in 
fact, contribute to increasing revenue and, therefore, a 
reduction in the federal deficit.
    Today, not despite, but in part because of the 2003 tax 
cuts, federal tax revenue is at an all-time record high. And 
more importantly, the actual tax revenue being collected today 
and the last couple years exceeds what CBO projected we would 
be collecting this year prior to the tax cuts being enacted.
    Now, I am not going to sit here and tell you that I can 
tell you that I know how much revenue we would have brought in 
had there never been these tax cuts. I would argue that nobody 
can tell you that. But we can look back at what was projected 
for this year prior to the tax cuts' enactment. And the fact is 
we are bringing in more revenue than what was projected at that 
time.
    Of course, increased federal revenue all else being equal 
leads to lower deficits, not larger deficits, and we are not on 
track to finish this fiscal year with a deficit on the order of 
what is really a mere $200 billion or about 1.5 percent of GDP, 
well below America's post-war average.
    So we believe that the relationship between tax cuts, 
economic growth, revenue, and deficits is a strong relationship 
and subjecting tax cuts to the PAYGO rule severs this 
relationship by removing an important catalyst for economic 
growth.
    Ultimately, of course, we view the problem of the proposed 
statutory version of PAYGO in that it treats tax cuts the same 
way that it treats new government spending by treating these as 
equivalents. In fact, that view is predicated on a static view 
of the world that we think is patently wrong. The economy is 
not static. It is dynamic in its nature. And as I have 
mentioned above, new tax cuts properly done can expand economic 
activity.
    But a broader point needs to be made about focusing 
excessively on budget deficits. While shrinking the federal 
deficit is important, we think that it is not as crucial as an 
end in itself as it is a tool to achieve an end and that end is 
greater prosperity and greater economic growth.
    At the end of the day, job growth, higher incomes, gains in 
family wealth are more important than the number on the 
government's ledger.
    Now, some will argue that deficits detract directly from 
economic growth by driving up interest rates. What we have seen 
in recent history suggests that that certainly is not the case 
in the current environment. We went from significant surpluses 
to significant deficits and as we went through that process, 
interest rates tumbled.
    That simply proves that interest rates clearly are driven 
by other factors and not exclusively and probably not even 
primarily by federal deficits. What really matters is not the 
absolute size of the deficit but the size of the deficit as a 
percentage of the economy.
    And, finally, let me close by saying that the real 
budgetary crisis, and this was raised in the previous panel, 
the real budgetary crisis facing our federal government is not 
addressed by PAYGO. The real crisis is the unsustained 
projected growth in entitlement spending both in absolute 
dollars and as a percentage of GDP. Actual total federal 
government debt owed to others today is about 37 percent of GDP 
whereas the unfunded liability of the existing entitlement 
programs is over 370 percent of GDP.
    PAYGO is a very well-intentioned rule, but we think its 
implementation should not come at the cost of preventing 
economic stimulating tax cuts and any long-term attempt to deal 
with our budgetary crisis must begin with reform of our 
entitlement programs.
    Thank you very much.
    [The prepared statement of Pat Toomey follows:]

   Prepared Statement of Hon. Patrick J. Toomey President, Club for 
      Growth, Former Representative in Congress From the State of 
                              Pennsylvania

    Mr. Chairman and members of the committee, thank you for inviting 
me. I am pleased to be here today to offer my views on the effects of 
reestablishing statutory PAYGO rules.
    Supporters of PAYGO have long argued that PAYGO rules are necessary 
to reduce the federal deficit. At the outset let me say that reducing 
the deficit is a well-intentioned objective. That said, subjecting tax 
cuts to the PAYGO rule--as the Majority's proposal does--may actually 
take us farther away from that goal instead of bringing us closer to 
it, and in the process, do great harm to American prosperity.
    Subjecting tax cuts to PAYGO rules will not only sound the death 
knell for future tax cuts, but will also result in the largest tax 
increase in American history. While it is technically possible to 
extend the current tax rates in compliance with PAYGO rules, it is 
clear that there is no appetite for the reduced mandatory spending that 
would be required. The resulting huge tax hike will not go unnoticed by 
the American economy. An economic downturn may well result, which could 
lead to a decline in federal tax revenue, leading, in turn, to much 
larger deficits than the path we are currently on.
    Opponents of tax cuts have long resisted the inextricable 
connection between tax cuts and economic growth. But even a brief look 
at the economic benefits of the 2003 tax cuts suggests that any rule 
that precludes their extension and instead forces a reversion to prior, 
higher rates will likely have the unfortunate effect of inhibiting 
economic growth in this country.
    A simple before and after picture does the trick. The before 
picture is as grey and grim as the after picture is bright. Consider 
the following numbers:
     Two years before the 2003 tax relief was implemented, 
American workers lost 2.7 million jobs--at an average of 100,000 jobs 
lost per months. Two years after the 2003 tax cuts, the American 
economy gained 4.3 million new jobs, an average of 160,000 per month. 
Today, we have gained over 8 million jobs since August 2003, and the 
economy continues to create jobs at a similar rate.
     In 2001, Gross Domestic Product growth was at a meager 
1.1%. Two years after the tax cuts, GDP growth was at 3.8%.
     At the time of the 2003 tax cuts, the unemployment rate 
was at 6.1%. Two years after the cuts, unemployment sank to 5.1% and 
currently sits at 4.5%.
     Prior to the tax relief, business investment had declined 
for eight straight quarters. After the tax relief, it increased for 15 
straight quarters, and continues to climb today.
     Since the 2003 tax cuts, the Dow Jones Industrial Average 
has increased nearly 80%, recently hitting a record-breaking level of 
14,000.
     Capital gains income has increased by 153.3% since the end 
of 2002.
     In 2005, capital gains income was $604 billion, just $11 
billion below the all-time high set during the boom in the late 1990's.
     In 2005, dividend cash payments grew by more than 11%, 
marking the third straight year of double digit growth of S&P 500 
dividend income.
     Dividend income ended 2005 at a record level of $154 
billion.
    Specifically, the tax cuts on capital gains and dividends earnings 
in 2003 have been a huge boon for shareholders, according to the IRS. 
Consider these numbers:
    Clearly, the 2003 tax cuts have played a large role in the 
increased economic growth in this country. But the story does not end 
there. Increased economic growth contributes directly to increased 
revenue and therefore, a reduction in the federal deficit. While 
opponents of the tax cuts argued (and continue to argue) that we could 
not afford the decrease in federal revenue resulting from the tax cuts, 
we saw huge revenue increases very shortly after the tax cuts were 
implemented, and tax revenues continue to flow into the federal coffers 
at an astonishing rate. Again, a quick before and after picture is 
instructive.
    After declining from 2000 to 2003, federal tax revenue surged in 
2004, 2005, and 2006. In 2004 and 2005, revenues grew by 14.6% and 
11.8% respectively. To understand just how remarkable these numbers are 
consider that 2005 marks the first time since the mid1980's (following 
the Reagan tax cuts) that our nation has generated double-digit revenue 
growth in consecutive years. Fortunately, this positive trend is 
continuing today. For the first eight months of 2007, incoming tax 
revenue has already increased by 6.9%.
    Despite the preponderance of evidence to the contrary, opponents of 
tax cuts have a habit of leaning on the Congressional Budget Office 
projections to argue the magnitude of revenue losses that will result 
from tax cuts. But this is like a cripple leaning on a faulty crutch. 
If there is one thing that is clear from the past four years it is the 
CBO's inability to accurately project revenue. Consider the following 
numbers:
     In 2004, the CBO projected tax revenues to increase by 2%, 
compared with an actual increase of 5.5%
     In 2005, the CBO projected tax revenues to increase by 
9.4%, compared with an actual increase of 14.6%.
     In 2006, the CBO projected tax revenues to increase by 
7.4%, compared with an actual increase of 11.8%.
     In 2007, the CBO projected tax revenues to increase by 
5.6%. Thus far, revenues are up by 6.9%.
    Worse, the CBO radically underestimated the government's revenue 
intake from capital gains earnings after the 2003 tax cuts. At the 
time, dire warnings about the price of the cuts rang through these very 
halls. Instead of witnessing the fulfillment of those warnings, we have 
witnessed a sharp increase in revenue from capital gains--far beyond 
what the Joint Committee on Taxation and the Congressional Budget 
Office predicted.
    In January of 2004, the CBO forecasted capital gains revenue to be 
$42 billion for 2003; $46 billion for 2004; $52 billion for 2005; and 
$57 billion for 2006. Actual returns were significantly higher: $51 
billion in 2003; $72 billion in 2004; $97 billion in 2005; and $110 
billion in 2006. In total, the CBO's forecast on capital gains revenue 
for 2003-2006 was off by a staggering 68%. Clearly, if we are in need 
of an economic projector, history has a better track record than the 
CBO.
    The aforementioned numbers are clear and stark. It is no 
coincidence that federal tax revenue from capital gains earnings shot 
up immediately after the tax rate was lowered dramatically. Opponents 
of the capital gains tax cuts focused on the decreasing tax rates and 
assumed that tax revenue would follow suit. This is far too simplistic 
of an equation. Revenue taken into government is not solely dependent 
on the tax rates we impose, but on the tax rates as applied to income. 
If you broaden income by lowering rates, revenue can increase.
    Of course, increased federal revenue--all else held constant--must 
result in a shrinking deficit. As revenue continues to flow into the 
federal government's coffers, the Congressional Budget Office and the 
Office of Management and Budget have been forced to significantly 
revise downward their deficit projections for 2004-2006, citing robust 
growth and revenues as a large reason for their revisions.
     In 2004, the OMB projected a deficit of $521 billion. The 
actual deficit was $412 billion, a decrease of $109 billion, or 21%.
     In 2005, the OMB projected a deficit of $427 billion. The 
actual deficit was $318 billion, a decrease of $109 billion, or 25%.
     For 2006, the OMB originally projected a deficit of $423.3 
billion. The actual deficit was $247.7 billion, a reduction of $175.6 
billion, or 41%.
     For 2006, the CBO originally predicted a deficit of $371 
billion. The actual deficit was a reduction of 33%.
    The relationship between tax cuts, economic growth, revenue, and 
the deficit are clear. Subjecting tax cuts to PAYGO rules effectively 
severs this relationship at the head by removing the very catalyst that 
helps the economy grow. If the purpose of PAYGO is to decrease the 
deficit--or at least hold it at bay--then ruling out future tax cuts 
and imposing the largest tax increase in American history is the wrong 
path to take. Rather than decrease the federal deficit, the Majority's 
PAYGO rules may actually exacerbate the very problem the Majority is 
trying to solve. Instead, PAYGO rules could be tantamount to 
legislating economic disaster.
    Ultimately, the problem with the Majority's PAYGO rules is that it 
treats tax cuts and new government spending as equivalent. Supporters 
of this proposal assume that the tax cuts will cost the government a 
set number of dollars just like a new government program. This outlook 
is predicated on a static view of the world that is patently wrong. The 
economy is not static, but a dynamic creature. As I have demonstrated 
above, new tax cuts (if they are done properly) expand economic 
activity and can result in an actual increase in new government revenue 
and a reduction in the deficit. The same cannot be said for new 
government spending which does not (except sometimes briefly) expand 
economic growth--and can even have the effect of retarding it--and 
results in decreased revenue and an increased deficit.
    But a broader point must be made about focusing excessively on 
budget deficits. While shrinking the federal deficit is important, it 
is not crucial as an end in itself, but only to the extent that it 
serves as a means to another end--increasing prosperity and economic 
growth. At the end of the day, job growth, higher incomes, and gains in 
family wealth are more important than the number on the federal 
government's ledger.
    Some will argue that deficits contribute directly to the rate of 
economic growth and are therefore worthy of being elevated to such a 
high priority. Proponents of this argument claim that excessive 
government borrowing crowds out private borrowing and drives up 
interest rates, thus retarding economic growth. This can be true, but 
the operative word in this argument is ``excessive.''
    A brief stroll down memory lane demonstrates the hollowness of this 
fear in the near term. Over the past five years, the U.S. government 
went from surpluses to deficits, but the interest rates tumbled at the 
same time. The reason for this is simple. Interest rates are driven 
primarily by other factors. Certainly, truly excessive debt has the 
potential to boost interest rates and harm economic growth, but we are 
far from approaching this worst-case scenario. It is important to 
remember that the current deficit is only 1.5% of the Gross Domestic 
Product and decreasing by the day.
    What really matters is not the absolute size of the deficit but the 
size of the deficit as a percentage of the economy. This is true in 
most facets of life. Consider the following simple scenario: An elderly 
man dies, leaving his son two businesses from which to choose his 
inheritance. The first business is worth $500,000 and carries no debt. 
The second is worth $10 million, but carries $1 million in debt. 
Clearly, the second business is the better choice. The point of this 
little anecdote is that the size of the debt doesn't tell us the whole 
story. While no one likes debt, its presence out of context should not 
be the decisive factor in setting economic policy.
    Finally, the real budgetary crisis facing our federal government 
isn't addressed by PAYGO. The real crisis is unsustainable projected 
growth in entitlement spending in absolute dollars and as a percentage 
of GDP.
    While PAYGO is a well-intentioned rule, its implementation should 
not come at the cost of preventing economy-stimulating tax cuts, and 
any long-term attempt to deal with our budgetary crisis must begin with 
reform of our entitlement programs.
    Thank you again for allowing me to comment on this important issue.

    Chairman Spratt. Go next to Mr. Bixby and then, Ms. 
MacGuineas, we will let you be the cleanup hitter.

                  STATEMENT OF ROBERT L. BIXBY

    Mr. Bixby. Thank you very much, Mr. Spratt, Mr. Ryan, other 
members of the Committee.
    I am here representing the Concord Coalition. And in our 
view, reinstating PAYGO in law would be a very positive step in 
restoring fiscal discipline and preventing the daunting long-
term outlook from getting any worse. I think it would also 
encourage a necessary discussion of the tough choices that need 
to be made for a sustainable fiscal future.
    I think it is important to note at the outset that while 
strong budget enforcement rules such as PAYGO can provide very 
positive incentives for fiscal discipline as has been stated, 
they are not a substitute for political will and PAYGO would 
not address the long-term problems that are on an unsustainable 
course right now, but that does not mean that we should not do 
it because it would help prevent the situation from getting any 
worse.
    I want to begin by thanking you for having this discussion 
because there is a general feeling among the American people or 
there is a general feeling anyway that the American people do 
not care about this issue, that the eyes can glaze over. 
Actually, that is not the case.
    As Comptroller General Walker has mentioned, we have been 
going around the country. The Concord Coalition has organized 
this fiscal wake-up tour that includes General Walker and 
people from Brookings and people from Heritage and we have been 
doing this for almost two years now. And we find that people 
are indeed very interested in this.
    We have been to over 20 cities now. They understand the 
difficulty of the challenge. They understand the need to make 
sacrifices. What they do not understand is why all of us here 
in Washington are not able to deal with the problems.
    But I would like to report that as you consider 
reestablishing statutory PAYGO, I think you can be encouraged 
by knowing that the public from our experience instinctively 
grasps the logic behind the rule. It is a common-sense concept 
that says that we must make choices to stop digging a bigger 
hole for future generations to fill in.
    So my overall first point is that the public gets that. 
People understand that and I think that PAYGO has a public 
constituency out there.
    I am not going to spend any time unusually talking about 
the long-term outlook because everybody has mentioned that. I 
will just say that I agree with the consensus from all sides 
that the future is unsustainable on the current path.
    So what can budget process reforms do? Well, I would like 
to make a couple of points about PAYGO. I start with the 
premise again that, no, it does not do enough, but we do 
believe that it is important not to dig the hole any deeper.
    PAYGO should definitely apply to both sides of the budget, 
that is to say we believe it should apply to both spending and 
revenue decisions. It goes best with a set of discretionary 
spending caps as it did in the original ``Budget Enforcement 
Act.'' That way, all sides of the budget have some sort of 
enforcement mechanism and nothing is exempt.
    PAYGO should also have a credible threat, that is to say 
the sequestration element of PAYGO is very important. It is 
really what gives it its teeth and separates it from the rule 
that both the House and the Senate have adopted.
    It is important for the sequestration threat to be 
credible, however, and I would urge you if you go this route to 
have a fairly broad base of programs. I would frankly make no 
exemptions. I am sure that that would not get too far because 
people would want to exempt Social Security and then you start 
down a road where what do you exempt and what do you not 
exempt.
    The problem you get into is that if almost all of the 
mandatory side of the budget is exempt, then it makes it almost 
impossible to actually do a sequester because the consequences 
are too toxic. So the broader the base, the more credible the 
threat, I would think, and the fairer the threat because it 
would be spread more broadly.
    I think that another point you are going to have to 
consider if you go this route is whether there should be any 
exemptions from PAYGO. I do not think that there should be. 
There is a former rule in the Senate that said that, you know, 
anything that was written into the budget rule would be exempt 
and that is one way of doing PAYGO.
    Arguably that makes sense because you could say Congress 
would decide every year what it was prepared to do and then 
they would enforce that rather than just put a PAYGO 
requirement on everything.
    The Concord Coalition has not favored that approached, 
however, and the reason why is that it is a huge exemption and 
it basically allows Congress to enact fiscally irresponsible 
policies simply by writing them into the budget resolution. So 
that does not really provide a whole lot of enforcement.
    I think that if you, a final point on this, is that if you 
go this route, and I would say, by the way, that any sort of 
rule you have can be gimmicked. I mean, Congress has always has 
a capacity to you write the rules, you can change the rules. 
You can try to get around the rules. I do not think it is a 
reason not to adopt a strict PAYGO rule to say, well, you know, 
you can try gimmicks to get around it.
    I think that the important thing is that if you have a 
statutory component to PAYGO, it is going to be more difficult 
to waive than the rule that exists now, particularly the House 
rule. And it is a backup because the House rule works 
differently and the Senate rule works differently.
    With the statutory PAYGO, you would have a backup procedure 
at the end that would look at all of the actions on both the 
revenue side and the mandatory spending side and you would have 
that threat of sequestration hanging over the whole process. So 
it would complement and be a backup to what you have now, so I 
do not think it would be a redundancy in any sense.
    My final point is that if you are going to do some new 
statutory PAYGO, I would consider including some long-term 
budget targets this time, not spending caps, not entitlement 
caps per se, but the Concord Coalition has made a suggestion 
about including sort of a long-term budget component and apply 
the PAYGO rule to that as well, and that might get into some of 
the look-back things that Comptroller General Walker was 
talking about so that it would bring existing mandatory 
spending programs within some sort of budget enforcement 
procedure.
    Again, I would not talk about automatic triggers or cuts or 
anything like that, just a method of bringing everything into 
the tent and under the PAYGO rubric.
    Thank you.
    [The prepared statement of Robert L. Bixby follows:]

Prepared Statement of Robert L. Bixby, Executive Director, the Concord 
                               Coalition

    Chairman Spratt, Mr. Ryan and Members of the Committee, I am 
pleased to appear before you today to discuss the merits of 
strengthening the budget process by restoring statutory ``pay-as-you-
go'' (PAYGO). In my view, reinstating PAYGO in law would be a very 
positive step in restoring fiscal discipline and preventing the 
daunting long-term outlook from getting any worse. It would also 
encourage a necessary discussion of the tough choices that must be made 
for a sustainable fiscal future.
    I am here representing The Concord Coalition, a nonpartisan 
organization dedicated to strengthening the nation's long-term economic 
prospects through sound and sustainable fiscal policy. Concord's co-
chairs are former senators, Warren B. Rudman (R-NH) and Bob Kerrey (D-
NE). They, along with Concord's President former Commerce Secretary 
Peter G. Peterson and our nationwide membership, have consistently 
urged Washington policymakers to produce a credible plan for long-term 
fiscal sustainability.
    It is important to note at the outset that while strong budget 
enforcement rules, such as PAYGO, can provide positive incentives for 
fiscally responsible action, they are not a substitute for political 
will. No strategy for fiscal sustainability will succeed over the long-
term unless we find a way to reduce projected costs, particularly for 
health care. A realistic strategy will likely require some mix of 
spending reductions, and revenue increases--negotiated in a bipartisan 
process--aimed at preventing total spending, taxes or debt from 
reaching levels that could reduce economic growth and future standards 
of living.
    In my remarks, I will begin with brief comments about the budget's 
long-term outlook, followed by a discussion of measures--such as 
PAYGO--that could assist the Congress in its efforts to restore and 
maintain fiscal discipline despite the economic and demographic 
pressures that confront the federal budget.
    But first, I would like to thank you for undertaking this 
discussion. After all, the conventional wisdom is that the American 
people are largely indifferent to issues related the federal budget's 
long-term prospects. That is not an accurate assessment. For almost 2 
years now, The Concord Coalition has undertaken a Fiscal Wake-Up Tour 
to talk to the American people about what is common knowledge in 
Washington D.C.--that current budget policies threaten the nation's 
future economic well-being.
    United States Comptroller General David M. Walker, and experts from 
The Brookings Institution, the Heritage Foundation, and The Committee 
for Economic Development, have joined The Concord Coalition on the tour 
to explain the issues and to hear from communities across the country. 
As a result of visits to more than 20 cities, I can report to you that 
people understand the difficulty of the challenge and the need to make 
sacrifices. What they do not understand is why their elected leaders 
are not making adequate progress on solving the problems we face.
    Members of the Fiscal Wake-Up Tour do not necessarily agree on the 
ideal levels of spending, taxes and debt, but we do agree on the 
following key points:
     Current fiscal policy is unsustainable
     There are no free lunch solutions, such as cutting waste 
fraud and abuse or growing our way out of the problem.
     Finding solutions will require bipartisan cooperation and 
a willingness to discuss all options.
     Public engagement and understanding is vital in finding 
solutions.
     This is not about numbers. It is a moral issue.
    We do not recommend specific policy solutions. Indeed, we are 
upfront about the fact that we do not necessarily agree on solutions. 
However, we remind audiences that each of the realistic options comes 
with economic and political consequences that must be carefully 
weighed, and that there must be tradeoffs.
    Those who want to raise taxes are asked to explain what level of 
taxation they are willing to support and the manner in which the new 
revenue should be raised. Those who argue that spending must come down 
from projected levels are asked which programs they would target and 
how the savings would be achieved. Those who are unwilling to do either 
are asked how much debt they are willing to impose on future 
generations. I mention this because these are precisely the choices 
that you, as elected leaders, must face when making decisions under a 
PAYGO rule.
    Our experience is that when audiences are told the facts, and shown 
that if they demand their ``rights'' to programs or policies it will 
have damaging economic effects to other groups or generations 
represented in the audience, they begin to accept the need for 
tradeoffs. In other words, as you explore the possibility of restoring 
statutory PAYGO, you can be encouraged by knowing that the public 
instinctively grasps the logic behind the rule. PAYGO is common sense 
concept. It says that we must make choices to stop digging a deeper 
hole for future generations to fill in. People understand that.
    In addition to the Fiscal Wake-Up Tour, the same group of analysts 
from Concord, Heritage and Brookings have been working with Public 
Agenda and ViewPoint Learning, on a project designed to provide insight 
into how attitudes evolve as people discuss difficult trade-offs with 
regard to long-term fiscal policy. It is called ``Facing Up to the 
Nation's Finances.''
    As part of this project, three intensive day-long ``Choice 
Dialogues'' have been conducted in San Diego, Kansas City, Philadelphia 
and in three locations in Tennessee. Public Agenda has released a 
report on these dialogues1 in which the following observations stand 
out:
     The public is strongly averse to big increases in the size 
of the national debt and, with the right kind of leadership, is 
prepared to accept sacrifices to avoid it.
     For most people, the overriding concern is not resistance 
to taxes but a profound lack of trust in government. People are willing 
to pay for what they want so long as they can be satisfied that 
government will spend the money wisely and for the purposes intended.
     Americans are willing to make changes in entitlements, but 
again on condition that trust and accountability exist.
     While there is continued strong support for defense 
spending, it is accompanied by the widespread perception that funds are 
misallocated and often wasted.
     Americans want to be engaged in addressing these issues 
and are frustrated by the lack of engagement that contributes to their 
mistrust of government
    Both the Fiscal Wake-Up Tour and the Facing Up project will 
continue through 2008.
           observations about the federal budget's prospects
    The most recent analyses of the Congressional Budget Office, the 
Government Accountability Office, the Office of Management and Budget, 
and independent fiscal and economic policy experts consistently 
conclude that current budget policies are on an unsustainable path. 
Since many of those experts are available to you today, I do not need 
to spend much time on the projections aside from noting that The 
Concord Coalition joins with their consensus conclusion.
    I would, however, like to make two observations to emphasize how 
important it is to address the imbalances in current budget policy. 
First, recent ``good news'' on the budget could be bad news if we use 
it to conclude that our problems are behind us, and second, nothing 
about the short-term improvement in the deficit represents a 
fundamental shift in the daunting long-term picture.
    The good news may be bad news.
    Clearly, there has been some good news on the budget front. In 
2007, for the third year in a row, revenues are up and the deficit is 
down. So why are The Concord Coalition and others traveling around the 
country issuing a fiscal wake-up call? It's because we are not looking 
in the rear view mirror. We are looking ahead. And it doesn't take a 
crystal ball to see what's coming:
    Our nation is undergoing an unprecedented demographic 
transformation against the backdrop of steadily rising health care 
costs and steadily falling national savings. It is a dangerous 
combination for the future health of the economy.
    Consider three facts:
     Social Security, Medicare and Medicaid already comprise 40 
percent of the federal budget. That is before the baby boomers begin to 
retire.
     Over the next 25 years, the number of Americans aged 65 
and up is expected to nearly double, growing from 12 percent of the 
population to 20 percent. The ratio of workers paying into Social 
Security and Medicare relative to the number of beneficiaries will fall 
by roughly one-third.
     Demographic change, however, is only part of the problem. 
For the past 40 years health care spending has consistently grown 
faster than the economy. If the same growth rate continues over the 
next 40 years, Medicare and Medicaid will absorb as much of our 
nation's economy as the entire federal budget does today.
    It is true that CBO's baseline for fiscal years (FY) 2008-2017 
projects declining deficits followed by budget surpluses in FY 2012 and 
thereafter. Moreover, the President has taken to the road to argue that 
under his budget policies the deficit would disappear by 2012. Taking 
these projections at face value produces a deceptively benign outlook.
    The ``good news'' could be bad news for fiscal discipline because 
it fosters an attitude of complacency. It makes worrying about long-
term fiscal imbalance look as out of place as wearing a raincoat on a 
sunny day. In effect, the improved short-term fiscal outlook encourages 
higher spending and deeper revenue reductions--the very policy changes 
that negate the projected improvements to the bottom line of the 
budget.
    A look back at the budget outlooks from 1999 to 2001 reminds us of 
how seductive good news can be. Baseline projections of surpluses ``as 
far as the eye could see'' kicked off a holiday from budget discipline 
that has yet to end. Despite CBO warnings that that the short-term 
projections of surpluses did not resolve long-term fiscal imbalances, 
spending increased at a faster pace than contained in those optimistic 
projections while tax cuts reduced revenues. Subsequent changes in the 
economy and threats to the nation's security at home and abroad 
significantly altered the budget's outlook without motivating a return 
to responsible fiscal posture.
    The following chart (figure 1) illustrates a plausible alternative 
to CBO's current budget outlook. It assumes:
     Continue funding while gradually phasing down operations 
in Iraq and Afghanistan, reducing troops in those missions to 75,000 by 
2013 and beyond;
     Extend all tax cuts expiring in FY 2007-2017;
     Index the alternative minimum tax for inflation; and
     Increase spending for regular discretionary programs at 
the same rate of growth as the economy.

                                figure 1



    Under that set of assumptions the deficit in 2017 would approach 4 
percent of gross domestic product GDP instead of the surplus of 1 
percent of GDP contained in CBO's baseline. Further erosion of the 
budget's bottom line would result if the PAYGO principal of budget 
neutrality contained in the FY 2008 Congressional Budget Resolution is 
not enforced as new authorizations for the State Child Health Insurance 
Program (SCHIP), agricultural subsidies, tax cut extensions, and other 
programs are finalized.
    The good times won't last.
    Even if the CBO projections somehow turn out to be close to target, 
the growth in programs affected by the aging of the population will, 
under current laws, outpace the growth in the economy and revenues. If 
policy makers do not act to slow the growth in spending for Social 
Security, Medicare and Medicaid, to reduce spending on other programs 
or to increase revenues, financing the resulting fiscal gap--net 
interest costs--grows faster than any other category of the budget 
including Medicare and Medicaid. Recent analyses from the Government 
Accountability Office show that in 2050 net interest costs as a share 
of GDP could exceed Social Security, Medicare and Medicaid combined--
obviously an unsustainable outcome.2 Those who say that deficits don't 
matter are not paying attention to interest costs. Even now, net 
interest is a bigger expense than the wars in Iraq and Afghanistan or 
the federal government's share of Medicaid.
    The country has not yet reached a consensus over the question of 
whether projected spending is too high or projected revenues are too 
low. But there is no question that the projected gap between revenues 
and spending, and the resulting debt burden, would put our Nation's 
economic security in serious jeopardy and increase exposure to the 
uncertainty of global capital markets.
    So far, there is little evidence that the bond markets are 
concerned about the potential borrowing needs of the United States 
government over the long-term--a ``conundrum'' as it is called by the 
Federal Reserve's former Chairman Alan Greenspan.
    Long-term Treasury rates remain comfortably at or below levels seen 
throughout the last 40 years. That has prompted some to believe that 
the projected fiscal gap does not matter because an ample supply of 
willing lenders exists to fill the gap. The favorable interest rate 
conditions are likely to persist as long as the markets doubt, as 
appears to be the current case, the likelihood of serious federal 
deficits over the long-term. If, however, they have reason to question 
that assumption, the market's reaction could be swift and costly. There 
will be no forbearance as policy makers attempt to remedy the 
perception. Acting proactively--not waiting for markets to react--would 
allow a more gradual shift to the policy adjustments that will have to 
be made.
    Global borrowing conditions in the coming decades almost certainly 
will be significantly different than they are today. The United States 
is not alone when it comes to long-term fiscal imbalances. Many other 
countries are facing similar pressures related to the aging of their 
populations. That implies an overall increase in resources required to 
support older populations that would put upward pressure on global 
interest rates. Indeed, the populations of many countries--China, 
Japan, Germany, France and the United Kingdom, for example--are aging 
more rapidly than our own. Those countries are among the largest 
holders of current Treasury debt. Many of those same countries provide 
more extensive public retirement and health benefits.
    It is not possible to predict with any certainty whether future 
debt issued by the U.S. Treasury will retain its attractiveness to 
global lenders relative to other borrowers. There are some indications, 
however, that the U.S. may have greater potential risks that could 
affect borrowing costs. For example, within the European Union many 
governments are making progress towards addressing their own age-
related fiscal imbalances through reforms for public pension programs, 
real asset accumulation, and greater attention to health care and long-
term care programs.3
    In addition, the United States starts at a significant disadvantage 
when it comes to containing future health care spending, which is the 
primary driver of escalating spending projections in the long-term 
budget. The United States already spends significantly more per capita 
than any other country, and health spending consumes a significantly 
larger share of GDP than in other countries with advanced economies (16 
percent in 2006 compared to the 9 percent average for Organization for 
Economic Cooperation and Development countries).4 Moreover, the annual 
excess growth rate of real health care costs is roughly double that of 
the OECD (non-U.S.) average, indicating that health care could exert 
greater pressure on the U.S. economy and the budget than in other 
nations.5 Despite higher spending per capita health care, the U.S. does 
not achieve superior health outcomes (measured in terms of infant 
mortality, healthy life expectancy at age 60, etc.).6
    The point is, whatever the world economy looks like two, three, 
four decades from now, the United States will have greater room to 
maneuver if it acts now to limit the growth in future debt levels. 
Today's apparent budgetary ``good news'' should not lull policy makers 
into believing that conditions cannot change. Hard as it is, adopting a 
more disciplined stance toward the budget will be easier now than later 
when the magnitude of required policy adjustment is likely to be 
greater and far more disruptive to the American people.

                                figure 2



                     budget process reform can help
    The Concord Coalition strongly supports your efforts to strengthen 
the budget process. We have repeatedly urged the Congress and the 
President to return to the statutory rules enacted in the 1990 Budget 
Enforcement Act (BEA). Those measures set enforceable limits on 
discretionary spending and required that changes to entitlement 
spending and revenue provisions be deficit neutral--the pay-as-you-go, 
or PAYGO requirement. The BEA rules provided the fiscal discipline that 
helped to balance the budget in 1998 for the first time in nearly three 
decades. The lesson that can be learned from that overall success is 
that budget enforcement can be an important tool in achieving long-term 
budget goals.
                           reinstating paygo
    The Concord Coalition encourages the House to adopt measures that 
strengthen its ability to enforce the budget. Reinstituting statutory 
PAYGO and limits on discretionary spending--both enforced through 
sequestration--would be a good beginning. Statutory PAYGO would put 
additional teeth into the PAYGO rule by establishing a mechanism that 
cannot be easily waived. In addition, because levels established in the 
Congressional Budget resolution would be written into law, it would 
force the Executive branch to play an earlier role in the congressional 
budget process.
    We believe that reinstituting two-sided PAYGO, which incorporates 
both entitlement spending and tax policy changes, is an important first 
step towards restoring fiscal discipline. Not only does PAYGO help to 
keep the long-term outlook from getting worse, but it also forces 
explicit acknowledgement of the obvious--someone sometime will have to 
pay for deficit financed increases in entitlement spending and tax 
cuts, if not within the five to 10-year budget window, then sometime in 
the future through higher taxes or reduced federal programs, benefits 
and services.
    Restoring a sense of fiscal discipline will be a very difficult 
challenge. It will be virtually impossible without strong budget 
enforcement mechanisms. There are too many claims on too few dollars to 
declare that formal budgetary restraints are no longer necessary. And 
while it cannot be said that either discretionary spending caps or 
PAYGO worked very well after 1998 when surpluses emerged, it is clear 
that protecting a surplus is not something we'll need to worry about in 
the near future. Sadly, the task at hand is to bring the deficit back 
under control. The track record for caps and PAYGO in times of big 
deficits is one of success.
    There should be no wishful thinking that we will ``grow our way'' 
back to budget balance. Deficits are back for as far as the eye can see 
and they are likely to persist unless Congress and the President take 
specific steps to rein them in.
    Unfortunately, quite the opposite has been happening in recent 
years. The political consensus that once existed in support of running 
a surplus excluding Social Security (i.e., an ``on-budget'' surplus) 
has broken down. Rather than setting priorities and making hard 
choices, Congress and the President have simultaneously increased 
spending and cut taxes--with little or no regard for how it all adds 
up.
    It is worth noting in this regard, that the huge $5.6 trillion 
surplus projected just six years ago did not simply disappear because 
of changing economic projections. According to CBO estimates as of 
January 2007, legislation and its associated interest costs have 
consumed more than the entire amount. Economic and technical factors 
have reduced it by another $2 trillion--meaning that over the same 
timeframe, 2002 to 2011, we now have a projected deficit of $2 trillion 
instead of a projected $5.6 trillion surplus. If one looks at just the 
five-year window (2002-2006), which is no longer based on projections, 
the cost of new legislation (spending and taxes) exceeded the projected 
surplus by $200 billion. While it would not be fair to attribute the 
breakdown in fiscal discipline entirely to the end of statutory PAYGO, 
certainly the absence of this rule has been a major factor.
    Some have argued that limiting PAYGO to spending would focus 
enforcement on the elements of the budget that are the source of long-
term fiscal woes--that is, entitlement programs in general and Social 
Security, Medicare and Medicaid in particular. Those programs are of 
particular concern because they will grow as the population ages and 
health care costs continue to outpace economic growth. Together they 
will comprise larger and larger shares of the budget reducing the share 
of resources available for all other programs and putting upward 
pressure on taxes (see figure 3).
    As the number of beneficiaries increases, Social Security's growth 
is projected to be modest (about 2 percent of GDP). Health care 
entitlements are the source of deeper concern. They are projected to 
grow faster than the growth in eligible beneficiaries and the economy.
    The Concord Coalition has long maintained that it would be a 
mistake to isolate spending from revenue decisions through the 
application of PAYGO to spending alone. Budgeting is a process of 
allocating resources that requires trade-offs, not only among competing 
spending priorities but also between spending and revenue objectives. 
Spending and tax decisions both affect overall budget deficits or 
surpluses. Exempting tax decisions risks encouraging the expansion of 
so-called ``tax entitlements'' (where benefits are funneled through the 
tax code rather than through direct spending) whose benefits are 
difficult to target and evaluate in terms of effectiveness and 
performance. In addition, subjecting tax changes to PAYGO provides 
balance to budget deliberations by subjecting those who stand to 
benefit from tax changes to the same level of scrutiny as beneficiaries 
of entitlement changes. Finally, of concern to advocates of limited 
government, exempting tax cuts from PAYGO fosters the false notion that 
government services are ``free.'' Debt is not a painless alternative to 
taxation.
    Many key issues would need to be addressed in restoring statutory 
PAYGO. For example, Congress should formally decide whether, or how, 
the rule should apply to projected surpluses, a point left vague by the 
former law. Another issue is whether there should be exemptions. For 
example, the Senate's former PAYGO rule exempted policies assumed in 
the budget resolution. Arguably, such a rule could provide appropriate 
flexibility, but in practice limiting PAYGO to those policies not 
assumed in the budget resolution provides little incentive for fiscal 
discipline. It essentially allows Congress to enact fiscally 
irresponsible policies by simply assuming them in the budget 
resolution. That is a loophole much too tempting to permit--even if 
proposed in good faith.
    It would also be important to design and enforce strict rules about 
emergency exemptions. As for sequestration, it would be important to 
provide the widest possible base. The fact that popular programs many 
be threatened by sequestration is what gives PAYGO its punch. If the 
burden of sequestration falls on too narrow of a base the resulting 
cuts may prove too toxic to enforce. There must be a credible threat 
that is uncomfortable, but plausible.

                                figure 3



        beyond paygo: confronting the long-term fiscal imbalance
    Statutory PAYGO would help enforce budget discipline in the near 
term. Addressing the projected long-term fiscal gaps, however, will 
take other measures. PAYGO is designed to keep long-term imbalances 
from getting worse, not to make them better. As discussed earlier, 
maintaining the status quo leads to deficits and debt that spiral 
upward and out of control.
    Ideally, a new bipartisan fiscal policy agreement should be reached 
along with PAYGO. After all, the original PAYGO law came out of the 
1990 bipartisan budget negotiations between President George H.W. Bush 
and the Democratic Congress. Such a new agreement would enact budget 
procedures that would promote closure of the long-term gap projected to 
arise between spending and revenues. At present, however, proposals for 
a budget agreement or enforceable measures to close the long-term gap 
are more conceptual than practical and controversial within the budget 
community. In any case, there is little political appetite for such 
measures.
    But the fact that more needs to be done is not an excuse for doing 
nothing. The choice for policymakers is whether to reclaim a measure of 
fiscal discipline through the budget process while a more substantive 
plan is negotiated, or to sit by while deficits drift higher in the 
absence of any procedural hurdles designed to rein them in.
    In Concord's view the choice is clear. We believe that reinstating 
strong budget enforcement rules, such as PAYGO, is the best step that 
can be taken immediately to stop digging the fiscal hole deeper.
    While this would be a positive step, it falls short of addressing 
the central long-term budget challenge, which is constraining the cost 
of existing entitlement programs. PAYGO requires Congress to offset the 
cost of new programs or expansions of existing programs. It does not 
apply to current-law benefits.
    In fact, there is nothing in the budget process that requires 
Congress to review the current-law budget outlook beyond the next ten 
years, much less take corrective action.
    The current budget process encourages short-term thinking by 
focusing on a 5 or 10-year window. Yet, as analysts from all sides 
generally agree, our truly unsustainable fiscal problem stems from 
commitments that extend far into the future. Congress could greatly 
improve the transparency of our future obligations and encourage 
actions to deal with them by including in the budget resolution targets 
and estimates of major policy proposals stretching out for at least 40 
years.
    A five or ten year budget window may have been adequate back when 
most federal spending was appropriated annually. It is insufficient 
when most of the budget consists of entitlement programs set on a 
rising autopilot. It's time to include the long term in the budget 
process. In that regard, I believe the legislative recommendations 
(Transparency in Accounting and Budgeting) made by United States 
Comptroller General David M. Walker provide an excellent framework.
    At a minimum, The Concord Coalition believes that lawmakers should 
have available to them clear and explicit information about the 
potential long-term consequences of proposed legislation that would 
expand major entitlement programs or reduce taxes. We have proposed an 
approach that would inject that long-term outlook for the budget into 
the annual budget process. It makes no pretense of compulsion, but by 
providing a formal means for the Congress to confront long-term 
projections would lead to constructive adjustments to entitlement and 
tax policies.
    In our proposal, Congress should establish long-term targets for 
revenues and outlays by major spending category as part of the annual 
budget resolution. It should note how major legislative proposals 
assumed in the resolution would affect these targets and how the 
targets differ, if at all, from current law as projected by the CBO. 
Separate targets could be established, as a share of GDP at five-year 
intervals through 2040, for total revenues, defense spending, domestic 
discretionary spending, Social Security, Medicare, Medicaid, other 
entitlements, and net interest. If the targets differ from current-law 
projections, CBO could be required to issue a report with an 
illustrative menu of reform options capable of generating the proposed 
savings. 7
    Compelling Congress to go on record about its long-term budget 
priorities, would focus the public (and Congress itself) on the nature 
of the choices before us--and so might pave the way for lasting reform.
    The Concord Coalition proposal is forward looking. It empowers 
lawmakers by assigning them with an explicit responsibility of 
evaluating and planning for the future. It charges elected officials 
with developing strategic vision for the nation. If some leaders want 
to leave revenue levels alone, they would present a plan specifying 
what measures they would propose to spending or to finance any 
resulting fiscal gap. If other leaders want to maintain or expand 
current-law entitlements, they would present a plan for financing their 
proposals. The CBO options would put a concrete face on the types of 
measures that will be necessary, thereby helping to educate the public 
about the size of the problems we face and the real-life implications 
of necessary adjustments.8
                               conclusion
    Given the difficulty of the challenges presented by long-term 
budget projections, it is not surprising that little progress has been 
achieved. New budget rules alone will not solve the problem. Across-
the-board sequestration is not a desirable means for addressing 
deficits. But enforceable budget rules focus attention on the bottom 
line numbers and thereby engineer a debate over the substantive policy 
issues that are at the root of long-term budget woes.
    When budget experts discuss the intricacies of an effective PAYGO 
rule or craft a sequestration threat that is onerous enough to compel 
congressional avoidance of a rule violation, we tend to forget that 
this is not just a technical debate over an obscure internal 
governmental process. Public participants in the Fiscal Wake-Up Tour 
understand that continued inaction on the long-term challenges in the 
budget and increases the amount of uncertainty about standards of 
living for themselves and their families in the future. They do not 
understand why their elected officials, for whom the long-term budget 
outlook is old news, are not doing something about it.
    Although budget rules alone will never be able to solve the 
nation's fiscal problems, enforcement mechanisms can bring greater 
accountability to the budget process and help provide Members of 
Congress with the political cover to make the tough choices necessary 
to reduce the deficit. Pay-as-you-go rules (PAYGO) for all tax and 
entitlement legislation is a proven tool for fiscal discipline.
    Yet, no budget rules will be effective if they are not accompanied 
by a commitment to enforce them. Thus, it is critical that Congress 
resist the pressure to weaken them by exempting politically popular 
items, assuming additional costs in the baseline or routinely 
circumventing them with scorekeeping gimmicks when they become 
inconvenient. This will require policymakers to set priorities and make 
compromises among competing needs. Many tax and spending initiatives 
will need to be scaled back to fit within the amount of available 
offsets. The Concord Coalition would welcome the opportunity to work 
with you to develop practical approaches to encouraging long-term 
budget sustainability.
    Thank you for your attention. I would be happy to answer any of 
your questions

                                endnotes

    \1\ See, ``It's Time to Pay Our Bills,'' http://www.facingup.org/
about-us/new-report-its-time-pay-our-bills
    \2\ See, GAO, Long-term Simulation Data, Alternative Simulation at 
http://www.gao.gov/special.pubs/longterm/april2007altsimulation.pdf
    \3\ See Directorate-General for Economic Affairs, The Long-Term 
Sustainability of Public Finance in the European Union, October 2006, 
http://ec.europa.eu/economy--finance/publications/european--economy/
2006/ee0406sustainability--en.htm.
    \4\ OECD Health Data 2007, July 2007, http://www.oecd.org/document/
16/0,3343,en--2825--495642--2085200--1--1--1--1,00.html.
    \5\ Chapin White, ``Health Care Spending Growth: How Different Is 
the United States from the Rest of the OECD?'' in Health Affairs, May/
June 2006.
    \6\ Cathy Schoen, Karen Davis, Sabrina K.H. How and Stephen C. 
Schoenbaum, ``U.S. Health System Performance: A National Scorecard'' in 
Health Affairs, November/December 2006.
    \7\ See, Concord Coalition Facing Facts Quarterly, December 2006, 
``Beyond Paygo: How to Encourage Long-Term Fiscal Discipline,'' by 
Richard Jackson.
    \8\ CBO is developing important analytic capability that eventually 
will allow it to assess in greater detail potential impacts of policy 
changes over the long term. Requiring the agency to develop long-term 
budget options would likely require additional analytic resources. The 
additional resources have the potential to expand understanding of the 
long-term budget implications of policy proposals--a result that will 
be sorely needed as policy makers address long-term challenges.

    Chairman Spratt. Now we go to Maya MacGuineas from the 
Committee for a Responsible Budget and the floor is yours to 
wrap it all up. Thank you for coming.

                  STATEMENT OF MAYA MACGUINEAS

    Ms. MacGuineas. Good morning. Thank you.
    The bipartisan Committee for a Responsible Federal Budget 
whose co-chairs are Bill Frenzel and Leanne Pinetta and many of 
whose members seem to be staring down at me from the walls 
around here believe that statutory PAYGO and tight caps on 
discretionary spending were instrumental in confronting the 
fiscal challenges of the 1990s and we believe they should be 
reinstated to help address the challenges today.
    We encourage a strengthening of PAYGO including reinstating 
statutory PAYGO to make the principles more consistent, 
transparent, and effective. I will touch upon some of the 
possible improvements and I discuss this in more dept in my 
written testimony.
    We strongly support dual-sided PAYGO. If PAYGO is not 
applied to both sides of the budget, there is a stronger 
incentive than there already is to run spending programs 
through the tax code further distorting our already disastrous 
tax base.
    This organizational position is unrelated to our position 
on extending the tax cuts and our board is actually quite 
divided on this question. Some of our board members favor 
extending all or most of the tax cuts. Some of them favor 
extending some or none of the tax cuts.
    But as a group, we believe that tax cuts should not be 
exempt from fiscal controls. And it is worth pointing out that 
for those who would like to control the growth of government, 
as many of our board members would, offsetting tax cuts with 
spending reductions should be seen as a desirable policy, not a 
problematic one.
    Second, timing issues. Many tax cut and spending proposals 
have relatively modest cost in the shorter-term budget windows 
but have much larger longer-term costs which are not subject to 
limits. PAYGO should be structured to cover the long-term costs 
as well.
    And on the flip slide, some proposals with near-term costs 
could be justified on the basis that they produce longer-term 
saving.
    Addressing these timing issues involves complex questions 
about how to measure longer-term costs on savings of 
legislation and increasing uncertainty of estimates over time, 
we would suggest further studying these issues.
    We believe the treatment of taxes and entitlements should 
be equalized. The most straightforward approach is probably to 
build the cost of major tax cuts and entitlement programs into 
the baseline requiring that all long-term costs be offset when 
the legislation is created even if the program is assumed to 
sunset.
    A related issue is whether there is a way to require that 
if a policy ends up costing more than it was originally 
projected to, the additional costs should have to be offset.
    Other changes. If statutory PAYGO is reinstated, there are 
a number of improvements that should be made. We would suggest 
broadening the sequestration base. It should be made more 
difficult to suspend sequestration or wipe the score card 
clean. We should be vigilant about what counts as emergency 
spending and we should require that separate votes be taken to 
exempt legislation from PAYGO requirements, making these 
choices more transparent.
    So, finally, PAYGO could actually be strengthened to 
encourage action to improve the fiscal situation, not just keep 
it from deteriorating.
    For instance, we could enact a form of a super PAYGO that 
would kick in when the deficit and/or unfunded liabilities 
reach a certain point, requiring that new costs both be offset 
and paired with some level of deficit or unfunded liability 
reductions. There are a lot of ways to be creative as we look 
forward to PAYGO for the future and the new challenges that we 
face.
    The concept of PAYGO represents the simple truism that 
budgeting is about tradeoffs. We commend Congress for bringing 
the PAYGO principle back to budgeting. We hope they will 
maintain it throughout this budget cycle.
    We recognize the challenges in doing so, but the stakes are 
high and we fear that a break in the resolve to live by the 
PAYGO principle will open up the floodgate for debt finance 
policy requests.
    The bottom line is that PAYGO in any form is only as good 
as the commitment of legislators to follow it. We look forward 
to working with all of you to strengthen the requirements as 
well as the underlying commitment to the important principle.
    Thank you.
    [The prepared statement of Maya MacGuineas follows:]

 Prepared Statement of Maya C. MacGuineas, President, Committee for a 
                       Responsible Federal Budget

    Good morning, Mr. Chairman and Members of the Committee. I have 
been asked to comment on the merits of reestablishing the statutory 
PAYGO law. Thank you for the opportunity to testify. It is a privilege 
to appear before this Committee.
    I am the President of the Committee for a Responsible Federal 
Budget. Our Co-Chairs are Bill Frenzel and Leon Panetta and our Board 
is composed of past Directors of the Office of Management and Budget, 
the Congressional Budget Office, and Chairs of the Federal Reserve 
Board and the Budget Committees. Our focus is the federal budget and 
related process issues. I am also the Director of the Fiscal Policy 
Program at the New America Foundation, a non-partisan think tank here 
in Washington D.C.
    The Committee for a Responsible Federal Budget has a long-standing 
record of supporting the budget reforms in the Budget Enforcement Act 
of 1990. We believe that statutory PAYGO and tight caps on 
discretionary spending were instrumental in confronting our fiscal 
challenges in the 1990s and we believe they should be reinstated to 
help address the challenges we face today. We also support a number of 
other budget process reforms detailed in our report, Federal Budget 
Process: Recommendations for Reform at http://www.crfb.org/pdf/2000/
RecommendationforReform.pdf. We will be publishing a new options book 
on budget process reform in the coming months.
    A clear starting point for us is that budget deficits do matter. 
They affect the economy, they affect budgetary flexibility, they affect 
future standards of living, and they affect generational equity. The 
Congressional Budget Office's projections show the debt held by the 
public growing by $450 billion over the next three years. Considering 
where we are in the business cycle, the amount of debt we have 
accumulated in past years, and the looming retirement of the baby 
boomers, this is an unacceptable additional burden that we should not 
be entering into. We should be looking at paying down the national 
debt, not running it up. Furthermore, we face imbalances of trillions 
of dollars in Social Security and Medicare, our two largest entitlement 
programs. We should be using every fiscal tool we can find in the tool 
box to help meet these challenges.
    The reinstatement of PAYGO--in any form--is a great first step. 
Clearly, PAYGO will not by itself balance the budget or address our 
long-term fiscal challenges, but it will help to bring discipline back 
to the budgeting process. PAYGO puts the breaks on policies that 
increase the deficit and it provides hurdles Congress has to clear 
before enacting new mandatory spending or tax cut policies. We commend 
the new Congress for bringing the PAYGO principle back to budgeting, 
and we hope they will maintain it throughout this budget cycle. We 
recognize the challenge of doing so, but the stakes are high and we 
fear that a break in the resolve to live by the PAYGO principle will 
open a floodgate of debt-financed policy requests.
    The concept of PAYGO represents the simple truism that budgeting is 
about trade-offs. PAYGO requires that Congress identify the means for 
offsetting the costs of new tax cuts or mandatory spending programs, 
thereby allowing Congress the flexibility to implement the policies it 
chooses along with the responsibility of paying for those policies.
    Statutory PAYGO was originally introduced in the bipartisan budget 
agreement of 1990. It was extended in the bipartisan balanced budget 
agreement of 1997 and remained in effect through 2002. PAYGO was 
successful in large part because it represented an agreement by both 
parties to only advance their policy priorities in a fiscally 
responsible way in exchange for the other side agreeing to do the same.
    Unfortunately, PAYGO was a victim of its own success, as the 
surpluses that it generated weakened the resolve of Congress to offset 
new spending and tax changes. Since the expiration of statutory PAYGO, 
both the House and the Senate have introduced PAYGO rules (the House 
just recently.) While they operate in a similar manner, statutory PAYGO 
and a PAYGO rule are not the same. Both forms of PAYGO stipulate that 
an increase in mandatory spending or a decrease in taxes must be offset 
by an equal decrease in mandatory spending and/or increase in taxes, so 
that the legislation does not increase the deficit. The differences 
arise in the way PAYGO is enacted, enforced, and waived. (One-sided 
PAYGO and post-policy PAYGO obviously differ from the statutory PAYGO 
of the 1990s in other significant ways as well.)
    Statutory PAYGO applies the same rules to the House and Senate and 
is agreed to by the President. This type of PAYGO is binding, and is 
enforced by the Congressional Budget Office. Under statutory PAYGO, 
changes to tax or entitlement programs that increase the deficit 
trigger across-the-board sequestration in certain mandatory spending 
programs. Each individual bill does not have to balance, but changes 
have to balance out over the session. If balance is not maintained, 
automatic reductions to rebalance the budget are required. Though there 
were no sequesters in the 1990s, the threat of the blunt reductions 
affected policy choices and helped to control the deficit.
    PAYGO rules lack the force and the breadth of statutory PAYGO. The 
rules apply individually to each chamber and do not bind the other. 
They establish parliamentary points of order that must be raised by a 
Member to take effect. To suspend them, only the chamber to which they 
apply must approve. The rules in each House and Senate can be quite 
different. Currently, the PAYGO rules in the House and Senate differ in 
that the Senate relies on a scorecard and allows offsets to be carried 
over from one bill to another, while the House does not. Also, for 
PAYGO to be waived in the House, the Rules Committee must make and pass 
a specific rule exempting the piece of legislation at issue from PAYGO 
requirements; in the Senate, 60 Senators must vote to exempt the bill 
and overturn the point of order--a release lever that we greatly fear 
will be used all too regularly.
    The Committee for a Responsible Federal Budget encourages a 
strengthening of PAYGO in any way that would help make the principles 
more consistent, transparent, and effective. This includes, but is not 
restricted to reintroducing statutory PAYGO. It is helpful to have 
identical restrictions operating in both the House and Senate. The two 
Chambers should not have to spend their time negotiating PAYGO 
differences at the expense of working on key budget issues such as 
determining national priorities and finding responsible ways to enact 
and oversee related policies. To keep Congress and the White House from 
operating on different tracks, it is also useful to have a statute to 
which both Congress and the President have agreed. Statutory PAYGO also 
has the advantage of being self-enforcing. There are always ways to get 
around the law, many of which were employed in the past, but statutory 
PAYGO makes the restriction harder to bypass. The threat of a sequester 
certainly makes Congress think twice about failing to offset the costs 
of new policies.
    Statutory PAYGO is desirable because of its consistency between 
both chambers and the White House, the default mechanisms that it 
utilizes, and the added difficulty of ignoring the law. At the same 
time, there are important improvements that could and should be made to 
the design of PAYGO.
    Dual-Sided PAYGO--Recently, there has been a good deal of 
disagreement over whether PAYGO should apply to both spending and taxes 
or just spending. The Committee for a Responsible Federal Budget has 
strongly supported dual-sided PAYGO in the past and continues to 
believe that a balanced form of PAYGO is a critical component of 
ensuring budget discipline. It is necessary to apply PAYGO to both 
sides of the budget--taxes and spending--otherwise there will be 
stronger incentives than there already are to run spending programs 
through the tax code in order to avoid the requirement of offsetting 
the costs. One merely needs to look at the moth-eaten tax base to see 
that spending by means of the tax code is already overused.\1\ 
Furthermore, the lack of balance in a one-sided PAYGO system stymies 
the widespread political buy-in from both parties that is needed to 
make PAYGO an enduring and effective instrument of fiscal discipline.
---------------------------------------------------------------------------
    \1\ See ``Closing the $700 Billion Tax Loophole'' by Maya 
MacGuineas in Ten Big Ideas for a New America http://
www.newamerica.net/publications/policy/ten--big--ideas--for--a--new--
america
---------------------------------------------------------------------------
    Timing Issues--It is critical that opportunities to end-run PAYGO 
be eliminated or at least reduced to the extent they can be. The longer 
a rule exists, the smarter those who want to break it get at finding 
ways to do so. PAYGO is no exception. With regards to timing, many tax 
cut and spending proposals have relatively modest costs within the 
shorter-term budget windows covered by PAYGO rules, but have much 
larger long-term costs, which are not subject to limits. We recently 
saw an example where one tax cut was paid for by another due to timing 
anomalies. Allowing legislation with permanent costs to be offset by 
temporary savings that later turn into permanent costs clearly defeats 
the purpose of the principle. PAYGO should be structured to cover long-
term costs as well as those that are more immediate. Now more than 
ever, given the long-term budget challenges we face, altering the rule 
so that long-run costs are covered is an important improvement.
    On the flip side, some proposals with near-term costs could be 
justified on the basis that they will produce long-term savings. Some 
types of Social Security individual accounts that are paired with long-
term savings, for instance, could be fiscally responsible, though they 
would not comply with the current versions of PAYGO. Addressing these 
complex timing issues involves several difficult questions about how to 
measure long-term costs and savings of legislation, the increasing 
uncertainty of cost estimates over time, and how to balance the 
relative certainty of near-term costs with the less certain prospects 
for long-term savings. We do not have all the answers to these 
important questions but we firmly believe that they need to be studied 
in order to improve PAYGO and close the loopholes that most seriously 
weaken it.
    Balance Between Spending and Taxes--Some argue that PAYGO is biased 
against tax cuts because the presumption is that entitlement programs 
will continue--even if they are set to expire--but that tax cuts will 
expire as planned, and must then be offset if they are extended. The 
opposite side of this coin, however, is that entitlement programs are 
scored as though they will continue, making the original costs higher, 
while tax cuts can be made to look cheaper by truncating the policy 
time frame and assuming the savings associated with expiration. The 
major tax cuts created in 2001 and 2003 are expiring (and will have to 
be paid for if they are extended under PAYGO) because they were passed 
in a way that used a sunset provision to limit their original cost 
estimates.
    We believe the treatment of taxes and entitlements should be 
equalized. The most straightforward approach would be to build the 
costs of major tax and entitlement legislation into the baseline. This 
would mean that extending the policies would not ``cost'' anything or 
require future offsets, but it would be more costly to create the 
policy in the first place and would require long-term offsets even if 
the policy were slated to sunset. Including the costs of extending all 
policies that are likely to be reauthorized presents a more accurate 
picture of the fiscal future. A related issue is whether there is a way 
to require that if a policy ends up costing more than is originally 
projected, the additional costs would have to be offset. We think this 
would be desirable for both tax and spending policies.
    Our policy position on PAYGO as an organization is unrelated to our 
personal positions about extending the tax cuts. Our Board is divided 
on this question: some would make permanent most or all of the tax 
cuts, others would extend only a few or none of them. But as a group, 
we believe that tax cuts should not be exempt from fiscal controls. It 
is worth pointing out that for those who would like to control the 
growth of government spending--as many of our Board Members would, 
offsetting tax cuts with spending reductions should be seen as a 
desirable policy, not a problematic one.
    Other Changes--If statutory PAYGO is reinstated, there are a number 
of improvements that should be made. We should broaden the 
sequestration base. Too many programs have been made exempt. Since the 
exempt programs are generally the most popular, this defangs 
sequestration and it increases the severity of the cuts that would have 
to be applied to the remaining programs. Also, when statutory PAYGO was 
in place, Congress regularly intervened in order to prevent sequesters. 
By passing legislation, it removed the balances on the scorecard in 
1999 and every year thereafter that the law was in effect.\2\ It should 
be made more difficult to suspend sequestration or wipe the scorecard 
clean to circumvent PAYGO. Additionally, Congress tried to use directed 
scorekeeping to circumvent the law by directing OMB to score 
legislation so that it did not affect the PAYGO scorecard. Though these 
attempts were not successful, in the future, directed scorekeeping 
should not be permitted.
---------------------------------------------------------------------------
    \2\ The first three waivers were passed in Conference Reports for 
omnibus appropriations while the fourth was passed as a freestanding 
bill.
---------------------------------------------------------------------------
    Another avoidance tool Congress used was to stretch the definition 
of ``emergency spending'' to include things that certainly were not, as 
a means of avoiding PAYGO restrictions. This abuse coincided with the 
general eruption of the use of the emergency designation to circumvent 
budget rules. Congress needs to tighten up and enforce the definition 
of emergency spending to keep this blatant abuses from happening in the 
future. Finally, to improve transparency, we should require that 
separate votes be taken to exempt legislation from PAYGO requirements.
    We are in a worse fiscal position then we were in when PAYGO was 
first enacted. The deficit as a share of GDP is not as problematic, but 
the long-term problems are far worse--exacerbated in large part by 
policies enacted while PAYGO was not in place--and the retirement of 
the baby boomers is much closer. An important question is whether PAYGO 
could be strengthened so that it does not just keep things from getting 
worse, but rather is designed to encourage, and when necessary, force 
action to improve the fiscal situation. This could take many forms, but 
one I will propose is that when the deficit and/or unfunded liability 
numbers reach a certain point as a share of GDP, perhaps a ``Super 
PAYGO'' that would require new costs to both be offset and paired with 
some level of deficit or unfunded liability reduction, would kick in.
    The bottom line is that PAYGO in any form is only as good as the 
commitment legislators have to following it. Congress should not pass 
PAYGO requirements, declare victory, and then spend its time attempting 
to bypass the intent of the principle. Too often process is used as a 
replacement for the hard choices when it is really only one step of 
many. Process will never on its own be able to do the heavy lifting of 
rebalancing the budget.
    Nonetheless, PAYGO has a number of desirable benefits. It is based 
on the common sense principle that we should pay for what we spend. 
This is something the public believes and Congress should support. 
PAYGO has a bipartisan pedigree--it was the product of a bipartisan 
agreement in 1990, was included in the Democratic budget in 1993, and 
the Republican budget in 1995, and was extended in 1997 with the 
support of both parties. It allows Congress the flexibility to pass the 
legislation it wants as long as the costs are offset, enforcing the 
notion that budgeting is, and should be, about tradeoffs between 
national priorities. The statutory form of PAYGO is stronger and, given 
its solid track record and the need for fiscal discipline, it should be 
reinstated, albeit with some technical changes to make it more 
effective and balanced. The rules established by the Budget Enforcement 
Act made a significant contribution to bringing the deficits under 
control in the 1990s and we urge Congress to move forward with 
legislation reinstating these statutory budget rules. We applaud 
Congress for returning to a pay-as-you-go era and we look forward to 
working with all of you to strengthen the requirements, as well as the 
underlying commitment to this important principle.

    Chairman Spratt. Thank you very much.
    And now I am going to yield my time to Mr. Moore as the 
sponsor of legislation on the Committee and be the baseline we 
start with when we sit down to draw up some legislation.
    And let me further say to all of you what you testified to 
today will be helpful to us as we try to craft a new rule. 
Thank you very much for your input.
    And let us go to Mr. Moore.
    Mr. Moore. The panel members, thank you for being here and 
for your testimony.
    Were you here and heard the testimony of Dr. Orszag and Mr. 
Walker, please, all of you?
    Mr. Toomey. Yes.
    Mr. Moore. I would ask, Mr. Toomey, you heard the response 
to my question about are all tax cuts created equally. Did you 
disagree with their answers, Mr. Toomey?
    Mr. Toomey. No. We believe strongly that all tax cuts are 
not created equally.
    Mr. Moore. Okay. And, for example, repeal of the estate 
tax, is that going to pay for itself?
    Mr. Toomey. Probably not. I do not recall that I have seen 
an analysis on that itself.
    Mr. Moore. Is it correct or do you understand it to be 
correct that in the past six years, the national debt of our 
country has increased about $3 trillion?
    Mr. Toomey. Well, it depends on what you are talking about 
by the national debt. I think the only meaningful national debt 
really are two. One is the actual obligation of the government 
to other people. Intergovernmental borrowings and lendings 
should be netted out.
    And the other one is the big unfunded liability of the big 
entitlement programs. So I am not sure which of those you are 
referring.
    Mr. Moore. Well, at the time, about six years ago, as I 
recall, I believe this is correct, I believe the national debt 
stood at about 5.7 or $5.8 trillion and now it is over $8.8 
trillion. Do you disagree with that?
    Mr. Toomey. I would just observe that that includes the 
intergovernmental borrowings. And if I lend myself money, that 
is neither an asset nor a liability. So that is not as 
meaningful as the 4.9 trillion which is the real obligation to 
other lenders and the 50 trillion unfunded liability of our 
entitlement programs.
    Mr. Moore. When were the last surpluses in the past, say, 
15, 20 years?
    Mr. Toomey. Late 1990s, around 2000.
    Mr. Moore. And that was when we had PAYGO; is that correct?
    Mr. Toomey. That is correct.
    Mr. Moore. All right. And as soon as PAYGO expired, we 
started having deficits; did we not?
    Mr. Toomey. Of course we had some very calamitous events 
occur in the interim as well including September 11th and an 
economic recession and some very, very significant budgetary 
impacts.
    Mr. Moore. And do you really expect that we are going to 
get back into a balanced budget unless PAYGO is reinstituted?
    Mr. Toomey. I hope we could, but I think it is going to be 
a function of if and when Congress and the President jointly 
agree to restrain spending. You know, for a brief and glorious 
time in the 1990s, there was that absolutely historically 
unprecedented boom in investment and innovations that really 
were on par with the Industrial Revolution when we had the 
whole internet and the technology sector which was a tremendous 
driver of the economy and revenue. Those are unusual times.
    Mr. Moore. Did you see Congress Daily yesterday and the 
article that I referred to when I talked to Mr. Orszag, Dr. 
Orszag?
    Mr. Toomey. I did not.
    Mr. Moore. All right. I want to read you just the first two 
paragraphs. A new analysis by the nonpartisan CBO found that 
projected budget deficits would have largely been wiped out and 
possibly turned into surpluses had it not been for President 
Bush's 2001 and 2003 tax cuts.
    In addition, quote, the overall impact of the tax 
legislation on the economy is likely to be modest, end quote, 
said the analysis released late Friday.
    Would you agree or disagree with that?
    Mr. Toomey. Well, I would disagree with that and I am not 
sure how they would square that with the fact that back in 2003 
prior to the tax cuts, the revenue that they were projecting 
for this year, for instance, and for last year was less than 
what is actually coming in this year and last year.
    Mr. Moore. But we still have deficits this year and last 
year; is that right?
    Mr. Toomey. Yes. My point is, though, they were projecting 
that without the Bush tax cuts, they would have been larger or 
at least the revenue would have been less. So who knows what 
spending would have occurred. That is obviously the other part 
of the equation.
    Mr. Moore. You said all tax cuts are not created equally.
    Mr. Toomey. Right.
    Mr. Moore. Which ones do you think contribute to deficits 
and debt?
    Mr. Toomey. Well, the way we look at it is there are some 
tax cuts that generate greater economic growth and if they 
generate more economic growth, they expand the base upon which 
taxes are applied and, therefore, can generate more revenue.
    In particular, we think the most pro-growth tax cuts are 
those which lower marginal tax rates on work, savings, 
investment. Lower marginal tax rates increases the incentive to 
engage in all of those activities and you get more of them. 
That leads to the stronger economy and ultimately greater 
revenue.
    Using the tax code to target benefits on narrow groups, for 
instance, is not at all conducive to economic growth and that 
kind of tax cut, if one calls it that, we tend to frown upon.
    Mr. Moore. Thank you.
    I yield back, Mr. Chairman.
    Chairman Spratt. We will turn now to Mr. Ryan and then we 
will save a few minutes for questions on this side to wrap it 
up.
    Mr. Ryan.
    Mr. Ryan. We have a vote, so that is why I think we are 
going to be--I will do this fast.
    Boy, there is a lot I could go into all of this. Let me 
first start with the current House SCHIP Expansion Bill, it is 
my understanding proposes doing away with the Medicare 45 
percent trigger.
    Let me just ask from Bixby and down to Mr. Toomey, do you 
think that is a good idea to repeal the Medicare 45 percent 
trigger?
    Mr. Bixby. I do not. I think that some sort of trigger 
should be in place. If the general revenue trigger is not a 
good idea, then I think that somebody should come up with 
something to replace. But, no, I would not favor just simply 
repealing it.
    Mr. Ryan. Mr. Greenstein.
    Mr. Greenstein. I do favor repealing it. The 45 percent 
trigger, I think, is very distortionary. I do think there is an 
argument for some sort of a trigger, but I think the 45 percent 
trigger is so badly designed that it is actually worse than 
having no trigger at all.
    Ms. MacGuineas. We do not favor repealing it. We think that 
there is a whole lot of use for triggers in the future and we 
hope we will see more of them in the budget.
    I would recommend triggers that kick in usually when 
spending is a share of GDP is probably a better way to craft 
them. But I think getting rid of it would be a huge step in the 
wrong direction and we will be hoping and working with members 
to keep that trigger in place.
    Mr. Toomey. We do not favor repeal of the trigger. We just 
heard about the enormous costs that accelerating healthcare 
costs are imposing on the economy and the government and this 
is a mechanism, however flawed, to at least trying to address 
that.
    Mr. Ryan. Well, I guess three out of four is not so bad.
    This is one of the little speed bumps we have that says, 
whoa, let us pause and take note of the fact that Medicare is 
on an unsustainable path, that it is growing out of control.
    And the idea that we will remove just this little bump in 
the road, this little pause to get Congress to think seriously 
about entitlement reform, to me, would just be a huge step in 
the wrong direction which unfortunately I believe this will be 
passed on to the Ways and Means Committee tomorrow, I believe, 
is the intention.
    Since we have just a few minutes left, I will not take up 
my full five because I know Marcy wants to ask a question.
    I will simply say when we think about PAYGO, for instance, 
for the record, and I think this needs to be settled, in 2004, 
we had a vote on PAYGO. It was one-sided as people described 
this, PAYGO on spending with discretionary spending caps. And 
the votes were 146 Republicans were in favor of it, 72 
Republicans were opposed to it, most of whom came from the 
Appropriations Committee. And all Democrats were opposed to it.
    So even putting part PAYGO extension and discretionary 
spending caps when we had the vote on the floor three years 
ago, it failed.
    I would simply say that we have agreement, I think in this 
room, on at least discretionary spending caps. Why do we not 
bring a bill to the floor with discretionary spending caps. All 
of us, I think, agree on just that.
    So maybe we have a disagreement on PAYGO. I will not go 
through that argument. We have what we think are good 
arguments. You have what you think are good arguments. But I 
think if you go over through this Committee, you will probably 
have unanimous agreement, maybe two or three people opposed to 
it, that we should have discretionary spending caps. So why do 
we not move forward with that? And that is just an appeal I 
would like to make to my colleagues.
    Chairman Spratt. Well, I mentioned a minute ago, look at 
what we are spending for defense, $50 billion in the base 
defense budget and $140 billion in the war supplemental. 
Accommodating that under any kind of cap is going to be very 
awkward to do and it would probably have to be fixed from time 
to time such as to make the cap meaningless. Let us go on. We 
will have that debate again.
    Mr. Ryan. Well, I will not take any more time because I 
know we have to vote.
    Chairman Spratt. Anyone on our side who would in particular 
like to pose a question at this point? Mr. Edwards, Ms. 
Schwartz?
    Mr. Edwards. I do not want to keep anybody from missing the 
vote. Do we know how many minutes we have left?
    Chairman Spratt. We have got eight and a fraction.
    Mr. Edwards. Very quickly, Mr. Greenstein. As I understand 
it, we always have economic growth when we are coming out of 
recession. I have also seen numbers that indicated the economic 
growth coming out of the recession of 2000 has been slower than 
the economic growth coming out of the recessions for the past 
40 years in this country. That might undermine to some degree 
the comments made by our former colleague, Mr. Toomey, about it 
was the tax cuts that created economic growth.
    Any insights on economic growth coming out of this last 
recession compared to other recessions where we did not have 
these trillion dollar tax cuts?
    Mr. Greenstein. We have looked at how this recovery has 
compared on seven basic measures, GDP growth, net investment 
growth, jobs and salaries, et cetera, et cetera. What you find 
is that on six of seven, everything except corporate profits, 
the growth in the current recession is below the average for 
all other recovery since the end of World War II. And it 
compares unfavorably with the comparable phase of the 1990's 
recovery which actually followed a tax increase.
    So I do not think there is an argument to be made there in 
terms of the economic effects of the tax cuts enacted earlier 
in the decade.
    One more quick comment on tax cuts and this is about Mr. 
Ryan's question on the 45 percent trigger. Part of my real 
objection to the 45 percent Medicare trigger is that under that 
trigger, you can cut Medicare beneficiaries and you can raise 
payroll tax rates on workers to help meet the trigger, but you 
are not allowed to deal with tax preferences that General 
Walker talked about. You would not be allowed to deal with 
excesses, for example, in healthcare tax preferences. I think 
there is something wrong with a trigger that says payroll tax 
rate increases are okay and closing tax preferences is not 
allowed and that is why I think it should be repealed.
    Chairman Spratt. Thank you very much.
    We have to rush through the conclusion, but we assure you 
we will consider the legislation and what you have left. And we 
thank you very much.
    I ask unanimous consent that all members be allowed to 
submit an opening statement for the record at this point if 
they have not had an opportunity to make one. And I ask 
unanimous consent that members who did not have the opportunity 
to ask questions may submit questions for the record within 
seven days.
    The Committee is now adjourned.
    [Whereupon, at 12:36 p.m., the Committee was adjourned.]

                                  
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