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


 
              TREASURY DEPARTMENT FISCAL YEAR 2009 BUDGET

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 13, 2008

                               __________

                           Serial No. 110-31

                               __________

           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
NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey        PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia  JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina        RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon               ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington              [Vacancy]
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                 Austin Smythe, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 13, 2008................     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.................................................     3
    Hon. Henry M. Paulson, Jr., Secretary, U.S. Department of the 
      Treasury...................................................     4
        Prepared statement of....................................     6


                          TREASURY DEPARTMENT
                        FISCAL YEAR 2009 BUDGET

                              ----------                              


                      WEDNESDAY, FEBRUARY 13, 2008

                          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, Schwartz, 
Doggett, McGovern, Tsongas, Andrews, Scott, Etheridge, Baird, 
Moore, Bishop, Ryan, Barrett, Garrett, Hensarling, Conaway, and 
Smith.
    Chairman Spratt. Secretary Paulson, welcome back. We are 
pleased to have you testify before our Budget Committee, partly 
because we know how busy you have been.
    And in that vein, let me thank you for the role in 
particular that you played in formulating a stimulus bill and 
helping us push it through to passage.
    All sides had to make concessions and most of us have ideas 
on how we could have improved the package, but it is a good 
measure which I think meets the test we set forth. It is 
timely. It is temporary. It is targeted. And let us hope it is 
a boost to our sagging economy.
    Today we want to discuss with you the President's budget 
for fiscal year 2009. In particular, we hope that you will 
elaborate on the Administration's current outlook on the 
economy and budget deficits given the stimulus that we have 
just passed.
    We find that the budget for 2009 bears the hallmarks of 
previous budgets from this Administration. It has more tax 
cuts. It has, as a result, more deficits and more debt in the 
near term offset by what we look upon as some draconian cuts in 
Medicare and Medicaid and smaller but significant cuts in 
things such as the Social Services Block Grant and the 
Community Services Block Grant, two of the pillars of the 
safety net.
    When President Bush took office, he inherited a budget that 
was in surplus. His first budget message, he proclaimed that 
his budget would retire ``nearly $1 trillion over the next four 
years, an accomplishment that he tallied as'' the largest debt 
reduction ever achieved by any nation at any time.''
    But by the year 2004, the surplus was gone, replaced by a 
deficit of $413 billion. In nominal terms, this was the largest 
deficit in American history.
    And we are here today in the Administration's final year. 
Instead of retiring a trillion dollars in debt, the policies of 
this Administration will increase the debt by $4 trillion by 
the time the President steps down.
    So if we are a little skeptical of the budget before us, 
you can attribute them to six years of watching targets be set 
and missed by a wide margin.
    For fiscal 2009, the Administration proposes a deficit of 
$477 billion, very near the record debt in 2004. But in 
calculating this deficit, the Administration has inserted a $70 
billion plug for the cost of our deployments in Iraq and 
Afghanistan and provided nothing at all thereafter.
    The Administration has also assumed that the alternative 
minimum tax will be fully in effect after 2008, affecting in 
particular middle-income taxpayers and, in effect, reclaiming 
with one hand the tax cuts that are extended with the other.
    We do not understand why the Administration emphasizes or 
prioritizes extension of the 2001 and 2003 tax cuts which do 
not expire until 12/31/2010, over and above a permanent fix to 
the AMT which is needed immediately, this year, next year, and 
so on.
    At least three Administration witnesses have sat where you 
sit and told us that the AMT can be reformed and should be 
reformed and should be and can be reformed within the Tax Code 
on a revenue-neutral basis without any effect on the bottom 
line.
    I have asked the Bush Administration for the past couple of 
years to lay out such a proposal, its proposal for permanently 
fixing the AMT. But the Administration never released such a 
plan.
    Instead the Administration rejected Mr. Rangel's revenue-
neutral AMT proposals last year, both a broad, permanent reform 
and the one-year patch, and seems fundamentally opposed to any 
such reforms done in a revenue-neutral way.
    The Administration uses AMT revenues to cloak the size of 
its forthcoming tax cuts. By understating spending and 
overstating revenues, we believe that this budget understates 
the deficit which is large enough at over $400 billion.
    But if realistic adjustments are made for our deployments 
in Iraq and Afghanistan, not $70 billion but a real number, if 
the AMT is adjusted so that it is not applied to middle-income 
taxpayers, and everybody in this room would agree it was not 
intended for that purpose and should not be used for that 
purpose, then by our calculation, the deficit under this 
Administration policies rises well above $440 billion and sets 
a new record.
    This still does not account for the possibility that the 
economy may actually be weaker than your forecast assumes even 
after the positive boost that the stimulus package may have 
provided.
    Faced with huge deficits and mounting debt, President 
Reagan changed the thrust of his budget by signing TEFRA in 
1982 and then by signing Gramm-Rudman-Hollings in 1985.
    The first President Bush agreed to a budget summit and 
signed into law the resulting five-year plan.
    President Clinton made deficit reduction his top priority. 
Within a month of taking office February the 17th, he sent 
Congress a five-year plan to cut the deficit by more than half. 
Five years later, he finished the job with the ``Balanced 
Budget Act of 1997,'' which put the budget in surplus for the 
first time in 30 years.
    This Administration has run larger deficits than the Reagan 
Administration or the Bush Administration or the Clinton 
Administration. Unlike its predecessors, it has offered us no 
grand solution, no offer of negotiation, anything, except the 
budgets that look increasingly alike from year to year.
    Indeed, and I mean this as no criticism of you, I admire 
the work you have done, but it seems to us that taken as a 
whole, far from proposing a plan to fix the budget this year, 
the Administration is proposing policies that will worsen it 
and leaving the consequences for the next Administration and 
the next generation.
    Mr. Secretary, we have many questions. We are looking 
forward to your testimony and your responses. But before you 
begin, let me turn to our Ranking Member, Mr. Ryan, for his 
opening statement.
    Mr. Ryan. Thank you, Chairman.
    And welcome, Secretary. The Republican conference is still 
underway, so our members are running late and they will be here 
a little later.
    Clearly the issue on everyone's mind in recent months has 
been the condition of our economy in the near term. The Federal 
Reserve has been taking aggressive actions to try and ease the 
slow-down and just last week Congress passed the fiscal 
stimulus package which the President is scheduled to sign 
today, I believe.
    Secretary Paulson, I look forward to hearing your thoughts 
and expectations on these actions as well as your efforts to 
address the problems occurring in the housing and credit 
markets such as the plan that Treasury announced just yesterday 
to address rising home foreclosures.
    But I will also be interested in the broader, more 
fundamental issue central to our interest today and that is 
also to your interest, that is maintaining our prospects for 
long-term growth. And this is something we also have to keep 
our eye on that ball.
    As I see it, the challenge and opportunity has three parts 
and they are all interrelated. First, we have to reform our 
major entitlement programs, Medicare, Medicaid, and Social 
Security, to help fulfill the missions of health and retirement 
security for all Americans.
    Second, we need to eliminate the debt burden for future 
generations. The weight of this burden will soon explode and 
threaten our ability to do what past generations have done for 
us, leave our economy and our country even stronger than we 
inherited them.
    Third, and connected to the first two, we have got to win 
globalization in this increasingly competitive international 
marketplace. We do not just want globalization to happen to us. 
We do not want to just survive it. We want to win 
globalization.
    And there are two ways in which our broad budget policies, 
our fiscal policy play into these goals. First, we need a Tax 
Code that truly promotes savings investment and job creation. 
That means keeping tax burdens low and our overall tax policy 
consistent.
    Second, we have to deal with the level of government 
spending because that is what really drives our need to tax and 
borrow.
    And without question, the biggest driver of our spending 
problem is the unsustainable growth of entitlements. We know 
today that these programs, as they are currently structured, 
cannot keep their promises.
    To take just one example, the Medicare program has an 
unfunded liability, an unsupported promise of $34 trillion in 
present value. That translates into an obligation of more than 
$300,000 for every household in the country. That is about 
twice the average of a price of home in the district I serve in 
southern Wisconsin.
    Yet, this is the cost of just one program. It does not 
count everything else we expect from the government.
    So in short, in a global economy and with the collision of 
demographics that has already begun, failing to reform our 
largest entitlements will lead to even greater loss than these 
critical programs because on their current path, they are not 
only growing themselves into extinction, but at the same time, 
they are overwhelming the budget and they are threatening to 
cripple our economy.
    Last week Congress received the President's budget as the 
Chairman just mentioned. It includes several proposals for 
addressing the entitlement crisis. And while it did not fix the 
problem in one fell swoop, it at least took the initiative to 
put some solid, specific discussion, some proposals on the 
table.
    Secretary Paulson, in your capacity as Treasury Secretary, 
you also serve as the Chairman of the Board and Managing 
Trustee of the Social Security and Medicare Trust funds. So, 
again, I have great interest in your testimony and the critical 
issues facing the economy today, but also of the issues in 
facing our long-term growth prospects and that is entitlement 
reform because our actions on this issue or lack thereof will 
have an impact on our nation's economy for generations to come.
    I thank the Chairman for his indulgence. I look forward to 
the testimony.
    Chairman Spratt. That you, Mr. Ryan.
    Mr. Secretary, thank you again for appearing before us to 
testify. And let me say at the outset that if you wish, you can 
submit your statement for the record, but we encourage you to 
take all the time you need to fully discuss the problems at 
hand. Thank you again for coming. And let me say at this point 
in the record that any member who did not have the opportunity 
to submit an opening statement may do so at this point.

   STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Paulson. Chairman Spratt, Congressman Ryan, 
members of the Committee, what I am going to do is give you a 
very brief statement and we can submit something longer for the 
record.
    I am pleased to be here to discuss the President's budget 
for fiscal 2009. My highest priority is a strong U.S. economy 
that will benefit our workers, our families, and our 
businesses.
    Through a measured approach that balances our nation's 
needs with our nation's resources, the President's budget 
supports that priority.
    This is especially important now as after years of 
unsustainable home price appreciation, the U.S. economy 
undergoes a significant and necessary housing correction. This 
correction combined with high energy prices and capital market 
turmoil caused economic growth to slow rather markedly at the 
end of 2007.
    The U.S. is diverse and resilient and our long-term 
fundamentals are healthy. I believe our economy will continue 
to growth, although at a slower pace than we have seen in 
recent years.
    Four weeks ago recognizing the downside risk to our economy 
and that the short-term costs of doing nothing was too high, 
President Bush called for an economic growth package to provide 
a temporary boost to our economy as we weather the housing 
correction.
    The Congress responded with bipartisanship, cooperation, 
and speed to pass an economic growth package that is temporary, 
broad-based, and will get money into our economy quickly.
    We have demonstrated to the nation and the world that we 
can come together to address the needs of the American people 
as we weather the housing downturn.
    Today the President will sign the economic package into 
law. Treasury is already working to send payments out to more 
than 130 million Americans. The IRS will manage the current tax 
filing season and simultaneously prepare to issue these 
additional payments starting in early May. Payments will be 
largely completed this summer putting cash in the hands of 
millions of Americans at a time when our economy is 
experiencing slower growth.
    Together the payments to individuals and the investment 
incentives for businesses will help create more than a half 
million jobs by the end of this year.
    In addition to an economic growth plan to help us weather 
this housing correction, the Administration will continue to 
focus on aggressive action to try to provide alternative 
options to foreclosures. That includes encouraging the Hope Now 
Alliance's outreach to struggling homeowners.
    Congress can do its part by finalizing the FHA 
Modernization and GSE Regulatory bills and by passing 
legislation that will allow states to issue tax exempt bonds 
for innovative refinancing programs.
    We continue to monitor capital markets very closely and to 
advocate strong market discipline and robust risk management. 
Working through the current stress is our first concern. 
Through the President's Working Group on Financial Markets, we 
are also reviewing underlying policy issues because it is just 
as important to get the long-term policy right.
    While we are in a difficult transition period as markets 
reassess and reprice risk, I have great confidence in our 
markets. They have recovered from similar stressful periods in 
the past and they will again.
    The Administration will also continue to press for long-
term economic policies that are in our nation's best interest, 
a pro-growth tax system, entitlement reform, and a balanced 
budget.
    To that end, the President's budget makes the 2001 and 2003 
tax relief permanent and keeps the federal budget on track for 
a surplus in 2012.
    In the future as in the past, our long-term economic growth 
will also be enhanced by supporting international trade, by 
opening world markets to U.S. goods and services, and by 
keeping our markets open. Congress can help create jobs and 
economic opportunity by passing the pending Free Trade 
Agreements with Colombia, Panama, and South Korea.
    I appreciate the cooperative and bipartisan spirit that has 
brought the Congress and the Administration together to support 
our economy and look forward to that spirit continuing as we 
work through this period.
    Mr. Chairman, thank you.
    [The prepared statement of Henry M. Paulson follows:]

      Prepared Statement of Hon. Henry M. Paulson, Jr., Secretary,
                    U.S. Department of the Treasury

    Chairman Spratt, Congressman Ryan, Members of the Committee: I am 
pleased to be here to discuss the President's budget for fiscal year 
2009. As Treasury Secretary, my highest priority is a strong U.S. 
economy that will benefit our workers, our families and our businesses. 
Through a measured approach that balances our nation's needs with our 
nation's resources, the President's budget supports that priority.
    This is especially important now as, after years of unsustainable 
home price appreciation, the U.S. economy undergoes a significant and 
necessary housing correction. This correction, combined with high 
energy prices and capital market turmoil, caused economic growth to 
slow rather markedly at the end of 2007.
    The U.S. economy is diverse and resilient, and our long-term 
fundamentals are healthy. I believe our economy will continue to grow, 
although at a slower pace than we have seen in recent years.
    Four weeks ago, recognizing the downside risks to our economy and 
that the short-term cost of doing nothing was too high, President Bush 
called for an economic growth package to provide a temporary boost to 
our economy as we weather the housing correction.
    The Congress responded with bipartisanship, cooperation and speed 
to pass an economic growth package that is temporary, broad-based and 
will get money into our economy quickly. We have demonstrated to the 
nation and the world that we can come together to address the needs of 
the American people as we weather the housing downturn.
    Today, the President will sign the economic package into law and 
Treasury is already working to send payments out to more than 130 
million Americans. The IRS will manage the current tax filing season 
and simultaneously prepare to issue these additional payments starting 
in early May. Payments will be largely completed this summer, putting 
cash in the hands of millions of Americans at a time when our economy 
is experiencing slower growth. Together, the payments to individuals 
and the investment incentives for businesses will help create more than 
half a million jobs by the end of this year. In addition to an economic 
growth plan to help us weather this housing correction, the 
Administration will continue to focus on aggressive action to try to 
provide alternative options to foreclosures. That includes encouraging 
the HOPE NOW alliance's outreach to struggling homeowners. Congress can 
do its part by finalizing the FHA modernization and GSE regulatory 
reform bills and by passing legislation that will allow states to issue 
tax-exempt bonds for innovative refinancing programs.
    We continue to monitor capital markets closely and to advocate 
strong market discipline and robust risk management. Working through 
the current stress is our first concern. Through the President's 
Working Group on Financial Markets, we are also reviewing underlying 
policy issues because it is just as important to get the long-term 
policy right.
    While we are in a difficult transition period as markets reassess 
and re-price risk, I have great confidence in our markets. They have 
recovered from similar stressful periods in the past, and they will 
again.
    The Administration will also continue to press for long-term 
economic policies that are in our country's best interest--a pro-growth 
tax system, entitlement reform and a balanced budget. To that end, the 
President's budget makes the 2001 and 2003 tax relief permanent, and 
keeps the federal budget on track for a surplus in 2012.
    In the future, as in the past, our long-term economic growth will 
also be enhanced by supporting international trade, by opening world 
markets to U.S. goods and services and by keeping our markets open. 
Congress can help create jobs and economic opportunity by passing the 
pending Free Trade Agreements with Colombia, Panama and South Korea.
    I appreciate the cooperative and bipartisan spirit that has brought 
the Congress and the Administration together to support our economy, 
and look forward to that spirit continuing as we work through this 
period. Thank you.

    Chairman Spratt. Thank you, Mr. Secretary.
    Every week it seems that the crisis now in financial 
markets gets worse. A new dimension has added to the problem. 
Maybe every week is overstating it, but frequently at least.
    The most recent revelations appeared yesterday in the New 
York Times, the Wall Street Journal, both with articles 
indicating that the subprime problem had grown to the prime 
mortgage problem and is now extending to credit in general, 
particularly for consumers.
    Is that happening and what are the implications, if so, for 
the budget deficit and for the economy generally?
    Secretary Paulson. Mr. Chairman, let me start with the 
capital markets and move into housing which is related and then 
the economy and your question on the deficit.
    We have been working our way through a period of stress in 
the capital markets since August. And in certain respects, 
there has been progress. When you look at some of the funding 
spreads in the shorter term, inter-bank markets and so on, 
there has been real progress.
    Other markets are not performing as we would like to see 
yet. I think it is going to take longer to work through that 
period. And the biggest focus that I have right there is 
encouraging our financial institutions to take losses, 
recognize the losses, and raise capital.
    And we have seen capital raising. I think we are going to 
continue to see it and I think it is very important because, as 
you know, given your previous background, that banks, you know, 
if they are not well capitalized and they are forced to shrink 
their balance sheet, then that has a negative impact on our 
economy. And we want them to continue to lend.
    You are right to the extent that the economy is slowing. 
The housing downturn, the housing slump is continuing, and it 
has not run its course yet. There has been some modest erosion 
in other credit related products to date. I continue to believe 
that this economy, although it is slowing markedly, I continue 
to believe that we are going to continue to grow.
    So I see growth slower, but continuing to grow, very much 
believe that the risk is to the downside, but will continue to 
grow. And the biggest risk is housing. And we have programs to 
deal directly with housing, but another way of addressing that 
and getting to the issue that you raise is the stimulus package 
which is designed to boost the broader economy and consumers 
this year. And so that is, you know, the measure to address 
that.
    And in terms of the capital markets, I think the issue in 
the capital markets, and this is a gross oversimplification, 
because there is still stress in a number of products from 
high-yield debt to all the structured products, structured 
credit products, mortgages away from the GSEs, and so on, but I 
think the question in the capital markets is becoming much more 
about what is happening in the economy and what is happening in 
housing generally.
    Chairman Spratt. The Times indicated that in the subprime 
market, the level of past due, delinquents was 16.9 percent of 
all subprime mortgages.
    Secretary Paulson. Yes. I would say that if you look at 
housing overall and you look at the mortgage market that----
    Chairman Spratt. If you look at the mortgage market 
overall, it is 7.3 percent, prime and subprime.
    Secretary Paulson. Well, yes. And 93 percent is the number 
I use of mortgage holders that are making their payments on 
time. The subprime is the biggest issue and it is one piece of 
the mortgage market. And the mortgages, the subprime mortgages 
whose interest rates are going to be going up, the adjustable 
rate mortgages that are being reset, we are going to have 
roughly 1.8 million of those resets in 2008 and 2009. And that 
problem is the biggest because those mortgages that are 
resetting now that were made in 2006 were the poorest quality 
in terms of the underwriting standards.
    So I expect that portion of the mortgage market to get 
worse, but I think that is pretty well baked into what is going 
on in the capital markets. I think the markets understand that 
and a lot of those markets, there have been downgrades and they 
have been repriced in the markets. But that does not mean that 
the human cost and the cost on the economy overall and 
neighborhoods has been repriced, and that is something we are 
working very hard to deal with through a number of programs we 
have.
    Chairman Spratt. The Times also indicated that vehicle 
loans were 7.1 percent delinquent.
    Secretary Paulson. I cannot confirm that number. Everything 
you read in the press is not always true, so I cannot confirm 
that.
    Chairman Spratt. I would certainly second that. The basic 
question is, are we seeing the formation of a credit crunch 
like 1990, 1991 when the Administration was trying to stoke the 
economy and simply could not get it to get up off its feet and 
get going? Is this thing apt to spread and, if so, what are the 
consequences for the budget as well as the economy?
    Secretary Paulson. Well, let us talk about that. The 
slowdown that began in December because the consumer spending 
and business spending held up right into early December and 
what the economic numbers showed and what the anecdotal data 
has shown is that there has been a slowdown in discretionary 
consumer spending and business spending.
    And so when you go through a period like this, there is an 
erosion, some erosion in credit quality. And, again, in terms 
of getting to your basic question, and, people, this is a 
question, it is not like it is a surprise. Everywhere I go, I 
get asked the question. People ask the ``R'' word, are we going 
into a recession.
    And I just simply say what I believe and everything I have 
looked at and I do not know for sure, but that I believe that 
we are going to continue to grow. And so I see growth at a 
slower rate for a quarter or two. And the housing is what we 
need to watch closely because that is the biggest risk.
    And it would be not only my hope, it would be my 
expectation that when we start getting these checks at the 
beginning of May that it will make a difference, that we are 
going to continue to grow. But we are watching this very 
carefully.
    And as your question shows you understand, that is the big 
issue that you see in the capital markets today and that is why 
it is so important that our banks and our financial 
institutions be adequately capitalized.
    Chairman Spratt. In all of the post-war recessions, I think 
there have been ten all together, we have either extended or 
expanded unemployment insurance. We did in the last, for 
example.
    Secretary Paulson. Right.
    Chairman Spratt. That is not in this package. If we appear 
to be in or approaching a recession, is this still an open 
issue with the Administration? Are you still negotiable on the 
desirability of having unemployment insurance extended?
    Secretary Paulson. Mr. Chairman, what I have said is that 
unemployment, the last number is 4.9 percent, so in my 
judgment, it would have been a serious mistake when we have 
never extended it when unemployment was this low. The lowest it 
has ever been is 5.7 when we extended it.
    So what I have said all the way along is I do not expect to 
see us there. But if the economy becomes worse than we have 
projected, then I think this is something we all should discuss 
together. It is something we should discuss and take up at that 
time.
    Chairman Spratt. Fair enough. Thank you.
    Looking at the budget in particular, you heard my opening 
statement, we have got some real concerns with what is in the 
budget. Senator Gregg, the Ranking Republican on the Senate 
side, said this is not a real budget because there are cuts 
proposed, for example, that have been proposed repeatedly in 
the past and have gone nowhere and they are not going anywhere 
now.
    So to represent that these cost reductions are going to be 
achieved is to defy history.
    But in addition to that, looking specifically at the 
budget, war costs after next year are omitted altogether. 
Indeed, the level of expenditure for the base budget, defense 
budget from 2009 onward goes down in real terms, which I do not 
think is going to happen. But in addition to that, it includes 
only $70 billion, nothing thereafter, for next year.
    Under cross-examination, Secretary Gates yielded and told 
Senator Levin last week his guess would be maybe $170 billion, 
which is off by $100 billion, the plug that they put in the 
budget.
    And while you have war costs and supplemental costs 
understated, as to the alternative minimum tax, unless you fix 
that tax and adjust the thresholds, it will apply to middle-
income taxpayers for whom it was never intended. Republicans do 
not want that to happen. Democrats do not want that to happen.
    But this particular budget assumes that after next year the 
AMT will be in full force and effect taking from middle-income 
as well as upper-bracket taxpayers.
    Do you think that is any way to put a budget together? I 
mean, you have done it repeatedly not just at Treasury but at 
Goldman Sachs. I mean, we have got a variable here of a couple 
of hundred billion dollars that we can immediately point to.
    Secretary Paulson. Let me say, and I am not making this 
about our budget because I will defend it and any of the issues 
you want to raise, but I will just say in general whether it is 
the budget, and with all due respect, whether any 
Administration's budget making and government defies some of 
the principles we see in the private sector, the whole way 
PAYGO rules work where people have to keep reminding me what 
goes in and discretionary spending does not apply. It is hard, 
but the one thing I will say that is a positive and, to me, 
there are just two huge principles that are key.
    Well, first of all, one positive thing, then I will get to 
the principle. The positive is that we have been wrong, 
everybody has been wrong in terms of the rate at which revenues 
are coming in. So the fact is revenues have been coming in 
ahead of projections and our fiscal deficit at the end of this 
last year was 1.2 percent of GDP.
    So that is something we can all be grateful for. Whatever 
the political arguments are on both sides, we can be grateful 
about.
    Chairman Spratt. You would not advocate extension or 
leaving the AMT unfixed as to middle-income taxpayers?
    Secretary Paulson. Now, I will get to that in a minute. But 
I am saying the other thing is the entitlements are the huge 
issue which you know and you and I have talked about it.
    Chairman Spratt. Yes.
    Secretary Paulson. So now let us get to the AMT. The AMT is 
one thing we should all do because we have it in the budget and 
the revenues are in the budget, we should all just get that 
done this year soon so we do not torment the American people 
and have there be the uncertainty.
    Now, in looking at the other, in looking at the AMT, I look 
myself in the mirror because I say we have got those revenues 
in the budget, they are very transparent, and we say that this 
is a major issue and we have got to do something about it.
    I have never said we need to do something about it on a 
revenue-neutral basis. What I have said is on this that we need 
to look at this. This is unacceptable the way it is. And when 
we look at this, we need to think about first of all what 
percentage of our economy should be taken up by taxes. So that 
is one thing we want to look at.
    So some people want to raise taxes to pay for it, but I 
think we need to look at it and say what percentage. And then 
we need to look at it in terms of the entitlement issue and 
what we see staring us in the face there.
    So you said in your initial statement no one, and I do not 
mean to sound defensive, but no one in this Administration has 
tried to deal with this issue. At least for a year, I said, 
please, let us come to the table, both sides, no preconditions, 
let us talk about entitlements. And I was thinking about the 
AMT in that context. And I got tired of playing solitaire.
    So I will say to you we do have this AMT question and we 
need to resolve that. And we have got entitlements. And I do 
agree with you that the cost of the war is going to be greater 
and everyone knows that. No one said anything other than that, 
that that $70 billion was the plug figure and that will be 
filled in later.
    Chairman Spratt. Just quickly, these problems are of such 
magnitude they are going to have to be taken in sequence. I do 
not think we can resolve them all in one fell swoop, one great 
big package and hope to pass it on the House or the Senate 
floor.
    And I think the hurdle that comes first is debt service. It 
is truly mandatory. It cannot be changed. It is obligatory and 
has to be paid. And on our side, we would not want to make 
concessions as to the other entitlements, only to find that 
continuing deficits mount up national debt which has to be 
serviced and paid first to the detriment of these other 
programs.
    So that is just why I was pushing some solution on the 
budgetary front as the first step towards entitlement reform.
    Secretary Paulson. Yes. I got you.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. Thank you.
    Welcome, Secretary. First, I want to go in the area of 
GSEs. James Lockhart, who is the current regulator of the GSEs, 
recently testified before the Banking Committee that the 
increase in the conforming loan limits for Fannie and Freddie 
would pose ``new risks to the already challenged GSEs.'' And he 
suggested that securitizing these jumbo loans could drain 
capital from less expensive mortgages. He also talked about 
concentrating even more risk in certain geographical areas 
where we have problems.
    My basic question is twofold. With all the problems that 
GSEs have had, do you think the conforming loan limit should 
have been increased absent reforms as it is done today? And, 
number two, will the Administration oppose extension of these 
higher conforming loan limits if acceptable legislation is not 
enacted to reform these GSEs?
    Secretary Paulson. Congressman Ryan, thank you for asking 
the question.
    First of all, I had been very, very strong in advocating 
that the loan limits be raised for a temporary period of time 
only in the context of GSE reform. I have felt that raising 
them was bad public policy and that it flew in the face of the 
GSEs affordable housing mission.
    But I saw a benefit, okay, in terms of what is going on in 
the mortgage market to do that on a temporary basis. But I did 
not want to separate it from the reform because I thought the 
reform was the overriding necessity.
    I felt that before coming to Washington, but everything I 
have seen after coming to Washington and looking at the massive 
losses that they have had, and fortunately they have been able 
to raise a lot of capital and then keep performing their 
mission, so I think we very much need GSE reform.
    As you know, the expiration that the loan cap was raised 
just through the end of this year. And, you know, clearly I do 
not want to see that extended without GSE reform. I sure hope 
we do not have to wait until the end of the year. I mean, I 
cannot think of why we should have to wait for the end of the 
year.
    The House has a bill that is a very reasonable approach and 
is something that can be worked with. And Chairman Dodd has 
said he really wants to take that up.
    And so, again, I think, you know, you are absolutely right 
that we need that reform and I sure want that reform before 
these loan limits expire. And if they do expire, I do not want 
to extend them without GSE reform.
    Mr. Ryan. So your preference is let them expire if there is 
no reform?
    Secretary Paulson. If there is no reform, let them expire. 
But I would not have put them on with no reform. I just found 
that when we negotiated the deal with the House that I had both 
sides on that case that I said publicly I got hit by a 
bipartisan steamroller, and I did. I mean, there just was an 
overwhelming--and I could not look people in the eye and say 
that there would not be a benefit in the housing market 
temporarily to do this. I just thought the greater good was 
reform and I did not want to separate the two.
    Mr. Ryan. Let me talk about inflation for a minute. I know 
monetary policy is in sort of expressly the purview of the 
Treasury Department, but you have enormous influence and 
opinions in this area.
    We have got a federal funds rate that is lower than the 
rate of inflation right now. We have had enormous rate cuts. We 
have a lot of signs of inflation on the horizon. We have a 
weakening dollar.
    Just recently, the President of the Federal Reserve Bank of 
Philadelphia is sounding the alarm of concerns of inflationary 
expectations.
    The economic report of the President projects real GDP 
growth this year to be 2.7 percent, next year to be 3.0 
percent. CBO is a little lower than that, but I think it is 
reasonable to expect CBO may be revising their economic growth 
projections to go up this year.
    So given that most of the forecasting, whether it is blue 
chip or government forecasters, are expecting growth this year 
and growth next year, is it wise to continue down the path of 
monetary policy that we are and are we not inviting inflation 
and will that not hamper growth in the future and cause a tough 
belt tightening, a tough hitting of the brakes by the Fed, you 
know, right around the corner? What are your thoughts on that?
    Secretary Paulson. Well, Congressman Ryan, you probably 
know that I am not going to venture into monetary policy other 
than to say, which is heartfelt, I have a great respect and 
admiration for Ben Bernanke as Chairman of the Fed.
    And when I look at how responsive our Fed is and compare 
that to other things I see around the world, I think we can all 
be grateful for our Federal Reserve and that we have Ben 
Bernanke there.
    And other than that, I just would simply say I look at all 
the information like you do and it still looks to me like when 
we look at core inflation, it is relatively contained.
    I would also say to you that the 2.7 percent forecast that 
was done prior to the budget was done in November. And there is 
no doubt that the data we have since November would lead me to 
say that that forecast may be a bit high.
    But I do agree with you. I think we are going to continue 
to grow. And so there we agree. I understand your point.
    Mr. Ryan. And I understand your ability to only go so far 
in your comments on that. But I think it is an issue that we 
need to start discussing when we are talking about the 
confluence of fiscal monetary policy.
    Let me get to the AMT. You actually mentioned this a bit in 
your Q and A with the Chairman. But we waited until the end of 
December to patch the AMT and we all knew more or less, those 
of us on the Ways and Means Committee, that we were going to 
patch the AMT. The problem is the American people were not sure 
or did not know that we were going to patch the AMT.
    From just a growth perspective there is talk about doing 
more ``stimulus to the economy.'' Would it not be helpful for 
growth to actually patch the AMT now and early knowing that we 
are probably going to end up doing that for the 2008 calendar 
year? Would it not be actually helpful to sort of stabilize 
those investment horizons to show the American people that 25 
million people are not going to get hit with this unknown, 
unforeseen tax for this calendar year? Would it not be actually 
helpful for economic growth if we actually patched the AMT now 
rather than waiting until after the election and possibly doing 
a lame-duck session in December?
    Secretary Paulson. Well, Congressman, I clearly want to see 
it done immediately to eliminate uncertainty, particularly when 
we all know it is ultimately going to get done. And we will not 
be raising taxes to deal with it.
    I would say to you the most perverse thing about the AMT is 
I bet you there are not 25 million people that even know about 
it. And so if it ever were not patched, this would be a 
surprise bordering on shock to them.
    And so, again, I just think it is just better to get this 
done, to get this done as soon as possible.
    Mr. Ryan. We have a vote, so let me just ask you one quick 
question about moral hazard in the housing markets.
    In your job, you are more or less the referee of whether we 
cross the line of moral hazard or not. Give us an idea of where 
you think that line is that we should not cross on producing a 
moral hazard.
    We are going to have a correction. Corrections are often 
necessary in the markets, in the credit markets, in the housing 
markets. Where in your mind is this line that should not be 
crossed with respect to moral hazards?
    Secretary Paulson. Well, I would say this, Congressman. I 
am going to answer your question because I think it is the 
right question, although I have learned in life never to draw a 
precise line because then guess what? Something happens you did 
not plan on.
    Mr. Ryan. It is the market's ability.
    Secretary Paulson. But I clearly say that my view like 
yours is this is an inevitable and a necessary market 
correction. And you have seen that there are various estimates 
as to the extent to which housing prices are overvalued and you 
can have a correction either by having the housing prices drop 
or drop a bit and have the economy keep growing. Okay? And so 
then they can meet somewhere in between.
    And obviously there are different issues in different parts 
of the country because housing is a regional market. So our 
approach has been to do things that do not interfere with 
market mechanisms and do things that are aimed at avoiding a 
market failure.
    In other words, I believe that the hope now, fast tracking 
protocols to deal with these subprime mortgage resets. The 
reason I am very comfortable with this is this is the private 
sector, number one, and it is the private sector taking actions 
which are in everybody's best interest and approximates what 
they would do under normal circumstances if we did not have the 
securitization process being as expansive as it is and the 
volume of resets.
    And so we focused on that. We focused on that 
communications, focused on the private sector. And we clearly, 
to get to what you are saying, do not want to bail out 
speculators, do not want to bail out lenders for profligate 
practices, do not want to bail out people that said, well, I am 
going to put no money down and play the game and if the home 
price keeps going up, I will win; otherwise, I will just walk 
away from it.
    And we clearly want to be very vigilant and aggressive 
about punishing wrongdoing, punishing fraud, but that is sort 
of the way we are thinking about it.
    Mr. Ryan. I simply want to encourage you to continue to be 
mindful of the moral hazard issue. Private sector reform is 
great. Government involvement will produce a moral hazard which 
will give us systemic problems that we do not want to have to 
deal with down the road. And I just encourage you to stay on 
that side. Thank you.
    Secretary Paulson. I understand your point and I appreciate 
it a lot.
    Chairman Spratt. The fact that there is a vote on the floor 
and in light of that, I have agreed to recognize Mr. Barrett.
    Secretary Paulson. I was thinking my gosh, we might be over 
by eleven.
    Chairman Spratt. Not so easy.
    Secretary Paulson. I thought this was Roger Clemens and I 
was going to be answering questions about whether I would use 
HGH or something. Okay.
    Chairman Spratt. Mr. Barrett.
    Mr. Barrett. Thank you for being here and, Mr. Chairman, 
thank you for yielding the time.
    The President in his State of the Union address said the 
following: Unless Congress acts, most of the tax relief we have 
delivered over the past seven years will be taken away. Some in 
Washington argue that letting tax relief expire is not a tax 
increase. Try explaining that to the 116 million American 
taxpayers who will see their taxes rise by an average of 
$1,800.
    My question, Mr. Secretary, is that the President's budget 
does not include any provision for extending sales tax 
deductibility which affects my State and six others.
    Now, if the President who has pledged not to increase taxes 
does not include in his budget extension of sales tax 
deductibility, is the President not calling for a tax increase 
on the residents of my State and six others and how would you 
justify that?
    Secretary Paulson. Well, I understand your point and I am 
going to tell you how I am answering that question which is 
that there are a number of different provisions, you have 
pointed to the key ones, that are being extended. Others are 
not. The one you cited is not being extended. That does not 
mean we are against extending it. That is not in the budget and 
we are very prepared to talk about these on a one-off basis. 
And I do understand that when that expires what the impact is.
    Mr. Barrett. Well, just for the record, the impact is 
somewhere between four to five hundred dollars or more per 
facility who itemizes deduction in our states. And I am a bit 
troubled that a President who on the one hand would chastise 
Congress for not extending tax cuts seems himself to act with 
impunity when he proposes not extending a tax cut.
    It seems that only his own tax cuts, the ones he favors 
matter. But I will tell you, to our State and ironically to 
this State and the Vice President's State and four others, that 
being Florida, Tennessee, South Dakota, Wyoming, and Nevada, 
those seven states take this quite seriously.
    Secretary Paulson. I understand that. And as I am saying, 
there are more than one of these provisions that are not being 
extended in the budget. But that does not mean we are 
necessarily against it.
    Mr. Barrett. Consistent with the principle that the failure 
to extend a tax cut is tantamount to a tax increase, would you 
affirmatively on behalf of the Administration affirm today that 
you would support extension of sales tax deductibility?
    Secretary Paulson. No, sir, I am not prepared to do that 
today, but I am prepared to tell you we will talk to you about 
it.
    Mr. Barrett. Okay. We would certainly appreciate the 
opportunity to have that conversation.
    On to the stimulus, I was one of a handful of folks who 
voted against it and my concern was, quite frankly, that it 
seems to me we got into this fix by doing two things, borrowing 
too much money with no plan to pay it back, to buy things we 
could not afford, and because energy prices have skyrocketed. 
My problem is that the solution seems to be more of the problem 
and we have done nothing to address energy prices.
    Could you talk a little bit about the merit of such things 
as production tax credits and other things? We had an 
opportunity here to seize the financial crisis, to call on the 
American people to lower their energy consumption, lower energy 
prices, put money back into their pockets in that fashion.
    And if we were going to do a stimulus package to invest in 
renewables and a host of other things so we would have people 
working, tangible assets created, and a lasting infrastructure 
built, and it seems to me we squandered that opportunity with 
the $168 billion that we are going to borrow from other 
countries with no plan to pay it back.
    Secretary Paulson. Okay. Congressman, thank you very much. 
And as you might imagine, I heard that argument a lot as we 
went through this discussion. And let me tell you how I, you 
know, will respond to you and as I responded to others.
    First of all, I totally agree with you that energy security 
is as big an issue, it is right up there, when you look at the 
long-term structural issues, right up there with the budget 
issue. So it is very significant.
    I also think we have taken some actions and some important 
actions together. And as someone who looks at the Tax Code all 
the time, I will also say to you that there is a natural 
tendency to want to do things through the Tax Codes and 
sometimes you do not have to do all these policies through the 
Tax Code.
    It has got some advantages through the Tax Code, but one of 
the disadvantages, we at Treasury are not experts on energy and 
it makes the Tax Code more complicated.
    But in terms of your specific question, what I said is 
there are some very good ideas and that are very important 
ideas and that are longer term and strategic, but that in my 
judgment, they were not stimulus. Okay? And I define stimulus 
as something that would add this year, okay, to economic 
growth.
    And so on the business side, we dealt with it. And the 
other thing we did on the business side which gets to your 
point is the business is, when you look at the way the 
economics work with bonus depreciation, accelerating 
depreciation----
    Mr. Barrett. I actually support those provisions.
    Secretary Paulson [continuing]. It pays for--you know, the 
cost over a ten-year cycle is not as great because, you know, 
you are getting some of the revenues on the back end.
    Mr. Barrett. I very much appreciate that answer. The one 
last thing I would encourage is we are going to introduce a 
resolution in the next day or so calling on the American people 
when they receive their rebate checks to spend that on 
renewable energy and energy conservation measures so you get a 
multiple saving and to call on retailers to offer incentives to 
do that as well. I hope maybe the Administration could do this 
so we can make it a win-win. When people get the money use it 
to save energy.
    Secretary Paulson. Well, whether we do or not, I commend 
you for that. That is an innovative approach.
    Mr. Barrett. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Barrett.
    Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    And I thank you for being here for the testimony today. I 
want to begin by commending you for your continued attention to 
the housing problem that the American market is suffering. I 
applaud your efforts to work with the private sector and 
consumer groups to create solutions that will basically help 
the consumer, the homeowners stay in their homes and hopefully 
keep the current housing problems from further spreading into 
other sectors of the economy which it seems like it is doing.
    Furthermore, I appreciate the new program that you 
announced yesterday, the Project Lifeline, which as I 
understand it is an agreement between the six largest servicers 
to provide homeowners with up to 90 more days delinquent on 
their mortgages, a delay in the foreclosure process in order to 
have more time for the servicer and the homeowner to work out a 
plan that could help the homeowner stay in their house.
    Realistically nobody benefits from a foreclosure, neither 
the homeowner, the bank, or investor down the line. And so I am 
pleased you are working with the private sector to try to face 
this problem.
    I would like to go back to a comment that the Ranking 
Member addressed. I share some of the concerns that he has with 
one recent action that was taken by the Administration and also 
by Congress and that is, as Mr. Ryan stated, the raising of the 
GSE conforming loan limits. And it was done, as you indicated, 
without any passage of any broader GSE reform.
    I really believe that when you raise those loan limits even 
temporarily, you will greatly exacerbate the risk that is posed 
to our nation's economy and also potentially to the American 
taxpayers with regard to the GSEs.
    The increase in the conforming loan limits will allow the 
GSEs to expand into jumbo market loans. It will raise the 
limits from 417 to $730,000. Now, the GSE's business rapidly 
grew in 2007 doubling their market share over 2006 to over 75 
percent of the market.
    And if you add into that, I looked at my notes here, if you 
add in the FHA banks as well, it is almost 90 percent of the 
market now between the GSEs and the Federal Home Loan banks.
    Over the same period, Fannie and Freddie combined debt grew 
from roughly 16 percent, grew roughly 16 percent to $6.3 
trillion, almost $7 trillion, twice the entire budget that we 
are seeing is now in debt for these.
    Now, before the Senate Banking Committee last week, Jim 
Lockhart from OFHEO testified and he said jumbo loans, and I 
assume he was talking either on a permanent or temporary basis, 
would prevent new risk to the already challenged GSEs. The 
provisions also pushes the GSEs to increase their geographical 
concentration in some of the riskiest real estate markets. 
Roughly half of all jumbos will be in California. Underwriting 
them successfully require new models and systems to ensure safe 
and sound implementation.
    Additionally, another problem he said was capital also 
would present challenges even if all newly conforming mortgages 
are securitized. For example, a $600,000 loan requires as much 
capital as three $200,000 loans which means that you are 
shifting and adding to the risk.
    That all occurs even if it is on a temporary basis. Fannie 
and Freddie currently do not have, as you know, satisfactory 
financial statements. They have also not met a number of the 
improvements that OFHEO and Director Lockhart asked for.
    Since the Treasury Department basically blessed the 
expansion of these conforming loan limits, I would like--well, 
you have already given your assurances that you will work to 
make these temporary and you have already given your 
assurances, correct me if I am wrong, you would like to see the 
reforms coming at a later date.
    I would like to hear one explanation because from what I 
read on the press accounts and from other members as well that 
going into these negotiations, there was some agreement that or 
understanding that, for example, the House had already passed 
some of these reforms out of our House as far as to the GSEs.
    Members from the Financial Services, we have had hearings 
on it. It came out of Financial Services, came out of the 
House. I believe the Chairman was a bit taken aback that this 
was not part of the reforms.
    So I would appreciate your comments as to where the push 
came not to have this. Was it from the House? Was it from the 
Senate? Was it from the White House?
    Secretary Paulson. It was from John Boehner and Nancy 
Pelosi who were equally strong and were clear that we needed to 
raise the loan limit. So I just cannot be any clearer. So it 
was from your leader and the Democratic leader who told me, 
Hank, this is one thing we are not going to compromise on.
    Now, let me, though, say to you, and I find it frustrating 
even needing to say this because one of the things that I have 
been most frustrated by is we do not have GSE reform. And as 
someone coming from the industry that I come from, I cannot 
explain it. I cannot explain why we would have these huge 
institutions that do not have a regulator. You should have a 
regulator that is stronger than you have in the private sector. 
We do not have one that is close to as strong, do not have the 
authorities, and it is a significant risk.
    So the idea that I am here taking grief from people saying 
why do we not have GSE reform, I have worked hard to get it 
done. And I am also a believer that we cannot let the perfect 
be the enemy of the good because what we have got right now, 
let me tell you, it is not good. It is a lot less than good.
    And so we worked with Barney Frank to get something that I 
did not think was perfect, but, boy, I would take it in a 
minute over what we have got right now. And so I was pretty 
clear going into these.
    I got asked a question when I was meeting with Senate 
Republicans in the middle of these and I got asked a question, 
where do you stand on this. And I said I will tell you where I 
stand. I would raise the loan limits only as a part of GSE 
reform. But there is sentiment on both sides. Well, I found out 
the sentiment was stronger than I thought on both sides.
    And, again, as the Chairman said, all of us did not get the 
things we wanted. And guess what? The Administration did not 
get everything they wanted also. But we got something that 
works.
    And I will tell you now that we do have it and there is a 
loan limit that has been raised for a temporary period of time. 
I am going to be all over the GSEs to make sure that they use 
that in a way that helps our economy and helps the housing 
market because, trust me, it will make a difference because the 
market, the other side here, you made a point that also 
troubles me which is that raising the loan limit flies in the 
face of the affordable housing mission, because you could have 
no loan limit and they could just have the whole market. And 
that is not what we want.
    But the fact is I can tell you that the jumbo market, the 
market away from the GSEs, the reason the GSEs have a bigger 
market share today is it is very hard to get mortgages and get 
mortgages on attractive terms away from the GSEs.
    Mr. Garrett. Right.
    Secretary Paulson. And the reason is because of that 
implied because they are taking the the mortgage risk and they 
are selling their credit. So, again, I think this will be 
helpful to the market. You are not going to get, if you are 
pressing on me, you are yelling at the wrong guy.
    You should be going to the Senate and saying give us a 
bill, okay, because I am just sitting here saying the same 
thing you are, give us a bill and let us work with it and let 
us not let the perfect be the enemy of the good.
    Mr. Garrett. I thank you for that.
    Thank you.
    Chairman Spratt. Mr. Edwards.
    Mr. Edwards. Secretary Paulson, thank you for your service 
and for being here today.
    As we know, the President is signing the stimulus package 
today. And I would like to ask you, for those who would 
question the impact of approximately a $150 billion stimulus on 
a $14 trillion annual economy, can you quantify the impact of 
the stimulus package? Will it increase our GDP growth by one-
half of one percent, by one percent?
    Secretary Paulson. I would say my guess is six-tenths to 
seven-tenths of a percent more or less. We are going to work 
very hard to get these checks out right away. And I think given 
where the checks are targeted and where they are going to go, I 
think you will find it has a real impact. And we know what 
bonus appreciation will do and that will kick in later in the 
year. But, yes, I think it will be meaningful.
    Mr. Edwards. Could it also have a nonquantifiable impact on 
consumer confidence?
    Secretary Paulson. You bet. And I will tell you I think 
people have to be pleased to see how quickly Congress has come 
together on this.
    Mr. Edwards. Thank you.
    Clearly the subprime mortgage crisis and the home 
foreclosures that have resulted from it have contributed 
significantly to our present economic challenges.
    Do you think those problems have bottomed out vis-a-vis the 
number of foreclosures coming as a result of the subprime 
crisis? Has that problem bottomed out or is it going to have to 
get worse before it gets better?
    Secretary Paulson. No. The subprime, as I have said, the 
subprime mortgage issue on the adjustable rate subprime 
mortgages, as I have said, that is going to get worse before it 
gets better because we have the poorest quality loans were 
underwritten in 2006. And roughly 1.8 million of those, over 
the next couple of years will have their rates reset.
    That is why a big part of our effort is aimed at those and 
the private sector initiative of getting fast track 
modifications to those loans which in many cases will be 
interest rate freezes.
    Mr. Edwards. Okay. Thank you.
    Let me ask you one question regarding the President's 
budget. I Chair the Military Construction and Veterans 
Appropriations Subcommittee. And as I look at the President's 
budget, after a one-year uptick in VA healthcare funding for 
2009, the President's budget would actually cut $17\1/2\ 
billion out of veterans' healthcare current services between 
2010 and 2013.
    Given that that budget also includes some significant tax 
cuts for families making over a million dollars a year, do you 
think that is fair to the men and women who have already 
sacrificed so much on behalf of our country?
    Secretary Paulson. That, Congressman, is clearly a loaded 
question.
    Mr. Edwards. Well, it is a question based on the facts of 
the President's budget.
    Secretary Paulson. Well, I guess what I am going to say to 
you on that is I focus on the budget overall, the revenue side 
of this. There is a lot of tradeoffs in the budget and you are 
going to have to ask, and I am not familiar with the details 
there and I will pass them on to others, you will have to ask 
the head of the Veterans Administration and others about this.
    Mr. Edwards. Okay.
    Secretary Paulson. Okay?
    Mr. Edwards. Let me ask you since I have some time 
remaining, in your opinion, does a dollar worth of tax cuts pay 
for itself in additional revenue brought in as a result of that 
dollar of tax cuts?
    Secretary Paulson. I do not believe it pays for itself 
entirely, although I also have been disappointed to say the 
least at sort of the static way in which people make estimates 
on all kinds of things down here because I do know and I did 
see really major behavioral changes after the President's tax 
relief.
    And I have got to just make the point that Republicans and 
Democrats and the CBO and everyone that scored this have been 
very surprised at the extent to which revenues have been coming 
in. So there is something wrong with the way we are doing the 
estimates, but, yet, I have seen the analyses and I would 
answer the question the way I did.
    Mr. Edwards. And I believe most economists, those who have 
testified here have said, I think CBO, in fact, has said even 
under the most optimistic assumptions, maybe a dollar of tax 
cuts brings in an additional 20 to 25 cents and that in some 
cases, if you fund tax cuts by borrowing money, including 
borrowing money from overseas lenders, you could actually 
reduce overall revenues even more than the tax cuts because of 
long-term interest rates going up.
    Secretary Paulson. I will tell you I am definitely not 
there. I just think I would be very different. But I will say 
that you have to look at different taxes and I think the right 
way to think about taxes is we need taxes because we need 
revenues. And so no one is arguing about that.
    So the two questions to ask are what percentage of GDP 
should be taken up by taxes. You know, taxes should be what 
percentage of GDP, how big should they be in relation to our 
economy, and then what is the right form, because for any given 
amount of taxes, we want to maximize our jobs and our growth 
and our competitiveness.
    And I would say the form of some of our taxes make them 
very, very expensive in terms of what they do to hurt growth 
and competitiveness.
    Mr. Edwards. Thank you, Mr. Secretary.
    Secretary Paulson. Thank you.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. Thank you.
    Mr. Secretary, welcome. Good to see you again. I am unaware 
of any tax cut that Congress is presently considering. I am 
aware, though, that there are some huge scheduled tax increases 
due to take place on the American family and the American 
economy.
    Right now by January 1, 2011, ordinary income taxes are due 
to increase 13.1 percent at the top bracket; capital gains, an 
increase of a third, from 15 percent to 20 percent; dividend 
increase, 164 percent tax increase. Death tax goes from zero up 
to 55 percent. The child tax credit is scheduled to decrease by 
half, and the lowest tax bracket is due to increase 50 percent 
from the 10 percent bracket to the 15 percent bracket.
    My question, Mr. Secretary, as we look at a troubled 
economy, what is the impact of these presently scheduled tax 
increases, what is the impact on the American economy, and what 
impact will that have in your opinion on working families as 
they try to meet their healthcare needs, their education needs, 
their energy needs?
    Secretary Paulson. Well, first of all, I believe as you do, 
I am sure, that one of the most important things we can do 
would be to make that tax relief permanent. And if they are 
ever allowed to expire that those will be real tax increases to 
a number of the constituents you mentioned.
    And the thing that I focused on also in my job is small 
businesses because when you look at the top two tax brackets, 
you have 70 percent of the flow through businesses in this 
country are paying tax at that rate. And as you know, when the 
small businessman saves a few extra dollars, they reinvest it 
in their business.
    And so, again, I think you are pointing your finger at a 
very important issue.
    Mr. Hensarling. Let me turn to another issue, Mr. 
Secretary. One thing you can usually set your calendar by is 
that once the President introduces his budget, it will be 
roundly criticized.
    One of the factors that the budget has been criticized by 
my friends on the other side of the aisle is certain reforms 
that the Administration proposes for Medicare.
    Right now I believe it is fairly universally accepted that 
the cost of doing nothing in Medicare and other entitlement 
spending is fairly significant. In fact, I heard Comptroller 
General Walker say recently that the cost of doing nothing for 
just Medicare and Social Security is about $2 trillion a year.
    So let me first remove the myths. In the five-year budget 
window, does the Administration propose any decreases in 
Medicare spending or is Medicare spending due to rise each and 
every year of the Administration's budget?
    Secretary Paulson. It is going to rise.
    Mr. Hensarling. It is going to rise.
    Secretary Paulson. And as I say, what we have done, and 
Mike Leavitt is the expert and will give the details, but the 
idea is to slow the trajectory of growth from 7.2 percent to 
five percent. And even doing that, although that makes a pretty 
significant difference, if you look 75 years out in terms of 
the overall deficit, but it takes about one-third of that.
    Mr. Hensarling. Mr. Secretary, quantify the cost of doing 
nothing in another way. Is it a fair assessment in your opinion 
that if we do not reform Medicare, the program as we know it 
will no longer be here? Within a generation, taxes may have to 
be doubled to sustain the program. Is that a fair assessment?
    Secretary Paulson. Yes. I guess without those numbers 
exactly, I would just say it is clearly unsustainable. And I 
think everyone knows that because we have the demographics and 
the rising cost of healthcare. And it is the huge issue facing 
us all.
    Mr. Hensarling. Mr. Secretary, there are many in Congress 
who believe that the only way you can show compassion to people 
is to take money away from them and write a federal check. 
Others believe, though, that it is possible to actually reform 
retirement programs and healthcare programs and achieve even 
better quality or certainly no loss of quality.
    The head of CBO, Dr. Orszag, who was a Democratic 
appointee, not a Republican, has stated in earlier testimony 
before this Committee, ``It may even be possible in some cases 
to reduce cost growth and improve health at the same time.'' He 
goes on to cite academic research suggesting that national 
costs for healthcare can be reduced by perhaps 30 percent 
without harming quality.
    Do you agree with the assessment that it is not always how 
much money you spend but how you spend the money and can we 
sustain quality healthcare without necessarily spending more 
money?
    Secretary Paulson. Well, let me say this. I am not a 
healthcare expert, but I will tell you clearly in many, many 
things in life, it is not the amount of money you spend, it is 
how you spend it. So I cannot disagree with that.
    Mr. Hensarling. I am out of time. Thank you, Mr. Secretary.
    Thank you.
    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Secretary.
    As the cabinet officer responsible for tax policy or the 
top cabinet officer in that regard, I would like to direct your 
attention in that area.
    Over the last decade, there have been a variety of 
proposals. I think the current form is the so-called fair tax 
to substitute a sales tax of some type for the income tax. That 
is not included in this budget, is it?
    Secretary Paulson. No.
    Mr. Doggett. And, indeed, with this Administration in its 
eighth year, this Administration has never recommended that we 
replace the income tax with a sales tax, a mislabeled fair tax, 
or anything of that type?
    Secretary Paulson. No.
    Mr. Doggett. And with reference to the idea that as my 
former Chairman of the Ways and Means Committee suggested, a 
Republican Chairman, that we could just pull the income tax out 
by its roots and substitute a vastly different income tax, the 
Administration does not have any major individual 
simplification of the income tax included in this budget, does 
it?
    Secretary Paulson. No, we do not.
    Mr. Doggett. And even with reference to corporate taxation 
in your efforts last year to consider the possibility of 
repealing some of the tax incentives, tax subsidies for 
corporate activity in return for reducing the overall level of 
corporate taxation, there is nothing in the budget for the 
simplification or reduction of corporate taxes, is there?
    Secretary Paulson. No. Can I give you a little bit longer 
answer on that?
    Mr. Doggett. If I do not run out of time.
    Secretary Paulson. Okay. Yes, because we put out a number 
of studies and papers exploring different things.
    Mr. Doggett. But we are down to the end of the 
Administration and it has had eight years----
    Secretary Paulson. Yes.
    Mr. Doggett [continuing]. If you will, and nothing has 
happened. I understand you have not been there for all that 
time.
    And then in the area of the tax changes that the 
Administration either recommends or does not oppose that this 
Congress might take, last year, the only form of correction of 
the alternative minimum tax for the year that the 
Administration would support was one in which we borrowed the 
money to pay for it.
    And I gather from your remarks this morning that that is 
the only approach for this year that the Administration would 
support, is that we borrow whatever it takes to pay for 
correcting the alternative minimum tax.
    Secretary Paulson. Remember, there are two ways. Everything 
is not as simple as borrowing or tax. There is also the 
spending side.
    Mr. Doggett. That is right. You could come in and recommend 
specific programs to abolish or cut to pay for the 
alternative----
    Secretary Paulson. All dollars are green. And so we came up 
with a budget and the deficit inherent in that budget is part 
of the overall plan.
    Mr. Doggett. In fact, the Administration supports the 
permanent repeal of the alternative minimum tax.
    Secretary Paulson. The Administration has said that we need 
to do something to deal with this because we clearly do not 
want this to hit, you know, the taxpayers. But we have not said 
we support the permanent repeal. We said that clearly when we 
come to the final solution here, we are going to need to take a 
look and say how big should taxes be as a percentage of our 
economy and we want to look at a number of other things.
    Mr. Doggett. As to permanency, you do support the permanent 
enactment of every one of the Bush tax cuts; do you not?
    Secretary Paulson. We support the major ones that are in 
the budget.
    Mr. Doggett. Are there any of the Bush tax cuts that you do 
not support permanently?
    Secretary Paulson. Well, there are some of the extenders 
that are not in the budget.
    Mr. Doggett. Okay. But do you not support them as long as 
we are willing to borrow money to pay for them?
    Secretary Paulson. If they are not in the budget, we can 
talk about it.
    Mr. Doggett. Well, we can talk about it only if we borrow 
money.
    Secretary Paulson. Well, we could talk about borrowing 
money or we could talk about making some additional spending 
cuts.
    Mr. Doggett. What specific spending cuts do you think we 
should prioritize to pay for correcting the alternative minimum 
tax this year?
    Secretary Paulson. I would say the alternative minimum tax, 
you have our budget, and the only point I was making, sir, was 
it is not quite as simple as saying that the alternative 
minimum tax is being paid for from borrowing because it is part 
of a coherent budget. And so you could take any part of it and 
you could say any spending portion----
    Mr. Doggett. And I will not in this last 20 seconds debate 
you on whether it is a coherent budget. I clearly do not think 
so.
    But if there are any specific spending cuts that the 
Administration feels we should use to pay for the alternative 
minimum tax, your tax policy assistant could not identify any 
last year to the Ways and Means Committee, I would just ask you 
to supplement in writing what they are.
    You also believe that we should----
    Secretary Paulson. If I can explain what I said. I did not 
say we are pro spending.
    Mr. Doggett. I understand what you are saying. I am just 
asking.
    Secretary Paulson. I just said we have a budget and----
    Mr. Doggett. I understand you have got a budget that you 
think takes care of everything. I am just asking you to 
supplement in writing if there is any specific spending cut 
that you would ask us to use to pay for the alternative minimum 
tax correction.
    And also to be clear, you proposed that we continue to pay 
for what you call a plug figure, I call a phoney figure, on the 
Iraq War, whatever it costs, that we continue to pay for that 
by borrowing money, right?
    Secretary Paulson. Again, it will be part of the budget.
    Mr. Doggett. Well, that is borrowed money.
    Secretary Paulson. That is right.
    Mr. Doggett. And it is just----
    Secretary Paulson. There is no doubt it will add to the 
debt.
    Mr. Doggett. It is just a basic disagreement whether we pay 
as you go or borrow as you go. And the amount of borrowing 
proposed in the budget and to supplement this budget strikes me 
as just an incredible astronomical amount on top of the $3 
trillion that the Bush Administration has added to our national 
debt over the course of its tenure.
    I thank you for your service and respect your point of 
view.
    Secretary Paulson. Thank you.
    Mr. Doggett. Thank you, Mr. Chairman.
    Chairman Spratt. Ms. Schwartz.
    Thank you.
    Ms. Schwartz. Thank you, Mr. Chairman.
    Secretary, welcome. We have an empty hall here, but I think 
we will get a few minutes together.
    I raised some of these issues with Mr. Nussle last week and 
wanted to raise some of these issues with you. And I do 
understand, as you said earlier, you are not a healthcare 
expert, so I acknowledge that.
    But you know something about taxes and you know something 
about this budget. So I do want to raise some questions with 
you about the Administration's effort to and proposal to deal 
with some of the issues around healthcare.
    And you said very clearly that the issue of healthcare 
costs both to the government and I believe to businesses and to 
individual families is an economic competitiveness issue for 
this country.
    I think your opening remarks talked about a long-term 
stimulus, what we need to be doing to tackle some of the major 
issues and challenges facing us in this country, that we have 
to tackle healthcare. You did not mention that specifically 
except under entitlements.
    Secretary Paulson. I clearly agree. This is a major, huge 
structural issue for us.
    Ms. Schwartz. Okay. I appreciate that, you know. And I 
think that one of the things that I would contend that the 
proposal, the President's budget basically does two things 
around healthcare.
    One I am going to leave aside which is Medicare, which is 
just basically cuts without any targeting for what really 
works, what does not, any kind of investments, sound 
investments really that could make a difference in cost 
containment.
    But what I really wanted to ask about was the tax proposals 
that the President put forward again this year. He did it last 
year. And I think particularly in contrast to the strength of 
the Administration's opposition to extending CHIP, the 
Children's Health Insurance Program, seems to me just so 
misguided.
    And I wanted to see whether you could justify why we would 
choose to do a tax deduction, not even a tax credit, not even a 
refundable tax credit that would help our lowest-income folks 
be able to afford health insurance, but instead to do a tax 
deduction, a broad-based tax deduction, not targeted, for 
individuals, taking money away from those who are employed, and 
actually do it in a way that is fairly inefficient because it 
does not target the uninsured. It could be just a complete 
wash. People who have insurance now in a group market could go 
to an individual market and actually cost us more money.
    Estimates I have is that the President's proposal would 
cost--first of all, it is $105 billion investment. We have been 
asking for $35 billion for children. This would cost $2,600 per 
person per year. Children's health insurance was going to cost 
$1,200, half of that.
    And what we knew is that we were targeting the Children's 
Health Insurance Program to lower middle-income folks. It has 
been successful. It has been bipartisan, costs less per family, 
targets again those without insurance, uninsured kids, is a 
very effective use of dollars, and costs us less.
    The President was vehemently opposed as we know from having 
vetoed CHIP extension twice and instead is proposing a $105 
billion investment to help individuals leave the group market 
and go to an individual marketplace which we talked about last 
year really does not exist if you have health issues, that 
preexisting conditions exclude you. If you are older, it is too 
expensive.
    And, in fact, it is very hard for lower middle-income 
folks, even middle-income folks, a family making $50,000 a year 
for them to come up with 10 or $12,000 in cash and then look 
for a tax deduction later is really just not reasonable.
    So could you speak to how this is targeted, how it deals 
with the uninsured, how it is cost effective for this 
government, and how it deals with any of the major issues 
facing us in healthcare accessibility, quality, and cost for 
families in this country?
    Secretary Paulson. Yes. You all will be around here longer 
than I am and as you are looking for how to pay for some of the 
things we need to do in the healthcare area, you should look 
very closely at the biggest preference there is in the Tax Code 
which is $3.3 billion over a ten-year period which is the 
preference that goes to those who get employer health 
insurance.
    Now, I want to just----
    Ms. Schwartz. By reducing that, that is one of the 
Administration's----
    Secretary Paulson. No. I want to just go on this and say 
what we are doing if you really want to hear.
    Ms. Schwartz. Sure.
    Secretary Paulson. First of all, the idea that it is a tax 
increase is wrong, that it is going to cost money. This was 
intended and we would implement it in a way which was revenue 
neutral.
    So, again, people can try to play games and say, well, we 
have done the numbers. Well, we will just take it as a given. 
Anything we would do here, we would work the numbers to be 
revenue neutral.
    The next thing I----
    Ms. Schwartz. You are saying there is no, the $105 billion 
investment----
    Secretary Paulson. No, there is not. The proposal was a 
general proposal to say this would be revenue neutral.
    Ms. Schwartz. Right. By capping the amount of tax 
deductibility for those who are employed?
    Secretary Paulson. No. No. All this does, what this does is 
will set a limit.
    Ms. Schwartz. Right.
    Secretary Paulson. So for the gold plated. And so someone 
who is getting $15,000 of benefits or more will be able to 
either, if they want to, if they do not want to lose the 
benefit, they can restructure their program. So all this does 
is gives money----
    Ms. Schwartz. It is seeking to limit that group insurance. 
But speak to how it is going to actually help those who find it 
very difficult, if not unaffordable and inaccessible to buy 
individual insurance and whether that is the most effective way 
to do it.
    Secretary Paulson. I just looked at it and to me, it just 
looked like a gross injustice, that I saw that $3.3 trillion 
preference and I saw it going to a privileged group. And I took 
a look at the construction worker, the waitress, all the people 
who do not have health insurance and by giving them the same 
benefit, it would add to those that are insured.
    And, again, I would just say this to you. Before we just go 
on the attack, there is also a way to look and say how can you 
take this and make it better. This could be one piece of a 
program. And so, again, this is something that right now is not 
transparent. It is an incentive to overspend because there is 
no limit on it, and so the gold plated programs.
    And we could do something that would encourage more 
insurance, add to those that get insurance, and do something I 
think is in a fair way and everyone has got the opportunity to, 
if you have a program that goes above the deduction, to 
restructure it.
    So, again, you and I have a difference on this, but do not 
come away with the feeling that this is something that in this 
case this is either going to be a reduction or an increase in 
spending. This should be neutral.
    Ms. Schwartz. Well, let me just clarify on perspective. And 
it is different. Let me say where I do agree, and I would hope 
that we can tackle this, is I do believe that if we can make 
sure that the individuals who are paying for insurance or could 
buy insurance, that should be either tax deductible or 
potentially be a refundable tax credit. I think we should work 
on that.
    You are right. I do not agree that we should take it away 
from other people. And let me----
    Secretary Paulson. The tax credit, again, I----
    Ms. Schwartz. Excuse me.
    Secretary Paulson [continuing]. Was surprised when we threw 
that out there that others would come back and say that is a--
--
    Ms. Schwartz. If I may, Mr. Chairman.
    Secretary Paulson [continuing]. That is a good idea, I got 
a refundable tax credit. No one said that.
    Ms. Schwartz. We could actually talk about that. But if I 
just may say it is not correct that it is going to be really 
possible for the waitress who is earning 20 or $25,000 a year 
or $30,000 a year to be able to find out-of-pocket--first of 
all, if she can even find an individual insurance, that she 
would be able to find that $10,000 that she may need to 
purchase it and that she may not even be paying taxes so that 
she may be earning too little, so she may not get a tax 
deduction.
    So this is targeted not to--I do not need you to answer 
this. I am just making a statement that that, in fact, is not 
targeted to the lowest-income working folks. It is not dealing 
with the issue because of the marketplace and because of the 
reality of high cost of health insurance for too many 
Americans.
    So the dialogue we should continue to have because we have 
to be able to tackle a way to help Americans be able to afford 
health insurance in this country, and I look forward to having 
that discussion with you.
    Thank you, Mr. Chairman.
    Secretary Paulson. Good, because there are two ways of 
looking at this. One is----
    Mr. Ryan. Mr. Chairman.
    Chairman Spratt. I recognize the gentleman for 30 seconds 
and then Mr. Andrews for five minutes.
    Mr. Ryan. I was not going to interject, but since we are 
going way over the time here, odds are that that waitress does 
not have health insurance, so we are discriminating the Tax 
Code against people who do not have health insurance given to 
them from their jobs.
    And this idea to equalize the tax treatment so that 
waitress can have the same kind of preference that other people 
get in the Tax Code to go out and get health insurance, we can 
discuss whether it is a deduction or a credit, but the point is 
we are spending three and a half trillion dollars over ten 
years on healthcare and a lot of people do not have it.
    We spend two and a half times the per capita average in the 
industrialized world on healthcare. Yet, 47 million are 
uninsured. So we have discrimination in the Tax Code that we 
want to attack and the idea is to equalize the treatment to be 
fair and to get more people insured. We can have honest 
disagreements about how to achieve that goal, but that is what 
this is about.
    Ms. Schwartz. And yielding back my nonexistent time, I 
would say that that is a conversation we should have on how we 
should do it.
    Mr. Ryan. Exactly. So let us go to Mr. Andrews.
    Secretary Paulson. Whether it is a credit or a deduction, 
we should be discussing it.
    Chairman Spratt. I recognize the gentleman from New Jersey, 
Mr. Andrews, for five minutes.
    Mr. Andrews. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I have a short-term question and 
a long-term question.
    On the short term, as you said, we have worked together. 
The President today will sign a stimulus plan which I supported 
and I believe will do good for the country.
    Let me ask you a question. Looking at it six months from 
now, what matrix will you look at to evaluate whether the 
stimulus plan has worked or not? What should we be looking for?
    Secretary Paulson. I think that is an excellent question 
because we are going to need matrix, all of us on this, because 
obviously we will be able to look and we will be able to see 
what GDP growth is, but we will not know what it would have 
been without the stimulus.
    And so it is not a perfect world and we will never be able 
to do it with precision. But what we will do is, and I am going 
to be developing my own at Treasury Department, but we will be 
doing research on what families have done with their checks, 
how much spending. And so there will be a business behavior, 
but it is at best an imperfect science.
    Mr. Andrews. I certainly do not ask the question for 
academic reasons.
    Secretary Paulson. No.
    Mr. Andrews. I am very optimistic and hopeful----
    Secretary Paulson. Yes.
    Mr. Andrews [continuing]. That this plan will work, but I 
think we have a responsibility to evaluate it in a few months 
to see if it is working, whether we have done enough, and 
whether we have to do more.
    Let me ask you the long-term question. The Congressional 
Budget Office a few years ago estimated that we would be 
borrowing or we would need, rather, between three and five 
percent of GDP to cover the gap in Medicare and Social Security 
by about 2025 to 2030. And I think your Department, the Fed, 
just about everybody has essentially confirmed the scope of 
that problem.
    And I honestly do not mean this as a rhetorical question. 
In order to fix that problem, it is going to require 
significant compromise, significant political risk for everyone 
involved.
    You know, as the Chairman said earlier, in 1982 and 1986, 
President Reagan and Democratic leaders in the Congress, 
Republicans took a risk. I think it worked.
    In 1990, the first President Bush, the Democratic leaders 
of the Congress took a risk. I think it worked in the long run.
    Nineteen ninety-three frankly was solely on the Democratic 
side, but the risk was taken and it worked.
    And in 1997, a bipartisan agreement took the smallest risk 
for the greatest reward which was moving us back to surplus.
    I sincerely mean this not as a rhetorical question. The 
Administration does not stand for election this year. We all 
do. A third of the Senate does. Is the Administration willing 
to take that political risk and reach out to the Speaker, to 
the Majority leader, to the bipartisan leadership as you did on 
the stimulus plan and begin to talk about this enormous problem 
of the entitlement crisis looming over the country? Why have we 
not done that? Why can we not do it now?
    Secretary Paulson. Well, let me say I came down here and 
was confirmed and started my work in July of 2006. I knew the 
President had taken a pretty significant risk to take the first 
step with his Social Security proposal and it turned out to be 
not just an economic issue, difficult economic issue, it was 
politically complex. The President encouraged me to make a big 
effort and we did. And we are very disciplined.
    I talked with a lot of people. I have had very good 
conversations with your Chairman, a lot of encouragement from 
people. And the idea of saying let us get together without 
preconditions, everyone talk about what they want to do and let 
us get together and work something out, and for whatever 
reason, behind closed doors, people would say this is a great 
idea, something we have got to get done, but it did not and 
people would not come to the table.
    Mr. Andrews. You know, I understand.
    Secretary Paulson. And so I think----
    Mr. Andrews. And we are all up for election this year in 
the House and we understand. But I would say this to you----
    Secretary Paulson. But, see, that is it. See, the one thing 
that is clear to me about this is it is going to take 
bipartisan support like the stimulus and people are going to 
have to come together and----
    Mr. Andrews. Well, we just did. And although the stimulus 
frankly was an easy political move because you are giving 
people money back and----
    Secretary Paulson. Absolutely.
    Mr. Andrews [continuing]. I understand that. I think it 
sets a template. There is not a person in this country that is 
a serious thinker who does not understand we have a huge 
problem over the next 15 or 20 years. And we are not talking to 
each other about it and we should. I am not faulting you. I am 
making an observation.
    Secretary Paulson. I commend you for making the point 
because, to me, it is the forest through the trees. We are 
talking about whether this is transparent in the budget or 
that----
    Mr. Andrews. I understand.
    Secretary Paulson [continuing]. Or this is a holding 
number. That is the elephant in the living room.
    Mr. Andrews. I am sure the Chairman is available this 
afternoon to start.
    Secretary Paulson. Yes.
    Chairman Spratt. I believe Mr. Scott is next. Oh, Mr. 
Bishop is next. I beg your pardon. I beg your pardon. You were 
here before the gavel went down.
    Mr. Bishop. Thank you, Mr. Chairman.
    And, Mr. Secretary, thank you very much.
    And, Mr. Scott, thank you for deferring.
    I have two questions. As I was leaving to go over to vote 
the last time, I heard Mr. Hensarling start a question about a 
looming, huge tax increase that is forthcoming. And I was not 
here, but I believe he was referring to the 2001 and 2003 tax 
cut expiration; is that right?
    Does not this budget that has been submitted by the 
Administration already include the largest tax increase in 
history with respect to the middle class by continuing to 
assume the revenue associated with the AMT?
    I mean, the revenue is assumed through 2012 and to capture 
that revenue, instead of imposing the tax on the four million 
people that we are imposing it on now, we would be imposing it 
on 37 million people, most of whom would be middle-class and 
upper middle-class people.
    Secretary Paulson. Yes. And I think that is very 
unacceptable. And so what we have, the revenues are there 
because they are there by law, but what we are doing is what we 
said. We said very freely this is an issue that we need to come 
together and address.
    And there are two ways you can address this or, rather, 
three ways. We talked about it. One way is, and there are some 
that look at it and say the first thing we need to look at is 
what percentage of our economy should be taken up by taxes. You 
know, taxes have averaged about 18 percent of GDP over the last 
40 years. What is the right level? And I think that is one 
thing we really need to look at when we address this.
    And, again, your Chairman said, Hank, maybe you are making 
it too complicated by saying look at that and look at it in the 
context of entitlements is the way I have thought about that. 
Others have said the way to address it is raise taxes. And so I 
do not think the way you should address it is by raising taxes.
    Mr. Bishop. When Mr. Portman was here last year as the 
Director of OMB, he was asked a similar question with respect 
to dependence on AMT revenue. And his response was that the 
Administration believed that the AMT revenue needed or the AMT 
problem needed to be fixed within the context of larger tax 
reform and that the anticipation would be that the tax reform 
would be revenue neutral.
    Does that remain the Administration's position?
    Secretary Paulson. I have the highest regard for Ron 
Portman, but I never said that last year. And I do not believe 
that that was the Administration's position last year, that we 
were saying that it had to be revenue neutral. And so what I 
always said about AMT last year and I was----
    Mr. Bishop. If I may.
    Secretary Paulson. Okay.
    Mr. Bishop. If it is not revenue neutral and if we assume 
as the budget presumes the continuation of the 2001 and the 
2003 tax cuts which with interest added has about a ten-year 
cost of about $3 trillion and the ten-year cost of the AMT is 
about $1 trillion, so we would be foregoing $4 trillion of 
revenue over a ten-year period.
    How do you see the budget accommodating that loss of 
revenue?
    Secretary Paulson. Well, you automatically make the 
assumption that we are either going to be raising taxes or 
borrowing money.
    Mr. Bishop. No. I am making no assumption. I am simply----
    Secretary Paulson. Well, that is why I think the only way 
that I can think of or I should not say the only way, but I 
think the best way to address this, and I am hoping that it 
will be addressed if not now, in the next Administration, it 
will be addressed by looking at this, as I said, in the context 
of entitlement, the whole entitlement spending issue, looking 
at the AMT, and also Congress and the Administration coming 
together and saying what percentage of our economy should be 
taken up in the form of taxes, what form should those taxes be, 
and looking at all those things together.
    Mr. Bishop. But the Administration has already answered a 
part of that question by virtue of the assumptions it makes 
with respect to the 2001 and the 2003 cuts. Your are already 
assuming that those will be continued. So you are already 
answering the question of what proportion of our economy ought 
to be taken up by taxes; are you not?
    Secretary Paulson. Well, that is one part of it, okay, 
because that is one part of it.
    Mr. Bishop. Okay.
    Secretary Paulson. You have seen that is something that 
this Administration thinks is very important. But, again, the 
idea we have and as I looked at different budgets over the 
budget window, I see, and, again, this has been altered 
somewhat by the stimulus package, but our revenues as a 
percentage of GDP were what, 8.7 percent, 8.6 percent. We show 
it going up throughout the budget window. And I think at some 
time, this is a question we all have to look at. It is just a 
basic question, how much are going to be taxes, what are the 
form of taxes going to be, and how much are we going to be able 
to get to by restraining spending.
    And you are not going to be able to restrain enough 
spending without getting at the entitlements question. And we 
all know that. I mean, we are just----
    Mr. Bishop. Thank you. My time is expired. I appreciate it. 
Thank you.
    Secretary Paulson. Thank you.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. None.
    Chairman Spratt. Okay. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Secretary, as Treasury Secretary, you are involved in 
monetary policy and have to make projections. We have a budget 
that has been presented to us that shows a surplus in the years 
2012, 2013.
    What are you projecting? The blue line is the President's 
projection. What are you projecting for a surplus deficit for 
those last two years?
    Secretary Paulson. You know, what we are projecting is, 
based upon the assumptions in the budget, we are projecting a--
--
    Mr. Scott. Yes. But you have to make realistic projections 
and project monetary policy based on what you honestly believe 
the surplus deficit numbers are going to be.
    What is a realistic expectation for the deficit in 2012, 
2013?
    Secretary Paulson. Yes. I am going to stick with our 
budget, you know, that the----
    Mr. Scott. That is your honest assessment? You are 
telling----
    Secretary Paulson [continuing]. That there is----
    Mr. Scott. Wait a minute. You are telling Congress that we 
should plan for 2012 and 2013?
    Secretary Paulson. Here is what I will say to you, that 
since coming to government, and I said this at the beginning, I 
do not know if you were here, someone asked me, gee, did you 
plan this way, budget this way in the private sector. I said 
you have budgetary rules, scoring rules, certain things. You 
know, taxes are in the PAYGO rules. Appropriations are.
    In terms of what we are going to do, there are a lot of 
assumptions and we have had revenues coming in much faster than 
forecasted to date.
    Mr. Scott. Are the budget projections realistic to have a 
surplus in 2012, 2013?
    Secretary Paulson. If you think the Treasury Secretary is 
going to come up here testifying on the budget and say that I 
disagree with the budget projection, it would be pretty 
interesting testimony.
    Mr. Scott. Well, we are basing economic policy and if you 
are here just to spin the Administration budget and we are 
trying to get bona fide information from you as Treasury 
Secretary. And I just asked you a simple question. Is that 
realistic or not?
    Secretary Paulson. And I would say that I think you take a 
look at the budget----
    Mr. Scott. In all honesty, is that a realistic assumption 
or not?
    Mr. Ryan. Will the gentleman yield?
    Secretary Paulson. What?
    Mr. Ryan. Will you yield? Well, if we implement the 
Administration's policies on entitlements and things like that, 
then these become realistic expectations.
    Secretary Paulson. Yes.
    Mr. Ryan. The whole point of producing a budget is to enact 
budget-changing policies that gets you to these points. So if 
we do not act on these policies, then, no, it will not 
materialize. If we do act on these policies, then perhaps, yes, 
these projections would materialize.
    Mr. Scott. Reclaiming my time, Mr. Secretary, in your 
statement, you indicate that the stimulus and others will help 
create more than half a million jobs by the end of the year.
    Is that half a million a total or more than we would have 
created otherwise?
    Secretary Paulson. It is obviously more than we would have 
created otherwise. And I think that is on the low end.
    Mr. Scott. Your statement indicates that home price 
appreciation, the United States undergoes a significant and 
necessary housing correction. The word necessary is curious in 
there.
    Can we assume that by necessary that we are not going to do 
much about a situation that most consider a bad thing?
    Secretary Paulson. We are working hard to prevent avoidable 
foreclosures. The word necessary means that when markets get 
out of whack, it is counterproductive for the government to get 
in and stand in the way because it creates all kinds of other 
distortions and it prolongs the problem. Markets do not go up 
at the rate at which these housing prices went up without it 
coming down.
    Mr. Scott. Family income, what has happened to median 
family income since 2001 and are we going to try to change that 
direction or expect more of the same?
    Secretary Paulson. I do not have the precise numbers here 
with you, but I assume what you are alluding to is that you 
would like to have seen the median family income growing at a 
faster rate.
    Mr. Scott. Excuse me? Grow at a faster rate?
    Secretary Paulson. Well, I would say the median family 
income has gone up. It has not gone up at least in the years I 
have looked at it since I have been here.
    Mr. Scott. Can you get chart 18.
    Secretary Paulson. Yes.
    Mr. Scott. And page nine.
    
    
    I am sorry. Number 20, two more.
    Okay. The information we have shows the median income going 
down a thousand dollars.
    Secretary Paulson. And you showed it going down. You picked 
from 2000 and I would have to see what you have got in those 
numbers and how they have been put together. And I think what 
has happened, the median family income is up after taxes, but 
it is down before taxes. But a courtesy----
    Mr. Scott. Median or average?
    Secretary Paulson. Current median----
    Mr. Scott. Wait a minute. Median or average?
    Secretary Paulson. Median. A courtesy of the Bush tax 
relief, the median after-tax income has gone up. But, again, 
your basic point, which I understand your basic point, and it 
is something that I am very, very focused on, and I think it is 
quite important to keep this economy growing and there has been 
a trend that has been going on, sir, for a good number of years 
in terms of income distribution.
    And the other thing I would point out is that there is 
great, and all of the Treasury studies on this confirm this, 
that the income mobility, there has not been any decline in 
terms of mobility.
    And so those in the bottom 20 percent, half of those will 
move out over a ten-year period, half of those at the top 20 
percent will be new. And so while we would like to see the 
median income moving up more quickly, the fact is people move 
through the median income and continue to move up in this 
society.
    Chairman Spratt. Thank you, Mr. Scott.
    If I could just clarify something, Mr. Secretary. Our 
problem with the AMT reform is, and we were harking back to the 
statement by Ron Portman----
    Secretary Paulson. I remember his statement. I just was 
pointing out that I had not said the same thing.
    Chairman Spratt. But what you are saying is now that you do 
not intend that it necessarily be revenue neutral. However, if 
you look in the budget for this year, the Administration's 
numbers for revenues imply that the AMT is fully in effect, 
unadjusted for inflation.
    So we think you are trying to have your cake and eat it 
too, and putting that number in there when you are assuming 
that there is going to be AMT reform.
    Secretary Paulson. Yes. What I had said and when I 
testified before your Committee last time, I was very careful 
not to, as we were getting everyone to come together, trying to 
get together to address this, I was very careful to not, and I 
talked with the President very carefully about this, to not 
make any hard and fast statements about revenue neutrality.
    We basically looked at AMT and said this is quite 
transparent, you know. We have the revenues there. We need to 
come together and solve this issue. And, again, I will not 
repeat what I have just said here, so that was our position.
    Chairman Spratt. Well, still we are looking at this year's 
budget request and it appears to us that it assumes that 
revenue is consistent with an AMT unadjusted, fully in effect, 
will be----
    Secretary Paulson. I have got you. I understand your point.
    Chairman Spratt. Probably want to take a look at that.
    Secretary Paulson. Yes.
    Chairman Spratt. And when you consider that, because the 
AMT is a robust revenue raiser if it is not adjusted for 
inflation.
    Secretary Paulson. Yes.
    Chairman Spratt. Add that to the fact that the 
Administration is only putting $70 billion in for the cost of 
the war, the supplemental of the war, and then nothing after 
that, in the years after that.
    These two factors have a profound influence on the idea of 
budgets and call in the real question if they were treated 
realistically whether or not you can even approach a balanced 
budget in 2012, which is the central claim of this budget. That 
is what we are struggling with.
    Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman.
    Would you put up chart number five, please.
    
    
    Okay. I just wanted five up there just so we could focus on 
it because that is going to be what I am--I am going to talk 
about chart eight because chart five, though, is the one that 
leads to the challenges in chart eight with the huge deficits 
over the last five years, which are the largest by any 
Administration in history.
    Now would you put chart number eight up, please?
    
    
    Mr. Secretary, thank you for being here and thank you for 
your testimony. And I am going to have a brief question at the 
end, but I want to get a few statements on the record, if I 
may, because this slide is quite troubling to me and it should 
be to a lot of folks.
    It shows very graphically that the federal expenditure for 
net interest exceeds, will exceed and is exceeding roughly $200 
billion and it shows how we are neglecting a lot of the other 
issues that if we are going to be competitive in the 21st 
century in this global economy, we got problems when we look at 
education, when we look at benefits for our veterans, when we 
look at homeland security, et cetera.
    Let me just touch on that for just a minute. I just got 
through testifying this morning before the Education Committee. 
Having been a former Chief School Officer in my State, there is 
a huge need out there. And at times when we are asking our 
schools to do more than ever, we continue to shortchange them 
at the federal level. Even though this year in the budget, 
there is a flat-line funding, that really gets us behind when 
you think of the extra children coming, the tremendous need 
they have in the 21st century.
    And as a veteran myself and an individual who represents 
Fort Bragg, it bothers me a great deal that this budget 
neglects our veterans at a time when our nation is fighting two 
wars halfway around the world.
    I was particularly concerned that the Administration 
continues to propose increases in VA pharmacy co-pay increases 
that this Congress has rejected year after year. With all the 
new veterans coming home from Iraq and Afghanistan and the 
unique problems associated with these deployments, we face a 
veterans' care crisis in this country that we neglect at our 
peril. I believe that.
    And I happen to represent a State that depends on homeland 
security quite a bit when it comes to hurricanes. North 
Carolina sort of sticks out there. And if you dial 911 on a 
hurricane, it tends to answer in North Carolina. We have been 
fortunate these last few years and I hope we do not have it 
again.
    But, you know, no matter how much people in this town want 
to bad mouth big government, when you have a national crisis, 
they hope the calvary is coming and they want the calvary to be 
a part of their state and federal and local preparedness.
    And we have been fortunate in North Carolina, and I 
appreciate the progress that is being made in bioshields which 
has been a congressional priority and an Administration 
priority to bolster our medical countermeasures and 
preparedness against chemical, biological, radiological, and 
nuclear attacks. I think that is appropriate.
    But I am very concerned that cuts to first responder 
funding in favor of other programs that really have impact not 
only in my State but a lot of states across this country and 
could very well.
    And I am particularly bothered that so much of this 
interest is being paid to foreign debt holders. I know we do 
not know who buys them, but we all know in recent years that 
much of that has been offshore.
    It was one thing when interest was being paid to people in 
the United States. It was recirculating in our economy in one 
way or another. And today that is not necessarily true. And I 
recognize we are an international economy.
    But as we look at this slide, it bothers me because I think 
our priorities as we look down the road, piggy-backing on Mr. 
Scott's previous question, it should raise deep concerns. And I 
would be interested in your comments as we look at this issue.
    And certainly from your experience as a business person, 
you are carrying this heavy debt load, you may want to measure 
it toward GDP. But as GDP drops in a downturn, that number goes 
up substantially and has a drag on the economy. And I would 
appreciate your comments on it as it relates to this budget and 
projections.
    Secretary Paulson. Yes. I get asked that question a lot. 
And just like a very large company can borrow more money than a 
small company and just like a wealthy individual can afford a 
bigger mortgage than someone that is not as wealthy that I 
believe, and I am not saying this for political reasons, it 
just is economic reality, the only way to look at debt, it is 
sort of meaningless to just look at debt and say X billions. It 
would be just like criticizing Exxon because they had a couple 
hundred million dollars in debt when their shareholders would 
criticize them if they did not. So I think the right way to 
look at this is a percentage of GDP.
    And, again, my concern, and I am very concerned about the 
deficit and I do believe deficits matter, and I am concerned 
because I see an issue coming that is huge and it is a 
structural deficit and it is entitlements.
    I looked at the deficit, you know, at the end of this year, 
this last year. It was 1.2 percent of GDP. It is now going to 
go up and it will be about 2.9 percent of GDP. And then it is 
projected to drop a bit in the short term and then getting to 
balance.
    But, you know, I have just a very high regard for your 
Chairman and when we put the numbers up, you know, basically 
what I am sitting here and thinking is we are disagreeing and 
any budget can be wrong. Any budget based upon projections can 
be wrong. We are disagreeing about, you know, a number of 
hundreds of billions of dollars, you know, one way or another 
which are big numbers in the absolute sense. But when we look 
at the magnitude of the long-term problem, that is really the 
important thing.
    So I would say our numbers right now are very manageable as 
a percentage of GDP and given the size of our economy. I would 
like the deficits to be smaller, all of us would, but they are 
quite manageable. The bigger issue is a longer-term one.
    And in terms of foreign holders of our debt, we should be 
glad that we have such strong interests outside of our country. 
And I will say as I look at the numbers and I have got the 
numbers that every country holds in our debt and no one owns a 
big percentage. We trade $500 billion of treasuries in a year.
    And, you know, Japanese own the biggest amount. They own 
about 580 billion which is more than one day's trading volume. 
Chinese are next. You know, they went down a little bit there. 
They are less than a day's trading volume. They are about 380. 
Then in the UK, holders held a little bit over 300 billion.
    So, again, I appreciate the fact you mentioned is obviously 
the interest payments now go out of the country. And I think we 
are all focused on the same thing. We are all focused on, you 
know, minimizing our debt. But the big issue is one we all have 
to deal with.
    Mr. Etheridge. Mr. Secretary, I appreciate that and I thank 
you for your answer, but I think the other point that bothers 
me and I think it should bother every member of this Congress 
no matter where they come from is the crowding out this can do 
for those investments that we badly need to make of 
infrastructure and I include education as a part of that, our 
future as well as fiscal infrastructure. That is the troubling 
part of this whole process because we are going to pay debt 
first as you and I both know. And these other pieces get really 
crowded out in a hurry and I think that is the real danger we 
face.
    Secretary Paulson. Thank you.
    Chairman Spratt. Mr. Secretary, thank you for coming. Every 
time you testify, we are reminded of how and why you were all 
Ivy tackle and CEO of Goldman Sachs both. You did a splendid 
job. We are glad you are where you are and we look forward to 
working with you to resolve some of these problems.
    I would like to ask as a housekeeping matter that all 
members who did not have the opportunity to ask questions may 
submit questions within seven days for the record.
    Thank you again.
    Secretary Paulson. Thank you, Mr. Chairman.
    [Whereupon, at 12:00 p.m., the Committee was adjourned.]

                                  
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