[Senate Hearing 110-559]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 110-559
 
        CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2009

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               ----------                              


 January 24, 2008--THE CONGRESSIONAL BUDGET OFFICE BUDGET AND ECONOMIC 
                                OUTLOOK

             January 29, 2008--THE LONG-TERM BUDGET OUTLOOK

January 30, 2008--ECONOMIC STIMULUS: BUDGET POLICY FOR A STRONG ECONOMY 
                      OVER THE SHORT AND LONG TERM

January 31, 2008--THE LONG-TERM OUTLOOK AND SOURCES OF GROWTH IN HEALTH 
                             CARE SPENDING

  February 05, 2008--THE PRESIDENT'S FISCAL YEAR 2009 BUDGET PROPOSAL

February 06, 2008--THE PRESIDENT'S FISCAL YEAR 2009 BUDGET AND REVENUE 
                               PROPOSALS

February 12, 2008--THE PRESIDENT'S FISCAL YEAR 2009 DEFENSE BUDGET AND 
                               WAR COSTS
 February 14, 2008--HEALTH CARE AND THE BUDGET: INFORMATION TECHNOLOGY 
                        AND HEALTH CARE REFORM

                                     
                                     



           Printed for the use of the Committee on the Budget

        CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2009



                                                        S. Hrg. 110-559

        CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2009

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

 January 24, 2008--THE CONGRESSIONAL BUDGET OFFICE BUDGET AND ECONOMIC 
                                OUTLOOK

             January 29, 2008--THE LONG-TERM BUDGET OUTLOOK

January 30, 2008--ECONOMIC STIMULUS: BUDGET POLICY FOR A STRONG ECONOMY 
                      OVER THE SHORT AND LONG TERM

January 31, 2008--THE LONG-TERM OUTLOOK AND SOURCES OF GROWTH IN HEALTH 
                             CARE SPENDING

  February 05, 2008--THE PRESIDENT'S FISCAL YEAR 2009 BUDGET PROPOSAL

February 06, 2008--THE PRESIDENT'S FISCAL YEAR 2009 BUDGET AND REVENUE 
                               PROPOSALS

February 12, 2008--THE PRESIDENT'S FISCAL YEAR 2009 DEFENSE BUDGET AND 
                               WAR COSTS
 February 14, 2008--HEALTH CARE AND THE BUDGET: INFORMATION TECHNOLOGY 
                         AND HEALTH CARE REFORM

          
                     U.S. GOVERNMENT PRINTING OFFICE
42-157 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

          




?

                        COMMITTEE ON THE BUDGET

                  KENT CONRAD, North Dakota, Chairman

PATTY MURRAY, WASHINGTON             JUDD GREGG, NEW HAMPSHIRE
RON WYDEN, OREGON                    PETE V. DOMENICI, NEW MEXICO
RUSSELL D. FEINGOLD, WISCONSIN       CHARLES E. GRASSLEY, IOWA
ROBERT C. BYRD, WEST VIRGINIA        WAYNE ALLARD, COLORADO
BILL NELSON, FLORIDA                 MICHAEL ENZI, WYOMING
DEBBIE STABENOW, MICHIGAN            JEFF SESSIONS, ALABAMA
ROBERT MENENDEZ, NEW JERSEY          JIM BUNNING, KENTUCKY
FRANK R. LAUTENBERG, NEW JERSEY      MIKE CRAPO, IDAHO
BENJAMIN L. CARDIN, MARYLAND         JOHN ENSIGN, NEVEDA
BERNARD SANDERS, VERMONT             JOHN CORNYN, TEXAS
SHELDON WHITEHOUSE, RHODE ISLAND     LINDSEY O. GRAHAM, SOUTH CAROLINA

                Mary Ann Naylor, Majority Staff Director

                Denzel McGuire, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
January 24, 2008--The Congressional Budget Office Budget and 
  Economic Outlook...............................................     1
January 29, 2008--The Long-Term Budget Outlook...................    53
January 30, 2008--Economic Stimulus: Budget Policy for a Strong 
  Economy Over the Short and Long Term...........................   123
January 31, 2008--The Long-Term Outlook and Sources of Growth in 
  Health Care Spending...........................................   205
February 5, 2008--The President's Fiscal Year 2009 Budget 
  Proposal.......................................................   263
February 6, 2008--The President's Fiscal Year 2009 Budget and 
  Revenue Proposals..............................................   361
February 12, 2008--The President's Fiscal Year 2009 Defense 
  Budget and War Costs...........................................   417
February 14, 2008--Health Care and the Budget: Information 
  Technology and Health Care Reform..............................   487

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Conrad.....................1, 53, 123, 205, 263, 361, 417, 487
Ranking Member Gregg....................11, 63, 132, 211, 302, 370, 492
Senator Allard...................................................   425
Senator Bunning......................................122, 200, 273, 415
Senator Enzi..............................................246, 328, 588
Senator Feingold.................................................   201
Senator Menedez................................................310, 404

                               WITNESSES

Laura Adams, President and CEO, Rhode Island Quality Institute.510, 514
Alan S. Blinder, Gordon S. Rentschler Memorial Professor of 
  Economic and Public Affairs, and Co-Director, Center for 
  Economic Policy Studies, Princeton University................135, 139
General James Cartwright (USMC), Vice Chairman, Joint Chiefs of 
  Staff, U.S. Department of Defense..............................   427
Gordon England, Deputy Secretary, U.S. Department of Defense...427, 430
Mary Grealy, President, Health Care Leadership Council.........516, 519
Tina Jonas, Under Secretary of Defense (Comptroller), U.S. 
  Department of Defense..........................................   427
Valerie C. Melvin, Director, Human Capital and Managment 
  Information Systems Issues, U.S. Government Accountability 
  Office.......................................................493, 495
Daniel Mitchell, Senior Fellow, The CATO Institute.............168, 171
Hon. Jim Nussle, Director, Office of Management and Budget.....274, 278
Peter R. Orszag, Director, Congressional Budget Office.13, 18, 213, 217
Hon. Henry M. Paulson, Jr., Secretary, U.S. Department of the 
  Treasury.....................................................375, 377
Hon. David M. Walker, Comptroller General of the United States, 
  U.S. Government Accountability Office..........................65, 73
Mark Zandi, Chief Economist and Co-founder, Moody's Economy.com, 
  Inc..........................................................151, 155

                         QUESTIONS AND ANSWERS

Questions and Answers................................253, 331, 460, 592




      THE CONGRESSIONAL BUDGET OFFICE BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                       THURSDAY, JANUARY 24, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Stabenow, Whitehouse, 
Gregg, Allard, and Crapo.
    Staff present: Mary Ann Naylor, Majority Staff Director and 
Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. We will bring the hearing to order. I want 
to welcome very much our distinguished witness, Dr. Orszag, to 
talk about the CBO outlook. We appreciate very much your being 
here and your service as the Director of the Congressional 
Budget Office. I know you have already had a chance to testify 
over on the House side and also in the Finance Committee on the 
stimulus package, so you have been very busy to start the New 
Year. But we welcome you to the Senate Budget Committee as 
well.
    Let me just go through quickly a couple of slides to put in 
perspective the circumstances we find ourselves in. We have had 
a substantial deterioration in the budget picture. You can see 
last year we had a deficit of about $163 billion. This year, 
when we take the CBO baseline and we add back war spending that 
is not in the CBO baseline and the effects of the proposed 
stimulus package, we see a deficit this year approaching $380 
billion.

[GRAPHIC] [TIFF OMITTED] T2157.016


    But that tells just one part of the story. We also see the 
debt going up substantially more than the deficit, and as I 
travel around, I find enormous confusion among the public about 
the difference between the deficit and the debt. The biggest 
difference between these figures, of course, is the Social 
Security Trust Fund money that is being used to pay regular 
operating expenses of the Federal Government. That is money 
that will have to be paid back, but it does not show in the 
deficit calculation. It is nearly $200 billion. But it is all 
added to the debt.

[GRAPHIC] [TIFF OMITTED] T2157.017


    Let's go to the next slide if we can. We look at the CBO 
deficit estimate, and we put with that the President's 
policies--that is, the extension of the tax cuts and additional 
war costs--and we see that by 2018 we would face a deficit of 
nearly $600 billion.

[GRAPHIC] [TIFF OMITTED] T2157.018


    We can go to the next slide. All of this leaves us with a 
picture of ever escalating debt. The gross debt of the United 
States was $5.8 trillion at the end of 2001. At the end of 
2009, which will be the last year that the President's budget 
will have been operational, we anticipate now the gross debt of 
the United States will be $10.3 trillion, and we are headed by 
2013 for a gross debt of over $13 trillion.

[GRAPHIC] [TIFF OMITTED] T2157.019


    Let's go to the next slide, if we can, and if we look at an 
even more extended picture, according to CBO, the Federal debt 
absolutely soars on the long-term budget scenario going out to 
2058. This is a result largely of the retirement of the baby-
boom generation and the pressure on Medicare and Social 
Security. And I hope that we will have a chance to have some 
discussion today about the absolute need to face up to these 
long-term imbalances, these shortfalls in the entitlements, and 
the disconnect between revenue and expenditure, at least 
proposed expenditure.

[GRAPHIC] [TIFF OMITTED] T2157.020


    I would like also just to put in perspective economic 
conditions that we face, the housing slump. We see that the 
sales of new family homes has fallen dramatically. We continue 
to see fallout from the subprime crisis and the other credit 
markets. We have seen certainly serious effects in the 
financial markets.

[GRAPHIC] [TIFF OMITTED] T2157.021


    This is a headline from the Financial Times: ``Fears spark 
global plunge.'' This is what happened--this is from January 
22nd. These are foreign markets. Obviously, our market 
yesterday showed a significant increase. I think we were up 
almost 300 points yesterday on the Dow. But this is what has 
been happening in other markets, the U.K., Europe, Asia.

[GRAPHIC] [TIFF OMITTED] T2157.022


    We have also seen consumer confidence deteriorate in 2007. 
The index of consumer confidence from the Conference Board has 
slumped dramatically. That is why there is the talk of a 
stimulus package, the need to do something and do it quickly.

[GRAPHIC] [TIFF OMITTED] T2157.023


    I just want to reference the Chairman of the Federal 
Reserve, who warned us that any program should be explicitly 
temporary, both to avoid unwanted stimulus beyond the near-term 
horizon and, importantly, to preclude an increase in the 
Federal Government's structural budget deficit.

[GRAPHIC] [TIFF OMITTED] T2157.024


    Finally, I would like to end on something that is 
bipartisan, at least on this Committee, and that is the 
question of a device to address these long-term imbalances, the 
shortfalls in Medicare and Social Security. That is the 
proposal that the Ranking Member Senator Gregg and I have made 
for a task force to address the long-term fiscal imbalance. A 
panel of lawmakers and administration officials with everything 
on the table, with fast-track consideration so it is not just 
another commission report that sits on a shelf somewhere but 
actually comes to Congress for a vote, and that is structured 
in a way that assures a bipartisan attention to these issues.

[GRAPHIC] [TIFF OMITTED] T2157.025


    I just want to alert my colleagues that it is going to be 
my intention to advance this proposal this year. Senator Gregg 
and I are talking about on what vehicle it would be most 
appropriate, but I want to alert staff of our colleagues who 
are here. I have been patient. I have listened very carefully 
to the concerns of colleagues. We are prepared to have some 
change in the timing of the report. We are also prepared to 
consider other constructive suggestions. But I just want to 
alert my colleagues that I am not going to allow this year to 
go by without giving our colleagues an opportunity to vote on 
whether or not we advance this proposal.
    With that, I want to turn to my very able colleague, the 
Ranking Member, the former Chairman of this Committee, Senator 
Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Senator Conrad, and, Dr. Orszag, 
it is nice to have you here today. Let me pick up where Senator 
Conrad, the Chairman, has left off on the issue of addressing 
what I consider to be--after the issue of fighting Islamic 
fundamentalism, which is a threat to us from a physical 
standpoint--the issue that I consider to be the biggest issue 
we face as a Nation, which is the potential fiscal meltdown of 
our country over the fact that we have on the books obligations 
exceeding our net worth, $66 trillion of obligations for three 
entitlement programs--Medicare, Medicaid, and Social Security. 
Our net worth as a Nation is about $52 trillion. We simply have 
to address this.
    The Bipartisan Fiscal Task Force proposal that Senator 
Conrad and I have drafted and for which there was considerable 
input from a lot of people as it evolved is a valid way to 
approach this. We have shown over time, unfortunately, that as 
a political culture we cannot address this issue by simply 
putting ideas on the table because everybody shoots at the 
ideas, especially people who like to make money by doing that 
shooting. And so the best approach, in our humble opinion, is 
to set up a procedure which drives policy, and that is what 
this proposal does.
    Obviously, any procedure, to be successful in these areas, 
because they are so sensitive to the American people and 
because all Americans are affected by them, has to be seen by 
the American people as absolutely fair and absolutely 
bipartisan. And that is why this proposal is structured this 
way.
    Interestingly enough, yesterday Republicans convened, 
Senate Republicans convened for a day-long session of sorting 
through our thoughts as we start this session, and one of the 
main considerations was a discussion of this proposal, the 
Conrad-Gregg proposal. And there was, I think, general 
agreement--although there was no formal vote taken, but there 
was general agreement within the conference, the Republican 
conference, that this was a legitimate and appropriate idea to 
proceed on and that we should be proceeding in a bipartisan way 
to try to address this. There are two of my colleagues here who 
were at that meeting who maybe can hopefully substantiate that 
as being the sense of the meeting. So that is good news, and I 
congratulate the Chairman for being willing to push this to the 
front of the agenda.
    We are here today to discuss the recent findings of CBO 
relative to our economic outlook and what is happening. I am 
interested in discussing that. Also, I am most interested, 
obviously, in the topic of the day, which is the stimulus 
package and how that will be put together and what its real 
impact is.
    On the issue of the actual numbers that we have seen on 
projecting deficits into the out-years, I just want to put out 
the caveat that the CBO numbers were done under a baseline 
which is controlled by arcane rules which do not accurately 
reflect reality in many ways. For example, there is in that 
baseline approximately $800 billion of revenue, I believe, from 
the AMT which is assumed. There is also an assumption that we 
will be doubling the tax on dividends--actually, more than 
doubling the tax on dividends for high-income individuals and 
moderate-income individuals, and that we will be doubling the 
tax on capital gains, and that as a result revenues will 
essentially be increased by trillions of dollars over the same 
period through tax increases. That may occur, but my view is 
that that is probably not an event that should be scored if you 
were looking at it in a realistic way versus subject to the 
rules of the baseline. So I do not say that in terms of in any 
way trying to throw disparagement on CBO. You have done your 
job the way you have to do it--the way we require you to do it, 
by the way--but what we are telling you to do is not realistic 
to what will actually happen on the ground over the next 10 
years. So that would concern me.
    The biggest issue that concerns me is how we put this 
stimulus package together. I readily admit--in fact, I have 
been talking about it for a long time--that we are facing an 
extraordinarily sensitive economic time and potentially a very 
severe economic event. The subprime collapse--which represents 
this year about $500 billion and next year about another $600 
billion of rollovers in mortgages, which, because of the way 
they were structured, a large percentage of them will not be 
able to be repaid by the people who borrowed the money because 
of the jump in the interest rates and the collateral underneath 
them does not support them--creates just a massive economic 
credit crunch. And that is feeding on itself right now, and I 
have been through three of these in my professional lifetime, 
and, regrettably, at one point I was Governor during the last 
major real estate meltdown. And so I think I understand how 
they work, and, unfortunately, what happens is that when you 
get into one of these contractions, you not only see the bad 
loans get called, but the good loans do not get made because 
the lenders have to build up their capital positions and, 
therefore, it feeds on itself and the whole system starts to 
contract and that causes the economy to slow down. And we are, 
regrettably, on the cusp of that occurring in a fairly 
significant way, I am afraid.
    However, we also have some good news out there. For 
example, today's unemployment numbers are very strong, 
extremely strong, and we appear to have other sectors of the 
economy which have not yet been overwhelmingly impacted by the 
housing slowdown. But they will be impacted, I suspect, by the 
credit contraction.
    And so what should we as a Government do to address this is 
the question, and the proposal that has been put forward by 
both the administration and the Democratic leadership of the 
Congress is an attempt to try to address this, and I 
congratulate them for taking that initiative. But I want to 
make sure that we put the money where we get the action, where 
we get something for it. And my concern is every dollar that we 
are going to put into this economy in stimulus is going to have 
to be borrowed. That chart that the Chairman just put up is 
going to be aggravated by it. It is going to be a compounding 
event. If we put $150 billion into this economy today, we are 
not going to pay for it. Our children are going to pay for it, 
and our children's children, and it is going to be paid for at 
a much higher price because they are going to have to borrow 
it. That compounds.
    So let's get something for it. Let's just not send 
helicopters over the country throwing cash out the door. Let's 
get something for it. So what I am going to want to ask you 
about, Doctor, is what gets us the most for those dollars. How 
do we get the most out of those dollars? And I know you have an 
opinion on that. Some people agree with it and some people do 
not, but I want to get it because you are one of our most 
professional people around here.
    I thank you for coming today, and we look forward to 
hearing from you.
    Chairman Conrad. Again, Dr. Orszag, welcome and thank you 
very much for your service at the Congressional Budget Office. 
It has been exemplary.
    Dr. Orszag.

 STATEMENT OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Orszag. Thank you very much, Mr. Chairman. My testimony 
this morning will discuss the economic and budget outlook.
    First, the economy has been buffeted by several interlinked 
shocks, and the risk of recession is significantly elevated 
relative to normal economic conditions. After a dramatic run-up 
in housing prices during the first half of the decade, as my 
first chart shows, housing prices have started to decline, and 
many forecasters expect further declines this year. The 
weakening of the housing sector directly affects the economy 
through reductions in residential investment and indirectly 
affects it by reducing consumer spending as housing wealth 
declines. Moreover, problems in the housing and mortgage 
markets have spilled over into broader turmoil in financial 
markets, which poses the risk of impeding the flow of credit 
essential to a modern economy.
    Energy prices have also increased substantially. Although 
the effect of increases in the price of oil today on the 
economy are not as large as they were in the 1970's or 1980's, 
the rise in oil prices is still an economic drag. The 
combination of these forces has not yet fully manifested 
itself, although the unemployment rate has ticked up. Indeed, 
the 3-month moving average unemployment rate is now 0.4 
percentage points higher than it was a year ago, and any time 
that has occurred in the past, it has tended to be associated 
with recessions, as you can see from that graph. The dark bars 
are recessionary periods. An increase of about 0.4 percentage 
points tends to be associated with a recession.
    On the other hand, and as Senator Gregg noted, other labor 
market indicators that have typically been associated with 
those kinds of increases in the unemployment rate in the past 
during recessionary periods are not currently occurring. For 
example, in the past, unemployment insurance claims have tended 
to rise by, say, 20 percent associated with the kinds of 
increases in unemployment rates that I show there. That has not 
occurred currently, and, in fact, if anything, initial 
unemployment insurance claims have ticked down just a bit.
    Especially with the most recent and notable action by the 
Federal Reserve earlier this week, many professional 
forecasters are projecting continued, albeit sluggish, economic 
growth in 2008 rather than an outright recession. And one 
bright spot which reinforces that view has been net exports. 
The dollar has depreciated gradually, which is part of the 
necessary adjustment to the Nation's external imbalances, and 
that depreciation of the dollar along with strong growth abroad 
has driven rapid growth in net exports, which has helped to 
stabilize, and even improve slightly, the Nation's current 
account deficit.
    The bottom line is that although the risk of recession is 
substantially elevated, CBO expects, along with most 
professional forecasters, a period of unusually weak growth 
rather than outright recession. In particular, CBO expects 
growth for the year as a whole of under 2 percent and an 
increase in the unemployment rate to 5.1 percent on average for 
the year.
    A reflection of the overall slowing of economic activity is 
seen in job growth. In 2005, jobs grew by an average of 220,000 
per month. In 2007, that fell in half to an average of 110,000 
a month. We project that it will fall in half again to an 
average of 55,000 per month in the first half of 2008.
    Let me now turn to the budget outlook. A reflection of the 
softening economy is already seen in slowing revenue growth, 
especially in corporate income taxes. And, in fact, we now have 
projections for January in which we expect corporate income tax 
receipts to be below their level of a year ago for the seventh 
month in a row. For 2008 as a whole, we are projecting a slight 
decline in corporate income tax revenue relative to the 
previous year. That is notable because, as CBO highlighted in a 
letter to Senator Conrad last year, a large share of the 
improvement in the fiscal picture between 2003 and 2006/2007 
can be attributed to a very rapid rise in corporate income tax 
revenue over that period.
    Our baseline suggests that after 3 years of reductions in 
the budget deficit, the slowing economy will boost the deficit 
this year to $219 billion, or roughly 1.5 percent of the 
economy. If policymakers provide the additional funds that the 
administration has requested for the ongoing war in Iraq and 
Afghanistan, the deficit would rise to about $250 billion this 
year. And if additional measures are undertaken as fiscal 
stimulus, the deficit could rise significantly above that, 
although I would note that would be one of the purposes of 
temporary fiscal stimulus.
    Thereafter, under the official baseline, the budget moves 
toward balance in 2012. However, as both Mr. Conrad and Mr. 
Gregg have noted, that baseline is not a prediction of the 
future but, rather, a projection of a certain set of policies 
that are embodied in current law.
    For example, as the next chart shows, the baseline assumes 
no further relief from the alternative minimum tax, and as a 
result, the AMT rises from about--affecting 4 million taxpayers 
last year to 26 million this year, and then continues to rise 
thereafter. If instead of making that type of current law 
assumption one instead continued the alternative minimum tax 
relief, extended the 2001 and 2003 tax legislation past their 
scheduled expiration in 2010, adopted our higher-cost scenario 
for the global war on terrorism, and increased the rest of 
discretionary spending in line with the economy rather than 
just in line with inflation, the outcome is substantially 
different than the baseline. As the next chart shows, indeed 
instead of a cumulative surplus of $274 billion between 2009 
and 2018, the result would be a deficit of roughly $6.5 
trillion, about 3.5 percent of the economy.
    Even over the next 10 years, furthermore, the Nation's 
long-term budget pressures begin to manifest themselves. 
Caseloads on both Medicare and Social Security are projected to 
rise rapidly as the first edge of the baby-boom generation 
becomes eligible for benefits. Social Security beneficiaries 
are projected to rise from about 50 million currently to 64 
million by 2018. Projected increases in beneficiaries account 
for about 30 percent of the growth in mandatory spending over 
the next decade. A far more important factor is the ongoing 
rise in the cost per beneficiary, especially in our health-
related programs, and you can see that the health-related 
programs grow more rapidly than Social Security does. Indeed, 
Medicare and Medicaid are projected to increase from 4.6 
percent of the economy to 5.9 percent of the economy over the 
next decade, an increase of 1.3 percentage points, while Social 
Security rises from 4.3 to 4.9, or about half a percentage 
point of the economy. And that reflects that differential 
growth rate in health care costs.
    Thereafter, under the long-term budget outlook that we 
released in December, health care costs increasingly dominate 
the Federal budget. You can see the light blue area in that 
graph, which is Medicare and Medicaid, is really the key to our 
fiscal future. If you combine that spending path with a revenue 
projection that reflects the Tax Code as it existed at the end 
of last year, you can come up with a summarized fiscal gap 
which measures the difference between projected revenue and 
projected spending. And over the next 75 years, that gap 
amounts to 7 percent of the economy. What that tells you is 
that if you want to avoid an explosion of Government debt over 
the next 75 years, you need to reduce spending by 7 percent of 
GDP or increase revenue by 7 percent of GDP. And given that 
both of those are now about 20 percent of the economy, you can 
see that those are very large adjustments that are necessary, 
and they reflect the scale of the Nation's long-term fiscal 
imbalance.
    I would just note quickly that most of that long-term 
fiscal gap is not due to the pure effect of aging and 
demographics. As this chart shows, the dark blue area there--
and also there is an interaction effect, the light blue area--
reflects the pure effect of aging and demographics. Most of the 
long-term fiscal gap, that lighter area, is not due to that 
factor but, rather, reflects things like the ongoing increase 
in health care costs per beneficiary.
    Finally, the combination of an elevated risk of recession 
in the short term and the Nation's very serious long-term 
fiscal imbalances leads me to a short discussion of fiscal 
stimulus. Last week, we submitted a report to this Committee 
and the House Budget Committee on fiscal stimulus options. Let 
me just briefly say that in a period of unusual economic 
weakness, which is unusual, the key constraint on economic 
growth is the demand for goods and services that firms could 
produce with their existing resources. By contrast, in most 
circumstances, and certainly over the long term, the key 
constraint on economic growth is the rate at which those 
resources or that capacity is expanding through increases in 
capital and labor and improvements in productivity.
    When we face ourselves with the unusual situation in which 
aggregate demand is the key constraint on economic growth, 
fiscal policy and monetary policy can help by stoking demand. 
And the key question is--we need to remember on the fiscal 
policy side the automatic stabilizers built into the budget 
will already help to attenuate any economic downturn by 
cushioning the blow in terms of after-tax income. The question 
is whether additional fiscal action is necessary.
    Our analysis suggests that a fiscal stimulus, if it were 
well designed, of roughly one-half to 1 percent of GDP or 
roughly $75 to $150 billion--and, again, I want to emphasize if 
it were well designed--could help to reduce the elevated risk 
of a recession down to more normal levels.
    The stimulus need not be targeted at the source of economic 
weakness; that is, even though the weakness started or 
originated in the housing and mortgage markets, the economic 
stimulus need not be targeted there. Instead, the key is that 
it helps to bolster aggregate demand and thereby helps to jump-
start a positive cycle of increased demand leading to increased 
production until the constraint once again becomes how much we 
can produce rather than how much we are willing to spend.
    In the report that we provided to you, we analyzed many 
more specific options, and I would be happy to answer questions 
about them. But I did want to emphasize that it is an unusual 
situation in which we find ourselves because more typically the 
constraint on economic growth has to do with the rate at which 
resources are being expanded and what is appropriate to a 
period of economic weakness is, unfortunately, often the 
opposite of what is appropriate to long-term economic growth.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Orszag follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.001
    

    [GRAPHIC] [TIFF OMITTED] T2157.002
    

    [GRAPHIC] [TIFF OMITTED] T2157.003
    

    [GRAPHIC] [TIFF OMITTED] T2157.004
    

    [GRAPHIC] [TIFF OMITTED] T2157.005
    

    [GRAPHIC] [TIFF OMITTED] T2157.006
    

    [GRAPHIC] [TIFF OMITTED] T2157.007
    

    [GRAPHIC] [TIFF OMITTED] T2157.008
    

    [GRAPHIC] [TIFF OMITTED] T2157.009
    

    [GRAPHIC] [TIFF OMITTED] T2157.010
    

    [GRAPHIC] [TIFF OMITTED] T2157.011
    

    [GRAPHIC] [TIFF OMITTED] T2157.012
    

    [GRAPHIC] [TIFF OMITTED] T2157.013
    

    [GRAPHIC] [TIFF OMITTED] T2157.014
    

    [GRAPHIC] [TIFF OMITTED] T2157.015
    

    Chairman Conrad. Thank you for that very excellent 
description.
    Let's go right to the question of stimulus and what you see 
as the need for it. You can see already people questioning 
stimulus, the requirement for stimulus. I was doing a series of 
interviews yesterday, some of them on talk radio, and it was 
very interesting the kinds of questions people raised about 
stimulus.
    First of all, the first question I got was: Gee, do we 
really need stimulus? We saw a market rebound yesterday, some 
300 points, before any stimulus package has been put in place 
but after the Federal Reserve has taken action.
    Some have said to me, you know, $140 billion of stimulus, 
which is roughly what the President is talking about, is 1 
percent of gross domestic product. One of the questions I was 
asked, what is the effect in a comparable way, of what the 
Federal Reserve has already done? Do you have any rule of thumb 
that could tell us? For example, when they reduced rates by 
three-quarters of 1 percent in an emergency meeting, is there 
any rule of thumb about what that means in terms of share of 
gross domestic product?
    Mr. Orszag. Yes. The typical rule of thumb--and there is an 
important caveat--is that a reduction of, say, 100 basis points 
could have an effect on economic activity of about 1/2 percent 
of GDP. There is a big ``but.'' The ``but'' is that the lag 
involved is typically lengthy, that is, somewhere between four 
and eight quarters. So when you reduce interest rates today, 
you are disproportionately affecting economic activity in early 
2009.
    Or it may be a slightly different situation currently. To 
the extent that part of what the monetary policy interventions 
are trying to do has to do with calming financial market 
turmoil, we have seen, in response to both interest rate 
changes and the new term auction facility that the Federal 
Reserve introduced, a very significant reduction in the 
spreads--that is, in basically the interest rates that banks 
charge each other for short-term borrowing.
    Chairman Conrad. Which had become quite large.
    Mr. Orszag. Which had become quite elevated, yes, and they 
are now back to somewhat more normal levels.
    Chairman Conrad. So let me see if I can translate this. 
Fifty basis points would translate into about 1 percent of GDP, 
but that is with a lag of four to----
    Mr. Orszag. Eight.
    Chairman Conrad. Eight quarters.
    Mr. Orszag. Yes.
    Chairman Conrad. So we are talking a year to 2 years.
    Mr. Orszag. And so the real question is: Is there an air 
pocket, especially in early 2008? And what, if anything, can be 
done in the intervening period?
    Chairman Conrad. ``Air pocket'' meaning economic weakness 
that might be somewhat offset by our providing fiscal stimulus 
in addition to the monetary stimulus provided by the Fed?
    Mr. Orszag. ``Air pocket'' meaning that most forecasters 
project very weak growth, if any growth, in early 2008. And I 
think the key question then becomes whether there is any 
additional fiscal stimulus that can be delivered in a timely 
enough fashion to affect economic activity in early 2008. And I 
think that is a very significant question.
    Chairman Conrad. Well, that is exactly the next question I 
wanted to go to. Yesterday, I was, as I indicated, doing a 
series of interviews. A talk-radio host asked me, ``Senator, 
what are the odds that this stimulus turns out to be ill-timed, 
turns out to come too late and actually becomes 
counterproductive?'' What would you say in answer to that 
question?
    Mr. Orszag. The longer you wait and the longer the 
implementation lag involved, the more risk there is of that.
    Chairman Conrad. And can you give us some rule of thumb in 
terms of time? For example, if the fiscal stimulus that we put 
in place, Congress working with the President put in place, was 
not felt for 6 or 8 months, is that within the timeframe that 
is relevant? Or is that on the brink of being too late?
    Mr. Orszag. That would be pushing it. And as you move into 
early to mid-2009, I think the risks that you are--especially 
given the impulse from the monetary policy changes that have 
already occurred, the risks that you are then being 
counterproductive go significantly up.
    Chairman Conrad. All right. Senator Gregg?
    Senator Gregg. When you say counterproductive, do you mean 
you are creating an inflation event?
    Mr. Orszag. Yes. You do not want to add demand to an 
already rapidly growing economy because all you do at that 
point is increase inflationary pressures.
    Senator Gregg. Which is a really severe event.
    Mr. Orszag. Which would be an unfortunate circumstance, 
yes.
    Senator Gregg. Second, as I understand it, you testified 
yesterday, I think, that the IRS could not get out rebate 
checks before June. That is your understanding.
    Mr. Orszag. Yes. Our information suggests that--and let me 
just explain briefly because I think the experience from 2001 
may be being misapplied. When the rebates were issued in 2001, 
the IRS had already completed, basically, the tax filing 
season. The computers and people and infrastructure that are 
used for the tax filing season unfortunately are exactly the 
same ones that have to be used in the process of issuing 
rebates. So until the IRS has completed the peak filing season 
for 2007--which traditionally would be the end of May but 
perhaps could be accelerated to mid-May--it cannot really turn 
to processing the rebates. So you are looking at the first 
checks being available mid- to late May, maybe early June, and 
then it takes 6 to 8 weeks to actually mail the checks out. And 
I would also note the evidence suggests that the 2001 rebates 
were relatively effective, but their maximum kick came after 
two quarters. So if people are receiving checks in June or July 
and then the maximal response is two quarters thereafter, you 
are affecting Christmas spending in 2008, not economic activity 
in the first half.
    Senator Gregg. Which would be well outside the window you 
just testified about.
    Mr. Orszag. That is correct. At least somewhat outside the 
window, yes.
    Senator Gregg. Now, you made an eloquent argument that the 
counterintuitive position makes sense right now, that you can 
stimulate the economy through consumption and that that is what 
you should do in the short run, as versus stimulating the 
economy through making it more productive, which is what you 
would want to do, I think, if you want to make the economy 
stronger.
    Let me make the opposite case, which is more traditional--
not necessarily more traditional because it is not accepted by 
economists, I guess, of your expertise, which is 
extraordinarily high and well admired by myself. But if we know 
the problem was the credit contraction caused by the housing 
bubble, where we know that the problem was that too many loans 
were made to people who did not have the wherewithal to pay the 
loans back under the terms of the loans because of the 
acceleration in the interest rate as a result of the ARMs, and 
that the collateral underneath the loans did not support the 
loans, and then those loans were taken, sold, resold, 
synthesized, and syndicated in a way that you basically had an 
inverted pyramid so that you had a lot of people creating a 
bubble out of the housing market, wouldn't it make some sense 
to say to the economy and to the consumer we have a housing 
problem, we are going to give you an incentive to go out and 
buy a new house, and get right to the essence of the issue 
through a tax credit on the purchase of a new house in some 
form so that basically you are picking up the cost of the 
interest and you are creating an incentive for people to go out 
and buy a house and get that inventory out of the market and 
get that part of the economy going again?
    Mr. Orszag. I guess I would say two things.
    First, many of the proposals aimed specifically at the 
housing market probably would not have that large of an effect 
even on the housing market. It depends exactly what you did, 
and it depends, for example, on your tax credit idea of what 
the parameters were and what have you. But I think more 
broadly, the point at this stage is that the concern has 
expanded well beyond just the housing market. It is like--I do 
not know. If you had a wound and your body became infected, you 
need to treat the general infection and not just the----
    Senator Gregg. But isn't the general infection the 
contraction in credit?
    Mr. Orszag. It is not just the contraction----
    Senator Gregg. And the lack of liquidity in the market.
    Mr. Orszag. That is perhaps the most salient and prominent 
concern, but it also includes consumer confidence; it includes 
the elevated energy prices, which have some drag on the 
economy. It is the confluence of those events and the combined 
impact on aggregate demand at this point.
    Senator Gregg. Well, I appreciate that, but I guess my 
point is if you simply give everybody in America who paid taxes 
an $800 or a $600 check for a one-time consumption event, which 
may occur outside the window of the severity of the problem. 
You are basically adding to the debt, so it is going to have to 
be paid through debt financing, so you are going to create an 
out-year problem of debt. You may be creating an inflationary 
event. And you are probably not doing a lot to get to the 
underlying productivity of the economy.
    Do you solve the confidence issue by doing that? The 
confidence issue seems to me to be resolved when the markets 
feel that the underlying problem has been made transparent so 
that they can evaluate what it really costs and then they have 
adjusted to it. That is happening now, hopefully, and the Fed 
is reacting. But I am not sure that a stimulus package that 
simply puts money into the economy through consumption which 
may occur after the framework of the problem will do anything 
other than say that the Government reacted. It will not solve 
the problem. I do not think that does a lot for confidence.
    Mr. Orszag. Let me try to answer that in two different 
ways.
    First, on the housing market, we have to realize that part 
of the issue here is that through a confluence of events, 
including very low interest rates, including perhaps lax 
regulatory standards and expectations of ongoing price 
increases, a series of developments occurred that are difficult 
to now clean up after the fact. So even a tax credit is not 
going to--or even trying to bolster demand for housing 
temporarily or even over an extended period of time is not 
going to jump-start immediately a housing market that has some 
adjustment that has to happen. And, in fact, you could argue 
that trying to prevent that from happening will just prolong 
the pain that is necessary to work off imbalances that 
occurred.
    I would also just come back to one should not expect a 
temporary fiscal stimulus to be a panacea. Even with an 
effective stimulus package, it is possible, perhaps even 
likely, that economic activity will be sluggish for some period 
of time.
    Senator Gregg. But under the structure that is being talked 
about here, where most of this stimulus goes to consumption 
that is most likely going to occur outside the window of the 
slowdown issue, isn't the real exercise of the stimulus package 
to show that the Government reacted and create confidence?
    Mr. Orszag. Well, what I wanted to get to is whether there 
are--I still think there are options that could act more 
quickly. They may not be the ones that are featured in the 
discussion, but a real question----
    Senator Gregg. Well, give us your top three. I would be 
interested in your top three.
    Mr. Orszag. Fastest spendout would include--from my 
understanding, unemployment insurance benefits and food stamp 
benefits would spend out--would start spending out within 2 
months.
    Senator Gregg. Unemployment insurance benefits in a time of 
full employment, is that really a good idea?
    Mr. Orszag. It depends what your objective is. Again, if 
the objective is to spur spending, unemployment insurance 
benefits will spur spending because the people who receive them 
tend to spend the vast majority of them. So unemployment 
insurance benefits being extended or expanded are a way of 
getting money out the door fast and having it spent rapidly. 
But I think they also underscore this tension between this 
unusual short-term weakness and what might be appropriate there 
and long-term economic performance.
    The evidence does suggest that especially during periods of 
economic strength, extending unemployment benefits or raising 
their level has some adverse effect in terms of lengthening the 
spell of unemployment.
    Senator Gregg. It reduces productivity.
    Mr. Orszag. It increases unemployment levels, at least. 
That effect, by the way, it is not clear it actually occurs to 
the same degree during these unusual periods of economic 
weakness. So the question is: Are you trying to, again, do this 
quick jump-start, or are you thinking about longer-term 
structural----
    Senator Gregg. I know we have Senator Allard here and he 
has some questions, but I want to come back to that point. I 
have always thought any unemployment expansion should be tied 
to a trigger. But----
    Chairman Conrad. If I can just interrupt, Senator Allard, 
if you would not mind, we have just had breaking news here that 
would go to this question. We have just been told the AP is 
reporting now there is an agreement on a stimulus package, and 
the elements of the stimulus package do not include food stamps 
or unemployment benefits. Those have been left out, according 
to this AP report, that it is a rebate from $300 up to $1,200 
for a family of four, would apply to people who paid payroll 
taxes but not income taxes, as well as those who pay income 
taxes, would be limited to individuals earning $75,000 or less 
and couples with incomes of $150,000 or less. People would have 
had to have earned at least $3,000 in 2007 to receive the 
rebates.
    The business package is much larger than previously 
discussed, some $70 billion. The business tax portion would 
give businesses incentives to invest in plant and equipment, 
give small businesses more generous expensing rules, and allow 
businesses suffering losses now to reclaim taxes previously 
paid.
    So that is the outline, according to the Associated Press, 
of the agreement----
    Senator Gregg. Can I ask you a question? Did you say it was 
coming out of payroll taxes?
    Chairman Conrad. No. It was----
    Senator Gregg. Is there a payroll tax holiday here?
    Chairman Conrad. It is to provide a rebate to people who 
have not only income tax liability but payroll tax liability. 
That is, again, according to the AP's report.
    Senator Allard? And thank you for your courtesy, Senator 
Allard.
    Senator Allard. You bet. Thank you.
    In 2003 when we actually increased the expensing for small 
business, I talked to Alan Greenspan, at that time Chairman of 
the Fed, and I made the comment to him, that, I think one of 
the greatest drivers to get our economy going is the increased 
expensing for small business, because that is where you get 
your innovation, that is where you get new job creation. And I 
think I am pleased to hear that this proposal has increased or 
sustained those expensing provisions. And he happened to agree, 
by the way. He said nobody has been talking about how 
increasing the expensing provisions has driven the economy in a 
positive direction. But he felt like it had a `pro' kind of 
impact.
    I would appreciate your comments and feeling on that 
because that is part of what has just been announced by the 
media. So go ahead and comment on that, if you would.
    Mr. Orszag. Sure. Let me comment both on the Section 179 
small business expensing and also the bonus depreciation 
provisions that were included in legislation in 2002 and 2003.
    The theory here, especially for temporary changes in those 
kinds of provisions, is very strong in the sense that you 
create an incentive for firms to do more investment today, 
maybe some that they were planning on doing in 4 or 5 years, do 
it today instead to capture a more substantial tax incentive.
    At least with regard to the bonus depreciation provisions 
that were appropriate for many larger businesses, too, the 
results from 2002 and 2003 were not as auspicious as we had 
hoped. So we have a really good theory. The most recent 
experience was not as promising as one would have hoped for, 
and that led us in our report to conclude that this would have 
a kind of medium effectiveness, in part because the most recent 
experiment or experience was not as strong as we would have 
hoped.
    Senator Allard. Well, of the things that we did, what did 
you think did the most to stimulate the economy?
    Mr. Orszag. Per dollar, it looks like the rebate that was 
advanced in 2001 turned out to be the most effective. Per 
dollar?
    Senator Allard. Long term?
    Mr. Orszag. No, no. I should back up. This entire 
discussion--or from my end, this entire discussion is in terms 
of short term.
    Senator Allard. Short term.
    Mr. Orszag. Aggregate demand, and those are much different 
considerations than long-term growth.
    Senator Allard. Were your comments on expensing and the 
other provision, was that long-term or short-term discussion?
    Mr. Orszag. It was short term, although the same 
considerations there would apply to long term. The question is 
how much kick you are getting.
    Just briefly, there is some ambiguity, but studies that 
looked at the bonus depreciation provisions before, during, and 
after, you would expect the largest response for long-lived 
assets because if you were under previous law allowed to 
depreciate something over 20 years and all of a sudden you are 
allowed to expense or depreciate a lot more of it up front, 
that is a much larger change than for a 3- or 5- or 10-year 
property. And there is some ambiguity about whether we even got 
the response in terms of investment classes, that is, whether 
the longer-lived assets disproportionately responded. In any 
case, even the studies that found that that did occur suggested 
that the aggregate impact was small.
    Senator Allard. The fact that we sunsetted that in 10 
years, you know, if it is a long-term benefit, you whack off 
your long-term benefit when you do that. Is that correct?
    Mr. Orszag. Again, it depends what your objective is. If 
you want to spur short-term investment----
    Senator Allard. No, I am talking about long term.
    Mr. Orszag. Long term.
    Senator Allard. Yes.
    Mr. Orszag. Long-term investment, you can argue that more 
permanency is beneficial. But if you are trying to accelerate 
things into the short term, actually having it be temporary is 
beneficial because firms then say, oh, something I was going to 
do in 5 years might as well do today to capture this benefit.
    Senator Allard. Well, you know, I am of the view with many 
people that there has to be an adjustment in the markets. I 
mean, obviously, there was a lot of willingness to move into 
buying a home with the assumption that the growth in value was 
always going to be there year after year. And, realistically, 
that does not happen where you have a capital market.
    Is there anything other than perhaps a tax credit for 
buying new homes, which would tend to cut down your inventory 
on homes that would be coming on, is there anything that you 
see where we could target the problem where it originated, 
which is out of the housing market and the subprime loan area?
    Mr. Orszag. The final section of our report to the 
Committee on stimulus options had to do with options in the 
housing and mortgage market area. I would just note a lot of 
them--there is no clean, you know, perfect solution here. 
Again, imbalances built up, and trying to come in after the 
fact and kind of clean up is very difficult. So they all have 
both pros and cons. There is nothing that sort of stands out as 
an elixir.
    Senator Allard. It seems to me that we can be thankful that 
we have allowed for the securitization of these loans, which 
has spread risk. If we had not done that, I think we would be 
in a worse problem today than we are. But with the 
securitization, we spread the risk. In fact, we spread it 
beyond the borders of the United States. But I guess the 
downside is you do have not only an impact on our economy here, 
but you have a worldwide impact, and other countries do not 
have the flexibility to adjust, I think, that our economy does.
    Go ahead. I know you are anxious to comment.
    Mr. Orszag. Oh, no. I was just going to say I agree. 
Securitization is very beneficial in spreading risk, and that 
is a wonderful innovation and very important to our financial 
markets.
    On the other hand, the securitization process may have 
played some role in the situation that we currently find 
ourselves, both because originators may not have had adequate 
incentive to take care in originating loans, and also because 
securitization complicates the renegotiation of mortgages. The 
traditional model where you sat down with your banker and said 
here is what happened and you sort of work out a deal to 
renegotiate the mortgage is difficult when there are thousands 
and thousands and thousands of people or investors owning bits 
of your mortgage.
    Senator Allard. Yes. What about the regulatory environment? 
You know, it seems to me that we are getting pretty heavy on 
the regulatory side and making it much more difficult for 
companies to produce and create jobs because of the regulatory 
environment. Do you think the regulatory environment now is at 
a point where it is having a noticeable effect on the economy?
    Mr. Orszag. Well, I mean, in general, relative to, say, the 
1960's and 1970's, the regulatory environment has moved toward 
a more flexible and more market-oriented structure. And 
certainly relative to other, especially continental European 
countries, we have a more market-oriented system of 
regulations. But it really depends on what you----
    Senator Allard. In the United States.
    Mr. Orszag. It really depends on what you are comparing it 
to, and I think we are learning to apply the insights from 
market incentives to a broader array of regulatory matters so 
that you can accomplish your public policy purposes as 
efficiently as possible.
    Senator Allard. Well, one of the things I am looking at, 
when you presented your chart there on the accelerated costs of 
health for Medicare and Medicaid, you said a certain portion 
was demographics. The other portion was the cost of Medicare. 
The big impact of that is regulation. You know, you use a lot 
of hazardous materials in medicine, and so we have applied a 
lot of regulations and rules on the way we manage our hazardous 
materials for laboratory tests, in products that we use for 
medicine. They end up in machinery and the stuff that you use 
in medicine such as X-ray machines and all the other machines 
that we have now. And so I do not think a lot of people in 
implementing those stop to think of what the end impact may be 
on some industry that provides a vital service that Americans 
have considered No. 1 in priority, and that is health care.
    And so that is what brings up that question, and you may 
not want to comment on it, but I think it is worth some 
discussion.
    Mr. Orszag. Well, Senator, I understand. I think I may be 
appearing before this Committee next week to talk about rising 
health care costs, so we can have an extended discussion next 
week on those topics.
    Senator Allard. Yes, because there are built-in things that 
we--well, energy is another area, and it is a fundamental area. 
When you have cost growth, it affects everything. And you get 
an area like medicine, you use a lot of energy, too. In the 
hospitals the lights are on 24 hours a day, equipment is on 24 
hours for monitoring and everything like that.
    Mr. Orszag. I look forward to that.
    Chairman Conrad. Let me just say I was just in the hospital 
several nights with my daughter who had an appendectomy and 
spent all night in the hospital, and they do keep the lights on 
through the night.
    [Laughter.]
    Chairman Conrad. I found that out.
    Senator Murray.
    Senator Allard. By necessity.
    Senator Murray. Well, Mr. Chairman, thank you. Thank you 
very much, and I apologize for being late. I had three hearings 
at the same time this morning. This is obviously a very 
important one. I had a number of questions about the short-term 
economic stimulus. I understand you just announced that there 
is some kind of deal, and many of those questions have been 
covered so I will not dwell on that too much.
    I did want to ask you one question regarding short-term 
economic stimulus. It is an issue that I have been looking at 
very closely, and that is the issue of what is called the 
Summer Jobs for Youth program that helps bring some money into 
the economy quickly, clearly helps businesses with getting some 
workers, solid workers, but has an additional impact of giving 
skills to young people when we have a rising number of young 
people that cannot get into the work force. And the 
unemployment rate for African Americans 16 to 19 years old has 
increased last month just by 5 percent, and the unemployment 
rate for all teens rose to 17 percent, up from 13 percent a 
year ago.
    So I just wanted to ask you that one small question, do you 
agree that putting some money into a summer youth employment 
jobs program would help bring some stimulus to the economy?
    Mr. Orszag. Well, I think two things. First, let me just 
underscore that there are significant problems and challenges 
associated with unemployment rates and lack of labor force 
attachment among teenagers and the serious long-term 
consequences that can flow from that. But we might want to 
think about programs like that in the camp of sort of long-term 
economic performance, and the question becomes whether you can 
effectively and efficiently dial that program up in a short 
period of time to deliver stimulus in the near term, and I 
think that is a little less clear.
    Senator Murray. Right. And we do already have a WIA, 
Workforce Investment Act, program that gets those dollars out 
to the communities. It is already there. Beefing it up will, I 
think, make a tremendous impact. I know it is not short term. 
It is like next summer. But even the rebate checks that we are 
talking about will take several months to enforce and get out 
into the economy.
    Let me go back. You know, one of the reasons we are 
considering this economic stimulus package, the crisis everyone 
is talking about, is the issue of the rising foreclosures, 
particularly in the subprime market, and major writedowns on 
the subprime-backed securities in the financial sector that 
have sort of led to this crunch in the credit market.
    Some people are talking about raising the conforming loan 
limit that is set at $417,000 as sort of a means of providing 
liquidity into the market. Do you believe a temporary increase 
in that conforming loan limit would be helpful?
    Mr. Orszag. It depends what else was done, and it depends 
in what part of the market. We have experienced some difficulty 
in the so-called jumbo market, above those conforming loan 
limits, as a spillover from other problems in the mortgage 
markets. Raising the conforming loan limit would tend to help 
bring down rates, especially on jumbo, that is, mortgages that 
are above the conforming loan limit. But it also depends on 
whether you are changing the overall limits on the portfolios 
that the GSEs--Fannie Mae and Freddie Mac--are allowed to hold. 
If you just raise the conforming loan limit and do not change 
the aggregate amount of mortgages that they are allowed to 
either securitize or hold on their own books, you are then just 
merely shifting things around from one part of the market to 
another. If you temporarily raise the limits, the issue then 
becomes whether you are concerned about increased risks 
associated with those entities.
    Senator Murray. So do you think it is a good idea or not?
    Mr. Orszag. Oh, I am not allowed to say things like that 
anymore.
    [Laughter.]
    Senator Murray. OK. Well, what other actions do you think 
we should consider to help provide liquidity into the markets 
and bring some stability to the housing market?
    Mr. Orszag. We go through a whole variety of options in the 
back end of the stimulus report that we provided to the 
Committee. And as I indicated earlier, the problem at this 
point is there is no perfect solution. A set of imbalances 
arose for a variety of reasons, and it is a mess now. And 
cleaning up a mess is difficult, so----
    Chairman Conrad. Messy.
    Mr. Orszag. It is messy. And I cannot give you, you know, 
one option that just clearly stands out as having benefits that 
far surpass potential costs because everything, unfortunately, 
has both costs and benefits in that area. I do not have an 
elixir here.
    Senator Murray. OK. Well, we are talking about a short-term 
boost to the economy. What actions do you think we should be 
looking at for a longer-term stability and boost to the 
economy?
    Mr. Orszag. Longer term, the key issues facing the economy 
involve things like our significant fiscal imbalance, and 
especially bending the curve on health care costs so that we 
are not only avoiding a very rapid increase in expenditures, 
but also getting more for our health care dollars. There is a 
lot more value and efficiency that we can get out of the money 
that we are putting into health care.
    Relatedly, raising our Nation's national saving rate is 
essential over the long term because we cannot continue saving 
just 1 or 2 percent of our income. That is something, again, I 
want to emphasize long term. We do not want to be doing that 
right now because it would exacerbate the economic downturn. 
Part of that has to do with increasing household saving, and I 
think there are things that have now been shown to really work 
in terms of boosting both retirement and other saving for 
households, mostly by making saving more automatic and easier 
for households to do.
    Beyond that, we can keep going down the list, but we have--
--
    Senator Murray. What about investment in infrastructure?
    Mr. Orszag. Investment in infrastructure is part of the 
physical capital that helps to improve productivity, and I 
think there are questions both about the amount of 
infrastructure investment that we are undertaking over the long 
term, and also how we are allocating and pricing the 
infrastructure that we currently have. So a question not only 
about how much, but also where and how well we are using what 
exists.
    Senator Murray. OK. Well, thank you very much, Mr. 
Chairman.
    Chairman Conrad. Thank you, Senator Murray.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Mr. Chairman.
    Mr. Orszag, welcome back. I understand that we will be 
having a health care-specific budget hearing shortly, so 
although that is my favorite and constant subject, let me ask 
you, since we are in the arena now of stimulus packages, you 
point out in your written testimony that the enactment of a 
stimulus could further increase the projected deficit for 2008. 
The hope of a stimulus package would be that it would be 
helpful to boost consumption and GDP. Do you believe that the 
revenue generated by a carefully crafted stimulus could cancel 
out that cost over the 10-year horizon?
    Mr. Orszag. The revenue generated by effective stimulus, 
because the stimulus would then boost economic activity, could 
offset part but not all of the cost. A rough rule of thumb--and 
I want to again say we are now entering a round that in 
official scoring CBO does not undertake, but a rough rule of 
thumb is that each additional dollar of economic activity 
generates roughly 20 cents in revenue. We have said that an 
effective stimulus could generate roughly an extra dollar of 
economic activity for each dollar of budgetary costs. So if one 
wanted to go down that path of figuring out what the net impact 
is, you could shave something like 20 percent off the budget 
cost, if it were well designed and you wanted to incorporate 
that revenue feedback effect. But, again, I want to emphasize 
in official scoring that is not done.
    Senator Whitehouse. And in terms of the quality of design, 
in terms of the effectiveness that you have described, how 
would you rank income tax rebates, unemployment compensation 
extensions, and food stamp provisions along that, by those two 
benchmarks?
    Mr. Orszag. All of them rank high in terms of their cost-
effectiveness; that is, the extra consumption or demand that 
you get per dollar of budgetary cost, especially on the rebate, 
if it were tilted toward liquidity-constrained and lower-income 
households.
    There is, however, a difference in terms of timing. We 
indicated in our----
    Senator Whitehouse. Could I interrupt you and ask you to 
define a liquidity-constrained----
    Mr. Orszag. Sorry. A household that has difficulty 
borrowing. So the evidence, for example, from the 2001 tax 
rebate suggested that households with lower credit limits were 
those who had exhausted a larger share of their credit limit.
    Senator Whitehouse. Would that correlate to family income?
    Mr. Orszag. It does not always, but disproportionately 
lower-income households tended to spend more of their rebate 
ultimately than households that did not face those kinds of 
borrowing constraints.
    Senator Whitehouse. OK. Sorry to interrupt.
    Mr. Orszag. But that is the logic for why tilting a rebate 
toward lower- and moderate-income households tends to get you 
more kick in terms of immediate spending.
    There is, however, a difference between the--the 
unemployment insurance benefits and food stamps benefits 
similarly will rank high because any money that you pump out 
the door will likely get spent, to a large degree, and result 
in additional consumption. There is, however, a difference in 
terms of timing. The length of lag from the enactment to the 
actual stimulus we said for a tax rebate is medium, and I can 
define medium more precisely in a second; whereas, for 
unemployment insurance benefits and food stamp benefits, it is 
short. So there is a difference in timing. We expect that after 
enactment, food stamp benefits and unemployment insurance 
benefits could start to affect spending within, say, 2 months; 
whereas, under a rebate, because of where the IRS is 
currently--where it currently is in the tax filing season and 
because the response to a rebate seems to lag by a quarter to 
two quarters, you are going to be disproportionately affecting 
spending basically at the end of 2008. And that may well be 
outside of the window of economic weakness that you want to be 
targeting.
    Senator Whitehouse. In addition to the question of 
effectiveness and in addition to the question of timing, is 
there also a question of multiplier effect depending on what 
goods are likely purchased with the stimulus funds? For 
instance, since food is fairly likely, particularly if the 
income level is affected by food stamps, to be American 
produced, is there a multiplier effect from that versus 
somebody with a higher income buying a made-in-China television 
that has bounced once in a low-margin, big-box American company 
before it moves into the hands of the consumer?
    Mr. Orszag. There could be differences. I would say in 
general the type of spending that is induced probably is less 
important than the aggregate amount that you do. But you are 
right that to the extent the response is disproportionately 
consumption of imported goods, you do not get as much impact on 
domestic production as if it were domestically produced goods.
    Just in general, those ratios do not tend to vary so much 
across broad categories of spending that it is a first--of sort 
of primary importance. But you are right that there could be 
differences.
    Senator Whitehouse. I think my yellow light is on so I will 
not trespass on the red light, and I will yield back my time. 
Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Whitehouse.
    I would like to go back to this question of timing because 
it is very, very important, I think, to an analysis of how 
effective this stimulus package might be. What I heard you say 
was that the IRS, given its position in the filing cycle, will 
not be able to send out checks until the May timeframe. Is that 
correct?
    Mr. Orszag. Well, more precisely, and again, I do not--this 
is the information that we are being provided with, and I am 
under the impression that even extraordinary efforts would not 
change the basic facts. The IRS would be able to process the 
rebate amounts by mid-May at the earliest, maybe beginning of 
June. Technically, the checks are then sent out by FMS, the 
Financial Management Service, and that process takes 8 to 10 
weeks. So----
    Chairman Conrad. Eight to 10 weeks. So now we are talking 
mid-July.
    Mr. Orszag. Until all of the checks are out, yes.
    Chairman Conrad. So we are talking about June-July, the 
checks actually go out. Somewhere in this mid-June timeframe, 
mid-July. Correct?
    Mr. Orszag. I think that would be the most reasonable 
estimate.
    Chairman Conrad. Then, as I heard you say, the analysis of 
what happened in 2001 indicated that the economic effects of 
that were not felt--or the biggest part of it--for one to two 
quarters. Is that correct?
    Mr. Orszag. Yes. And, in fact, just coming back to the 
discussion before about households with credit card debt, it 
looks like what happened initially was people 
disproportionately brought down----
    Chairman Conrad. Paid down debt.
    Mr. Orszag. They paid down their credit card debt during 
the first quarter, and then it is like they realized, ``Oh, my 
credit card debt is down, I can go out and spend.'' And they 
brought their credit card debt back up, which means they 
ultimately did spend most of the money. But it took some time. 
They initially responded by buying down some of their credit 
card debt.
    Chairman Conrad. So we are really talking about the effects 
of these rebates that have been discussed in the Associated 
Press story about the potential agreement, that the economic 
effect of those not being felt until December, January--
December of this year, January of next year.
    Mr. Orszag. If you were worried about Christmas spending 
this year, this would be a particularly effective approach to 
adopt.
    Chairman Conrad. Well, that strikes me as kind of missing 
the ball game myself.
    Now, let me ask you this: The 2001 rebates were different 
than these rebates.
    Mr. Orszag. Yes.
    Chairman Conrad. The 2001 rebates only went to those who 
paid income taxes. These rebates are more targeted. They are 
going to people who paid payroll taxes as well as income taxes, 
and they are, as I understand it from the press reports, going 
to couples earning less than $150,000 a year.
    Do we have any picture from 2001 on lower-income people 
using that money more quickly than higher-income people?
    Mr. Orszag. Well, what we have is only among those 
recipients of the 2001 rebate, which, again, did not----
    Chairman Conrad. But we would have--but those are only 
income taxpayers.
    Mr. Orszag. Right.
    Chairman Conrad. I understand.
    Mr. Orszag. But as you go down the----
    Chairman Conrad. This is income taxpayers and payroll 
taxpayers, but among income taxpayers, did those of lower 
income spend this money more rapidly?
    Mr. Orszag. I do not think we can say that, and indeed, 
again, among those who had higher credit card debts, the 
response tended to be to initially buy down credit card--I 
brought all the studies with me. I can check that in a moment. 
But, in general, I do not think you should necessarily expect a 
much different response in terms of timing, just because you 
are including those who have payroll tax liabilities but not 
income tax liability.
    Chairman Conrad. Let me say that would be counterintuitive 
to me. I would think somebody that is more hard pressed gets a 
check that they are more likely to do something or that----
    Senator Gregg. He is saying they are going to pay down 
their credit card.
    Chairman Conrad. Yes, I understand they are going to pay 
down their credit card initially, but then they are going to 
spend it in the second quarter.
    Mr. Orszag. Right, and they tend to spend--let me be clear. 
They tend to spend more of it ultimately, but your question was 
do they--whatever they ultimately do, does more of it happen 
rapidly? And I do not think we have evidence of that, but I 
will check.
    Chairman Conrad. Right.
    Senator Stabenow?
    Senator Stabenow. Mr. Chairman, I apologize for being late. 
I was in the Finance Committee. But it was a very interesting 
testimony from two economists: Dr. Martin Feldstein, who was 
President Reagan's Chairman of the Council of Economic 
Advisers, and Dr. Jason Furman from President Clinton's 
administration. And what was interesting--and it leads into 
this discussion right now--is how much they were saying the 
same thing. And it was the same thing we have heard from CBO. 
Both of these economists agreed that we should be stimulating 
the economy by increasing food stamps, and they disagreed on 
unemployment insurance, but on food stamps they agreed that the 
quickest way was to put money in the hands of those who will 
immediately go to the grocery store and buy food for their 
families.
    There was also a very interesting debate among colleagues 
on the other side of the aisle who were arguing for more supply 
side tax cuts, and Dr. Feldstein, again, coming from the Reagan 
Council of Economic Advisers, indicated he felt this was a 
demand issue, not a supply issue. And there was amazing 
agreement that we ought to be focusing on demand, which is, in 
fact, putting money in the pockets of people who have been 
unemployed or losing their income or find themselves--who 
basically we know to be the people squeezed, middle-class 
people squeezed economically right now.
    So I share that because I think having heard last week from 
Dr. Orszag and then this week from two other economists, it was 
an amazingly uniform message, even though some of the pieces 
were different. And I am very disappointed in what I am reading 
so far of what the agreement is in the House because it does 
not address what--if I remember correctly--and I apologize for 
not coming in, again, for your presentation, Dr. Orszag. But 
having heard it in Finance, if I remember correctly, food 
stamps and extending unemployment compensation were the top two 
ways in which you suggested we could get the most immediate 
bang for the buck, as it were, in terms of the least risk and 
the most impact. Is that correct, in terms of economic 
stimulus?
    Mr. Orszag. Yes. The impact is similar to a rebate in terms 
of dollars spent, but the effect tends to be quicker because 
you can get money to recipients faster.
    Senator Stabenow. Mr. Chairman, I would just raise one 
other issue that I hope we will have on the table in the Senate 
as well. There is no question there will be pieces focused on 
business, and we can debate, you know, issues of bonus 
depreciation or what is the quickest way to stimulate the 
economy. But we do know that when we look at something like 
bonus depreciation, the States lose revenue as a result of 
that--in Michigan, it is about $150 million lost in tax 
revenue--at the same time that cash-strapped States are finding 
more people going on Medicaid and needing more social services.
    I would hope that we would do what was done in 2003, which 
is include a temporary increase in match for Medicaid. There 
was a $20 billion economic stimulus piece for States in the 
2003 package, and I know, Dr. Orszag, you had recommended that 
just general support for States was not particularly effective 
as a stimulus. But to the extent that we could target it, that 
would be more effective. Is that correct?
    Mr. Orszag. The States are in much different fiscal 
conditions, and the impact from providing relief to the States 
depends on what they do with the money. If it just winds up in 
a rainy day fund because the States have a decent fiscal 
position, you are not doing much in terms of stimulus.
    Senator Stabenow. Right. But if we can focus it on those--
because right now we have a number of States that have 
announced they are going to be cutting Medicaid, so we have 
people who will be losing their insurance. So if we can stop 
that, that, in fact, would assist in what we are trying to do.
    Mr. Orszag. Yes. If you can target fiscal relief on the 
States and local governments that are having difficulty and 
that would otherwise be cutting spending or raising taxes and 
then by providing them relief they do not, that is effective 
stimulus. The Government Accountability Office, I think last 
year or the year before, came out with an analysis of ways of 
trying to do that through changes in local and State 
unemployment rates. And there are other ways of trying to 
target it more efficiently also.
    Senator Stabenow. Thank you. Well, I would hope as the 
Senate works its will that we will add to the package that 
appears to be coming from the House and focus on the issues 
that there is broad support for in terms of truly stimulating 
the economy, which is unemployment compensation, food stamps, 
and hopefully adding support for States directly as it relates 
to Medicaid as a part of the balanced approach that we come up 
with.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Stabenow. I would just 
say that we have some additional details coming in at the 
moment that indicates there is a housing piece to this, 
increasing the loan limits for FHA and for Fannie Mae and 
Freddie Mac--for FHA from $362,000 to $725,000, and for Fannie 
Mae and Freddie Mac from $417,000 to $625,000. So these are 
additional details that were not included in the previous 
story.
    Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman. Obviously, we do 
not have the specifics of this proposal, but as you look at the 
proposal as it has been outlined by the Chairman, what is your 
reaction relative to its ability to infuse consumption dollars 
into the economy--because you believe that is what we need--
into the economy in the next two quarters, which is the period 
where you said there is a window of softness?
    Mr. Orszag. Again, I do not have the details, but the 
general structure of the proposal seems like it would rank 
relatively well from a perspective of bang for the buck. But 
the question is when the bang occurs, and I think there are 
issues surrounding the timing involved, especially on the 
rebate side, which sounds like it may be, you know, the biggest 
single component of the proposal.
    Senator Gregg. I think that was my question. I appreciate 
that your answer was not as precise as I might like, but let me 
try to get a more precise answer. In the next two quarters, 
including this quarter as the first quarter, and the next 
quarter being the quarter that ends in the beginning of the 
summer, would this proposal give you the bang for the buck?
    Mr. Orszag. It sounds like you would not--most of the 
stimulus would not be delivered during that period of time.
    Senator Gregg. Actually, if you--OK.
    Mr. Orszag. Could I quickly add on the response--because I 
think this is an important question--on the response of low-
income households, that I was able now to look these up. It 
depends on whether we are looking at households that are 
credit-constrained or low-income households. The credit-
constrained households do not seem to--the time pattern does 
not seem to be that different. It is just kind of scaled up. 
The evidence on low-income households does seem to suggest that 
more of the response is up front than medium or typical 
households.
    Chairman Conrad. I should have been an economist.
    Mr. Orszag. There you go.
    [Laughter.]
    Senator Gregg. This idea that you get more for the food 
stamp dollar, I want to get to the point that Senator 
Whitehouse was making. Where does the dollar of consumption go? 
And you seem to feel that it did not matter. If you give 
somebody $800 or $600, or whatever this works out to, and they 
go out and consume and they buy a product which is not made in 
the United States, what is the value that is added to the 
American economy that causes you to say that that energizes 
economic stimulus here?
    Mr. Orszag. To the extent that the additional consumption 
comes in the form of imports, it does not add directly to the 
demand for domestic production. My point was just that the 
share of imports in general, if you are thinking about 
providing food stamp benefits--well, food stamp benefits----
    Senator Gregg. Well, I do not want to take food stamps. 
They are an agricultural product, and it just becomes another 
farm bill. But----
    Mr. Orszag. I guess my point was just that----
    Senator Gregg. Six hundred dollars----
    [Laughter.]
    Senator Stabenow. And what is wrong with that?
    [Laughter.]
    Senator Gregg. I am talking about a $600, $800 rebate check 
that is not tied to any specific spending program. The person 
gets the check, they pay down their credit card, or they go out 
and they buy a product; and if the product is manufactured 
outside the United States, what is the economic stimulus?
    Mr. Orszag. There is none there, and my only point was that 
across broad categories of goods, the variation in the share of 
imports, while it is there, it is not large enough to think 
that we should be targeting specific categories of spending. It 
is just--food stamps may be a particularly viable--or may work 
better from that perspective than other things. But if the 
question is should we worry about where people spend the money, 
in general I am not sure that that is a productive undertaking, 
because in general, the share of imports in consumption is 
small enough that most of the bang will spill over into 
domestic production. It does not hold universally across all 
categories of goods.
    Senator Gregg. That is a statement which I hope is correct, 
but I am not sure that I intuitively think it is, because if 
you are buying a product or an item that is in that price 
range, which is not going to be a house or something that is 
fairly large--you are buying basically a durable good. You are 
buying a television, a dishwasher, or something in that range. 
What percentage of those types of items are imported versus 
domestically produced? Do we have any numbers on that?
    Mr. Orszag. Yes. But I am not sure that we should accept 
the premise, which is the response to the 2001 rebate suggested 
it was not just that kind of thing, but also increased 
consumption of, you know, going out to restaurants, apparel--I 
mean, there are a whole variety----
    Senator Gregg. What percentage of apparel is American 
manufactured?
    Mr. Orszag. I do not have an exact percentage, but----
    Senator Gregg. Low.
    Mr. Orszag. Low. ``Low'' would be a good characterization.
    Senator Stabenow. If I might just interject for my friend 
there, I would be happy if we would target that to American-
made automobiles.
    Senator Gregg. I know.
    [Laughter.]
    Senator Gregg. I have no problem with that. That means we 
would be buying more automobiles made in Tennessee or South 
Carolina.
    Mr. Orszag. Well, let us pause on apparel for a second 
because it did seem like the response to the 2001 rebates 
came--I mean, you have to be careful because the data are a 
little slippery here--came disproportionately in that category. 
We do need to remember that, you know, part of the price of 
apparel here is not just the cost of the good itself but, 
rather, also the value-added and the retail----
    Senator Gregg. Right. I understand that----
    Chairman Conrad. Can I just say that the Chairman deems 
that the time of the Senator from New Hampshire has expired.
    Senator Gregg. I am just getting into the agriculture.
    Chairman Conrad. Even though let me just say it cost him 1 
minute of his time to make this crack about the farm bill.
    [Laughter.]
    Senator Gregg. I do want to go back, though, to this 
question of whether under this stimulus package as presented we 
are going to get it into the two quarters that we presume are 
going to be the most problematic or is it going to be outside 
those quarters and toward the end of what we can see is the 
problematic period. Shouldn't the stimulus package therefore 
take on more of a personality of being a long-term structural 
improvement of the competitiveness so that the underlying 
economy is made stronger as versus stimulated?
    Mr. Orszag. Well, I suppose you could ask whether if the 
short-term impact is so delayed, what exactly one's--what one 
is doing.
    Senator Gregg. Confidence. This is all about confidence 
that the Government can act. That is what this appears to be 
about. But if the Government is going to act but act in a way 
that does not stimulate the two quarters that we are most 
concerned about, shouldn't the practical implications of this 
package be that it improve the underlying structure of the 
economy by going toward productivity and more efficiency in the 
economy?
    Mr. Orszag. The longer out you go, the more the entire 
premise of undertaking this kind of activity would need to be 
questioned. I mean, there still might be concerns about 
economic activity in the latter half of this year, but as you 
go out beyond that, certainly, again the whole sort of theory 
behind it changes.
    Senator Gregg. Thank you.
    Chairman Conrad. Yes, I think this is really not what I was 
hoping for from a package. I would just say that. I was hoping 
that in terms of doing a package, we are going to do one that 
had a more rapid effect. I do not know. Do we have any measure 
of psychological effect? That is, if people anticipate that 
they are going to get a check, and they are going to get it in 
June or July, do we have anything, any evidence that would 
suggest that affects their consumption now?
    Mr. Orszag. There is theory behind that. In practice, 
especially if you are trying to target the households that have 
difficulty borrowing, it is often difficult to spend it in 
advance of when you actually receive the money.
    Chairman Conrad. Those are people that you described as 
credit-constrained.
    Mr. Orszag. They are living paycheck to paycheck.
    Chairman Conrad. Yes. I do not know, though. People always 
have an ability--it is amazing how innovative, creative people 
are in terms of they want something they need, or at least 
think they need.
    Mr. Orszag. I mean, so, for example, one can imagine also 
there have been issues surrounding the terms of various 
transactions, but in traditional income tax refunds, there are 
loans that are advanced by private sector entities to advance 
the money to individuals, often at what some people believe are 
very high interest rates. But there are ways of----
    Chairman Conrad. Payday loans.
    Mr. Orszag. There are ways of, you know, even in advance of 
when the checks arrive, having some of the liquidity provided 
to households that may spend it.
    I think it is also worth pausing on the bonus depreciation 
or business investment incentives component because there may 
well be some response to businesses as soon as that is 
announced, but firms usually take some time to adjust their 
investments decisions. And you also tend to get the peak 
response toward the end of whatever the period is when you are 
providing an incentive, because you might as well capture it 
right then.
    Chairman Conrad. People wait.
    Mr. Orszag. So, again, the impact over the next couple 
months presumably will be relatively limited in terms of its 
direct impact, and the confidence effects, coming back to 
Senator Gregg's comments, will depend again on how people 
perceive it in psychology. That is difficult for me to evaluate 
immediately.
    Chairman Conrad. Well, we are finding out a little more 
about this package now, at least press reports. They are saying 
that specifically the plan would modify the 10-percent bracket, 
a change worth up to $600 for a single taxpayer, $1,200 for a 
married couple. Tax filers earning too little to pay income 
taxes could still benefit under the plan from a refundable $300 
child tax credit.
    So, you know, I do not know--there is no indication in this 
story whether it is limited to people, couples below $150,000. 
But assuming the previous report was correct on that, this does 
appear to be targeted to middle-income people, lower-middle-
income people. And I guess one has to hope that there is some 
expectation effect, that people see that they are going to be 
getting this money, and then move to increase their spending in 
order to stimulate the economy.
    In terms of the business side of it, they are saying that 
businesses would be able to write off 50 percent of the cost of 
capital purchases and allow small businesses to write off all 
of the costs of some additional purchases. So that is increased 
expensing.
    You know, I have been a big supporter of that in the past, 
but I must say the--as a stimulus, I supported that very 
strongly in 2001. Isn't the evidence from 2001 that increased 
expensing, bonus depreciation got us pretty weak bang for the 
buck?
    Mr. Orszag. One study suggested that you, again, did not 
even get the response across different types of investments 
that you would have expected. Another study suggested you did 
get that but the aggregate impact was something like 0.1 or 0.2 
percentage points of GDP, which is obviously quite modest.
    Chairman Conrad. Very weak, much weaker than I would have 
anticipated.
    Mr. Orszag. We had built into our baseline at the time an 
expectation of much more rapid growth in investment as a result 
of bonus depreciation that then did not occur.
    Senator Gregg. May I ask a question on that point?
    Chairman Conrad. Sure.
    Senator Gregg. Doesn't that depend, though, on where you 
are in the business cycle?
    Mr. Orszag. It may, yes.
    Senator Gregg. Because if you basically are pretty much at 
full plant utilization, then an investment tax credit is going 
to generate an immediate reaction. But if you have assets that 
are not being used, people are not going to go out and buy more 
assets.
    Mr. Orszag. It is possible that the reaction now will be 
different. At that time we had built up basically a capital 
overhang, and there was a very steep reduction in investment 
that occurred post, say, 2000 and it may well be that the----
    Senator Gregg. And where are we now in that cycle?
    Mr. Orszag. We are not at the same point. In other words, 
it is possible that the response now will be better than it was 
then. But I think some caution----
    Chairman Conrad. Actually, following Senator Gregg's logic, 
that would tell you it would be weaker. It would be weaker now.
    Mr. Orszag. No, no. The point being that at that time I 
think the perception among firms was that they had overinvested 
especially in particular kinds of physical capital.
    Chairman Conrad. Y2K effect.
    Mr. Orszag. And telecommunications capacity and other 
things, and so were more reluctant to undertake new investment. 
That overhang is not present currently.
    Chairman Conrad. But if you have a weakening economy--
Senator Gregg's point as I heard it was if you have a weakening 
economy, if you are in that part of the business cycle, people 
are not going to go out and make more capital investments when 
they do not need it to produce for the demand that they are 
facing.
    Mr. Orszag. Right. I am sorry. I was keeping sort of 
expectations of economic activity constant. It is absolutely--I 
think one of the reasons why the effect may not have been as 
large as expected is the investment decision is being driven 
much more by expectations about what future prospects are like 
for firms than from any tax savings, which can often be quite 
modest. And I would also point out one other factor that may 
have affected the impact in 2002 and 2003, which is that many 
States decoupled from the Federal tax change, and as a result, 
I think some corporations just said I do not even want to 
undertake the complexity of----
    Chairman Conrad. Sorting that all out.
    Mr. Orszag. Sorting that all out.
    Chairman Conrad. Senator Whitehouse?
    Senator Whitehouse. Thank you, Mr. Chairman.
    Two quick questions. Back to the issue of the timing of the 
stimulus effect--and I do not know if you are the person to 
even answer the first one. But with respect to the IRS and its 
ability to put the rebate through the tax system, is there any 
chance that this could be connected to the 2007 refund process, 
which would presumably be quicker than----
    Mr. Orszag. Yes, my understanding is that there is special 
programming that would be required for processing a rebate like 
this and that it could not be done in conjunction with the 
current tax filing season.
    Senator Whitehouse. OK. The other question is that we have 
sort of overlooked our senior citizens in this whole stimulus 
equation in the event that we were to choose a stimulus 
mechanism that involved seniors, and specifically a Social 
Security mechanism, how quickly would money flow through Social 
Security to seniors?
    Mr. Orszag. I am told that after enactment it would involve 
something like perhaps a 3-month lag or so before it would 
actually show up in benefit payments.
    Senator Whitehouse. So quicker than tax rebates, less rapid 
than unemployment insurance extensions and food stamps.
    Mr. Orszag. That is probably fair.
    Senator Whitehouse. Thanks, Mr. Chairman.
    Chairman Conrad. Any others, Senator Gregg?
    Senator Gregg. No. I want to thank the doctor for his 
excellent presentation. He is always so competent, and we very 
much appreciate it.
    Mr. Orszag. If I could take the opportunity to thank my 
excellent staff for both the stimulus report and the economic 
and budget outlook, both of which were produced under tight 
time constraints.
    Chairman Conrad. We appreciate that very much as well. We 
appreciate the professionalism of you, Dr. Orszag, and your 
staff. They are really excellent to deal with, and we 
appreciate it very, very much.
    With that, we will adjourn the hearing.
    [Whereupon, at 11:32 a.m., the Committee was adjourned.]


                      THE LONG-TERM BUDGET OUTLOOK

                              ----------                              


                       TUESDAY, JANUARY 29, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Wyden, Stabenow, 
Menendez, Whitehouse, Gregg, Domenici, Allard, and Bunning.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order. I want to 
welcome our witness, the Comptroller General of the United 
States, David Walker. We want to extend a special welcome to 
his wife, Mary, who is with him this morning. I think we now 
know why General Walker has been so well received in Congress. 
It is really not him. It is all about Mary. But, Mary, we 
especially thank you for what has to have been a challenging 
time in the Walker household, with General Walker going around 
the country with the Fiscal Wake-Up Tour, and we thank you very 
much for your contribution to having that happen.
    I know how challenging it can be for spouses who have to 
put up with our schedules, and I just want to say how much we 
appreciate the contribution that has been made by the Walker 
household to alerting the American people about the real 
serious challenges facing this country, and your husband has 
really been a leader and somebody that those of us on this 
Committee admire greatly.
    Let me just kind of give my own review of where we are. 
When we look at the 10-year budget outlook, and when we put 
back the proposals the President has made on both making the 
tax cuts permanent and war costs, we see that the 10-year 
deficit situation continues to deteriorate.

[GRAPHIC] [TIFF OMITTED] T2157.026


    When we look at the debt, that also deteriorated even 
further. It was $5.8 trillion at the end of the President's 
first year. At the end of his 8 years of responsibility, we now 
see the debt, the gross debt of the United States, will be over 
$10 trillion, and we are headed to more than $13 trillion of 
debt by 2013.

[GRAPHIC] [TIFF OMITTED] T2157.027


    Part of the reason, of course, is the demographic tidal 
wave that is coming at us--roughly 80 million retirees by 2050.

[GRAPHIC] [TIFF OMITTED] T2157.028


    And let's go to the next slide. Within 4 years--and I think 
this is a very sobering slide. Within 4 years, more than half 
of the baby boomers will be at or near retirement; that is, 
they will be 55 years of age or over. And while many do not 
retire at 55, increasingly people are retiring at 55. And what 
this tells me is the urgency of addressing these long-term 
problems. We are preparing a chart that will show at age 62 
what percentage of the population; I hope to have that for our 
next meeting.

[GRAPHIC] [TIFF OMITTED] T2157.029


    Let's go to the next slide, if we can. Looking at CBO's 
long-term budget outlook, we now see by 2050 that 12 percent of 
all Federal spending will go just to Medicare and Medicaid--by 
2050, according to CBO's latest estimates. This is actually 
somewhat better than their previous estimates, but, 
nonetheless, Federal Government spending is about 20 percent of 
GDP now. To have just two items--just two--take up 12 percent 
of GDP, and this does not include Social Security, nothing for 
defense, nothing for parks, nothing for law enforcement, 
nothing for debt service, nothing for any of the other--look, 
we are on a course that is utterly unsustainable.

[GRAPHIC] [TIFF OMITTED] T2157.030


    Let's go to the next slide, if we can. This is Director 
Orszag's testimony before this Committee last June, and he 
said, ``There are a variety of health care reform approaches 
that hold promise. One of the challenges we have is that I have 
not seen a comprehensive plan that would credibly bend the cost 
curve sustainably over the long term. So one of the challenges, 
we need to be trying different things, seeing what works and 
then readjusting as we figure it out. And the sooner we start 
that, the better off we are going to wind up being.''

[GRAPHIC] [TIFF OMITTED] T2157.031


    Let's go to the next slide, if we can. This is on the 
question of tax cuts. The President called last night for 
making the tax cuts permanent but not paying for them. If we do 
that, the cost of the tax cuts explodes at the very time the 
trust fund cash surpluses turn to deficit. This is looking at 
the period 2007 to 2026, and we can see we just go right over 
the cliff. So this is not going to work.

[GRAPHIC] [TIFF OMITTED] T2157.032


    When we look at the Federal debt, under CBO's long-term 
budget scenario we see where we are now, but we see where we 
are headed. The debt absolutely explodes.

[GRAPHIC] [TIFF OMITTED] T2157.033


    The former Treasury Secretary told us this. Former Treasury 
Secretary Snow acknowledged the need for a bipartisan approach 
to solving our long-term challenges. He said, ``You cannot do 
health care reform or Social Security reform without a 
bipartisan consensus. If we made a mistake, it was not 
approaching it in a more bipartisan way.''

[GRAPHIC] [TIFF OMITTED] T2157.034


    That brings me to the proposal that the Ranking Member 
Senator Gregg and I have made on a fiscal task force to address 
the long-term fiscal imbalance: 16 members--8 Democrats, 8 
Republicans; everything on the table; and an assurance that if 
12 of the 16 could agree, it would come to a vote in the U.S. 
Congress. That would assure a bipartisan outcome because we 
would require a super majority of the committee, 12 of the 16, 
to report a plan and a bipartisan vote in both the House and 
the Senate.

[GRAPHIC] [TIFF OMITTED] T2157.035


    I announced at our last meeting that it will be my 
intention to bring this to a markup this year in this 
Committee, and I know there is controversy surrounding that. We 
know that we are going to have to change the timing of what was 
in our proposal last year because that was really geared to 
this year. We know that a number of the Presidential candidates 
have now affirmatively endorsed this approach. Governor Romney 
and Senator Obama have both affirmatively endorsed this 
approach. Senator Clinton has endorsed a commission approach. 
We welcome that. We would urge the other Presidential 
candidates to come forward and indicate support for this kind 
of approach as well because there is really no alternative.
    Let's face it. We have to do something, and in the early 
period of the next administration, that is the time to act. 
This will bedevil the next administration, whoever it is, 
unless they face up to it. Can you imagine the squeeze that the 
next administration will face on every domestic priority with--
as more and more of the baby boomers retire and we get closer 
and closer to the point of insolvency, this will be the 
opportunity. And we cannot let it pass.
    With that, I want to call on Senator Gregg, the very able 
Ranking Member of this Committee. Senator Gregg?

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Senator Conrad, and let me 
associate myself with especially your final comments relative 
to the need to do something now and the use of this approach of 
the task force as a procedure to force policy in a bipartisan 
and fair way, which are the two operative words here that will 
allow us to make progress.
    I also want to associate myself with your comments relative 
to the Comptroller General and his great assistance in this 
effort, really being on the point, and I thank his wife, as 
Senator Conrad did, for her forbearance and tolerance in 
allowing her husband to do public service and such important 
public service. It is very much appreciated.
    I want to join in the concern expressed by Senator Conrad 
that the numbers are not sustainable. Most of the numbers have 
come from Mr. Walker, General Walker, and they simply speak for 
themselves. And I know you are going to go through these 
numbers again for us, which is important, because although we 
understand them, the idea is to communicate them. And so even 
though it may seem a bit repetitious to some in this room, it 
is not repetitious to a lot of people. We are hearing it for 
the first time.
    We as a generation, the baby-boom generation, have no right 
to pass on to our children less of a Nation than we received. 
But that is exactly what we are going to do if w do not address 
this issue. We will give them a Nation in fiscal meltdown, 
where their capacity to list as high a quality life as our 
generation has will simply be limited by the fact that they 
will have to support our generation at such levels with taxes 
or the burden of support that they will no longer be able to 
afford their first home, afford their college tuitions for 
their children, afford their opportunity to live the quality of 
life that we have lived. And that is not right for one 
generation to do to another generation, so it is our 
responsibility as the generation that is going to be causing 
the problem, the baby-boom generation that retires, to step 
forward with a solution.
    That is why Senator Conrad and I have come up with this 
idea of allowing a process to set policy, to drive policy. We 
have come to the conclusion that everybody who puts policy on 
the table first ends up getting shot at by the different 
interest groups who want to make progress around here, on 
fundraising usually, but who have some axe to grind, and that 
putting policy on the table first simply does not work in our 
institution. But the only way to do this is to create a 
procedure which is viewed as absolutely fair, absolutely 
bipartisan; where nobody can game anybody; and where the 
decision of that process, the task force, is viewed by the 
public as fair, open and bipartisan; and that that decision by 
that task force, which will be a decision being made by people 
who understand the issues and who have skin in the game, so to 
say, will then be voted up and down by the Congress, and 
without amendment, the reason being that if you have 
amendments, everybody can go and hide behind an amendment. And 
we hopefully will, as a result of that, make very significant 
progress on these big issues and everything is on the table. 
All the entitlements are on the table, all the tax policy is on 
the table, with the idea that we would move significantly down 
the road toward reducing the burden on the next generation, on 
our children and our children's children. This is all about 
that--making sure that we pass on to them a viable Nation that 
they can afford.
    And so I congratulate the Chairman of the Committee for 
being so aggressive in promoting this idea. We may disagree on 
some things, like tax policy, but we do not disagree on the 
need to have a procedure to reach an agreement here. And it has 
to be done sooner rather than later.
    So we look forward to hearing from you, General, again, on 
your thoughts. We know that it is as a result of your efforts 
and the information that you have been putting out with your 
tour that the public is getting educated, and this is another 
opportunity to do that. Thank you for being here today.
    Chairman Conrad. I thank the Ranking Member for his 
statement, and, again, General Walker, we thank you for your 
contribution. You know, you would not have to do this, you 
would not have to stick your neck out, you would not have to go 
traveling around the country trying to alert the country about 
the risk of what is out there for our Nation. But you have 
taken on the responsibility, and we greatly admire you for it. 
General Walker?

 STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
      UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Walker. Thank you, Chairman Conrad, Senator Gregg, 
other Senators. It is a pleasure to be back before you here 
today, and it is a privilege to be the sole witness before this 
important hearing. Thank you for your kind comments also about 
myself and my wife.
    I want to thank Chairman Conrad, Senator Gregg, and others 
for their leadership in connection with this issue. As you 
know, it takes patience, persistence, perseverance, and 
ultimately pain before you prevail in a really important change 
effort. And this issue is no exception, but it is important 
that we prevail.
    What I would like to do is submit my entire statement for 
the record and then use a quick PowerPoint presentation to make 
some key points and then make myself available for questions. 
But let me, before I begin the PowerPoint presentation, make a 
few comments.
    First, I was at the State of the Union last night, as I 
imagine most if not all of you were, and it is understandable 
that the Congress and the President are concerned about the 
current economic slowing of growth, and recent disruptions in 
the housing market and the capital markets. I believe that it 
is possible to do something with regard to a short-term 
stimulus while still being fiscally responsible. At the same 
time, I think it is critically important that such action be 
timely, targeted, and temporary. If something is done that 
meets those three criteria, then I think it would be 
understandable if Congress acted. But we must not be deluded to 
think that our problem is the short term because, quite 
frankly, we will have much, much, much bigger economic 
challenges in the future if we do not deal with our real 
problem, and that is our large and growing fiscal imbalance, 
which you will see, only grows with the passage of time.
    Third, it is important that we figure out what is a proper 
way forward. I am going to mention two things out of many:
    First, I think it is critically important that a capable, 
credible, and bipartisan task force or commission be formed as 
soon as possible in order to make recommendations to the next 
Congress and the next President for an up or down vote on this 
issue. This is critically important.
    Second, I also think it is very important that this 
Congress enact legislation to improve transparency and 
accountability with regard to financial and budget matters. We 
are working with OMB, Treasury, and CBO to present a joint 
proposal within the next 2 to 3 months that I hope this 
Committee and others in Congress will favorably consider. I 
think it is very important because transparency is a powerful 
force.
    Now, if I can, let me take you through these slides; my 
understanding is that all of you have a copy. At least I have 
asked for that to happen.

[GRAPHIC] [TIFF OMITTED] T2157.336


    This is what the longer range looks like as it relates to 
the deficit as a percentage of our economy based upon 
reasonable assumptions. And, obviously, one can run different 
scenarios. The assumptions here are that we tax at historical 
rates of about 18.6 percent of the economy, which is roughly 
what we are taxing at now, and that is what we have taxed at on 
average over the last 40 years; that we do not reform Social 
Security and Medicare, which we need to, but we have not made 
any progress on that other than progress that digs the hole 
deeper, which was passage of Medicare Part D; and, third, that 
the rest of the budget, the so-called discretionary spending, 
grows by the rate of the economy. This is what you get. Not a 
pretty picture. And it is getting worse with the passage of 
time.
    By the way, Mr. Chairman, let me just note for your benefit 
and the benefit of all the members that if you look at the 
composition of the Federal budget, about 38 percent of it is 
discretionary spending. And that is what is getting squeezed.
    Now, what is interesting, when you read the Constitution of 
the United States--which I have one on my desk and I carry one 
with me in my briefcase everywhere I go. If you read the 
Constitution of the United States, you will find that every 
express and enumerated responsibility envisioned by the 
Founding Fathers for the Federal Government is in discretionary 
spending: national defense, homeland security, Federal judicial 
system, foreign policy, treasury function, Congress of the 
United States, Executive Office of the President. Those are the 
express and enumerated responsibilities envisioned by the 
Founding Fathers, and yet that is in the 38 percent portion of 
the budget. Stated differently, 62 percent is different things 
that are on autopilot, of which some is interest on the debt, 
which is mounting rapidly.
    Next, if we look at the next chart, we will see, that 
although the Federal Government has a challenge, it is not the 
only challenge we face as a Nation. GAO for the first time 6 
months ago did a long-range simulation for State and local 
governments in the aggregate. Now, some States are better off 
than others. We all know that. Some States have real balanced 
budget requirements; some have illusionary balanced budget 
requirements. For example, California, requires the Governor to 
submit a balanced budget but not for the State to actually have 
a balanced budget. They balance it the old-fashioned way, just 
like the Federal Government: they borrow to make up the gap. 
And so they have a serious problem going out. Other States have 
more honest balanced budget requirements.

[GRAPHIC] [TIFF OMITTED] T2157.337


    But what this shows is that within the next 10 years, just 
as with the Federal Government, State and local governments in 
the aggregate will face large and growing structural deficits, 
primarily for four reasons:
    No. 1, Medicaid costs. And if there is one thing that could 
bankrupt America, it is health care costs. We are the only 
industrialized nation on Earth that essentially writes a blank 
check for health care. The only industrialized nation on Earth. 
We write a blank check for Medicare and Medicaid. It is 
imprudent, it is irresponsible, and it must change.
    States also have a challenge with regard to unfunded 
retiree health care, underfunded pension plans, and deferred 
maintenance and other critical infrastructure needs. So for 
those reasons and others, our national challenge is actually 
greater than our Federal challenge.
    Next, please.

    [GRAPHIC] [TIFF OMITTED] T2157.338
    

    This shows you what is expected to happen on autopilot if 
we do not engage in fundamental reforms. This represents debt 
as a percentage of our economy. The all-time high in the 
history of the United States was about 109 percent of GDP in 
the aftermath of World War II. And, quite frankly, with World 
War II we were betting the ranch. We were betting the future of 
the free world in World War II, and so, therefore, we did 
whatever we had to do in order to make sure that we prevailed.
    In today's situation, it is basically our addiction to 
debt. We run deficits in good times and bad. We are charging 
the national credit card, building up compound interest and 
expecting our kids and grandkids to pay it off--and many of 
them do not even have the right to vote because they are too 
young. So if you want to talk about taxation and 
representation, that is another way to talk about taxation 
without representation. These are unacceptable and 
unsustainable burdens and, quite frankly, the short-term 
burdens are really worse than advertised. You know why? Because 
we do not want to count debt held by the trust funds. The real 
debt-to-GDP ratio is about double what we advertise because 
some want to ignore the debt that is held in the trust funds. 
But guess what? That debt is real debt, too. And that debt will 
be honored by this Government. I mean, I have no doubt because, 
otherwise, that would represent a default as well--not only a 
default on our debt, but a default on the promise with regard 
to the excess revenues we have already received from Social 
Security beneficiaries that the government used to pay for 
other things.

[GRAPHIC] [TIFF OMITTED] T2157.339


    Now, here is a challenge, a new graphic that I would like 
you to see, which is really important. You know, we have three 
ways of calculating the deficit. I would not say we have three 
sets of books, but we have three ways of calculating the 
deficit. We have the unified budget deficit, which is cash-
based and last year was $163 billion. We have an operating 
deficit, which means that we ignore the Social Security surplus 
because we spend all of that on other government operating 
expenses. So the operating deficit last year was $344 billion. 
And then we have the accrual-based net operating cost. And you 
can see that no matter which measure you use, over the last 3 
years they have come down, and that is good. Lower deficits are 
better than higher deficits.
    But please look at the red line. The red line is on a march 
to the northeast corner of the graphic. That is our large and 
growing long-term fiscal exposures, our fiscal gap, the total 
liabilities and unfunded commitments of the United States, the 
difference between what we have promised for Social Security 
and Medicare and how much in payroll taxes, trust fund assets, 
and premiums that we are expected to receive for these 
programs. Namely how much money you would have to have today to 
deliver on those promises. And Medicare is short $34 trillion, 
while Social Security is short about $7 trillion.
    Next, please.

    [GRAPHIC] [TIFF OMITTED] T2157.340
    

    This is similar to the one that the Chairman showed, which 
shows Social Security, Medicare, and Medicaid are on a path to 
take up all of the Federal revenues based upon historical 
averages. This does not count interest on the Federal debt. 
This does not count national defense, homeland security, all 
those things that the Founding Fathers thought the Federal 
Government was going to do, and does do, but are increasingly 
getting squeezed.
    Next, please.

    [GRAPHIC] [TIFF OMITTED] T2157.341
    

    The real problem is health care. It is not demographics. I 
mean, demographics are a challenge. There is no question about 
that. But it is really health care. And if there is one thing 
that could bankrupt America, it is health care. It is the No. 1 
challenge for the Federal Government. It is the No. 1 challenge 
for State governments. It is the No. 1 competitiveness 
challenge for American business. We spend a lot of money on 
health care, but we get below-average results for an 
industrialized nation--below-average results and yet we spend a 
lot more money.
    This is how much of our economy we are dedicating to health 
care, and as I said, we spend a lot of money, but we get below-
average results. I would say that is not very good value for 
money.

[GRAPHIC] [TIFF OMITTED] T2157.342


    And, last, before I summarize, these are tax preferences. 
You know, there is a lot of time and effort spent discussing 
how much money we spend on direct spending, which is close to 
$3 trillion a year. But there is not enough time spent on the 
$800 to $900 billion in lost revenues that we incur every year 
because of tax preferences--deductions, exemptions, exclusions, 
credits. The No. 1 tax preference in the Internal Revenue Code 
is the fact that a vast majority of Americans do not pay income 
tax or payroll tax on the value of employer-provided and paid 
health care. It is almost $200 billion a year, the fastest-
growing tax preference. And it disconnects people from the cost 
of health care, from the rising cost of health care.
    Therefore, one of the things that we need to do is to put 
tax preferences on the radar screen that need to be part of any 
budget controls, that need to be periodically reviewed and 
potentially reauthorized, as we do on spending programs, 
because we cannot afford to keep $800 to $900 billion on 
autopilot either, just like we cannot afford to put $3 trillion 
worth of spending on autopilot.
    So, in summary, in the short term deficits are coming down. 
Our problem is not the short-term deficit or even the current 
debt. It is where we are headed. We are headed for 
unprecedented rough seas that could swamp the ship of state if 
we do not get serious soon.
    It is understandable that Congress and the administration 
want to do something with regard to fiscal stimulus in the 
short term to complement the Fed's monetary stimulus. But it 
needs to be temporary, targeted, and it needs to be timely. 
And, second, we cannot lose sight of the ball. I know you are a 
big baseball fan, Mr. Chairman. We need to keep our eye on the 
ball so we do not strike out. The real problem is our large and 
growing structural imbalance that grows with the passage of 
time. If we balance the budget tomorrow, we still have a $53 
trillion hole that grows by $2 to $3 trillion a year on 
autopilot.
    And then, last, we need a task force or a commission. We 
need more transparency and accountability on the financial 
reporting and budgeting side. We at GAO look forward to working 
with you and your colleagues to try to make that a reality this 
year.
    Thank you.
    [The prepared statement of Mr. Walker follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.037
    

    [GRAPHIC] [TIFF OMITTED] T2157.038
    

    [GRAPHIC] [TIFF OMITTED] T2157.039
    

    [GRAPHIC] [TIFF OMITTED] T2157.040
    

    [GRAPHIC] [TIFF OMITTED] T2157.041
    

    [GRAPHIC] [TIFF OMITTED] T2157.042
    

    [GRAPHIC] [TIFF OMITTED] T2157.043
    

    [GRAPHIC] [TIFF OMITTED] T2157.044
    

    [GRAPHIC] [TIFF OMITTED] T2157.045
    

    [GRAPHIC] [TIFF OMITTED] T2157.046
    

    [GRAPHIC] [TIFF OMITTED] T2157.047
    

    [GRAPHIC] [TIFF OMITTED] T2157.048
    

    [GRAPHIC] [TIFF OMITTED] T2157.049
    

    [GRAPHIC] [TIFF OMITTED] T2157.050
    

    [GRAPHIC] [TIFF OMITTED] T2157.051
    

    [GRAPHIC] [TIFF OMITTED] T2157.052
    

    [GRAPHIC] [TIFF OMITTED] T2157.053
    

    [GRAPHIC] [TIFF OMITTED] T2157.054
    

    [GRAPHIC] [TIFF OMITTED] T2157.055
    

    [GRAPHIC] [TIFF OMITTED] T2157.056
    

    Chairman Conrad. Thank you, General Walker, for once again 
laying out, I think in a clear and concise way, the challenge 
that we confront.
    Let me ask you this: I have had people say to me: ``You 
guys are a bunch of Chicken Littles down there. `The sky is 
falling, the sky is falling.' Nothing ever happens. Your 
deficit is only 1.2 percent of gross domestic product. That is 
well within historical norms. Aren't you guys just overstating 
the problem facing the country?''
    What would you say in answer to people who have that view?
    Mr. Walker. First what I would say is it is absolutely true 
that our current deficit and debt levels are not a major 
problem. It is absolutely true that we have run larger deficits 
and have had higher debt levels as a percentage of our economy 
in the past than we do now. But it is also true that when you 
are trying to help make sure that we discharge our fiduciary 
and stewardship responsibilities to this great Nation, you 
should not just look in the rearview mirror; you should 
actually look ahead and find out where we are headed. And when 
you look ahead and find out where we are headed, based upon 
reasonable and realistic assumptions, we have never seen 
anything like what we are heading into. And there is absolutely 
no question that it is imprudent and unsustainable. There is 
absolutely no question we cannot grow our way out of the 
problem. And there is absolutely no question that it is going 
to take budget controls, entitlement reforms, spending 
reprioritization and constraint, and tax reform, and ultimately 
more revenues than 18.5 percent of GDP.
    But, you know, we are going to have to do it, and the 
sooner we do it, the better, because in the end the default is 
probably higher taxes. And that is not good for economic 
growth, that is not good for disposable income, and that is not 
good for our competitive advantage.
    Chairman Conrad. Well, and really isn't the default 
position not only dramatically higher taxes, but very dramatic 
cuts in benefits? Because, I mean, if we fail to act, if we 
just wait--which some are suggesting. I hear this, you know, 
from some of my colleagues. Let's just kick this can down the 
road. You know, everybody is concerned about the next election, 
the next election, the next election. Let's just wait.
    What is the risk of just continuing to kick the can down 
the road?
    Mr. Walker. First, Mr. Chairman, I would say it is fiscally 
irresponsible to do that, and it is politically less feasible 
to do that as time goes on--I am not an elected official. You 
are. But let me analyze it from my perspective.
    The longer you wait, the bigger the gap is going to be, the 
more change you have to make, the less transition time you 
have, the more disruptive it is likely to be, and the greater 
the risk that we are going to have a serious economic 
disruption, not the kind of challenge we are seeing right now. 
Therefore, I think it is prudent to act sooner.
    Second, I believe we have a 5- to 10-year window of 
opportunity to demonstrate to our foreign lenders that we are 
going to get serious about this--5 to 10 years, and it is 
closing. And I think it is closer to 5 than to 10.
    The longer you wait, the more people are enfranchised in 
the status quo. And the people that are enfranchised in the 
status quo tend to be more politically active--namely, seniors. 
The people who are going to pay the price and bear the burden, 
younger people, tend to not be as informed and involved. 
Therefore, I think for fiscal reasons, for political reasons, 
for economic security reasons and otherwise, it is prudent to 
move sooner rather than later.
    Keep in mind, we are the largest debtor nation in the 
history of mankind, and it is getting worse, not better.
    Chairman Conrad. What is the threat to the economy? You 
know, we talk about a need to act. You have just talked about a 
5- to 10-year window to convince these international markets 
that the United States is going to be fiscally responsible. 
What is the threat to this economy of a failure to act?
    Mr. Walker. I think one of the most likely threats would be 
a reduction in the willingness of foreign lenders to continue 
to buy our debt at attractive rates that we have been able to 
finance our debt recently. If interest rates go up, that will 
have a compounding effect on the budget, a compounding effect 
on the economy, a compounding effect on American families. And, 
by the way, the scenarios that I just showed you do not assume 
a significant rise in interest rates. If there is a significant 
rise in interest rates, then we accelerate and compound our 
challenge.
    Chairman Conrad. Well, let me ask you this: So what if 
foreign lenders become less willing to extend credit to this 
country? Couldn't we just finance this internally? Couldn't we 
just borrow from ourselves?
    Mr. Walker. No. We are a great country, and Americans are a 
great people, and we are particularly great at spending. But, 
unfortunately, we are poor at saving. America has the lowest 
savings rate of any major industrialized nation. In the last 2 
years, Americans spent almost everything that they made. We had 
close to a 0 personal savings rate in the last 2 years.
    Now, why would you be concerned about that? Because with 
savings comes investment. With investment comes research and 
development. With that comes innovation and productivity 
increases. And with that comes an additional economic growth 
and additional competitive advantage. With that comes 
improvement in our standard of living. We are eating our seed 
corn. And there are a lot of American families that are 
following the bad example of their Federal Government. They are 
spending more money than they make. They are charging their 
credit cards, taking out home equity loans, building up debt 
and compound interest. You can do that for a little while. You 
cannot do that over the long run.
    Chairman Conrad. Well, the Government can do it because we 
can print money. What is the adverse effect of doing that?
    Mr. Walker. First, we are no longer the single reserve 
currency in the world. We have competitors, and they are likely 
to grow over time.
    Second, some people say, well, don't worry about it, we 
will just print money and inflate our way out of the problem. 
As we all know, inflation is probably the cruelest tax of all. 
It affects people that are lower- and lower-middle-income worse 
than it does people that are middle- and upper-income.
    Furthermore, we cannot inflate our way out of the problem, 
and here is why. Of the $53 trillion hole, only $9 trillion 
relates to current debt. You can inflate and decrease the 
burden associated with that $9 trillion, but the remaining $44 
trillion is growing faster than inflation. Health care costs 
have grown about 2.6 faster than the economy, which grows 
faster than inflation. Social Security costs are indexed. They 
are indexed for inflation once you draw the benefit, and they 
are wage-indexed in determining your primary initial benefit.
    You cannot grow your way out of this problem, and that is 
an illusion. So people who think that you can do not understand 
the programs and have not run the numbers.
    Chairman Conrad. The final point I would make, and I will 
then turn to Senator Gregg: These people that talk about 1.2 
percent of GDP as the deficit, that was last year. This year 
the deficit is going to be 2.5 percent of GDP. But of greater 
concern, the increase in the debt this year will be well over 
$600 billion, which is well over 4 percent of GDP. And this is 
the sweet spot in the fiscal cycle. This is the sweet spot. 
This is before the baby boomers start to retire. This is before 
we have the additional continuing explosion of health care 
costs.
    Senator Gregg?
    Senator Gregg. Well, I think you have certainly summarized 
the problem, and I think Senator Conrad's questions, which were 
intentionally structured so, led through the different options 
and why many of them are not viable, such as inflating your way 
out of this issue and losing investment from abroad as a result 
of lack of confidence or raising the interest rates as a result 
of having to attract more investment.
    Let me get more into the weeds, if I can. Because this 
problem is so significant, I think there has to be an admission 
that there are going to have to be some tough decisions made.
    For example, we are going to get a budget this year. 
Shouldn't that budget include reconciliation instructions which 
address the issue of entitlement spending if we are going to 
start moving on this problem?
    Mr. Walker. I think there needs to be something on that. We 
need to move. I talked before about budget controls, bringing 
back budget controls, and I think part of those budget controls 
have to include something to do with mandatory spending, both 
direct as well as entitlement programs, as well as tax 
preferences. But on the instructions, yes, I think----
    Senator Gregg. Last year, for example, the President 
proposed--and I thought it was a fairly reasonable proposal--
that we should require high-income individuals to pay a 
percentage of the Part D premium. Today they are not required 
to do so. You know, if you are Warren Buffett and you get the 
Part D premium, you do not have to pay anything for that. Isn't 
that a reasonable movement in the direction of trying to get 
some relationship between the burden and the expense?
    Mr. Walker. In my view, the Congress should seriously 
consider better targeting beneficiary subsidies by the 
taxpayers--both with regard to Medicare as well as with regard 
to tax preferences for employer-provided and -paid health care.
    In other words, it is one thing to say that you are 
eligible for coverage at group rates under these programs. It 
is another thing to say that irrespective of your wealth and 
your means, you are going to get the same taxpayer subsidy. 
That is a logical place to start, but ultimately, I think we 
are going to have to reform the entire health care system in 
installments.
    Senator Gregg. But in a world where incremental action is 
more likely than global action, isn't it reasonable to do 
reconciliation instructions which actually accomplish 
incremental action? Wouldn't that be helpful?
    Mr. Walker. I think it is essential that you act on health 
care incrementally because there is no way that you are going 
to be able to achieve comprehensive health care reform in one 
proposal.
    Senator Gregg. Now, one of the proposals that has been 
floated--and it actually, interestingly enough, was again 
floated by the White House because it would be perceived as 
impacting high-income taxpayers, just like the Part D premium 
was, basically a requirement that high-income individuals pay 
more for their premium. Is this idea that your $187 billion of 
tax preference which is tied to the deductibility of insurance 
plans being--of insurance plans being deductible, that that tax 
preference should be cutoff at some point--I think it was 
$11,000 per employee--so that high-income employees or more 
expensive plans would not be covered, and that we should take 
that money that is saved so that high-income employees or more 
expensive plans would not be covered, and that we should take 
that money that is saved--and this was the White House 
proposal--take that money that is basically generated from 
revenue and use it to fund insurance plans, private insurance 
plans, for people who are not covered today, that 41 million 
people who potentially--who do not have health insurance.
    First off, do you think it is a good idea to cap the 
deductibility? Which I suspect you do. And, second, though, 
getting into the more substantive--the more geopolitical or 
geo-economic issue, does that really in the long term address 
the health care question because basically money is fungible, 
and whether it is--I mean, it is going to be spent on health 
care if it is taken as a deduction, or it is going to be spent 
on health care if it is given as a payment to allow a person to 
buy an insurance policy. Other than getting more people 
covered, which is a social policy, does it really impact the 
bigger issue of the fiscal policy?
    Mr. Walker. First, I do not believe that you ought to limit 
the deduction. The deduction is what the employer gets. And I 
think if you tried to seriously limit or eliminate the 
deduction, it would be counterproductive because employers are 
looking for an excuse to get out of this business.
    Senator Gregg. Not eliminate.
    Mr. Walker. Right.
    Senator Gregg. Cap.
    Mr. Walker. Exclusion. I think what you meant, Senator, 
which I agree with, is the income exclusion. The $187.5 billion 
is the fact that none of us have to pay income tax on what is 
paid for by our employer; by the Federal Government in our case 
since it is our employer. Same thing for payroll taxes.
    I do think that just as it is appropriate to better target 
direct taxpayer subsidies through spending, as we talked about 
before, it is also appropriate to target taxpayer subsidies 
through tax preferences; and that, intellectually, you should 
determine at what level of health care coverage you might 
provide a tax incentive, and anything beyond that should be 
included as taxable income.
    Think about the way the system works now----
    Senator Gregg. But my question is: If you take that revenue 
that you get from there and move it over to funding coverage of 
uninsured, which is, of course, a legitimate public policy 
decision and social decision, have you really addressed your 
bigger issue of the cost drivers in health care?
    Mr. Walker. No. I think you--well, yes and no. First, I 
think to the extent that you make individuals more aware of and 
sensitive to the increasing costs of health care, that will 
have a behavioral effect over time that will help to deal with 
excess utilization. However, if you end up taking the money 
that you save and spend it on something else, then immediately 
you have really done only 2 things increased sensitivity to 
cost and improved coverage. I do think the four things you need 
to try to do in health care are: deal with universal access to 
basic and essential health care; impose a cap on what the 
Federal Government will spend on health care every year; 
implement universal national practice standards for the 
practice of medicine and also use of prescription drugs; and 
provide more personal responsibility and accountability for 
one's health and wellness.
    And so I think targeting is a logical first step both for 
tax preferences as well as for taxpayer subsidies through 
Medicare.
    Senator Gregg. Doesn't your second idea of capping the 
amount of Federal payments, which may very well be required 
here, lead to some significant adjustments in the delivery of 
health care?
    Mr. Walker. Yes, it would. Some people say, Would it result 
in the rationing of health care? The answer is let's be honest 
with people. We ration health care now. We just do not ration 
it rationally. We cannot afford to write a blank check for 
health care. That is why I think you have to look at all four 
things. Just putting a cap on how much the Federal Government 
will spend by no means solves the problem. You need to look at 
universal access to basic and essential health care, which I am 
happy to answer questions on that if you want. You need to have 
national evidence-based practice standards that will improve 
consistency, enhance quality, reduce costs, and dramatically 
reduce litigation risk because it would be a safe harbor for 
the practice of medicine. And you need to increase personal 
responsibility and accountability for one's own health and 
wellness.
    So one piece by itself will not get the job done. They work 
in an interactive fashion--and, by the way, I might say that on 
this issue and Social Security reform and some other things 
that I have been working on at GAO, along with others, we have 
run up this in 26 States, in town hall meetings in 26 States, 
and it gets a pretty favorable reaction.
    Senator Gregg. Thank you.
    Chairman Conrad. Senator Murray?
    Senator Murray. Thank you very much, Mr. Chairman. And 
thank you for the tremendous amount of work you have done on 
this and your passion on an issue that is very difficult to 
deal with, but one we clearly have to. In your testimony, you 
are talking about as the long-term challenge increases, it is 
really important how we design any stimulus package. And as you 
know, the House and White House came to an agreement on an 
economic stimulus package. I believe they are passing it out 
today, with tax rebates.
    Do you think that package in its current form meets your 
criteria of timely, targeted, and temporary?
    Mr. Walker. Senator Murray, I have not studied it in 
detail. I have read press accounts with regard to that package. 
On the surface, it appears to be timely, targeted, and 
temporary. Reasonable people can and will differ as to whether 
or not it is the right package.
    Senator Murray. Have you looked at how it might affect our 
long-term fiscal challenge at all?
    Mr. Walker. I think by definition you are going to increase 
deficits in the short term. All the more reason why it is 
important that it be temporary. If you want to have the impact 
on economic growth, it needs to be timely and targeted to 
people who are likely to use that money and spend that money 
because 70 percent of our GDP is based upon consumer spending.
    Senator Murray. So if the caps were lift on the rebate, for 
example, that would not be very effective?
    Mr. Walker. On which rebate?
    If your income is less than, I think it is, $150,000, if 
that $150,000 was eliminated and it was for anybody, I assume 
that that would be----
    Mr. Walker. One would want to target it to those that are 
most in need and those that are more likely to spend the money, 
I think from an intellectual standpoint.
    Senator Murray. OK. You talked a lot about health care, 
Social Security, those kinds of issues. One issue you did not 
talk about was the war in Iraq and the impact on our deficit. 
We have continued to see supplemental requests for funding this 
war, and we are now almost into the sixth year of this war. I 
think we have spent about $450 billion on the war already in a 
supplemental. Can you tell us what the annual interest is we 
are now paying on that debt?
    Mr. Walker. Our effective interest rate now is, about 5 
percent. One of the fortunate things that we have right now, 
Senator Murray, is that we have very low interest rates right 
now, but we will not have low interest rates over the longer 
run if we do not get our fiscal house in order.
    Senator Murray. I would like to see that and what your 
projections are for the future on that, too. I would assume 
that your recommendation would be that we include that--or the 
President include that within his budget request and not a 
supplemental because of its impact?
    Mr. Walker. Well, GAO has already recommended that, to the 
extent that we expect to have recurring costs in the Defense 
Department budget, that those ought to be put in the regular 
budget request. And it is only the temporary or non-recurring 
costs that are more difficult to estimate that ought to be in a 
supplemental. We have said that for a long time.
    And, by the way, I think it is pretty clear that there are 
things coming through the supplemental that do not relate 
solely to the global war on terrorism. There are ways to try to 
help make the Pentagon whole with regard to some of the effects 
of the global war on terrorism.
    Senator Murray. Within the budget?
    Mr. Walker. Yes.
    Senator Murray. OK. You stated in your testimony that CBO's 
latest estimates project the deficit rising in response to a 
weakening economy, and you talked a little bit about the trust 
fund issue. Can you tell us, as we draw down that remaining 
surplus in Social Security, how that affects our deficit 
projections in the future?
    Mr. Walker. Yes. First, the trust funds are not really 
trust funds. I was a trustee of Social Security and Medicare 
from 1990 to 1995. And, you know, Washington uses some words 
that do not mean the same thing as Webster's Dictionary. I used 
to be a fiduciary in the private sector for real trust funds. 
Trust funds are separate and distinct legal entities. They come 
with fiduciary responsibility and liability. And in most cases, 
when you are dealing with other people's money, they come with 
very strict prohibitions on what you can and cannot do with 
regard to investments.
    In the case of the trust funds for Social Security and 
Medicare, they are sub-accounts of the general ledger. They do 
not have fiduciary responsibility and liability. We are 
investing in our own debt. If the private sector did with its 
pensions the same thing that we do with Social Security and 
Medicare, the fiduciaries would go to jail, because employers 
cannot invest all their pension assets in their own debt.
    The other thing that is outrageous is that we do not show 
the bonds in the trust fund as a liability on the financial 
statements of the U.S. Government. We also do not consider it 
in our debt-to-GDP ratio.
    So, we are playing fast and loose here with regard to how 
we are treating this. So, you know, I apologize. You hit a 
chord here. If you noticed.
    Senator Murray. I noticed.
    Mr. Walker. And I apologize. Please let me know when I have 
not answered the----
    Senator Murray. I just wanted to know if you could 
specifically tell us how it affects the debt projections in the 
future.
    Mr. Walker. Sure. Thank you very much.
    In 2009, the Social Security surplus will start declining 
rather than increasing, as it has been. That means Congress 
will start going through withdrawal, and the executive branch, 
because they have been used to spending and having the ability 
to spend, increasing surpluses. It will flip in 2009. And then 
in 2017, based upon the current projections, the cash-flow will 
be negative. So rather than helping the unified budget deficit, 
it will hurt the unified budget deficit.
    Guess what? I think somebody will probably have an epiphany 
in 2017 to say, Gee, maybe we ought to take this off budget, 
because then it starts hurting you rather than helping you.
    Senator Murray. OK. One other question for you. If we 
extend the 2001 and 2003 tax cuts, can you tell us what happens 
to the deficit projections?
    Mr. Walker. I think Chairman Conrad showed some graphics on 
that. I would be happy to provide you something for the record. 
Obviously it hurts. I think you have to keep in mind it adds 
about 1 to 2 percent of GDP. Clearly it does not help. At the 
same point in time, the gap that we face over the longer term 
is multiple times that.
    And let me say--and I have said this before--I do not think 
we can solve our long-range problem with Federal revenues at 
18.5 percent of GDP. At the same point in time, I think it is 
important to try to keep taxes as low as possible for several 
reasons. No. 1, on the corporate side, because we compete in a 
global economy--and believe me, corporations do not have duty 
of loyalty to countries. They have duty of loyalty to their 
shareholders. They will move someplace else. They will move 
operations offshore if we are not competitive on corporate 
taxes.
    On individual taxes, if we want to maximize economic 
growth, maximize disposable income, and maximize individual 
choice, you want to try to keep it as low as possible. On the 
other hand, you have to have enough revenues to pay your 
current bills and deliver on the promises that you intend to 
keep.
    Senator Murray. And you also need to invest in order to 
grow your economy as well.
    Mr. Walker. You have to invest selectively, although one 
has to be careful about how you define investment, because one 
of the things I have found over the years is one person's 
investment is another person's waste, and one has to deal with 
that.
    But you are right, and that comes back to the savings issue 
I talked about before. We are eating our seed corn. We are not 
investing, which means that we are not doing what it takes to 
maintain and to improve our competitive advantage, and as a 
result it is diminishing with the passage of time.
    Senator Murray. Thank you very much.
    Mr. Walker. Thank you.
    Chairman Conrad. Senator Allard?
    Senator Allard. Thank you, Mr. Chairman.
    You made a comment in regard to the health care here in the 
United States. You said that we are below average. When you 
said we are below average, you were referring to, I assume, the 
life expectancy and percentage of uninsured, were you not?
    Mr. Walker. Several things, Senator Allard. First, for an 
industrialized nation--and these are based upon OECD 
statistics, the Organization of Economic Cooperation and 
Development, of which the U.S. is one of 30 members. It is 
based in Paris. We are below average on life expectancy. We are 
below average on preventable death rates. We have higher than 
average infant mortality rates. Now, these are not good things. 
And we are way above average on the percentage of our 
population that is uninsured. We are number one on spending 
though.
    Now, in some areas we do well, but with regard to generally 
accepted outcomes that deal with broad segments of society, we 
are not getting value for money.
    Senator Allard. I think it maybe depends on how you measure 
outcomes. You know, when you talk about infant mortality, some 
countries--and I do not know what percentage of these would be 
considered industrial--really do a poor job of reporting infant 
mortality. Infant mortality will occur outside a hospital. And 
so how valid would that sort of comparison be? Or if you look 
at the uninsured percentage, for example, this has been a flat 
line. If you look at the percentage of uninsured in the 
country, as well as my State of Colorado--we have done a lot of 
things to try to deal with the uninsured--the flat line is 
right at 15, 16 percent uninsured, no matter what we do.
    And so there are things in our medical system, I think, 
that are good. People come to this country for medical care. 
You know, you imply somehow or other that there is not quality 
here. I think there are things that we can do to improve 
physician care, but I do think that we have to be careful on a 
study like this because I can see other countries do not do as 
good a job of gathering their statistics as we do in this 
country. Would you say there is some validity to that?
    Mr. Walker. Thank you, Senator Allard. First, I am not 
saying that we are below average in everything. We are not. And 
you are correct in saying that with regard to high-end medical 
procedures, many people come to this country because of our 
proven track record of success with regard to high-end medical 
procedures.
    The OECD countries are major industrialized countries that 
do a pretty good job with their statistics. We are talking 
about Germany, United Kingdom, France, Italy, the Netherlands. 
We are talking about Japan. We are talking about Australia, 
Canada, New Zealand. So we are not talking about Third World 
countries when we cite the OECD. But you are correct in saying 
that the statistics are only as good as the reliability of the 
data that underlie them. But I think OECD generally is viewed 
as being a pretty reliable source.
    Senator Allard. So assuming that they are correct then, 
what could we do to make that better in this country as far as 
our health care so that these look better for us?
    Mr. Walker. Senator, I think we need to focus as a country 
on something that we have really not done before. In my 
opinion, we have not had a national discussion and debate to 
differentiate between broad-based societal needs in health care 
that are affordable and sustainable over time versus unlimited 
individual wants in health care which are not affordable and 
sustainable.
    And so what happens, like so many government programs, 
whether it be on the spending side or the tax side, you end up 
enacting something into law. You add things to it. You add 
things to it. Things get layered on. Before you know it, you 
have an amalgamation and combination of things that may not 
make any sense. And I think that is exactly where we are at.
    I think we need to step back and say what is basic and 
essential in terms of health care coverage and services that 
everybody needs and that it is in our broad-based societal 
interest to do that. And you know with your background, things 
like wellness and preventative care; inoculations against 
infectious diseases; things like protection against financial 
ruin due to unexpected catastrophic illness; things like 
guaranteed insurability at group rates but have choice as to 
whether or not you want more, but you are going to have to pay 
for it if you want more than that. So focusing on the basic and 
essential needs of everybody rather than what we have today: 
broad-based, much more generous coverage to some segments of 
the population and nothing for other segments of the 
population.
    Second, a budget, not a blank check.
    Third, national evidence-based practice standards that 
would be determined by physicians and other qualified parties 
that could help serve as a safe harbor for malpractice, among 
other things.
    And we need to make sure that individuals have incentives 
and accountability for taking care of their own health and 
wellness. Right now, take Medicare as an example. The subsidy 
is the same. The subsidy is the same not only with regard to 
your income in most cases, but also with regard to whether or 
not you take care of yourself or not. That creates very 
perverse incentives over time.
    And so, I think, you know, in the short term we need to 
target better; in the long term we need to restructure the 
whole system, including the division of responsibilities 
between employers, Government, and individuals. And I am not 
talking about socialized medicine, Senator, let me make that 
very clear. But even countries that have ``socialized'' medical 
systems, they ration and they have budgets. And, by the way, 
they also have private sector systems where employers end up 
buying supplemental policies for many of their employees, 
because they may not want their employees to wait or may want 
them to have access to certain procedures they otherwise would 
not get access to through the government system.
    We have done some work on this, as you know, at GAO, 
Senator Allard.
    Senator Allard. Mr. Chairman, thank you.
    Chairman Conrad. I turn to Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman, as usual for a 
very important hearing, and thank you, Mr. Walker, for your 
service and for being here.
    Just to continue on health care for a moment, I appreciate 
your numbers because it is clear. As I understand it, we spend 
about twice as much of our gross national product on health 
care as any other country, and yet we have almost 50 million 
people with no health insurance so that picture does not seem 
to jibe. And I am wondering if you might speak a little bit 
more about the notion of universal access because, as you have 
indicated, the Federal Government really is not unique. Every 
family, every business, every State and local government is 
facing the same kinds of things that we are in terms of the 
costs going up and the fact that we use emergency rooms 
inappropriately. I mean, we have a universal system. It is just 
extremely expensive because you walk into the emergency room, 
you receive care, you may be sicker than you otherwise would 
be. The hospital treats you and then shifts the costs to those 
employers that have insurance. So we are paying for a system 
right now that it is pretty crazy to me on how we are paying 
for the overall system for folks.
    But I wonder if you might talk about in a little more 
detail the need to do something more systemwide in order to 
capture savings and to be able to address the broader issues 
that you talked about.
    Mr. Walker. Thank you, Senator Stabenow. First, I think we 
spend about 2.5 times more per capita than the median OECD 
country, almost 50 percent more of our economy than the median 
for all OECD nations and we have about 47 million uninsured, 
roughly those numbers which you touched on.
    I think we have to recognize that there is a lot of cost 
shifting going on right now, and I think people have to keep in 
mind when you look at the data, you will find that in the last 
40 years, health care costs have grown about 2.6 percentage 
points faster than the economy every year. And the point of 
compounding that over time means that is why we are spending so 
much more of our economy on health care than we used to.
    But during that same 40-year period, you will find that a 
disproportionate amount of the increase in the health care 
costs has been borne by two parties: No. 1, employers; and, No. 
2, governments. And while individuals have paid more as a 
percentage of their income on health care than they did 40 
years ago, the relative burden share has been more for 
government and for employers. But governments face fiscal 
challenges, and employers face competitiveness challenges.
    And so starting within the last several years, we have seen 
governments and employers start to shift costs to individuals. 
So individuals really for the first time within the last 
several years are starting to feel the effect of increased 
health care costs, and they do not like it.
    Something has to give; I think we need to take a systemic 
approach. We need to focus on all four of those elements, but 
with regard to access, I think we have to be honest with 
ourselves to say let's focus on what our broad-based societal 
needs in the form of health care are, basic and essential 
health care services that everybody should have. Let's focus on 
trying to deliver that, and when we are doing that, we need to 
make sure that it is affordable and sustainable over time. 
Because right now we have a situation that the Federal 
Government has made a lot of promises it is not going to be 
able to keep, and it ought to be honest with the American 
people and tell them that. It is not going to be able to keep 
them without doubling tax levels, which this country has never 
supported in the past. Now, maybe they will, but I would not 
bet on it.
    Senator Stabenow. Well, just to followup on your comments, 
when you say individuals do not like having to pay more, they 
cannot pay more I mean, many----
    Mr. Walker. Some can.
    Senator Stabenow. Far more people are finding themselves 
less wages or unemployed, and so obviously the cost shift is 
increasingly putting pressure on middle-class families, and it 
certainly is a competitiveness issue. I can look in Michigan 
right across the river that literally you can swim across, and 
the difference between Canada and the U.S.--and we could debate 
the systems, but the reality is wages are the same for 
manufacturing, environmental standards are the same. The only 
difference is health care, and we see plants being built there. 
So it is an issue that is costing us jobs, there is no 
question.
    I wonder, before my time runs out, if I might ask you one 
other issue related to this, and that is talking about 
comparative effectiveness, which is so important. And because 
of these issues being so important for us from a competitive 
issue in Michigan, we have developed in the medical society 
something called the Keystone Project, which has focused on 
quality initiatives very, very effectively. I do not know if 
you have looked at that. But we have also been very aggressive 
on information technology and have in southeastern Michigan 
very aggressively focused on e-prescribing, which has made a 
big difference in quality and dealing with costs and so on.
    I wondered if you might speak to what you view as an 
effective comparative effectiveness program and also how 
technology, information technology and those kinds of things 
fit into that.
    Mr. Walker. Sure. First, I do think there is an opportunity 
to leverage technology to improve outcomes and to reduce cost. 
But it has to be leveraged with more information and evidence-
based practice standards. Right now what is happening is a lot 
of the technology is being used because it is available, and it 
is actually driving health care costs. I am talking about MRIs 
and a variety of other procedures, where everybody wants one 
and as long as somebody else is willing to pay for it, why not?
    Second, there is a very real competitiveness issue here on 
health care. You are right that some families are already 
feeling the squeeze, and it is only going to get worse with the 
passage of time. You are right in knowing that Michigan, in 
particular, is affected by this because you have a number of 
major employees that have huge legacy costs for health care. 
You are also, in a situation where a lot of people do not 
realize the impact of health care costs being out of control. 
One of the reasons that we have not been able to get pension 
coverage up higher than 50 percent of the full-time work force 
for 40 years is because health care costs are out of control, 
and, therefore, employers cannot afford to do more because of 
out-of-control health care costs.
    So it is really the big challenge from a variety of 
perspectives.
    Senator Stabenow. Mr. Chairman, I know my time is up. I 
would be remiss if I did not also indicate I am pleased to join 
with Senator Wyden. I am sure he is going to talk about his 
health care proposal, but we do have, I think, an important 
proposal on universal coverage that I know we are going to be 
discussing more. Thank you.
    Chairman Conrad. I thank the Senator.
    Senator Bunning?
    Senator Bunning. Thank you, Mr. Chairman.
    Mr. Walker, I am interested in your statement to the effect 
that our total debt, including the gap between funded and 
unfunded future benefits, is approximately $53 trillion. Is 
that correct?
    Mr. Walker. That is correct, Senator.
    Senator Bunning. OK. More than 4 times the current size of 
our economy.
    Mr. Walker. That is correct.
    Senator Bunning. Because of this, the major credit rating 
agencies recently have questioned our Nation's ability to 
maintain our AAA-rated debt if we do not make changes. I 
understand that other major industrial nations are coming to 
terms with their own pension and health care liabilities in 
light of their own aging populations. How does our current 
situation compare to theirs at the present time?
    Mr. Walker. Thank you, Senator Bunning. First, just to 
clarify, the $9 trillion, roughly--a little bit more than 
that--is current debt. The balance represents the unfunded 
commitments that will be future debt if we do not engage in 
reforms. But it is a current commitment.
    We issued a report on January 18, 2008, at the request of 
this Committee to look at what other countries have done to try 
to deal with their fiscal challenges and to also look at 
whether and to what extent they use task forces or commissions 
as a way to try to help facilitate more expedited action. That 
has been made available to this Committee.
    Some countries are ahead of us. A number of countries, 
frankly, are ahead of us. Australia is ahead of us. New Zealand 
is ahead of us. Canada is ahead of us. The U.K. is ahead of us. 
Sweden is ahead of us.
    Senator Conrad. Norway.
    Mr. Walker. Norway is ahead of us. Well, they actually have 
real money in their trust funds. That is a different issue.
    So, you know, we are a great Nation. We are not the only 
nation that faces this challenge. The problem is we are slow 
off the start. We are late to the effort to start dealing with 
this, and it is important that we start sooner rather than 
later.
    Senator Bunning. We talked about the fiscal stimulus 
package. What changes, if any, would you make in the fiscal 
stimulus package that the House is voting on today? Should we 
be concerned about the long-term consequences of this package 
if the stimulus is poorly timed or ineffective in 2008?
    Mr. Walker. Senator, unlike you and other members here, I 
have not been elected, so I do not think it is appropriate that 
I critique it in detail.
    I will tell you this. I will come back to what I said to 
begin with. I think action needs to be timely. I think the 
Congress needs to act by no later than February on something. 
Second, I think it needs to be targeted so that the money is 
likely to be spent and otherwise help our economy. And, third, 
I think it needs to be temporary so that it does not end up 
increasing our longer-range structural imbalance. And I will 
leave it to your judgment and your colleagues to figure out how 
best to do that.
    Senator Bunning. Well, but that is a cop out.
    Mr. Walker. I am not elected, Senator.
    Senator Bunning. It is not a question of being elected. You 
study these things constantly.
    Mr. Walker. Yes, sir.
    Senator Bunning. What happens if we fail to hit the mark 
and in 2008 the approximately $155 billion is pushed into 
calendar year 2009 when the interest rates are low and the jobs 
are not forthcoming? You know what happens when we do that. We 
have something that was created in 1980 or so called 
``stagflation.'' We have inflation going up this way and we 
have jobs going the other way, and that leads to bad things for 
our economy.
    Mr. Walker. Paul Volcker is a friend of mine, and he is 
very familiar with stagflation, and it is not something that we 
want to try to have to go through again, quite frankly, in the 
history of this country.
    I think it is very important that you, again, try to make 
sure that you target this so that it does good quickly and that 
it be a temporary initiative. If it does not work, then I think 
you and I both know that Congress is going to try to figure out 
what else it might need to do. And I think one of the things 
that I introduced a number of years ago--remember when we had 
surpluses. Remember when we thought--I know you do, Senator 
Domenici. Remember when we thought we actually were going to 
pay off all the national debt and people were worried about it? 
Well, we do not need to worry about it anymore.
    One of the concepts we need to think about is triggers. How 
can we identify triggers----
    Senator Bunning. That is something that has been discussed 
in this Committee.
    Mr. Walker. Right. How can we talk about triggers that say 
when something comes off and when something goes on? You know, 
that is really important.
    I also think we have to think about incentives, how can we 
create incentives, you know, so that it would provide 
discipline on spending and other types of actions through 
proper design.
    Senator Bunning. I have one last kicker.
    Mr. Walker. Yes, sir.
    Senator Bunning. You talked about entitlements and the 
uncontrolled escalation in entitlements. And my numbers may be 
off a year or two, but by the year 2030, if we do not cap or 
change our entitlements, take them off automatic pilot, we will 
spend our entire budget on entitlements and, therefore, the 12 
agencies that we enact appropriations bills for will have no 
money.
    Mr. Walker. In theory. If you tax at historical levels and 
you allow--and you say I am not going to reform entitlement 
programs, they are going to be a first claim on tax revenues, 
then you squeeze out everything else.
    By the way, the numbers do not include interest on the 
Federal debt, so when you include interest on the Federal debt, 
it is actually worse than that. And, in addition----
    Senator Bunning. It comes earlier.
    Mr. Walker. Correct. And, in addition, they do not assume a 
significant increase in interest rates, and I can assure you 
there will be before then based upon our----
    Senator Bunning. Well, depending on who is running the 
Federal Reserve. Thank you.
    Chairman Conrad. Thank you, Senator Bunning.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Walker, thanks for your testimony, for being a little 
bit of a Paul Revere about our long-term fiscal challenges. I 
appreciate your service in that respect. I have a series of 
areas I want to pursue, so if you would work with me in trying 
to be tight in the answers but nonetheless responsive, I would 
appreciate it.
    First, on page 14 of your testimony, you talk about this 
whole health care issue being the overriding issue--they are 
all important, but the overriding issue in terms of the long-
term fiscal challenge, and in that respect, the four points 
that you have there as pillars, I just want to--you say provide 
universal access to basic and essential health care. Access is 
not necessarily coverage, though, right?
    Mr. Walker. No, I think I intended it to be coverage.
    Senator Menendez. You intended it to be coverage.
    Mr. Walker. I intended it to be coverage, which either 
could be provided through a Federal program, through a State 
program, through an employer, through a union, but basically 
one way you could do it--one way--would be a universal mandate 
and provide alternative ways that it could be delivered, 
Government being one of the ways it could be delivered. But it 
means coverage, not just the option but you will be covered.
    Senator Menendez. All right. Good, because I have heard 
``access'' be used in the past not as covered.
    Mr. Walker. I understand.
    Senator Menendez. Second, you talk about imposing limits on 
Federal spending for health care. Does that imply necessarily 
paying more for those who have the health care coverage by 
virtue of the Federal Government, Medicare and Medicaid?
    Mr. Walker. It means that we----
    Senator Menendez. The individuals I am talking about.
    Mr. Walker. It means that we cannot afford to write a blank 
check, and if we end up having a budget, it will force tough 
choices, and it will force tough choices on behalf of the 
Government to restructure its programs.
    Senator Menendez. There is one of three possibilities: 
either you cut back on services to providers, payments to 
providers; you cut back on the universal services or how those 
services are delivered; or, third, the person who is covered 
contributes to it or it is a combination of all of those.
    Mr. Walker. I think that is clearly what the three options 
would be absent fundamental reform. But if you engage in 
fundamental reforms, I think you have other options. We need to 
recognize that the system we have right now is badly broken, 
and we cannot just tinker around the edges because we are 
betting the ranch. Wand esse are betting the future of our 
economy on health care costs.
    Senator Menendez. Third, you talk about evidence-based 
practice standards to improve quality, control costs, reduce 
litigation. Is prevention a big part of that? You know, we work 
on a disease-based system, largely.
    Mr. Walker. I think it is a function of three different 
elements: I think that is a function of defining what ``basic 
and essential'' is; I think that is a function of evidence-
based standards; and I think it is also a function of increased 
personal responsibility and accountability for one's own health 
and wellness. So I think prevention comes into all three of 
those elements, those pillars.
    Senator Menendez. Many of us have been saying for quite 
some time, though, that it seems that in a system that is based 
on disease versus on preventing that disease, which is a lot 
less costly, that it should be a significant part of the 
equation.
    Mr. Walker. I agree.
    Senator Menendez. And, last, when you talk about steps for 
Americans to assume more personal responsibility and 
accountability, do you see incentives in that to move Americans 
in that direction?
    Mr. Walker. I do, but it does not necessarily mean tax 
incentives. For example, to the extent that one does more to 
try to take care of one's own health and wellness, maybe there 
would be a difference as to what your cost sharing would be. 
Rather than giving you an incentive to do something, maybe you 
would have to bear more burden if you do not take care of 
yourself. So incentives, broadly defined.
    Senator Menendez. Let me turn to an answer you gave Senator 
Murray when she was talking about what would happen if we made 
the President's long-term tax cuts permanent, and you did 
acknowledge that they would increase the deficit over time. 
Then you got onto a discussion of--and correct me if I am 
wrong--that we cannot solve our long-term fiscal challenges by 
taxing at 18.5 percent of GDP. And then you went on to say how 
it is also important to keep taxes as low as possible. It 
sounds like having it everybody wants it the same way.
    Did I understand that answer to mean that you believe that 
you are going to have to increase taxes as a percent of the 
gross domestic product, but while increasing them, try to 
increase them at the lowest possible level?
    Mr. Walker. Right. Let me clarify what I mean. 
Historically, the highest that Americans have allowed 
themselves to be taxed as a percentage of the economy is 
roughly 20.5 percent of GDP, and that is roughly where we were 
when we had the surpluses, at about 20.5 percent of GDP. And, 
by the way, Congress periodically has to do tax cuts in order 
to keep tax burdens from going higher. Why? Because with 
inflation, economic growth and other factors, if you do not end 
up taking steps over time, by definition you will end up having 
a higher percentage of GDP in the form of taxes because of 
inflation and economic growth and other factors.
    So, historically, Americans have only gone to 20.9. Are 
they willing to go higher than that for things like security 
and safety and a variety of other issues? Maybe. But they are 
not, I do not think, likely to be willing to go to 30.
    So the answer is as follows: We are taxing at about 18.5. 
You are going to have to get the most money, in my opinion, out 
of entitlement reform. You are going to have to get a 
considerable amount of money out of reprioritizing and 
constraining spending. But even after you do all of that, the 
gap is so great, you are going to need more than 18.5 percent 
of revenues.
    I will say this: I have been to 25 States for town hall 
meetings. I am going to my 26th one tomorrow. The American 
people are hesitant about sending more money to Washington 
absent tough budget controls that will make sure that that 
money will not be wasted.
    Senator Menendez. And I appreciate that view. Finally, let 
me get to a provincial question but one that has ramifications. 
I read your response to a New Jersey delegation letter about 
comments made by individuals who were suggesting that the GAO 
and the BRAC process was on their side and that they needed the 
right figures to make it work. And I saw the press accounts of 
your review with this individual. You know, my problem is we 
have seen BRAC go from an allegation that it was going to save 
X number of billions of dollars, $36 billion, to now being 
reduced to about $15 billion. That is 58 percent less. In my 
home State of New Jersey, Fort Monmouth was supposed to be $780 
million. Now it is at almost $1.5 billion. And I do not think 
we are finished yet.
    I have a real problem looking at this process which is 
supposed to save us an enormous amount of money, then gets 
reduced dramatically, does not even take into effect the 
economic consequences of what happens in those communities at 
the end of the day, which ultimately contributes to the tax 
process. And then I get really concerned when I read comments, 
e-mails that say that the GAO, which I really have faith in, 
generally speaking, is on the side of the BRAC process. And I 
do not understand--I read the comments about what the person 
supposedly meant that we have supported--the GAO supported 
overall the concept of BRAC. You do not have to say I am on 
your side to say you support the BRAC process. That seems to me 
I am on your side in making the numbers work for something that 
does not work.
    Mr. Walker. Sure. Well, Senator, first, I have not written 
that letter yet. I told----
    Senator Menendez. I just read the public comment----
    Mr. Walker. I told the press that I intended to. I have met 
with Dr. College, who was the person who sent that e-mail. I 
think if Dr. College had thought about it, he probably would 
have sent a different e-mail rather than that one, because 
there has been a lot of speculation about what he meant.
    I know GAO's procedures. I know the people who worked on 
this engagement. I stand behind our work. Here is the key 
point----
    Senator Menendez. How could we be so far off?
    Mr. Walker. Well, you make a good point, Senator Menendez, 
and let me be clear. We were asked, GAO was asked--in fact, it 
was statutorily required--to look at the overall process, 
methodology, the reasonableness of the overall assumptions. We 
were not asked, nor do I think it is appropriate for us to be 
asked, about a decision with regard to an individual base. I 
testified myself on behalf of GAO and expressed serious 
concerns with regard to the over-optimism by the Department as 
to how much money they were going to save with regard to this 
BRAC round, both as it relates to military construction costs 
as well as personnel savings.
    And, furthermore, with regard to Fort Monmouth, I testified 
myself that we also had concerns that they were being overly 
optimistic with regard to what percentage of skilled employees 
were going to be willing to move from Fort Monmouth to Aberdeen 
or elsewhere. That is on the record. We stand by that. And I 
would be happy to talk to you separately if you want.
    Senator Menendez. I would look forward to that 
conversation.
    Mr. Walker. I would be happy to.
    Senator Menendez. Thank you, Mr. Chairman, for your 
courtesy.
    Chairman Conrad. Senator Domenici?
    Senator Domenici. Thank you very much.
    Mr. Walker, I do not come to every meeting, but I spent 
plenty of time in the past at meetings of this Committee, so I 
like to let other people come now, like the distinguished 
Chairman, he and this distinguished Republican. They are doing 
well, and I come when I am needed. But there are so many 
questions to ask of you that I am going to tick through a few 
and just see what you say. OK?
    Mr. Walker. Yes, sir.
    Senator Domenici. Is the stimulus package proposed by the 
House and the President, as you look at things, more or less 
the right size and the right kind of stimulus, if we need one 
now?
    Mr. Walker. Senator, I will just go back to what I said. 
Timely, targeted, and temporary, it appears to meet those three 
criteria. I have not studied it in detail.
    Senator Domenici. All right. But dollar-wise, you know how 
many billion it is.
    Mr. Walker. It is about $145 to $150 billion.
    Senator Domenici. Right. So I guess I am going to just put 
this up there from my standpoint, see if you agree. It is 
barely of sufficient size for an economy of our size to do the 
job.
    Mr. Walker. We have about a $13 trillion economy.
    Senator Domenici. And so this is a pretty small kick, but 
if it is done quickly and we do not fool around with it 
forever, coupled with the Chairman of the Federal Reserve and 
his use of their power on interest rates, it would seem like we 
are sending a strong signal that we are going to do something 
and do it now. Is that correct?
    Mr. Walker. That is correct, Senator. You know, the Fed is 
looking at monetary policy. You are looking at fiscal policy. 
You and I both know that there are limits as to how quickly the 
IRS can act in the middle of the tax season. So all the more 
reason why you need to move very quickly because the money may 
not flow for several months.
    Senator Domenici. That is right. Now, my next question, 
just do it as quickly as you can, but it certainly is something 
we have never had in all the years I was Chairman up here, and 
it is there now, and that is what has happened to the American 
dollar. Would you just answer for me, is that a serious problem 
now, as you see it? And if it is, is there anything that can be 
done in any event by the United States or others?
    Mr. Walker. I think it is a serious problem. We are no 
longer the world's only reserve currency, the euro being one 
that people are looking to with increasing frequency.
    I think one of the other reasons, Senator Domenici, that it 
is a problem is a lot of people do not realize that crude oil 
is priced in dollars.
    Senator Domenici. Right.
    Mr. Walker. And that one of the reasons that crude oil 
prices go up is not just because of supply and demand, but if 
those producing countries want to maintain purchasing power, 
they have to charge more dollars because the dollar is in the 
tank.
    Senator Domenici. You are right. Now, there is no question 
that that is a correct statement. There is no question that all 
the debt we have, the world has bought it up, whether it is 
China that bought it up or European countries or India or 
Indonesia or whomever. And it is precarious when they thought 
they were buying up the best currency in the world, and it 
turns out that they may not. That causes some consternation on 
the part of those who had bought our money, right?
    Mr. Walker. Correct. When third parties hold more of your 
national mortgage, it means that they have more influence on 
you and you have less influence on them. It is that simple.
    Senator Domenici. And people that would say they do not 
have anything, they hold nothing over us, I think they are 
mistaken when, as a matter of fact, somebody like China owns so 
much of our debt, it is not, as some say, ''Well, that is 
good.`` It is not perfect, right? It might be less than good, 
right?
    Mr. Walker. In the short term it is good because we are 
lucky that they are willing to lend us their savings. But in 
the longer term, it increases our risk.
    Senator Domenici, you probably recall what happened in 1956 
with regard to the Suez crisis.
    Senator Domenici. No. I am old but not that old.
    Mr. Walker. Well, the bottom line is France and U.K. and 
Israel wanted to challenge President Nasser's taking over the 
Suez Canal, and at that point in time, the U.S. held a lot of 
U.K.'s debt and a lot of pounds and suggested that they may 
want to rethink their actions if they wanted us to continue to 
support their currency and their debt. That was an ally.
    Senator Domenici. Yes. Now, look, I want to go through two 
or three more, and, Chairman, you stop me whenever I am 
supposed to stop, all right?
    One, I want to say to you in terms of health care costs in 
America, health care costs distort everything. For instance, if 
you equate how much health care cost there is in an automobile, 
you can kind of say, well, you open the trunk and the health 
care cost is in the trunk, and you put a dollar sign on, and it 
turns out that in some instances it makes the automobile that 
you are talking about non-competitive in the world market 
because you have added too many hundreds of dollars in health 
care costs. That is a very serious problem, is it not?
    Mr. Walker. The last numbers I saw is that there is more 
health care cost in the cost of an automobile than steel.
    Senator Domenici. Right. That is incredible. You could not 
even fit that in the trunk so you would have to use some other 
approach, as you talk about it.
    Mr. Walker. That is for U.S. auto makers.
    Senator Domenici. Correct. Have you seen the proposal that 
the Chairman and Senator Gregg have with reference to a 
bipartisan approach to the entitlement program, resolution of 
the entitlement program?
    Mr. Walker. I have.
    Senator Domenici. And have you analyzed it sufficiently to 
tell me whether you think it is a good approach or not?
    Mr. Walker. I think it is a good approach. My personal view 
is that I think if you look at Chairman Conrad's approach, it 
is a very positive approach. I think if you look at his, if you 
look at Senator Voinovich's bill, at both the Cooper-Wolf bills 
in the House, and your bill with Senator Feinstein, doing a 
combination of these actually would even be better, and I would 
be more than happy to work with any of you on that.
    Senator Domenici. I would just pass the word to the 
Chairman. No question in my mind because he is Chairman, his 
takes on a little stronger impetus, and I have a good one that 
I worked hard on, but I think his might be better. Mine is 
Domenici-Feinstein. I am more than willing to forget mine and 
work with him and Senator Gregg. It must be done. You know, we 
sit around figuring somebody will be courageous enough to pass 
a law. It really is not courageous or non-courageous. It is 
almost impossible for a legislator to do this. There has to be 
a new process invented, and the process is what we are speaking 
of at this point. Normally, processes do not solve big 
problems. But in this case, it will solve a big problem. If you 
use it and it gets carried out such that the entitlement group 
does what Congress says and you put smart people on there and 
people who want to work only for the country and not for a 
party, it has a chance of fixing, Social Security could be 
fixed. You could do that first. You could do that in a year 
with no question. Medicare is harder and more urgent, but 
people do not believe that, but it is. But you have to do both 
of them. You cannot do just one and leave the other one out 
there.
    Mr. Walker. And, Senator Domenici, I believe it is totally 
unrealistic to expect that we are going to make significant 
progress on this $53 trillion imbalance through the regular 
order. It is policy, players, and process, and process matters.
    Senator Domenici. You bet.
    Mr. Walker. In my opinion, you need to address at least 
four things through any task force or commission that you come 
up with:
    No. 1, tough budget controls, if you have not done it 
before then.
    Second, comprehensive Social Security reform where you are 
not preprogrammed to have to come back. In 1983, we were 
preprogrammed to have to come back. We do not want to do that 
again.
    No. 3, round one of health care reform.
    And No. 4, round one of tax reform.
    If you do those four things as a package, with everything 
on the table, I believe we can achieve at least a $12 trillion 
downpayment on our $53 trillion imbalance. Now, think what that 
would do for the credibility of the Congress. Think what that 
would do for confidence and trust. Think what that would do for 
the ability to hopefully make more progress and to sustain 
momentum over time.
    Chairman Conrad. I thank the Senator.
    Senator Domenici. I want to say to you, sir, I remember 
when you came, we had some rough edges between you and some of 
us. That is natural. We kind of wonder what you are doing 
fooling around in our business. You kind of wonder why we are 
not accepting your recommendations because you think it is your 
business. Things are getting better. We are listening to you, 
and you are doing a terrific job, and we thank you for it. We 
need your kind of clear-headedness speaking to the people, and 
thank you for it.
    Mr. Walker. Thank you, Senator. I like your new 
international look, too. You look very distinguished.
    Senator Domenici. Oh, thank you.
    Chairman Conrad. Senator Whitehouse?
    Senator Whitehouse. Thank you, Mr. Chairman.
    I would suggest that if we are going to get credit for the 
$12 trillion downpayment, the first thing we have to do is make 
the people of America understand that they have this $53 
trillion liability out there. And I applaud you for getting 
around to 25 States, soon to be 26. But I can tell you that in 
my experience, there is almost no American you could stop on 
the street and ask that number and get anything resembling a 
confident or knowledgeable answer. So I think we have a large 
public relations mission ahead of us to put this into the right 
context.
    With respect to the trust fund, I enjoyed your description 
of how the phrase ''trust fund`` used in this context does not 
in the fashion meet the legal fiduciary definition of a trust 
fund. Just to explore that a little further, I would suggest 
that since it has no funds and cannot be trusted, you do not 
even have to get to the fiduciary level. You just get to the 
pure, you know, Webster's street corner definition of those 
words and it fails.
    I may be oversimplifying this, but it strikes me that this 
is ultimately really a cash proposition. The people who need 
Social Security need the money now. It goes out. When we take 
the Social Security so-called trust fund and when we take the 
cash out of it and spend it on other things and put an IOU back 
in, there is really nothing there, because the IOU, it strikes 
me, is an IOU to ourselves. And for somebody who is watching 
this who has a family budget, it would be like saying, well, I 
know we need to pay for my daughter's braces, I know we need to 
set aside money for college for both the kids, I know we have 
these expenses coming, but I am going to spend all the cash 
that I have, all the money that comes in on this other stuff, 
but then I am going to write myself an IOU for some of it. The 
problem is when the dentist comes and when the college bill 
comes, you do not have the cash, and the IOU does not matter.
    Is that a fair parallel to where we are with Social 
Security? And if it is, shouldn't we just start setting up a 
proper trust fund and just force that issue by putting some 
money aside?
    Mr. Walker. First, I think we are masking the size of our 
deficits and our debt problems by not being more transparent 
with regard to what we are really doing. Let me clarify.
    The bonds in the trust fund are backed by the full faith 
and credit of the U.S. Government. They are guaranteed as to 
principal and interest. In my view, they will be honored. They 
must be honored. They should be deemed to be a liability of the 
United States. But you are correct----
    Senator Whitehouse. Well, from our point of view, we still 
have to go find the cash----
    Mr. Walker. You are correct, absolutely, from an economic 
standpoint in recognizing that they are nothing more and 
nothing less than a priority claim on future general revenues, 
that you must do one of three things: either raise taxes, cut 
spending, or go out and borrow more money from Japan, China, 
OPEC nations or somebody else to be able to convert that to 
cash. Cash is key, and we need to be focused on cash-flow more 
than we are now.
    Senator Whitehouse. So in a perfect world, what would the 
trust fund look like?
    Mr. Walker. Well, Norway has a pretty good idea, but I do 
not think we probably will ever get there because I think we 
have waited too long. Norway saw that they had a demographic 
challenge, just like we did, and Norway knew that in order to 
try to be able to meet the bow wave of the tsunami of spending, 
they needed to invest early so that they did not put an undue 
burden on future generations. They actually created a real 
trust fund, and it actually is something you can trust and it 
actually has real funds in it, real investments in it. It is 
their sovereign wealth fund. It is a very large fund to try to 
help reduce the burdens of the retirement of their baby-boom 
generation.
    Now, we have waited maybe too long to do that. We could 
consider that as an element, but as you know, the surplus will 
start to go down in 2009. We go negative cash-flow in 2017. So, 
you know, the really good years are behind us, and so we are 
going to have to do more than that.
    Senator Whitehouse. On health care, it strikes me that 
there are a trio of areas where there is huge ground to be 
gained. One is with health information technology, and I think 
the sooner we start looking at our health information 
technology infrastructure as infrastructure and treat it that 
way, the quicker we will be able to resolve the problems of 
health information technology. The second is quality reform, 
which you have talked about in the best practices context.
    I would like to suggest to you that as a Nation we really 
have not developed a very significant skill set yet in quality 
reform in health care. And if you are going to go out and 
develop these best practices, figure out how to apply them, how 
to enforce them, there is a process component to it as well. 
There is a substantive component on what the best practice is. 
We are in a very, very baby-step stage in that.
    So as you talk about this, I would urge you to consider 
what the best process is, consider trying to make it as broad 
as possible. I worry if people talk about this and the solution 
that people think of is, well, we will set up a best practices, 
you know, place in Washington, and we will start doing them one 
by one in Washington. I do not think we have that kind of time, 
and I do not think we can limit ourselves that much in terms of 
experimentation.
    I would like to see a mechanism set up so that every State 
under the authority of its own health department, so that it is 
kept legitimate and safe, can engage in best practices research 
and figure out a way to enforce and incent that and allow 
benefits to accrue from it. And then you can get 50 teams 
working on it, and you can learn from each other, and the whole 
thing moves a lot more rapidly. So I would just urge you to 
think about that, that the sort of Federalist doctrine really 
would make a lot of sense there.
    The last thing, the third piece, is on reimbursement. We 
send idiotic price signals into the health care system and are 
surprised when we get idiotic responses. It strikes me that 
there is a correlation between the things that America is good 
at, as you were discussing with Senator Allard, and the things 
we pay for. The money is there for high-end procedures; we do a 
great job. The money is not there for prevention; we do a 
horrible job.
    And it strikes me that an underlying problem is that we 
have taken the question of what gets paid for in health care, 
and we have taken that choice, and we have moved it to the 
private sector, specifically to the insurance industry. It 
strikes me that the insurance industry is colored with massive 
conflicts of interest in this respect, both having to do with 
their own business strategy and having to do with the fact 
that, for instance, every insurer in this country looks at 
getting rid of all of their customers into Medicare at some 
point, and many of them are looking just from a turnover point 
of view at a 5-, 6-, 7-year customer relationship, so they have 
no financial interest in prevention and welfare except as a 
means to attract big-employer customers who are really driving 
this.
    I think if we can address these three things together--
quality reform, information technology, and solving these 
reimbursement problems--we can set up virtuous cycles that will 
yield rewards beyond what we are even now forecasting. I would 
just like your reaction to that. I know I have gone over my 
time. I apologize.
    Mr. Walker. Senator Whitehouse, let me just briefly say 
that leveraging technology, focusing on quality, and also 
looking at our reimbursement practices are subsets, in my view, 
of the four pillars. And I do think they are important, and we 
will focus them.
    Senator Whitehouse. I would love to work with you.
    Mr. Walker. Thank you.
    Chairman Conrad. Let me just followup on the Social 
Security discussion very briefly to say in the private sector, 
if you were taking the retirement funds of your employees and 
using them to pay operating expenses, which is what we are 
doing, you would not be on your way to the White House or the 
House of Representatives. You would be on your way to the Big 
House because that is a violation of Federal law.
    I must say, when I first came here from positions in a 
financial arena, I was so amazed and really stunned by the way 
we operate here. I mean, the financial reporting is just a 
complete fiction around here.
    Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman. And we want to 
thank you again for all of your good work and especially on 
health care. We are now up to 12 Senators on the Healthy 
Americans Act as cosponsors--6 Democrats and 6 Republicans, the 
first bipartisan effort in the Senate in literally decades. And 
if you track the legislation, it is sure pretty close to what 
you have been out talking about, and we just thank you for all 
your leadership. And I think when this country fixes health 
care--and I believe we can get it done this time--a big part of 
it is going to stem from the fact that you have been out 
prosecuting the case around the country, trying to lay out the 
choices for people.
    Let me, if I might, talk about some of the biggest issues 
that we are going to be wrestling with, starting with the 
development in the last 24 hours. It looks like the California 
proposal is not going to be able to go forward. They have done 
an awful lot of good work and tremendous commitment and 
passion, the Governor and legislators of both political 
parties. But it just does not look like it is going to be able 
to move at this point.
    My sense is that the message out of California--and I would 
be interested in your assessment--is that the States cannot fix 
health care by themselves. The biggest hurdles have, in effect, 
been put out there by the Federal Government, specifically the 
Tax Code, the ERISA statute, the Employee Retirement Income and 
Security Act,and Medicare. I think this is pretty much 
consistent with your thinking, and I think it would just be 
helpful to get this on the record, because I do not want the 
country to say, well, it is the States' fault. I think it is 
quite the opposite. I think the States have done some very good 
work given how little bandwidth within which they have to 
operate. And I think it would be just helpful to get your 
thoughts on the record about how important it is that the 
Federal Government be a better partner in terms of working with 
the States in fixing health care.
    Mr. Walker. I think the States have their own significant 
challenge with regard to health care. They have a challenge 
with regard to their portion of the Medicaid costs. They have a 
challenge with regard to their employees, et cetera, and the 
uninsured population. I think there is an opportunity for more 
federalism, but I do not think they can solve the problem by 
themselves, by no means. I think the Federal Government has a 
major responsibility.
    Being a CPA, I am very familiar with the tax provisions. I 
was former Assistant Secretary of Labor for ERISA, and I was a 
trustee of Medicare. So there is no question that those are 
three major challenges that must be addressed by the Federal 
Government.
    Senator Wyden. Let us talk about the Tax Code because, of 
course, that involves judgments that were literally made more 
than 60 years ago. And I think what is at stake here is 
modernizing the employer-employee relationship. That is how I 
would characterize it. What we have done today does not work 
particularly well for either employers or workers. The employer 
spots the global competition, you know, 15, 18 points the day 
they open their doors, and workers, unlike, for example, 
Members of Congress, usually, if they are lucky enough to have 
coverage--and many of them do not have coverage at all--simply 
get the one offering of their employer and do not have the 
benefits of being able to use their clout in the marketplace.
    So what we try to do in the Healthy Americans Act is to try 
to give some relief to both the employer and the employee in 
terms of modernizing this relationship and, of course, make the 
changes in the Tax Code, redirecting the Tax Code primarily so 
we do not reward inefficiency and subsidize the most affluent.
    What is your sense about the importance of modernizing the 
relationship between employers and employees which largely 
governs pretty close to 250 million people, if you set aside 
Medicare and the military?
    Mr. Walker. Just as I do not think the States can solve 
this problem alone, employers are not going to solve this 
problem. I think we need to modernize the relationship between 
employers and employees and also the Government. I think we 
need to stand back and refocus on those four pillars, and that 
means modernizing the relationship for employers, employees, 
and Government.
    Senator Wyden. With respect to the individual--and I have 
really been pleased that you have been constantly bringing back 
this matter to the individual because I think not only is 
personal responsibility important, but we have pretty much 
divorced individuals from much of the decisionmaking process. 
The employer buys the health care, and the worker says, ''I 
hope my insurance covers it,`` and we go off and call it a day. 
And, of course, we try to change that as well in the 
legislation by, in effect, making sure that the employee sees 
that there are actually rewards in terms of shopping 
efficiently.
    But on the question of quality--and Senator Whitehouse has 
done very good work on this. He and Senator Stabenow have 
really been our leaders. I want to ask you about something that 
I am talking to people at home about and around the country, 
and that is the consequences of buying health care that is not 
particularly cost-effective or is not high quality.
    I get the sense that Americans, if they feel they are 
getting good information--in other words, we are doing the 
kinds of things Senator Whitehouse is talking about, making 
sure people get good information--I think they are prepared to 
say, ``All right, if I want to go to so-and-so and it is not 
the best buy in terms of dollars or at the top of the quality 
list,'' I think they are prepared to say we ought to pay a 
little bit more for that, as opposed to the offerings that 
might be higher on the chart with respect to quality and cost-
effectiveness.
    What is your thinking with respect to consequences for 
individuals of buying quality when, in fact, we have put in 
place the kinds of reforms that Senator Whitehouse is talking 
about so that people can actually get good information?
    Mr. Walker. It is appalling to me how outdated and how 
inadequate the information that we have on health care is, 
given the size of health care spending as a percentage of our 
economy and given the importance to a variety of players. 
Clearly, we need more timely, accurate, and useful information 
on cost and quality in health care. And when you use the words, 
``are we willing to pay for it,'' I assume you mean the 
individuals, are they willing to pay for it, because I think 
part of the problem we have right now is that the ``we'' is 
future generations.
    Senator Wyden. Individuals, but starting to weave this 
through the system. We say, for example, in the Healthy 
Americans Act, that under Medicare, you know, seniors who do 
things to lower their blood pressure, their cholesterol, stop 
smoking, they are going to be eligible for lower Part B 
premiums. I am interested in your thoughts about making sure 
that individuals really see that there are some actual 
financial underpinnings for buying smart.
    Mr. Walker. I strongly support that concept, and it is 
fully consistent with the four pillars that I talked about. 
When I talk about, personal responsibility and accountability, 
it means incentives for people to behave properly; and if they 
do behave properly, they achieve some benefit. And if they do 
not behave properly, there is some consequence.
    I think for any system to work--a health care system, a tax 
system, a corporate governance system, whatever--you have to 
have three things that we are touching on: incentives for 
people to do the right thing, and that does not necessarily 
mean tax incentives, by the way; second, transparency to 
provide reasonable assurance they will do the right thing 
because somebody is looking, and it could mean the public, the 
consumer; and, third, accountability if people do the wrong 
thing.
    So if we build around the four pillars of health care and 
those three universal concepts, I think we can achieve some 
great things, but it is likely to have to be done in 
installments.
    Senator Wyden. Well, that is, I think, a topic for another 
day. I hope that we will recognize that health care is like an 
ecosystem. If you move it over here, you are going to have 
effects over there. And the history, of course, of going at 
this piecemeal is not particularly good. If you look, it is not 
just after 1993 when, of course, the plan went down during, you 
know, other periods of time, and I actually looked at the 
history. You know, what we almost always say is, well, we have 
to do it, you know, this piece and that piece. I think that is 
very hard to do. We have now got 12 United States Senators who 
I think are making that judgment that this is an ecosystem. A 
lot of the people who have coverage are one rate hike away, you 
know, from losing it, and that there are reasons now to 
intertwine the interests of those with coverage and those who 
do not have coverage. In the past, they were often pitted 
against each other.
    I think if you keep doing the outstanding work you are 
doing to make sure that people understand what the choices are 
in areas like we have talked about this morning, that the 
Federal Government has to be a better partner so that we do not 
see the Californias and other States that are trying so hard, 
see their proposals go by the boards. I think this time, after 
60 years of jawing on this, I think this time we are going to 
be able to thread the needle, and a big part of it when we do 
is going to be the fact that you spent so much time and effort 
educating the public on our choices, and I thank you for the 
good work.
    Mr. Walker. Senator, I want to thank you for your 
leadership on health care area. I know you have been really 
dedicated to this for a long time. And, again, the two issues 
we are talking about here are directly interrelated. Our fiscal 
challenge is driven primarily by health care. In many ways, 
what you are saying is, just as Chairman Conrad has said that 
he believes there is a need to have some type of task force or 
commission in order to be able to deal with the multiple 
elements at once, you are saying you believe you need to deal 
with multiple elements at once in order to try to achieve 
meaningful health care reform that treats it like an ecosystem, 
which I think is an interesting analogy.
    I am just saying I do not think that you will pass one bill 
and say, ''We are done.``
    Senator Wyden. Fair enough.
    Mr. Walker. That is all I am saying. But I am all for 
trying to make progress on as many of those pillars as 
possible.
    Senator Wyden. Chairman Conrad has given me a lot of extra 
time. I think it is fair to say--and I think the Chairman said 
it--we expect as members of the Budget Committee and the 
Finance Committee to be working on health care throughout our 
time in public service. There is not going to be one shot and 
it is done.
    Thank you for your outstanding work and for the extra time, 
Mr. Chairman.
    Chairman Conrad. Yes, sir, Senator Wyden. I very much 
respect the extraordinary effort that you have made in this 
area and also the very substantive contributions of Senator 
Whitehouse. I really appreciate the special dedication that you 
have given to what really is the greatest challenge that we 
face in all this, which is the health care sector. That is the 
800-pound gorilla. That is what could swamp the boat.
    In that regard, on Thursday we are going to be having a 
hearing especially dedicated to long-term health. I hope both 
of you will be here. We are going to have Dr. Orszag here from 
the Congressional Budget Office who has done a good deal of 
work. I know the two of you have both worked with him closely.
    Tomorrow, we are going to be doing a hearing on the 
economic stimulus package, and with respect to that, I would 
like to ask one more question. You have said the stimulus 
package ought to meet the test of the three T's: timely, 
temporary, and targeted.
    With respect to the third, targeted, we now have a proposal 
before the Senate Finance Committee to take the income caps off 
of the rebates. The White House and the House of 
Representatives leadership had agreed to caps that begin at 
$150,000 for a couple, $75,000 for an individual. Under the 
Senate proposal, as I understand it, those caps would be 
completely lifted, which would mean we would have the spectacle 
of the Federal Government sending $1,000 checks to Bill Gates, 
Donald Trump, Barry Bonds, Members of Congress.
    What do you think about that?
    Mr. Walker. Even though it is obviously not to my personal 
advantage, I do not believe that meets the definition of 
''targeted.``
    Chairman Conrad. Nor do I. I think, you know, we have to 
show some discipline around here, and if we are going to start 
sending checks--in fact, I asked the first--I asked about it. 
''You mean, you are telling me my wife and I are going to get a 
check?`` I mean, you know, we do not need a check. Wouldn't 
spend it if we got it, so that does not stimulate the economy. 
Sending a check for a thousand bucks to Bill Gates is not going 
to stimulate the economy. Sending $1,000 to Donald Trump is not 
going to stimulate the economy. I have high regard for both of 
them, but that is not going to stimulate the economy. I think 
at some point we would become ridiculed if we start just 
sending checks regardless of whether it has any stimulative 
effect.
    Would it, in your judgment, have any stimulative effect to 
be sending checks to the highest-income individuals in our 
country?
    Mr. Walker. I think you should target the action to those 
that are most likely to consume the funds quickly, and the 
persons you talked about have plenty of funds. They do not need 
$1,000.
    It would be interesting if maybe at the time you sent out 
the $1,000 refund check, if you sent out the $175,000 bill, 
which is the per capita burden for the $53 trillion, that might 
get people's attention. ''Here is the good news and the bad 
news.``
    Chairman Conrad. Yes, ''Here is your thousand bucks. By the 
way, you owe net $175,000.``
    Mr. Walker. We need to think outside the box on how we can 
start communicating some of this information in forms that 
people might read it. And, Senator Whitehouse, one of the 
things that I think we ought to be doing, the national debt 
clock shouldn't be based on $9.2 trillion. It should be based 
on $53 trillion. And why do I say that? Because if you make a 
$12 trillion downpayment, you get credit if you have a $53 
trillion clock. If you have a $9.2 trillion clock, you do not 
get any credit because you are not reducing the current debt. 
You are reducing the future burden.
    So I do think we have to think about how we can end up 
using opportunities to communicate more effectively with the 
American people. And I am only halfway kidding. Maybe we ought 
to think about--you know, you know they are going to open the 
check. You know they will open that, and they will read that. 
Maybe they will read a stuffer.
    Chairman Conrad. I tell you, it is really sobering, the 
situation that we are in. Every time we hold these hearings, it 
becomes increasingly apparent that we are on a course here that 
is utterly unsustainable. And it is time to act. The reason it 
is so important we take action sooner rather than later is the 
longer we wait, the more draconian the solutions become. And, 
you know, I understand my colleagues. I cannot tell you--just 
in the last week I have had a number of my colleagues come to 
me and say, ''You aren't really going to go to markup on your 
proposal, are you? You are going to insist we actually vote?`` 
Yes, I am going to insist we actually vote, because this is a 
situation that we simply must address. And so we are going to 
vote. And I am sorry if that causes discomfort to some of my 
colleagues, but, look, this cannot be kicked down the road 
again. Why not? Because the time for action is the early part 
of the next administration, whoever leads it--you know, you 
think about this. They are going to come into office in 2009. 
At the end of their term, the trust funds will have gone cash 
negative.
    You know, this is it. We have kicked this can down the road 
about as long as it can be, and it will absolutely bedevil the 
next administration. The time to act is the first year. It will 
not happen the second year because we will be right back in an 
election year. And the time to act is next year. And the only 
way we are going to do that is if we have a process 
established.
    Now, I am open to the thoughts of colleagues about how the 
proposal that Senator Gregg and I have offered might be 
changed. We have heard three complaints:
    One, timing, because we had called for the report to be 
done this year, in anticipation of the work being done this 
year. Obviously, that is not going to happen, so the timing 
needs to be changed.
    Second, we have heard criticisms that there ought to be the 
possibility for amendment. Let me just say we will resist that 
because we have set up a process that requires super majorities 
to have a report, super majorities to pass, and, of course, the 
President retains the right to veto. That would require a two-
thirds vote to overcome. If we start having amendments, we know 
what will happen. There will be amendments offered which will 
have no revenue. There will be amendments offered that have no 
benefit reductions, and people will vote for one of those and 
say, ''Gee, we did something.`` You know, one will have revenue 
as part of a package and one will not. One will have benefit 
reductions. One will have benefit reductions that are 
insufficient to do the job. And so people will vote for one or 
the other and then have an excuse not to vote for the one that 
would actually do something. We all know how this works.
    The other question--we have the question of timing. We have 
the question of amendment. We have the question of whether a 
super-majority vote is required in the House. That I am open to 
consideration on because the House does not have a tradition of 
requiring a super-majority vote. They are concerned about 
setting the precedent. They are concerned about turning the 
House into the Senate, because in the Senate, obviously, there 
is a right to filibuster, there is a requirement for a super 
majority. So there is going to have to be a super-majority vote 
here. But, look, at the end of the day we need to get this 
resolved.
    The other question is whether there are outside persons 
involved. I personally do not think that is wise with respect 
to the membership. I do think it is required that we have 
outside advisers. For example, I believe there should be 
certain ex officio members. Dr. Walker, you would be among the 
most prominent that I think ought to be ex officio advisers who 
would be involved every step of the way with respect to 
providing advice and counsel to the members of this task force.
    With that, I want to conclude this hearing and again thank 
you for your contributions to this Committee and, more 
importantly, to the country.
    Mr. Walker. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you. We adjourn the hearing.
    [Whereupon, at 12:02 p.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.036
    



 ECONOMIC STIMULUS: BUDGET POLICY FOR A STRONG ECONOMY OVER THE SHORT 
                             AND LONG TERM

                              ----------                              


                      WEDNESDAY, JANUARY 30, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:01 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Nelson, Menendez, Cardin, 
Gregg, Domenici, and Bunning.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to thank our witnesses for being here today. It 
turns out that this hearing is very timely because the Finance 
Committee is going to mark up the stimulus package this 
afternoon. So this, largely through serendipity, proves to have 
been held at precisely the right time.
    Let me just try to put a frame on this morning's hearing 
and then go to Senator Gregg for his observations and then turn 
to our witnesses.
    We see, if we go to the first slide, that economic growth 
is expected to slow sharply in 2008. In fact, we have just 
received the news that gross domestic product grew at an annual 
rate of only six-tenths of 1 percent in the final quarter of 
last year. Over the course of 2007, GDP grew 2.5 percent, down 
slightly from the fourth quarter of 2.6 percent in 2006. We see 
that CBO is telling us they anticipate growth in 2008 at 1.5 
percent.

[GRAPHIC] [TIFF OMITTED] T2157.057


    Let's go to the next slide.

    [GRAPHIC] [TIFF OMITTED] T2157.058
    

    We all know that the subprime mortgage crisis, as some have 
described it, has been at the heart of the economic slowdown. 
It has obviously spread from the subprime area to other areas 
of credit. We see new home building falling dramatically 
through 2006 and continuing into 2007. I had a delegation of 
home builders come to see me yesterday, telling me about they 
see their industry not in a recession but in a depression, as 
they described it.
    Let's go to the next slide.

    [GRAPHIC] [TIFF OMITTED] T2157.059
    

    In the midst of all this, we also have soaring energy costs 
affecting people when they go to gas up at the pump, affecting 
them when they pay their utility bills. I certainly noticed it 
in my utility bills this last month. Energy costs, with the 
real price of oil soaring, oil at one point at $100 a barrel, 
all of this affecting consumer confidence. We see a 
continuation of declines in consumer confidence: after 
declining sharply last summer, consumer confidence has remained 
depressed into this year.

[GRAPHIC] [TIFF OMITTED] T2157.060


    Unemployment has jumped. In December of 2006, the 
unemployment rate was 4.4 percent. In December of 2007, it had 
jumped to 5 percent.

[GRAPHIC] [TIFF OMITTED] T2157.061


    As a result of this, the Federal Reserve, as we all know, 
recently took emergency action between meetings to lower its 
target, Federal funds rate by three-quarters of 1 percent.

[GRAPHIC] [TIFF OMITTED] T2157.062


    Let's go to the next slide, if we could.

    [GRAPHIC] [TIFF OMITTED] T2157.063
    

    The Chairman of the Federal Reserve has called for an 
explicitly temporary stimulus measure. He said, and I quote, 
``Any program should be explicitly temporary, both to avoid 
unwanted stimulus beyond the near-term horizon and, 
importantly, to preclude an increase in the Federal 
Government's structural budget deficit.''
    Let's go to the next slide, which is also a quote from the 
Chairman of the Federal Reserve. He said, in January of this 
year, before the House Budget Committee, ``There is good 
evidence that cash that goes to low- and moderate-income people 
is more likely to be spent in the near term... Getting money to 
people quickly is good, and getting money to low- and moderate-
income people is good, in the sense of getting bang for the 
buck.''

[GRAPHIC] [TIFF OMITTED] T2157.064


    Let's go to the final slide that compares the House package 
and the Senate package. We know in terms of rebates that more 
people would be eligible for the Senate rebate. There is no 
income limit. Seniors are eligible. On the business side, the 
significant difference is that the Senate package provides for 
net operating loss carrybacks. And on unemployment insurance, 
while the House does not have a provision, the Senate does.

[GRAPHIC] [TIFF OMITTED] T2157.065


    And then in terms of cost, the Senate package obviously 
costs somewhat more: $161 billion in 2008 compared to $146 
billion for the House package. Over 2 years, the Senate package 
costs $196 billion compared to $161 billion on the House side.
    I am delighted we are having this hearing with such 
distinguished witnesses today so that we can discuss the views 
of the members and the views of the witnesses with respect to 
what a stimulus package might include and how we might think 
about those issues.
    With that, I want to turn to my very able colleague, the 
Ranking Member of this Committee, the former Chairman of this 
Committee, Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Thank you, Senator Conrad, and many of the numbers that you 
have cited are numbers which set the table appropriately 
relative to the issue of the economic slowdown. But the 
question is, What should the Federal Government do? And any 
stimulus package, in my humble opinion, should be a real 
stimulus package, and that means it should be targeted on this 
quarter, the next quarter, and the following quarter--the first 
three quarters of this year.
    My guess is that most of what the Fed is going to do--and 
this was testimony actually from Dr. Orszag--will have an 
impact beginning aggressively in the third and fourth quarters 
of this year. And we need to be careful that the stimulus 
package is well focused as a result of that and does not end up 
incurring costs and stimulus outside of what is the period when 
we expect the slowdown to occur.
    We also have to understand that any stimulus package is 
going to be funded by debt, and I noticed in your numbers--and 
I presume that this is reasonable--that you did not calculate 
in the interest, I do not think, on the debt that all this is 
going to cost, but our calculation is that a $150 billion 
stimulus package today over 5 years will have about a $36 
billion debt cost and over 10 years will have about an $80 
billion debt cost. I think those are the numbers. Is that 
right? OK.
    So you are talking packages which are truly going to cost 
our kids around 200 billion bucks. And what are they going to 
get for that? What is the economy going to get for that? Well, 
I am not a great fan of the House package, but it appears to be 
the high watermark when you compare it to the Senate package, 
because the Senate package, for some unknown reason, is now 
lifting the cap and saying let's send $500 to everybody. So we 
will fly across the country in a plane and throw money out of 
the plane to everybody. And what are the practical implications 
of that?
    Well, with high-income people, first off, it is unlikely 
that that rebate is going to get out the door very quickly. If 
it gets out by the middle of June, we would be fortunate, and 
that means it is probably not going to impact us until the 
third quarter. And with high-income people, it is probably 
going to be saved. It is probably not going to go into demand 
stimulus, which is what usually you are looking for.
    Second, as a very practical matter, if you extend the 
unemployment insurance, as is proposed in the Finance Committee 
package, you end up with a situation where we are at 5-percent 
unemployment right now in most of this country--in some places 
well under 5 percent, like in New Hampshire--and it is very 
hard to defend extending unemployment insurance as an economic 
stimulus event because if you are in what is a relatively full-
employment economy, it just simply creates more of an incentive 
for people not to go out and find a job. Most of the jobs that 
are--most people find their jobs in the last couple weeks of 
their insurance running out. If you extend it for a year, which 
is what is proposed in the package, you basically end up with a 
situation where, if that extension occurs in States where you 
have fairly close to full employment, you are not going to get 
much stimulus out of that package. Thus, there should 
definitely--any unemployment extension should, in my humble 
opinion, be tied to a trigger which says it occurs in States 
where the unemployment has reached a historic level which is 
deemed to be not full employment, such as 5.7 or 5.8 percent, 
which is the historic number we have been looking at.
    There is no trigger, however, in the proposed package here, 
and it is a bigger package as a result of that. Also, I am not 
sure how this NOL in the Senate Finance package works. I have 
heard different statements that you get the NOL if you do not 
take advantage of the accelerated depreciation. But if you take 
advantage of the accelerated depreciation, then you cannot take 
the NOL. I am not sure what the economic impact of that is.
    I will say that, from my own personal standpoint, if you 
are going to do something to create long-term efficiencies in 
the economy, expensing, accelerated depreciation, NOL carryback 
are probably positive things. But they are not going to have an 
immediate economic stimulus. But they will at least have a 
long-term effect. Whereas, simply giving people a rebate check, 
in some instances giving them a check even though they do not 
pay taxes, is probably not going to have any significant 
stimulus on the economy other than the psychological stimulus, 
because much of what will be purchased with that stimulus will 
be manufactured outside the United States. And as Dr. Orszag 
testified yesterday, if it is manufactured in China, the $500 
is spent on a television manufactured in China, the stimulus to 
our economy is basically nonexistent.
    So this stimulus package is really, in my humble opinion, 
more about building confidence that the Government can act and 
that a divided Government can come together and take action 
than about actually having stimulus effect in the next two to 
three quarters, which is when we need it. In that context, the 
package which does the most good from a standpoint of the 
``Kumbaya'' factor is the House package. And the package which 
does the most harm from that standpoint is probably the Senate 
package because it divides an already agreed to understanding. 
But I have reservations about both, obviously.
    However, that being said, I look forward to hearing from 
the witnesses as to what they think should be done, and that is 
why they are here and they are experts, and they are highly 
regarded in their field, and we appreciate them taking the time 
to testify.
    Chairman Conrad. Thank you, Senator Gregg, and thank you 
for your observations.
    I must say when we have identified all along the three T's 
as what we should be doing with the stimulus package--targeted, 
timely, and temporary--to start taking----
    Senator Gregg. ``Kumbaya.''
    [Laughter.]
    Chairman Conrad. To start taking the income cap off and 
sending $1,000 checks to Bill Gates and Barry Bonds and Donald 
Trump and Members of Congress, I think we have really lost our 
way.
    Senator Gregg. I agree.
    Chairman Conrad. I mean, that just cannot be the answer 
here.
    Senator Gregg. Once again, bipartisan agreement in the 
Budget Committee.
    Chairman Conrad. OK. We have agreement here.
    Senator Gregg. I do not know. We did not ask Senator 
Bunning.
    Senator Bunning. Yes, I agree 100 percent.
    Senator Gregg. Two Finance Committee members agree.
    Chairman Conrad. We welcome Alan Blinder, the Gordon. 
Rentschler Memorial Professor of Economics and Public Affairs, 
and Co-Director of the Center for Economic Policy Studies at 
Princeton University. Dr. Blinder has testified before this 
Committee before, and we welcome you back. We also have with us 
Mark Zandi, the Chief Economist and Co-Founder of Moody's 
Economy.com. I am very glad to meet you, sir, because I very 
much enjoy reading your work. And Daniel Mitchell, a Senior 
Fellow at the Cato Institute. Welcome all. We are delighted 
that you are here.
    Dr. Blinder, why don't you proceed, and then we will go to 
Dr. Zandi and then to Dr. Mitchell.

  STATEMENT OF ALAN S. BLINDER, GORDON S. RENTSCHLER MEMORIAL 
  PROFESSOR OF ECONOMICS AND PUBLIC AFFAIRS, AND CO-DIRECTOR, 
    CENTER FOR ECONOMIC POLICY STUDIES, PRINCETON UNIVERSITY

    Mr. Blinder. Yes, thank you, Mr. Chairman, members of the 
Committee. I appreciate the opportunity to testify here on this 
particular day on this particular issue, which is, of course, 
an important issue for the Budget Committee, by definition, and 
also something that is on the immediate Senate agenda. But at 
the end I want to raise a couple of things that are not quite 
on the immediate agenda, but that I think are more important.
    The testimony, which is much too long to deliver in 7 
minutes, is organized around five questions. I am going to boil 
them down to three for purposes of this morning.
    The first is something that Senator Gregg was just 
implicitly asking, which is: Should we enact a fiscal stimulus 
package now at all? I think the answer to this is probably yes, 
but, frankly, the case is not airtight. The Federal Reserve, as 
you know, is cutting interest rates aggressively. We are 
normally accustomed to leaving these sorts of tasks to the Fed. 
But the problem is that the Federal Reserve's medicine works 
slowly, as you mentioned, Mr. Chairman. And so that says that, 
if the economy starts deteriorating very rapidly in front of 
your eyes, the Fed can act very quickly, but it will not 
actually give the economy a boost in a sufficiently timely way. 
So the question is: Is the economy actually slipping down very 
rapidly?
    Again, I would say the answer is that there is a reasonable 
likelihood of that, but we do not know for sure. It is 
certainly not as clear as many people are saying. I would be 
much more convinced if, 2 days from now, when we get the next 
employment report, it looks as bad as the previous one, or 
worse, rather than much better, which I think is the current 
guessing. And I would also be more convinced if I saw one more 
month of weak retail sales. We have only really seen one so 
far. The real issue here for the economy is the infection of 
what I like to call ``the 96 percent'' by ``the 4 percent.'' 
The 4 percent is the housing sector, which, as the Chairman 
mentioned, quoting someone else, is really in a depression. 
There is not any question about that. Up to now, the 96 percent 
is holding up well. But there are fears that it is not going to 
last.
    So I think it is wise to get a stimulus package designed 
and ready to go immediately, basically. I do not imagine--
although the House and the Senate are moving with incredible 
speed on this--that this is going to be enacted before February 
13th, anyway. But I could be wrong about that. I cannot 
remember seeing this body move as quickly as it is moving right 
now. You are all better judges of that than I am.
    The second question, which is always of interest to the 
Budget Committee is about this idea of paying for it and how 
does this square with PAYGO. When it comes to stimulus, the 
answer to the question ``should we pay for it?'' Is a 
resounding no. Paying for it takes away the stimulus with one 
hand that you are putting in with the other hand. That said, 
this Committee's longstanding concerns with budget deficits is 
very, very valid. But what needs to be understood is that it 
pertains to long-run issues. We want to keep the budget deficit 
down in order to spur capital formation, to improve technology, 
to keep real interest rates low in the long run, and so on. 
These all have to do with the economy's ability to supply goods 
and services.
    In a short-run emergency, the focus is not on supply but on 
demand, on getting spending higher--or preventing it from 
sagging, which amounts to the same thing. And it is that 
thinking that leads to the three familiar principles that 
Senator Conrad just alluded to, the three T's. And the one that 
I want to emphasize in that context is targeted to produce 
spending. The other two are equally important, and 
temporariness is especially crucial to the question of how much 
deterioration in the long-run budget picture are we causing by 
a stimulus. The answer is quite little. The numbers that 
Senator Gregg was just citing on the interest burden were 
suggestive of around $4 billion a year, or something in that 
kind of a range--which, of course, in a budget the size that we 
have is extremely small.
    The third question, which is the one that Congress is 
wrestling with literally right at this minute, I guess, is what 
elements of a stimulus package make sense. I want to answer 
that two ways--first sort of generically, just in the abstract, 
thinking about stimulus; and then, second, how can we tailor 
this to the circumstances of 2008?
    So, generically, I would give the grade of A, in terms of 
inclusion on a stimulus package, to two things which, 
unfortunately, were left out of the House package: the 
extension of unemployment benefits and Food Stamps. The 
reasons, again, have to do with bang for the buck. When you 
give money to people that have lost their jobs, you are giving 
money to people who are trying to maintain their previous 
standards of living. It is hard to imagine anything that has 
greater surety of getting spent right away than that--except 
maybe giving it to Food Stamp recipients who are literally 
living hand-to-mouth. The basic principle is that you want to 
give the money to people who are going to spend it right away, 
if and when your objective is stimulus, which I think is the 
case now.
    After that, I would give a grade of B to sending out 
checks, e.g., tax rebate checks, especially to low- and 
moderate-income people--as Senator Gregg mentioned, not to 
high-income people--who are less likely to spend it. But it is 
important not to limit the checks to people who have enough 
income to pay income tax, and it was a good idea that the House 
package was designed that way. And I think it was also a good 
idea that the House package capped the payments at certain 
income levels. There is no magic number there, but the 
principle of capping is very important if you care about bang 
for the buck. And I think we need to care about bang for the 
buck.
    It will not have escaped your attention that this list of 
recipients who would get moneys that were labeled, by me 
anyway, and other people, too, A's and B's are the people most 
in need. We all know about Franklin Roosevelt's famous aphorism 
about bad morals being bad economics. When it comes to 
stimulus, good morals turn out to be good economics as well. 
That is where the ``Kumbaya'' factor comes from, and it is 
perfectly appropriate in this case.
    Moving down the list, and very briefly, I would give the 
grade of C, which is still a passing grade, to transfers to 
State and local governments who otherwise are going to be 
raising taxes and cutting spending and making the situation 
worse.
    I would give the grade of D, with charity, to business tax 
cuts, which may or may not have good rationales for long-run 
reasons, but which are not going to provide short-run stimulus. 
That is all in general.
    What about the specifics of 2008? As the Chairman 
mentioned, two things, and mainly one, are contributing to the 
current economic travails: higher oil prices and housing, which 
is a multifaceted problem. So what might we do specifically in 
such circumstances that we might not want to do in more generic 
circumstances?
    Well, in terms of energy prices, there is a program that 
you all know about called LIHEAP that is specifically designed 
to send money to poor people who are having trouble paying 
their energy bills--which, of course, have mounted 
substantially. This is by the same reasoning as for Food 
Stamps, likely to lead to checks sent by the Government that 
lead to spending by people extremely rapidly.
    On the housing front, it is quite a bit more difficult, 
since there is no ready-made institution for doling out the 
money to the particular types of people having difficulties 
with their houses--for example, forestalling of foreclosure--
that would guarantee very rapid turnaround of spending. There 
are some steps in this direction in the House bill, and I think 
they are fine. I think the Congress, both Houses, and the 
executive branch need to keep working on this significantly. As 
I will say in a moment, I think some new institutions are 
probably necessary. But you do not do that in a stimulus bill. 
You do that after a stimulus bill.
    But what I want to close with is just a minute or two of 
what maybe should happen after the stimulus--as a natural 
followup because of the specific and longer-term difficulties 
we are having with housing. I will be very brief on this.
    To start, I am very much in the Alan Greenspan school. You 
may have noticed that he told an interviewer--I cannot remember 
who it was--a few days ago that one thing we know the 
Government can do is send cash to help alleviate this problem. 
So how could you send cash? Well, one way is cash transfers to 
help poor people make their mortgage payments and avoid 
foreclosure. Another is giving assistance to State and local 
governments and community organizations who are trying to 
prevent neighborhoods from being blighted by abandonment. And 
this is happening. A third is to put more counselors, and 
especially workout specialists, into the field to help people 
who can avoid foreclosure to actually avoid foreclosure, 
perhaps by refinancing their mortgages on more reasonable terms 
than the ones that they now have.
    But, unfortunately, the current financial problems extend 
well beyond subprime mortgages and, indeed, beyond mortgages as 
a whole. As I think you all know, the credit and fixed-income 
markets are in a tizzy right now, and some of them are barely 
functional at all. That is what is motivating the Federal 
Reserve's actions, I think, more than anything else. But in any 
case, my personal worry is less about recession--actually 
showing negative GDP growth as opposed to positive 0.6 
percent--and much more about our economy's ability to mount a 
vigorous recovery after the period of sag. That is what plagued 
us in the years 2002, 2003, and 2004. It was not that we had a 
terrible recession in 2001. We had a minuscule recession. But 
we just did not climb out of the hole as rapidly as we had in 
the past.
    Now, in terms of fixing these markets, it would be nice to 
see and appropriate to see private capital rushing in to do the 
job. Unfortunately, this crisis is now about 6 months old, and 
this does not seem to be happening to any great degree. 
Instead, what you see is incredible risk aversion ruling the 
markets, bid-ask spreads for fixed-income securities that are 
gigantic, amazing. When they are that large, that means the 
market is basically not functioning. And a scarcity of bargain 
hunters coming in to take advantage.
    This is a dangerous situation, and that is what leads me to 
say that Congress ought to start thinking, after the stimulus 
bill, about establishing potentially new Federal agencies. One 
that I would think about would be analogous to but not 
identical to, because the problems are different, the RTC, the 
Resolution Trust Company that Congress started in order to fix 
up the mess left by the savings and loan debacle. The job here 
would be to get these fixed-income markets functioning again 
and then go out of business, as the RTC did.
    The other thing I think Congress should be thinking about 
is something analogous to what was done in the Great 
Depression, the last time we had a housing problem this bad. 
The HOLC, Home Owners Loan Corporation, existed for about 3 
years and was focused on refinancing homes to prevent 
foreclosures. This is not going to get done in 24 hours. It is 
probably not going to get done in a month. But it is something 
I think the Congress needs to think about for the future.
    Thank you all for listening.
    [The prepared statement of Mr. Blinder follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.066
    

    [GRAPHIC] [TIFF OMITTED] T2157.067
    

    [GRAPHIC] [TIFF OMITTED] T2157.068
    

    [GRAPHIC] [TIFF OMITTED] T2157.069
    

    [GRAPHIC] [TIFF OMITTED] T2157.070
    

    [GRAPHIC] [TIFF OMITTED] T2157.071
    

    [GRAPHIC] [TIFF OMITTED] T2157.072
    

    [GRAPHIC] [TIFF OMITTED] T2157.073
    

    [GRAPHIC] [TIFF OMITTED] T2157.074
    

    [GRAPHIC] [TIFF OMITTED] T2157.075
    

    [GRAPHIC] [TIFF OMITTED] T2157.076
    

    [GRAPHIC] [TIFF OMITTED] T2157.077
    

    Chairman Conrad. Thank you, Dr. Blinder.
    Dr. Zandi?

   STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND CO-FOUNDER, 
                   MOODY'S ECONOMY.COM, INC.

    Mr. Zandi. Thank you, Mr. Chairman. Thank you, members of 
the Committee. My views that I am expressing today are my own, 
not those of the Moody's Corporation. And let me say none of 
this is my fault.
    [Laughter.]
    Mr. Zandi. I have a slide show, and I am going to make four 
points with my slides.
    Point No. 1, I do think the economy is on the edge of 
recession, or very close. I think the economy contracted in 
December. It may have very well contracted in October, grew in 
November, and it feels very soft coming into 2008. The most 
telling statistic is the increase in unemployment. As you can 
see here, this is the percent change a year ago in the number 
of unemployed. You can see the recession boars--I think you can 
see them. Yes. Every time we have seen a measurable increase in 
unemployment, a recession has ensued, and it has never falsely 
predicted a recession. And there is logic to it. When 
unemployment rises, it undermines consumer confidence. The 
consumers pull back on their spending. Businesses respond by 
curtailing their hiring and investment. That causes 
unemployment to rise further, and you are in the middle of a 
very self-reinforcing negative economic cycle. And it appears, 
if history is any guide--and sometimes it is not, but it is 
useful to examine--this would suggest strongly that we are 
entering into that very strong self-reinforcing negative cycle.
    I do believe there are many parts of the country that are 
already in recession. As you know, the National Bureau of 
Economic Research determines recessions nationally by looking 
at a plethora of data and determine based on that data whether 
we are experiencing a persistent, broad-based decline in 
economic activity. I take on that responsibility at a regional 
level using the same methodology, and you can see I think a 
handful of States are in recession already. California, Nevada, 
Arizona, Florida, and Michigan are in recession. The States 
that are in orange are very close, and I suspect they will fall 
into recession in the next couple 3 months.
    The key to whether the national economy actually falls into 
recession is the Northeast corridor from Boston to D.C. New 
York City is now struggling quite significantly because of the 
layoffs and lost compensation on Wall Street. I do not know if 
you are shedding any tears over Wall Street, but they are 
having all kinds of problems. So I do think there are 
significant regional economic problems that are developing and 
that highlight the recession risks.
    Point No. 2, the problem is housing. It goes beyond just 
construction, though. This is the most severe housing downturn 
literally since the Great Depression. To give you a sense of 
that, as a percentage decline, peak to trough in house prices, 
nominal house prices, home sales, new and existing, and housing 
starts, this is the percentage decline peak to trough in the 
early 1980's downturn when unemployment was in the double 
digits. You can see housing starts fell 60 percent peak to 
trough, home sales 50; nominal house prices did not fall. That 
was a period of significant inflation. Real prices fell, but 
nominal prices did not.
    This is the early 1990's downturn in housing. You can see 
how that stacks up, not quite as bad as the 1980's downturn.
    This is the current downturn so far. To date, housing 
starts are down 55 percent from their peak. That was your 
chart. Home sales are down 35 percent. New home sales are down 
measurably more than that. It just cratered in December, 
600,000 home sales back to 1995 levels.
    House prices are down 8 percent nominal. That is 
unprecedented nominal price declines.
    This is where I think things are going to end up. I think 
the downturn will continue throughout 2008. Fundamentally the 
market is awash in unsold inventory. We got new data yesterday 
from Census. The inventory increased. We have almost a million 
of excess housing units. It is not getting any better. It is 
getting worse because of the collapse in home sales and the 
surge in foreclosures. So we are going to see continued 
declines in construction, home sales, and housing, particularly 
housing--most importantly housing values.
    Just to give you a sense of the magnitude, an 8-percent 
decline is equal to roughly $1.5 trillion of household net 
worth. If we decline 15 percent, you can do the math. It is 
quite significant in terms of the impact on household wealth.
    This is where the declines are most serious. These are all 
381 metropolitan areas across the country. The areas that are 
in red are crashes. These are house price declines that are 
over 10 percent. This understates the decline. These are 
measured house prices. If you can consider non-price discounts 
that sellers and builders are giving to homeowners, the price 
declines are 5 to 10 percent more than this in these very 
distressed markets.
    Two-third of the Nation's housing markets are experiencing 
persistent price declines. That is two-thirds of the Nation's 
housing markets. This is unprecedented in terms of its scale 
and scope.
    And adding to it, of course, and contributing to the 
problems is the surge in mortgage credit problems that Dr. 
Blinder talked about. They are stunning. We have very high 
quality data that we collect based on consumer credit files 
maintained by Equifax. We take a 5-percent random sample at the 
end of every month of all the credit files across the country 
and construct very high quality data on delinquency and default 
across all kinds of consumer product lines, including 
mortgages.
    As you can see, as of the last week of December, which is 
the last data point in this chart, there were 1.8 million first 
mortgage loan defaults at an annualized pace. Nothing ever--we 
have never seen anything close to this, and you can see it is 
going straight up.
    Thirty-day, 60-day, 90-day, 120-day delinquency are all 
rising. It is everywhere. There are five metropolitan areas out 
of the 381 that are not experiencing increasing delinquency and 
default, and they are on the border with Mexico in Texas and in 
Oklahoma. North Dakota is doing OK, by the way. All 500,000 
North Dakotans are OK. But outside of that, everyone is 
experiencing some pain, significant pain.
    The third point, all the risks are to the downside. Risk 
No. 1, the problems in the housing, in market economy markets 
has infected the global financial system. The banking system is 
under severe pressure. That will not go away, in my view. To 
give you a sense of the exposure in the banking system, this is 
data from the Federal Reserve Board. It shows the amount of 
residential real estate assets on the books of the Nation's 
large commercial banks. The blue bar represents billions of 
dollars. That is the left-hand scale. We are at just under $2 
trillion worth of residential real estate whole loans and 
mortgage securities. As a share of their assets, it is falling 
now because their balance sheet is ballooning out because of 
all of the stuff coming up from their exposure to the global 
financial system, the SIVs and other problems that they have. 
But you can see it is still very high, so the banking system 
is, in my view, going to remain under tremendous pressure.
    This does not include construction and land development 
loans, which we have heard nothing about, which are under--
these are loans to home builders. They have to be under 
tremendous pressure. This does not include the consumer loans 
that are under a lot of pressure as delinquencies are rising on 
auto loans and credit card loans and student loans and consumer 
finance loans.
    Risk No. 2 is the infection in the housing market is 
bleeding into the consumer sector. Consumers are sensitive to 
what is going on in the housing market. You can see that 
relationship here. The red line represents house price growth 
year over year percent change a year ago. That is the left-hand 
scale. Retail sales, the growth in retail sales is the blue 
line, right-hand scale. The twist here is that house prices 
lead consumer spending 6 months, by 6 months. There is a lag 
between what happens in the housing market and how it affects 
the willingness and ability of consumers to spend. And one of 
the reasons why is because of their ability and willingness to 
take out equity from their home. This shows you the amount of 
cash they are pulling out of their homes. Back at the peak of 
the cash withdrawal in late 2006, early 2007, it was $900 
billion annualized. It is about 10 percent of disposable 
income. And you can see, as you would expect, it is crashing 
now because of the decline in housing values and the tightening 
of borrowing rate standards. So my view is that when we get Dr. 
Blinder's read on retail sales, it will be a very negative one. 
Christmas sales are going to be weak, and it will be measurably 
weaker as we make our way into 2008.
    My final point is I think fiscal stimulus is absolutely 
necessary. You know, I do not know that it is going to 
forestall recession. Even under the best of circumstances, the 
checks you write will go out in June. But I think it could make 
a very large difference between a long recession or short 
recession, a 12-month recession or a 9-month recession. It 
could be the catalyst to push us out of a recession. It could 
make a difference between a weak recovery and a reasonably good 
recovery. So just because you cannot get it out there in the 
next couple three, 4 months and forestall an actual economic 
downturn does not mean that you should not do it.
    Now, I have simulated the economic consequences of two 
different packages of stimulus programs. The blue bar 
represents the contribution to real GDP growth, and the first 
bar is in the second half of 2008 when the stimulus actually 
will take effect, and the first half of 2009 is the second bar. 
I say ``likely stimulus.'' That is my forecast of what happens. 
And this does not mean it is going to happen, but I am usually 
accurate in my forecasting. But who knows?
    This package is exactly what the President and the House 
agreed to with the addition of an extension of UI benefits 
similar to what you have proposed--or what the Senate Finance 
Committee has proposed. You can see that it will add about 1.5 
percent to annualized real GDP growth in the second half of the 
year. That is important. That will make a big difference. That 
could be the difference between negative numbers and positive 
numbers and a significant effect on jobs.
    The red bar is my optimal package. In that package, I have 
a tax rebate plan that is very similar to what is proposed by 
the House and the President. But it has no depreciation 
benefits or other tax incentives for businesses, and I use that 
money to finance extension of UI benefits, food stamps, which 
are--I will reinforce the point that Dr. Blinder made--are 
extremely important and very efficacious policy. And just 
listening to some of the folks that operate these programs, 
they can get that out into the world very quickly, within 4 to 
6 weeks, and that will make a big difference. And aid to the 
State governments, I think if that happens now, that would be 
very, very timely. Half the States are now going to have budget 
shortfalls, and there will be significant cuts in spending, 
which I think will be very pernicious, particularly on things 
like education and Medicaid. So if I were King for the Day and 
I designed my own package, that is the red bar, and you get a 
sense of the GDP impact.
    And, finally, what it means for jobs. In the likely 
stimulus, by June of 2009 it means 662,000 more jobs than would 
have otherwise been the case; in the optimal stimulus package, 
close to a million jobs.
    Finally, one other point just to reinforce something that 
Dr. Blinder said. I do not think monetary and fiscal stimulus 
is all that should be focused on here because he is absolutely 
right, we may get to the other side of this and the economy, 
you know, struggles through a couple 3 years of very weak 
economic growth. And that is very possible because underlying 
our problems is what is going on the housing and mortgage 
markets, and until we address those with more targeted types of 
policy, I think that is going to be a significant weight on our 
economic growth prospects.
    Thank you.
    [The prepared statement of Mr. Zandi follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.078
    

    [GRAPHIC] [TIFF OMITTED] T2157.079
    

    [GRAPHIC] [TIFF OMITTED] T2157.080
    

    [GRAPHIC] [TIFF OMITTED] T2157.081
    

    [GRAPHIC] [TIFF OMITTED] T2157.082
    

    [GRAPHIC] [TIFF OMITTED] T2157.083
    

    [GRAPHIC] [TIFF OMITTED] T2157.084
    

    [GRAPHIC] [TIFF OMITTED] T2157.085
    

    [GRAPHIC] [TIFF OMITTED] T2157.086
    

    [GRAPHIC] [TIFF OMITTED] T2157.087
    

    [GRAPHIC] [TIFF OMITTED] T2157.088
    

    [GRAPHIC] [TIFF OMITTED] T2157.089
    

    [GRAPHIC] [TIFF OMITTED] T2157.090
    

    [GRAPHIC] [TIFF OMITTED] T2157.091
    

    [GRAPHIC] [TIFF OMITTED] T2157.092
    

    [GRAPHIC] [TIFF OMITTED] T2157.093
    

    [GRAPHIC] [TIFF OMITTED] T2157.094
    

    [GRAPHIC] [TIFF OMITTED] T2157.095
    

    [GRAPHIC] [TIFF OMITTED] T2157.096
    

    Chairman Conrad. Thank you, Dr. Zandi.
    Dr. Mitchell, welcome.

STATEMENT OF DANIEL MITCHELL, SENIOR FELLOW, THE CATO INSTITUTE

    Mr. Mitchell. Well, thank you very much, Mr. Chairman, 
members of the Committee. My name is Mitchell. I am a Senior 
Fellow at the Cato Institute. I will summarize some of the key 
points of my testimony.
    I feel like this is the Monty Python show from my youth, 
and I am going to say, ``And now for something completely 
different.''
    I do think that Government policy, fiscal policy, does have 
a large impact on the economy. I think the level of taxes and 
spending matter a lot. I think changes in the level of taxing 
and spending matter a lot. And I think the actual composition 
of spending and taxes matter a lot. Some programs help the 
economy, some hurt the economy. Some taxes have worse effects 
on the economy than others. So I think all these things matter. 
But I think they matter for the long run. I do not think that 
Government through fiscal policy has a whole lot of influence 
and ability to affect short-term economic performance.
    Now, economists do not do a very good job of predicting the 
economy. If we did, we would all be on the beach in the Cayman 
Island rather than testifying here. So I will not try to add to 
the profession's embarrassment by making my own predictions. 
But let's assume for the sake of this testimony that we are 
heading into a recession. The question is: Can fiscal policy--
let's set aside the Fed and other issues like that, but can 
fiscal policy help ward off a downturn, or at least alleviate 
its impact? And I think the most realistic answer is no. Again, 
this is not because fiscal policy does not affect economic 
performance but because in the short run, you are probably not 
going to have any effect. And what we are really talking about 
here is a debate over something I thought had sort of vanished 
into history, and that is Keynesian economics, the notion that 
Government can go out, borrow money, give it to people 
somehow--through tax policy or spending policy--and that this 
is going to stimulate economic growth.
    Specifically, one of the notions of Keynesian economics is 
borrow money, give it to people, they go out and spend it, 
especially consumer spending, that is supposed to be the key. I 
think this is rather fanciful. Consumer spending tends to be a 
function of economic growth, a result of economic growth, not a 
driver of economic growth.
    I think the key reason to be skeptical about Keynesian 
stimulus is that it only looks at one-half of the equation. 
Everyone says we are going to go around the country and give 
everyone $500, $1,000, whatever the amount is, and everyone 
says that is great. If you send me a check, I will certainly 
cash it. But the question is: Where does that money come from? 
And whether you are giving money directly to people or whether 
you are spending it on programs like UI or food stamps, which 
ultimately, of course, is supposed to go to people, where does 
the money come from? Obviously, Government is borrowing it. And 
so any money that the Government is putting in the pockets of 
Person A or any money that the Government is putting into 
Program B necessarily is going to come out of the pocket of 
Person C. Person C is the person who is going to buy the 
Government bonds.
    Now, admittedly, we can start thinking, well, what if it is 
foreign pension funds and sovereign wealth funds and the 
Chinese? Yes, all sorts of people outside the U.S. might borrow 
the money, and so yes, that might complicate the issue a little 
bit. But, in general, what happens when the Government borrows 
money from Person C and gives it to Person A or Program B, you 
are simply redistributing the use of national income. You are 
doing nothing to increase national income.
    Now, some people say, well, but it is really important that 
if you give the money to people who spend it, that makes a big 
difference. Well, again, let's assume that the borrowers, the 
people who would go out and buy Government bonds so that you 
would then have this money to give to people around the 
country, if they do not spend the money, what happens to it? 
Well, through the process of financial intermediation, it is 
going to wind up in somebody's pockets. Banks do not put money 
under mattresses. They only earn profits and make money for 
their shareholders by lending the money out. And whether that 
money is being lent to consumers who, say, want to buy cars or 
whether it is being lent to businesses that want to build 
factories, and in that case you are purchasing investment goods 
instead of consumer goods, there is no net increase in the 
amount of money in the economy through Keynesian fiscal 
stimulus.
    And I think that is borne out by looking at not only a lot 
of the academic evidence that is out there, but I think even 
more persuasive to people is let's look at the real world. 
Whether we are looking at the Keynesian episode back in the 
1930's, whether we are looking at the rebates back in the 
1970's, or whether we are looking at what happened in 2001, I 
think we have a hard time finding any evidence that taking 
money out of Pocket A and putting it into Pocket B has any 
beneficial effect on the economy.
    I think the 2001 episode is particularly instructive. When 
you compare the 2001 Bush tax cuts with the 2003 Bush tax cuts, 
you found much better economic results after the 2003 tax cut. 
Why is that? Well, in 2001, the bulk of the money was in the 
form of Keynesian style policies: rebates, child credits, 
things that put money in people's pockets but did not change 
marginal tax rates on productive behavior. What happened? We 
did not have a very strong recovery or expansion? In 2003, by 
contrast, the tax cut focused on marginal tax rate reductions: 
lower tax rates on dividends and capital gains, and an 
acceleration of the good parts of the 2001 tax cut that were 
postponed until 2004 and 2006.
    Again, we do not find evidence that Keynesian policies 
work, and I think that makes perfect sense when you think about 
the fact that all that is happening is a redistribution of 
existing national income, nothing to give people incentives to 
increase national income.
    Now, what does work? What works is the policies that are 
good in the long run are also good in the short run. 
Admittedly, though, results tend to be small in the short run. 
I have an example in my testimony that if you did something 
that increased economic growth by four-tenths of 1 percent, in 
the first year it is not going to matter much at all. Even 
after 10 years, your level of income is not going to be that 
much higher. But over 50 years and over 100 years, because of 
compounding, even small changes in economic growth matter a 
lot. Those are things that you actually can control. You can 
make the economy grow faster or slower, depending on whether or 
not you have an environment that is more conducive to 
productive behavior.
    And, finally, I want to close by just making a few comments 
on the amazing turnaround in the thinking in Washington, and 
the thinking is, I think, misguided both where you started and 
where we are heading now.
    A couple years ago, everyone said that deficits were all 
that matters and, by God, we have to reduce deficits, we have 
to try to have surpluses, because then interest rates will be 
low and that is the magic nirvana for economic growth.
    I never thought that really was as important as what is the 
size of Government, what is Government doing, what is the size 
of the tax burden, and how is that money being created. But 
everyone thought deficits were the most evil thing in the 
world. And now we are being told that deficits are the best 
thing in the world for the economy.
    In reality, deficits are the least important--at least 
within the magnitudes that we are talking about in the U.S., 
deficits are far less important than the overall structure of 
spending and the overall structure of the tax burden. And if we 
want to focus on policies that increase economic growth, I 
think we should focus on the big picture of spending and taxes. 
What is the Government doing and how is it doing it? What can 
we do to make the economy grow faster in the long run that will 
help in the short run? But we do not really have any magic 
wands that will make the economy grow faster.
    I will close by just giving the example of Japan. Japan for 
years, beginning in 1990 for over a decade, Japan tried one 
Keynesian stimulus program after another. They dramatically 
increased their deficits. They dramatically increased their 
debt. It was textbook Keynesianism, and Japan wound up mired in 
a 15-year stagnation. Now, I think Japan had problems that were 
insolvable by fiscal policy. They had major problems with 
overvalued assets, and when you run into that problem, which 
is, I think, where we are with housing, there is really not a 
whole lot you can do about it except let it work its way out of 
the system. Japan tried to avoid that, and I think they paid a 
heavy price with a much, much longer and deeper period of 
economic stagnation.
    Thank you.
    [The prepared statement of Mr. Mitchell follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.097
    

    [GRAPHIC] [TIFF OMITTED] T2157.098
    

    [GRAPHIC] [TIFF OMITTED] T2157.099
    

    [GRAPHIC] [TIFF OMITTED] T2157.100
    

    Chairman Conrad. Thank you, Dr. Mitchell.
    Dr. Blinder, Dr. Zandi, is there anything that you heard 
from Dr. Mitchell that you would especially want to respond to?
    Mr. Blinder. Everything.
    [Laughter.]
    Mr. Blinder. First, I think he should go over to the other 
side of town and tell this to the Federal Open Market 
Committee, which even as we speak is thinking about stimulating 
the economy, as they did last week, by what some people with 
pride and some people derisively call ``Keynesian thinking.'' I 
think it is exactly the right thing. It does not mean it is 
right to every detail, but it is basically the right thing to 
do. When you have a dearth of spending, you do something that 
increases spending.
    Most things that you would do in that context will not have 
profound effects on long-run economic growth. I mentioned that. 
That is true. But that is not the name of the game right now. 
This is about what is called stabilization policy, not about 
growth policy.
    The specific instances that Dr. Mitchell mentioned--leaving 
aside Japan, which is a whole other story and still somewhat 
mysterious, I might add--are all evidence on the other side. I 
mean, when the United States finally got around to actual 
action instead of talk, that would be called in modern parlance 
``fiscal policy''--and this was mobilization for the Second 
World War--it had profound effects on the economy. There have 
been careful studies of the spending from the 2001 rebate that 
showed that a substantial amount of the money was spent in a 
relatively small amount of time. And most economists--obviously 
not all--think that that is one reason, though not the only 
reason why the 2001 recession was so shallow.
    Chairman Conrad. Dr. Zandi?
    Mr. Zandi. Yes, I think it is appropriate that Dr. Mitchell 
focused on deficits. I think that is going to be our most 
significant long-term issue for the next President. I think 
that will be very daunting. But I have two points.
    First, I think it will cost the Treasury more if we do 
nothing and the economy slides away into recession. That will 
mean lost tax revenue. That will mean increased spending on 
transfer programs. The automatic stabilizers will be--they will 
kick in, and they will be quite costly. And if we can forestall 
a more severe recession, shorten a recession by some well-
timed, targeted stimulus, I think it will actually cost the 
Treasury less in terms of what it means for deficits and debts. 
So I think that is point No. 1.
    Point No. 2, what really matters, I think, for long-term 
growth is long-term deficits. Now, I do not think it really 
matters if we spend $150, $200, $250 billion, and it is 
temporary and everyone knows it is temporary. All the programs 
you are designing, they are not going to be with us a year from 
now, so that has no impact on anyone's thinking about long-run 
deficits. But I do think long-run deficits matter, and they 
matter very much, and we are going to see that very clearly, I 
think, in coming years.
    Chairman Conrad. I think anybody who was here at our 
hearing yesterday with the Comptroller General of the United 
States, it is about as clear as it can be. We are on a 
completely unsustainable course. Deficits and debt do matter. 
Of course, the Government can borrow money so it can kind of 
delay the effect. But we are on a course now in which virtually 
all Federal spending will be dedicated to three things: 
Medicare, Medicaid, and Social Security--crowding out 
everything else unless there is some affirmative action.
    Let me go through, if I could very quickly, stimulus ideas 
that are going to be before the Finance Committee this 
afternoon. And before I do that, let me first ask about the 
size of the package: the package out of the House, basically 
$146 billion; the package in the Senate, $161 billion, roughly 
1 percent of GDP. If I could just get one sentence from each of 
you in terms of the size of the package. Too big? Too small? 
About right?
    Mr. Zandi. I think that is an appropriate size, yes. I do.
    Chairman Conrad. Dr. Blinder?
    Mr. Blinder. I agree. You can get to that logic two ways. 
First, look at the forecast relative to trend and ask how much 
of a boost we could use--these numbers are in my testimony. You 
get a ballpark figure of 1 percent. Another way is to look at 
how much housing has knocked off of GDP growth. In the last 
seven or eight quarters, it is 1 percent. You come to the same 
number.
    Chairman Conrad. Dr. Mitchell?
    Mr. Mitchell. I do not think the size particularly matters 
because we are simply taking money out of the left pocket and 
putting it in the right pocket.
    Chairman Conrad. All right. Let me go to some very specific 
things, and, again, if I could get short answers, because these 
are going to be things that Senator Bunning and I are going 
face votes on this afternoon. One idea has been to do some 
infrastructure spending, largely highways. There has been a 
survey of State transportation industry--State transportation 
departments, rather, that found 2,700 projects with an 
estimated cost of $15.6 billion that could be----
    Senator Gregg. Are those earmarks?
    Chairman Conrad. No.--that could be initiated within 3 
months of a stimulus package enactment. If you could do those 
projects in 3 to 6 months or begin them, is that worthy of 
consideration as part of a stimulus package?
    Mr. Zandi. My view is that infrastructure spending does 
have significant bang for the buck, if you can cut the checks 
immediately. I am very skeptical that that happens and that it 
will occur in a timely way. But in theory, if you could cut 
them, I think it would provide a lot of stimulus, yes.
    Chairman Conrad. Dr. Blinder?
    Mr. Blinder. My answer would be no. I say that against the 
background that--I have been an advocate of more infrastructure 
spending since the late 1980's. This is not a new problem. We 
need it. Things are crumbling all over the place. We have Third 
World infrastructure in a lot of places.
    That said, it is not so much the initiation--and I would be 
a little skeptical about that, anyway--but rather the spend-out 
rates. If you look at, say, $100 million spent on an 
infrastructure project, a highway or bridge or whatever, it 
spends out very slowly. These things have a natural rhythm. You 
have to build these things. And we do not want to tell people, 
oh, because we have a short-run need to spend cash, you should 
try to do in a day what really takes a month. If you do, you 
are not going to get a good bridge.
    Chairman Conrad. OK. Dr. Mitchell?
    Mr. Mitchell. I would not want to look at road building as 
a stimulus measure, and I certainly would be more favorable to 
the State and local governments doing it anyhow. But if a road 
project meets a cost/benefit test as a long-run infrastructure 
project, then by all means do it, but not because it is for 
stimulus.
    Chairman Conrad. OK. For that same reason that it does not 
get out quickly enough?
    Mr. Mitchell. Well, again, I am completely skeptical of the 
notion that we can borrow $100 billion from Person A and spend 
it on Persons or Programs B and C and that it is going to make 
any difference to the economy. So the whole fundamental concept 
of Keynesian economics I think is a fallacy.
    Chairman Conrad. All right. Energy taxes. There is going to 
be a proposal for a 1-year extension of the energy tax 
provisions that would otherwise expire at the end of the year. 
It costs $3 billion. Dr. Zandi?
    Mr. Zandi. You know, I do not have a view on that. I do not 
know the explicits--the explicit----
    Chairman Conrad. Credits for renewable electricity 
production, building efficiency, clean renewable energy bonds, 
solar fuel cell investment, wind.
    Mr. Zandi. I do not know that it adds any significant 
stimulus, no. I would not consider it.
    Mr. Blinder. I would say the same. I think Congress may 
want to do that for other reasons, but it is not going to 
provide short-run stimulus.
    Chairman Conrad. All right. Dr. Mitchell?
    Mr. Mitchell. I was just going to say, in a $14 trillion 
economy, I do not think $3 billion of energy tax provisions, 
whether they are good or bad, really matter.
    Chairman Conrad. Yes, so de minimis, that does not have 
much of an effect.
    The mortgage revenue bond proposal, this goes to the issue 
of what is happening in housing. All of you have pointed to 
housing as a key component of the downturn. This would give 
States a 1-year, $15 billion increase in mortgage revenue bond 
authority that would be expanded to include refinancing of 
subprime mortgages as allowable use for those bonds.
    Mr. Zandi. I think it is a very laudable policy step. If it 
mucks up the process of getting a stimulus package through, I 
would not spend any time on it. But I think it is a good step, 
yes, and I think it would be helpful in mitigating some of the 
severe foreclosure problems we are having across the country.
    Chairman Conrad. Dr. Blinder?
    Mr. Blinder. I do not know the details of the proposal, but 
it is completely consistent with what I was saying before--that 
you have this very short-run need for stimulus, so let's get 
some spending, but we also have deeper problems in the mortgage 
and financial sectors which are going to need a variety of 
institutions and approaches. And that may be a good one.
    Chairman Conrad. Dr. Mitchell?
    Mr. Mitchell. The only thing I would say is to keep in mind 
that if you are going to divert more capital into residential 
housing, you are necessarily going to have less capital for 
other purposes. There are tradeoffs. There are cost/benefit 
analyses that should take place.
    Mr. Zandi. Can I say something? There is no capital going 
into housing now. We need a little bit of capital to go in.
    Chairman Conrad. All right. Senator Gregg?
    Senator Gregg. Well, picking up on that point, this 
stimulus package has nothing in it which would encourage the 
drawdown of the present housing inventory that you have pointed 
to, Dr. Zandi. And if that is the underlying problem that is 
generating the economic slowdown, would we not focus on that? 
And I asked this question of Dr. Orszag, and he said, no, you 
have to focus on the large economy through demand, which is the 
Keynesian approach that has been debated here. And I guess my 
reaction is that we have so much policy in place which 
energizes purchasing of real estate, of homes, that is what got 
us into the problem to begin with. I mean, essentially the 
subprime event was driven in large part by tax policy and 
Federal policy on housing.
    And I listened to you folks, Dr. Blinder specifically, and 
I have followed your comments for years, obviously, because you 
are someone with significant national influence. But it does 
appear that you sort of reject the idea of the market settling 
this issue out, that this was a classic bubble and that if we 
do not--and that allowing the market to work its will so that 
we basically clean out the inefficiency which created this 
initial bubble is the only way you are probably ever going to 
get the market right in the long run. The Japanese approach of 
trying to artificially under--support an economy which is 
totally overextended in assets which are overvalued does not 
work. I mean, the Japanese have proven that to us 
incontrovertibly, that you cannot through Federal policy 
basically try to redirect the efficiency of a market, that the 
market should be setting the efficiency. And we created a 
bubble. And the question is: What is the Federal role in trying 
to mitigate the harms being created by the bursting of that 
bubble? And it appears listening to you, Dr. Blinder, and to a 
certain extent Dr. Zandi, you are essentially saying that we 
should not allow the market to work. Am I wrong?
    Mr. Blinder. The last sentence was wrong. We should allow 
the market to work. The bulk of the cure of this set of 
difficulties is going to come from the markets one way or 
another, regardless of what Government does. The question is 
whether it is fast enough, whether the Government can push it 
along faster, and maybe even change its direction slightly. But 
I want to focus much more on the speed. The context in which I 
am worried, as I said, is our ability to recover nicely from 
whatever kind of a sag, recession, or whatever we may have.
    If you look out there in the markets right now, you find 
panic, basically. Now, markets sometimes do this. You could 
call this a bubble in the other direction. We are having a 
bubble in the other direction.
    Senator Gregg. Well, that is a classic reaction.
    Mr. Blinder. Sure.
    Senator Gregg. I mean, I have been through this three times 
in my experience: back in the late 1970's and back in the late 
1980's--when I was Governor, regrettably, it happened in the 
housing industry in New England and the country--and then in 
the late 1990's when we had the Internet bubble.
    Mr. Blinder. Yes.
    Senator Gregg. I mean, it is a classic overreaction which 
occurs, which is that when one part of the economy gets 
overextended, the good part of the economy starts to contract 
because you try to rebuild your capital reserves.
    But I guess my question is this stimulus package which we 
are proposing does not seem to get to any of this. I mean, you 
are talking about, by my calculation, spending $220,000 to add 
a job. That is the way it works out: 660,000 jobs, which is 
your high-level job number, which is over the President's 
estimate--he is saying half a million jobs--cost under this 
stimulus package $220,000 per job. I guess my question is do 
you even get that return, because if you give a person $500, 
are you getting a job in the United States? If they buy a TV 
made in China, you are getting a job in China. You cannot 
control where those dollars flow. What percentage of that goes 
out of the country?
    Mr. Zandi. Well, actually, if you look at total consumer 
spending, our entire budget, 10 percent is imported, so 90 
percent is produced here.
    Senator Gregg. So you are saying 90 percent produces 
activity here.
    Mr. Zandi. Yes, on average. I mean, yes----
    Senator Gregg. You gave us some really startling figures on 
the housing side, which I suspect are absolutely accurate and I 
do not question that at all. But what percentage of the economy 
is housing versus trade? In other words, we have a dollar 
situation where trade is significantly increasing because the 
dollar has been weak. And the housing market is in--how much is 
the trade issue offsetting the housing collapse?
    Mr. Zandi. The contribution to the improvement in the trade 
deficit over the past year, not accounting for today's numbers 
because I have not had time to process them, but approximately 
a point to GDP growth. Over the same period, the decline in 
housing construction, just simply housing construction, has 
subtracted about a percentage point from growth. But 
housing's--that is not the end of the story. Housing's 
tentacles run deep into the economy. It is not just 
construction.
    Senator Gregg. So does trade. I mean----
    Mr. Zandi. No. I mean, think about housing values and what 
they imply. When housing values are declining, they affect 
people's net worth and their willingness and ability to----
    Senator Gregg. Psychology.
    Mr. Zandi. Well, no, it is not psychology. It is the 
ability to pull cash, to borrow to finance spending. Moreover, 
think about the property taxes your local governments are going 
to struggle with as their revenues are going to fall, decline.
    Senator Gregg. But there is nothing in the stimulus package 
which addresses the issue of housing value.
    Mr. Zandi. Yes. Now, let me say something to that point, 
and it is a very good point. I think policymakers have to be 
working at--this is a substantive issue and problem. The 
economy is under significant pressure. So we cannot tackle it 
with one thing. There are three types of policy that should be 
brought to bear. The first and most obvious is monetary policy, 
and the Federal Reserve is working very aggressively on that 
end. But Dr. Blinder is correct. It works with a long lag, 
particularly given that the key conduit between monetary policy 
and the economy runs through the housing market and that has 
been short-circuited. So it is not going to be as efficacious 
in this current environment.
    Senator Gregg. Well, if it allows loans to be--if it allows 
these ARMs to be refinanced to a level where they can be 
refinanced.
    Mr. Zandi. But it is not going to work as well as in the 
past.
    Two, stimulus. I think that is a very appropriate policy 
response to what is happening. I think that will be very 
helpful in mitigating--not forestalling a recession but 
mitigating the severity of a recession.
    But the third thing is that housing and mortgage policy 
should be focused on--and all the steps we have taken so far, 
that you have taken so far, are all laudable steps. HOPE Now, 
the mortgage bonds if they get passed, FHA expansion, GSE loan 
cap expansion temporarily, I think are all very useful. But 
they may not work because if you go into the securities markets 
and look at what has happened, they are literally shut down. 
The mortgage securities market, nonconforming--not the 
conforming market, not what Fannie and Freddie do. They are 
fine. But that is half the market in 2006. The other half is 
completely, literally, shut down. If you look at bond issuance 
of the nonconforming bonds, subprime, Alt-A, and jumbo loans, 
in the last 3 months of 2007 it averaged $10 billion per month. 
I mean, that is down from $250 billion a month at the peak. So 
it gives you a sense of the magnitude of the problem. It is not 
going to be solved easily by just letting the market work 
through.
    Senator Gregg. And a stimulus package is not going to have 
an impact on that.
    Mr. Zandi. But that is the point.
    Mr. Blinder. No, Senator. That is why I raised the point, 
at the end of the testimony, that there is more to be done 
beyond the stimulus package----
    Mr. Zandi. Beyond the stimulus package.
    Mr. Blinder [continuing]. To address these market travails. 
The stimulus package is not going to solve that at all. It 
should contribute a little bit, because everything goes better 
if the economy is going uphill than downhill. But it is 
certainly not targeted on that problem.
    Senator Gregg. What the stimulus package is, it is a feel-
good event, and maybe that helps the confidence of consumers. 
But as a practical matter, the substantive impact on this 
underlying problem, which is the failure of the market over the 
issue of housing financing, is not going to be addressed by the 
stimulus package, in my humble opinion. And feel-good events 
are not bad. This is just going to be very expensive for our 
children, this feel-good event.
    Chairman Conrad. Well, I would just say, I think it is more 
than a feel-good event. It does give some modest lift to GDP, 
which may help avert a recession or make a recession more 
shallow. But we should not overstate--I agree with the Senator 
entirely. We should not overstate what this does.
    Senator Murray?
    Senator Murray. Thank you very much, Mr. Chairman. It is a 
fascinating discussion, and kind of following up on what 
Senator Gregg is talking about, sort of the housing 
foreclosure, rising defaults sort of brought us to this point 
where we are looking at economic stimulus. Senator Conrad is 
right. We should not overstate it. We all, I think, agree we 
need to move forward with some kind of short-term economic 
stimulus.
    But what about the bigger picture? Dr. Zandi, you just 
listed a whole bunch of things we were looking at in terms of 
the housing issue, and you said, well, all that might not work. 
What do you recommend we do look at doing?
    Mr. Zandi. Well, my view--and it may sound a little bit out 
there, but I think we should be--so did ARM freezes 8 weeks ago 
sound kind of out there. And it goes to a suggestion that Dr. 
Blinder made.
    I think that it would be appropriate to consider and start 
thinking about some type of Treasury-backed fund that would buy 
up mortgage loans and mortgage securities. This fund would 
operate under an auction process. As soon as it was 
operational, it would establish a price in the market. The 
reason the market is not working----
    Senator Murray. Stabilizing house prices?
    Mr. Zandi. Well, not immediately. What it does is 
stabilizes the price for the mortgage loans and the mortgage 
securities. And as soon as that happens, then you will start to 
see credit flowing back into the housing market. And as soon as 
that happens, then people can get loans, then they can go buy a 
home, and then prices will begin to stabilize.
    Right now the market is completely frozen. There is no 
activity in the market because everyone is scared to trade with 
each other. There is no price. If you have a market maker, the 
Treasury, step in and say I am going to make a market, as soon 
as that happens you will jump-start things. And, in fact, at 
the end of the day, it may not cost the Treasury anything 
because prices will probably rise, because Dr. Blinder is 
right, there is now panic in the market and the prices--if you 
force someone to sell, it will be at a much lower price than 
the underlying value of the security. Am I making sense?
    Senator Murray. Yes, I am fine.
    Dr. Blinder, did you want to add anything to that.
    Mr. Blinder. No. I agree. The basic symptom--you can see it 
in the market--is that the bid-ask spreads are incredible on a 
lot of these assets. When bid-ask spreads are like that instead 
of like that, it tells you the market is not working. It is not 
making a price, and there is no activity. So that is what 
prompted me, at the end of my testimony, to mention that I 
think we probably need two different sorts of institutions. One 
would be like what Dr. Zandi was just saying, picking up on 
what I had said, designed to try to get these markets 
functioning again. But the other would be aimed specifically at 
the bottom of the pyramid, so to speak, at the foreclosure 
problem.
    We did this in the Great Depression, and as Dr. Zandi 
showed on his slides, we now have a housing problem as big as 
we had in the Great Depression. The rest of the economy looks 
much better than then, but the housing sector looks just as bad 
as it did then. And we had this thing called the HOLC during 
the Great Depression, which assisted in refinancing mortgages.
    Now, none of that is going to happen in the next 2 days in 
a stimulus package. But in terms of addressing this longer-run 
problem, I think that is the direction in which the Congress 
ought to be thinking.
    Senator Murray. Yes, OK. I did hear your testimony. I 
thought you said that the U.S. economy may recover after the 
next two to three fiscal quarters. I heard a lot of other 
people saying that this housing market crisis may last well 
into 2009. On what are you basing your thoughts that it may be 
shorter?
    Mr. Blinder. Well, both can be true. The housing sector is 
about 4 percent of the economy--and sinking, by the way. It is 
on its way to less than 4 percent of the economy. So things can 
get pretty terrible in the 4 percent, even worse than they are, 
and they are awful. But as long as the other 96 percent is 
doing pretty well, the economy will be ok. Exports were 
mentioned before as doing pretty well. Up until very, very 
recently, the consumer was holding up quite well. You could 
have a recovery, even a pretty good recovery, in the whole 
economy without having a recovery in housing.
    Now, that said, it is not going to be that easy because the 
housing problems are deep and they seem to be getting worse, 
not better. And much more importantly, the thing that I 
emphasized, which brings me to the idea we are now toying with, 
is the credit-granting mechanism more generally--not just 
mortgages. There are lots of other types of credit. And every 
economy runs on credit. Those mechanisms are getting jammed up, 
and that is quite serious because it is part of the blood that 
flows through the economic body to make it function. And I 
worry about that, which takes us way beyond housing and really 
does go to this question. OK, once we bottom out, whenever that 
is, do we actually come up rapidly or do we trundle along the 
bottom for a while?
    Senator Murray. Well, you have an intriguing fast-track 
procedure proposal that we would move forward on something but 
it would not be implemented unless there were other economic 
indicators coming out. What is the risk of not doing something 
quickly if we put in place something that is waiting for 
something else to happen?
    Mr. Blinder. You are quite right. There is always a risk of 
being too late, and nobody can deny it. There is also a risk of 
doing it when you do not need it.
    I think the odds are that we probably do need it, and the 
specific indicators that I mentioned in the testimony--I think 
I also mentioned them verbally--are coming very, very soon. So 
far we have had one lousy-looking month of employment data and 
one lousy-looking month of retail sales data. It could be that 
those are flukes. They could even disappear in data revisions. 
Things like that happen. My guess is they will not, but I do 
not know that. I would just like to see one more readius on 
each, and we are talking about only 2 weeks from now when we 
will have seen one more on each.
    Now, where your question might really come to the fore is 
here: Now suppose the next employment report comes in rather 
good-looking--say 100,000-plus jobs. And suppose the next 
retail sales report comes in rather good-looking. Then I think 
Congress might sit back and say, well, let's think about this. 
Do we actually need a stimulus or not?
    Mr. Zandi. May I respectfully disagree.
    Senator Murray. Yes, Dr. Zandi.
    Mr. Zandi. Sorry.
    Mr. Blinder. That is all right.
    [Laughter.]
    Mr. Zandi. Because the quality of the data that we are 
looking at is always suspect, even in the best of times. At 
turning points in the economy, it is very difficult to read, 
and these data are revised. The two he mentioned, employment 
payroll employment, and retail sales in particular--are 
notoriously revised significantly, and years after the fact.
    So, for example, this Friday we are going to get an 
employment report that gives us a read on January employment, 
but we are going to have revisions to the data back more than 2 
years, and there will be downward revisions, significant 
downward revisions based on what the BLS has already told us. 
So my point is that you--I think the downside--we cannot have--
we have to be very careful of focusing on a data point or two. 
We have to take the plethora of information that is before us. 
I think most importantly consider sort of what are the downside 
risks if you do nothing, particularly in the context of what 
everyone now believes you are going to do. If you do not do 
that and follow through at this point, in my view, I think that 
would be a much more serious harm to confidence and to the 
general economy. I think it would be a huge mistake.
    Senator Murray. OK. And I just have a few seconds left, but 
Senator Conrad was asking you about different proposals. What 
about unemployment insurance and food stamps?
    Mr. Zandi. In my view, they are the most efficacious form 
of stimulus. I mean, in terms of I put a dollar into extending 
UI claims, UI insurance or expanding the food stamp program 
temporarily, I am going to get back much more in terms of 
economic activity and GDP than any other thing that you can do.
    Senator Murray. Dr. Blinder?
    Mr. Blinder. I agree with that. I put it right at the top 
of the list.
    Senator Murray. Dr. Mitchell?
    Mr. Mitchell. I think it is the perpetual motion machine of 
fiscal policy. If unemployment insurance benefits were so 
great, we should ask companies to fire everyone so more people 
can get unemployed so we can get more stimulus. It is just a 
silly idea.
    Senator Murray. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Bunning?
    Senator Bunning. Thank you, Mr. Chairman. There are some 
really strange ideas going around.
    First of all, I want to ask each and every one of you: When 
is the economy in recession? What is the definition of a 
recession?
    Mr. Zandi. The definition is a persistent, broad-based 
decline in economic activity. It is a judgment call by----
    Senator Bunning. Two quarters?
    Mr. Zandi. That is a rule of thumb.
    Senator Bunning. Rule of thumb.
    Mr. Zandi. Yes. It----
    Senator Bunning. It is not a fact.
    Mr. Zandi. No.
    Mr. Blinder. That is actually a media definition. The 
media----
    Senator Bunning. A media definition?
    Mr. Blinder. Yes.
    Senator Bunning. Well, I want to throw that out to start 
with. What is a recession, Dr. Blinder?
    Mr. Blinder. That is exactly right. There is an 
organization, as you know, called the National Bureau of 
Economic Research, which, well after the fact--so it is not so 
useful in real time--dates recessions. They do it based on a 
plethora of different time series data on the economy, focusing 
on sales, production, employment--am I leaving something out?
    Mr. Zandi. Real income--incomes less transfer payments.
    Mr. Blinder. Yes. Incomes less transfers--those would be 
sort of the big four. But they look at many other things.
    Senator Bunning. Dr. Mitchell?
    Mr. Mitchell. I have always thought the rule of thumb is 
that the most reasonable thing to--unless you want to go after 
the fact--and I already stated in my testimony I do not think 
economists do a very good job predicting, so it is really only 
looking for the rearview mirror that we can say these things 
with certainty.
    Senator Bunning. Thank you very much.
    Dr. Blinder, many economists have expressed skepticism 
about a fiscal stimulus because Congress typically acts too 
late. I think we are proving that Congress can act quickly. 
Members can put aside their differences and work together for a 
common good when we face a dire threat to our economy.
    You also said that stimulus must be fast-acting, but you 
caution us to wait for more employment report--one more 
employment report and one more report on retail sales. If we 
wait too long, isn't there a danger that the stimulus will be 
poorly timed and that will only result in a return to the 1970 
style stagflation?
    Mr. Blinder. I do not think the latter. But, yes, if you 
wait too long, it will be poorly timed. The wait that I was 
talking about specifically in the testimony is about 2 weeks. 
So I do not think that is----
    Senator Bunning. In other words, for the Congress to act 
and pass and have the President sign a stimulus package?
    Mr. Blinder. The so-called fast-track proposal that I 
mentioned in the testimony and that Senator Murray brought up 
would have the Congress agree as soon as it can--and it looks 
like it is moving very fast--on what the package will be and 
then vote on it at the time, on a fast-track basis what it 
wants to put----
    Senator Bunning. One more question, Dr. Blinder. Should 
unemployment compensation benefits be taxed? Professor 
Feldstein, who testified before the Senate Finance Committee 
last week, believes they should be taxed. What is your opinion?
    Mr. Blinder. I guess I do not think it is that important an 
issue. This question is part and parcel of how generous should 
they be. If you tax them, people above certain income levels 
are going to get less. I do not have a big quarrel with----
    Senator Bunning. Wouldn't that get more money quickly into 
the economy if we did not----
    Mr. Blinder. You mean right now as part of----
    Senator Bunning. Oh, yes, as part of the package.
    Mr. Blinder. To the extent you tax it back, you get less. I 
thought--I was interpreting that----
    Senator Bunning. No, no, no. That is part of the package. 
You do not tax the additional.
    Mr. Blinder. Oh, I see. I see. You do not tax the 
additional. Yes, I think that would get more spending----
    Senator Bunning. OK. Thank you.
    Mr. Blinder. Right away. Yes. Sorry.
    Senator Bunning. Dr. Mitchell, in your testimony, you point 
out that bad monetary policy was partly responsible for the 
economic weakness in the 1930's. The Federal Reserve raised 
rates at the wrong time. What role do you think monetary policy 
has played in the current crisis? And would you agree with 
Professor Anna Schwartz, who recently argued that the Federal 
Reserve ``failed to confront something that was evident,'' 
meaning the asset bubble in housing, and kept interest rates 
too low for too long?
    Mr. Mitchell. I agree with Anna Schwartz. I think one of 
the problems we have today is the housing bubble. One of the 
things that caused the housing bubble was artificially low 
interest rates by the Fed. As a matter of fact, I am a little 
bit worried about a return to stagflation because if you have 
an easy monetary policy, like we had in the 1960's and 1970's, 
combined with increases in the overall burden of Government--I 
do not think we are anywhere near where we were in the 1960's 
and 1970's, but I am worried that we are trending in that 
direction of the Fed not being focused on protecting the value 
of the dollar. I think the European Central Bank is doing a 
much better job than the Fed, and I think that shows up in the 
falling value of the dollar versus the euro, not to mention 
other currencies. And I also worry that certainly over the last 
several years we have had an increase in the aggregate burden 
of Government as a share of GDP, and I worry that is just not a 
good recipe unless we want to wind up like, you know, some of 
the slow-growth economies in Europe.
    Senator Bunning. We are going to have an FOMC meeting this 
week, the end of this week, and it is anticipated that a 50-
basis-point reduction in the Fed rate will occur on top of an 
emergency 75-point reduction.
    Dr. Blinder, since you were on the Fed, don't you think 
that is kind of a crisis management?
    Mr. Blinder. Oh, I do, yes. I think the Fed has been 
watching this rolling financial crisis that really erupted in 
the July-August of last year timeframe. One might have thought 
that the markets would have cured all of this by now, but they 
have not. And if anything, it is getting better in some 
dimensions; but it is getting worse in other dimensions, and 
new things keep happening. You may have noticed in the 
newspapers in the last few days there is a lot of discussion 
about the bond insurers and what could happen if they go under 
or are impaired. So, yes, the Fed is looking at this as a 
crisis. If, in fact, they lower the Fed funds rate another 50 
basis points today--we will know in about 3 hours----
    Senator Bunning. 2:15, to be exact.
    Mr. Blinder. 2:15, exactly right. That would be incredible 
speed by Federal Reserve standards. You have to go back----
    Senator Bunning. Incredible?
    Mr. Blinder. Yes. You have to go back to the 1980's to see 
them moving interest rates that much in that short a timeframe.
    Senator Bunning. In my opinion, watching the Fed operate--
and I have been a Fed watcher since you were on the Fed--it is 
total panic. Since they did not in normal operating procedures 
react, but with a 25-basis-point at their last meeting, all of 
a sudden in 2 weeks--are you kidding me? And we are to believe 
that they knew what they were doing?
    Mr. Blinder. I think, Senator, they concluded on the 22nd 
of January, or probably a little before, that they had done too 
little----
    Senator Bunning. No kidding.
    Mr. Blinder [continuing]. And they had some catching up to 
do. Yes.
    Senator Bunning. No kidding. Everybody was urging--urging 
them to do more the last time they met, and there was one 
dissent. And that dissent was not to do anything.
    Mr. Blinder. Well, the previous meeting, actually----
    Senator Bunning. Had one dissent, the same way, to do more. 
But I am telling you, 11 people in one room, or 12, depending 
how many people show up--well, that is a fact because some of 
our bank presidents do not get there in time or are absent and 
vote by telephone. I find the Fed inactivity, and now being 
very active, very disturbing to our economic well-being.
    Thank you.
    Chairman Conrad. Thank you, Senator.
    Senator Domenici?
    Senator Domenici. Well, Mr. Chairman, as I told you 
privately, I have to go to a business meeting of the Energy 
Committee, and Senator Bingaman does not call those very often, 
so I probably only have two questions. I will only have time 
for that.
    I would like to ask any of you this question: As I 
participate and read and see what I can--how I can catch on to 
this and is the House-passed package going to work, because it 
is going to pass, it is going to be law--and I am quite sure I 
could predict that today. But it seems to me that everybody is 
acknowledging that there is a very big problem in housing and 
that that problem is a very entangled one because, you know, 
the securities got away from everybody. It is not like they are 
sitting around in a nice place, that the negative ones are 
perking up all over the place where nobody ever even expected 
them. People are adding assets to their portfolio that are 
broke all over the place.
    And I guess I am wondering if that is not bad enough that 
our typical anti-recession package, which is what we are doing 
and the House--all we are doing is doing it quickly and fooling 
everybody because the House did it bipartisan so quickly. Now 
the people are glad of that and are saying do something, do it. 
But I have a question. Is it not possible, even probable, that 
the housing mess may negate the effectiveness of this package 
that we are all talking about doing?
    Let's start with you first, sir, in the middle.
    Mr. Blinder. I do not think so, but in the following sense.
    Senator Domenici. Please.
    Mr. Blinder. We could imagine having the same sort of 
macroeconomic environment but, that housing had nothing to do 
with it, that we were just sagging for some other reason, in 
which case the House probably would have designed the package 
very much like what they designed, with the exception of those 
things about the FHA and a few other little things. But it 
basically would have been essentially the same, and its 
macroeconomic impact would have been essentially the same, too. 
The package is intended to give the economy some oomph in the 
short run from more spending to prevent the sag or to make it 
less than it otherwise would.
    The housing mess, as you quite correctly characterize it, 
is a big set of complicated problems that we do not have our 
arms around yet because it does go way beyond housing into the 
fixed-income securities markets.
    Senator Domenici. Yes.
    Mr. Blinder. For that, we need longer-range things, 
including perhaps some unusual Government interventions that we 
have been discussing in this hearing. That is where you see the 
uniqueness of the current situation coming to the fore. And you 
are quite correct, it is not going to be solved in a stimulus 
bill passed tomorrow.
    Senator Domenici. Do you see any ideas around that are out 
of the ordinary? Since it is an out-of-the-ordinary securities 
problem, are there some ideas around of significance that you 
are aware of?
    Mr. Blinder. Yes, there are several. I saw you had to step 
back----
    Senator Domenici. But they are not going to be in this 
package.
    Mr. Blinder. They would not be in this package because they 
take some thought about design. You know, these are the kinds 
of things in which truly the devil is in the details, and you 
do not want to try to design them in an overnight markup and 
pass it.
    Senator Domenici. But you think they can be drawn?
    Mr. Blinder. I think so. I think so. There have been 
suggestions, for example, I mentioned earlier----
    Senator Domenici. I am sorry I did not hear it.
    Mr. Blinder. It is quite all right.--of bringing back 
something like was done in the Great Depression, with the Home 
Owners Loan Corporation to stave off foreclosures. There have 
been suggestions made about having Government assistance, let's 
put it that way, to get the credit markets back functioning 
again, somewhat analogous to what the RTC did after the total 
collapse in the savings and loan industry back in the late 
1980's and early 1990's. And there have been other suggestions 
like that. So there are ideas, somewhat out-of-the-box ideas, 
floating around.
    Senator Domenici. We had some pretty big people involved 
with that. James Baker was involved, and Darman, who is 
deceased, he was involved. They thought that one through and 
did something extraordinary.
    Mr. Blinder. Absolutely.
    Senator Domenici. That is what we need now.
    Mr. Blinder. And Bill Seidman, who is still around, was the 
head of the RTC then.
    Senator Domenici. Right. Well, do you think the same thing, 
Dr. Zandi?
    Mr. Zandi. Yes, I do. I think Congress and the 
administration have done a number of good things. They are 
small, but they are all good things. I think HOPE Now is a 
useful process.
    Senator Domenici. Right.
    Mr. Zandi. Give it a chance to work. I think FHA expansion 
and GSE loan cap expansion are good ideas.
    Senator Domenici. Too small.
    Mr. Zandi. And I think we should prepare for the 
possibility that the problems are bigger than all this and that 
we need to do something--in a broad philosophical sense, I 
think what the Treasury has done so far is try to facilitate 
the market. It has not put itself on the line. I think we are 
at a point where the Treasury is going to have to put taxpayer 
dollars on the line and say we are behind this, and once that 
happens, I think the cost to taxpayers and the Treasury 
ultimately will be less.
    Senator Domenici. Dr. Mitchell?
    Mr. Mitchell. I am a Fairfax County homeowner. I have 
enjoyed a lot of appreciation in the value of my house over the 
last 14 years, and I suppose I should be appreciative that you 
all are trying to prop up the value of my home, even if it is 
at the expense of low-income and young people who might be home 
buyers. But I think the problem we have in housing is that we 
did have a bubble, and the more the Government intervenes to 
try to prop up the value of homes, we will be making the 
mistake the Japanese made in not allowing the bad loans to work 
their way out of the system.
    The only really good thing I can tell you about the overall 
stimulus package is that at least it is not intervening in the 
housing market because I do worry that we might make the 
mistake the Japanese made. I do not want my home to fall in 
value, but I also know that over the last 14 years, I am still 
way ahead of the game. And I know that if we had the Government 
intervene in propping up the value of homes, it is going to 
hurt people who are lot less well off than I am, or any 
homeowners in this room are.
    Senator Domenici. Thank you very much. Thank you, Mr. 
Chairman. Thanks to all three of you.
    Chairman Conrad. Thank you, Senator Domenici.
    I would like to go back to the housing situation. Dr. 
Zandi, I would like to go to your charts, if I could, and I 
would like to go to the chart that is headlined ``Inducing an 
unprecedented surge in defaults.''
    Mr. Zandi. Yes.
    Chairman Conrad. First mortgage loan defaults. I would like 
you to help us understand this chart more fully.
    Mr. Zandi. OK.
    Chairman Conrad. Take us just briefly, if you could, 
through the implications of this chart. This is showing us 
mortgage loan defaults. Is this by month or by quarter?
    Mr. Zandi. This is as of a certain--this is as of the last 
week of each quarter.
    Chairman Conrad. OK. As I read this chart, it tells me we 
have 1,800,000 mortgage loans in default.
    Mr. Zandi. In that last quarter.
    Chairman Conrad. That last quarter, and----
    Mr. Zandi. That is at an annual rate, though. I have 
annualized.
    Chairman Conrad. Annualized.
    Mr. Zandi. I think it was 450,000, if my math is correct.
    Mr. Blinder. You need to divide that by 4.
    Chairman Conrad. Yes. And then this thing is going up like 
a scalded cat.
    Mr. Zandi. That is a great way to describe it. I would not 
have come up with that, but OK.
    Chairman Conrad. So tell us what you think the implications 
are? And, you know, Dr. Mitchell has this view that, you know, 
let the market work. And, you know, if the Government 
intervenes to make this less of a crisis, all you do is, as I 
hear you, Dr. Mitchell--correct me if I am misstating your 
perspective--that if we interfere in market correction, all we 
do is really delay the day of reckoning.
    Senator Gregg. Misallocate resources.
    Chairman Conrad. Am I fairly characterizing your position?
    Mr. Mitchell. Yes, I think the quicker we allow markets to 
work, the more efficient that capital allocation will be in the 
economy and the better our long-term rate of growth will be. 
There is a reason why countries with more laissez-faire capital 
markets grow faster than countries with more government 
intervention. It is because market forces, not political 
forces, are driving the allocation of resources. And I would 
not want us to travel down the path of countries that are less 
prosperous and growing less quickly than we are.
    Chairman Conrad. OK. And, Dr. Zandi, what would be your 
reaction to that?
    Mr. Zandi. I think that is a very appropriate principle for 
all of us to follow under--99 percent of the time. I think that 
is exactly correct. I think there are cases--and I think we are 
potentially in one of those cases--where the market does not 
work, or it will not work for a considerable amount of time and 
will create a significant amount of loss of wealth, income, and 
jobs. And there are other times when we faced that. The last 
time was in the early 1990's with the S&L crisis. I think it 
was beyond a solution for the market, or at least one that was 
financially palatable for us, and we decided that we were going 
to solve this problem collectively and put our resources on the 
line. And we solved that problem in a very, I thought, at the 
end of the day, incredibly efficient way. It cost the taxpayers 
a lot less than it certainly could have.
    And I think there is a distinct possibility we are at one 
of those other points in time where we just cannot let the 
market do its thing because it is not going to do its thing in 
a reasonable amount of time. It is going to cost us a lot of 
wealth.
    Chairman Conrad. Let me ask you this, if I could. I have 
had major financial players in this country call me and tell me 
they are extremely concerned about a potential lockup of 
financial markets. And by that, what I took them to mean was 
that people pulled back from even good deals and that that has 
a cascading effect on the economy. And what they were sharing 
with me is their top economists telling them they think there 
is a 50-50 chance of a severe recession, and that it is in all 
of our interests, our collective interest, to try to prevent 
that from occurring.
    What would be your reaction to that characterization of 
events? And I would ask each of you, starting with you, Dr. 
Zandi, and then Dr. Blinder, and then Dr. Mitchell.
    Mr. Zandi. I think that is a reasonable concern. Just 
looking at the marketplace today, and as Dr. Blinder mentioned, 
it has now gone well beyond the mortgage securities market. It 
has affected the asset-backed securities market where credit 
cards and auto loans and student loans are traded and financed. 
That is where a lot of capital for our credit cards come from. 
It has affected the commercial mortgage-backed securities 
market. So if you talk to anybody in commercial real estate, 
transactions are not happening because they cannot get 
financing.
    Chairman Conrad. Let me just say that that was confirmed 
for me by our--I was just sharing with Senator Gregg. A person 
who is in commercial told me the deals that were good deals 
typically get 80 percent financing without much of a problem. 
They are now struggling to get 50 percent financing, and as a 
result, that market is locking up, at least in parts of the 
country. I do not know how widespread that is or if you have 
evidence that that is beginning to happen.
    Mr. Zandi. Yes, it is happening across most of the 
commercial mortgage lending market, both in terms of the 
securities market and in terms of bank lending. It has not 
affected everyone. I mean, if you are a pristine borrower, 
meaning you have a lot of equity in your investment, your 
property, if you have good cash-flow, you still can get credit 
at a reasonable interest rate. But, increasingly, borrowers 
that you would deem to be reasonably good credits in normal 
times are not getting credit today. It is bleeding out into the 
corporate bond market, not in the high-grade, investment-grade 
market, but just one step below and certainly to the junk bond 
market it is happening. You know, credit spread are widening 
out. There is no bond issuance.
    So the market is very, very fragile. In my view, we are one 
event away from a very significant financial problem. And if 
the securities markets do shut down, then as Dr. Blinder 
mentioned, credit is the mother milk of economic activity; if 
that shuts down, even for a brief period of time, it will have 
very significant economic implications. So I think that is a 
reasonable risk, yes.
    Chairman Conrad. Dr. Blinder?
    Mr. Blinder. I would say 50 percent odds on a recession. A 
severe recession? Of course, one does not quite know what that 
means, but let's say it is something like the early 1980's. 
That was a very severe recession. I would handicap that as very 
low probability. No one can say it is impossible, but low.
    I am much more worried about a failure to snap back from 
the sluggishness, as I have said. You may remember the so-
called head winds period in the early 1990's when, from 
somewhat similar but not nearly as serious problems in the 
financial sector, the economy just could not quite get the 
engine stoked. It was growing, but not growing very well for a 
while, and then it finally did start going up.
    Regarding the question of whether the markets are locking 
up, to some significant extent they are already locked up. I 
mentioned the wide bid-ask spreads. That is a symptom that they 
are locked up. Another is to look at the rates at which the 
U.S. Treasury can sell debt at now. Why? That is the only thing 
anybody wants to buy. The financial markets are flooding into 
U.S. treasuries. They have beaten the rates down to incredibly 
low levels because they know the Treasury is going to pay them 
back, and they do not trust that the other so-called AAA 
credits are going to pay them back. So there is a tremendous 
amount of fear, which also leads to lockup.
    And I would just like to relate this to the point we were 
talking about before about interfering with home prices versus 
letting the market work itself out. As Dr. Zandi said, letting 
the market work itself out is almost always the right answer. 
It becomes the wrong answer when the whole economy is at risk. 
I do not want to sit here, and I certainly would not want my 
representatives in Congress sitting here and saying, you know, 
it is too bad, you all made mistakes and you are all going to 
suffer for it. I think that is one of the reasons we have a 
Government.
    Falling housing prices are not the only problem, but they 
sit right at the base of the other problems. Why are we looking 
at foreclosures? A major reason is falling housing prices. Why 
are we worried about consumer spending sagging? A major reason 
is falling housing prices. Why doesn't anybody want to buy MBS 
anymore? Mortgage-backed securities. Falling housing prices. 
Why are these CDOs that have been built on top in complicated 
ways totally unmarketable these days? Falling housing prices.
    So falling housing prices, for better or for worse--and it 
has been for worse, actually--have become central to this 
drama. And that is why I think it is appropriate for the 
Government to do things--not to go in and bail out particular 
people who have speculated and made bad bets. Certainly not. 
But to do things with the macroeconomy that make this market 
function better.
    Chairman Conrad. My time is--I am well over my time, so I 
am going to turn to Senator Gregg. And, Dr. Mitchell, I will 
come back to you on my next chance.
    Senator Gregg.
    Senator Gregg. Well, why don't you answer? Why don't you 
follow on since all three of you were asked the question.
    Mr. Mitchell. Well, I would simply add that in some sense 
falling housing prices are toothpaste that is out of the tube, 
and I do not know that anything that is going to be done is 
going to solve that problem. Instead, I look at what lessons 
can we learn and how can we avoid similar problems in the 
future. And I think that we have an awful lot of subsidies and 
programs and preferences for housing, and I think those are 
some of the things, combined with, I think, a lot of the blame 
with the Fed keeping interest rates artificially low, I think 
we should be cautious about programs, whether it is bailing out 
housing or bailing our Wall Street, we have to think about what 
sort of precedent we are setting and what sort of incentives 
that people in those markets are going to have in the future, 
if they think, well, we can go ahead and take a risk that might 
normally be imprudent because we think somehow the Government 
is going to be there to bail out our mistake.
    And so, you know, the problem with housing, it is there, it 
already exists. I think a lot of policies are trying to push on 
the string. We are not really going to solve the current slump 
in housing prices. I am more worried about are we learning the 
right lessons so that we avoid similar mistakes in the future.
    Senator Gregg. Well, we certainly got into the macro debate 
here, not much relationship to the stimulus package, which 
probably will have no effect on this exercise. But my frame of 
reference is this: I went through this as a bank attorney in 
1978-79, and then I went through it--not a bank attorney. [I 
was a corporate attorney representing a bank.] And then I went 
through it again as Governor of New Hampshire in 1990 when 
seven of my--I had seven large banks in New Hampshire, and they 
were all insolvent. And my State revenues fell for 36 straight 
months in real terms. And what we saw was a contraction which 
was driven by the fact that the housing market collapsed as a 
result in New England not of fraud, as occurred in Texas, but 
because the mutual banks had converted to commercial banks, and 
they did not know how to make commercial loans, and they 
started throwing money at condo projects that did not have any 
viability. And so they collapsed, and what that led to was what 
Dr. Zandi was talking about, which is that people were not able 
to--the good loans were not able to be made because everybody 
had to rebuild their capital. And so it was a self-fulfilling 
problem.
    I guess my interest in this effort today is what have we 
learned from that. And it seemed to me that one thing we 
learned was that you did not concentrate the debt in the hands 
of the banks so that you spread the risk. And I think that has 
happened in this event. It appears to me that rather than 
having most of the banks in New Hampshire owning the loans that 
they made, they are probably owned by somebody in China or 
somebody in Europe, to a large extent. So we have spread this 
risk. So the capital issue on our banking community may not be 
as severe.
    But you have this chart here, Dr. Zandi, that seems to 
imply that we are going to have very serious problems with our 
capital structure of our banking system. And I guess since we 
are talking macro here, I would like to know--this is your 
chart entitled ``The Banking System Is at Significant Risk.'' I 
am wondering if that is true if we talk about the traditional 
banking system. With FIRREA in the 1990's, we basically forced 
better capital structure. We do not have the smaller banking 
community--community banking, and I am talking about the less 
than $3 billion bank--with serious lending practices, because 
they did underwriting probably fairly well.
    Doesn't this really apply more to the banking houses who 
were not forced to maintain capital, such as Bear Stearns and 
Merrill, rather than the big banks that are traditionally--and 
the banking community that has traditionally been the strength 
of our economy? Because if our banking community is in 
serious--if this chart is true to the banking community, then 
we do have a huge problem because they are going to start 
significantly ratcheting down this economy in order to get 
their capital position back.
    So I want to know where is this--what are the specifics of 
this chart? Is it banking generally? Or is it more the banking 
houses?
    Mr. Zandi. Well----
    Chairman Conrad. Could we just interrupt? Could we get up 
on the----
    Senator Gregg. Maybe you can punch that up.
    Mr. Zandi. It is on my slide.
    Chairman Conrad. ``The Banking System Is at Significant 
Risk.''
    Mr. Zandi. Yes, so this is data from the Federal Reserve 
that shows that there is just under $2 trillion worth of--these 
are residential real estate whole loans and residential 
mortgage security----
    Senator Gregg. But do they go to the capital structure of 
our banks?
    Mr. Zandi. Yes, that is a good question. This is large 
commercial banks, so this is roughly the 30 largest banks in 
the country. They have asset bases of tens of billions of 
dollars. They are the most exposed.
    Senator Gregg. But is their capital position addressed?
    Mr. Zandi. I believe it is, yes. And their capital position 
is measurably better than when you were advising a bank, the 
banks--or you were Governor of New Hampshire in the early 
1990's. Back then the bank capital/asset ratio was 6.5 percent. 
Before all this here in this period, it is 8.5 percent. But 
there have been some very positive developments. Every time a 
large commercial bank reports a loss on these assets that I am 
showing to you, they are able to fill the capital void by an 
equity investor, sovereign wealth fund or--so far it has been 
mostly foreign money coming in to fill the equity void.
    Senator Gregg. Well, I think Bank of America went out and 
financed it. But, anyway----
    Mr. Zandi. Yes, and, you know, Fannie Mae and Freddie Mac 
are going around and issuing various kind of equity to fill the 
void. So there is capital coming in.
    My concern, though, would be that if there are continued 
mortgage losses--and not only mortgage losses, it is now--if 
you listen to the banks, they are telling you it is in their 
credit card portfolio, it is in their auto lending portfolio, 
even in their CNI loan portfolio. B of A came out and said we 
are seeing a deterioration in our small business lending 
portfolio, which is the first time I had heard that.
    So the next time they come out with major losses--and this 
is a risk. I do not know if this is going to happen, but this 
is what I am concerned about--they will not be able to fill the 
void. Even though they have an 8 percent equity/capital ratio, 
they have to take a multi-billion-dollar writedown, and they 
are unable to fill the hole with another equity investor. They 
say, ``No, I am going to wait.''
    Senator Gregg. Given that as a potential, there is nothing 
in the stimulus package that is going to address that.
    Mr. Zandi. No, sir. No, sir.
    Senator Gregg. And is there anything the Government 
theoretically can do? You have your RTC idea here basically, 
right? I mean other than that.
    Mr. Zandi. Well, in my view, I do think that it would take 
a philosophical leap but in terms of dollars and cents a small 
step to establish a fund that would buy up--say I am going to 
buy mortgage loans, whole loans, and mortgage securities, and I 
am going to establish a price in this marketplace.
    Senator Gregg. Well, why isn't that the Japanese approach?
    Mr. Zandi. The Japanese approach is they had no----
    Senator Gregg. Basically underwriting----
    Mr. Zandi. No, sir. The problem in Japan was--no, they left 
the--they did not solve their problem. They left the bad assets 
on the banks' balance sheet for years, and it impaired the 
capital position of the banks and their ability and willingness 
to extend credit. What I am proposing to do is clean that out 
right now. As soon as you establish a price in the marketplace, 
then the banking system has to mark down to that price, and we 
clean it out. Right now they are not marking because they do 
not know what to mark to so they are having trouble.
    Senator Gregg. Obviously, Dr. Mitchell, you have a 
different view----
    Mr. Blinder. If I could just put in two footnotes to that. 
In the Japanese case, they finally did get the problem mostly 
solved--it is not 100 percent solved even to this day--with 
massive government intervention. They put public funds at risk. 
They nationalized some banks and then de-nationalized them. 
They did a lot of things. It took them a long, long time to get 
to that. For a long time they dithered and really did not do 
anything, and that was part of the problem.
    Second footnote. You asked, will the stimulus package do 
anything to help this set of problems? Not directly. But to the 
extent the economy improves, all problems shrink. One of the 
reasons that the RTC wound up spending much less taxpayer money 
than almost anybody thought at the beginning--it was still a 
lot, but the numbers that were bandied about were much higher--
was that the economy started to improve as we got into 1992 and 
1993. As the economy starts to improve, bad loans become good 
loans, just as it works in the other direction. And when the 
economy starts to deteriorate, good loans become bad loans.
    And so doing something to boost macroeconomic activity, 
which is what the Fed is up to and which is what the stimulus 
package is about, will at the margin also contribute to this 
particular problem.
    Senator Gregg. I am sorry. Dr. Mitchell? And I know, Ben, 
you have been----
    Mr. Mitchell. I actually will agree completely that if the 
economy does better, that helps everything. If the economy does 
worse, that hurts everything, and that is why I think the focus 
should be on what is good long-term policy, because I do not 
think it is under your control with a stimulus package to 
affect the short-term economic results.
    In terms of the Federal intervention in housing, I will 
repeat what I said before. I am very worried about what signal 
may be sent. If people in the future think that, well, maybe 
the Government is going to step in and prop up house prices at 
a certain level, I just worry that that is going to have 
implications for the overall efficiency of capital markets and 
what is being allocated where. And I think it is also going to 
probably lead people to take more risks than they otherwise 
would take because they think there is a possibility of the 
Government stepping in if somehow things go south. And I just 
think that is not a good signal to send in terms of long-term 
economic performance.
    Senator Gregg. I appreciate it.
    Chairman Conrad. Senator Cardin, yes, I join the Ranking 
Member in thanking you very much for your patience.
    Senator Cardin. Well, thank you, Mr. Chairman. I have found 
this discussion to be very, very helpful. But I could not help 
but think of how the typical person in my State of Maryland 
would be responding to this discussion. The typical family in 
Maryland is concerned about energy costs, health care costs, 
and perhaps even job security. The stimulus package that passed 
the House is a conventional approach to try to restore some 
confidence in our economy, and to me it is helpful.
    But the point that has been raised here about the housing 
market is of particular importance to Maryland. Maryland does 
not have an high unemployment rate, but we have a high 
foreclosure rate. Foreclosures are increasing in our State, up 
significantly in the last quarter. Bankruptcies are also up in 
Maryland. The trigger for the economic problems we are 
experiencing right now is clearly the housing market. And I can 
tell you, having visited several parts of Maryland, that in the 
Washington suburbs, there are many homeowners with subprime 
loans that are behind and in danger of foreclosure.
    So I would say to Mr. Mitchell: the toothpaste is not out 
of the tube yet for them. They can still save their homes. And 
they are looking to this Congress to do something to give them 
hope that they will be able to restructure their mortgages, and 
be able to stay in their homes and not be forced into 
foreclosure.
    I was in Salisbury on Monday. It is in a rural part of our 
State. I asked the local leaders whether there was a problem 
with the housing market in rural Maryland. They told me that 
people cannot sell their homes, and inventories are very high.
    I was in Baltimore talking to a young family who cannot 
find a mortgage to buy a home. They want to buy a home. They 
cannot. So the credit crunch is real. It is affecting our 
economy today.
    So as we look at the stimulus package this afternoon on the 
floor of Congress, I believe we have a responsibility to do 
something about the housing crisis. And I was very much 
interested in our witnesses' comments that if we can do 
something to ease the credit crunch, if we can do something 
that gives some degree of optimism, then maybe that will have 
an impact.
    When the Federal Reserve reduces the prime rate, we all 
know it has some direct impact, but it is also a signal. It is 
a signal of concern and confidence. And my own gut feeling is, 
for the people whom I visited in Maryland, they want this 
Congress to do something about the housing crisis. They do not 
want us to just sit back and say you cannot affect private 
contracts; we do affect the economy here.
    So I will leave that as an open-ended question. What we can 
do in the short term--and the long term, but we have the short 
term before Congress right now--to, first, help that person who 
has a subprime loan today in the Washington area, who is trying 
to make payments, but has fallen behind, has a good job, is 
creditworthy, and needs help. What can we do in the short term 
to assist those people?
    Mr. Zandi. Well, I think one thing you can easily do is 
raise the loan caps temporarily for Fannie Mae and Freddie Mac. 
I think that has been proposed, and I think that would be very 
efficacious, particularly for your State, Senator. If you look 
at the 2006 data on mortgage originations, which is the latest 
full year of data we have, and you look at all the loans that 
were originated above $417,000--that is the current loan cap--
about 10 percent of the borrowers in Maryland in that order of 
magnitude would be affected by that. They would be able to get 
Fannie- and Freddie-backed credit if we changed this rule. 
Right now they cannot get any credit because the market is 
frozen outside of what Fannie and Freddie are doing.
    So I think it is a very easy, very laudable thing to do, 
and I think it would be effective. It would have been more 
effective 6 months ago when Fannie and Freddie were in better 
financial situations. They have their own capital problems now, 
and that is going to limit their ability to use this and help 
the market. But it would still be helpful.
    Expanding FHA, I think that is a slam-dunk. I do not know 
why we do not immediately increase FHA to allow homeowners into 
homes. I think that would be very helpful.
    I think the proposal to allow for increased issuance of 
municipal bonds to finance State funds, to help in refinancing 
efforts of people who face payment resets on their mortgages to 
refinance into another loan is a very effective way, and it 
allows the States to--because they are on the ground with these 
folks, and they know and can help decide who gets this.
    So these are not big things, but they are things that can 
be done very quickly and would be very helpful now.
    Senator Cardin. Thank you. Any other suggestions? I agree. 
First of all, the indirect impact that it will have will be 
positive.
    Mr. Zandi. Right.
    Senator Cardin. Additionally, it will demonstrate that we 
are taking action, which can feed on itself.
    Mr. Blinder. Well, just a couple of quick points. I think 
your point about giving people the feeling that something is 
going on can be helpful in a variety of dimensions. Regarding 
some of the things we were talking about earlier about getting 
the capital markets functioning again, I am ``convinced''--
nobody really knows what the future will bring, but I am 
relatively convinced--that if we could get these markets 
functioning so there are actually prices for these assets at 
which people knew they could buy and sell, then private capital 
would come pouring in, and the Government would have to do 
relatively little in the end. It is sort of an igniter in that 
sense.
    The other thing that I wanted to mention is that the 
refinancings are only one part of the issue. The other part of 
the issue is the debt workout. There are people who haveten 
themselves into debts that they are not going to be able to 
pay. This happens all the time. When it is banker to customer, 
the banker knows that if it goes to foreclosure, there is going 
to be value destroyed. If you think about how much value the 
banker and the homeowner together have, it is going to go down 
in a foreclosure. Bankers know that, and so they try to get 
workouts. How much can you pay? Stretch it out. Lower the 
interest rates. Whatever.
    The problem we are having now is that most of these 
mortgages have been securitized, sliced and diced, put into 
CDOs, MBSs. They are all over the world. And so some of your 
homeowners in Maryland may actually have mortgages that are 
owned by a pension fund in Italy or something. That pension 
fund does not even know that they own this mortgage of your 
homeowner in Maryland. So you get a very difficult coordination 
problem.
    Now, in the fullness of time, the markets are going to 
solve those problems, no doubt. But the question is how full we 
want time to be, and I think there is a case for the Government 
coming in acting as a coordinating mechanism, as a catalyst to 
get this hypothetical pension fund in Italy and the homeowner 
in Maryland together to do something that will actually be in 
their mutual benefit--if only they knew each other.
    Senator Cardin. Thank you.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator.
    A couple of quick things before we end. One, Dr. Zandi, you 
mentioned $250 billion of--I took it to be mortgage 
refinancings that have been typical in previous periods, and 
now we are down to $10 billion. Was that your reference? Was it 
to mortgage refinancing?
    Mr. Zandi. No. That was to bond issuance.
    Chairman Conrad. Bond issuance.
    Mr. Zandi. Bond issuance. And just to give you the----
    Chairman Conrad. Bond issuance in a particular sector or 
just broadly?
    Mr. Zandi. In the nonconforming market, so that would 
include----
    Chairman Conrad. Nonconforming. That is over $417,000.
    Mr. Zandi. And all the subprime and Alt-A and all the 
jumbo. That was half the market in 2006. In fact, in 2006, 
there was $1 trillion, give or take a billion, in bond issuance 
to finance those loans, which obviously many of those loans 
should not have been made.
    In the fourth quarter of 2007, to give you context, there 
were less than $200 billion altogether, and by December we were 
down to, you know, nothing essentially--I mean, very little 
bond----
    Senator Gregg. Can I ask a question?
    Chairman Conrad. Yes, absolutely.
    Senator Gregg. And the rollover number I have heard is that 
there is a half a trillion of subprime coming due this year and 
a half a trillion coming due next year.
    Mr. Zandi. Yes, well, this year it is subprime. In 2009 and 
2010, it is the option ARMs, which are some subprime, but some 
are jumbo. You know, prime borrowers, they just have these 
balloon payments coming. But they are going to have a great 
deal of difficulty because they got in with housing values at a 
certain level, their mortgages were right up to the value, and 
now they are underwater. So this is a problem that is not going 
to end in 2008. It is going to extend into 2009 and 2010.
    Chairman Conrad. And what could we do about that problem? I 
take Dr. Mitchell's entreaties. But if one was concerned about 
that becoming an even bigger problem in the economy than it 
might otherwise be, taking his entreaties seriously that 
largely you want to market to deal with this, what steps could 
we take that would help the market resolve it in a less 
cataclysmic way?
    Mr. Zandi. OK. Well, there is a multifaceted way, approach 
to this, and it is not just one thing. Some are small, some are 
large. The RTC idea, the RTC-like idea is a large idea that 
takes a lot of thought, but may be needed. But when you give 
permission to the State governments to issue more tax-exempt 
bonds for refinancing, that will help. That is going to go to 
help refinance people who are facing these ARM resets. So the 
more funds you can provide into that program, the more helpful 
that will be.
    HOPE Now, which is the initiative that Treasury has set up 
to facilitate the modification process, is a good idea. It is 
going to be very small, though. And one caveat I just want to 
throw out there so that you are aware of this, most of the 
effort so far has been in establishing so-called repayment 
plans. They do not help the homeowner at all. All a repayment 
plan does is say to the homeowner, You did not pay me the last 
few months, I am going to take the interest you owe me and the 
fees and roll it back into the principal, and you are going to 
be put on a new payment schedule, which, in fact, in most cases 
will have a higher mortgage payment.
    So when you hear that HOPE Now has resulted in a quarter 
million repayment plans, that is in my view not helping at all. 
That is going to be more of a problem--not years ahead--in 
months ahead. These people are not going to be able to make 
good on it. But HOPE Now, broadly speaking, is a laudable 
process.
    But, ultimately, the only way this problem is going to be 
solved is if there is more--if credit starts to flow into the 
mortgage market, that lenders are able to extend out credit to 
good potential homeowners, to first-time buyers, to people who 
under normal circumstances would not be able to get a loan. Not 
the investor, not the subprime borrower who had no chance of 
making good, but reasonably good credits. And anything you can 
do to improve that flow of credit I think is going to help.
    Chairman Conrad. Let me go to one other thing because we 
are running out of time here, and that is longer term. Senator 
Gregg and I have a proposal to have a task force, eight 
Democrats, eight Republicans, that would have the 
responsibility to come up with a plan to deal with our long-
term fiscal imbalances, deal with the entitlement shortfalls 
that we all know exist, and that if 12 of those 16 members 
could agree on a plan, that plan would come to Congress for a 
vote. It would not be a commission that just comes up with a 
recommendation and nothing ever happens, because we have 
concluded that the normal legislative process simply is not 
going to take on these very tough, overarching issues absent 
some change in process.
    I would just ask each of you for your reaction. Do you 
think that is something that would be helpful? Would it be a 
confidence builder to markets to see the United States was 
facing up to its long-term mismatch between commitments and 
revenue?
    Mr. Zandi. So the idea is that you would have a commission 
that would come with a proposal that is binding, it is up or 
down, kind of like a BRAC Commission process?
    Chairman Conrad. Yes.
    Mr. Zandi. You know, fundamentally that is absolutely--
something like that has to happen because the only way we are 
going to come to a solution to this long-term problem is there 
has to be tax increases and spending cuts, a combination, and 
that is going to be very painful to get through any legislative 
body. And the only way is some kind of process outside of the 
current process.
    Mr. Blinder. I agree with that very much. I have written 
about this also. It is a certainty that the ultimate long-run 
budget fix-up, whatever it is, is going to have in it so many 
things that every single Member of Congress will not like 
something in it. And so, you know, the genius of the Base 
Closing Commission was exactly to sort of bundle it all 
together. That was also the secret to the Tax Reform Act of 
1986, which had lots of things in it that individual members 
did not like. But somehow everybody came together and we got a 
very good tax reform.
    I do not have a personal opinion on whether the exact 
details of what you just said is the right way to do it. But 
maybe it is. But something that is philosophically like that 
needs to be done. And let me just add an obvious codicil to 
that. To the extent that partisanship can, not disappear but 
sort of be put in the closet for a little while, that would be 
a good thing, because in truth, in many of these cases it is 
partisanship that prevents the agreement from going forward. 
And if you could, you know, as a thought experiment, get a 
handful of nonpartisan people together, I think you would get 
agreement on many things without a great deal of difficulty. 
But that is hard to get done in Washington, I know.
    Chairman Conrad. Dr. Mitchell?
    Mr. Mitchell. I certainly applaud the attention that the 
two of you are giving to fiscal issues, long-term fiscal 
issues. I am a tad bit worried that the focus is on the 
imbalance as opposed to the growth of government. If we look at 
country like Sweden, they have a budget surplus, but government 
is consuming more than 50 percent of GDP, and their per capita 
disposable income is only 65 percent of American levels. SO I 
would not want to trade places with Sweden even though they 
have a surplus and we have a deficit.
    So I would certainly hope that such a commission would 
focus on, if it ever was passed and wound up producing 
recommendations, it would focus on how to control the size of 
government and keep it where it is now, as opposed to become 
like Sweden with a surplus but a much poorer society because 
government is too big.
    Chairman Conrad. Let me just say in answer to that, I think 
the honest answer here is we are going to have to have some 
more revenue. I would prefer it to be in areas that are not 
actually tax increases, at least the first place we look for 
revenue not tax increases. But there are also going to have to 
be benefit adjustments. And if you look at the math, I think it 
is very clear that the heaviest part of the load is going to 
have to be on the benefit adjustment side of the house. We have 
a runaway train here, especially on the health care accounts, 
and that is the 800-pound gorilla that can swamp this boat.
    We talk about what is happening here. We have had repeated 
testimony before this Committee by Chairman Bernanke, the head 
of the Federal Reserve, by the head of the Congressional Budget 
Office, by the Comptroller General of the United States, and 
economists of all stripes telling us we are on an unsustainable 
course, and the quicker we make a course correction the better.
    Senator Gregg?
    Senator Gregg. Well, let me associate my comments with your 
comments. Again, Mr. Chairman, you are right on. And I thank 
the panel. I found this to be extremely informative and also 
entertaining and worthwhile, and I appreciate the point of 
views. And I like the fact that there were different folks, 
different views here expressed. I wish we had a magic wand, but 
we do not. But hopefully we can get through this.
    Thank you.
    Chairman Conrad. Thank you. Thanks to my colleague Senator 
Gregg. Thanks to each of the witnesses. I have enjoyed this 
very much. Dr. Zandi, Dr. Blinder, Dr. Mitchell, I think you 
all made an excellent contribution to the work of this 
Committee, and we thank you for it.
    Mr. Zandi. Thank you.
    Mr. Blinder. Thank you.
    Mr. Mitchell. Thank you, Senators.
    Chairman Conrad. We are adjourned.
    [Whereupon, at 12:12 p.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.101
    

    [GRAPHIC] [TIFF OMITTED] T2157.102
    

    [GRAPHIC] [TIFF OMITTED] T2157.103
    

    [GRAPHIC] [TIFF OMITTED] T2157.104
    

    [GRAPHIC] [TIFF OMITTED] T2157.105
    



  THE LONG-TERM OUTLOOK AND SOURCES OF GROWTH IN HEALTH CARE SPENDING

                              ----------                              


                       THURSDAY, JANUARY 31, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Wyden, Gregg, and Enzi.
    Staff present: Mary Naylor, Majority Staff Director; and 
Scott Gudes, Staff Director for the Majority.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    We would like to thank Dr. Orszag for being with us once 
again. You have been very busy, yesterday at the Finance 
Committee on the stimulus package. I think we all know the jobs 
data out this morning provides more evidence of critical need 
for us to take action on fiscal stimulus. And we hope that that 
can be done expeditiously.
    The turnout is not as strong as it might otherwise be 
because the leadership called a special caucus for 10 o'clock 
this morning to discuss the stimulus package. So we apologize 
for that, but we thought it was important to proceed, given 
what we are trying to do in terms of schedule on this committee 
this year.
    Let me just take a moment to inform colleagues and their 
staffs that it will be my intention to complete action on the 
floor on the budget resolution before the March break. That is 
an ambitious schedule but I think it is imperative that we do 
that. That would mean markup would occur the week before, and 
it would be our intention to do it on the Wednesday and 
Thursday in the Committee, then go to the floor the next week 
before the March break. So you might inform your members that 
that is the schedule.
    I have visited previously with Senator Gregg about that. 
He, as always, is wanting to move the work of this Committee in 
an expeditious way, as well. So that will be our intention.
    With that, we want to turn our attention to the health care 
circumstance that we confront that really is the 800-pound 
gorilla. We have said it many times in this Committee. That is 
where we have the biggest disconnect between the commitments 
that have been made and the resources that are available. This 
requires our urgent attention.
    This is a matter of not only Medicare and Medicaid, but 
also veteran's health care. All of the health care accounts in 
the Federal Government are jumping dramatically in cost.
    Let's turn to that first slide. This is CBO's long-term 
budget outlook from December of last year. This takes their 
scenario, makes the tax cuts permanent, provides for an 
indexing of the Alternative Minimum Tax, and Medicare physician 
payments growing with the higher MEI rate. This is all to try 
to reflect some notion of what the President has called for, 
coupled with CBO's long-term outlook.

[GRAPHIC] [TIFF OMITTED] T2157.343


    And this is what it shows. It is a total runaway train, in 
terms of debt. Let's go to the next slide.

[GRAPHIC] [TIFF OMITTED] T2157.344


    We all know that one of the key drivers is the demographic 
tidal wave. We are going to have roughly 80 million retirees in 
2050, up from about 40 million now.
    That, coupled with this next factor, which is health care 
costs, a point that the Director of CBO has made to us 
repeatedly, that this not just a demographic phenomenon, 
although that is certainly a component. The even larger 
component is rising health care costs. You can see that with 
Medicare and Medicaid alone, we are heading for 12 percent, 
nearly 12 percent of GDP by 2050 if the current trend lines 
continue.

[GRAPHIC] [TIFF OMITTED] T2157.345


    That is almost incomprehensible. But that is the course we 
are on. And we simply cannot permit that to play out.
    If we look at spending on health care as a percentage of 
GDP, including Medicare and Medicaid but also adding in all 
other health care spending, we would be approaching 40 percent 
of gross domestic product just on health care.

[GRAPHIC] [TIFF OMITTED] T2157.346


    I know that Senator Enzi is working on an initiative in 
this area. Senator Wyden is, as well. Senator Whitehouse is 
deeply engaged in this. This is going to require our attention 
because we are clearly on a course that is unsustainable.

[GRAPHIC] [TIFF OMITTED] T2157.347


    This is what the Comptroller General said to the House 
Budget Committee in February of 2005: ``Federal health care 
spending trends should not be viewed in isolation from the 
health care system as a whole. Rather, in order to address the 
long-term fiscal challenge, it will be necessary to find 
approaches that deal with health care cost growth in the 
overall health care system.'' I think he got it exactly right. 
Let's go to the next slide.

[GRAPHIC] [TIFF OMITTED] T2157.348


    Health care reforms that have potential for long-term 
savings, even though they may have up front costs, include 
expanding comparative effectiveness research, something that I 
believe is critically important because we see this tremendous 
variance across the country in terms of approaches to health 
care. We see, in some treatment regimes, a five-to-one spending 
difference and no improvement in health care outcomes. Five-to-
one difference in terms of expenditure with no evidence of 
better outcomes.
    No. 2, widespread adoption of health information technology 
and e-prescribing. The RAND Corporation has told us we could 
save as much as $80 billion a year if that were appropriately 
deployed.
    Third, coordinating care for the chronically ill. This is 
something that jumps out to me as being a key factor. Roughly 5 
percent of beneficiaries are using roughly half of the budget. 
Now in business school, I was taught when you have that kind of 
statistic, you had better focus on it like a laser.
    Fourth, changing provider incentives and beneficiary cost-
sharing.
    And fifth, promoting healthy lifestyles and preventive 
care.

[GRAPHIC] [TIFF OMITTED] T2157.349


    The Chairman of the Federal Reserve, on the budget outlook, 
told the Senate Budget Committee last year ``One might look at 
these projections and say well, these are about 2030 and 2040, 
and so we really do not have to start worrying about it yet. 
But in fact, the longer we wait, the more severe, the more 
draconian, the more difficult the adjustments are going to be. 
I think the right time to start is about 10 years ago.''
    I will end on that note and turn to my colleague, Senator 
Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. Again, I 
congratulate you for holding a hearing that is critical and 
topical to what is the primary fiscal problem we confront as a 
Nation and obviously it involves a lot of social policy, too. 
And that is the cost of health care and the way it is going to 
affect the capacity of this Government to be affordable for our 
children and our children's children.
    It is nice to have the former chairman and the ranking 
member of the Health Committee here, because he is obviously 
playing a huge role in how this gets moved forward.
    The Chairman has touched base on a number of key areas and 
I would just reinforce what he has said by taking a slightly 
tangential approach. Health care is not like Social Security. 
Social Security has five or six moving parts. We know how to 
fix Social Security; all it require is the political will. If 
you put the right people in the room, we could solve Social 
Security in probably half an hour, or significantly improve it.
    Health care, on the other hand, is an incredibly complex 
matrix of moving parts, which is constantly evolving and 
changing. Because of the fact that diseases change, the ability 
to know how to address them changes and life expectancy 
changes. And of course research and development in health care 
is having a massive impact on both cost and quality, in many 
ways positive and in some ways not so positive on the cost 
side.
    But in any event, it is not something that there is a magic 
wand for. There are not four or five adjustments.
    So I do not subscribe to the Big Bang Theory of solving the 
health care issue. I think you have to do it with major 
incremental steps, find an area where you can address something 
that you know is not working, and try to improve it.
    For example, working with Senator Clinton, we introduced 
something called the Medicare Quality Enhancement Act, and with 
the assistance of Senator Enzi, a version of it was passed out 
of Senator Enzi's Committee. The bill would make available to 
purchasers Medicare statistical data that would be collected in 
a central place and then be available to people who wanted to 
purchase health care so that they would know whether this 
hospital or this group of physicians or this procedure was more 
cost efficient and produced better quality than the other 
hospital or group of physicians or procedure.
    That type of information is critical. It is part of the 
transparency effort. Unfortunately, it is being held up now in 
a bigger issue with the health IT bill.
    In addition, things that are being done, for example, by 
the Dr. Wennberg at Dartmouth, where they are basically 
developing an atlas of how much it costs and what type of 
results occur across this country in different health provider 
groups, is absolutely critical information. Then using that 
information effectively through transparency and making it 
available to the people who purchase the goods, the health care 
services, is absolutely critical.
    So there are specific things we can do. And we should do 
them and line them up and knock them off one by one.
    And one of the things we can do, and I mentioned this 
yesterday, is use the reconciliation instruction strength of 
this Committee to start to move on specific areas where we can 
take action which will help bring into balance the cost of 
health care. I point again to the proposal from the 
Administration last year, which I think was terribly 
reasonable, that we require high income individuals to pay a 
higher portion of their Part D premium. It just is beyond me 
why a person working in a restaurant or a person working in a 
factory or a person working at any job that does not get paid 
dramatic sums of money, should have to underwrite people who do 
make dramatic sums of money such as Warren Buffet or Bill 
Gates' father. Not to pick on those two people, but the fact, 
is they can afford to pay a larger percentage of their Part D 
premium and they should.
    Also, I think the Administration proposal last year to 
recover some of the effeciencies that have resulted in the 
health care community as a result of technology improvements 
and cost savings. Not all of that benefit is being asked to be 
recovered, but the taxpayers ought to get some of that back.
    So there are specific things we could do using the 
reconciliation instructions to energize that effort. And I hope 
we will look at that as we mark up the budget.
    But I think in making these decisions, what we need is good 
information. You cannot make decisions unless you have good 
information. That is why what Dr. Orszag and his team are doing 
at CBO in this area is critical. And that is why I think this 
hearing is so important, because it will give us the 
information off of which, hopefully, we can build some of this 
significant instrumental policy to try to get this issue under 
control.
    So I think Dr. Orszag for being here today.
    Chairman Conrad. Thank you, Senator Gregg.
    Again, welcome, Dr. Orszag, to the Committee and please 
proceed with your testimony.

 STATEMENT OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Orszag. Senator Conrad, Mr. Gregg, members of the 
Committee, the rising costs of health care represent the 
Nation's central long-term fiscal challenge. As my first slide 
shows, over the past four decades, health care spending overall 
has roughly tripled as a share of the economy from about 5 
percent of GDP in 1960 to more than 15 percent today.
    Costs per beneficiary have been rising about 2 percent 
faster than income per capita. This metric, which is often 
referred to as excess cost growth--which, by the way, does not 
necessarily mean excessive cost growth, it just means that 
costs are rising faster than income--has been roughly the same 
in Medicare, in Medicaid, and the rest of the health care 
system, which underscores that many of the same factors driving 
up costs in our public insurance programs are also driving up 
costs in the rest of the system.
    The report that we released today examines studies that 
have concluded that the most important factor driving up costs 
historically has been the emergence, adoption, and widespread 
diffusion of new medical technologies and services, including 
new drugs, new devices, again new services, as well as new 
clinical applications of existing technologies.
    The bottom row of the next slide shows you that available 
estimates suggest that approximately half of the growth in 
long-term health care spending, or spending in health care over 
the long-term, has been associated with these technological 
advances. Those estimates are arrived at largely through the 
process of elimination. That is, trying to account for all 
other possible causes of spending, and then what you are left 
with is attributed to changes in technology.
    One example of another----
    Senator Gregg. Can I ask a question before he goes on?
    Chairman Conrad. Absolutely.
    Mr. Orszag. Absolutely.
    Senator Gregg. That is up to today? In other words, you are 
not counting the baby boom population?
    Mr. Orszag. I am going to get to that.
    Senator Gregg. OK.
    Mr. Orszag. Right. This is historical.
    Older people do have higher health care costs than younger 
people. But if you look back over the past several decades that 
factor only accounts for a small share of the overall increase 
in health care spending, in part because the population has not 
been aging that rapidly yet. You can see a variety of studies 
suggesting only a couple of percentage points.
    Other factors that contribute to higher health care 
spending include the growth in personal income and the 
expansion in health insurance coverage and the resultant 
reduction in out-of-pocket costs as a share of total health 
care costs. Both of these tend to raise demand for health care. 
You can see, though, that they again only explain a minority of 
the total increase.
    Some other factors, which we could have a longer discussion 
about, include defensive medicine and physician-induced supply, 
also do not appear to explain a large share of the growth in 
spending according to published studies. We can come back to a 
more nuanced discussion about that.
    The conclusion from these studies, therefore, is that most 
of the growth, or at least about half, has occurred because of 
the expansion of technologies. That is, we can do more things 
now than we were able to do previously.
    Another cost increasing factor, which is illustrated in the 
next slide, has to do with changes in chronic disease and, in 
particular, changes in obesity. We know that obesity raises an 
individual's risk of serious illness, including cardiovascular 
disease and diabetes. And the share of the population that is 
obese or morbidly obese has risen dramatically.
    In 2001, as this chart shows, spending per obese person was 
about $3,700. Spending per morbidly obese person was $4,700, 
relative to spending of a normal weight person of about $2,800. 
So it is natural to think that the roughly doubling of the 
share of the population that is obese or morbidly obese has 
significantly raised costs.
    Most of the increase in spending on obese or morbidly obese 
people has occurred because we are spending more per obese 
person rather than because we now have more obese people. In 
particular, if health care spending per capital remained at the 
levels that we saw in 1987 and we just ramp up the prevalence 
of obesity that we have experienced, you can only explain about 
4 percent of the total increase in health care spending that 
actually occurred.
    The bigger factor has been that the spending per obese 
person has gone from $2,700 to $3,700, or for a morbidly obese 
person from $2,700 to $4,700. And that comes back probably to 
the same story. The technologies that we are now applying for 
those beneficiaries have changed and we are now spending more 
per person, rather than it primarily being that the population 
hasten more obese.
    Stepping back again, though, the bottom line from these 
analyses is that the single most important factor driving 
historical increases in health care costs involves medical 
technologies which, on average, have brought very significant 
improvements in health outcomes. But the technologies then 
often get applied in lots of settings where they may not be 
yielding significant benefits. And that drives up costs without 
improving health quality, a topic I will come back to briefly 
at the end.
    Turning to the future now, Senator Gregg, we also project 
forward that in the absence of any significant change in these 
long-term trends national spending on health care is going to 
grow substantially. You can see the chart, and Senator Conrad 
already put this up so I will not belabor the point. One thing 
I do want to note, however, is that the projections are based 
on current Federal law, and therefore they are not a prediction 
of the future but rather an illustration of what will occur if 
you do not change Federal statutes and Federal policies.
    Health care spending will roughly double as a share of the 
economy by 2035 and spending on Medicare and Medicaid will rise 
from about 4.5 percent of the economy today to roughly 12 
percent by 2050 and almost 20 percent of the economy by the end 
of our projection window in 2082. That is the entire size of 
the Federal Government today.
    As has already been noted, most of that increase is not due 
purely to the fact that the population is getting older, but 
rather that we will be spending more per beneficiary. So again, 
just like the story with increased obesity prevalence, most of 
this spending increase is occurring because of increases in 
costs per beneficiary rather than the number of beneficiaries.
    All of these projections, as has already been noted, raise 
fundamental questions of economic sustainability. These 
increases are the largest driver of spending increases over the 
long term. If you combine that with projections on the revenue 
side, you get explosions in debt, which is shown in the next 
slide.

    The key question then becomes what can be done? Given that 
future health care cost growth is the most important factor 
driving our fiscal future, CBO is devoting increasing resources 
to assessing options for reducing such spending in the future. 
I think a few things are worth noting.
    First, straightforward changes to Medicare and Medicaid can 
save money for the Federal budget, in part by shifting costs to 
households. Ultimately, those kinds of cost-shifting approaches 
will not be sustainable if you want to maintain widespread 
access to the public programs over time. So the key is trying 
to restrain or reduce overall health care spending over the 
long term.
    In that light, two potentially complimentary approaches to 
reducing health care spending, rather than just reallocating it 
across different parts of the system, involving generating more 
information about what works and what does not, and then 
aligning incentives for better care rather than just more care. 
Today, most of our incentives are to provide more care, 
regardless of whether it is better.
    And I would just end by noting the final slide, rather than 
the geographic slide that I usually walk around with, I want to 
just highlight this final slide. We have very substantial 
variations, as has already been noted, in costs per beneficiary 
across parts of the United States, even at our top medical 
centers. If you look at beneficiaries within the last 6 months 
of life, costs per beneficiary at UCLA Medical are twice as 
high as costs per beneficiary at the Mayo Clinic for reasons 
that are not correlated with quality outcomes. That is to say, 
quality is actually better by the measures that we have at the 
Mayo Clinic.
    And I would just again end by saying taxpayers are paying 
for that difference. And we do not know what we are getting in 
exchange for the higher expenditures. So if there were a single 
thing that we could do, both to make sure that taxpayers are 
getting their money's worth out of the dollars that we are 
putting into these programs, and also to help future 
generations address the key factor affecting long-term budget 
spending, figuring out why we have this kind of variation and, 
in particular, what we are getting for it and how we can do 
that better, I think is absolutely essential.
    And that will likely involve changes in information. It 
will likely involve changes in incentives. And it will likely 
involve changes in health behavior that will take a long time 
to pay off.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Orszag follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.106
    

    [GRAPHIC] [TIFF OMITTED] T2157.107
    

    [GRAPHIC] [TIFF OMITTED] T2157.108
    

    [GRAPHIC] [TIFF OMITTED] T2157.109
    

    [GRAPHIC] [TIFF OMITTED] T2157.110
    

    [GRAPHIC] [TIFF OMITTED] T2157.111
    

    [GRAPHIC] [TIFF OMITTED] T2157.112
    

    [GRAPHIC] [TIFF OMITTED] T2157.113
    

    [GRAPHIC] [TIFF OMITTED] T2157.114
    

    [GRAPHIC] [TIFF OMITTED] T2157.115
    

    [GRAPHIC] [TIFF OMITTED] T2157.116
    

    [GRAPHIC] [TIFF OMITTED] T2157.117
    

    [GRAPHIC] [TIFF OMITTED] T2157.118
    

    [GRAPHIC] [TIFF OMITTED] T2157.119
    

    [GRAPHIC] [TIFF OMITTED] T2157.120
    

    [GRAPHIC] [TIFF OMITTED] T2157.121
    

    [GRAPHIC] [TIFF OMITTED] T2157.122
    

    [GRAPHIC] [TIFF OMITTED] T2157.123
    

    [GRAPHIC] [TIFF OMITTED] T2157.124
    

    [GRAPHIC] [TIFF OMITTED] T2157.125
    

    [GRAPHIC] [TIFF OMITTED] T2157.126
    

    [GRAPHIC] [TIFF OMITTED] T2157.127
    

    [GRAPHIC] [TIFF OMITTED] T2157.128
    

    [GRAPHIC] [TIFF OMITTED] T2157.129
    

    Chairman Conrad. It is pretty sobering, is it not?
    Mr. Orszag. Yes.
    Chairman Conrad. I mean, you look at these things, it is 
really sobering.
    So, the question is what can we do about it? And as you 
know, Senator Gregg and I have a proposal to have a task force 
that is given the responsibility to come up with a long-term 
fiscal plan. If we were able to get that task force in place, 
would you have proposals that you think could have a 
significant effect in altering what we see as the future here?
    Mr. Orszag. Let me answer that by saying two of the most 
significant activities that CBO will be undertaking in this 
area this year are intended to produce two volumes, hopefully 
by the end of this year or perhaps early 2009. One is something 
that we are calling Critical Topics in Health Reform. The goal 
there is to go through systematically many of the major topics 
that people are talking about, disease management, care 
coordination, pay-for-performance, what have you, and provide 
some guidance to the Congress about what our views are in terms 
of what the effects may be. Probably in ranges, rather than 
specific, you know 22.2 kind of point estimates.
    This could be $10 billion to $20 billion a year and if you 
do it this way you are more likely to be closer to the $20 
billion, if you do it that way you are more likely to be closer 
to the $10 billion.
    And then, in addition to that, we intend to pull out of the 
budget options volume that we do every other year and produce a 
separate health options volume that will provide for more 
detailed specific proposals, precise point estimates of what 
the budgetary and other impacts would be.
    We have a major cross-agency undertaking to provide that 
kind of information. So I guess it would depend when your 
commission started operating.
    Chairman Conrad. Well, our intention now is that it would 
be next year.
    Mr. Orszag. Well, that timing works.
    Chairman Conrad. In terms of the conclusion of your work, I 
heard you say either late this year or some time early next 
year?
    Mr. Orszag. Yes.
    Chairman Conrad. Well, the earlier it was done next year, 
the better for the purposes of what we are trying to do. And I 
think, you know, if you look at the reality here, you get a new 
administration, whatever it is. They are going to have no 
choice but to tackle these issues because their whole 
presidency, I think, could potentially be defined by how they 
grapple with these challenges.
    As you think about this yourself, how serious a threat do 
you see these long-term projections to be to not only the 
fiscal stability of the country but the economic strength of 
the country?
    Mr. Orszag. If we were ever to actually wind up on the kind 
of debt path that is illustrated in the chart before this one, 
the economic consequences would be orders of magnitude much 
more severe than anything we are currently experiencing, which 
is obviously generating--in some quarters--concern.
    So that kind of path simply cannot happen. It would be an 
economic disaster.
    Chairman Conrad. I hope the word gets out, you know? Our 
colleagues have to join us in this effort. There is no sitting 
on the sidelines this time, I do not think. So I am calling my 
colleagues, through their staffs that are here, I hope they are 
paying very close attention to what we have just heard here.
    And I hope this moves them to support the proposal that 
Senator Gregg and I have made. If they have ideas for change, 
let's hear them. But I want to once again state that we are 
going to go to markup on this proposal. To me, this cannot be 
kicked down the road anymore. This has to be--we have to have 
the beginning of facing up to this.
    And I do not pretend for a moment we are going to be able 
to solve all of the problem on the first bite at the apple. But 
it needs to be a big bite and it needs to be very serious and 
it needs to be bipartisan.
    Dr. Orszag, I would ask you, do you believe that an 
initiative along these lines is important and important to do 
now?
    Mr. Orszag. Yes, and I would also just add one other thing 
that Senator Gregg mentioned: in this key area of health care, 
we currently do not have the specific proposals and the 
specific information that you would need to alter that path 
immediately. We need to be building that infrastructure and 
being much more aggressive, just orders of magnitude more 
aggressive, in getting under the hood and finding out exactly 
what works and what does not, and trying different things and 
evaluating them.
    We cannot afford to just wait and kind of say well, we do 
not really know because we do not have the information base. We 
will not have it when the time comes unless we are building it 
now.
    Chairman Conrad. Senator Gregg?
    Senator Gregg. Following up on that, do you think the 
Dartmouth studies are of value in this area?
    Mr. Orszag. The Dartmouth studies are of unbelievable 
value, which is why I walk around with their results all the 
time. But I would note that even the Dartmouth studies are 
hampered by data limitations and by data imperfections. We 
could be doing a lot more of that kind of research. I think 
they are path breaking and are leading the way. But we need the 
artillery to come in behind them and really bring this back 
down to a more serious thing.
    We should not be relying so much on a very dedicated but 
small group of researchers at Dartmouth University for this 
kind of absolutely key--
    Senator Gregg. Dartmouth College.
    Mr. Orszag. Oh my goodness, I am sorry, Dartmouth College--
for this kind of key information.
    Can we strike that from the record?
    Chairman Conrad. Yes.
    Senator Gregg. Otherwise, you will be beaten with hockey 
sticks.
    [Laughter.]
    Mr. Orszag. I have been to New Hampshire, I know. I do not 
want to do that.
    Senator Gregg. Well, as a result of those studies, I tried 
to figure out what can we do with this information. And what we 
came up with was this MQEA initiative, which is essentially to 
have this clearinghouse where the information is gathered and 
we get over this hurdle of not having this information 
generally available.
    I mean, what good is it for Medicare to have all this 
information about the quality of providers if people cannot get 
access to it? We have this proposal which Senator Enzi has been 
kind enough to report out of his committee but has been tied up 
in the middle of the health IT bill. I do not know what is 
wrong with the health IT bill but somehow it got tied up.
    Is this not the type of thing we need to do--get 
information in a centralized place where it is easily 
accessible and transparent? It is good solid information so 
that an insurer or a business that has a lot of employees who 
have health insurance can go to that data bank and say well, if 
we send our employees to this hospital they are going to get 
this amount of care at this quality level at this cost. If we 
send them over here we are going to get better quality, better 
cost.
    Mr. Orszag. It is absolutely the kind of thing we need to 
be doing. We need to be getting better and more information and 
more transparency.
    I would also add, one of the limitations with many existing 
efforts, not necessarily the one that you are describing, of 
combining insurance claims data bases, which can be helpful, is 
that they often lack the quality part of the equation. And we 
need more information there, too.
    And, in fact, I think it is entirely plausible that one of 
the biggest payoffs to health information technology on a 
broader scale will not necessarily be the internal efficiencies 
of ordering fewer tests and what have you, but rather that you 
will have an information base for evaluating what works and 
what does not on a much more comprehensive basis.
    I would also note, however, that I think there is a major 
debate in the medical profession that also will have to occur. 
We are not going to be able to rely on randomized trials for 
all of the array of information that we are going to need. And 
that is unfortunate because randomized trials are better. They 
are the gold standard. But it is not practical to think that we 
are going to be able to study whether you should go back and 
see the doctor four times a month or twice a month and all the 
sorts of things that you are going to need to examine just 
using randomized control trials it will be too expensive and to 
impractical to do.
    Senator Gregg. But the Government's role, really, is going 
to be to create a playing field where this information is 
available, where it continues to be able to be brought forward 
in a flexible way so that there is constant updating and it is 
substantive, useful, visible and transparent, I think.
    On another subject, in this out-year period, where the 
prices are driven dramatically, I saw an estimate that said the 
Part D premium had an $8 trillion unfunded price tag to it. If 
that is true, and the total Medicare unfunded price tag is 
somewhere in the $34 trillion range, the Part D premium issue 
is a big part of this problem, is it not?
    Mr. Orszag. Well, I could come at that another way and say 
our long-term fiscal gap, that is the sort of collapsed 
imbalance between spending and revenue under our so-called 
alternative fiscal scenario, is about 7 percent of GDP. The 
Part D program accounts for about 1 percent of that. So it is 
not a trivial share.
    Senator Gregg. No, that is pretty big.
    And I guess, wouldn't it be logical to, at least, structure 
the payment process for that Part D premium along the lines of 
the Part B premium, where there is some larger percentage 
participation by the wealthier recipient?
    Mr. Orszag. I guess I would say that something has to 
change, and that is a policy decision. Clearly, you need some 
combination of more revenue and cost restraint, and that is one 
way of getting it.
    Senator Gregg. The issue which Senator Conrad has often 
spoken about, which elected governments find almost impossible 
to address, is the issue of the last 6 months of life and how 
you deal with that. The fact that you said, 40 percent of the 
cost is in the last 6 months is very hard for an elected 
official in a democracy to deal with.
    Other Western democracies, not even Western but 
industrialized democracies, have done it through basically 
rationing. That is what they do in Canada. That is what they do 
in England. They have a nationalized system where if you reach 
a certain age, your capacity to get certain treatments and 
devices is, if not curtailed, it is made very difficult. There 
is a time lag that is significant.
    Do you have thoughts on this area? Because it is such a big 
part of the whole overall issue?
    Mr. Orszag. Yes, and let me bring up that final slide again 
because that is literally for beneficiaries in the last 6 
months of life. Maybe even a broader theme that I would suggest 
might be beneficial, given the very substantial differences we 
have within the United States, many of the cross-country 
comparisons that we often do are difficult to do. There is so 
much variation within the United States, even just within 
Medicare, which is the same insurance program--that I think we 
can probably get a lot farther by trying to examine exactly why 
that is happening and maybe ease up a little bit on the cross-
country comparisons that are difficult to do well.
    That having been said, look at those data. Again, 
beneficiaries in the last 6 months of life, if you try to 
measure quality or outcomes or even how beneficiaries feel they 
are being treated, you do not appear to be getting anything for 
spending an extra $25,000 per beneficiary at one of our leading 
medical centers relative to another.
    It is what Elliott Fisher at Dartmouth College has said: 
how can the best medical care in the world cost twice as much 
as the best medical care in the world for those last 6 months 
of life? That is obviously a kind of cute way of saying it, but 
it is a very deep question that we need to be getting under the 
hood of.
    Senator Gregg. How do we?
    Mr. Orszag. That then raises the question--
    Senator Gregg. I mean, do we say to UCLA, at St. Mary's 
they can do this for half the price you do it, so you better 
start doing it for that price?
    Mr. Orszag. I think there are several ways of getting to 
this. Why is the regional variation occurring?
    I think a key reason why the regional variation is 
occurring is that we have a payment system that accommodates 
the more intensive approaches, even when they do not help. And 
we have different norms among practitioners in different parts 
of the country so that you have, in some parts of the country, 
much more intensive approaches without any medical evidence 
backing those approachs. And the payment system accommodates 
it, which gives you these huge variations in costs without any 
improvement in quality.
    There are lots of ways of trying to get at that. One way of 
getting at it is to note that this variation occurs most 
dramatically where we do not know what works or what does not. 
We do not know whether the MRI is indicated or how beneficial 
it is in this kind of diagnostic setting.
    In some parts of the country--for example, in the darker 
parts of the country, the parts with the higher spending 
according to the researchers at Dartmouth College--I am never 
going to make that mistake again--physicians are much more 
likely to order an MRI when someone has back pain--or says they 
suffer from back pain and there is some indication of nerve 
damage----than in the areas of the country with lower spending.
    If we had clearer guidance on when the MRI made sense and 
when it did not, I think the variations would be narrowed. And 
I believe they would likely be narrowed toward the lower 
spending regions.
    So one benefit from the kind of information agenda that you 
have already embraced involves, I think, that the more 
information we have and the more clarity about guidelines for 
the medical profession, the less variation there seems to be.
    A simple example again, is variation in imaging and in 
diagnostic tests. Things like MRIs, where there is a lot more 
ambiguity about when it should be applied, there is a lot of 
variation. Simple things that have been shown to work, like 
administering an aspirin for heart attack victims when they 
show up at the hospital, there is not a lot of variation. Where 
it is very clear what should happen, physicians tend to do 
that.
    Senator Gregg [presiding]. Thank you.
    Senator Enzi.
    Senator Enzi. Thank you. I want to congratulate you for 
your efforts to provide us with answers to deal with the 
growing health care costs. Those that have been suggested this 
morning might make a difference.
    I do have a statement that I would like to be part of the 
record.
    Senator Gregg. So moved.
    [The prepared statement of Senator Enzi follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.130
    

    [GRAPHIC] [TIFF OMITTED] T2157.131
    

    [GRAPHIC] [TIFF OMITTED] T2157.132
    

    [GRAPHIC] [TIFF OMITTED] T2157.133
    

    Senator Enzi. Senator Kennedy and I have been working 
primarily on education issues last year because the HELP 
committee handles everything from birth to retirement. And 
since most of those issues needed authorization, we are trying 
to get that done. We are about to finish up the Higher 
Education Act, I think. The House is taking it up next week.
    So now we will be able to concentrate more on health care. 
It is not that we have not been doing anything on it the last 
year. I was tasked with looking at the different ways people in 
both parties say that we should be dealing with health care 
issues, and what they feel we ought to be doing.
    And across the aisle I have compiled a list of 10 different 
things that we could do to improve access and the quality in 
health care, in addition to getting every American insured. And 
if we did all 10 of them, that would be the result.
    It is proposed as 10 pieces because we seldom do anything 
really comprehensive around here. Because if you have 10 
pieces, one of them will have five people that do not like it, 
another one will have eight people that do not like it, another 
one 11 people that do not like it. Pretty quickly you are at 51 
and you cannot get it done.
    But if you pick out the one that has five people against 
it, 95 to five is not too bad and we can get it done.
    One of the key pieces in this is health IT. That is the 
great idea supported by Senator Gregg that seems to have 
stalled out. One of the reasons it has stalled is because the 
bill was scored as costing $47 million in 2008 and $317 million 
over 2008 to 2012.
    Yet the RAND Corporation says that this interoperability in 
health IT would save $162 billion a year--a year. Even if we 
had some costs associated with that, it seems to me that there 
would be a couple of bucks left over...
    [Laughter.]
    Senator Enzi. ...even with the way we do accounting here.
    But that is what I want to ask about. I want to know why it 
does not save any money? And what can we do with the bill to 
change it so that it will get a score that shows savings and 
still do the things that we need to have done? All we have in 
there is a small grant program to get it kicked off--
eliminating that does not seem to do anything toward the $162 
billion a year.
    Mr. Orszag. Thank you for that question. Let me first say 
that we will be coming out at some point early this year with a 
full report on health information technology and the evidence 
on what it does and what it does not do. I think a general 
theme is that there are many things that by themselves do not 
do very much, but that in conjunction with other features or 
other changes would have larger effects.
    For example, installing a health information technology 
system in a system that is relatively integrated likely has a 
lot different effects than installing a health information 
technology system in a part of the health sector that is not 
particularly integrated.
    We have had the RAND folks in so we have scrubbed those 
numbers. I think it is fair to say that there is, in many of 
the major items, skepticism about the specific magnitudes 
involves in some of those estimates.
    I again come back to saying that because our health system 
is so decentralized and fragmented, if you will, installing 
health information technology more broadly, by itself, may not 
have as big a pay out as it would in conjunction with other 
changes----for example, using the health IT system as a basis 
for gathering information for comparative effectiveness 
research and then tying provider payments and incentive 
payments to that information. A health information technology 
system that is feeding data to some other effort--whether it is 
private or public or a combination thereof--to then study what 
works could, over the long term, significantly reduce costs.
    But if you just put the health information technology stuff 
in by itself, you do not get that big of a pay out because in a 
fragmented system it does not look like it is that beneficial.
    So the political economy of splitting up the 10 pieces that 
you described perhaps accurately, unfortunately under the 
scoring side may lead to problems because we have to score each 
proposal by itself.
    Senator Enzi. OK. Of course, in the Senate, we run into a 
little bit of a problem because we tend to work on 
jurisdictions and the doctor evaluation--which I prefer to call 
the pay-for-best practices--actually comes under the 
jurisdiction of the Finance Committee. And if the finance piece 
is combined with the health piece, then the Finance Committee 
may not get sufficient credit. But that is a problem that we--
    Mr. Orszag. These are problems I cannot solve.
    Senator Enzi. I understand that. But I will be asking some 
more questions in depth on how you come up with just evaluating 
the $47 million instead of giving even an iota of credit on 
$162 billion worth of savings. I mean, that--they do say that 
to put in that integrated system would cost about $40 billion, 
one-time. And it does have to be an interoperable, integrated 
system.
    And the reason we are trying to get this piece through is 
to enable us to reach that interoperability so that we do not 
have one system in Wyoming, another one in New Hampshire, a 
different one in Massachusetts, and a different one in Florida 
that will not interoperate, giving up a huge portion of that 
$162 billion.
    I always worry that somebody from Wyoming is going to come 
out to Washington and get in a wreck and because their medical 
records are not available, they will die. This would be a way 
for them to carry a card with all of their information on it.
    Mr. Orszag. Senator, if I could just add quickly-- and I do 
appreciate the question. One of the reasons we are coming out 
with this report is this is among the various topics where I 
think CBO scores in the past have raised questions about how 
can it be so different than other estimates that you all have 
seen?
    One of the things I am trying very hard to do is to make 
sure that while you may not always like the answer, I want you 
to understand why we reached the conclusions that we did. The 
report and other things will attempt to do that.
    Senator Enzi. It probably would be helpful to have those at 
the time that we get the valuation on the bill instead of 
almost a year later.
    One of the biggest savings, probably, in health care comes 
from prevention. But when CBO looks at the cost of health care 
and medical technology, does it take into account what savings 
might result as diseases are prevented or if they are caught at 
very early, more treatable, stages when it would be less 
expensive? Is there a cost savings in the scoring if a disease 
or injury such as a stroke is dealt with early before it leads 
to major disability?
    Mr. Orszag. There can be. For example, there was tobacco 
legislation that we scored yesterday or the day before. The 
reduced rate of teen smoking that would occur under the bill 
would have an effect on low birth weight children, which would 
then have an effect on Medicaid spending. And that was part of 
our score.
    One of the challenges in many of these settings, such as 
prevention, is that a lot of times those effects do not show up 
within a 10-year window or do not show up dramatically within a 
10-year window. There may be quality improvements but the cost 
savings--to the extent they do occur--often may occur down the 
road, which is not within the window that has been chosen for 
evaluating the budgetary impact.
    Senator Enzi. That is probably the problem that we have in 
trying to reward doctors for keeping people healthy, as well.
    I have some other questions but I will submit them in 
writing.
    Senator Gregg. Thank you, Senator.
    The Chairman needed to go to a meeting, that is fairly 
important, of his caucus since he is very much involved in the 
stimulus package and has a couple of key amendments that were 
in the Finance Committee.
    I certainly want to thank you, Dr. Orszag, for what you are 
doing. I think it is exactly what we need to have done. And the 
more information and the faster you can get it to us with some 
direction on how we can use it successfully is really, really 
important.
    I am hopeful that the Chairman's and my proposal on a task 
force is fast-tracked and will be approved. If it is, it is 
going to need this type of information. Even if it is not, we 
are still going to need it because we are going to have to take 
action.
    So I congratulate CBO for doing this. I congratulate you 
for your leadership in this exercise. And we want to work with 
you and give you whatever you need to be successful here. Thank 
you very much.
    Mr. Orszag. Thank you.
    Senator Gregg. Thank you for your time.
    [Whereupon, at 10:48 a.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.143
    

    [GRAPHIC] [TIFF OMITTED] T2157.144
    

    [GRAPHIC] [TIFF OMITTED] T2157.145
    

    [GRAPHIC] [TIFF OMITTED] T2157.146
    

    [GRAPHIC] [TIFF OMITTED] T2157.147
    

    [GRAPHIC] [TIFF OMITTED] T2157.148
    

    [GRAPHIC] [TIFF OMITTED] T2157.149
    

    [GRAPHIC] [TIFF OMITTED] T2157.150
    

    [GRAPHIC] [TIFF OMITTED] T2157.151
    

    [GRAPHIC] [TIFF OMITTED] T2157.152
    



            THE PRESIDENT'S FISCAL YEAR 2009 BUDGET PROPOSAL

                              ----------                              


                       TUESDAY, FEBRUARY 5, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Feingold, Nelson, 
Menendez, Lautenberg, Cardin, Sanders, Whitehouse, Gregg, 
Allard, and Bunning.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order. Senator 
Gregg is experiencing some flight delays, so he will be 
somewhat detained but will be joining us shortly.
    I want to welcome the Director of the Office of Management 
and Budget, Jim Nussle. This is Director Nussle's first 
appearance before the Budget Committee since his confirmation, 
so we want to especially welcome him. He has, I think, the 
unenviable job of coming here to defend the President's budget, 
but I have no doubt that he will do his best.
    As I said yesterday, we have seen this script before, and 
it is a script and a play that leads us to, I think, an 
unfortunate ending: more deficit spending, greater debts, and, 
unfortunately, a fiscal circumstance that will leave the next 
President inheriting what I believe will be a fiscal meltdown.
    Let me just go to the background in terms of what we see as 
the deterioration in the budget picture.
    The President's budget indicates that for 2008 the deficit 
will be up to $410 billion, near record terms and dollar 
amounts; for 2009, at about the same level.

[GRAPHIC] [TIFF OMITTED] T2157.194


    But I think that really misses the point, and to me, the 
media coverage and much of the analysis misses the biggest 
problem that we confront, which is the growth of the debt. I 
really believe increasingly the debt is the threat, and let me 
indicate why.

[GRAPHIC] [TIFF OMITTED] T2157.195


    While the President is saying that the deficit for 2008 
will be $410 billion, the debt will increase by more than $700 
billion in 1 year. The total debt of the United States is now 
over $9 trillion, as we meet here today, some $9.2 trillion. By 
the end of this year, we could be approaching a gross debt of 
$10 trillion.
    Now, I see this all the time, a confusion between the 
deficit and the debt. The deficit is the difference on an 
annual basis between spending and revenue, but it neglects to 
take into consideration the money that is being taken from 
Social Security to pay other bills--some $200 billion this year 
alone, none of which is counted in the deficit, every penny of 
which is counted in the debt, every penny of which has to be 
paid back.
    And so when I read in the news media over and over and over 
``deficit of $400 billion,'' I do not see a word mentioned 
about the increase in the debt. And I never hear the word 
``debt'' leave the President's lips. Never.

[GRAPHIC] [TIFF OMITTED] T2157.196


    Let's go the next slide.
    The result of all this is that the gross debt of the United 
States is going up like a scalded cat. As I indicated, by 2009 
we now anticipate the debt will be over $10 trillion, headed 
for $13 trillion, and this is the sweet spot of the budget 
cycle. This is before the baby boomers retire. What is going to 
happen when you put on top of this legacy of debt the 
retirement of the baby boomers?

[GRAPHIC] [TIFF OMITTED] T2157.197


    And even more startling is foreign holdings of U.S. debt 
and what has happened there. I have shown this chart before, 
but it becomes even more dramatic as we include the latest 
numbers. It took 42 Presidents 224 years to run up $1 trillion 
of foreign-held debt. This President has more than doubled that 
amount in just 7 years. So, increasingly, we owe hundreds of 
billions of dollars to the Chinese, the Japanese, and all 
around the world.

[GRAPHIC] [TIFF OMITTED] T2157.198


    Now the President brings us a budget that says that as a 
result of all this, we have to cut Medicare and Medicaid some 
$600 billion over the next 10 years, and in the same document 
says, oh, by the way, cut taxes $2.2 trillion. Let's dig the 
hole deeper, more debt, more borrowing from China and Japan.

[GRAPHIC] [TIFF OMITTED] T2157.199


    I think this is the way that great nations squander their 
strength and wind up greatly diminished. I look at this budget, 
and what I see is largely a fantasy: no war costs beyond the 
first half of fiscal year 2009; no alternative minimum tax 
reform beyond 2008; no spending policies beyond 2009, other 
than these very deep cuts in Medicare and Medicaid.

[GRAPHIC] [TIFF OMITTED] T2157.200


    When I look at the war costs, the President says in this 
budget the war is going to cost $70 billion in 2009. Does 
anybody believe that? Does anybody believe that? In 2008, we 
are almost $200 billion. What is the President forecasting 
here? That there is an abrupt end to the war in Iraq? Is that 
the forecast? That must be the only possibility to see that 
kind of dramatic reduction, is that the President is 
forecasting an abrupt end to the war in Iraq.

[GRAPHIC] [TIFF OMITTED] T2157.201


    Let's go to the next slide, if we could.
    When I look at the specific priorities here, again, the 
President trots out proposals that have been completely 
rejected by Congress in the past, both Democratic Congresses 
and Republican Congresses. The President says cut the COPS 
program 100 percent, cut weatherization assistance--not 50 
percent, not 75 percent. The President says eliminate it. First 
responder grants--that is our fire, that is our ambulance 
squads--cut those 78 percent. Cut clean water grants 21 
percent. Cut community development block grants that every 
mayor will tell you are the most flexible funds available to 
them to meet contingencies, cut those 20 percent. Cut low-
income energy assistance program nearly 20 percent.

[GRAPHIC] [TIFF OMITTED] T2157.202


    When we look at the legacy of this President, I believe it 
will be summed up in three D's: debt, deficits, and decline. 
And that will be a tragedy--not just a tragedy for this 
President's legacy, but far more important, a tragedy for this 
country.
    If we look back, this President inherited a record surplus, 
projected surplus of $5.6 trillion, which he touted at the 
time. Now what do we have? Deficits of $400 billion a year and 
debt increasing at more than $700 billion a year. He inherited 
a circumstance in which we were on track to pay down all 
publicly held debt. Instead, as a result of his policies, we 
have a debt that is exploding, a debt that will nearly have 
doubled on his watch. He inherited the strongest economy in 
three decades. Now we have an economy that is slowing sharply, 
so seriously that the Federal Reserve has taken emergency 
action, and this Congress is now contemplating a stimulus 
package.
    Finally, this President had robust job growth when he came 
in. Now we have the weakest job growth since the Hoover 
administration. What a record.

[GRAPHIC] [TIFF OMITTED] T2157.203


    But that is the fiscal record of this President and, again, 
tragedy for his legacy because at every step of the way he has 
been wrong. Every single year what he has said would be the 
outcome has been wrong. Not just a little bit wrong. Completely 
wrong.
    You will recall when we started this exercise he said there 
would be no deficits. When that proved not to be true, then the 
President said, well, the deficits will be small and short 
term. When that proved not to be the case, he said, well, they 
will be small by historical standards. When that proved not to 
be true, he said, well, sometime down the road we will get back 
on track.
    It has never happened. What has happened is an explosion of 
debt and deficit, a weakening economy, and this country's 
future fiscal condition gravely jeopardized. This President is 
going to hand off to the next President the worst fiscal 
condition, I think, in the history of this country when you 
take into account that we are also poised to have the baby-boom 
generation begin to retire, and that beginning to retire starts 
this year and next. And this President has done nothing to 
prepare for it.
    Well, with that, I will end my opening statement and turn 
to our colleague, Senator Bunning, who will give the opening 
comment for the Republican side given that Senator Gregg is 
somewhat delayed.

              OPENING STATEMENT OF SENATOR BUNNING

    Senator Bunning. Thank you, Mr. Chairman.
    For the first time this year, the President proposed a 
budget amounting to just over $3 trillion. Our population is 
now at just over 300 million. Therefore, the President's budget 
amounts to approximately $10,000 for every man, woman, and 
child in America.
    Most Americans do not pay $10,000 in taxes, however. 
Because of our progressive tax system, only about 95 million 
individuals and families pay any net Federal income tax at all. 
Of this 95 million, only about 14 million have a Federal tax 
liability of more than $10,000. These taxpayers, more than 10 
million of them, with incomes between $100,000 and $200,000 
paid an average of $48,000 per return in 2006. This productive 
minority will be asked to pay a much higher percentage of their 
income if the blueprint outlined by the Chairman of the Ways 
and Means Committee is ever enacted into law. Its members face 
the more immediate threat of the alternative minimum tax in the 
current year and the prospect of the largest tax increase in 
history when the 2001 and 2003 tax rate reductions expire.
    When Members of Congress called for more taxes on the rich, 
this group adjusted its behavior to the detriment of the 
remaining 286 million. The Federal Government is likely to 
suffer as well.
    An interesting feature of this year's budget is that it is 
divided into three parts, with a little over one-third 
representing all discretionary spending--one-third 
discretionary spending--and the two remaining parts represent 
mandatory spending and interest on our more than $9 trillion in 
Federal debt. We tend to focus on the third representing 
discretionary spending, but this Committee is responsible for 
the entire budget, and we should focus on it as a whole.
    I am pleased that the White House has again taken the 
challenge of entitlement spending seriously. I applaud the 
administration for tackling the issues of proposing to curb the 
unsustained growth in Medicare and Medicaid and Social Security 
spending. As a member of the Senate Finance Committee and 
Budget Committee, I look forward to examining the proposals in 
this budget thoroughly with the eye toward making changes that 
will put us on a path toward sustained entitlement programs, 
ones that we can live with, ones that will not bankrupt the 
country by the year 2030 if we do not do anything about them.
    Thank you.
    Chairman Conrad. Thank you, Senator Bunning.
    We will now turn to the witness, and, again, we want to 
welcome on a personal basis--we have strong disagreements with 
respect to budget policy, but this Committee has always treated 
our witnesses respectfully, and we certainly extend that to 
Director Nussle, who used to be the Chairman of the House 
Budget Committee, and we worked closely with him in that 
capacity.
    We welcome Chairman Nussle to the Committee. Again, I think 
you have a pretty difficult task of defending what I see as the 
indefensible. But take a shot at it.
    [Laughter.]

 STATEMENT OF HON. JIM NUSSLE, DIRECTOR, OFFICE OF MANAGEMENT 
                           AND BUDGET

    Mr. Nussle. Well, Mr. Chairman, first of all, thank you for 
your hospitality. The more I have an opportunity to sit here, 
the fonder my memories of sitting where you are, and being able 
to grill the witnesses and take the testimony.
    I want to start, if I may, by thanking the Committee and 
your staff for the respectful way I was treated during the 
confirmation process and the expedited way I was handled. I 
appreciate that, not only from you, Mr. Chairman, but from the 
members. We had things to discuss, we had challenges to 
overcome, but it was done in a very respectful way, and I 
appreciated everyone's help in that regard.
    Second, if I may, just before I begin with my testimony, I 
would like to thank the people who make it possible for the 
budget to be created in the first place. You know, as I told 
you at the time of confirmation, I had just scratched the 
surface of getting to meet many of the extraordinary 
professionals who work at OMB and have done so in many 
instances for five, six Presidents going back. We had a 
gentleman--a couple who retired this year who would as far back 
as Nixon and Johnson, and they just have done a fantastic job. 
And so many of them labor in obscurity and without a lot of 
credit, but they just do a tremendous job. They do not just 
work on the inputs. They also talk about the outcomes. There is 
a lot of that that goes into a process that puts this together, 
and I just have nothing but high praise for the opportunity to 
work shoulder to shoulder with so many of them.
    Chairman Conrad. Mr. Director, I might just say some of 
them, after looking at this budget, may be glad for the 
anonymity.
    [Laughter.]
    Mr. Nussle. That is probably true every year, Mr. Chairman. 
And as you know, for the first time, this year we sent the 
budget in an electronic format, an e-budget, and we are proud 
of it. Now, we understand there were some who maybe did not 
like it. Change is always difficult. But I can tell you that 
the initial reaction from those who have had a chance to surf 
the Web and to use what I think is a much more user-friendly, 
fast, transparent, public way to display the President's budget 
and some of the priorities, I think it has been successful. 
Certainly there are improvements that can always be made, and 
we would look forward to hearing from not only Senators but 
also from your staff as to ways we can improve this going 
forward.
    There is no question that as a result of the work we have 
done this year, we are just on the cutting edge of what can be, 
I think, a much better process moving forward if we stick 
together and say, hey, let's try and make this electronic and 
transparent.
    Mr. Chairman, the President asked me to present a budget 
and in my preparation take into consideration five main goals 
that I displayed here for you in chart format.
    First, he wanted to make sure we addressed the immediate 
economic challenges. This has been something that has been at 
the forefront for him since he first took office and dealt with 
a downturn in the economy, the bubble bursting in the dot-com 
and the stock market. He has been addressing economic 
challenges throughout his Presidency and did so this time in a 
bipartisan way with the Congress, and we look forward to that 
continuing.
    Second, to sustain prosperity for the long term. We know 
what economic growth can do with regard to all of the 
challenges that you, Mr. Chairman, brought up. Whether it is 
the short-term deficits or whether it is the long-term 
obligations, economic growth is very important. You cannot grow 
your way out of it, as the old phrase used to say. However, 
economic growth is good, and growth can get you a long way in 
dealing with the challenges. And we want to continue to grow.
    He wanted to make sure that we kept America safe. 
Obviously, that is job one of our Constitution as the 
Commander-in-Chief. It is the most important thing. Our economy 
cannot function; We cannot live in freedom or even have the 
kind of conversation we have today if America does not remain 
safe.
    He wanted us to balance the budget by 2012 and in doing so 
not take our eye off the ball which he has promoted since he 
came to office, and that is, let's deal with the long-term 
entitlement problems, whether it be Social Security, Medicare 
or Medicaid. We have a challenge to meet. He has made proposals 
every year he has been President and will do so again this 
year. So let me turn to some of these.
    First of all, continued economic growth is really the most 
critical element in reducing the deficit, getting back to 
balance and addressing our long-term challenges. Obviously, in 
a bipartisan way this year, the growth package that has been 
promoted, which we do include in this budget at $145 billion--
the President asked for 1 percent of GDP, and so we included 
that in the budget--combined with a slowing economy does 
contribute to a much larger short-term deficit. There is no 
question about that. In fiscal year 2008, the deficit will be 
2.9 percent of GDP. But in fiscal year 2009, with economic 
growth coming back and rebounding, we can see an improvement to 
2.7 percent of GDP. But both of these upticks in the deficit 
can be temporary and I think can also be manageable if we keep 
taxes low, if we accelerate economic growth, and if we keep 
spending in check.
    Second, let me just say I do not believe we are 
experiencing these short-term deficits because the American 
people are undertaxed. As this slide shows, the tax burden, if 
you measure it against the economy, GDP, it is 18.5 percent, 
which is higher than the 40-year historical average. Now, that 
may surprise a lot of people who think that because of the tax 
cuts in 2001 and 2003 that there obviously must be a lot less 
revenue coming into the Federal Government. Well, that was 
simply not the case. As the tax cuts took effect and the 
economy grew, actually revenue was quite strong and ran way 
ahead of GDP. In 2005, revenue grew at 14.5 percent, 11.8 
percent in 2006, and we had revenue growth of 6.7 percent in 
2007--all above GDP. And we can have that again if we continue 
to focus on economic growth.
    Revenue has really never been the problem here. Spending is 
the problem. We must do more, I believe, to keep spending in 
check in order to balance the budget in 2012 and address our 
longer-term spending challenges. The budget proposes to keep 
non-security discretionary spending growth below 1 percent for 
2009 and then hold it at a level pace for the next 4 years. If 
debt is the threat, then spending must be controlled.
    Also in this budget, we need to terminate or significantly 
reduce 151 programs that we identify as programs that are 
either underperforming, have outlasted their usefulness, or 
could be better done at the State level or by the private 
sector. By doing so, we save over $18 billion in the first year 
alone--again, by getting spending under control. These are 
programs that are not just--you know, are not achieving 
results. Frankly, you cannot just throw good intentions alone 
as an answer to justify a program that is not working or no 
longer is a high priority. Focusing on outcomes, not just 
inputs, I think is the answer here if you want to control 
spending.
    We also believe that earmark reform is necessary in order 
to change not only the culture in Washington, which has led to 
low-priority spending that has been, we believe, wasteful, but 
has also caused nearly 12,000 earmarks that have not been voted 
on by Congress, costing almost $17 billion.
    In addition, mandatory spending, as the Chairman said and 
so many others have said, is really overwhelming the rest of 
the budget. Sixty-two percent now of all spending is on 
autopilot, it is automatic. It will occur if Congress and the 
Executive Branch do not take some specific action in order to 
control that spending. And these trends are just not 
sustainable. As David Walker testified before you last week, 
the trends are not sustainable. The Fiscal Wake-up Tour, which 
has traveled around the country to wake all of us up and wake 
up the American people to these disturbing trends, has 
suggested that in the next 25 years automatic spending could 
swallow the entire budget, not leaving with regard to revenue 
for some of our basic requirements and responsibilities under 
our Constitution, such as national defense and homeland 
security. The President, therefore, is proposing a mandatory 
savings package of $208 billion over the next 5 years.
    Now, I realize, just reading the press accounts, that this 
may be challenging to Congress, but this package, I would 
remind my friends and members of the Committee, that we are 
proposing is smaller than the effort we took together in a 
bipartisan way in 1997 under the Balanced Budget Act of 1997. 
It is a smaller package. It is a bite-sized piece of what is a 
much bigger challenge. It is a downpayment. And so I would 
challenge Congress to take a fresh look at this. We cannot just 
put off until tomorrow what must be done today. My Dad always 
told me growing up that tomorrow never comes. And I can tell 
you in Washington tomorrow definitely never comes. You have to 
be able to start tackling those now if we going to manage those 
challenges in the future, and that is why within this package 
the President has proposed reasonable steps to get Medicare 
growth under control.
    Medicare is growing. We propose $178 billion of savings 
from that growth. Medicare will continue to grow at 5 percent. 
We are just asking it to not grow at 7.2 percent. We believe 
this is a very responsible approach and one that was done in 
1997 to bend the growth curve in order to get a handle on this 
problem.
    So, in conclusion, I would say to the Committee, the 
President, I believe, addresses within this budget the 
immediate economic challenges that have been undertaken in a 
bipartisan way.
    No. 2, it does, I believe, ensure sustained prosperity. 
Economic growth is the key in order to accomplish that. It does 
keep and continue to keep America safe, which we in a 
bipartisan and between branches believe is such an important 
issue. It balances by 2012, and it continues to address the 
long-term challenges that face our country.
    Mr. Chairman, I am pleased to present the President's 
budget, and I look forward to an opportunity to address your 
and other members' questions. Thank you.
    [The prepared statement of Mr. Nussle follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.153
    

    [GRAPHIC] [TIFF OMITTED] T2157.154
    

    [GRAPHIC] [TIFF OMITTED] T2157.155
    

    [GRAPHIC] [TIFF OMITTED] T2157.156
    

    [GRAPHIC] [TIFF OMITTED] T2157.157
    

    [GRAPHIC] [TIFF OMITTED] T2157.158
    

    [GRAPHIC] [TIFF OMITTED] T2157.159
    

    [GRAPHIC] [TIFF OMITTED] T2157.160
    

    [GRAPHIC] [TIFF OMITTED] T2157.161
    

    [GRAPHIC] [TIFF OMITTED] T2157.162
    

    [GRAPHIC] [TIFF OMITTED] T2157.163
    

    [GRAPHIC] [TIFF OMITTED] T2157.164
    

    [GRAPHIC] [TIFF OMITTED] T2157.165
    

    [GRAPHIC] [TIFF OMITTED] T2157.166
    

    [GRAPHIC] [TIFF OMITTED] T2157.167
    

    [GRAPHIC] [TIFF OMITTED] T2157.168
    

    [GRAPHIC] [TIFF OMITTED] T2157.169
    

    [GRAPHIC] [TIFF OMITTED] T2157.170
    

    [GRAPHIC] [TIFF OMITTED] T2157.171
    

    [GRAPHIC] [TIFF OMITTED] T2157.172
    

    [GRAPHIC] [TIFF OMITTED] T2157.173
    

    [GRAPHIC] [TIFF OMITTED] T2157.174
    

    [GRAPHIC] [TIFF OMITTED] T2157.175
    

    [GRAPHIC] [TIFF OMITTED] T2157.176
    

    [GRAPHIC] [TIFF OMITTED] T2157.177
    

    [GRAPHIC] [TIFF OMITTED] T2157.178
    

    [GRAPHIC] [TIFF OMITTED] T2157.179
    

    [GRAPHIC] [TIFF OMITTED] T2157.180
    

    [GRAPHIC] [TIFF OMITTED] T2157.181
    

    [GRAPHIC] [TIFF OMITTED] T2157.182
    

    [GRAPHIC] [TIFF OMITTED] T2157.183
    

    Chairman Conrad. Thank you, Director Nussle, for your 
opening statement.
    Let me put up a chart that I used in my opening remarks 
that reflects what is happening to the debt. At the end of the 
President's first year, the debt of the United States was $5.8 
trillion. We do not hold him responsible for the first year 
because he is working off the budget plan from the previous 
President. We are now at over $9 trillion of debt. At the end 
of the President's 8 years of his responsibility, we will be at 
over $10 trillion.
    Is this a sustainable course?
    Mr. Nussle. I believe that it is not a sustainable course, 
and, in fact, by my calculation about 50 percent of the debt 
that is added and that will continue to be added comes from our 
mandatory programs--not the programs that, unfortunately, we 
will talk about during the bulk of the appropriations process 
over the next 6 to 9 months but, rather, the programs that 
unless we actually take active effort on both our parts will 
continue to grow and grow out of control.
    Chairman Conrad. Director Nussle, this is what happens 
under the President's plan. Take the President's plan 
altogether, this is the result. You have testified it is not 
sustainable, and yet that is the President's proposal.
    Mr. Nussle, it is to me not just irresponsible, it is 
wildly irresponsible to lay out this blueprint for the 
country's finances. It is just debt on top of debt.
    What do you anticipate the debt will go up this year?
    Mr. Nussle. Well, let me get that figure in front of me.
    Chairman Conrad. Gross debt, how much will that go up this 
year?
    Mr. Nussle. Let me see if I have that here.
    Gross Federal debt from 2008 to 2009 is $9.7 trillion to 
$10.4 trillion.
    Chairman Conrad. So that is $800 billion.
    Mr. Nussle. From 2008 to 2009.
    Chairman Conrad. So, again, what is the increase then in 
the debt that you are forecasting under this plan? From 2008 to 
2009 it is going to go up $800 billion?
    Mr. Nussle. I think you have it about right. Yes, sir. But 
if I may, Mr. Chairman----
    Chairman Conrad. Well, let me just say this to you: $800 
billion--how much has it gone up since this President took 
office?
    Mr. Nussle. Well, what should we do about it? Let's do 
something about----
    Chairman Conrad. Well, this is your opportunity to have 
done something about it, sir. You have come----
    Mr. Nussle. We do.
    Chairman Conrad. You do? You have increased it.
    Mr. Nussle. No, sir.
    Chairman Conrad. The debt last--what did the debt go up 
last year?
    Mr. Nussle. Let me tell you what the President----
    Chairman Conrad. How much did the debt go up last year?
    Mr. Nussle. The President holds non-security discretionary 
spending at near a freeze, No. 1.
    Chairman Conrad. Yes, but that--let's talk about----
    Mr. Nussle. No. 2----
    Chairman Conrad. That does not talk about the debt, sir. 
The debt. How much did the debt go up last year?
    Mr. Nussle. Well, I am willing to consider proposals that 
will decrease discretionary spending and, for that matter, save 
much more money----
    Chairman Conrad. Well, that is good. Now you are working 
with one-sixth of the budget.
    Mr. Nussle. OK----
    Chairman Conrad. One-sixth. I am talking about----
    Mr. Nussle. Let's open up the mandatory spending----
    Chairman Conrad [continuing]. The final result. You want to 
focus on a sideshow.
    Mr. Nussle. No, this----
    Chairman Conrad. I want to focus on the result. The result 
is the debt has done nothing under this President's watch but 
skyrocket, and the budget you bring before us today, sir, says 
let's increase it some more.
    Mr. Nussle. All right. Let's open up mandatory spending.
    Chairman Conrad. And you say it is not--and it is not 
sustainable.
    Mr. Nussle. Then let's open up mandatory spending.
    Chairman Conrad. Let's open up, sir, everything.
    Mr. Nussle. OK.
    Chairman Conrad. Because you cannot just do it on one-sixth 
of the budget. You have to deal with all of it. You have to 
deal with the spending side. You have to deal with the revenue 
side. And what you all have done--you had your opportunity. 
This was the time to come forward with a plan. And your plan 
just explodes debt.
    Now, let me go to the second point, if I can, which is on 
war cost. War cost in 2008 was roughly $200 billion. Do you 
agree with that?
    Mr. Nussle. A hundred ninety--yes, ballpark, $196 billion 
requested.
    Chairman Conrad. It can be 196, 193, depending on what you 
include. In 2009, what has the President got in for war cost?
    Mr. Nussle. $70 billion.
    Chairman Conrad. What does the President have for 2010?
    Mr. Nussle. He has not proposed any additional spending for 
war cost in 2010.
    Chairman Conrad. So he has nothing. Let me just remind you 
of what you said when you were going through confirmation. You 
stated you had been the first Chairman to criticize the 
Administration on funding of the war. You further stated you 
believed the administration's last year had finally made 
greater progress on budgeting for the war and that you believe 
strongly that even though the estimate of multi-year war cost 
was uncertain, the correct answer was not zero. And yet as 
Budget Director, representing this administration--and I know 
you are here representing the President. This is not Jim 
Nussle's decision. But you bring before this Committee a budget 
that says the cost for the war in 2010 is going to be zero, 
when you said in the confirmation process if there is one thing 
that is clear, it is that the right answer is not zero.
    Now, how can anybody take seriously this budget, which on 
one of the central costs before us is war cost, and you tell us 
the war cost is going to go down by two-thirds, how can anybody 
take that seriously?
    Mr. Nussle. Well, I think part of the challenge here, Mr. 
Chairman, is that because it is not zero, we also know that it 
is currently----
    Chairman Conrad. But it is zero in your budget for 2010. 
There is a big zero.
    Mr. Nussle. But, Mr. Chairman, Congress has still not 
delivered on the war funding for this current year. It is not 
zero for this year either.
    Chairman Conrad. No, no, but we are talking about the 
President's budget. You are here defending the President's 
budget. The President's budget says all of a sudden war cost is 
going to go down dramatically this year, and next year it is 
going to be zero.
    Mr. Nussle. No, that is actually not what we are saying. 
What we are saying----
    Chairman Conrad. Well, that is what is in your budget.
    Mr. Nussle. Well, let me--if I may explain.
    Chairman Conrad. Please.
    Mr. Nussle. May I explain? The President proposes $70 
billion for a couple of reasons. First of all, Congress has 
still not delivered on, I believe, their responsibility to fund 
the troops in the field who are there now. We know that money 
is necessary. We know that the remainder is not zero----
    Chairman Conrad. So is the President telling us, Director 
Nussle, that what Congress should approve is $70 billion for 
the war cost in 2009? Because that is what is in the budget.
    Mr. Nussle. As a downpayment, that would be the important 
amount to----
    Chairman Conrad. But is that the full amount that the 
President believes would be the responsible thing for Congress 
to do in 2009, to budget $70 billion?
    Mr. Nussle. If I may conclude, I would be happy to give you 
the rationale behind it.
    Chairman Conrad. There does not appear to be a rationale. I 
do not know how you can say there is a rationale when the war 
cost last year was almost $200 billion, and in the President's 
budget he is saying for this year it is $70 billion----
    Mr. Nussle. If the war costs last year were $200 billion, 
how come we do not have the money yet?
    Chairman Conrad. Why don't you have the money yet?
    Mr. Nussle. Yes. Why don't we have the money yet? When is 
Congress going to send us----
    Chairman Conrad. How much have you got?
    Mr. Nussle [continuing]. The money?
    Chairman Conrad. How much have you got?
    Mr. Nussle. When is Congress going to send us the rest of 
the----
    Chairman Conrad. How much money have you got----
    Mr. Nussle [continuing]. Billion dollars?
    Chairman Conrad. How much money has been provided?
    Mr. Nussle. Barely $87 billion. So when are we going to get 
the rest of the funding for the troops in the field?
    Chairman Conrad. Well, the President is asking this year--
--
    Mr. Nussle. It is difficult to budget for next year or for 
2 years down the line if you have not paid your bills for this 
year. How do you do that? You have to----
    Chairman Conrad. Well, I will tell you----
    Mr. Nussle [continuing]. Pay your bills for this year.
    Chairman Conrad [continuing]. If you do not budget the----
    Mr. Nussle. We know the bills are coming due, and it is not 
zero.
    Chairman Conrad. Yes, well, in the President's budget for 
2010 it is zero.
    Mr. Nussle. Well, we do not know----
    Chairman Conrad. And this year, the President is saying----
    Mr. Nussle [continuing]. What it will be in 2010.
    Chairman Conrad. This is not Congress' document, sir. This 
is your document. Your document is telling this Congress that 
the amount of money you intend to spend on the war in this 
year, $70 billion.
    Mr. Nussle. Well, in 2009----
    Chairman Conrad. That is not credible.
    Mr. Nussle. Well, we believe that in----
    Chairman Conrad. And 2010, you are going to spend zero? 
That is what is in your budget, in your document. Not a 
congressional document, your document. And it is not credible. 
It is not credible. I do not know of anyone that would consider 
it credible.
    I have used my time. We welcome Senator Gregg.
    Senator Gregg. Well, I apologize to the Director. 
Unfortunately, I had some airplane problems getting in here. 
But since I was not here in the allotted time, and since it is 
our tradition to recognize people at their point of arrival, I 
would yield to whoever on my side was next.
    Chairman Conrad. Senator Allard?
    Senator Allard. I think Senator Bunning was here before me, 
but do you want me to go?
    Chairman Conrad. Senator Bunning made an opening statement, 
but if you would like to defer, we are certainly glad to have 
Senator Bunning----
    Senator Bunning. I would like to followup on some of the 
questions that have been asked.
    Director Nussle, because of the unsustainable growth in the 
entitlements, basically Medicare, Medicaid, Social Security, 
and the other entitlement programs that we have, we have been 
told time and time again that we cannot afford to make the 2001 
and 2003 tax cuts permanent. The Chairman of the Ways and Means 
Committee also was so troubled by the looming deficit that he 
proposed an extraordinary 4-percent surtax on gross income on 
behalf of his party last year. Even so, in your budget you 
stubbornly cling to the idea--so out of tune with conventional 
wisdom here in Washington--that we should not increase taxes or 
allow the 2001 and 2003 tax cuts.
    Can you explain to me why the conventional wisdom is so 
wrong?
    Mr. Nussle. Well, I guess first of all I would say to the 
Senator that the President believes making these tax cuts 
permanent is important for the economy, No. 1, in order to 
promote economic growth, sustained for the future.
    No. 2, that there are 116 million taxpayers across the 
country who would see their taxes go up an average of about 
$1,800 a person if, in fact, those tax cuts were not made 
permanent and would all of a sudden come back as a looming tax 
increase.
    Third, I think you can see that the challenge over the 
course of the last number of years has not been because of lack 
of revenue in Washington. The revenue growth has been strong 
and sustained. It is a matter of not dealing with the spending 
challenges.
    I doubt seriously that I will hear anyone go below the 
President's budget today. There may be a few who may propose 
one or two programs, but my bet or my guess is that there will 
not be a cry to go higher than $208 billion in mandatory 
spending savings or lower than the President's number with 
regard to discretionary spending. The spending is out of 
control, and we have to control spending. And, yes, the debt is 
a challenge, yes, the deficit is a challenge, yes, we have to 
deal with wars, yes, we have to deal with the current economic 
challenge. But I can tell you that it makes it harder to 
increase spending at that same time. It makes it more 
challenging if you increase and do not deal with the 
entitlement spending at that same time. And that is why the 
President has proposed as part of this budget an attempt to 
begin to tackle both the spending and the growth of 
entitlements.
    Senator Bunning. Let me get to one of the questions that 
the Chairman was hammering at. Last year, the President 
requested $196.4 billion for combat operations in Iraq and 
Afghanistan for fiscal year 2008. Congress approved less than 
half of that, about $70 billion for the general operation and 
$16.8 billion for mine-resistant, ambush protection vehicles.
    What effect has Congress' piecemealing funding of the war 
had on this year's Department of Defense baseline budget? 
Thanks to increased politicalization of the Iraqi war by some 
of my colleagues, do you anticipate that the Department of 
Defense will become increasingly reluctant to streamline more 
of their anticipated costs in the baseline budget as opposed to 
emergency supplementals?
    Mr. Nussle. Well, it does make it very difficult, Senator, 
for the Department of Defense to operate on a piecemeal 
approach. In fact, this year, it not only did not get the war 
funding on time for our troops in the field, but it also had to 
live within its base budget and supply not only the base 
services from the Department of Defense but also fund the war 
at the same time. It is the reason why I think the President 
has made a decision not to send a detailed supplemental. We 
sent a detailed supplemental last year. It did not work out so 
well, for a couple of reasons. First, Congress did not consider 
it, still has left about $108 billion left to consider. We know 
that the number is not zero. We know it is at least $108 
billion, No. 1.
    No. 2, even after we sent up the detailed request a year 
ago, it changed. It changed after the Petraeus testimony and 
report from the commanders in the field as to what was 
happening and what needed to happen. And so the strategy 
changed; therefore, the funding changed.
    Third, it also responds to a need not to make a decision 
and tie the hands of our commanders until General Petraeus has 
an opportunity to come back and testify yet again this year, 
most likely in March or early April.
    And then, finally, funding the war at $70 billion in 2009, 
yes, we know that is not the full amount, but we do not know 
the full amount. And rather than tying the hands of our next 
Commander-in-Chief who can make the decision about what that 
strategy ought to be, we decided to fund it to a reasonable 
time after this President has left office, to give that 
flexibility to the next Commander-in-Chief to make the decision 
about not only what the strategy should be but also what the 
funding level should be.
    Senator Bunning. I will get back--my time has expired, but 
I wanted to get back to the mandatory spending. Thank you.
    Chairman Conrad. Thank you, Senator.
    Senator Sanders?
    Senator Sanders. Thank you very much, Mr. Chairman. Jim, 
thanks for being with us today.
    I strongly concur with Senator Conrad's comments about what 
a disastrous budget this is and the very negative impact that 
it will have on the future of this country and our kids and our 
grandchildren. But I want to take this discussion a little bit 
away from the issue of the national debt, as important as that 
is, and the deficit to talk about what this budget means to 
ordinary human beings and to try to understand the moral values 
that have been placed in this budget, or I perhaps should say 
the lack of moral values. Senator Bunning a moment ago talked 
about tax burdens in this country, but let me talk about who 
pays the taxes, who earns the money in this country.
    Mr. Director, as I am sure you are aware, the United States 
has by far the most unequal distribution of income and wealth 
of any major country on Earth, and increasingly we are looking 
more like Brazil and Mexico than we are like Europe and 
Scandinavia and other industrialized countries.
    When Senator Conrad talks about legacy for this President, 
what we should be aware of, since President Bush has been in 
office, 5 million more people have slipped into poverty, the 
middle class has shrunk, median family income has declined by 
over $1,000. Eight million Americans have lost their health 
insurance. Three million Americans have lost their pensions. 
And, yes, some people have done very well, and those are the 
people on top. And of all of the statistics that we throw out 
around here, I want to throw out one statistic, and I want to 
get your comment on it, Director Nussle.
    According to the latest reports from the IRS, the 
wealthiest one-tenth of 1 percent--one-tenth of 1 percent; 
300,000 men, women, and children--now earn more income than do 
the bottom 150 million Americans. One-tenth of 1 percent, more 
income than 50 percent of the American people, and that gap is 
growing wider.
    What is your sense about what it means to the future of 
this country and economic justice that we have such an unequal 
distribution of income and wealth?
    Mr. Nussle. Well, first of all, Mr. Sanders, Senator, I 
have not thought about that question. I will----
    Senator Sanders. Don't you think it is a question that we 
should think about?
    Mr. Nussle. I will give it some thought. I have given some 
thought to tax distribution and tax reform, and I would agree 
with you that our Tax Code needs to be reformed, and there are 
problems within our Tax Code that need to be rooted out. We 
have the top 1 percent of the Tax Code of the people paying 
taxes in this country pay 39 percent of all of the taxes. The 
top 5 percent pay 59 percent----
    Senator Sanders. But I have just given you----
    Mr. Nussle [continuing]. Of all of the taxes.
    Senator Sanders [continuing]. An example of the fact that 
the wealthiest one-tenth of 1 percent earn more income than do 
the bottom 50 percent.
    Mr. Nussle. But they also pay taxes, don't they?
    Senator Sanders. Of course they pay taxes, but not 
proportionate to what they earn.
    Let me ask you another question, a moral question. Let's 
forget about being in the U.S. Senate. Let's get down to basic 
morality. In your budget, you propose over $700 billion in tax 
breaks for the wealthiest three-tenths of 1 percent--$700 
billion in tax breaks for millionaires and billionaires at the 
same time as you want to eliminate, among other programs, the 
Low-Income Weatherization Assistance Program, as you want to 
make massive cuts in the LIHEAP program, which you are very 
familiar with. Well, in Vermont, and all over this country--in 
Iowa, I dare say--it is getting cold. Older people cannot 
afford to keep their homes warm.
    What is the moral justification for giving over $700 
billion in tax breaks to millionaires and billionaires and then 
cut back on programs which keep people warm, which provide 
health care for desperate people, and which provide many other 
basic necessities? Give me the moral justification for that.
    Mr. Nussle. The tax cuts that the President proposed in 
2001 and 2003 are distributed much further than the top one-
tenth of----
    Senator Sanders. But I have given you an example of how it 
impacts the top three-tenths of 1 percent, $700 billion. Tell 
me why the richest people in this country need tax breaks when 
poverty is increasing.
    Mr. Nussle. I would guess under that that you received a 
tax cut.
    Senator Sanders. I may have. But I am talking about 
millionaires and billionaires. And I do not need a tax break. 
You do not need a tax break. Tell me why should the richest 
people----
    Mr. Nussle. Why don't I need a tax break?
    Senator Sanders. Because you are doing well and other 
people are going hungry in America, and people are--the middle 
class is shrinking.
    Mr. Nussle. And so it is my responsibility----
    Senator Sanders. I am not talking about you. I am talking 
about millionaires and billionaires.
    Mr. Nussle. Then take anyone as a taxpayer----
    Senator Sanders. I will give you an example. You want to 
repeal the estate tax. Is that correct? All of the benefits of 
the estate tax go to the richest three-tenths of 1 percent. If 
the estate tax is completely repealed, the Walton family, which 
is worth $80 billion, which owns Wal-Marts, will get over $30 
billion in tax relief. Do you think the Walton family needs $30 
billion in tax relief when you are cutting back on health care, 
when you are cutting back on programs that feed hungry people, 
hungry senior citizens? Let me hear the moral--your 
administration talks a lot about morality and family values. 
Now, tell me about the morality of giving tax breaks to the 
Walton family worth $80 billion and cutting back on the needs 
of the most desperate people. And throw in there a 
justification for raising the fees for our veterans for getting 
into the VA hospital, significantly increasing them, which will 
drive veterans off of the VA.
    Mr. Nussle. Well, these are the veterans who have incomes 
that are higher than----
    Senator Sanders. Yes, $27,000 a year. In other words, I 
want to hear a simple--Jim, man to man, man to man, you tell me 
about tax breaks for billionaires and cutting back on the needs 
of veterans and low-income people.
    Mr. Nussle. First of all, I do not know what the tax bill 
is for the Walton family. I do not know how much they pay. My--
--
    Senator Sanders. My estimate is they will save $30 billion 
through the repeal of the estate tax. Tell me why they need a 
$30 billion----
    Mr. Nussle. What do they do with that $30 billion then?
    Senator Sanders. I have no idea, but I will tell you----
    Mr. Nussle. But my bet is that they are quite 
philanthropic, as are many in that situation, and, again, I do 
not have personal knowledge about what they do with it, but 
they earned it----
    Senator Sanders. I am glad you are concerned about the 
Walton family. Some of us are concerned about----
    Mr. Nussle. Well, no, you brought up the Walton family. I 
do not even know them. I have never met them.
    Senator Sanders. But you are worried, your Administration 
is protecting their----
    Mr. Nussle. I am not worried--I do not think the Waltons 
would tell you that we ought to be worried about them either.
    Senator Sanders. Good. Probably not.
    Chairman Conrad. Senator Gregg.

            OPENING STATEMENT OF SENATOR JUDD GREGG

    Senator Gregg. Mr. Chairman, if I might, just as a point of 
personal privilege, take a couple minutes here and then yield 
to Senator Allard and later I will come back and reclaim the 
balance of my time. But I do think it is important on this tax 
policy issue, because Senator Sanders in his usual eloquence 
has raised the issue, presenting the Vermont approach to it. 
Let me present the New Hampshire approach to it.
    If you could put up the first chart, under the tax policy 
which we presently have today, we are generating more in 
revenues than we have historically generated. We are up to 
about 18.7 percent of gross national product is now coming in 
in revenues as compared to 18.2 percent of gross national 
product.

[GRAPHIC] [TIFF OMITTED] T2157.189


    Please put up the second chart. And the highest 20 percent 
of taxpayers in this country, income taxpayers today are paying 
more in taxes as a percentage of the total burden than they 
were during the Clinton administration. In other words, the top 
end of American income people are paying more in taxes as a 
percentage of the total burden of our Federal tax burden than 
the lower--than they were under the Clinton time.

[GRAPHIC] [TIFF OMITTED] T2157.190


    If you will go to the next chart? And presently today the 
bottom 40 percent of people who have earned income in this 
country are getting more back--most of them do not pay income 
taxes. They get an earned income tax credit. They are getting 
more back in tax benefit through the EITC, almost twice as much 
as they got under the Clinton period.

[GRAPHIC] [TIFF OMITTED] T2157.191


    So we now have a tax law which, first, generates more 
revenue--more revenue--than has historically been generated for 
the Federal Government; second, taxes people at the high income 
and generates more revenue from high-income individuals; and, 
third, gives back more income to people in the lower-income 
brackets. That is called progressivity. It is also called a tax 
policy that works. Why does it work? Human nature. Human 
nature. You give people a reasonable tax rate, which is what we 
have done; you give people a reason to go out and be 
productive, to take that risk, to be the entrepreneur, to 
create that new job, they create economic activity. Economic 
activity does one very big thing. It creates jobs for 
Americans. It does a second very big thing. It creates a 
revenue for the Federal Government. And that is what our tax 
policy has done under this administration.

[GRAPHIC] [TIFF OMITTED] T2157.192


[GRAPHIC] [TIFF OMITTED] T2157.193

    So I happen to disagree with the Senator from Vermont. We 
do disagree. That is why he lives in Vermont and I live in New 
Hampshire. We have the lowest tax burden per capita in the 
country. They have one of the highest. That is just a 
fundamental difference.
    Senator Sanders. Will my friend from New Hampshire yield 
for a brief second?
    Senator Gregg. Not on my time.
    Senator Allard. I want to reclaim my time. I thank you very 
much.
    Senator Gregg. Not on my time, but I am sure you will get 
another second. That was my interlude.
    Senator Allard. And I also might note, you have a lot of 
people immigrating to New Hampshire, too. I assume that has to 
do with the lower tax burden.
    Senator Gregg. Yes, and we have a few people who come over 
from Vermont occasionally to buy a bottle of liquor, and we 
appreciate that.
    Senator Allard. Well, thank you for that point of interest 
because that is the point I wanted to make, Senator Gregg: we 
have seen revenues increase not only at the Federal level with 
the tax cuts of 2001 and 2003, but we have also seen revenues 
increase at the State level. And, of course, when you see that 
happening, there is money available to help to take care of the 
social needs that my friend from Vermont had talked about.
    I have a couple questions I would like to discuss with you. 
Obviously, we have had a problem with the debt, total debt, no 
matter which administration has been in power. That is because 
we have to do some major reform as far as mandatory spending is 
concerned, and I think you agree with that. You explained that, 
Mr. Nussle.
    I notice in balancing the budget that we see a decrease in 
spending under current law. Under current law, there is a 7.2-
percent average increase, and then under the policy proposed in 
the budget, there is a 5-percent increase in budget policy on 
the Medicare spending section.
    Can you explain to me what policies those were that were 
put in place that drove that spending down on Medicare?
    Mr. Nussle. Well, there are a number of them that we are 
proposing. Many of them come from MedPAC, examples of policies 
that have been tried and true for many, many years, some of 
which were tried back in 1997 as well in a bipartisan way, and 
some are just a matter of allowing current law to continue.
    For instance, with regard to the doctors, we allow current 
law to just continue, and there is a natural decline in the 
amount of reimbursement for physicians. We freeze providers for 
3 years. We establish competitive bidding for lab work. We do a 
number of things with regard to Medicare, encouraging hospitals 
under Medicare to be more efficient and productive and continue 
to promote quality and information technology, to root out 
errors and mistakes. So there are a number of things that we 
have done to build to this $178 billion figure, but we stand 
ready to work with Congress, if Congress is ready to work in a 
bipartisan way similar to 1997, to look at other reforms and 
ways that we can curb the growth in Medicare.
    We want Medicare to grow. Medicare will continue to grow 
even under the President's policy at 5 percent. It just will 
not grow at the current, what we believe is an unsustainable 
rate at 7.2 percent, and that is the basis for that.
    Senator Allard. And then the challenge that we have now 
before the Congress is to either decide to support your 
suggestions as far as holding down spending or Medicare, or to 
come up with our own plan. And I commend you for coming up with 
a plan in order to reduce spending in Medicare. I think the 
burden on us now as Members of Congress is to look at your plan 
and, if we have a better idea, make it better--if we want to 
cut it more, look at those options.
    Mr. Nussle. Yes, there is no question that the President 
has to be the first one out of the foxhole and show his cards 
on exactly what he wants to do. The question is: If, in fact, 
the--if debt is the threat, if the deficit is a concern, then 
we can control more spending. If the debt is a threat, we can 
go further with regard to our mandatory programs. You know, 
these are things that we can certainly consider, but, again, I 
have not heard anyone yet in any of the press statements 
suggest that we did not go far enough in cutting spending or we 
did not go far enough in reforming entitlements. In fact, most 
have said as much as--even today, we heard that the Majority 
Leader of the Senate suggested we are not even going to do 
appropriations this year. We are going to wait for a better 
deal under a President who might be willing to spend more. Or 
we are going to not worry about what happens with the 
entitlement spending this year because it is an election year.
    Well, we all know, I mean, friends, it is always an 
election year in Washington. We know that. I mean, my goodness, 
I think we have come to realize that over the terms of our time 
and careers here.
    So it is always difficult to make these changes, but we 
have to do it if we are going to bend the growth curve and get 
this growth under control.
    Senator Allard. Mr. Chairman, I have one more question if I 
might.
    If you look at the chart here on balancing the budget, it 
is deficits/surpluses as a percentage of gross domestic 
product. We see a jump in the deficit between 2007 and 2008. We 
see a decline in deficits 2004 to 2007, from 3.6 percent down 
to 1.2 percent. And then in the 2008 budget, we see a jump in 
the deficit to 2.9 percent. Can you explain that jump to us, 
please?
    Mr. Nussle. From 2008 to 2009?
    Senator Allard. 2007 to 2008.
    Mr. Nussle. Oh, that is----
    Senator Allard. You see a jump there in deficits, and then 
we see it is sustained at that level at 2.7. And then it takes 
a pretty dramatic drop down to 1 percent. You have a spike 
there for 2 years. I wonder if you might explain that.
    Mr. Nussle. Well, the biggest challenge is what we have 
certainly been talking about. Obviously, we are funding a war 
during this period of time. We are also funding in a bipartisan 
way a growth or stimulus package. Both of those obviously have 
a dramatic impact on the budget. The downturn in the economy 
and the slowing of revenue growth, particularly from corporate 
receipts have added to that, and that is the reason why you see 
some of the large jump from 2007 to 2008. There is no question 
that those have been probably the three biggest drivers to that 
effect.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Chairman, I have a statement that I would like included 
for the record at the beginning of the hearing.
    Chairman Conrad. Without objection.
    Senator Menendez. Thank you.
    [The prepared statement of Senator Menendez follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.184
    

    [GRAPHIC] [TIFF OMITTED] T2157.185
    

    Senator Menendez. I welcome the Director. I will say that 
it seems that you are as combative as the Director as you were 
as a Member of Congress. So it is interesting.
    Let me just say I believe this budget is a continuing 
legacy of lost opportunities, lost priorities, and misplaced 
values. I think we could have seen a budget in this last year 
of this Presidency that would have provided and built on the 
legacy for hope. Instead, we leave working Americans to fend 
for themselves on a variety of these programs that are critical 
to their ability, particularly in a struggling economy, we 
leave them behind. We leave a record, if we were to adopt this 
budget, of fiscal irresponsibility, turning a surplus into the 
five highest deficits that the Nation has seen. And, you know, 
my colleague Senator Sanders I think put it aptly. We could 
have waged the war on income inequality. Instead, we used 
fiscal policies that spent more than $2 trillion on tax cuts 
skewered to the wealthiest 1 percent of the country, and all we 
hear about from the Director is why don't we cut further on the 
discretionary side that helps average working Americans.
    But, most importantly, what is so alarming to me--and I 
think the Chairman pointed it out, and I want to pursue that a 
little bit more--is that the war funding--which is not paid 
for, by the way. It is not paid for. It is totally 
irresponsible and deceiving to put the amount in this budget 
that has been put in when, in fact, we are far away--know, all 
of us know, that there is far more to be asked for.
    So as far as I am concerned personally, as one member of 
the Committee, this budget is not up for negotiation. It is 
dead on arrival. And so the question is: Where do we go from 
here?
    I want to ask you, Director, to followup, you know, the 
President is asking for $70 billion for Iraq while at the same 
time stipulating that more requests are on the way. He boasts 
by, you know, projecting surpluses, but, on the other hand, he 
is concealing the true costs of the war. Isn't the real 
reason--isn't the real reason that you only got $70 billion 
when we spent $193 billion, you know, when you have put in $193 
billion, when your experiential factor is clearly there--you 
know how many troops you have, you know how much cost it is to 
do this operation. This is now 5 years. To come before the 
American people and put $70 billion, isn't that dishonest?
    Mr. Nussle. If it is, in fact, a fact that we know that it 
is going to cost $193 billion, then when will Congress be 
sending us the check to pay for that?
    Senator Menendez. You know, the beauty of the relationship 
we now have, Director, is that I get to ask the questions and 
you get to answer them. And the bottom line is I want to know. 
Is it dishonest to have 70--clearly, you believe----
    Mr. Nussle. No, I do not believe it is.
    Senator Menendez. Can you--if we put you under oath----
    Mr. Nussle. I do not believe it----
    Senator Menendez [continuing]. Could you tell this 
Committee that all we are going to need is $70 billion?
    Mr. Nussle. And I acknowledged----
    Senator Menendez. Is that what you would testify to? Yes or 
no. Give me a yes or no.
    Mr. Nussle. I acknowledged that earlier, yes, sir.
    Senator Menendez. That we would only need $70 billion?
    Mr. Nussle. I acknowledged that earlier, that, of course, 
it is going to cost more than that, yes.
    Senator Menendez. Then why not put that in the budget and 
be honest?
    Mr. Nussle. Because we don't know how much it is, and we 
rarely put supplementals into the budget. Last year was the 
first time it was done. We put it in specifically and----
    Senator Menendez. Isn't this exactly the problem?
    Mr. Nussle. --Congress did not act.
    Senator Menendez. The exact problem we have is that by 
hiding the true cost of the war and adding it onto debt, the 
supplemental is--you put in supplementals knowing how many men 
and women are in the field and the costs, and you have a well-
established experiential factor. So even with, you know, the 
reduction of the surge by mid-May or end of May, you know what 
it is going to cost to continue to operate them, clearly, 
beyond this administration. And so you do that purposely.
    Let me ask you one other question. We talk about, you know, 
the realities of working families, health care. This budget 
does not have enough money in it to simply keep the children 
who are presently under the Children's Health Insurance Program 
funded moving forward. Isn't that true?
    Mr. Nussle. No, that is actually not true, Senator. We fund 
$19.7 billion for SCHIP moving forward, which takes into 
consideration the population growth and not removing any of the 
children that are----
    Senator Menendez. In fact, States need at a minimum $21.5 
billion over the next 5 years simply to maintain their current 
program. So who are you knocking off?
    Mr. Nussle. Well, that is not--we do not calculate it quite 
that way, Senator. We believe that the program is for poor, 
uninsured children and----
    Senator Menendez. So, in other words, you are going to 
cutoff children over 200 percent.
    Mr. Nussle. We believe that the program should be for poor, 
uninsured children.
    Senator Menendez. You are going to cutoff children over 200 
percent. That is what you are telling me.
    Mr. Nussle. This is not an entitlement. It is a program 
that----
    Senator Menendez. Can you just give me a simple, direct 
answer? You are going to cut children over 200 percent.
    Mr. Nussle. We believe there are other options for families 
that are over the poverty level that have the ability to pay 
for insurance or that are already on insurance in many 
instances. So it is for poor, uninsured children.
    Senator Menendez. I agree, but the reality is that, you 
know, there is a wide swath of States across the country that, 
in fact, when you cut children over 200 percent--and I know 
what you are referring to is the Medicaid match. The reality is 
that what you do is shift the cost to the State. And that is 
what this budget is replete of. And the COPS program, you zero 
it out. Crime has gone up for the last 2 years in this country, 
and, in fact, you zero it out. That means shifting the cost to 
municipalities. You shift the costs on Leave No Child Behind. 
You shift the costs on the Children's Health Insurance Program, 
and that means the local taxpayers--a former mayor--pays more. 
That is what this entire budget is about: hide the war funding, 
shift the costs to the States, add to the debt, while we take 
care of the wealthiest people in the country. That is not, in 
my mind, the set of values that average working Americans have.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Gregg?
    Senator Gregg. Thank you, Mr. Chairman. I understand my 
time is a little truncated because I took some of it earlier, 
but let me just make a couple points here.
    First, I do not think the other side of the aisle 
necessarily comes at this with clean hands on the issue of fair 
and accurate budgeting. Last year, we saw a Democratic budget 
which claimed it was going to use PAYGO as the mechanism for 
disciplining spending. Put up the PAYGO chart. Well, they spent 
$146 billion by adjusting, abating, going around and basically 
playing games with the PAYGO rules, so that did not work.
    Then put up the SCHIP chart. Then they brought forward an 
SCHIP proposal which basically had a drop-off which represented 
a $46 billion hold when you got outside the 5-year window. So 
that did not make any sense.
    The budget also assumed a huge amount of revenues from just 
basically doing a better job collecting revenues. None of those 
revenues were realized. In the supplemental, you added $17 
billion of domestic spending, which was basically earmarks. In 
the general budget, you increased spending by $22 billion, 
which, if the President had not insisted on maintaining some 
fiscal discipline on the discretionary side, would have been 
spent, and instead we ended up with about half of that being 
spent, if you factored out all the emergencies.
    So I wish there was some realistic effort around here to 
control spending, but it certainly is not coming from the other 
side of the aisle. And I think, yes, you can point fingers at 
this budget. I have pointed a few fingers at this budget 
because this budget has some serious flaws from a standpoint of 
accuracy, and even more serious flaws from a standpoint of 
policy. But it is not just one side of the aisle that has been 
playing games around here.
    The war cost issue is a legitimate issue. I was not here 
for the exchange. I understand it was enjoyable and good 
theater between the Chairman and the Director. But the simple 
fact is you cannot put a $70 billion figure in this budget and 
claim that you are funding the war--unless you are going to say 
that that is all it is going to cost, and we know that is not 
all it is going to cost. There should be full transparency on 
the war cost, and last year the administration sent up a real 
number, and I regret they did not do it this year.
    There are also other issues in this budget which bother me, 
but let me go to the more philosophical question here. This 
budget is driving us toward--not necessarily this budget, but 
the economy, coupled with the stimulus package, coupled with 
the war cost, is driving us toward a $400 billion deficit in 
the year 2009 and a potentially bigger deficit in 2010.
    I guess my question to you, Mr. Director, is: Here we are 
on the cusp of how we are going to deal with the tax policy 
question of maintaining capital gains and dividends rates. Is 
it in the better interest of the long-term strength of this 
economy that we maintain the present rates on capital gains and 
dividends, which the administration put into place at the 
beginning of this administration? Or is it better that we have 
the stimulus package?
    Now, I recognize it is not in your view an either/or issue, 
but from a standpoint of just fiscal policy, which would have a 
stronger impact on the long-term structure of our economy?
    Mr. Nussle. On the long term, I do not think it is even a 
question that it is making the tax cuts permanent. This is the 
short-term challenge with the economy, and that is why a short-
term stimulus is necessary. But the President has said--and I 
certainly agree--that for the long-term strength of our 
economy, making the tax cuts permanent and not having an 
automatic tax increase in 2011 is exactly the right policy.
    Senator Gregg. Well, here is the problem we have. The 
stimulus package is going to cost us $150 billion. When you 
compound it with its interest, it is around $200 billion over 5 
years. That means we are going to be heading toward a deficit 
probably in the $400 billion range in the year 2010.
    It will be very hard. that makes the argument for 
maintaining the cap gains and dividends rates much more 
difficult when you are dealing with those size deficits. I 
happen to think that they generate revenue, but there are not a 
lot of people around here who necessarily subscribe to that 
view. And I am perfectly willing to argue that until--you know, 
until I lose, which I will. But the point is if we do this 
stimulus package, what do we get for it other than putting 
ourselves into the whole $400 billion at--other than 
aggravating the deficit by $150 to $200 billion and creating a 
disincentive or an atmosphere where it is going to be much 
harder to maintain those good fiscal policies which are a lower 
rate on capital formation on dividends. I mean, what are we 
getting for this stimulus package? We are spending--most of 
this money is going to be sent out as individual rebates which 
are going to be spent on consumable items made in China. So we 
are going to stimulate the economy of China. And we will get 
the one-time accelerated depreciation, which will assist. But 
as a practical matter, it will probably all occur after we have 
moved into some transition on this slowdown, hopefully. And 
other than being a wonderful political statement that the 
Congress can join with the administration in a ``Kumbaya'' 
event and make everybody feel good, what substantively when we 
get to this that we put our--are going to be digging such a 
deeper hole on the deficit that it will make it so much harder 
for us to deal with the tax policy, which is really important 
to us, that is coming down the pike?
    Mr. Nussle. Well, Senator, it is--and all of this, of 
course, is forecasting based on what economists will tell you, 
and they may disagree. But in the short term, by the third 
quarter, they estimate that it could and would bump GDP by six-
tenths of a percent. That is enormous, particularly when you 
see what that does for job growth, which is also estimated at 
about 500,000 jobs.
    Senator Gregg. Well, that works out to $300,000 per job. 
Divide 500,000 jobs into $150 billion, you get $300,000 per 
job.
    Chairman Conrad. They are really good jobs.
    Senator Gregg. Right, they must be good jobs. Well, they 
are going to pay a lot in taxes, I will tell you that much.
    [Laughter.]
    Senator Gregg. But--well, anyway, I think I have made my 
point. It was almost rhetorical. So my time is up.
    Chairman Conrad. I just want to take a moment on the PAYGO 
because the Ranking Member likes to put up this Swiss-cheese-go 
chart, but let's go back to reality. We had a positive balance 
on the PAYGO scorecard until the tax relief provided for in the 
alternative minimum tax. That meant the spending initiatives 
that we had were paid for. They did not increase the deficit or 
the debt. That is a fact.
    The alternative minimum tax is the one place where we 
diverged from PAYGO rules. That was with respect to providing 
tens of millions of people tax relief in this country, and that 
was not paid for. I did not agree with that. The administration 
insisted on providing the alternative minimum tax relief 
without paying for it, and a significant majority of Congress 
went along. That is also provided for under PAYGO because if 
you get more than 60 votes, you can waive the PAYGO rules. The 
fact is until that moment we had a positive balance on the 
PAYGO scored.
    Senator Gregg. Well----
    Chairman Conrad. Senator Murray?
    Senator Gregg. Mr. Chairman?
    Chairman Conrad. Senator Murray is recognized.
    Senator Gregg. You do not want to hear the other side of 
the argument?
    Senator Murray. Thank you, Mr. Chairman.
    Chairman Conrad. I will, I am sure.
    Senator Murray. Well, thank you, Mr. Chairman. And, 
Director Nussle. You know, a lot has been discussed this 
morning about the honesty of the budget proposal that has come 
before us, focused a lot on the war in Iraq, and I think we are 
all very disconcerted by that. But let me go to another point 
in this budget that I think is not very honest, and it is the 
Department of Energy's environmental management request.
    You know, a budget has to be not only a statement of 
priorities and a budget blueprint, but it also has to share 
honestly with the American public the obligations that we have 
as a country. As you know, the Hanford site is in my home State 
of Washington. I wish it was somewhere else, but it is in my 
State. We have to deal with it. But it is not just my State. 
The entire country has to deal with this. We are cleaning up 
from the cold war and from the Manhattan Project, and it is an 
obligation of the entire country.
    Now, I have to say I was stunned--stunned to see a 
significant cut from this administration to clean up these 
nuclear sites across the country. The total EM budget that you 
sent over is $166 million below fiscal year 2008 appropriated 
dollars. That is a budget that is going to ensure that this 
government will not live up to its obligation with regulators 
and with the States.
    You know, this is going to cause our contractors to 
virtually stop working. I do not know how we can tell our 
contractors that we are not going to fund what we need to do 
under contracts that are out there. This is just, to me, poor 
management.
    Tell us how the Government is expected to meet its legal 
obligation to clean up these sites when it does not provide 
adequate dollars to the contractors for the contracts that are 
out there.
    Mr. Nussle. Well, we worked with the Energy Department on 
this issue, and they made their determination based on risk: 
what were the sites that posed the highest risk, what were the 
ones that needed the most attention. Hanford was one of those 
sites.
    Senator Murray. Well, you cut the river corridor closure by 
$58 million. That is an extremely important project to clean up 
waste from the cold war that is going into the Columbia River, 
that will become an environmental and physical disaster for not 
just my region but the entire country if we do not stop it.
    Mr. Nussle. Again, I can tell you that we worked with the 
Department of Energy. It was based on risk and their risk 
assessment of what----
    Senator Murray. They do not think it is a risk to have 
nuclear waste going into the Columbia River because we have not 
cleaned up a site adequately that we have contracts with, tri-
party agreements, agreements with the States? They do not think 
that is a risk?
    Mr. Nussle. Well, I cannot speak for them.
    Senator Murray. But you can speak for the Administration. 
Does the administration not think it is a risk to have nuclear 
waste seeping into the Columbia River?
    Mr. Nussle. We do believe it is a----
    Senator Murray. That we know is happening?
    Mr. Nussle. We do believe that these sites are important. 
It is the reason why we do maintain it as a priority in the 
budget. But we base the determination across all of the sites 
that were available for cleanup based on risk.
    Senator Murray. Well, I disagree. I think you know full 
well that Congress is going to keep its obligation and fulfill 
this. This is just a way for you to balance the budget. So I 
just think when I got to honesty, that one just sticks out 
clearly to me.
    But let me go to another one, and Senator Sanders brought 
it up, and that is the budget for our veterans. Once again, the 
administration is proposing to double the drug copayments for 
our veterans and forcing our veterans to pay new user fees to 
access VA health care.
    Now, you know that this Congress has not agreed to do that 
in the past, and it seems to me that at a time of war, when we 
are asking the world of these men and women who have fought 
valiantly and put their lives at risk, when we ask them to sign 
up, we do not say, ``Gee, and, by the way, if you earn $27,000 
or more, we are going to charge you for your health care.'' We 
say to them, ``You sign up and fight for this country, and we 
will provide your health care.''
    So I find it very dishonest for this administration, who 
has worked very hard to recruit men and women to fight for this 
war, to then turn around and say to them, ``By the way, we are 
going to tell Congress that you are going to have to pay user 
fees and copayments for the health care we promised you.'' And 
not only that, these copayments that you are collecting from 
them will not go to pay for VA health care. You put it back 
into the budget.
    So what I see is that you are proposing these new user fees 
simply to balance the budget.
    Mr. Nussle. Well, these are proposals that the 
Administration has carried in its budget--I believe every year 
it has proposed it, and certainly we understand that Congress 
may not take it out, but----
    Senator Murray. Then I assume we should--this 
administration should be telling our recruits that if you earn 
more than $27,000 you are not going to get health care.
    Mr. Nussle. No, that is not what we are telling them. We 
are telling them it is a very good health care plan and that if 
you earn more than actually $50,000, the copayments go up, as 
well as an enrollment fee. It is something that we believe is a 
responsible way to not only maintain the program but it is also 
for veterans----
    Senator Murray. Well, I would just say it is balancing the 
budget----
    Mr. Nussle [continuing]. That have higher income.
    Senator Murray [continuing]. On the backs of her veterans, 
is how I see it. But I have a couple seconds. Let me quickly 
ask you about the VA construction program. We all saw what 
happened with Walter Reed. We looked across the country. We 
know these facilities are inadequate. We know that they have 
not met the standards for earthquakes or fires or patient 
privacy or so many other things. And it is really amazing to me 
that in this budget you short-fund the needs of veterans by 
hacking away at the construction account, which is clearly 
important for us to put money into, especially at a time when 
we have an increasing number of men and women who are coming 
into the VA. Can you tell me why you targeted the construction 
account?
    Mr. Nussle. Well, first of all, the President since he came 
to office has proposed and the Congress has added to and 
together we have increased the veterans budget 100 percent just 
in the last 7 years alone.
    Senator Murray. For health care.
    Mr. Nussle. So we have not been----
    Senator Murray. For health care.
    Mr. Nussle. So we have not been shortchanging veterans----
    Senator Murray. For health care.
    Mr. Nussle [continuing]. And I think in a bipartisan and 
also between branches, we have done a good job of addressing 
those needs. We have also addressed the needs of Walter Reed, 
and those are met within this budget as well. So we believe we 
are meeting those obligations and priorities in this budget.
    Senator Murray. Well, not when you have massive cuts to the 
construction program.
    Chairman Conrad. Senator Whitehouse?
    Senator Whitehouse. Thank you, Mr. Chairman.
    Director Nussle, the health care problem, the future 
liability of America for our health care obligations problem, 
has been estimated, depending on whose numbers you look at, in 
the $30 to $70 trillion range. Is that correct?
    Mr. Nussle. It does depend on who you ask, but certainly 
there is a huge challenge, yes, sir.
    Senator Whitehouse. And with respect to the President's 
desire to reduce the earmarks by Congress by half, that would 
create an $8 billion savings, correct?
    Mr. Nussle. I believe so, yes.
    Senator Whitehouse. Just to put that to scale, here are 8 
pennies in a little stack in front of me, and let's say that 
each penny was $1 billion. In order to equate that to the 
liability that we face on health care, you would need to stack 
30,000 to 70,000 pennies next to it, wouldn't you? Isn't that 
the math?
    Mr. Nussle. Well, that is why the President has a proposal 
in here for Medicare in order to help bend the growth curve on 
Medicare, which drives a lot of the health care inflation and 
costs throughout the country as----
    Senator Whitehouse. But I am correct about the math, that 
if it was $8 billion, then it would be----
    Mr. Nussle. I am sorry. I have not done the math, but I 
will take your word for it. That sounds----
    Senator Whitehouse. If you knock off a billion from each, 
you end up with 30,000 to 70,000 versus 8, right?
    Mr. Nussle. OK.
    Senator Whitehouse. And a stack of 30,000 to 70,000 pennies 
would go well through the roof of this very high room, correct?
    Mr. Nussle. Well, I do not know about you, but I grew up 
with a Dad that said if you worry about the pennies and the 
nickels and the dimes, the dollars will follow. And so I would 
worry about those 8 pennies that are sitting there just as much 
as----
    Senator Whitehouse. And the 30,000 to 70,000 would go 
through the roof of this room, would it not?
    Mr. Nussle. I would worry about both, actually.
    Senator Whitehouse. And it would go through the roof of 
this room, would it not?
    Mr. Nussle. I have not--I am sorry. I will take--I will 
have to take your word for it.
    Senator Whitehouse. What does it tell you about the culture 
of Washington when you consider this little pile of 8 pennies 
and the 30,000 to 70,000 stack of pennies that goes through the 
roof of this room to merit equal time in your testimony to the 
American people?
    Mr. Nussle. Actually, my testimony I think focused on the 
need to deal with some of those long-term spending challenges.
    Senator Whitehouse. Two paragraphs each. It was equal.
    Mr. Nussle. Well, the Chairman only gave me 5 minutes. I 
would have----
    Senator Whitehouse. In your prepared testimony.
    Mr. Nussle. I can be----
    Senator Whitehouse. In your prepared testimony.
    Mr. Nussle. I can be very eloquent and go off on a number 
of tangents if you want me to on this subject, but this has 
nothing----
    Senator Whitehouse. Well, let me ask you about one 
tangent----
    Mr. Nussle [continuing]. Based on----
    Senator Whitehouse. Because you said earlier that----
    Mr. Nussle [continuing]. The amount of paragraphs.
    Senator Whitehouse [continuing]. One of the ways to address 
this would be to promote quality and information technology. 
And let me start with by way of a framing section. I think 
there are two ways to address this problem. One way is to get 
into the health care system and repair it so that it is much 
more efficient in terms of delivering health care and save 
money that way. The other is to leave the existing broken 
health care system in place and simply stop putting money into 
it, cut people's benefits or raise taxes.
    It seems to me that it is responsible for us to really 
embark on what we can do to reform the health care system so 
that the terrible choice between either massive tax hikes or 
massive benefit cuts is with any luck foregone, but at least 
reduced. So in that context, and given your reference to the 
importance of promoting quality and information technology, 
what is the President's budget for the Office of the National 
Comptroller for Health Information Technology, the ONCHIT 
office?
    Mr. Nussle. I would have to check that for you. I do not 
have that off the cuff.
    Senator Whitehouse. Well, I will tell you. It is $66 
million.
    Mr. Nussle. OK.
    Senator Whitehouse. Which means if you took one of these 
pennies, you would have an infinitesimal piece, smaller than a 
half a grain of rice, that would reflect this administration's 
investment in trying to do something about the stack of pennies 
30,000 high that goes through the roof. I really think that if 
you are going to be serious about this--and you say you are 
going to be serious. You have a serious record. You are a 
serious man. I am inclined to try to take you at your word on 
that. It would seem to me that some serious effort at reforming 
this health care system and building in appropriate health 
information infrastructure and really addressing the quality 
issue in a significant way would merit a lot more attention 
than it is getting from this administration.
    Mr. Nussle. I would just say to the Senator, and this is 
just an example of where there sometimes is a disconnect: For 
the 2008 budget, the President requested $118 million for this 
office that you just described, and Congress only came up with 
$61 million. So I am not suggesting that--I mean, there is a 
disconnect. I do not disagree with you. I think certainly 
health information technology is an important priority.
    But when the President makes it a priority and Congress 
obviously does not see that, and then we actually increase it, 
which is what that $66 million would be as an increase over 
what the Congress gave, I think it does show in a tight budget 
that we are making it a priority. But I think Secretary 
Leavitt, as you know, has this as a very enormous priority, one 
that he believes can help with the overall challenge that we 
face in health care----
    Senator Whitehouse. He talks a good game, but even at $118 
million----
    Mr. Nussle. Well, I was trying to be respectful----
    Senator Whitehouse [continuing]. The number is----
    Mr. Nussle [continuing]. But how can you explain, if you 
will, why----
    Senator Whitehouse [continuing]. Terrible.
    Mr. Nussle [continuing]. We propose $118 million and 
Congress cuts that in half, and then I am----
    Senator Whitehouse. I cannot. I think that was a terrible 
mistake to cut it in half.
    Mr. Nussle. All right. Well, we----
    Senator Whitehouse. I think it should be way more than 
this, and I am trying to enlist----
    Mr. Nussle. Well, we are willing to work with you----
    Senator Whitehouse [continuing]. Some interest on your 
part. It is your Health and Human Services Department. It is 
your budget in the first instance. It is the President's 
emphasis on this that matters. And I want to see the emphasis. 
Where is it?
    Mr. Nussle. Well, we will be glad to work with the Congress 
on this office and in this area for this priority because it is 
very important, and the President did propose that in 2008. But 
based on Congress' reaction, we had to make a judgment and we 
did.
    Senator Whitehouse. My time has expired.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Whitehouse.
    Senator Cardin is next.
    Senator Cardin. Thank you, Mr. Chairman.
    Mr. Nussle, first let me say I am disappointed by the 
budget but not surprised--disappointed because I think it does 
not reflect the priorities that are important for our country. 
I do not believe it is an honest budget. Not only are the costs 
of the war not reflected in the deficit that you advertise, but 
there are many other items. The Alternative Minimum Tax--when 
we fix that, it is going to add to the deficit if we do not 
offset the costs. I could go on and on about areas where the 
deficits are much greater.
    But I want to spend my time dealing with the 
recommendations for Medicare cuts that are in your budget. I am 
really troubled by the way that you are trying to achieve 
Medicare savings. We need to have a much more cost-effective 
health care system. I agree with you on that. But the 
suggestions that you are making will have a major impact on the 
ability of seniors and disabled persons to find doctors who 
will treat them. More and more doctors are opting out of the 
Medicare system. The problem I find with your proposal to cut 
provider reimbursements is that you are cost shifting. You are 
cost shifting to the individuals who will pay for the hospitals 
and doctor bills and to companies that have to pay for their 
health insurance because Medicare will not be paying its fair 
share of the cost.
    It is unrealistic to expect that Congress will not take up 
the pending ten percent physician reimbursement cuts. We have 
done that every year. You do not provide funds in your budget 
to prevent a significant cut in Medicare physician 
reimbursements.
    But you are recommending that of the 2001 and 2003 tax cuts 
be made permanent. Your estimate is that over 10 years that 
costs $2.2 trillion. The Medicare savings are $603 billion. So 
from a fiscally responsible point of view, we could argue 
whether this makes sense.
    But there are certain areas where we could save money in 
Medicare and in the entire health care system that you choose 
not to deal with: the cost of prescription medicines, which are 
far higher to American consumers than to any other industrial 
nation's consumers because we fail to organize the market and 
use market forces collectively to bring down the cost. Also, in 
Medicare Part C we continue to reimburse private insurance 
companies much more than it would cost the taxpayers of this 
country if the senior were enrolled in traditional Medicare. 
You know those numbers. And yet you are leaving the private 
insurance companies alone. You are leaving the pharmaceutical 
manufacturers alone. But yet you are making recommendations 
that could affect access to care for people in my State and 
around the Nation.
    I want to work with you to bring down the cost of health 
care, but I do not see a good-faith effort here. Why don't you 
put on the table options that will save Government expense that 
affect the drug manufacturers and the insurance companies? Why 
should private insurance companies get 20, 30 percent more to 
cover seniors than it would cost the taxpayers to subsidize a 
senior in traditional Medicare?
    Mr. Nussle. Well, first of all--and the Senator is an 
expert in these programs, and I greatly respect your knowledge 
and willingness to work with us on that, on many of these 
issues. And that is the reason why the President has at least 
opened the door yet again this year for Medicare reform--not 
suggesting that this proposal is the only proposal that would 
be considered. This is an opening opportunity to, again, as we 
did in 1997, bend the growth curve on health care and on 
Medicare and tackle some of that long-term challenge.
    I am not saying anything is on the table or off the table. 
I am saying the President has opened the door for what we think 
is an appropriate and very important debate this year on 
Medicare if the Congress is willing to engage in that. And we 
believe the order of magnitude in this instance is one-third of 
that long-term liability, which is the reason why we picked the 
number of $178 billion. And some of the proposals, again, you 
have seen them before. These are proposals that we have debated 
many times over the years, and some have been accepted even in 
a bipartisan way. Many of them are put forward by MedPAC.
    And the part about the drug benefit, as the Senator knows, 
the cost of the drug benefit, Part D, was not what it was 
advertised when it first passed. It was supposed to be 634, and 
it has come in at 390, as I understand it. So, yes, we 
certainly continue to have high costs, but the program is 
working----
    Senator Cardin. Let me stop you there because my time has 
expired, and I am going to quit while I am ahead.
    I take that, Mr. Chairman, as an offer by the 
administration to deal with Medicare Advantage and negotiate 
prescription drug prices. And I will use that later in some of 
the arguments with our Committee. Thank you very much.
    Mr. Nussle. Well, Medicare Advantage, if I may, just to 
finish, Medicare Advantage under this plan does have as a 
result--because, as you know, it is based on fee-for-service. I 
think it is like $40 billion that comes out of the Medicare 
Advantage plans as a result of the changes that we are 
proposing.
    Senator Cardin. But they still will be reimbursed at a 
level higher than if the individual were enrolled in 
traditional Medicare.
    Mr. Nussle. Yes.
    Senator Cardin. Still a premium.
    Chairman Conrad. Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman.
    Good morning, Mr. Director.
    Mr. Nussle. Good morning.
    Senator Nelson. If you could explain the philosophy in a 
portion of the Medicare budget, I would appreciate it. Under 
the law a senior citizen who falls below a certain income level 
gets a subsidy in order to be able to pay his or her monthly 
premium for Medicare parts B and D. The President's proposal 
would eliminate inflationary updates to the qualifying income 
level, reducing the number of individuals eligible for this 
subsidy..
    Please explain to the Committee why you would do that to 
poor senior citizens.
    Mr. Nussle. What we do is we freeze it at--instead of 
allowing it to continue to grow at CPI. And it is one of the 
ways that we believe you not only have program integrity and 
you have the person involved in the program taking some 
responsibility for utilization, but it is also a way, again, to 
begin to grow--bend that growth curve that allows the program 
to continue to grow at 5 percent as opposed to over 7 percent.
    Senator Nelson. Well, understandably, you are looking for 
areas in which to cut, and I just want to share with you that 
in my State, where we are fortunate to have a lot of senior 
citizens, that in the year 2008 there indeed are senior 
citizens that are having to make the choice between food or 
their medicine or cutting their medicine in two because they 
are at a certain level of income that they cannot afford both. 
And it just seems to me that as the Good Book says, when we 
come and reason together, we have an obligation to take care of 
the least privileged among us. And poor senior citizens would 
certainly be a part of those that we want to make sure are made 
whole. And I just did not understand the reasoning for that.
    Thank you, Mr. Chairman.
    Chairman Conrad. I thank the Senator.
    Senator Feingold? And I just want to alert all Senators 
that the live quorum may commence in roughly 5 minutes or so.
    Senator Feingold?
    Senator Feingold. Thank you, Mr. Chairman. This Committee 
and this country have benefited by your leadership and by the 
leadership of our Ranking Member, Senator Gregg. I know you 
have significant policy differences, but I think you both have 
an abiding concern for the Nation's fiscal position. And I 
cannot help but believe that, as bad as things are, we would be 
a lot worse off but for your service as budget guardians. But 
despite your efforts, Mr. Chairman, despite the efforts of 
Senator Gregg, we are in a huge fiscal mess. The contrast 
between where we are now and where we were when the current 
President first took office could not be greater. And the same 
is true of the attitude of Congress about budget matters, both 
now and then. I find the difference startling. I came here in 
1992 when Senator Gregg and I were both elected, and the 
rallying cry really was, ``Eliminate the deficit.'' And thanks 
to the deficit reduction package passed in 1993, to a 
continuing concern about the Government's bottom line and 
ultimately to an economy that was certainly helped by fiscally 
responsible policies, we actually balanced the books by the end 
of that decade. And when President Bush took office, he was 
handed a Government in surplus, and with projected surpluses 
coming into the decade.
    Unfortunately, since then, the fiscal stewardship of our 
Government has been tragically lacking. But even though this 
has happened on our watch, we will not be the ones who will pay 
for this malpractice. The cost of this negligence will be borne 
by our children and grandchildren in the form of massively 
increased debt. This administration will add $4 trillion to the 
mountain of debt future generations will bear, and they will be 
the ones who will have to pay that debt in the form of either 
higher taxes or fewer Government services.
    Mr. Chairman, there are a number of programmatic issues in 
this budget that I would want to pursue, including areas such 
as funding for local law enforcement and the Women, Infants, 
and Children program, but I will address those later.
    Let me just finish by noting that the budget the President 
is sending Congress this year appears to be more of what we 
have seen in the past 7 years. The administration has again 
circumvented a basic principle that should govern the budget of 
any President, one that Chairman Conrad has enunciated on 
several occasions to this Committee: either provide the 
revenues necessary to pay for the spending you want, or limit 
your spending appetite sufficiently so that the taxes you are 
willing to levy can fully pay for it.
    This budget just simply does not conform to that principle. 
Instead, it adheres to an unfortunate alternative view: Do all 
the spending you want, but only pay the bills you want to pay, 
and your kids will make up the difference.
    Director, it may come as a surprise to some that on 
occasion I actually agree with the administration. For one, I 
strongly endorse your efforts to rein in unauthorized earmarks. 
I think it has been a little late in coming, but I certainly 
welcome those efforts. And along these lines I hope you will 
consider endorsing a bill I have introduced with my colleague 
from Wisconsin and a former colleague of yours, Congressman 
Paul Ryan--namely, a line-item veto measure that applies 
specifically to earmarks. It targets the abuse everyone says is 
the real reason a line-item veto is needed--namely, to go after 
earmarked spending.
    Have you had a chance to look at the proposal at all?
    Mr. Nussle. I have not, Senator, but I will, and the 
President obviously continues to support the legislative line-
item veto and would probably look favorably on anything that 
would provide some control on not only earmarks but, in 
general, excessive spending.
    Senator Feingold. Well, I appreciate that. I hope you will 
give it a good look. I know it may not be everything that this 
President or any President would want. I voted for the previous 
line-item veto that was struck down by the Supreme Court. What 
we are trying to do here is find something that would pass 
muster with the Supreme Court and still give the President the 
ability to help us get rid of some of these unfortunate 
provisions.
    Thank you, Mr. Chairman.
    Chairman Conrad. I thank the Senator.
    Senator Lautenberg?
    Senator Lautenberg. Mr. Chairman, thank you, and, Director 
Nussle, I would appreciate it if we could keep the answers 
short. The reins are tight on time allotment, so I am going to 
get right to the subject of my interest, and I would appreciate 
the quickest response you can give.
    Over the last 7 years, the President has tried to destroy 
our national passenger rail system, yet everybody knows how bad 
traffic is no matter where you go, whether it is the skyways or 
the highways. Why does the President continue to propose 
funding levels which would shut down Amtrak?
    For your information, it is a $500 million cut from what we 
used in our appropriations last year--$500 million. How is that 
a conclusion that we can comfortably live with?
    Mr. Nussle. Well, Senator, as you know, the Northeast 
corridor line is very profitable, or at least has a good 
economic track record, looks----
    Senator Lautenberg. It covers its operating costs; it does 
not cover its capital costs.
    Mr. Nussle. But that is not the same for some of the long 
lines, as the Senator knows, and it is for that reason that we 
continue to agitate on this issue. We need to----
    Senator Lautenberg. Is there traffic congestion throughout 
this country of ours?
    Mr. Nussle. On the rail lines?
    Senator Lautenberg. On the highways and the skyways. Is 
there traffic congestion wherever you look here?
    Mr. Nussle. There are many places where that is true.
    Senator Lautenberg. OK. So is there any logic, in your 
view, your personal view, to making a cut like that in Amtrak 
which would effectively destroy its ability to function?
    Mr. Nussle. Well, Amtrak just has not been managed well----
    Senator Lautenberg. I do not want any of your opinions 
other than on the numbers.
    Mr. Nussle. OK.
    Senator Lautenberg. Does it make sense to you to project a 
$500 million cut?
    Mr. Nussle. Yes.
    Senator Lautenberg. It does. It is irresponsible, I must 
tell you, to say the least. For every $1 billion invested in 
transportation projects, 47,000 jobs are created. Given the 
state of our Nation's aging bridges, roads, airports, et 
cetera, and now the focus on the decline in jobs, why then 
should there not be more consideration for those investments in 
refurbishing our transportation system?
    Mr. Nussle. Well, the President spends the final increment 
of SAFETEA-LU in this budget that was allocated under that Act 
and, in fact, has met the obligation. There will be a shortfall 
of about $3.2 billion in that fund because receipts will not 
meet the obligations that were put into SAFETEA-LU. And so a 
transfer has been proposed in order to fill that in, but there 
is no question that in the long term--and, actually, in the 
short term--there is a shortfall within the transportation 
account that the Congress and the President are going to have 
to work together on in order to resolve.
    Senator Lautenberg. Thank you. In other words, you are 
suggesting that maybe the President would compromise a little 
bit on this, because if you are suggesting we work together, I 
can tell you the attitude here is certainly not for continuing 
to reduce the amount of spending that we need for our 
infrastructure.
    The President claims he is concerned about reducing 
spending based on the effectiveness of programs. In that case, 
Director Nussle, how can he justify continued funding for 
abstinence-only education programs, which have been proven to 
be highly ineffective?
    Mr. Nussle. I do not think they have proven to be highly 
ineffective. I think, again, there are differences of opinion 
when it comes to that.
    Senator Lautenberg. Differences in opinion in the number of 
teen pregnancies and the exposure to sexually transmitted 
disease? Do you think that we have been gaining on that?
    Mr. Nussle. I have not seen the statistics in the last 
number of days or months, but I can tell you the last time I 
checked, I believe that teen pregnancy was actually down.
    Senator Lautenberg. Not in the abstinence-only programs, I 
can tell you, in school districts.
    Hospitals across the country are in bad financial straits. 
In New Jersey, nearly 50 percent of hospitals are operating in 
significant financial difficulty. How can we keep those 
hospitals open and provide the service for patients when the 
budget reduces the amount of Medicare payments to hospitals by 
$12.4 billion? How can we do it?
    Mr. Nussle. Well, Senator, the President has put forth a 
budget that tries to balance all of those priorities within a 
budget that realizes that there is a constraint based on the 
deficit. And what I hear from what you are telling me is that 
we need to spend more in all of these areas, which we certainly 
can look at, but that just drives the deficit higher, and the 
debt----
    Senator Lautenberg. Well, there has been expert deficit 
driving in this administration already on a continuing basis.
    Mr. Chairman, since there is--I do not see anybody else 
sitting here. Can I steal another minute.
    Chairman Conrad. Yes, sir.
    Senator Lautenberg. Mr. Nussle, how much has the average 
weekly cost been for the war in Iraq in the past year?
    Mr. Nussle. I am not sure I have that statistic in front of 
me.
    Senator Lautenberg. Well, let me help you. It is $3 billion 
a week. It is $3 billion a week. Now, when the President 
proposes $70 billion for the war costs in the 2009 budget, I 
guess he thinks that the war stops with the day he leaves 
office because that is as much of the 2009 budget the President 
is taking responsibility for. Is that a proper conclusion on my 
part?
    Mr. Nussle. I think it is only a proper conclusion if you 
also believe that Congress thinks the war stops here at about 
Memorial Day because they have not funded beyond Memorial----
    Senator Lautenberg. No, but doesn't the President have the 
responsibility a Commander-in-Chief--he has taken the 
responsibility so far--for doing all of the financing----
    Mr. Nussle. Well, my understanding is that Article I of the 
Constitution is where the power of the purse is and the 
responsibility to pay for this kind of a conflict.
    Senator Lautenberg. Mr. Chairman, I hope you are listening 
to this explanation. What we are getting here are political 
analyses. You know, I once asked a political consultant, ``How 
do you respond to questions?'' He said, ``Avoid answering it 
until you get your point across.'' It is good politics. Thank 
you, Mr. Nussle.
    Chairman Conrad. I thank the Senator and the former 
Chairman of this Committee.
    Let me just say--we have only got 6 minutes left on this 
vote, so you are saved by the bell, or at least relieved by the 
bell. I just want to tell you that some have said this budget 
is dead on arrival. I have never applied those terms to a 
President's budget, but I was thinking, What does this 
represent in three words? And the President's leaving. I think 
this represents ``Debt on departure.'' He is leaving a debt 
bomb on the steps of the next President. And the next President 
is going to inherit the worst fiscal mess that I have seen in 
my 21 years here. And if I look back historically, other than 
the time right after World War II, if you look at debt as a 
share of our economy, it will be at its highest level after 
this Presidency in 50 years. So this President has it going in 
precisely the wrong direction.
    With that, we again thank you for your appearance here, 
Director Nussle. We apologize that we are interrupted by this 
vote, but I do not think it would be fair to ask you to stay 
for another round of questioning at this point, unless you were 
really eager to be here another hour.
    Mr. Nussle. I am pleased to do so, Senator, Mr. Chairman, 
if you would like me to.
    Chairman Conrad. No. I think you have discharged your 
responsibility here, and we thank you again for your 
appearance. And, look, we have strenuous disagreements on 
policy, but we also admire your service and your willingness to 
take on a responsibility like this. I think it is one of the 
toughest ones in Government. Maybe it is the toughest one to be 
the Director of OMB.
    So, again, thank you for your attendance and your answering 
the questions of the Committee.
    Mr. Nussle. Thank you.
    Chairman Conrad. The Committee stands adjourned.
    [Whereupon, at 11:49 a.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.186
    

    [GRAPHIC] [TIFF OMITTED] T2157.187
    

    [GRAPHIC] [TIFF OMITTED] T2157.188
    

    [GRAPHIC] [TIFF OMITTED] T2157.350
    

    [GRAPHIC] [TIFF OMITTED] T2157.351
    

    [GRAPHIC] [TIFF OMITTED] T2157.352
    

    [GRAPHIC] [TIFF OMITTED] T2157.353
    

    [GRAPHIC] [TIFF OMITTED] T2157.354
    

    [GRAPHIC] [TIFF OMITTED] T2157.355
    

    [GRAPHIC] [TIFF OMITTED] T2157.356
    

    [GRAPHIC] [TIFF OMITTED] T2157.357
    

    [GRAPHIC] [TIFF OMITTED] T2157.358
    

    [GRAPHIC] [TIFF OMITTED] T2157.359
    

    [GRAPHIC] [TIFF OMITTED] T2157.360
    

    [GRAPHIC] [TIFF OMITTED] T2157.361
    

    [GRAPHIC] [TIFF OMITTED] T2157.362
    

    [GRAPHIC] [TIFF OMITTED] T2157.363
    

    [GRAPHIC] [TIFF OMITTED] T2157.364
    

    [GRAPHIC] [TIFF OMITTED] T2157.365
    

    [GRAPHIC] [TIFF OMITTED] T2157.367
    

    [GRAPHIC] [TIFF OMITTED] T2157.368
    

    [GRAPHIC] [TIFF OMITTED] T2157.369
    

    [GRAPHIC] [TIFF OMITTED] T2157.370
    

    [GRAPHIC] [TIFF OMITTED] T2157.371
    

    [GRAPHIC] [TIFF OMITTED] T2157.372
    

    [GRAPHIC] [TIFF OMITTED] T2157.373
    

    [GRAPHIC] [TIFF OMITTED] T2157.374
    

    [GRAPHIC] [TIFF OMITTED] T2157.375
    

    [GRAPHIC] [TIFF OMITTED] T2157.382
    

    [GRAPHIC] [TIFF OMITTED] T2157.383
    

    [GRAPHIC] [TIFF OMITTED] T2157.384
    

    [GRAPHIC] [TIFF OMITTED] T2157.385
    

    [GRAPHIC] [TIFF OMITTED] T2157.381
    



     THE PRESIDENT'S FISCAL YEAR 2009 BUDGET AND REVENUE PROPOSALS

                              ----------                              


                      WEDNESDAY, FEBRUARY 6, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:04 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Menendez, Cardin, 
Sanders, Whitehouse, Gregg, Allard, and Bunning.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    The Senate Budget Committee wants to welcome the Secretary 
of the Treasury, Secretary Paulson. We are delighted to have 
you back before the Committee. We thank you for your service to 
the country in this incredibly important position and at this 
extraordinarily important time.
    I think we all know the considerable risks that are out 
there to the economy and are eager to work together to prevent 
an economic downturn from turning into something steeper and 
longer-lasting than might otherwise be the case.
    Let me just start by putting in perspective our budget 
deliberations as we look forward to this year. We now have 
under this administration five of the highest deficits in U.S. 
history.

[GRAPHIC] [TIFF OMITTED] T2157.216


    The administration is telling us we can expect a $410 
billion deficit in 2008, and $407 billion in 2009. I hear often 
the pundits say, well, it is not so bad in terms of the share 
of gross domestic product. I just want to counter that by 
suggesting to those in the media that they are really missing 
the point, that the debt is going up much more rapidly than the 
deficit, and that while the deficit is forecast to be $410 
billion for 2008, there is also almost $200 billion of Social 
Security money that is being used to pay other bills. And if 
you put those two together, it exceeds $600 billion. That is 
over 4 percent of GDP.
    If you go back to the 1980's, which many people are eager 
to compare it with, we had a deficit then of $208 billion, but 
the Social Security surplus was only $200 million--$200 
million. So when people were looking at deficits to GDP in 
those days and compared to now, it is apples and oranges. There 
is no comparison between what the real shortfalls are now as a 
share of GDP and what they were then.
    Let's go to the next slide if we can.

    [GRAPHIC] [TIFF OMITTED] T2157.217
    

    The total debt for this year is not going to go up by the 
deficit of $410 billion. The debt of the country is actually 
going to go up by over $700 billion.

[GRAPHIC] [TIFF OMITTED] T2157.218


    Of course, the biggest difference is what I have already 
described, the Social Security money that is being taken to pay 
other bills, and other trust funds as well that are being 
tapped. So if you look at the gross debt of the United States, 
it is going up by $700 billion.
    Let's go to the next slide.

    [GRAPHIC] [TIFF OMITTED] T2157.219
    

    The result of all this is that we are building a wall of 
debt of stunning proportion, going from $5.8 trillion at the 
end of 2001 to $10.4 trillion by the end of 2009--the 8 years 
that the President will be responsible for--nearly a doubling 
of the national debt. And, increasingly, this is money that we 
are borrowing from abroad. We are increasingly dependent on the 
kindness of strangers.

[GRAPHIC] [TIFF OMITTED] T2157.220


    If we look at the top ten foreign holders of our national 
debt, we see Japan at the top at nearly $600 billion; China, 
approaching $400 billion; the United Kingdom, $300 billion; the 
oil exporters, over $120 billion; and on it goes. We even owe 
Korea more than $40 billion.
    The Comptroller General in testimony before the Senate 
Budget Committee on January 29th said this: ``I believe we have 
a 5- to 10-year window of opportunity to demonstrate to our 
foreign lenders that we are going to get serious about this--5 
to 10 years, and it is closing. And I think it is closer to 5 
than to 10. Keep in mind, we are the largest debtor nation in 
the history of mankind, and it is getting worse, not better.''

[GRAPHIC] [TIFF OMITTED] T2157.221


    That is the Comptroller General of the United States 
telling us, all of us--Congress, the administration--that time 
is a-wasting and we cannot continue to run up this massive 
debt.

[GRAPHIC] [TIFF OMITTED] T2157.222


    The administration comes forward with a proposal that says, 
well, we are going to start, we are going to lay down a 
proposal to save $600 billion in Medicare and Medicaid over 10 
years. But in the same budget document, they are saying cut 
taxes another $2.2 trillion. That just digs the hole deeper, 
and somehow my own belief is together we have to come up with a 
comprehensive plan that deals with the imbalance between our 
revenue and our expenditures and these enormous shortfalls in 
our entitlement programs.

[GRAPHIC] [TIFF OMITTED] T2157.223


    When I look at the assumptions behind this forecast, I see 
that OMB is estimating economic growth for this year of 2.7 
percent. The Congressional Budget Office says it will be 1.5 
percent. So as bad as these numbers are, they are buttressed by 
what looks like a rosy economic forecast.
    I think we all understand the need for a stimulus package. 
I am not going to go through here the elements that are in the 
stimulus package that has passed the Senate. We will get to 
that in questions. But I do want to conclude on this note.
    Senator Gregg and I have made a proposal for a task force--
16 members, evenly divided--to address the long-term fiscal 
imbalance and to come up with a plan that would then come to 
Congress for a vote, everything on the table.

[GRAPHIC] [TIFF OMITTED] T2157.224


    You know, when we started this earlier last year, I was 
convinced of its need then. Virtually every witness before this 
Committee has said it is imperative. It is imperative that we 
have some approach, either this one or something like it, to 
get at the extraordinary challenges that the next 
administration will face.
    With that, I want to call on my colleague Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and again, I want 
to thank the Secretary of the Treasury for being here today. I 
want to thank him for his extraordinary service to the country 
and his leadership during what is a very critical period in our 
economic cycle. We thank him for that.
    I wanted to respond to a couple of things that the Chairman 
said. First, I congratulate him, obviously, and appreciate the 
chance to cosponsor with him this initiative to try to address 
the fiscal out-year catastrophe which we face as a country. 
That is something that must be addressed, and we have proven 
beyond any doubt that as a Government we cannot address it item 
by item or policy by policy. Because of the nature of 
democracy, people tend to jump on policy proposals as they are 
put forward, depending on what their interest group is and what 
they desire to promote. And so sometimes you have to use 
procedure to drive policy, and that is why we have put this 
proposal forward.
    I respect the Chairman's interest and focus on debt. But I 
think you have to also reflect the fact that if you look at the 
Democratic budget that we have been functioning under this 
year, it has significantly aggravated the debt situation. On 15 
to 19 different occasions PAYGO, their rule of fiscal 
enforcement, was either waived, ignored, or basically gamed, 
causing about $145 billion of spending to escape PAYGO 
enforcement. Revenues which were projected under their budget 
through more enforcement and better enforcement of the Internal 
Revenue Service Code did not come forth. And then, in addition 
to that, on the discretionary side they proposed and put into 
the first supplemental $17 billion of new spending, which was 
essentially earmarks, and coupled that up with another $22 
billion in the underlying budget, which, as a result of the 
President being aggressive, was cut back to approximately $10 
to $12 billion, depending on how you account for emergencies.
    So there has been no significant contribution here. In 
fact, their budget made no effort in the area of entitlement 
reform, even though the President sent up two very reasonable 
proposals last year in entitlement reform--one of which was to 
simply ask that people like Warren Buffett actually pay a fair 
share of their cost of the Medicare Part D premium. Those 
reasonable proposals were rejected. So instead of controlling 
entitlement spending, we actually added to entitlement spending 
by increasing entitlement accounts last year and creating new 
entitlement accounts outside the PAYGO window, SCHIP being the 
classic example of that.
    So, while I appreciate Senator Conrad's focus on debt, 
there is no action here coming from the other side of the aisle 
to substantively address that.
    What I wanted to point out today, as the Chairman has 
already cited, there is $2 trillion of tax relief in the 
President's budget over 5 years, and that is not acceptable to 
the Democratic Party. I think it is important in the context of 
this economic slowdown that we are facing. I think it is 
important to point out what that means in real terms. And as we 
look at the present tax structure of our country, it is 
important to recognize that that tax structure which we have in 
place as a result of the tax cuts of the early part of this 
administration has generated more revenue than has historically 
been generated in this Government. We are up now in this year 
to approximately 18.7 percent of gross national product coming 
in in revenue. Historically, we have had about 18.25 percent of 
gross national product coming in in revenue. So under the 
present tax law as it exists today, we are actually generating 
more revenue than we have historically generated.

[GRAPHIC] [TIFF OMITTED] T2157.210


    At the same time it is important to note that under the 
present tax law, people in the highest brackets of income are 
paying a higher share of the Federal income tax than they paid 
under the Clinton years. Eighty-five percent of Federal income 
tax is now paid by the top 20 percent of earners in this 
country as compared to 81 percent during the Clinton years.

[GRAPHIC] [TIFF OMITTED] T2157.211


    And the people in the bottom 40 percent of the tax income 
brackets are actually getting money back. They do not pay 
income taxes in general, as an average rule. They obviously pay 
payroll taxes, but they do not pay income taxes. They are 
getting more back from the Federal Government--more--through 
the EITC than they did during the Clinton years; almost twice 
as much.

[GRAPHIC] [TIFF OMITTED] T2157.212


    So the tax laws, while generating more revenue than has 
been the historic norm of this country, are actually more 
progressive. In other words, the high-income people are paying 
more of the burden; the lower-income people are bearing less of 
the burden and actually getting more back.
    Why is that? Why is that happening? Well, it is called 
human nature. When you create a tax climate where people have 
an incentive to go out and work, to take a risk, to be 
productive, to be entrepreneurs, they do that and they create 
jobs and they create economic activity. We have had many 
quarters of job creation and economic activity here, and we are 
coming, unfortunately, to a slowdown. But for the last 4 years, 
4-1/2 years, we have had dramatic expansion in jobs and 
economic activity in this country. And it has been a function 
of the fact that we have finally gotten to a tax law which says 
to the entrepreneur, Go out and invest, go out and take a risk, 
be a true American, take that risk, create that small business 
and create a job as a result. And as a result, we have 
generated more revenues. It is that simple. Whereas, if you 
dramatically increase taxes--and the proposal here from the 
other side, I guess, is going to be that we raise taxes by $2 
trillion, not accept the President's budget in the area of tax 
policy. That is going to cause an economic slowdown. That is 
going to cause more than an economic slowdown. That is going to 
be hitting a great, big, huge cement wall if you raise taxes 
around here $2 trillion, especially on the productive side of 
our economy.
    So I just think it is important to stress again the success 
of having a tax law which says to the entrepreneur, Go out and 
invest, go out and take a risk, go out and create jobs, because 
that is how you generate a strong economy. That is how we 
compete with the rest of the world, and that has been one of 
the things that we have done under this administration.
    I appreciate the Committee's time.
    Chairman Conrad. Let me just take a moment to respond to 
the PAYGO assertion that the Ranking Member continues to make. 
The fact is we had a balance on the PAYGO scorecard last year, 
a positive balance, with one exception, and that was providing 
alternative minimum tax relief. I voted against extending that 
relief without paying for it, but our colleagues did not agree. 
The administration insisted on not paying for it. So the fact 
is on the PAYGO scorecard, we had a positive balance, with the 
exception of alternative minimum tax.
    Senator Gregg. If the Chairman will allow----
    Chairman Conrad. No, wait a minute----
    Senator Gregg. I would like to submit for the record my 
list of where----
    Chairman Conrad. Wait. The Senator is out of order. Wait. I 
am making a statement here. I did not interrupt you during your 
statement.
    Senator Gregg. I thought you had completed your statement.
    Chairman Conrad. No, I had not.
    Senator Gregg. OK. As soon as you complete it, I would like 
to have 2 minutes to respond.
    Chairman Conrad. No, no. We are not going to do that. You 
have had your chance. Then we are going to go to the witness. 
Then you can respond in your question period.
    Look, we had a positive balance on the PAYGO scorecard, the 
only exception being the alternative minimum tax relief the 
administration insisted on not paying for. That is a fact. We 
will have a chance in the question period to go back and forth 
on this and any other issue anybody wants to do.
    Secretary Paulson, again, welcome. Please proceed.

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

    Secretary Paulson. Chairman Conrad, Senator Gregg, members 
of the Committee, I am pleased to be here today to discuss the 
President's budget for fiscal year 2009. As you know, 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 that our economy will 
continue to grow, although at a slower pace than we have seen 
in recent years. Yet the risks are clearly to the downside, and 
President Bush knows that economic security is of the utmost 
importance to the American people. In recent weeks, the 
potential benefits of quick action to support our economy 
became clear and the potential costs of doing nothing too 
great.
    So we are gratified that Congress is advancing toward a 
growth package to support our economy as we weather the housing 
correction. We believe that a growth package must be enacted 
quickly; it must be robust, temporary, and broad based; and it 
must get money into our economy quickly. The Senate has begun 
to consider its version of this bill, and I am hopeful that you 
will complete your consideration very soon.
    If we keep moving along a fast track and Congress sends the 
President a bill that meets our shared principles, rebate 
payments can start in May and be completed this summer. 
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. This 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 response 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 do so 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 a 
track for surplus in 2002. 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 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.
    [The prepared statement of Secretary Paulson follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.204
    

    [GRAPHIC] [TIFF OMITTED] T2157.205
    

    Chairman Conrad. Thank you, Mr. Secretary.
    Let me start with the economic assumptions that underlie 
this budget. Do we have that chart that we could put up?

[GRAPHIC] [TIFF OMITTED] T2157.411


    In the administration's forecast, they say economic growth 
will be 2.7 percent this year. What is your forecast for 
economic growth for this year?
    Secretary Paulson. Mr. Chairman, that administration 
forecast was made in November. The economy has slowed down 
significantly since that time. I think over the budget window, 
our forecast is very similar to CBO's forecast, but that 
forecast was made at a different time.
    I would say to you, though, if CBO's forecast is right for 
this year, I think the difference, the added cost will be 
something in the neighborhood of $10, $15 billion. So it is 
real money, but when we look at the longer-term issues you and 
I have been talking about and you have been talking about, this 
is not the driver here.
    Chairman Conrad. All right. I want to get that on the 
record that your forecast is closer to the CBO forecast, but 
you do not see a material difference in outcomes with----
    Secretary Paulson. I did not change--I am not making a 
forecast. I am noting the fact that that forecast was made in 
November, that we have been pretty clear in saying the economy 
has slowed since that time, and I do not think that is a 
driver. And as far as I am concerned, I never place too much 
reliance on any economic forecast for 1 years. I look at it 
over a longer period of time.
    Chairman Conrad. All right. Let me turn to a chart that 
talks about what countries around the world are experiencing in 
GDP growth and their tax burdens. Can we put that up?
    I do not know if you can see that, Mr. Secretary, from 
where you are, but it is----
    Secretary Paulson. I do not have great eyes. I see the 
United States there in the middle.
    Chairman Conrad. Have we got a handout, a smaller version 
of this that you could hand the Secretary so that he could have 
this? Maybe somebody can hold that up while he is getting a 
copy of the Secretary.

[GRAPHIC] [TIFF OMITTED] T2157.412


    What this chart shows is leading industrialized countries 
and what their economic growth rates are and what their tax 
burden is. You know, I hear all the time that the key to 
economic growth is the level of taxation in a country. So I 
decided let's go actually look around the world, let's look at 
what tax burdens are, and let's look at what economic growth 
is. And what jumps out at you as you look at this chart is 
there seems to be no connection. We have all kinds of countries 
that have much higher growth rates than we do--Ireland, 
Hungary, Korea, Finland, Spain, Iceland, Sweden, United 
Kingdom--that have higher growth than we do, but much higher 
tax burdens than we do. Similarly, we have a whole series of 
countries that have lower taxes than we do, and they do not 
have more economic growth.
    So I am wondering, in your analysis what is the connection 
between GDP growth and tax burden?
    Secretary Paulson. Mr. Chairman, that is a very important 
question. I am looking at this chart for the first time, but 
let me make an observation.
    I think there are two issues when you look at taxes. First 
is what is the level of revenues that is appropriate to raise, 
any economy to raise, you know, through taxes, and then what is 
the form of taxes. And what we are finding increasingly is that 
other nations are not emulating is in terms of the form of 
taxes. And if we looked at it just in terms of growth, we would 
be saying what form of taxes will give us the greatest growth, 
give us the most jobs. And that is--Treasury has started doing 
work on this because what we have found is I think in many ways 
the most expensive tax dollars we raise in terms of inhibiting 
competitiveness and jobs and growth are the way in which we tax 
our businesses that compete globally, because some of these 
countries at the top of the list--and most of them have now 
learned that the key is reducing corporate taxes and the way in 
which corporations are taxed.
    So, again, I think this is a complicated question, and many 
of these countries make greater use than we do of consumption 
taxes. And various taxes on consumption I think have less of a 
drag on growth and jobs.
    Chairman Conrad. Have you looked at this fair tax proposal 
that is being advocated by some? They say with a consumption 
tax at 23 percent, with lower-income people being exempt, that 
that would raise the same amount of revenue as our current 
system. Have you done an analysis of that? And would a 
consumption tax at 23 percent, with low-income people being 
exempt, raise the same amount of revenue as our current system?
    Secretary Paulson. I would have to get back to you on that, 
but I would say the one thing we have done, which we have 
recently--Treasury has come out with a number of studies on the 
way we tax our businesses, small businesses that compete 
globally and corporations that compete globally. And we have 
documented the fact that we are out of step with the rest of 
the world, and we see grave danger there. And then we have put 
out a number of alternatives for addressing this, and one of 
these is replacing the corporate tax with a business activity 
tax, which is a form of consumption tax. And, again, there is 
no--every alternative has some issues. There is no perfection 
here. But I do think the kinds of questions you have been 
raising are the right ones, I very much agree with Senator 
Gregg when he said that we need to ask the questions: What 
portion of our economy should be taken up by taxes? What is the 
right level given the world we live in, given the entitlement 
issue we see coming? Then we need to ask, what is the right 
form of those taxes to maximize our competitiveness and 
maximize the jobs? That is what we should be asking ourselves, 
because taxes are necessary. They are necessary because we need 
revenues, and so now the question is how do we get the least 
drag on job production and continue creating good jobs for 
American workers and American people.
    Chairman Conrad. Yes, it really is quite striking. I mean, 
you look at this. You have a country like Finland that is 
taking much, much more in taxes, much higher tax burden, but 
much higher economic growth. Spain, much higher tax burden and 
much higher economic growth than we have. Sweden, Norway, all 
of them the same. On the other hand, Japan, has lower taxes 
than we have and economic growth at about half of our rate.
    Secretary Paulson. And Japan is the one country the world 
that has higher corporate taxes than the United States. So, 
they are also a case of having a form of taxation that is a big 
inhibitor to their economic growth.
    Chairman Conrad. Well, I hear all the time that we have the 
second highest corporate tax rate. But our effective rate is 
not the second highest, is it?
    Secretary Paulson. You are right. The headline rate is the 
highest. The effectiveness rate is above average.
    Chairman Conrad. Isn't it pretty close to average, our 
effective rate?
    Secretary Paulson. Our effective rate is pretty close to 
the average of the OECD countries, but the direction of change 
is what I find alarming. We went from being a high taxer of 
corporations in the 1970's to then in the 1980's becoming the 
lowest, and then others have all sort of copied, understood 
what we did and the benefits of lowering taxes. Now we have a 
higher corporate tax rate than the French and the Germans. Not 
only are we just about average, but that they are reducing 
taxes. And then our form of tax is not something that anyone is 
emulating anymore. I think most people recognize the way in 
which we tax is an inefficient way to do it.
    Chairman Conrad. If you could share with this Committee 
what analysis you have done along these lines, because many of 
us believe we are going to have to have thoroughgoing tax 
reform.
    Secretary Paulson. I will be able to send some analysis up 
to the Committee. Thank you.
    Chairman Conrad. Senator Gregg.
    Senator Gregg. Well, before I pick up on that point, I 
would just add this whole issue of tax policy is critical. I am 
sorry we were not able to submit it for the record, but let me 
just review, therefore, orally the ways in which PAYGO has been 
gamed. I am sure the PAYGO scorecard was positive, but that is 
because gimmicks were used to get around PAYGO enforcement. 
These were specific PAYGO violations under the Democratic 
Congress: the revenue loss from minimum wage, the Water 
Resources Development Act, the Prescription Drug User Fee Act, 
the Mental Health Parity Act, the Immigration Reform Act, and 
the Energy Act. Those were all very specific violations of 
PAYGO, and those bills were passed. And then PAYGO was 
gimmicked--gimmicked--so it would not show up on the scorecard.
    The MILC program, that was one of the most outrageous, 
where they took the MILC program and put it in the supplemental 
and declared it an emergency, total gimmick on PAYGO.
    Pell grant spending, that was a huge gimmicking of the 
process, using the reconciliation bill, creating a student loan 
interest rate, snapback. On the student loan interest rate, it 
drops to 3--I think it is 3.4 percent, but it goes back up to 
6.8 percent in 2012. Why? To gimmick PAYGO so PAYGO does not 
look like it has been violated.
    The PILT program, which is the county Payment in Lieu of 
Taxes program, again, another gimmick used in the Senate-passed 
bill to extend that program, declaring it an emergency.
    The SCHIP program, which had this huge, huge gap--so we 
basically reduced SCHIP in 2012 back to a $3.5 billion per year 
program from a $14 billion per year program in order to declare 
that it had met PAYGO. So there is a $45 billion--billion--hole 
on the PAYGO side.
    The farm bill, now that is a classic one. The farm bill is 
a $9.8 billion PAYGO gamesmanship, and then, of course, there 
are hidden costs in the farm bill which represent $17 billion, 
all of which adds up to $143 billion in PAYGO gimmicking around 
here.
    I would like to return to the issue of tax policy, which I 
think is critical. I believe it is intuitively obvious that if 
you are dealing with something like our Internal Revenue Code, 
which has literally thousands of deductions, thousands of ways 
to basically invest or not invest, and you create different tax 
rates on you as an individual or on you as a business, those 
incentives for investing or not investing are driven by social 
policy or political policy, but not necessarily by efficient 
use of economic dollars policy. The most efficient use of 
economic dollars, would be to simply say to people, ``Here is 
your money, here is your tax rate, you invest in the ways that 
you are going to get the best return.'' That is not what our 
tax law says. It says, ``Here is your money, here is your tax 
rate, but you can change that tax rate if you invest in A, B, 
C, D, E, F,'' some of which is not efficient at all.
    In that type of an atmosphere, where you have that type of 
a tax law, it is intuitively obvious that as you get rates 
higher and higher, people will take action, legal action, to 
avoid taxes by investing in a way which basically undermines 
productivity in the economy. Is that incorrect, Mr. Secretary?
    Secretary Paulson. That is correct. We had a conference at 
Treasury where we brought all kinds of experts from all over, 
and they clearly talked about all of the distortions and all of 
the policies--and the special benefits that are there for one 
industry or one company or another--that drive behavior in ways 
that are not always desirable. Complexity is an issue, and it 
is an issue very much with the individual income taxes and with 
business taxes. No doubt about it.
    Senator Gregg. Actually, Senator Wyden and I are hoping 
later this year to introduce a bill which would go back to sort 
of the 1986 Tax Act reform approach, which takes a lot of this 
out and gets us to a much lower rate and allows the economy to 
be hopefully more efficient. But the second approach is, of 
course, this approach which, if you look at the Chairman's 
chart there, I suspect that most of the countries which are 
above us in terms of revenue as a percent of GDP, especially if 
they are European countries, are using a value-added tax as 
their basic source of revenue.
    Secretary Paulson. You are absolutely right, sir.
    Senator Gregg. And I suspect, in fact, that their corporate 
rates are significantly less than ours and that their capital 
gains rates--for example, Ireland, I think, has a 15-percent 
corporate rate and a 0 capital gains rate, or something like 
that.
    Secretary Paulson. Absolutely. I remember spending a lot of 
time in my former job talking with Government leaders in many 
of these European countries. And at first they complained 
vociferously about what Ireland and England were doing, and 
they said it was unfair competition. Then they finally woke up 
and have started lowering their corporate rates and changing 
the form of taxation.
    Senator Gregg. And isn't this actually affecting our 
ability to form capital in this country? One of the concerns 
many of us have is that London is sort of becoming a center--
and you, of course, are the ultimate expert on this--a center 
of initial public offerings and capital formation versus New 
York. U.S. capital markets, obviously still the leading capital 
markets in the world, are being tested by the competition. And 
that competition is driven in large part by our tax policy 
here, as well as, obviously, our regulatory policy.
    Secretary Paulson. Well, first of all, you are not going to 
get me to say the U.S. isn't No. 1 in capital markets.
    Senator Gregg. No, I am not saying it isn't. I am just 
saying that there is competition.
    Secretary Paulson. What I will say is that in today's world 
it is increasingly easy for major corporations, multinationals, 
to set up a headquarters wherever they choose to. And, the 
number of companies we have headquartered in the United States 
is a big benefit to us. I just think we need to be increasingly 
mindful of that and think about the impact on jobs and growth. 
To me the one thing to look at is which tax policy will help 
the American people the most, create the best jobs for our 
citizens.
    Senator Gregg. In that context, the Chairman has complained 
about the $2.2 trillion, maybe it is $2.7 trillion, of what the 
Chairman and members on his side of the aisle view as tax cuts, 
which is basically the extension of present tax policy over the 
next 5 years, current tax policy being a 15-percent capital 
gains rate, a 15-percent dividend rate, lower estate tax rates, 
and lower marginal rates.
    If we were to raise those rates in this weakening economy 
in order to raise the $2.2 trillion that the Chairman feels is 
inappropriately in the budget from the President's side, what 
would be the practical effect of that in this slowing economy?
    Secretary Paulson. I think very few people would recommend 
that. That is the last thing you would want to do right now, 
given what is going on in our economy. And on top of that, 
using capital gains as an example, I believe that it is 
intuitively obvious that when you tax something, you have less 
of it. And I believe capital is a key to capital investment and 
to good jobs. So there is plenty of room for reform and 
simplification of all aspects of the tax system.
    Senator Gregg. Thank you. My time has expired.
    Chairman Conrad. I thank the Senator. I thank the 
Secretary.
    I just want to hopefully conclude on PAYGO.
    Senator Gregg. I would like time to respond.
    [Laughter.]
    Chairman Conrad. Well, you will have your chance.
    Look, the simple fact is the PAYGO scorecard had a positive 
balance of $1.3 billion over 11 years. Every bill sent to the 
President--the Senator has a list here of things that never 
went to the President, never completed action. That is not how 
the PAYGO scorecard works, I would say to the Senator. The way 
the PAYGO scorecard works is what gets sent to the President, 
and the fact is we had a positive balance on the PAYGO 
scorecard of bills sent to the President, with one exception, 
and that was alternative minimum tax relief that the 
administration insisted not be paid for. That was done over 
this Senator's objection. But that is the fact. The Senator has 
all kinds of things his staff has put together. They criticize 
the College Cost Reduction Act. According to the Congressional 
Budget Office, which is the official scorekeeper, that 
contributed to a positive PAYGO balance, was not a violation of 
PAYGO. And if you look at----
    Senator Gregg. Well, that is because it was gamed in by 
moving the interest rate back up to 6.8 percent. That is the 
only way you get to that number.
    Chairman Conrad. It was paid for, sir, by the scoring from 
the Congressional Budget Office. You do not agree with the 
means that were used to pay for these things. You do not agree 
with it. That is your business.
    Senator Gregg. No, I do not----
    Chairman Conrad. I would just say to the Senator, you did 
not like the Democratic budget, but you never offered a budget. 
So, frankly, if you do not offer a budget, you know, it is hard 
to take very seriously your criticisms of a budget that is 
adopted and is passed and is put into place. If you are going 
to offer a budget, then I think you have something to say. But 
you did not offer a budget.
    Now, this year, we will eagerly await your budget 
submission, and I would be----
    Senator Gregg. Well, let me respond to that.
    Chairman Conrad. I would be happy to have you respond. Go 
ahead.
    Senator Gregg. The point on PAYGO is that you offered--not 
you personally, because I know you believe very firmly in 
PAYGO. But your party offered up a budget which supposedly was 
going to be disciplined by PAYGO. And then on the Senate floor, 
either through gimmicks or through direct waiver, PAYGO was 
gamed to the tune of $145 billion. And the student loans is a 
perfect example of that. You set the rate at 3.4 percent, which 
was a very nice thing to do, and it was appropriate, and we 
recovered the funds from the lenders that were getting a 
windfall. But then in the fifth year, you jumped the rate back 
to 6.8 percent because you could not make the PAYGO numbers 
work under the lower interest rate that you had set. Now, that 
interest rate snapback is not going to happen. The same thing 
happened with SCHIP where basically you set a reasonable rate 
on SCHIP, a $14 annual billion program, and then in the fifth 
year you take the program down to $3.5 billion per year, in 
order to meet PAYGO. Obviously, that is not going to happen. 
These were all gimmicks.
    Now, I understand the PAYGO scorecard, but the PAYGO 
scorecard only can be viable because these gimmicks were used--
and some of these bills were stopped, obviously, but the 
gimmicks were used. So that is my point. Now, you have given 
your point, I have given my point. We disagree. That is the way 
we should----
    Chairman Conrad. We do disagree because what is your 
gimmick, two-thirds of what you have described as gimmicks have 
been scored by CBO as legitimate--
    Senator Gregg. Well, they have no choice.
    Chairman Conrad. Well, they have no choice because they, in 
fact, are paid for. That is why they have no choice. These 
things--
    Senator Gregg. But they are not realistic.
    Chairman Conrad. Well, in your mind they may not be 
realistic. Let's talk about SCHIP. Is anybody----
    Senator Gregg. A $3.5 billion program----
    Chairman Conrad. Well, does anybody believe that we are not 
going to change the health care system of this country in the 
next 5 years? That is not your position. Your position is not 
that we can just stay with the current system.
    Senator Gregg. Of course.
    Chairman Conrad. And it is not my position. And so talking 
about what is going to happen in the fifth, sixth, seventh year 
frankly is not terribly relevant to the real world----
    Senator Gregg. Well, it is to----
    Chairman Conrad. And the fact is it was paid for under the 
PAYGO rules. Now, look, the larger----
    Senator Gregg. It----
    Chairman Conrad. No. The larger--but you have raised this, 
and I am going to answer it.
    Senator Gregg. No, no. You actually raised it.
    Chairman Conrad. No. You raised the PAYGO issue. I did not.
    Senator Gregg. One of us did.
    Chairman Conrad. The reality here is that PAYGO has 
disciplined this process. No one knows that better than I do 
because I am the one who has to referee this, and I can tell 
you PAYGO has stopped tens of billions of dollars of spending 
around here. I deal with it every week. Anybody who says PAYGO 
has not contributed to the disciplining of the process is not 
being straight with the American people or colleagues on this 
Committee.
    Senator Murray?
    Senator Murray. Thank you, Mr. Chairman.
    Mr. Secretary, thank you. Good to have you here. I wanted 
to talk with you about an issue that concerns me a lot, and 
that is one that I know you have spoken to as well. Early on in 
your tenure at the Treasury Department, you actually 
distinguished yourself from your two predecessors by 
highlighting the issue, and that is the one of the growing wage 
and wealth inequality in America. I know that during a speech 
at Columbia University, you spoke to that issue and talked 
about how the wage gap has grown, I think it is more than 60 
percent since 1975. You said, ``Amid this country's strong 
economic expansion, many Americans simply aren't feeling the 
benefits.'' You cited rising energy and health care costs as 
part of the problem in that inequity, and I agree with you. I 
would also argue that globalization, with all the good that it 
brings, bring economic disparity as well, particularly with 
some of the weaker labor and environmental standards that we 
see overseas. And it is hard for American workers to compete 
with that, especially, I think, in the area of manufacturing.
    But independent of all the causes, the erosion of the 
middle class is an issue that I am very concerned about, so I 
am somewhat confused by what you said in your testimony today. 
You said that the President's budget continues to press for 
long-term economic policies that are in the country's best 
interest, with specific reference to making permanent the 2001 
and 2003 tax cuts.
    Do you believe that extending the 2001 and 2003 tax cuts 
helped to reverse that growing income and wealth inequality 
that you talk about in our country?
    Secretary Paulson. Senator, I look at the purpose of the 
tax system as being to raise revenues and do it in a way that 
promotes growth, because I think promoting growth and jobs is 
going to help American workers and American citizens.
    So I would agree with Senator Gregg in saying what we have 
seen happen under this President is that low-income earners, 
families of four right up to $42,000, no longer paying Federal 
income taxes. And when you look at the top 5 percent, the top 
20 percent, they pay more than they ever paid.
    We have also done analyses at Treasury that show that we 
have more economic mobility than I have seen in just about any 
other country. So the great thing about our system, as you look 
at the people who move out of the bottom the move up the 
ladder, some all the way to 20 percent, the top. So that is all 
good.
    But to get to your point, I think the structural issue we 
are dealing with right now is an issue that has partly to do 
with globalization, and largely to do with automization and 
technological advancement. And I think the challenge that we 
are increasingly going to have, in the United States and other 
developed countries, is how to get the skills to the people, 
how to provide more skills, more training to the people that 
are going to need it to compete.
    I think we have to be careful with some of the tax policy 
changes that some would like to make through the use of our tax 
system to further redistribute wealth, because what you may 
find is that it is going to slow down growth and slow down job 
creation.
    So, again, my big focus is on tax policies that are going 
to create better jobs over time.
    Senator Murray. Right. But you said the economic mobility 
of workers is there, but we have to have job training and 
skills training in order to give those people the ability to be 
mobile.
    Secretary Paulson. That is right.
    Senator Murray. What concerns me is that the budget that 
President sent us, by extending those tax cuts, forces large 
cuts; and where the President has chosen to do that is in the 
very education and training programs that that lower class 
needs in order to have that economic mobility that you just 
referenced.
    Secretary Paulson. When Margaret Spellings is here, she and 
others may talk more about what is in the education budget. But 
what I was talking about is that I do think that in the future 
we are going to have to rethink how we think about skill 
training to get the worker who is----
    Senator Murray. Well, do you agree with the President's 
budget that cuts job training, low-income housing assistance, 
home heating assistance, food assistance for seniors, all those 
things that the lower economic strata needs to have that 
economic stability to move up?
    Secretary Paulson. I think when you are talking about some 
of the programs you are talking about being cut, again, I would 
note that putting together a budget is a very difficult thing 
given the----
    Senator Murray. Well, especially when you do not have the 
revenue if you are giving tax cuts.
    Secretary Paulson. But I would say a lot of the programs 
you mentioned were not the kinds of skill training that----
    Senator Murray. Well, but the President's budget actually 
cuts job training and skill training dollars. So would you 
agree that that is probably not a wise place to put your cuts?
    Secretary Paulson. Well, I will tell you, the programs that 
I have looked, and these programs in the middle of my plate 
here, but the ones that I have looked at most carefully, for 
instance, trade adjustment assistance and others, I view as 
very much structurally flawed. I think it is not going to be 
just a matter of throwing money at something called training. 
It----
    Senator Murray. Well, but not having any resources, 
wouldn't you argue--OK. I hear you saying we need to give those 
people the skills.
    Secretary Paulson. Right.
    Senator Murray. But you are here defending a budget that 
takes away our ability to give those people the skills.
    Secretary Paulson. Well, again, I wouldn't make it quite as 
simple as you do. In terms of the specific programs, I do not 
have the details on the specific programs, and, again----
    Senator Murray. Well, then I would just argue----
    Secretary Paulson. Some of the programs that I have looked 
at I felt were structurally flawed and should be reformed 
before more money is put into. But to get to your basic point, 
I very much agree that there is a widening income gap, wealth 
distribution----
    Senator Murray. And you would agree that we need to train 
workers in order to give them the economic ability to move 
forward?
    Secretary Paulson. I think that is increasingly going to be 
the challenge that we face in today's----
    Senator Murray. And I would argue that the President's 
budget does not give us the flexibility to do that.
    Secretary Paulson. I hear your argument.
    Senator Murray. All right. Thank you very much.
    Chairman Conrad. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman. I am sorry that 
you and the Ranking Member are having a bad day.
    [Laughter.]
    Chairman Conrad. We are actually have--we are having a good 
day, other--just on this one area of disagreement. Other than 
that, we are having a very good day.
    Senator Bunning. Oh, good. I am very happy to hear that.
    Secretary Paulson, I want to ask you a question about your 
policy on China currency. Last month, one of your colleagues, 
Chris Padilla, praised China for ``brokering the most 
remarkable economic and social transformations in human 
history,'' and that is a quote. If you occasionally read Daily 
Report for Executives, I have it outlined in here.
    Later, when he came back home, he said that legislation--I 
have sponsored it with 21 other Senators--that deal with China 
manipulating its currency ``won't work''. ``I could throw 
armies of people at the problem,'' he said, ``but I just don't 
know how we would do what we are being asked to do.''
    That is a very revealing statement, Mr. Secretary, and I am 
troubled by it, because employment in manufacturing is down, 
and this is one of the reasons for our economic weakness. I 
know where you stand on this.
    I know you prefer to stick your head in the sand while 
China manipulates the WTO rules, denies us access to sell 
products there, counterfeits our goods, exports corrupted 
products, and exports prolonged unemployment here by 
manipulating its currency. But you must understand that the 
Administration does not control trade policy.
    I am troubled by Mr. Padilla's statement because it is 
suggests that you will not carry out the law when we enact it. 
It also suggests to me that you are ignoring laws on the books. 
For years, you have failed to recognize that China is 
manipulating its currency, and this has made it impossible for 
the United States to seek changes through the IMF. Do we need 
to add civil penalties to our bill?
    Secretary Paulson. Senator, let me say I have been accused 
of many things; this is the first time of sticking my head in 
the sand.
    Senator Bunning. It will not be the last.
    Secretary Paulson. Although some people think that with my 
bald head, maybe it would be better under the sand. But let me 
respond very clearly to you.
    I have engaged very actively with China, and I think with 
some results when you look at the currency. Do not be confused 
by the fact that I say I would like them to move quicker, 
because I would like them to move quicker. But the rate of 
appreciation of their currency roughly doubled last year to 6.7 
percent. In the last 3 months, their currency appreciated 4 
percent.
    Senator Bunning. If you add inflation to the fact, in the 
United States it almost is negated.
    Secretary Paulson. Do you want me to continue and answer--
--
    Senator Bunning. Well, sure. That is why you are here.
    Secretary Paulson. And answer your question, sir? Well, I 
will answer it.
    So I said they are definitely moving quicker. I would like 
them to move even faster.
    Now, to get to the question of legislation, I will just be 
direct since you are direct with me. I think it is bordering on 
the silly to say that one nation----
    Senator Bunning. Well, you are going to get it.
    Secretary Paulson. OK.
    Senator Bunning. Whether you like it, and you can have the 
President veto it, and we will override his veto.
    Secretary Paulson. Well, if I could just finish--for one 
nation to legislate another nation's currency policies or 
macroeconomic policies.
    Now, the other thing I would say, with all due respect, is 
that we are in a market right now where we are benefiting 
greatly from the growth of our exports, we are benefiting from 
trade. That is one of the drivers we have right now----
    Senator Bunning. Yes, the dollar has a lot to do with that.
    Secretary Paulson [continuing]. Over our economy, and I 
would say again, with all due respect, that I think given what 
is going on in the capital markets, the last thing in the world 
we need is something like this. I believe that. And I also 
think----
    Senator Bunning. We have a major difference of agreement.
    Secretary Paulson. We do. And I also think the other place 
we have a difference of agreement is that some of those people 
who wish that China would have economic problems are wishing 
for the wrong things. That is what we do not want and what we 
do not need.
    Now, I have to say, I think we are making real progress----
    Senator Bunning. Sir, you are using up all the time I get. 
I get 7 minutes, and you are using up all the time answering 
one question.
    Secretary Paulson. OK.
    Senator Bunning. I want to ask you about the economic 
stimulus package.
    Secretary Paulson. OK.
    Senator Bunning. I understand that in your negotiations 
with the House leaders, there was give and take. The final 
package represents some of Speaker Pelosi's priorities and some 
of the President's priorities. Each side put aside its 
differences in the interest of the American people, and I hope 
we will do the same thing when we vote on the economic stimulus 
package.
    Yesterday, when you testified before the Finance Committee, 
you seemed to indicate that the President is willing to allow 
some changes to the bill. Can you tell us in general terms what 
changes the President is willing to accept and what changes he 
will not accept?
    Secretary Paulson. Senator, let me first of all say you are 
right, the House bill is a bipartisan bill. I very much would 
prefer the House bill and would like to see that enacted 
quickly. That is No. 1.
    No. 2, I am increasingly concerned that in the Senate the 
bazaar is open, the special interests are coming to the trough. 
And when I am reading about and hearing about things like tax 
rebates for coal companies, benefits for oil well drilling and 
things like this, I am concerned that it is going to get bogged 
down. I am concerned that if we see things that are not 
stimulus and are not going to get money to the American people 
quickly, it will get bogged down.
    So to me, the point I want to make is that time is of the 
essence. Some people have said timing does not make much 
difference, we cannot do anything until after April 15th. 
Nothing could be further from the truth. The day that a bill 
gets on the President's desk, the IRS can start working. More 
or less within 60 days, with a little timeout for a few weeks 
in April, we can start getting checks to the American people 
and make a difference in the economy.
    So, first and foremost, I would say it has to be done 
quickly. If it is not, the American people are going to pay the 
price. The economy is going to pay the price. And complexity is 
our enemy here, and provisions that are not stimulus are our 
big enemy here. We are seeing some businesses saying that they 
would like some cash, give us some money. But if it is not 
stimulus, I do not think it is wise.
    So that would be my answer.
    Senator Bunning. Thank you.
    Chairman Conrad. I thank the Senator.
    Senator Sanders?
    Senator Sanders. Thank you very much, Mr. Chairman.
    It is a strange morning. I almost find myself in agreement 
with something that Senator Bunning said. There you go. How is 
that?
    Senator Bunning. Well, isn't that amazing?
    Senator Sanders. Isn't that amazing?
    Senator Bunning. It is amazing.
    Senator Sanders. All right. And Mr. Paulson, Mr. Secretary, 
thank you very much for coming, and I think you deserve a 
special commendation for giving us one of the shortest 
introductory remarks that I have experienced. Thank you very 
much. And thank you for being--although it does not necessarily 
say a whole lot--one of the illuminating lights of the Bush 
administration. It does not say a whole lot, but thank you very 
much for being here. We appreciate it.
    Now, I take a different look at economics, I think, than 
many of my colleagues. I share Chairman Conrad's deep concern 
about what this deficit and national debt is going to mean for 
our kids and our grandchildren and the future of this country. 
But I kind of look at economics as a question of winners and 
losers. You know, when we look at the Super Bowl, nobody goes 
around saying, well, they scored 31 points. Yes. Who got 17 and 
who got 14 is the issue. So we talk about economic growth, we 
talk about jobs, and all that stuff. That is great. But at the 
end of the day, what people want to know is who is winning, who 
is losing. And the reality is indisputable that the winners in 
this economy are not only the wealthy, but they are the super, 
super, super wealthy.
    We are in a situation now--and I do not want to suggest 
that it just began when George Bush became President. It 
certainly has been a long-term trend. It has accelerated under 
George Bush. We have a situation today which to my mind is 
quite incredible for a major industrialized Nation, because it 
is unparalleled in the industrialized world, where the 
wealthiest one-tenth of 1 percent--300,000 men, women, and 
children--earn more income than the bottom 50 percent of our 
population--150 million.
    So when my friend from New Hampshire talks about economic 
growth and job expansion and all this stuff, the question is: 
Who gets what? And the reality is the people on top are making 
out like bandits while poverty is increasing, while millions of 
people--since Bush has been in office, 8 million people have 
lost their health insurance, 3 million people have lost their 
pensions, median family income for working families has gone 
down.
    Now, in the middle of all that, I am not a believer in 
magic like my friend from New Hampshire, and he thinks all we 
have to do is give tax breaks to billionaires and, voila, every 
good thing happens. Now, he forgets to mention that when 
Clinton was in office, at the end of Clinton's administration, 
he raised taxes on the wealthiest people in this country. Guess 
what happened? More tax revenue developed.
    Now, it is true tax revenue is coming in now. But I think 
most economists, probably including you, would not think that 
there is a magic formula that giving tax breaks to billionaires 
suddenly results in more revenue coming in.
    My question is a simple one. If you look at the needs of 
ordinary people, as you know--you read the polls--massive 
dissatisfaction with the state of the economy, front-page story 
Washington Post just yesterday, and we understand why. Tell me 
why you think the repeal of the estate tax, $1 trillion which 
will go to the wealthiest three-tenths of 1 percent, $30 
billion to one family, is more important than providing 
weatherization for low-income homes, a LIHEAP program, decent 
health care, decent education, not forcing our veterans to pay 
$250 or $750 more to get into the VA. Tell me why you think we 
should give $1 trillion over 20 years in tax breaks to the 
wealthiest three-tenths of 1 percent.
    Secretary Paulson. Senator, hopefully you will find this 
constructive. In the interest of doing something that brings 
people together, take a look at the estate tax, because I think 
what we have here is something that no one on your side would 
find very desirable. We have a situation where today, the 
exemption amount is 2 million. Next year it will be 3.5 
million. Then you are going to have a situation in 2010 where 
the estate tax is totally repealed. And then in 2011, you are 
going to have a situation----
    Senator Sanders. Mr. Secretary, I do not have a lot of 
time. I am familiar with all that. We are all familiar with 
that.
    Secretary Paulson. So what I am saying is to me the 
President has been very up front, forward leaning in saying, 
let's get together and for the good of the American people, 
work something out.
    Senator Sanders. Well, but no, no, that is not quite 
accurate, sir.
    Secretary Paulson. And that----
    Senator Sanders. No, let me have it back.
    Secretary Paulson. And you would be against that?
    Senator Sanders. Let me have it back. I love working with 
everybody, but that is not what we are talking about. He 
wants--in 1 second, answer my question, please. You are a 
direct guy. Ninety-nine-point-seven percent of the people do 
not gain one penny by the complete repeal of the estate tax. 
All of the benefits go to the very wealthiest. One family--let 
me finish. One family, the owners of Wal-Mart, the Walton 
family, gets $30 billion in tax relief over the period. 
Meanwhile, this budget is cutting back on food programs for 
low-income senior citizens. Tell me why you think it is more 
important for the Walton family to get a $30 billion tax break 
than low-income seniors get nutrition.
    Secretary Paulson. I do not think that is the right way to 
frame the issue. It is----
    Senator Sanders. I think it is exactly the right way to 
frame it.
    Secretary Paulson. The President has been very clear that 
he believes that the estate tax should be eliminated.
    Senator Sanders. Yes.
    Secretary Paulson. But he has also been very open to 
saying----
    Senator Sanders. But you are not answering my question. The 
President, as you just said, wants to eliminate it. You tell me 
why that is a good idea. Don't tell me that we may negotiate 
it. We are in the majority now. Of course we will negotiate.
    Secretary Paulson. I am saying that the question is: Why 
aren't you trying to negotiate something and reform this? 
Because I do not believe the American people want the exemption 
to be as low as $1 million----
    Senator Sanders. You did not answer my question. The 
President wants to give $1 trillion in tax breaks--does he or 
does he not? Am I inaccurate?
    Secretary Paulson. The President does not want tax rates to 
go up.
    Senator Sanders. The President wants to give--tell me if I 
am right or wrong. Three-tenths of 1 percent of the population, 
all millionaires and billionaires, will get $1 trillion in tax 
breaks if we do what the President wants. Is that true or not 
true?
    Secretary Paulson. I do not believe it is true.
    Senator Sanders. What do you disagree with?
    Secretary Paulson. I would simply say that the $2 trillion 
tax number is if the tax relief was not permanent: tax rates 
would go up and everyone would pay the cost. In terms of the--
--
    Senator Sanders. OK. I do not want--we do not have a lot of 
time.
    Secretary Paulson. OK.
    Senator Sanders. Here is what the story is, and the reason 
why I think people are very upset about what goes on in 
Government, and especially at the White House. Major cuts in 
programs that people desperately need at a time when poverty is 
increasing and the middle class is shrinking, and people look 
incredulous. You want to give tax breaks to billionaires when 
ordinary people are hurting, drive up the national debt, drive 
up the deficit, cause more pain. And you have no answer. You 
did not give me an answer. That we would negotiate, that is 
fine.
    Secretary Paulson. I would say the answer, which I just 
said, and the Chairman and I were talking about it earlier, is 
that we need to bring people together. There is no doubt that 
the President has made clear that he would like to reform the 
estate tax.
    Senator Sanders. Reform the--no. The President has said he 
wants to repeal the estate tax.
    Secretary Paulson. He has said he is willing to compromise. 
You all know that. And the American people would love to see a 
compromise and would love to have some certainty. And there are 
many, many Americans, hard-working Americans----
    Senator Sanders. All right. Last question----
    Secretary Paulson [continuing]. Who own farms, who----
    Senator Sanders. Last question--very hard to find a farmer, 
a small farmer, who benefits. Last question. Last question. As 
you know, oil prices are soaring. Correct? Our friends at Exxon 
Mobil are doing very well. The average person cannot hear their 
home. All right--let me finish. And yet in your wisdom--in your 
wisdom, oil prices are soaring, middle class is shrinking, 
poverty is increasing. You substantially cut back on the LIHEAP 
program. Please tell the American people the sense of that. The 
LIHEAP program, as you know, is fuel assistance for low-income 
people, 40 percent of whom are senior citizens. Tell me why it 
is a good idea with oil prices soaring to cut back on LIHEAP so 
that people go cold in America.
    Secretary Paulson. That is a little bit like asking me, 
when did you stop beating your wife? You know, that is a loaded 
question.
    Senator Sanders. Well, if you were beating your wife, I 
would ask you that question.
    [Laughter.]
    Senator Sanders. But what you are doing is giving forth a 
budget which makes people go cold. Why do you do that?
    Secretary Paulson. I do not agree with your basic 
hypothesis that we are offering a budget that is making people 
go cold.
    Senator Sanders. Oil prices are going up, and you are 
cutting back on LIHEAP. What do you think the implications of 
that are?
    Secretary Paulson. Senator, I understand your point of 
view. Thank you for it.
    Senator Sanders. Well, I wish you would answer the 
question, sir.
    Chairman Conrad. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I want to go back to the chart that you had brought up at 
the start of our discussion here, where you implied that--well, 
it showed on your chart that if you have increased taxes, the 
economy was going to grow more. And I just want to be very 
specific in my question to the Secretary here. In relation to 
corporate taxes, that does or does not apply?
    Secretary Paulson. This chart?
    Senator Allard. Yes, that we talked about earlier.
    Secretary Paulson. Yes, what I said is that when I looked 
at that chart, the countries at the top of the chart and the 
one at the very top had the lowest corporate taxes, OK?
    Senator Allard. OK. So the point that you want to make is 
that the lower the corporate taxes, then the better the 
economy.
    Secretary Paulson. I would have to look at every one of 
those countries before I made that point quite as emphatically 
as you did. But the one thing I have looked at is not only the 
total amount of taxes but the form of those taxes. And I 
believe that our taxes on corporations are relatively high, and 
the form of the taxes we charge inhibits growth. And, that 
countries that rely to a greater extent on consumption taxes 
are able to raise more money with less of an impediment on 
growth and jobs and competitiveness than our tax system will 
allow.
    Senator Allard. Well, how do we rate on capital gains tax 
with other countries?
    Secretary Paulson. I have not done a study with all other 
countries.
    Senator Allard. Well, I think we are high.
    Secretary Paulson. Yes, I believe we are.
    Senator Allard. I think we are very high. I do not know 
that we are at the highest--we may even be at the highest, but 
I know it is very high compared to other countries. Would that 
have an adverse impact on our economic growth?
    Secretary Paulson. Clearly, when you get to corporate 
capital gains, this is a concept that does not even apply in 
certain other countries. But we have corporate capital gains at 
a level above even individual capital gains. But, again, I am 
just a believer when it comes to taxing something, if you tax 
it, you have less of it. And I think capital is what we need 
for investment to drive jobs and growth.
    Senator Allard. Do you want to explain to me why you think 
we have companies that leave the United States and move to 
other countries? I think Senator John Ensign had proposed a 
repatriation provision where that if we get certain companies a 
tax break, they would move back in. And as a result of that, 
even though it was scored negatively--this happened last 
session, last year or so, these companies responding--it 
actually had a very positive impact on our budget because they 
would have been moving back. Do you want to talk about that?
    Secretary Paulson. What I would say is when you look at 
corporate taxation, the rest of the world uses a system, by and 
large--and this is an oversimplification--under which their 
corporations pay the rate that the domestic companies pay in 
any particular country. We charge that rate, and then we gross 
it up for the U.S. rate. We charge a tax to bring money back.
    That does not seem to make a lot of sense to me, because 
you would think it would be in our interest to have our 
companies bring money back to the United States. And, again, I 
think it benefits us if our companies are able to compete 
successfully outside of this country as opposed to ceding that 
ground to the competition. Their success globally helps drive 
jobs and growth in the United States, and that is just simply 
the way I look at it.
    Senator Allard. What about the marginal tax rate on 
corporations? Is that beneficial to deal with marginal tax 
rates?
    Secretary Paulson. Well, there are three or four ways in 
which to approach this, and one would be to bring that rate 
down rather dramatically and simplify. There are a number of 
other ways, but I think that would one effective way of looking 
at it.
    Senator Allard. Now, I am assuming when you are talking 
about simplifying, you are talking to a certain degree about 
regulatory relief, and there is a cost to it. So that kind of 
brings me into another question. You know, if we look at some 
of the regulatory costs in the economy, I think that has an 
impact. Do we have some unnecessary regulatory costs in our tax 
structure that we can deal with without going into complete tax 
reform, like a value-added tax?
    Secretary Paulson. There are many things we can do to 
simplify, and we at the Treasury Department have tried to 
simplify the regulations. But I would say that the whole 
momentum is going in the other direction, because when Congress 
and others want to drive a certain policy, they very often look 
to put something in the tax code. And so our tax code, as you 
know, is overly complex on the corporate side and on the 
individual side as well.
    Senator Allard. I happen to be of a different persuasion 
than what you have heard around here. I do not have a problem 
with the differentiation between a low tax rate and a high tax 
rate because I think what happens, instead of shrinking the 
middle class, you have actually expanded the middle class. I 
think it also indicates that your economy is more mobile. In 
other words----
    Senator Sanders. Will the gentleman yield?
    Senator Allard. I will not yield, sir.
    Senator Sanders. OK.
    Senator Allard. You know, when you start out, out of 
college, like most of us did, you usually start out at a 
minimum salary, but then there is hope of being able to move 
up--and so that differentiation just indicates the upward 
mobility and the growth in our economy, and you have to have it 
there. Otherwise, what you begin to do is you begin to destroy 
the opportunity for new people entering into your economy to 
grow and someday gain the advantages that the previous 
generation enjoyed.
    Secretary Paulson. Senator, when I look at what positively 
differentiates us from a number of other countries, it is 
income mobility. And as troubling in some ways as is the 
widening income gap and wealth distribution gap, it is 
encouraging to see the mobility we have in our economy and 
among our workers and our people. As far as I am concerned, 
though, it does not take away the need to keep this economy 
growing, and I do believe that the biggest challenge we are 
going to have in the next 20 years, one of the biggest 
challenges, is finding ways to get skills to the people who are 
going to need them to compete in this economy. And I have had a 
lot of experience working with manufacturing companies, and I 
keep coming back to this is example. In 1950, we had 15 million 
manufacturing jobs in the United States. That was 30 percent of 
our work force. Today we have 15 million. That is 10 percent of 
our work force. And people say, where did the manufacturing 
jobs go? Well, the output is 7 times greater. Each worker 
produces 7 times the output. We are the largest manufacturing 
country in the world, 2-1/2 times bigger than China.
    But to me, the issue is automation. When I walk through 
plants, I used to walk through a Caterpillar plant in my early 
days and see a lot of workers. Now I see automation.
    We are creating a lot of other good jobs, but, again, this 
challenge we face is faced by other----
    Senator Allard. Well, I just want to make a point. I would 
like to hear your explanation of how you encourage the economy 
to grow when you compress people's ability to grow in that 
economy by trying to compress the wealthy down with the poor.
    Secretary Paulson. We can look at the issue, which is the 
widening gap. To me, I would not look at the tax code as a way 
to address that issue. The tax code under this President hasten 
more progressive. You can just look at the numbers. It has 
become more progressive.
    Senator Allard. I agree.
    Secretary Paulson. The challenge is to create jobs and to 
help people that need the help, and that is----
    Senator Allard. Yes, but you are going to have to do some 
explaining to me how you are going to com6press people by not 
allowing them to grow income and reach higher levels, and yet 
expect your economy to grow. I just think it is very difficult, 
and I do not think you can do it.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Whitehouse?
    Senator Whitehouse. Thank you.
    Secretary thank you for being here. I have a personal view 
that we have a White House that, in a fashion rather unique in 
recent history, really loathes and despises the American 
process of government, and that, you know, judicial review is 
anathema to them even though it is a core constitutional 
principle. They would like to do things without congressional 
oversight everywhere possible. And I cannot help but have that 
opinion in mind when I see the way the stimulus package is 
proceeding.
    We have a bicameral legislature. We have always had a 
bicameral legislature. It should not be news to anyone that the 
United States of America has a bicameral legislature. So the 
idea that a stimulus package gets negotiated between the White 
House and the House of Representatives and that is supposed to 
end the process is just silly from a process point of view. I 
cannot express how basic the process question is here. And I 
really think that unless this administration in its last year 
wants to govern by veto and veto alone, then in order to be 
relevant, you also have to be reasonable. You cannot just use 
force and pressure to get your way.
    And what I see right now as backdrop to this is the White 
House putting intense pressure on Republican Senators, heavily 
arm twisting to get them to vote against the Senate Finance 
stimulus package despite the fact that it will put them in real 
peril with 21 million seniors out there who will see a benefit 
that is now waiting for them stripped, despite the fact that it 
will cause intense damage to the wind and solar industry from 
the tax rebate not being granted to them, despite the fact that 
250,000 veterans would lose--disabled veterans would lose a 
benefit.
    It strikes me that the sensible thing to do, and consistent 
with the American process of Government, which is no mystery to 
anybody, would be to let the Senate do its work, since you have 
not negotiated with us, and then take the bill that emerges 
from the Senate, and then it goes back to conference. And in 
conference, with the input from the White House, the House and 
the Senate negotiate to a bill that then goes to the President 
for signature.
    But the idea that you try to stop this in the Senate 
without the Senate having any voice in the process by putting 
pressure from the White House on us I think is a misuse of the 
American process of Government, and I would urge you to use 
your credibility and your authority in this administration to 
ask them to calm down, to take the pressure off the Republican 
Senators, to let this thing work its way through the 
legislative process, to take it up in conference, and to come 
up with a bill. Because I really do not think it is such a bad 
thing to give 21 million American seniors a break or to give 
250,000 disabled veterans a break that is worth putting the 
White House into the legislative process and stopping this 
stimulus. Because what is stopping the stimulus is the White 
House pressure on Republicans Senators jamming it up.
    Secretary Paulson. Senator, let me respond to that.
    Senator Whitehouse. I wish you would. I would appreciate 
the opportunity to have you discuss this.
    Secretary Paulson. I would say, first of all, that what was 
done in the House was bipartisan and was simple.
    Senator Whitehouse. But not bicameral, and we are talking 
about the American process of Government.
    Secretary Paulson. I was going to get to that. And the 
reason it was able to be done was that your leaders said, in 
the interest of speeding up the process, why doesn't the house 
take the lead, work something out in the House, and then the 
Senate can take it up quickly.
    Now, I recognize and the Administration recognizes--and I 
am leading the effort from the Administration, so if you are 
going to point the finger, point it at me--but we recognize 
that the Senate has an important role to play here. I recognize 
that. And what I said yesterday, when I was asked a question 
about low-income seniors and veterans, is that the starting 
point was the 2001 legislation where the rebates went to 
taxpayers. The House changed that and broadened it to include 
working families. And when the question was put to me about 
seniors, low-income seniors, and veterans, I said I cannot 
negotiate this here, I should not negotiate in a public 
hearing. But we are well aware of the difficulties faced by 
low-income seniors and veterans, and I am sure something can 
get something worked out.
    Senator Whitehouse. The problem is, though, that from a 
process point of view, the Republican Leader is stopping 
anything happening on this bill.
    The Republican Leader is stopping anything happening on 
this bill in process so that those discussions, those debates, 
what we do in the Senate does not happen at all, and the 
information we have is that he is doing it on instructions from 
the White House. Since you are in the middle of this----
    Secretary Paulson. No, I would say----
    Senator Whitehouse. Why don't we get to vote on these 
things?
    Secretary Paulson. I would say this: I am not going to get 
into your legislative tactics and what is being done. The other 
thing I would take issue with--in all due respect because I 
understand what you are saying. But I think the American people 
are not going to be very patient if we are going to have two 
different bills, go to conference, get bogged down there, and 
you are going to delay getting the checks to the American 
people. So----
    Senator Whitehouse. But we could already be done if it had 
not been stopped by the Republicans in the Senate. It could be 
through conference now.
    Secretary Paulson. Again, all I am calling for is speed. I 
was hopeful that there would have been a vote last week. I was 
hopeful. I am looking forward to the vote. I am looking forward 
to a resolution. I am looking forward to getting checks to the 
American people. I certainly am not trying to rain on this 
bipartisan moment or cast a shadow on it, because I do think we 
have a bill that reflects Democrats' views, Republicans' views, 
and the primary driving factor is what is stimulus and what is 
going to benefit the American people. But----
    Senator Whitehouse. From the White House point of view----
    Secretary Paulson. Let me just say one other thing. When I 
made my comment, the things I singled out were things that were 
not necessarily Democratic provisions. They were things that 
were not stimulus, benefits for business that just were not 
stimulus.
    I think we want something that is going to work quickly, is 
going to help, and is going to be stimulus. And I am for a fast 
process.
    Senator Gregg. Mr. Chairman?
    Senator Whitehouse. OK. I just wanted to say that from the 
White House point of view, it is not enough to just say, look, 
I went and did the distasteful thing of negotiating with a 
Democrat, I did it with the House, and now I am done with it, I 
have done it and I am not going to do anymore, now it is 
bipartisan.
    We have a process of Government here in the United States 
of America that has two Houses of Congress----
    Secretary Paulson. Absolutely.
    Senator Whitehouse [continuing]. And ours has a right to go 
through a process.
    Secretary Paulson. I could not agree more.
    Senator Whitehouse. Thank you, Mr. Chairman.
    Secretary Paulson. This started, as far as I am concerned, 
with Senators Reid and McConnell being gracious and saying to 
the House, move and then we will move quickly. The Senate is 
going to have its say. You are working. I do not think it is 
pressure to express a view that I think it would be good to 
pass the House bill. You do not have to do it. I have expressed 
the view I did as it relates to some of these other things. But 
the one thing I want to resist is any thought that we have 
extra time and that delaying a few days is not going to hurt 
the economy, because it will. We need to get the checks to the 
American people.
    Chairman Conrad. Senator Cardin?
    Senator Cardin. Thank you very much, Mr. Chairman.
    Secretary Paulson, first, I genuinely want to thank you for 
your public service, and I thank you for the manner in which 
the negotiations took place in the House on the stimulus 
package. I think that was healthy for our economy, and I think 
it showed the right type of respect for negotiations.
    I first need to respond to Senator Allard's exchange with 
you because I found it very misleading. And I must say, you 
have an impossible task to try to defend this budget submitted 
by the Bush administration given the objectives that you have 
so eloquently pointed out for our economy.
    Senator Allard talked about the middle class growing. To 
let that go unchallenged is just intellectually dishonest, and 
it is not what is happening in America. We know that we have a 
widening disparity of wealth in this country, which you have 
acknowledged. And this budget does very little to correct that.
    To suggest that our code is progressive and then take on 
Senator Sanders' point about the repeal of the estate tax to 
me, again, is not furthering the debate.
    According to information that has been made available 
through our Committee, the budget provides $51 billion of tax 
relief for those making over $1 million in 2009. That is the 
gap that has to be filled because of the policies that you are 
recommending. And yet for just a fraction of that amount, we 
could deal with the problems that you are bringing up. We could 
develop a workforce able to compete in the future, put money 
into education, job training, and other programs that are well 
below any reasonable growth levels necessary to meet the 
challenges that you point out that we must meet for our economy 
to grow.
    I point that out because it will be difficult for us to 
make that connection if we are not going to work in the same 
spirit as the short-term economic stimulus package.
    I want to share with you some of the experiences I have had 
in Maryland regarding our economy and my disappointment with 
the budget that has been submitted. Marylanders are hurting 
today. They are having a hard time paying their health care 
bills, having a hard time paying their energy bills. They are 
worried about losing their homes. And I look at the Bush 
budget, and I do not see remedies for those deep problems. It 
might have been the housing market that triggered this economic 
problem, but there are also deep problems within our economy. 
And I would like to see us take action in 2008. I do not think 
we should wait until 2009 to deal with these problems.
    So let me start with housing, first. Over 2 million 
homeowners in this country are in jeopardy of losing their 
homes through foreclosure because of the subprime mortgage 
crisi by the end of next year. The initial program recommended 
by President Bush would do very little for those that are in 
danger of delinquency or are in delinquency in their mortgages. 
Part of the Senate Finance stimulus package, a proposal that 
the administration supports, would add some revenue bonding 
authority to be able to help homeowners. I make a plug for that 
because I do not want to forget homeowners. We talk about low-
income seniors, very important. We talk about disabled 
veterans, very important, but let's not leave out the housing 
issues, which we need to deal with now, and I hope that 
provision gets into the final package and becomes law.
    My question is, I do not see much in this budget that is 
going to help someone who was victimized by the subprime 
crisis--and in my State, many homeowners were victimized. The 
majority of subprime borrowers awere eligible for a 
conventional mortgage. They were steered into subprime loans, 
and now they are in danger of losing their homes. The credit 
crunch is affecting them, and I think we have a responsibility 
to be more aggressive, not only to ensure that homeowners are 
treat fairly, but also for the sake of our economy.
    In Baltimore, we just had layoffs announced from General 
Motors Transmission because light trucks are not being sold 
because of the building industry cutting back. So all of us are 
being affected by what is happening in housing. I would hope to 
have a more aggressive budget on this issue, and I welcome your 
thoughts.
    Secretary Paulson. Senator, let me talk about housing 
because that is the biggest drag on our economy, and it is the 
major risk, and it is a risk to the downside. First of all, the 
Hope Now Alliance is aimed at dealing with the 2 million 
subprime resets, and I am much more optimistic about that than 
you are. I think what you are going to find is that if you are 
a homeowner and you are able to make your initial mortgage 
payment--if you cannot make that, you are right, then it is 
going to take other alternatives--but if you can make the 
initial payment but have trouble making it under the higher 
rate, fast-track----
    Senator Cardin. Well, what are the other alternatives?
    Secretary Paulson. What?
    Senator Cardin. What are the other alternatives? You said 
it will take other alternatives.
    Secretary Paulson. I would say it will take one of the FHA 
products. We have FHA Secured, and if we can complete the 
legislation that has already passed the House and the Senate, 
this will give the FHA ability to help another couple hundred 
thousands homeowners. But I am saying that there are a large 
number--two-thirds of those resets--that we think will be 
homeowners who can make the initial payment.
    But I want to get to your more basic question, which is 
what we are doing for the homeowners that have been victimized 
who have other issues. We have thought about this a lot, and we 
said that dealing directly with homeowners is, we think, the 
right way to go. And then, the fairest and the most effective 
way of dealing with thus more broadly, is by putting these 
stimulus checks in the hands of people, many of whom will be 
homeowners. With the House package, you would see rebates of 
$600 for individual, up to $1,200 for married couples, and, of 
course, the child credit on top of it.
    So, again----
    Senator Cardin. I would just point out that these asre very 
limited, short-term protections. The problem is that these at-
risk homeowners have loan structures that they could have 
avoided, but they were steered into it. And I think we have a 
responsibility not to bail out the lenders----
    Secretary Paulson. Right.
    Senator Cardin [continuing]. But to help these homeowners 
refinance. And I think the revenue bond package will help. I 
think it is a good proposal, and I hope it is part of the 
stimulus package.
    Secretary Paulson. The revenue bond proposal was something 
we proposed in the budget that would be very helpful. We are 
also going to work very hard with this Hope Now Alliance to 
expand it and strengthen it as we go forward. But the one thing 
that we have not been able to figure out is how to deal with a 
homeowner who bought assuming the price of the home was going 
to keep going up and it has not, and who no longer wants to own 
the home and no longer wants to make the initial payment. We 
are not able to deal with that. But I think we do have a 
program aimed at those that can make the initial payments, and 
we need to get this FHA modernization legislation done, which 
will help with those that are having added trouble----
    Senator Cardin. Let me just conclude. I agree with what you 
are saying, but I blieve we need to go further. And I do agree 
with the point that you are raising, but there is a group out 
there that has been victimized. I am not talking about those 
who made bad judgments but those who have been victimized, and 
I think we have a responsibility. When you take a look at the 
communities that are particularly affected by the crisis, you 
find a lot of minority communities where the practices were 
different than in non-minority communities. And we have a 
responsibility to respond to that.
    Secretary Paulson. I agree. Senator, I have visited a 
number of those communities. I have spent time on the road. I 
am well aware of it. You know, there are abusdes that took 
place. Another big part of my focus is to come up with policy 
responses to minimize the chance of that happening again and a 
repeat of those kinds of practices. So we are trying to get 
through this period with as little harm to the economy and to 
individuals as possible and then come up with a strong policy 
response to deal with that problem. Thank you.
    Senator Cardin. Thank you.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, I am sorry that I did not get to hear your 
testimony, although I did read it, and the exchanges since I 
was on the Energy Committee, but I appreciate you being here.
    Mr. Chairman, I have a statement that I would ask to be 
included at the beginning of the hearing.
    Chairman Conrad. Without objection.
    Senator Menendez. Thank you.
    [The prepared statement of Senator Menendez follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.207
    

    [GRAPHIC] [TIFF OMITTED] T2157.208
    

    [GRAPHIC] [TIFF OMITTED] T2157.209
    

    Senator Menendez. I want to pick up where Senator Cardin 
finished. You know, at the Banking Committee, I raised this 
issue about your Hope Now program, and, you know, we hope it 
has hope. But the reality is that, you know, if we look at some 
of the percentages that have been extrapolated by independent 
entities, not very much has happened in percentage terms. As a 
matter of fact, the Center for Responsible Lending predicts 
that the plan only helps 3 percent of the subprime ARM 
borrowers, and that, in fact, the percentage of those who have 
actually been helped to date are incredibly small compared to 
the universe.
    What do you say to that?
    Secretary Paulson. Well, what I would have to say that is 
wrong. You will see some information put out later this week on 
what happened through December.
    Now, remember, the biggest issues we have are coming up 
this year, Senator. Over the next couple of years, we have the 
big wave of resets, and those are the mortgages that have the 
most lax underwriting standards, some of the abuses that 
Senator Cardin was talking about. So that is where the 
challenge is going to be. What I am pushing for and what we 
will get are metrics. We are going to get numbers, and we are 
going to just see what the answers are to your question.
    But what the----
    Senator Menendez. Well, for you to say it is wrong mean 
that you already have a different set of circumstances.
    Secretary Paulson. I would say what the latest numbers that 
were released near the end of the year show a real step-up into 
the third quarter in terms of the number of people that were 
helped, and so that has moved up dramatically. I am not going 
to make this out to be a silver bullet, but I am going to say 
that I will be unpleasantly surprised if we do not find that 
those people who are facing resets and have been able to afford 
the initial rate are helped. I believe that is what the facts 
are going to show, and we are going to drive that very hard. I 
think the numbers that have come out to date, the most recent 
numbers show there was a big step-up at the end of the year in 
terms of the number of people helped, 370,000.
    So, you know that different organizations can put out 
different guesses as to what will happen, and what I am going 
to drive for is metrics and numbers and getting the numbers out 
there. And I have to tell you that, if the members this 
alliance are not doing what they have said they are going to 
do, I am going to be all over them. And they will have to do 
other----
    Senator Menendez. I am all for metrics. But I must say that 
when your house is being foreclosed on, metrics alone is not a 
solution.
    Let me just say it is not just what they----
    Secretary Paulson. Metrics will prevent us from having----
    Senator Menendez. It is not what they just project will 
happen. They project that what has happened is very little.
    Secretary Paulson. The numbers that have come out for the 
fourth quarter--and we will send you those numbers--show that 
370,000 people have been helped. But, again, the reason I say 
metrics are important, and I know metrics will not save your 
house, is that when we are having this discussion in the 
future, we will know what the facts are. And, again, I believe 
what we are going to see is that a good number of people are 
going to be helped because they are going to be fast-tracked 
and do a quick modification or refinancing.
    Senator Menendez. Well, I just simply hope, Mr. Secretary, 
that you and others will be as aggressive about this as we are 
about making sure that the marketplace and Wall Street are 
reinvigorated.
    Secretary Paulson. I could not be more aggressive.
    Senator Menendez. Well, let me ask you about a different 
question.
    Secretary Paulson. I got to tell you, if this group does 
not perform, I am going to say so publicly, and I am going to 
be all over them.
    Senator Menendez. And I am going to be there right with 
you. Let me ask you the following: Yesterday at the Finance 
Committee hearing, you said that you were open--and correct me 
if I am wrong--to including rebates for seniors and disabled 
veterans in the stimulus, but you disagreed with including 
unemployment benefits. Is that a correct statement?
    Secretary Paulson. Well, I think that is an 
oversimplification. I chose my words very carefully because I 
was not there to negotiate. But I did say, and I said here 
today, that we understand the difficulties that low-income 
seniors and veterans are facing, and I am optimistic we will 
work something out.
    With unemployment, you have me right, because I oppose that 
very strongly for one major reason: the unemployment rate in 
this country is now 4.9 percent, and it would be unprecedented, 
it would be a huge break with precedent, to extent unemployment 
insurance at that rate. I have analyzed it. The lowest 
unemployment rate ever when we extended it was March of 2002. 
Then it was 5.7 percent. In November 1991, it was 7 percent; 
September 1982, it was 10.1 percent; January 1975, 8.1 percent; 
January of----
    Senator Menendez. So your opposition is simply based on 
that it is not high enough, the percent of unemployment?
    Secretary Paulson. I am saying that would send the wrong 
signal to the whole world. Again, I have been up front and very 
early out on the fact that the economy has been slowing down. I 
continue to believe growth is going to slow down, but we are 
going to keep growing.
    My only point is, if the situation that some people on the 
other side are predicting is correct, if the economy slows 
further than expected, if the unemployment rate rises 
significantly, then let's have the discussion at that time.
    Senator Menendez. Well, even though the economy lost 17,000 
jobs in the month of January, the first monthly loss of jobs in 
more than 4 years, which some say is an indicator of what 
forbears--you know, in March of last year, I said we are going 
to have a tsunami of foreclosures. Everybody pooh-poohed it. 
Unfortunately, we are facing a tsunami of foreclosures. This 
wave of unemployment I hope is not the reality, but I am really 
concerned about it. And the economists say that it is a quick 
and high bang for the buck that we get $1.64 for every $1 that 
we provide in this process, plus we help people who are trying 
to find a job but just cannot find one in this economy.
    So with all of that considered, if the whole purpose is 
stimulus, isn't this a good way to stimulate quickly?
    Secretary Paulson. I have had a huge focus on stimulus. I 
believe the rebate checks in the House bill, which is broad 
based, and given what I think we are going to be able to do 
with the IRS in terms of getting checks out quickly, much more 
quickly than people had expected, and getting a big check out 
all at one, I think will have a significant stimulus effect.
    And so, again, I understand your position; I have heard it. 
There were a lot of people in the House that felt the same way. 
The Speaker made the tough decision, let's do something that is 
stimulative and balanced and get support from both sides. 
Because I am for things that are stimulative, I gave you my 
objection and why.
    Senator Menendez. Well, I appreciate hearing your 
objection. Let me just say--and I know my time has run, but let 
me just say that if we are talking about timely, it is going to 
be far more timely than anyone who is going to get a rebate. 
That is for sure. It may not be as big as the rebate in the 
immediate--but timely, this will be far more timely. It will be 
in the hands of people far quicker, and probably by the time 
you get that rebate out, they will have had more money in 
unemployment benefits than they will get in a rebate. And the 
stimulus context as well as helping people stay on their feet, 
it seems to me that it is far better.
    Secretary Paulson. The numbers do not bear you out in terms 
of the amount of money, especially when you look at what it 
means to make a small increase in a monthly check, and when you 
look at the kinds of stimulus we are talking about with the 
benefits for children, and you look at the speed of getting the 
checks out. Again, that is why I am pressing so hard to get 
this on the President's desk, because we can then start 
programming immediately at the IRS, and I think we can start 
getting this money out in May. And so that is where we are.
    Senator Menendez. Well, hopefully you will talk to our 
colleagues, and we can get the Senate bill passed, and then we 
can have a conference.
    Secretary Paulson. The best of all worlds would be to get 
something passed and not need a conference. Then we would 
really get it out quickly.
    Senator Menendez. Well, it is not just doing it quick. It 
is getting it right. And, you know, there are two sides to the 
Congress, Mr. Secretary, having been here in both Houses for a 
while. You need to negotiate with both sides on behalf of the 
American people and its totality.
    Thank you, Mr. Chairman.
    Secretary Paulson. I agree with you on that, but do you 
agree that it could be possible to get quick action in both the 
Senate and the House and still not need a conference where it 
could get bogged down?
    Senator Menendez. I think there is every desire to get it 
out quickly, and there is also every desire to get it out right 
so we really stimulate this economy. And I think both can be 
reconciled.
    Secretary Paulson. Thank you.
    Chairman Conrad. Thank you, Senator.
    Mr. Secretary, there has been a lot of skepticism expressed 
about the stimulus package. I was on a talk radio show the 
other day, and the host posed the question to me in this way, 
and I would like your response. He said to me: ``Senator, you 
are going to go out there and borrow, you, Congress, and the 
administration are going to go out there and put $150 billion, 
roughly, into this package. All of it is going to be borrowed. 
Much of it is going to be borrowed from China and Japan. You 
are going to send checks to people who are then going to go 
down to the store and they are going to buy goods from China 
and Japan. Whose economy are you really stimulating?''
    What would your response be?
    Secretary Paulson. First of all, I also have had skepticism 
from a couple of groups of people. I have had skepticism from 
people who point to fundamental, long-term policy objectives 
that, if they could be enacted, would make a bigger difference 
in the intermediate and the long term. And so I have had 
skepticism from people there. I have heard skepticism from 
people that are concerned about the deficit, and I really 
respect your concerns there.
    What my position has been has been is that there is a need, 
and we should do something quickly that will make a difference. 
We need to do something that is big enough to make a difference 
in terms of the size, but not so big that it is going to create 
a big impediment to what we are trying to do in balancing the 
budget and dealing with the deficit. That is why we came up 
with the size we did. I would just say very directly that I 
have no doubt that if we can keep this simple and we can keep 
it focused on stimulus--I do not want to spend money that 
really is not going to be stimulus--it will make a difference 
this year.
    What I would say to the talk show host or anyone else is 
that if we get money out and put it in people's hands, not 
government programs, but people's hands and let people spend 
it, this will create jobs. It will create real jobs. It will 
create economic growth. It will make a difference this year.
    Chairman Conrad. And economic growth in this country?
    Secretary Paulson. In this country. Oh, absolutely economic 
growth in this country. That----
    Chairman Conrad. Is it true--I had an economist tell me 90 
percent of the goods and services sold in this country are 
American. And so this idea that----
    Secretary Paulson. I do not have the number, but----
    Chairman Conrad [continuing]. To whatever extent you 
stimulate----
    Secretary Paulson. The vast majority. I would just simply 
say that the No. 1 bogeyman we are fighting, I believe, are all 
those people who somehow or other believe that trade or 
globalization is hurting the United States or that we should 
lose our self-confidence and think we cannot compete with 
others around the world, or that we should not open ourselves 
up to that. And I will tell you, with repect to the imports we 
do get, the low-cost imports, the same people who are concerned 
about low-income citizens, that are concerned about what is 
happening to the middle class, some of those people are the 
ones who are trying to prevent low-cost imports and increased 
options and choice for citizens of this country.
    So, again, we benefit from our trading relationships around 
the world, and I think we can be self-confident. And, you 
know----
    Chairman Conrad. Can I just say, can I just give this word 
of advice?
    Secretary Paulson. Yes.
    Chairman Conrad. I think instead of getting off on a trade 
dispute, which gets off into a whole series of other issues, if 
we stayed focused on the question of stimulus, if you could get 
us what your analysis is of what the goods and services that 
would be bought by these checks, is it true--is it true that 90 
percent of the goods and services are American?
    Secretary Paulson. The vast majority are going to be 
American, and I want to stay----
    Chairman Conrad. Could you get us an analysis that would 
tell us----
    Secretary Paulson. I will do my best, but the analysis----
    Chairman Conrad. Because I will tell you something, this is 
going around. This is going around the talk show world, this is 
going around the political world, this notion that we are going 
to borrow money from China and Japan and we are going to turn 
around and buy Chinese and Japanese goods, and that we are 
really stimulating their economies, not ours. We need some 
factual analysis that tells us whether or not that is true.
    Secretary Paulson. I am going to say two things to you 
here.
    First of all, I believe that the talk show hosts are going 
to have a hard time convincing the American people that it is 
not good for them, that the American people are going to oppose 
getting checks. That is No. 1.
    No. 2, I have been very clear in saying that with a 
stimulus package like the House bill we expect to get at least 
500,000 jobs this year. We have looked at what it does to the 
GDP. It is seven-tenth of a percent, more or less, if we can 
get this out quickly and keep the package simple. I will do my 
best to get you an analysis that you have asked for.
    But, again, I think the overriding analysis is that this 
will give a boost to the economy. This will----
    Chairman Conrad. And to our economy.
    Secretary Paulson. Help our GDP. That is all we are talking 
about, our GDP, our jobs. And the only reason I go off a little 
bit on a tangent, is that it is just amazing how people want to 
point the finger at globalization or trade to fight almost 
anything good you would like to do.
    Chairman Conrad. Let me go to one other point that we have 
discussed previously, and that is this long-term debt. This is 
not a projection, at least until 2008. We know the debt of this 
country is going up like a scalded cat, and the question is: 
What do we do about it?
    Senator Gregg and I have made a proposal to empower, give 
the responsibility to 16 representatives, some from the 
administration--this would be done next year, now. We have 
changed the timing. It would be done next year. Some from the 
administration, some from the Congress, to come up with a plan; 
and if a significant majority of the members of that group 
would agree on the plan, that plan would come to Congress for a 
vote.
    As I look at what the next President is inheriting and the 
next Secretary of the Treasury is inheriting, it is a mess. Do 
you think that kind of approach has merit? Do you have an 
alternative recommendation for us? What would you tell our 
colleagues? Because there is a tremendous debate going on 
behind the scenes right now on what we should do about this 
longer term?
    Secretary Paulson. First of all, I want to commend your 
leadership and Senator Gregg's leadership in this area, and 
this Committee, because this is one of the major structural 
issues that this country is facing. I listened carefully to 
what you said about debt, and I would characterize it a 
different way. But I agree with the overwhelming issue you have 
raised. The big issue is what is happening with the Social 
Security and Medicare and how to deal with this.
    I think what you have suggested is a constructive approach, 
and I think it will take something like this to cut through all 
of the cross currents and the sentiment out there. This is an 
easy issue to demagogue if you do not want to get something 
done. And I have no doubt, Mr. Chairman, something will get 
done. It has to get done. But the longer we wait, the more 
costly it will be, and it is the younger generation that will 
pay the cost.
    So I just commend your leadership, I commend Senator 
Gregg's leadership, and I hope as you work behind the scenes, 
you get some traction for an idea like this.
    Chairman Conrad. Thank you very much.
    Senator Gregg?
    Senator Gregg. Mr. Secretary, I just want to make a few 
points, and they are rhetorical in nature, and then I have to 
leave, regrettably.
    First, I want to thank you for your service. The Nation is 
lucky to have you. And I think that the good fortune of our 
Nation is reflected through your leadership in this Hope Now 
program. I mean, you had this up and running last summer or 
early fall, and I guess Senator Menendez is not too impressed 
with it. But I am impressed with it. You got $150 billion, I 
think it was, in play for the purposes of addressing the 
rollover relative to the subprime issue on the adjustable rate 
mortgages, and it is going to relieve some of the problem here. 
And certainly for those people who got drawn into a subprime 
contract, who could not afford the step-up in the interest 
rates but could afford the underlying contract at the original 
rates, it is going to give them some options, which is very, 
very important for those individuals. And I congratulate you 
for setting it up, and I appreciate your leadership there.
    Second, Senator Whitehouse said that Senator McConnell is 
holding up the economic stimulus package and will not tolerate 
the issue of the Senate add-ons. Actually, what Senator 
McConnell has suggested in order to expedite this process is 
that we add the senior language, we add the veterans language, 
we straighten out the immigration language, and we put those in 
the House bill and we pass it and sent it over to the House and 
have them pass it. The House is ready to do that, as I 
understand it. Senator McConnell has asked that in numerous 
unanimous consent requests, and it has been objected to by the 
Democratic Leader. Why? Because the Democratic Leader wants to 
bring to the floor a Senate package which throws in a lot of 
other stuff. I mean, this is a train leaving the station and 
everybody wants to put their baggage on. We have a coal tax 
break. We have a windmill tax break. We have some sort of other 
energy tax breaks thrown onto this train. Totally inappropriate 
to the effort because those items are not stimulative.
    Obviously, there is some debate about the utility of 
extending unemployment insurance when you are at technically a 
full-employment economy, 4.9 percent unemployment. As you say, 
and you say accurately, to do an unemployment insurance 
extension when you are at 4.9 percent unemployment makes no 
sense in the historical context. You do an unemployment 
insurance extension when unemployment has jumped significantly 
and when people cannot find jobs. At a 4.9-percent unemployment 
rate, at least in some regions of this country, there are 
obviously jobs that are not being filled because that is a full 
employment number.
    In New Hampshire, for example, we have 3.6 percent 
unemployment. Arguably, if you extend the unemployment benefit 
for another 6 months, you are basically saying to people, Do 
not go out and look for a job even though there may be jobs 
available. So any unemployment insurance extension should be 
tied to an unemployment rate which reflects the fact that there 
are not jobs, and that would be at around a 5.7 percent 
unemployment rate at the base. So it should be a trigger event. 
At the best it should be a trigger event. It just should not be 
a national extension of the unemployment insurance.
    And that is a point I have been making. Sure, there may be 
regions in this country, like Michigan, where you should extend 
the unemployment insurance. But it should be done by a trigger 
based on actual unemployment numbers that show that there are 
no jobs available or the jobs are scarce versus undermining the 
productivity of the country by keeping people on unemployment 
insurance in regions where there are jobs available.
    So those are the three points I wanted to make in response 
to your efforts, and, again, I appreciate all you are doing. 
And I certainly appreciate your strong endorsement of Senator 
Conrad's and my efforts to try to address the entitlement issue 
which is coming at us.
    Secretary Paulson. May I say just one thing?
    Chairman Conrad. Yes, sir.
    Secretary Paulson. Currently, imports are 17 percent of 
GDP. Of course, we have imports from many parts of the world. 
So the vast majority of the spending for stimulus will go to 
U.S. goods. And so when we came up with our estimates on jobs 
and GDP, we took all of that into effect.
    Chairman Conrad. Well, we thank you for that.
    Let me just go back to this question of stimulus and what 
Senator Gregg was raising. There are other parts of this 
package that some of us think are important, the net operating 
loss provisions, and let's look at housing. Home builders 
employ about 3.5 million people in this economy. They are not 
in a recession. They are in a depression. And the package that 
was in the Senate was expanded to provide for 2008 losses to be 
carried back to profitable years, and the reason was we are 
being told by the home building industry that they are faced 
with a very serious problem. Not only are they facing 
operational losses and write-down on their book value from 
that, but in addition, their accountants are coming and telling 
them you cannot write off your losses, you cannot take them 
back to profitable years, and so you have to take another hit 
on your book value. That means they are under pressure to have 
a fire sale of assets to raise cash to continue operations.
    Now, this is the case they have made to us very 
persuasively, that they need to be included here if they are 
going to buffer the downturn that has already hit them, and hit 
them sharply.
    We had Mr. Zandi here of Moody's Economy.com last week for 
a hearing, very impressive economist, one of the most 
impressive witnesses that has come before this Committee. And 
he was sharing with us his forecast of where this is all 
headed, and I am sure, Mr. Secretary, you have seen it.
    I think every member of this Committee found it very 
sobering because, as you have described, we have not hit bottom 
here. And so I think the need for stimulus is absolutely clear, 
and the need to do it quickly is clear. The need for us to 
resolve these differences is also clear.
    I would say on unemployment, the one concern that I have 
about not including it is we are seeing long-term unemployed 
workers now comprise 18 percent of all unemployed workers. 
Those are people who have exhausted their 26 weeks. And, you 
know, in our conversation, the phone call that you made to me, 
which I welcomed, over last weekend, we talked about this 
issue. I did not know then that the percentage of unemployed 
workers who have exhausted their 26 weeks, remaining jobless 
for more than 26 weeks has now reached 18 percent of the 
unemployed. Does that give you any concern?
    Secretary Paulson. That is part of the structural issue we 
were talking about earlier when we were talking about income 
distribution. Of course, it is something I am concerned about, 
and I watch it carefully. But it does not change my view about 
extending unemployment benefits, extending the period across 
the board, when we have a 4.9 percent rate of unemployment. And 
I would----
    Chairman Conrad. Is it 4.9 or 5? I have been told----
    Secretary Paulson. It ticked down to 4.9. It was 5 percent. 
But whether it was 4.9 or 5, I would make the same point.
    Chairman Conrad. I think the message that should go forth--
and I apologize. I have to end because I have another 
obligation. But I would just say this: We have a mutual 
responsibility to reach a conclusion. It is absolutely true the 
administration reached an agreement with the House of 
Representatives, a good-faith effort and a very good beginning. 
It is also true that there is another body. That is the U.S. 
Senate. They have weighed in through the Senate Finance 
Committee. And while there are elements there that you may not 
support, somehow we have to find a way to reach a conclusion 
here in a rational way.
    Secretary Paulson. I am optimistic. I believe we will do 
it, and we will do it quickly. So let's hope we are both right.
    Chairman Conrad. On that positive note, the hearing is 
adjourned.
    Secretary Paulson. Thank you.
    [Whereupon, at 12:06 p.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.206
    



     THE PRESIDENT'S FISCAL YEAR 2009 DEFENSE BUDGET AND WAR COSTS

                              ----------                              


                       TUESDAY, FEBRUARY 12, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9 a.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Wyden, Feingold, Nelson, 
Menendez, Sanders, Whitehouse, Domenici, and Allard.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order. I 
especially want to welcome everyone to today's Budget Committee 
hearing on the President's defense budget and war costs. Our 
witnesses are Gordon England, the Deputy Secretary of Defense; 
General James Cartwright, the Vice Chairman of the Joint Chiefs 
of Staff; and Tina Jonas, the Under Secretary and Comptroller 
of the Department of Defense.
    Secretary England serves as the Chief Operating Officer of 
the Department of Defense and was previously the Secretary of 
the Navy, where he provided very distinguished service. 
Secretary England, we want to again thank you for taking on 
these chores. It is certainly not for the pay. It is certainly 
not for the cushy hours. It is terrific that people of your 
quality and character are willing to serve our country, and we 
appreciate it.
    General Cartwright is our Nation's second highest ranking 
military officer, with primary responsibility for overseeing 
the defense acquisition and budgeting process. General 
Cartwright, it is good to have you before the Committee. We 
also deeply appreciate your public service. These are 
difficult, challenging times, and we are fortunate to have 
people with integrity and quality in our Nation's service.
    And Under Secretary Jonas is the Chief Financial Officer of 
the Department of Defense. She is well regarded by this 
Committee, somebody who has done her homework, which we very 
much appreciate.
    Let me make a quick presentation. As you can imagine, I am 
going to be saying things here that do not reflect on any of 
our witnesses here. These are matters, frankly, that are of 
concern to this Committee that are decisions by this 
administration with respect to providing transparency or 
failing to provide transparency to this Congress and this 
Committee with respect to ongoing costs.
    Let me put up a recent headline from the New York Times to 
put the President's defense request in historical perspective. 
Its headline read, ``Proposed Military Spending Is Highest 
Since World War II.'' In fact, if we look at defense outlays, 
we can see that under the President's request, defense spending 
will exceed the highest levels during the cold war. We will 
spend more than at the peak of the Vietnam War or the peak of 
the Korean War, even after adjusting for inflation. Keep in 
mind we had several times as many troops deployed overseas 
during those war years as we do today.

[GRAPHIC] [TIFF OMITTED] T2157.238


[GRAPHIC] [TIFF OMITTED] T2157.239


    The costs of the war in Iraq are the major factor driving 
our defense expenditures. It is worth noting that before the 
Iraq War began, the Bush administration suggested that we would 
not see spending anywhere near this level. Here is the 
transcript of an interview in January of 2003 with Defense 
Secretary Rumsfeld on ``This Week with George Stephanopoulos'': 
``What should the public know right now about what the war in 
Iraq would look like and what the cost would be?''
    Rumsfeld: ``The Office of Management and Budget estimated 
that it would be something under $50 billion.''
    Stephanopoulos: ``Outside estimates say up to $300 
billion.''
    Rumsfeld: ``Baloney.''

    [GRAPHIC] [TIFF OMITTED] T2157.240
    

    Well, if that was baloney, we have double baloney now 
because we are now over $600 billion, either received or 
requested by this President for the war in Iraq alone. In fact, 
our most recent calculation is $624 billion on top of the 
regular defense outlays. That is for the war in Iraq from 2002 
through 2009. That is more than 12 times the administration's 
original war cost estimate. And that only includes the $70 
billion of war funding requested for 2009 in the President's 
budget. We all know that the costs will be far higher in 2009 
under the President's policies.

[GRAPHIC] [TIFF OMITTED] T2157.241


    It is disappointing that the Bush administration has again 
left realistic war costs out of its budget. This is not just an 
issue of concealing war costs from the American people and 
underestimating deficits under the President's policy. It is 
also ignoring the law the President himself signed.

[GRAPHIC] [TIFF OMITTED] T2157.242


    Last year's defense authorization bill, signed by President 
Bush, included a provision requiring the President to include 
war costs in his budget. I helped to get that provision adopted 
because having a good projection of war costs is essential to 
the work of this Committee as well as the Congress. In last 
year's budget, President Bush included $145 billion for 2008, a 
$50 billion plug for 2009, and nothing for the years after 
that.

[GRAPHIC] [TIFF OMITTED] T2157.243


    In this year's budget, he included $70 billion for 2009 and 
nothing for 2010 or any year after that. The President is 
clearly understating likely ongoing war costs under his stated 
policies. We know that more will be needed in 2009 and beyond 
no matter what happens next. In fact, Secretary Gates testified 
last week that the real 2009 war cost is likely to be closer to 
$170 billion, not the $70 billion that is in the President's 
budget.
    Meanwhile, the Congressional Budget Office has estimated 
that ongoing military operations could cost $616 billion from 
2009 through 2013 while the administration has included nothing 
after 2009. Even if the next President chooses to reduce troop 
deployments promptly, there are still foreseeable costs beyond 
2009. The Army has said that they need reset funding for 2 
years after the war in Iraq ends. None of that is in the 
budget.
    Finally, I want to raise the issue of military readiness. 
It is clear the war in Iraq is severely undermining readiness. 
Here is what Admiral Mullen, the Chairman of the Joint Chiefs, 
said last week: ``Tenuous, too, sir, [are] the long-term risks 
we are taking to our security commitments elsewhere in the 
world if we do not address the toll that ongoing combat 
operations are taking on our forces, our gear, our people, and 
their families. The well is deep, but it is not infinite. We 
must get army deployments down to 12 months as soon as 
possible. People are tired.''

[GRAPHIC] [TIFF OMITTED] T2157.244


    I would just say that ought to be an alarm bell to all of 
us. Military readiness is a critical component of deterrence. 
Instead of getting help, our troops have been overextended. Too 
many have been placed in harm's way without the proper 
equipment. Their deployments have been repeatedly extended, and 
when they leave the service, their veterans' care has been 
underfunded. They certainly deserve better than that.
    This Committee has tried to provide better. I am especially 
proud of what we did last year in terms of increasing veterans' 
health care funding to match and even surpass the Independent 
Budget in virtually every area. That has now been adopted and 
has become the law of the land, and I am especially proud of 
this Committee that provided the leadership to accomplish that.
    With that, I want to call on my colleague Senator Allard. I 
want to indicate that Senator Gregg, who is the Ranking Member 
of this Committee, could not be with us this morning. That is a 
rarity. Senator Gregg is a faithful participant in the 
deliberations of this Committee. But he could not be with us 
this morning, and he is ably filled in for by Senator Allard of 
Colorado. Senator Allard.

              OPENING STATEMENT OF SENATOR ALLARD

    Senator Allard. Mr. Chairman, thank you for yielding, and I 
appreciate you making arrangements to hold this hearing today. 
We are going to have a tough schedule this morning with a bunch 
of votes scheduled, so I know that you are anxious to get 
going.
    The subject matter of this hearing is, arguably, the most 
important function Congress will discharge this year: paying 
for the resources by which the Department of Defense fulfills 
the mission to defend the American people. The Department's 
requested core budget to carry out this mission is $515 
billion. That is about 20 percent above the cold war average in 
real terms and more than $200 billion more than DOD received in 
the year 2000.

[GRAPHIC] [TIFF OMITTED] T2157.236


    Yet some have doubted DOD's ability, even under these 
trends, to modernize its force within budget. The coming 
generation of weapons systems will be very expensive. For 
example, the Future Combat Systems may have a total program 
cost of up to $200 billion, and that is only one of our many 
modernization initiatives the military is planning.
    At the same time, DOD's current weapons inventory is aging 
rapidly. One of the objectives of this hearing is to satisfy 
ourselves that DOD has a plan to reconcile its military 
requirements with the budgetary resources available.
    Beyond DOD's core budget, we must also consider the 
supplemental budget. This country has been engaged in the 
global war on terrorism for more than 6 years. It has been paid 
for by a budgetary mechanism that is not a part of the Defense 
Department's regular budget. Last year, DOD for the first time 
took steps to budget for the war in advance and submitted a 
detailed supplemental budget request along with its regular 
2008 request. This year, however, the DOD budget submission for 
2009 arrived with a $70 billion plug for the war on terrorism.

[GRAPHIC] [TIFF OMITTED] T2157.237


    There was no detailed justification, and the amount, $70 
billion, was far below what will realistically be spent in 
2009. The administration has offered varying rationales for 
this placeholder submission, and it is one of our goals today 
to obtain greater clarity on war funding.
    Since our last hearing, the war in Iraq has reached a 
critical juncture. Over the past year, a surge has brought 
positive results as our troops have done everything asked of 
them. Through their brave and dedicated efforts, U.S. 
casualties are down, Iraqi civilian casualties have declined, 
and many indicators of progress--such as economic activity and 
delivery of public services--have started to improve.
    I hope our witnesses can give us a more specific sense of 
the way forward in the war on terrorism as we continue to make 
progress in this particular war. I, too, would like to join the 
Chairman in welcoming Deputy Secretary England, General 
Cartwright, and Under Secretary Jonas.
    I just might add that we do have our soldiers that are 
stressed, we have equipment that is getting old, is starting to 
show its wear and tear, particularly in the harsh environment 
in which our global war on terrorism has to be carried out. And 
yet last year, the Congress did not fully fund the dollars that 
were needed for our men to do the job.
    So my hope is that we can show a stronger commitment to our 
men and women in the armed forces overseas and the tremendous 
job that they have and that Congress was willing to show in 
standing behind them last year.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Allard.
    Now we will turn to our witnesses. Let me just indicate our 
appreciation, the Committee's appreciation of the witnesses for 
changing the time of this hearing because we had originally 
intended our typical hour of 10 a.m. But because a series of 
votes has been scheduled for roughly 10:15, eight or nine 
votes, there would have been no way to get the hearing in. So I 
very much appreciate the witnesses' agreement to move the 
hearing up, and with that, we will turn to Secretary England. 
Again, we welcome your testimony.

STATEMENT OF GORDON ENGLAND, DEPUTY SECRETARY, U.S. DEPARTMENT 
  OF DEFENSE; ACCOMPANIED BY GENERAL JAMES CARTWRIGHT (USMC), 
   VICE CHAIRMAN, JOINT CHIEFS OF STAFF, U.S. DEPARTMENT OF 
      DEFENSE; AND TINA JONAS, UNDER SECRETARY OF DEFENSE 
           (COMPTROLLER), U.S. DEPARTMENT OF DEFENSE

    Mr. England. Chairman Conrad, Senator Allard, first of all, 
I thank you for your very kind words. And, Chairman Conrad, you 
are right. These are difficult and challenging times. By the 
way, we are just pleased to be here today. I enjoy coming to 
this hearing with you. I do appreciate the interchange, and I 
appreciate the opportunity to be here. So I thank you. It is, I 
think, helpful for us and hopefully helpful for the Committee 
when we appear before you.
    It is a pleasure to have really good friends and people I 
work with every single day, General Cartwright and the 
Comptroller, Tina Jonas. As you rightly observed earlier, you 
need to have people with you who are extraordinarily smart, and 
so I did follow that advice today and brought with me some 
extraordinary people to help in this.
    A comment about the war and our respective roles. One thing 
we do share between us, between the legislative and the 
executive and the DOD for us, is we do have a common objective, 
and that common objective is to defend our Nation and defend 
our people, which is the first imperative of Government to do 
that. And so the budget that is before you is designed to do 
that. It is designed to defend the Nation in these very 
difficult and challenging times.
    As you know, this is a complex security environment that we 
are in today, and perhaps more complex than we have had in the 
past, and it is distinguished by a variety of very prominent 
challenges. First, as we are all familiar with, there is 
terrorism, extremism, and jihadism. We have ethnic and tribal 
and sectarian conflict in various places in the world. We 
still, obviously, are concerned about the proliferation of 
weapons of mass destruction, failed and failing states, and 
eventually emerging powers whose intentions today are not 
totally clear, but we need to be prepared in case they move in 
the wrong directions.
    Each of these threats possess and pose unique challenges 
and demands on the Department of Defense. Our security, 
however, relies on a comprehensive approach and is 
distinguished by a balanced set of capabilities for the entire 
spectrum of these challenges. So even while we are committed in 
Iraq and Afghanistan, we do have to be concerned about the 
other security challenges to our Nation. So we look at this in 
a much broader context.
    The budget request, you are right, is $514 billion. It is a 
lot of money, but it does reflect the reality of the world we 
live in and, when appropriate, it will provide the necessary 
resources to execute the National Military Strategy.
    Now, it is a lot of money, there is no question. We 
understand that at the Department of Defense. I guess, 
fortunately, our Nation's economy has grown, so, frankly, from 
the total macro point of view, it is an affordable amount of 
money. It is about 4 percent of GDP. So while we have indeed 
increased the total amount of money, it is affordable in terms 
of providing the defense of our Nation and our citizens. And 
that, by the way, is much less--even though in absolute terms 
it is high, it is much less than we have had in other periods 
of conflict.
    The comment about our $70 billion, you are absolutely 
right, we only turned in this year $70 billion in our 
supplemental to cover the war costs into the next year. I will 
say that while that is a decision of OMB, nonetheless it partly 
reflected my own views on this matter, so I need to frankly 
tell you some of the rationale for that, because it will be 
larger--there is no question it will be larger than the $70 
billion. However, a couple of the confusing elements were: In 
our view, it would not have been--it would have, frankly, been 
dishonest to give you a number that we couldn't support. And 
since we do not know when General Petraeus comes in, in late 
March or early April, what he will say in terms of going 
forward or what decisions will be made at that time, we did not 
feel that we could ``guess ahead'' for that period of time.
    Also, as Senator Allard commented, in the 2008 budget, we 
have also only received $70 billion, and we know that is not 
the right number. And so that has been very disruptive, both, 
you know, the money being late, all the uncertainty in this 
budget time. So there are some very complicating issues in 
terms of trying to project our way ahead, and to do that with 
any degree of certainty.
    I would urge the Congress to, frankly, do two things for us 
this year: One, try to get the 2008 supplemental squared away 
because that is very difficult for us. Also, this fall, I mean, 
we go with what I call a ``planned disruption.'' To change 
administrations, whatever that administration is, there will be 
great disruption as we go across from this administration to 
the next administration. It will be extraordinarily difficult, 
in my judgment, to manage the Department and to maintain our 
security both for our people in combat and for our citizens if 
we are also at that time in a budget turmoil like we were last 
year.
    So I would urge the Congress--I think this coming year it 
is vitally important that we have some consistency in terms of 
our funding and predictability in that funding; otherwise, it 
will be hugely disruptive, I think, for everyone come this 
fall.
    Chairman Conrad. Might I just interrupt you at that point 
and indicate that this Committee last year not only acted on 
time, but gave the President everything he asked for in terms 
of defense operations, both with respect to the war and with 
respect to the underlying budget. And the problem developed in 
the appropriations process and the negotiations between 
Congress--that is at a higher pay grade than ours, and a higher 
pay grade, I might say, than yours.
    Mr. England. Thank you.
    [Laughter.]
    Chairman Conrad. I think we need to call on everyone with 
respect to that issue, and I am happy to have you complete your 
testimony, and then I want to address this question of what is 
in the budget, because that is the primary responsibility of 
this Committee.
    Mr. England. Absolutely. Thank you, sir.
    So my last comments are while there is some confusion in 
all this, I do want to say that our security requirements 
remain. I mean, we do have a significant security threat that 
we need to address at this time, and we have these magnificent 
men and women who come forward to protect and defend our 
Nation. And it, therefore, is incumbent on us, frankly, to 
provide them the funding they need. They are deployed today, 
and it is incumbent on our Nation to support our men and women 
in uniform.
    So, again, I appreciate the support of this Committee, and, 
Mr. Chairman, Mr. Allard, we do look forward to a discussion 
with you on these issues. Thank you very much.
    [The prepared statement of Mr. England follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.225
    

    [GRAPHIC] [TIFF OMITTED] T2157.226
    

    [GRAPHIC] [TIFF OMITTED] T2157.227
    

    [GRAPHIC] [TIFF OMITTED] T2157.228
    

    [GRAPHIC] [TIFF OMITTED] T2157.229
    

    [GRAPHIC] [TIFF OMITTED] T2157.230
    

    [GRAPHIC] [TIFF OMITTED] T2157.231
    

    [GRAPHIC] [TIFF OMITTED] T2157.232
    

    [GRAPHIC] [TIFF OMITTED] T2157.233
    

    [GRAPHIC] [TIFF OMITTED] T2157.234
    

    [GRAPHIC] [TIFF OMITTED] T2157.235
    

    Chairman Conrad. Thank you, Secretary England.
    Let me just go to the question that I started with and that 
you addressed directly in your testimony, and that is, what is 
included in the budget. Let me just say for the purposes of 
this Committee, transparency is critically important because we 
have to act--our intention is to be on the floor the second 
week of March. The work week of March 10th we intend to be on 
the floor with the budget resolution. Senator Gregg has 
completely agreed with that timing. That puts considerable 
pressure on this Committee to do the work of building a budget. 
Secretary England, you know what that work is like, and all of 
the witnesses here do.
    Let me just say this: Here is what is very troubling to us. 
In 2008, the President asked for $145 billion, and in that 
budget year, in 2009, he put in what we call a plug for 2009 of 
$50 billion. We considered that progress in the sense that he 
was beginning to tell us for the first time in the budget 
process what the war might cost. But I can say on a bipartisan 
basis on this Committee--I am at least speaking for Senator 
Gregg and myself--we are extremely disappointed with this 
year's budget telling us it is going to be $70 billion for 2009 
and there is nothing, a big goose egg, for 2010.
    Now, one thing we know for us, the right answer is not 
zero. Secretary, you said hard to guess ahead, but, you know, 
that is what budgeting is. Budgeting is trying to bring some 
predictability out of uncertainty. That is our obligation. That 
is this Committee's obligation to our colleagues. And that is 
your obligation to us, to try to give us your best estimate of 
what things are going to cost. And we know, I think with great 
certainty, $70 billion is not the right answer for 2009; zero 
is not the right answer for 2010.
    With that, Secretary England, can you tell us--Secretary 
Gates indicated the other day, as I understand it, that the 
cost is more likely to be in the range of $170 billion for 
2008. Can you give us your best estimate? Do you think 
Secretary Gates--after all, you report to him so I assume you 
are in pretty close harmony on this question--are we reading 
his statements correctly that the cost is likely to be $170 
billion?
    Mr. England. Mr. Chairman, I would not say it quite that 
strong. I do not believe the Secretary believes it is likely to 
be $170 billion. I believe, under some duress to come out with 
a number, he said, listen, if you just want me to state a 
number, I will state a number, but it is more a guess than it 
is an estimate. Because earlier this year, when we were looking 
ahead in 2009, we realized that there were going to be 
significant changes taking place this year, unknown changes 
this year. In addition, we also know that this budget--most of 
this budget will be basically spent by the next administration. 
So there are a lot of decisions that will be made this year 
into next year, because this is 2009. So this is really the 
next administration's budget in terms of the war. Plus changes 
will be made this year when General Petraeus comes back to 
Washington. So there will be more debate and discussion at that 
time.
    So the judgment was rather than just try to put numbers 
together and not understand the basis--because, on the other 
hand, the Congress asks us to support these numbers when we 
submit them to the Congress. We do provide you detailed 
justification for the numbers. So the decision was since we 
cannot provide you detailed justification, let us just delay 
providing you those numbers, and then we will provide you 
numbers with detailed justification when those decisions are 
made this spring. That was----
    Chairman Conrad. Mr. Secretary----
    Mr. England. That was the decision's rationale.
    Chairman Conrad. But, Mr. Secretary, isn't the truth of the 
matter that the expenditures are going to be much greater for 
2009 than $70 billion under any scenario?
    Mr. England. Mr. Chairman, you are right, but I will tell 
you at least my thinking was, on the other hand, I mean, we 
know that this year the expenditures are more than $70 billion, 
but the Congress only appropriated $70 billion.
    Chairman Conrad. No, I think the right number now is, with 
everything, $86 billion.
    Mr. England. It is 86----
    Chairman Conrad. Our number is----
    Mr. England. No, you are right. It was 70 plus the MRAP 
vehicles, which was, I think, 86-plus. You are right. So it is 
more than--but it was the fundamental 70, and then we added the 
MRAP. The Congress agreed to that because of the protection of 
our troops.
    So, I mean, we are sort of in the same position here. In 
2008, the Congress decided to appropriate 70--or 86, knowing 
that it was----
    Chairman Conrad. But we know--we know that--we are just 
into 2008 now. This is February. We all know that much more 
money is going to be provided. We know that with a certainty. 
And we know with a certainty that 2009 is not going to be $70 
billion. And so let me just say for the purposes of the 
Committee and the Congress, to be told by the administration it 
is going to be $70 billion and that 2010 is going to be zero, 
we know that is not so.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I sympathize with the Ranking Republican as well as the 
Chairman in that I am disappointed that we did not have a more 
precise figure that we could plug into the budget. And I think 
the Chairman has pretty well pursued that issue, so I will not, 
except I am just going to ask this question: Can you give us 
some idea of when there might be a supplemental request? 
Because, obviously, we are looking at a supplemental request. 
Maybe you cannot give us a specific date, but maybe are we 
looking at late spring, summer, this fall? Do you think we 
might be looking at two additional supplemental requests?
    Mr. England. Mr. Allard, I sort of hate to jump in for OMB 
here because, obviously, that is their responsibility. But I 
would say the Department, based on what I know about testimony 
and decisions, it would be late springtime. Yes, sir.
    Senator Allard. OK. And so I think Secretary of Defense 
Gates mentioned $100 billion in a public comment he made about 
a week ago, and that is on top of the $70 billion that we have 
now, so a total expenditure might, if I understand his 
comments, would be somewhere around $170 billion. Is that 
correct?
    Mr. England. Again, I am not sure it is likely, and I am 
not sure it is an estimate, because we have not accomplished 
the work to do that. But I would say based on past 
expenditures, that is probably, you know, a rational number to 
look forward to. But, again, we do not have any detailed 
estimates to support that, Mr. Allard.
    Senator Allard. So if this Committee was to look at 
plugging in a figure here, I do not think the Committee is 
going to accept $70 billion. But we want to plug in a figure. I 
may even have an amendment--I do not know what the Chairman 
thinks--if he does not. To try and realistically plug into our 
budget about what that would cost, $170 billion would not be 
out of line.
    Mr. England. I certainly would not disagree with the 
Secretary of Defense, so I would say that--if you are going to 
plug in a number, that is probably an appropriate number to 
plug in, sir.
    Senator Allard. OK. Thank you.
    I want to talk a little bit about the sustainability of our 
forces right now. As I mentioned in my opening comments, we 
have some real challenges, particularly when you look at the 
Selected Acquisition Report. It seems to be one of the best 
tools for future budget consequences of present and past 
decisions. And there has been a doubling of acquisition costs 
in only the last 4 years, and in previous history we have not 
seen that dramatic an increase. So I guess the question is: How 
are we going to sustain some of our developmental systems? It 
looks like we are facing some real challenges there such as the 
Future Combat System, the Joint Strike Fighter, and the DD-
1000, when they hit full production a few years from now.
    Mr. England. Mr. Allard, I do not believe that is--I mean, 
while that projection is put together, it is sort of a straight 
line to where we are today. And that is not what happens. I do 
not expect we will have those kind of funds in the future to 
double those kind of programs. So we will make modifications as 
we go. I mean, we are certainly not going to double the cost of 
those programs. I mean, even though the Congress has been 
extraordinarily generous these past several years, I do not see 
that we can double those budgets. So we will take other 
measures to control the budget. We either change some of the 
requirements or change the rates or, you know, we will take 
other actions to control that cost growth.
    So that is a projection of future costs, but we then manage 
our way, you know, into a more realistic dollar amount as we go 
forward. So my view is that it is not what we would expect in 
the future. We would rather manage our way to a more realistic 
number.
    Senator Allard. The Secretary of the Air Force is saying 
there is a $20 billion shortfall. The Secretary of the Navy has 
a goal of 313 ships. Are those overly optimistic, or are they 
reasonable requests, do you think?
    Mr. England. So, Mr. Allard, I expect in the 2010 budget we 
will look more carefully at those numbers to see exactly what 
the basis for those numbers are. The Navy ships, right now 
operational ships are, I believe, like 280-some ships. The 
Littoral Combat Ship, which the Navy was planning to build 55--
I think they still are, but they basically had a setback, a 
delay of some couple years on that program. So they do have a 
way forward to the 313. The way forward, however, in the out-
years does require more money than we presently have 
programmed. So that is an issue in terms of achieving the 313.
    The Air Force issue, they do have older airplanes, and, 
unfortunately, I mean, a lot of money was spent on a relatively 
small number of F-22s at a very high cost, and they do not 
begin to recover until the Joint Strike Fighter comes along, 
which is a more affordable, what we call fifth generation 
airplane.
    So these are valid concerns. I will say they are concerns 
we face every year in terms of trying to get all the demands 
fit within the budget. But we will look at that more as we do 
the 2010 budget and better understand their requirements.
    Senator Allard. Just one final question, if I may, Mr. 
Chairman.
    Are the services now feeling any adverse effects from the 
failure to provide the $102.5 billion in the supplemental 
request this last year?
    Mr. England. Tina, perhaps you can help me here. I do know 
they are having some effect because we are not placing all the 
orders we would normally place. But I expect that will become a 
much more significant problem here in a couple months. But what 
would like to have is continuity of production, continuity in 
our facilities in terms of depots, et cetera. And when we have 
uncertainty of funding, you are not allowed to commit funds in 
advance. You know, it is anti--deficient you are not allowed to 
do that. So this does cause a lot of disruption.
    If we look at a few programs here just recently, I know in 
just a couple months we are going to be at the point where we 
will be uneconomical in terms of some of our ongoing 
maintenance programs, and, Tina, perhaps you could elaborate.
    Ms. Jonas. Sure. Mr. Chairman and Mr. Allard, some of the 
concerns that we have regarding the 102 that has not been 
passed by the Congress yet include the resetting of the force. 
There was about $32.6 billion that is still required by the 
military, and I think there are concerns there, as the 
Secretary has just discussed, that it becomes problematic when 
they are trying to plan and look forward as to how to plan 
production, et cetera, and inventories. So we want to make sure 
that the next-to-deploy forces have what they need and the 
inventories that we have are there.
    Also in that piece of procurement is about $11 billion 
worth of force protection. We did get the full amount for the 
MRAPs, the 16.8 in the initial amount, but there are about 
300,000 sets of body armor, a portion of which are still 
required in the second set of requirements. So that is 
important to us as well.
    And one date that kind of looms with me is our Army 
military pay accounts will be exhausted in June, so that is one 
of the greater concerns I have about not receiving the funds in 
a more timely way.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Allard.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Mr. Chairman.
    In the written testimony that you have provided, you 
requested $41.6 billion to maintain high-quality health care 
benefits for 2.9 million military members and their families. I 
am interested in a particular piece of that. As you probably 
know, the American health care system lags terribly in the 
deployment of information technology. It is probably the worst 
industry in the country except the mining industry. And in that 
rather desolate landscape, the VA program is a relatively 
bright spot, and there have been difficulties between the 
Department of Defense medical programs and the VA medical 
programs in terms of each of them have set up various types of 
information technology support, but they did not organize it so 
that they could talk to each other. There is now a VA/DOD 
health information-sharing program going on. I consider that to 
be a matter of pretty significant priority, and I am wondering: 
Of the $41.6 billion, what in there goes toward reconciling and 
bringing together the VA and the DOD information systems under 
this sharing program? And what is the schedule for completing 
that task? And what do you need to get it done completely?
    Mr. England. Senator Whitehouse, first of all, I share your 
view. This is something vitally important to DOD and the VA. 
Last year, we put together a special group between myself and 
Gordon Mansfield, who is the Deputy at Veterans Affairs, a 
great American and a great friend. So we put together a group 
that met every week with all the senior leadership of both 
Departments. And we had, I believe, what we called ``eight 
lines of actions.'' One of those was specifically devoted to 
this issue of electronic data sharing between DOD, VA, and both 
directions, but to make sure we had all this data readily 
available in both our organizations.
    So I believe we are now on a path--we have made great 
progress. A lot of that data today can be transferred between 
DOD and VA. I mean, we have moved----
    Senator Whitehouse. Can be transferred or is accessible?
    Mr. England. No; can be transferred. We now----
    Senator Whitehouse. So not full accessibility but----
    Mr. England. Right. But we can now transfer medical 
records. We cannot transfer, say, high-resolution brain scans 
or something because that is much more difficult for us to do. 
But we can all the medical records, all the pharmaceuticals, 
and all that. So you can now receive a lot of that data. And I 
will need to get back with you in more specifics here, but I 
believe it is later this year that we will have a vast majority 
of this completed between DOD and VA. So I am not sure of the 
exact money that is in the budget, but I can tell you we are 
adequately funded to do this, and it is a priority of our two 
Departments.
    And so if you will allow me, what I would like to do is get 
back with you on the very specifics, and we will come meet in 
your office and give you a lay-down of exactly this entire 
program with the milestones.
    We do have people assigned. We have milestones. We have 
funding. We regularly look at this. So we will be happy to come 
and address this. And perhaps, General Cartwright, you may want 
to add your thoughts too, because I know you have been involved 
in this.
    General Cartwright. I just would add one piece to this, 
which is the long term. It is not easy, but we can go out and 
buy for one time a program, an application that would allow us 
to trade this information. So we have taken it a step further 
with the services and the interagency to set standards so that 
as one application becomes worn and we find a better way of 
doing this as we move to the future, we will be on the same 
standards so that we are not depending on one agency buying at 
the same time that the budget is available for a second agency. 
So we also have gone to that step so that as we move to the 
future, we are going to have data standards for exchange and 
transfer of information that will be longstanding and allow 
people to improve these applications as the opportunity 
presents itself.
    Senator Whitehouse. OK. Thank you. Mr. Deputy Secretary, I 
accept your invitation.
    Mr. England. Yes, Mr. Whitehouse, we will call your office 
very quickly. We have that data immediately available, so we 
will do this very quickly and get back to your office.
    Senator Whitehouse. OK. My time has expired. I thank the 
Chair.
    Chairman Conrad. I thank the Senator.
    Senator Domenici.
    Senator Domenici. Thank you very much, Mr. Chairman. I know 
you are going to have another difficult year, and I compliment 
you for your work and efforts that I hear about this year's 
ideas that you have.
    I want to ask the General a question based on some facts 
that I know. As you know, General, among the things that I am 
interested in, I am very involved in our future domestic 
nuclear power. We are now finding that the time between getting 
a permit from the Nuclear Regulatory Commission, which we used 
to hear stories about for many, many years--we think we have 
that all on the right path. But now we hear from the companies 
that plan to build these nuclear power plants--I will get to my 
point pretty soon. They get ready and their boards of 
directors, are passionately frightened because they do not know 
where they are going to get the manpower, the equipment, the 
technology, just, believe it or not, the 30,000 electricians 
and welders that are going to have to be out there when they 
build three nuclear power plants. You know, they are not--they 
do not exist in America anymore. Nobody wants to do that kind 
of work, and there is nobody trained for it. And $40 an hour is 
not enough to entice people to go be an electrician and go to 
vocational school.
    Now, that is not an exaggeration. It is really happening, 
such that we had one very powerful company drop off the list of 
builders of nuclear power plants. I do not know if you read 
about it, but one big company said, ``No dice.'' And the only 
reason was their board of directors could not be assured of 
manpower, of times of delivery, et cetera, for the things they 
needed to build this complicated $6.3 billion power plant.
    Now, I ask you--and I have never heard anybody ask somebody 
in your position this question. As we attempt to maintain our 
military forces, are we having any problems with the delivery 
of parts and delivery of equipment in a timely manner and at 
bid price because we do not have the manpower and the ability 
to manufacture that as equipment we once had?
    General Cartwright. Senator, are you speaking broader than 
the nuclear----
    Senator Domenici. Yes. I am asking about you and the 
military. We are here talking about procurement, and that means 
all kinds of procurement. I assume it means equipment from 
General Motors. It means specially built things from Boeing. 
Right?
    General Cartwright. Right.
    Senator Domenici. I am asking the general question: Do we 
have the capacity to build for this war or not?
    General Cartwright. The capacity is there. It is spread 
globally. It is challenged by restrictions that we have on 
trade, special materials, the assurance that the equipment, the 
workmanship, and the quality of the basic design is to the 
standards that for the military--and I will only speak to the 
military need--are necessary.
    We have worked around in several cases issues with metals, 
issues with offshore suppliers, and so the answer to you is, in 
this global economy we do not--we are challenged in the United 
States to provide all of the technical expertise, equipment, 
and supplies necessary for all of the systems that the 
Department of Defense runs.
    We have found work-arounds. In many cases we have had to 
train. A classic case is the MRAP where you will find the 
assembly work and you will find much of the manufacturing down 
in South Carolina, and one of the reasons is because we were 
able to take the welders that worked in the shipyards that used 
to be there, retrain them, bring them up to a level of skill so 
that they could contribute to the MRAP.
    At the same time, at that same factory, you can walk out on 
the front lot, and the way that they get the transmissions and 
the way that they get the axles is to tear down existing, 
already built, new trucks because that is cheaper than finding 
the labor to build those economically in the United States.
    Now, when that business case changes, that company will 
certainly change, but the company is going to find the best way 
they can to produce this. So we are filling in some of these 
voids in critical areas, but we do not have sufficient to fill 
in all of them for all of our materials.
    Senator Domenici. Well, General, I am fully aware also that 
if we think the cold war has ended totally, we are big fools 
because Russia is back in the business across the board, 
especially when it comes to nuclear activity and to 
intercontinental ballistic missile work and the re-
establishment of their great laboratories of old. And I just 
want to keep myself and the generals that I talk to publicly, I 
want to keep this on the front burner, that the United States 
of America has big problems--it is not just the problems of 
this war in Iraq. The confrontations that exist between us and 
Russia are real today, and their production of things of war 
are very powerful as of now. And we have to do our share, and I 
am very fearful that this war we are in in Iraq is taking too 
much of our energy and time, and we just have to hope that that 
war will not have these budgets for 15 or 20 years, like some 
think, because I am quite afraid we will not have enough left 
over to develop the military that we need for other threats.
    I do not know what you think about that, but I know you 
have a lot of intelligence and you understand. Does this ever 
bother you, sir?
    General Cartwright. It is one of the things that would keep 
me up at night. As the Chairman spoke to, the broad range of 
our threats out there today is what really challenges the 
military. We have to be ready to go against those threats that 
existed in the cold war, as ready as well as the 
counterinsurgency threats that we face today, and as we look to 
the future, issues like the cyber challenges that we are going 
to face in the future, and the intellectual capital in this 
Nation to provide us the soldiers, sailors, airmen, and marines 
that will be able to work across this broad range of threats. 
It is going to be challenging for the individual. It is going 
to be challenging for us as a Nation to grow those people. And 
it is going to be challenging for this Nation to compete in 
that world. And if we do not pay mind to that, we will be 
challenged.
    Senator Domenici. Am I finished, Chairman?
    Mr. England. Could I make one comment, Mr. Domenici, if I 
could, though, on this? An issue that I think is important, 
because Mr. Allard and Mr. Conrad both commented earlier. We 
tend not to buy things at economic order of quantities, and we 
tend to buy them on a yearly basis. We have some programs that 
are multi-year. I think the industry view would be to maintain 
a base of workers and expertise. The very best thing we could 
do is long-term commitments at reasonable rates of production.
    So we are always in this position, frankly, of low rates 
and not having long-term, predictable production. And if we 
could get to that point somehow--I do not know if that is 
achievable, but I believe that becomes the critical flaw in the 
system.
    Senator Domenici. Sure it is. Right now we are talking at 
very high levels about doing 2-year budgets and 2-year 
appropriations. At least that is one jump away from where we 
are now. And that is a very serious issue. This Chairman has 
not decided where he is, but this old Chairman has decided 
where I am, and apparently within the next few days, there will 
be an effort to get before the public the starting of a 
momentum to change our process so we have everything 2 years, 
2-year budgeting, and you do all your work on 2 year cycles. 
That would be helpful.
    Mr. England. Yes, it would.
    Senator Domenici. You would like four, but, obviously, I 
have pushed to give you two, and we know why.
    Mr. England. But that would be a step in the right 
direction. Predictability for industry is very important for 
the investment both in assets and people.
    Senator Domenici. Thank you very much, Mr. Chairman.
    Chairman Conrad. Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman.
    Thank you very much for being with us this morning on an 
issue of enormous consequence.
    Mr. England. Good morning.
    Senator Sanders. Mr. Chairman, I am going to take this 
discussion, if I might, in a slightly different direction. You 
will recall, gentlemen, Mr. Chairman, and other Senators, that 
in 1960 a very great Republican President, Dwight David 
Eisenhower, warned us about the power of the military-
industrial complex. And he also told us at that point, a 
Republican President, that every dollar spent on the military 
in many ways is a dollar not spent on our children, not spent 
on the most vulnerable people in our society--which makes it 
terribly important with this budget, as well as every other 
budget, that we scrutinize it carefully.
    And, Mr. Chairman and members of the panel, I would remind 
you that this budget calls for a very significant increase in 
military spending, $515 billion; plus $15 billion, as I 
understand it, for nuclear weapons, which are not included in 
this budget; plus the war in Iraq; plus the war in Afghanistan. 
The bottom line, it is a lot of money. It is a huge amount of 
money.
    Meanwhile, in this same budget, the President has said that 
we should cut back on Medicare and Medicaid. He wants to 
eliminate the weatherization program in this country, which 
means that people are going to spend a whole lot of money on 
fuel to keep warm. He wants to cut back on the low-income 
LIHEAP program. Oil prices are soaring. People in my State will 
go cold. LIHEAP does not have any money. He wants to cut back 
on that, cut back on programs for education, cut back on 
programs that impact tens of millions of people.
    So it is terribly important that we take a hard look at 
what you are doing because, let's be clear, the money that the 
President is proposing, increases, huge increases for you, are 
resulting in massive cutbacks for millions of American people.
    Now, I have some very simple questions that I want to ask 
you. All of us are aware that terrorism is a major, major 
problem. We are worried that al Qaeda is, in fact, growing 
around the world. I do not want anymore to get into the war in 
Iraq and whether that has stimulated the growth of al Qaeda, 
another issue for another time. And we all know that we have to 
spend money to fight international terrorism.
    But let me ask you this question: In a budget this massive, 
I am curious to know actually how much of it is really being 
focused on international terrorism? When you build nuclear 
submarines, by and large that is not really targeted against 
Osama bin Laden. I know you can make the case that all $600 
billion are focused on international terrorism, but it is not 
really.
    Now, we all know--and Senator Domenici raised this issue. 
We went through a cold war. We had an enemy. It was called the 
Soviet Union. Conventional enemy, very powerful, huge army, 
nuclear weapons, and we spent hundreds of billions of dollars 
fighting them.
    My concern is that within your budget, there are tens and 
tens and tens of billions of dollars fighting the old Soviet 
Union. And I am curious who the enemy is. We know it is al 
Qaeda, and we want to fight them. Is China the enemy? As 
Senator Domenici mentioned, is it Russia again? Who are we 
fighting above and beyond al Qaeda? Mr. Secretary?
    Mr. England. So I would say, Mr. Sanders, certainly you are 
right, all this money is not to go fight an adversary. That is 
part of our mission, but that is a mission hopefully that the 
Nation does not find itself fighting in. Our budget is to deter 
future aggression.
    Senator Sanders. Who are we deterring? Are we deterring 
China?
    Mr. England. So we deter whatever country may decide in the 
future, you know, that they find us in a weakened position.
    Senator Sanders. But let me be--we do not have a lot of 
time. I mean, we are not spending this money deterring Chile or 
Uruguay. Who are the countries we are deterring?
    Mr. England. I would say that I think it would be better if 
we had another discussion on this in a more classified area for 
you. But let me just say that we do spend funds to deter--I 
mean, we do track what other nations are doing. We see what 
they are doing in terms of their own development of armament. 
And so it is prudent--and, by the way, you are absolutely 
right. I believe this is something that should be debated. This 
is a national decision of how funds are spent. So the Nation 
historically has spent money to deter aggression----
    Senator Sanders. Right, but we need----
    Mr. England [continuing]. And to fight the Nation's wars.
    Senator Sanders. All right. Here is the point. If you come 
here and you tell us that our soldiers need armor in Iraq, 
everyone says that is right, we understand that, let's get them 
the armor. And we did. But your answer is a little bit vague, 
and I would love to go into it in a classified situation. But 
when you are asking for hundreds of billions of dollars above 
and beyond al Qaeda, I want to know who the enemy is. Is China 
the enemy?
    Mr. England. Well, we know that China has nuclear 
submarines. We know the Soviets have nuclear submarines. We 
know that they have, you know, significant arms and----
    Senator Sanders. We also know that China is buying up a 
significant part of America. We know that corporations like 
General Electric see their future in China. My question is: If 
you come in here and you say, look, we want to go classified, 
we are really worried about China, that has impact about our 
trade policies, impact about whether or not we think it is OK 
for Chinese companies to be buying up America, does it not?
    Mr. England. Senator, as all elements of national power 
come to bear for America's position in the world, one part of 
that is our military and DOD. So there are many elements of 
national power. It is economic, it is trade, it is military. 
And there is typically, I would say, in an administration and 
Congress a debate about the balance between all those in terms 
of deterring future aggression. Obviously, we always want 
everyone to be our friend and ally.
    Senator Sanders. Mr. Chairman, I think, frankly, we do not 
have enough of this discussion. This is a lot harder discussion 
than saying, look, I voted against the war, I do not think the 
war is a good idea. But you can make the case this is what you 
need for the war. We can understand that.
    But we are talking about hundreds of billions of dollars, 
and I would love to go in classified discussion with you to get 
more information. I look forward to doing that.
    I want to ask you one other question.
    Mr. England. Sure.
    Senator Sanders. We scrutinize waste and fraud all over 
this place. We do not do it enough in the Defense Department. I 
want to give you one example. The Air Force inventory system, 
the GAO--I do not know if you are familiar with it. A GAO 
report noted that $18.7 billion, or 65 percent, of the Air 
Force's secondary inventory was not needed to support required 
needs. And the truth is that the Air Force now has warehouses 
full of part supplies not needed. According to the latest data 
available, the Air Force has on order--on order--$235 million 
in inventory already identified as ready for disposal. In other 
words, it is coming in, it is going out. They do not need it.
    Now, when we have kids in this country who do not have any 
health insurance, clearly we can spend money a little bit more 
wisely. Now, can you comment on the Air Force's spare parts 
program and what we are going to do to deal with that?
    Mr. England. Senator, I have not seen the report so I 
cannot comment, but I will, now that you have brought it to my 
attention--having not seen it----
    Senator Sanders. CBS Television did a little segment on it.
    Mr. England. Can I just comment? We do, I believe, Tina, 
what, over 3,000 audits each year?
    Ms. Jonas. Yes, sir, the Defense Contract Audit Agency last 
year did 35,610 audits. They saved the taxpayers over $2.3 
billion.
    Mr. England. So, I mean, we do regularly have audits, and 
we look at this, and so this particular case I am not familiar 
with. But, Mr. Sanders, I mean, perhaps that is right. I just 
cannot comment.
    I can tell you that we do try to put systems in place to 
make sure that we do not have these kind of problems. Do they 
happen? Unfortunately, they do happen, but hopefully that is an 
exception, if that is a valid report. I just cannot comment.
    Senator Sanders. Well, two points. Mr. Secretary, I would 
like to take you up on meeting on that. And, second, the last 
question is: The number of auditors in the DOD----
    Chairman Conrad. Senator Sanders, we have to move on.
    Senator Sanders. OK. Thank you, Mr. Chairman.
    Chairman Conrad. We have just been advised that the first 
vote is going to start in 20 minutes.
    Senator Sanders. Thank you very much.
    Mr. England. Mr. Sanders, I will call you, though.
    Senator Sanders. Thank you.
    Chairman Conrad. Senator Wyden?
    Senator Wyden. Mr. Secretary, there are tens of thousands 
of brave men and women who have waited more than a year and a 
half for the Defense Finance and Accounting Service to approve 
the benefits that they earned when they were fighting for our 
country. Now, as of yesterday, the agency--the Defense Finance 
and Accounting Service--told us that they have over 39,000 
cases to be processed of what are known as the CRDP or the CRSC 
claims. These are also known, of course, as Concurrent 
Retirement and Disability Pay claims or Combat-Related Special 
Compensation claims. And I know of one veteran in my State who 
died waiting for his claim to be processed. And my fear is, 
looking at your budget, that that constituent of mine isn't the 
only such veteran to be out there languishing waiting for a 
claim to be paid. These are some of the most courageous 
Americans we have ever known, and thousands of new claims are 
coming in.
    So can you point specifically, to me and to the Committee, 
how under your budget you are going to turn this around and get 
at this huge backlog of claims?
    Mr. England. So, Tina, if you could address that, please?
    Ms. Jonas. Senator, you are absolutely correct. I was made 
aware of this problem recently, and I asked the Director of the 
Defense Finance and Accounting Service, Zack Gaddy, to triple 
the number of people on this effort. And he is doing so. You 
are absolutely right, the backlog needs to be cleaned out. And 
so I wanted--I told him that we would like to have that done by 
April, and I accept what you are saying, sir.
    Senator Wyden. That sounds constructive, and I want to make 
sure that we are clear for the record, because there are 
thousands of these claims. You have now indicated to the 
Committee that you are setting in place a plan so that the 
backlog of these claims will be cleaned up by April----
    Ms. Jonas. I have told them that I want the staff--the 
staff is supposed to be tripled, and that they need to get the 
claims, particularly the most--the oldest claims done by April. 
So they are on track to try to get that done.
    Senator Wyden. I like the first answer a little better than 
the second answer. Of the 39,000 claims in the backlog, how 
many are going to be addressed by April?
    Ms. Jonas. I will have to get him to give you the exact 
number, but what I have directed him to do is get it cleaned 
out. So, obviously, they will--in fact, we will be happy to 
have them give you a weekly update on that, if you would like.
    Senator Wyden. That would be constructive.
    Ms. Jonas. OK.
    Senator Wyden. And I appreciate the tripling of the people 
because that is the kind of commitment that is needed. And if 
you would update us a weekly basis, that would be helpful.
    Ms. Jonas. Absolutely, Senator.
    Senator Wyden. One last question, if I could, Mr. 
Secretary, about the F-15s, and I know other Senators are 
concerned about this as well. You know, we have them in Oregon. 
The Fighter Wing in Portland and the one in Klamath Falls both 
fly the F-15. They have been grounded for structural problems. 
The President has requested money to repair them. Regrettably, 
the F-15s are so old and stressed that they are going to 
encounter more problems soon.
    My question to you is: Does the Department have a plan for 
replacing the F-15 in the near future? And if yes, is the plan 
to go forward with the F-22? And my reason for linking these 
two is that together we have to come up with some way to get 
planes that are safe to fly. So if you put it in the context of 
both the relationship of the F-15 and the F-22, that is the 
purpose of my question.
    Mr. England. So, Senator, the F-15s, first of all, the Air 
Force, there is still an investigation on the F-15. A lot of 
them have returned to flight, there are still some that have 
not. I believe there are like 160--158 that have not yet 
returned to flight. And so there is still an investigation in 
terms of what they can do to those airplanes, if anything. So 
the first question is: Can we fix those airplanes? I believe is 
a long-term issue with the airplanes. So that investigation is 
going on, and they have, I think, NASA and everyone involved in 
a pretty comprehensive study, analysis of that problem.
    So first we will hear the answer to that analysis. 
Depending on that outcome, then we will decide what to do on F-
15s. But in answer to your question about the F-22, I do not 
believe the F-22s will be replacements for the F-15. The F-22 
is a much more expensive, higher-end airplane, fifth 
generation. So I would expect that instead we would try to 
accelerate the Joint Strike Fighter, which is more the class of 
the F-15, so that the Air Force would move into Joint Strike 
Fighter, not into the much more expensive F-22 airplanes. So 
that would be my judgment, but, again, I need to temper that 
without having the specific data on the F-15s themselves until 
all that study and work is completed.
    Senator Wyden. I hope you will--and my time has expired--
continue to make sure that you address the future of the F-15s 
as well. My constituents care a great deal about this. We feel 
that they have made an important contribution to the country's 
national security. And I am sure you will get questions from 
other Senators on this.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Wyden, and thank you 
for bringing up the F-15 issue, which has broad interest on the 
Committee on both sides.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, let me ask you, I have a difficulty 
understanding why the Department of Defense does not seem to be 
able to put in for budget purposes, now that we have 5-year 
experiential factor in Iraq, the resources necessary. You know, 
we have seen supplemental appropriations for this war have 
grown from $62.5 billion in fiscal year 2003 to $189.3 billion 
in 2008. Every year, we have had additional supplemental 
requests, and we have clearly some experiential factor here. 
And then we had the Director of OMB here who, under questioning 
that I had of him, said, yes, clearly we will need more than 
$70 billion, but we do not know the amount. And then we had 
Secretary Gates before the Armed Services Committee, and when 
Chairman Levin pressed him about give us some sense, he said 
$170 billion.
    Why is it so hard for the administration to give the 
taxpayers a straight answer as to about what this war is going 
to cost?
    Mr. England. Well, so if I could answer maybe two. First, 
what is in the budget as opposed to the supplemental, that is 
really a decision by OMB. But the $70 billion is really a 
decision by ourselves and OMB. And there, Senator, the decision 
was made that we would go with the $70 billion until we had a 
better understanding of the 2009 requirement so that we could 
provide a higher precision number. So rather than just sort of 
guesstimate the number going forward, in our judgment it was 
better that we turned in basically a bridge number, which is 
similar to what we had been doing in the past, and then provide 
a more definitive number to the Congress that we could justify. 
So, I mean, that----
    Senator Menendez. But, Mr. Secretary, you know--you know--
that $70 billion is clearly not enough.
    Mr. England. Senator, you are absolutely right. I mean, you 
are absolutely----
    Senator Menendez. So why aren't we closer to the truth?
    Mr. England. Because we have two requirements. One is when 
we provide numbers to the Congress, we also provide detailed 
justification for those numbers. So we provide you great 
justification for the numbers, so our dilemma is if we cannot 
provide what we believe is accurate and complete justification, 
that gives us a dilemma. And since we know the situations will 
change or that it is highly likely things will change come 
March or April----
    Senator Menendez. Well, you know, I do not understand, Mr. 
Secretary, when in the Vietnam War, war funding for Vietnam was 
in the regular budget from 1967 on. What has changed so 
dramatically that the Department of Defense could do it then 
and cannot do it now?
    Mr. England. Again, Senator, that part is not our decision 
as to how it is handled. That is an OMB decision.
    Senator Menendez. Mr. Secretary, yesterday the New York 
Times reported on a Rand study from the summer of 2004. The 
report, called ``Rebuilding Iraq,'' was part of a seven-volume 
series on lessons learned from the war. It was very critical of 
the White House and the Department of Defense. The study found 
problems with ``nearly every organization that had a role in 
planning the war.'' And it seems that this report has upset 
senior Army officials, and they have refused to allow the 
publication of the unclassified report.
    When can we expect the Army to permit the publication of 
the unclassified sections of this report?
    Mr. England. Senator, that is the first I heard about the 
report yesterday. I read the same article. I have not had an 
opportunity to talk to the Army about this. We will do so, and 
we will get back with you on that, sir. I am just not familiar 
with the report.
    Senator Menendez. Well, I hope you get back to the 
Committee. You know, here is the problem. When I sit here, at 
least for myself--I cannot speak for my colleagues--I view my 
role as the fiduciary to the American taxpayers, and that means 
you have to have a judgment when you are being asked for more 
money for an engagement in which there are official reports 
that say that it is replete with errors, that cost maybe lives, 
but certainly cost the taxpayers money. And how does one make a 
judgment about whether the requests coming forward, which 
obviously are less than what, in fact, are necessary in the 
first place, clearly--clearly, Secretary Gates, OMB Director, 
clearly the experiential factor. And, second, how do you know 
that--how can the American people or those who have to act as 
fiduciaries on their behalf have an honest sense that your 
request is being used appropriately? I want to see the 
unclassified sections of that report published.
    Mr. England. So, first of all, I know nothing about the 
report. I do not know if that report is a valid report or not. 
I just know there is a report that was put out.
    On the other hand, we do provide to the Congress, Senator--
--
    Senator Menendez. A valid report? This is a report that I 
understand was commissioned. That is why you are holding it. 
What do you mean it is an unvalid--this wasn't from some 
organization doing it on its own, they would have published it. 
This is a report that the Department actually authorized. What 
does it mean, an unvalid report?
    Mr. England. So I will pass no judgment on the report. I do 
not know the quality of the report. And when we look at the 
report, we will provide feedback to you, sir.
    Senator Menendez. This is why, with a track record such as 
this, this is why the American people have little faith in 
asking for billions more when you cannot tell us the right 
amount, when you come in with supplementals every year that far 
exceed it, even though you have 5 years' experience, when in 
Vietnam we could have it as part of the regular budget since 
1967, and then when you keep reports, you know, secret when 
they should be clearly made public in terms of unclassified 
because they are critical, this is why you face the 
consequences of a reluctant Congress to give resources when we 
cannot make the judgments that in the first place the resources 
are being used appropriately.
    Mr. Chairman, I urge you as the Chair of this Committee to 
join us in trying to make sure that the elements of this report 
that are unclassified become public, because we need to know 
what went wrong so we can decide, when we are being asked to 
make budget decisions here, whether we are making the right or 
wrong ones.
    Thank you, Mr. Chairman.
    Mr. England. I do need to comment, though, Senator, in 
terms of your fiduciary responsibility. We do provide monthly 
Global War on Terrorism (GWOT) expenditure reports to the 
Government Accountability Office. Every month they come into 
the Congress, and they are here in detail. We provide summary 
reports quarterly to the Congress. We provide our coalition 
expenditures quarterly to the Congress. So we do provide----
    Senator Menendez. Mr. Secretary, those are after the fact--
--
    Mr. England [continuing]. Exceptionally detailed data to 
you.
    Senator Menendez. We are going to be marking up a budget in 
March. You know, those are after the fact. We need, after 5 
years--we are going to into the sixth year of this. There is no 
reason why we cannot have greater accountability. There is no 
reason that we cannot have this report public so that we know 
what went wrong. There is no reason that, in fact, you know, 
even the reports you refer to, the GAO has a report that says 
DOD needs to take action to encourage fiscal discipline and 
optimize the use of tools intended to improve the global war on 
terror cost reporting. So these are not just my views. These 
are the views of people who have independently looked at it.
    Thank you, Mr. Chairman.
    Mr. England. One last comment, if I can, because of the GAO 
report, and it is germane, I think, to this Committee. In 2001, 
when we came in office, there were 119 internal control 
deficiencies in terms of our financial systems. We now have 
that down to 19, and they will be completely taken care of by 
the end of this year. So I believe the reporting has improved 
considerably during this administration, and hopefully we will 
have all of our internal controls that we inherited, frankly, 
down to zero or very close to that by the end of this year.
    So we are making progress, Senator, in terms of our 
reporting and our confidence in terms of the expenditures and 
the rationale for those expenditures.
    Thank you.
    Chairman Conrad. I thank the Senator.
    I want to go, in the moments we have left here, into 
something that is critically important for this Committee, and 
members on both sides have asked me to pursue these questions.
    Last year, the press reported that the classified 
Chairman's Risk Assessment, which describes the risk that our 
military will not be able to win another war, showed 
significant risk. The Commission on the National Guard and 
Reserve found that the current Army plans for equipment will 
``not restore readiness and attain the goal of fully manning 
training and equipping its units until 2019.''
    In 2006, Lieutenant General Blum noted that readiness 
levels for non-deployed National Guard forces had plummeted 
because those units only had 26 percent of their authorized 
equipment.
    I know, as you do, that the detailed reports are 
classified, so in an open hearing, I will only say what defense 
officials have said publicly: that the trends for the Army and 
Marines over the last few years raised serious concerns. 
Congressman Skelton said last month that readiness was 
declining at an alarming rate. That is of very serious concern 
to this Committee, as you can imagine.
    Last year, there was press reporting suggesting that the 
Chairman of the Joint Chiefs raised his assessment of the level 
of risk that we face in executing the National Military 
Strategy. My understanding is that Congress has not yet 
received the Chairman's Risk Assessment for this year, although 
it is supposed to be transmitted along with the budget.
    My first question is: Secretary England, do you know why 
the Chairman's Risk Assessment has not been forwarded with the 
budget, as has been the long-term practice?
    Mr. England. No, I do not know why it has not been. I know 
we were looking at--we are required to turn in a risk 
assessment and also the mitigation approaches by the Department 
to mitigate that risk identified by the Chairman. So I know we 
have had a number of discussions and meetings on this subject, 
Mr. Conrad. So perhaps that is still being put together. I am 
not exactly sure of the schedule or why it was not exactly on 
that date. But I do know that we have a mitigation measure to 
go along with the Chairman's Risk Assessment, and I will just 
have to get you a date when we will submit that.
    Chairman Conrad. Can I just say that that is critically 
important to the work of this Committee.
    Mr. England. OK.
    Chairman Conrad. We need to know, and I am sure you 
appreciate that it is absolutely critical to the work of this 
Committee. And I have announced we are going to mark up in this 
Committee on the week of March 3rd. We are going to be on the 
floor the week of March 10th. We need that as soon as we can 
get it.
    General Cartwright, can you enlighten us with respect to 
this matter?
    General Cartwright. We are working our way through the 
final phases--we call it ``chops''--of the Mitigation Plan. The 
risk assessment is done. It has been--and this is the response 
to it. It has come to my level. I approved it yesterday. We 
should have it ready and to the Secretary within the next 48 
hours.
    Chairman Conrad. Can I just emphasize the need to get that 
up here as rapidly as possible? Because it is really 
irresponsible of this Committee to go forward with a budget 
mark without having the latest risk assessment by the Chairman 
and to understand the mitigation measures that are necessary to 
address whatever that risk assessment might be. And I 
understand that is classified. I have only talked here in open 
session about things that have been publicly reported. And I do 
not want to go beyond that.
    I do want to indicate the serious concern of the members of 
this Committee with respect to readiness issues. And we have 
seen that. All of us have National Guard and Reserve in our 
States. All of us hear frequently from those who command those 
forces and their growing concern reflected in the statement of 
General Blum for whom we have high regard.
    Mr. England. Mr. Chairman, I do have to say on the National 
Guard and Reserve, I believe the National Guard and Reserve at 
the national level is about 79 percent, I believe, the last I 
saw--and maybe somebody can correct me here--in terms of their 
``fill rates.'' And that is well above historical averages for 
the National Guard, and it is also against new standards. That 
is, we have increased the amount of----
    Chairman Conrad. But that does not go to the question of 
readiness, I think you will agree. I mean, that is one 
component, but that does not go to the larger question of the 
Chairman's Risk Assessment. And that is what is not before us, 
typically has been. At the time the budget comes up, we get the 
Chairman's Risk Assessment. For whatever reason, we have not 
received that.
    Mr. England. No, we will definitely get that to you. I 
mean, there is no question we will get that. I was just 
addressing on more of this National Guard and Reserve issue 
about the fill rates. The fill rates of the National Guard and 
Reserve I believe are at an all-time high now, and not only at 
an all-time high, but----
    Chairman Conrad. But there is also a question of 
recruiting, and, of course, this is a larger issue, because we 
know that to meet those recruiting rates, they have issued a 
series of waivers in terms of kinds of people they are able to 
recruit. So that takes us down a whole other line of a question 
of what is the quality that we are able to attract, what else 
has to be done.
    Let me just indicate that the first vote has now commenced, 
and I would be happy to give you, Secretary England, any final 
statement. Secretary England.
    Mr. England. Look, there are some issues we need to discuss 
and probably more so as followup to this meeting. First, Mr. 
Conrad, any questions you have, we would be pleased to respond 
to those questions by any member of the Committee. Obviously, 
if you will get them to us, we will. I do think some of these 
topics need to be addressed in more detail, and perhaps we will 
have an opportunity to do that.
    In the meantime, I do thank you again for the opportunity 
to be here with you and to express some of the views of the 
Department and to hear the views of the Committee. And I thank 
you for those views. We do respect your input, and we do 
appreciate it, and I do thank you on behalf of the Secretary.
    Chairman Conrad. We thank you, Secretary England, General 
Cartwright, Tina Jonas. Thank you very much for being here. As 
always, we look forward to working with you. And, again, if you 
can get us those items that we have mentioned here today, the 
highest priority is obviously the Chairman's Risk Assessment 
and mitigation measures that are necessary.
    Mr. England. We will do that, Mr. Chairman. Thank you very 
much.
    Chairman Conrad. We will adjourn the Committee--oh, excuse 
me. Senator Nelson has come. We will give him a chance to ask 
questions.
    Senator Nelson. And it will be quick. There is-#I21Mr. 
England. Hello, Senator.
    Senator Nelson. Good morning.
    Mr. England. Good morning. My favorite Marine right there.
    [Laughter.]
    Senator Nelson. There is a Reuters story that a Russian 
bear bomber has buzzed one of our aircraft carriers. Can you 
tell us what is going on.
    General Cartwright. Russian aviation, long-range aviation, 
has started to ramp up the number of sorties and the routes 
that they fly similar to the activity that they did during the 
cold war. One of those flights in the recent days came down the 
coast of northeastern Russia, Japan, to a carrier battle group 
that was doing training in the waters adjacent to Japan. They 
flew over the carrier. They were detected really more than 500 
miles out, escorted, as is the normal procedure in 
international waters, to an overflight of the battle group, and 
then to a subsequent turn, then back home.
    These are the standard practices from our standpoint of 
intercept, escort, follow them through, and then follow them 
until they are out of range of the battle group's normal 
operations, both for safety of flight in the area and for the 
potential protection that would be afforded by having an escort 
along.
    We treat that as something that is unusual from the 
standpoint there has been a significant lapse in time since 
that last occurred, but not significant in that the practice 
was done safely, professionally, and they were escorted out of 
the area.
    Senator Nelson. The Russian bomber flew over our aircraft 
carrier?
    General Cartwright. It flew over the battle group, several 
of the ships in the group.
    Senator Nelson. At what altitude?
    General Cartwright. I understand that it came in at low 
altitude, but still within the normal air structure.
    Senator Nelson. Is low altitude like 2,000 feet?
    General Cartwright. Low altitude in this case is below 
2,000--below 3,000 feet. But what we observed was nothing 
different and nothing unprofessional. Now what we are concerned 
about is what are the indications of this return to a cold war 
mind-set, what are the implications of that activity, and how 
do we best address that. It is free and international airspace, 
and we are just trying to now go back and look what message was 
intended by this overflight.
    Senator Nelson. Well, that sounds pretty provocative to me, 
Mr. Chairman, that they would be flying over one of our 
aircraft carrier battle groups, and specifically if it were the 
aircraft carrier itself. We will followup on this in the Armed 
Services Committee.
    Senator Domenici. Mr. Chairman?
    Chairman Conrad. Senator Domenici.
    Senator Domenici. I told you privately after my questions, 
and I want to say publicly that it is incumbent upon any 
Senators that are in the business we are in that they ask to 
see the current CIA report on Russia's rebuilding of its armed 
forces, in particular the science involved. It is rather 
incredible what is happening. As you know, there are making 
billions of dollars, and the billions of dollars are going just 
as they did before: first, to build their military, and then to 
the citizens. And they are pretty modern in terms of what they 
are building compared to what we have thought over the last 
decade, and nobody ought to be fooled. They are not built just 
to be parked up there in the icelands. They are also drilling 
oil in the icelands up there, exactly like we are not. Where we 
think we cannot go, they are up in their icelands drilling 
great, great new oil production.
    Chairman Conrad. Let me just say to the Senator that will 
have to be the last word because we have been notified we have 
7 minutes until this vote.
    I thank the witnesses.
    Mr. England. Thank you very much, Senator.
    Chairman Conrad. The hearing is adjourned.
    [Whereupon, at 10:25 a.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.386
    

    [GRAPHIC] [TIFF OMITTED] T2157.387
    

    [GRAPHIC] [TIFF OMITTED] T2157.388
    

    [GRAPHIC] [TIFF OMITTED] T2157.389
    

    [GRAPHIC] [TIFF OMITTED] T2157.390
    

    [GRAPHIC] [TIFF OMITTED] T2157.391
    

    [GRAPHIC] [TIFF OMITTED] T2157.392
    

    [GRAPHIC] [TIFF OMITTED] T2157.415
    

    [GRAPHIC] [TIFF OMITTED] T2157.416
    

    [GRAPHIC] [TIFF OMITTED] T2157.393
    

    [GRAPHIC] [TIFF OMITTED] T2157.394
    

    [GRAPHIC] [TIFF OMITTED] T2157.395
    

    [GRAPHIC] [TIFF OMITTED] T2157.396
    

    [GRAPHIC] [TIFF OMITTED] T2157.397
    

    [GRAPHIC] [TIFF OMITTED] T2157.398
    

    [GRAPHIC] [TIFF OMITTED] T2157.399
    

    [GRAPHIC] [TIFF OMITTED] T2157.400
    

    [GRAPHIC] [TIFF OMITTED] T2157.401
    

    [GRAPHIC] [TIFF OMITTED] T2157.402
    

    [GRAPHIC] [TIFF OMITTED] T2157.403
    

    [GRAPHIC] [TIFF OMITTED] T2157.404
    

    [GRAPHIC] [TIFF OMITTED] T2157.405
    

    [GRAPHIC] [TIFF OMITTED] T2157.406
    

    [GRAPHIC] [TIFF OMITTED] T2157.407
    

    [GRAPHIC] [TIFF OMITTED] T2157.408
    

    [GRAPHIC] [TIFF OMITTED] T2157.409
    

    [GRAPHIC] [TIFF OMITTED] T2157.410
    



  HEALTH CARE AND THE BUDGET: INFORMATION TECHNOLOGY AND HEALTH CARE 
                                 REFORM

                              ----------                              


                      THURSDAY, FEBRUARY 14, 2008

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:03 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Wyden, Nelson, Stabenow, 
Whitehouse, Gregg, and Grassley.
    Staff present: Mary Naylor, Majority Staff Director; and 
Denzel McGuire, Staff Director for the Minority.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. I want to bring the Committee to order and 
thank our witnesses. We have had a little traffic incident/
accident on one of the bridges, apparently, but all of our 
witnesses are now here. We want to welcome them all.
    Valerie Melvin, the Director of Human Capital and 
Management Information Systems at the GAO, good to see you. 
Thank you for being here.
    Laura Adams, the President and CEO of the Rhode Island 
Quality Institute, we are glad that you are here as well, 
undeterred by the traffic conditions in the Washington Metro 
area.
    And Mary Grealy, the President of the Healthcare Leadership 
Council. Thank you all for being here. What a distinguished 
group of witnesses we have.
    We want to thank, as well, members of this Committee who 
have been so active on this issue. I particularly want to thank 
Senator Whitehouse for his leadership. He has been a foremost 
advocate for health care information technology and we 
appreciate his really tireless efforts to address this issue. 
Thank you, Senator Whitehouse.
    I also want to acknowledge the work of Senator Stabenow and 
her pushing of information technology in health care and what 
it can do to both reduce costs and improve outcomes.
    We also should salute Senator Enzi on the other side, who 
is the Ranking Member of the HELP Committee and who has been 
actively engaged on this.
    And I would be remiss if I did not thank our Ranking 
Member, Senator Gregg, who has helped push through legislation 
that if we can get it passed would really form a foundation of 
the information that is required to make dramatic improvements 
in health care. We really want to salute his leadership role. 
It has been very important and we thank him for it.
    Let me just run through a couple of items to put this in 
perspective, or at least as I see it. Our health care system is 
simply not as efficient as we would all like it to be. We are 
spending far more on health expenditures as a percentage of 
gross domestic product than any other country in the OECD, and 
we spend more and more on health care as a percent of GDP each 
year. It is really quite startling that we are at 16 percent of 
our gross domestic product.

[GRAPHIC] [TIFF OMITTED] T2157.331


    That means that one in every seven dollars in this economy 
is going for health care.
    Despite this additional health care spending, health care 
outcomes in the United States are no better than health care 
outcomes in the other OECD countries. And OECD stands for the 
Organization for Economic Cooperation and Development. The OECD 
is really the international scorekeeper on these issues.
    Despite this fact, the number of uninsured continues to 
grow. In fact, the number of uninsured increased by over 2 
million in 2006 to now reach of 47 million people.

[GRAPHIC] [TIFF OMITTED] T2157.332


    It turns out, however, that demographics are not the 
biggest issue driving our long-term budget outlook. Rising 
health care costs will have a far bigger impact, as the head of 
the GAO has testified before this Committee. This is not just 
an issue of Federal health spending, its impact on the Federal 
budget. We can see it in the private sector as well.
    If we continue on the current trajectory, private sector 
will be overwhelmed by rising health care costs. In fact, if we 
look if we look at total health care spending if we stay on 
this trend line--I want to emphasize that, if we stay on this 
trend line--it will grow from 16 percent of gross domestic 
product, which is already high, to more than 37 percent by 
2050.

[GRAPHIC] [TIFF OMITTED] T2157.333


    Clearly, we must make changes. That would be one in every 
three dollars in this economy. No one is more acutely aware of 
that than the Ranking Member.
    Here is what the CBO Director told this Committee earlier 
this year. ``I think it's a mistake to look at containing costs 
just within the Federal programs themselves, Medicare and 
Medicaid. The underlying driver of that cost growth, of the 
costs in those programs, is the underlying rate of cost growth 
in the health care sector as a whole. And tackling that problem 
is the fundamental fiscal challenge and an important economic 
challenge facing the Nation.''

[GRAPHIC] [TIFF OMITTED] T2157.334


    There are a number of health care reforms that have 
potential to provide savings and improve health care outcomes. 
I think we should also acknowledge, if we are going to be 
honest with ourselves, that some of these reforms will have up 
front costs. We do not know yet how much they will ultimately 
save. But if we are going to address rising health care costs, 
we need to get started on some of these reforms.
    Here are several of the options with potential for long-
term savings.

[GRAPHIC] [TIFF OMITTED] T2157.335


    One, expanding effectiveness research. Two, better 
coordinating care for the chronically ill. Three, changing 
provider incentives and beneficiary cos-sharing to encourage 
use of best practices. Four, promoting healthy lifestyles and 
preventive care. And finally, the widespread adoption of health 
care information technology.
    I am going to stop there and turn to my ranking member for 
his opening observations and then we will go right to the 
witnesses.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. Thank you for 
holding this hearing and I thank the witnesses. This is a very 
important issue from a budget issue but, more importantly, from 
a standpoint of where this country is going.
    We know that health care is an extremely complex interwoven 
and overlaid matrix, that there is no one single answer to 
maintaining or producing a health care system that is 
affordable and delivers quality health care to all Americans. 
But we do know that one element of this matrix, and a fairly 
significant one, is how you communicate what is happening in 
the system and how you communicate within the system so that 
information is transparent and outcomes are known and costs are 
known, and we can use that information in order to effectively, 
hopefully, be better providers and purchasers of health care.
    The Chairman was kind enough to refer to a bill which I 
have sponsored with Senator Clinton called the MQEA bill, which 
is the Medicare Quality Enhancement Act, the purpose of which 
is to make information more readily available that already 
exists, basically Medicare data and creates secure entities 
where people can request information along with the ability to 
combine it with existing data in private sector and then use it 
as purchasers, either as insurers, business people who have a 
large number of employees, or the general public. The idea is 
to make this taxpayer paid for information more transparent 
relative to outcomes and costs.
    We also have the excellent work being done by Dartmouth 
Atlas Project in this area, the Dartmouth Atlas, which 
basically is the gold standard for assessing what is happening 
in outcomes and quality across the country. It is a work in 
programs due to the complex nature of this issue, but their 
initial findings are really rather important and can have a big 
impact on where we go here.
    So I am looking forward from hearing from this panel 
because it is a continuation of the discussion of what I 
consider to be one of the essential issues in how we do start 
to get a handle on health care, which is the question of how we 
handle health care information and how we make it more readily 
available to consumers.
    Chairman Conrad. Thank you, Senator. Now we are going to 
turn to our witnesses and we will start with Dr. Melvin. 
Welcome, good to have you, representing the GAO.

  STATEMENT OF VALERIE C. MELVIN, DIRECTOR, HUMAN CAPITAL AND 
MANAGEMENT INFORMATION SYSTEMS ISSUES, UNITED STATES GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Ms. Melvin. Thank you, Mr. Chairman, Ranking Member Gregg, 
and members of the Committee.
    I am pleased to be here today to comment on Federal efforts 
to advance the use of information technology for health care 
delivery. The use of information technology has great potential 
to help improve the quality of health care and the performance 
of the U.S. health care system. Its benefits offer promise for 
making patients' health information more readily available to 
health care providers and for reducing medical errors and 
streamlining administrative functions, all of which can help 
improve quality of care and patient safety and reduce 
administrative costs.
    In 2004, President Bush issued an Executive Order that call 
for widespread adoption of interoperable electronic health 
records by 2014. He then established a National Coordinator for 
Health IT within the Department of Health and Human Services to 
lead and foster public and private coordination of this 
initiative.
    Since 2005, we have been reporting on the efforts of HHS 
and the National Coordinator's Office to develop and implement 
a national health IT strategy. Today, at your request, my 
testimony summarizes their efforts to complete key health IT-
related activities based largely on our prior work.
    Overall, HHS and the National Coordinator's office have 
been pursuing various initiatives in support of nationwide 
health IT. Among other actions, the Secretary formed the 
American Health Information Community in 2005 to help define 
the future direction of a national strategy and to advise the 
Department on developing interoperable health information 
exchange capabilities.
    In this regard, initiatives have been undertaken in several 
areas, including advancing the certification and implementation 
of outpatient and inpatient electronic health records, 
identifying interoperability standards to be implemented in 
Federal health care programs, beginning trial implementations 
of a nationwide health information network to demonstrate real-
time information exchange, and addressing health information, 
privacy, and security.
    However, even though HHS has been pursing these important 
initiatives in an attempt to expand the nationwide 
implementation of health information technology, it has been 
doing so without a national strategy that integrates the 
outcomes of the various initiatives to help ensure that the 
President's goal is met. Given the many activities to be 
coordinated in an effort of this magnitude, such a national 
strategy is essential.
    Thus, in May 2005, we recommended that HHS develop a 
strategy that includes the detailed plans, milestones, and 
performance measures needed to ensure that its goals are met 
and we reiterated this recommendation again in March and 
September 2006.
    To his credit, the National Coordinator for Health IT has 
acknowledged that more detailed plans are needed to guide the 
various initiatives. And according to HHS's Fiscal Year 2009 
performance plan, the Office has prepared a draft plan which it 
intends to release in the second quarter of 2008.
    Overall, the National Coordinator's stated intent to act on 
such an approach is promising. However, Mr. Chairman, until HHS 
actually delivers an integrated national strategy, progress in 
pursuit of the President's goal for widespread adoption of 
interoperable electronic health records will be uncertain and 
the Department will be challenged to ensure that the outcomes 
of its various health IT initiatives will be successful.
    This concludes my prepared statement. I would be pleased to 
respond to any questions that you may have.
    [The prepared statement of Ms. Melvin follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.248
    

    [GRAPHIC] [TIFF OMITTED] T2157.249
    

    [GRAPHIC] [TIFF OMITTED] T2157.250
    

    [GRAPHIC] [TIFF OMITTED] T2157.251
    

    [GRAPHIC] [TIFF OMITTED] T2157.252
    

    [GRAPHIC] [TIFF OMITTED] T2157.253
    

    [GRAPHIC] [TIFF OMITTED] T2157.254
    

    [GRAPHIC] [TIFF OMITTED] T2157.255
    

    [GRAPHIC] [TIFF OMITTED] T2157.256
    

    [GRAPHIC] [TIFF OMITTED] T2157.257
    

    [GRAPHIC] [TIFF OMITTED] T2157.258
    

    [GRAPHIC] [TIFF OMITTED] T2157.259
    

    [GRAPHIC] [TIFF OMITTED] T2157.260
    

    [GRAPHIC] [TIFF OMITTED] T2157.261
    

    [GRAPHIC] [TIFF OMITTED] T2157.262
    

    [GRAPHIC] [TIFF OMITTED] T2157.263
    

    Chairman Conrad. Thank you very much.
    Now we will turn to Ms. Adams, Laura Adams, the President 
and CEO of the Rhode Island Quality Institute, who is here on 
the recommendation of our own Senator Whitehouse. Welcome.

   STATEMENT OF LAURA ADAMS, PRESIDENT AND CEO, RHODE ISLAND 
                       QUALITY INSTITUTE

    Ms. Adams. Thank you. Chairman Conrad and members of the 
Committee, thank you so much for this opportunity to appear 
before you today to testify on this issue of great importance 
to health care in our country.
    My name is Laura Adams and I am the President and CEO of 
the Rhode Island Quality Institute, an organization founded 6 
years ago by then Rhode Island Attorney General, now U.S. 
Senator, Sheldon Whitehouse. This multi-stakeholder 
organization comprised of hospitals, physicians, nurses, 
consumers, insurers, Government and employers has the singular 
mission of significantly improving quality, safety and value of 
health care in Rhode Island.
    We are not-for-profit. We are beholden to no one but the 
people of the State of Rhode Island and to the Nation insofar 
as we develop models of innovation worth replicating.
    My remarks today will reflect the perspective of our broad-
based coalition working together to transform the health care 
system in the State.
    The Quality Institute serves as Rhode Island's Regional 
Health Information Organization and we strongly believe in the 
value of health IT as an essential element in literally any 
viable proposal for the problems that plague our health care 
system. It is our goal to bring the delivery of health care out 
of the paper-based system which we recognize as a root cause of 
significant waste and harm.
    But we are under no illusions. We fully recognize that 
health IT alone adds little to no value and if developed in 
isolation from other critical reforms is likely to be--to 
borrow a phrase from Don Berwick--the next festival of waste. 
We have a clear understanding that health IT undergirds 
virtually every major health care reform initiative being 
advanced today.
    Whatever you support in terms of health care reforms, 
whether it's primary care's medical home model, emphasizing 
patient-centered primary care and prevention, consumer-driven 
health care, quality improvement and reduction of medical 
errors, pay for performance, population health and disease 
management, access for all, fraud and abuse detection, 
transparency and public reporting on quality and costs, none of 
these can succeed without a constant flow of reliable and 
timely clinical and administrative information, the kind that 
is only produced electronically.
    Therefore, it would be a mistake to regard health IT as 
merely one good idea in a sea of good ideas for reform. Those 
that are pioneering efforts to promote adoption and full use of 
health IT deserve our attention and strong support as a Nation. 
So much is riding on the failure orR success of these grass 
roots initiatives.
    I applaud the efforts of HHS, the Office of the National 
Coordinator on Health Information Technology, and especially 
the Agency for Healthcare Research and Quality, which has been 
particularly effective in grasping what is needed to prioritize 
and fund critically important initiatives in the field. 
However, our collective approach to funding and supporting 
these initiatives almost guarantees failure.
    To illuminate the point, let us assume for a moment that 
our goal is to make toast. One idea advanced by bread producing 
vendors is to put bread in the toaster. Yet a credible 
scientific studies suggests that toast-making benefits from 
efforts to push the lever down to lower bread into the toaster. 
Another prominent industry group insists that plugging the 
toaster in is the key and everyone should work on getting 
electricity to the toaster.
    Fund the testing of each of these ideas separately and we 
will conclude that there is simply no way to make toast or that 
reliable toast-making is still decades away. It is only when we 
combine all three of these in the same setting that we realize 
the potential.
    Achieving the significant and sustained improvement we need 
in health care requires the testing of multiple concepts in the 
field simultaneously. We believe that health IT adoption, work 
on quality improvement and prevention, and reforming the toxic 
payment system must be tested in aggregate in what is an 
essential, yet virtually non-existent, research and development 
role for health care.
    Efforts to test these concepts in real-world settings in 
which they must prove their worth are crippled by the necessity 
for local collaborators to cobble together funding and support, 
almost always with huge gaps for key elements necessary for 
informing the Nation of what truly works and what does not. As 
a result, we are learning at an achingly slow pace as a Nation.
    We have some initiatives focused on implementing health IT, 
others advancing improvement projects, and a brave few testing 
the new payment structures, each struggling independently 
against the gale force winds of status quo. Yet after literally 
years and years of toil, we have come nowhere near what the 
architects of these initiatives have envisioned. We are testing 
these as isolated concepts and, not surprisingly, we are having 
difficulty making toast.
    Rhode Island is no exception, even as some consider us as a 
candidate for most likely to succeed. For 6 years, we have had 
the CEO level leadership of every major health care stakeholder 
required to remake this system at the table and actively 
participating. We were the birthplace of SureScripts electronic 
prescribing system and currently ranked No. 2 nationally behind 
Massachusetts in e-prescribing. We are implementing a State-
wide health information exchange with the help of a $5 million 
AHRQ contract which ignited our State's progress unlike 
anything else.
    We have spawned unprecedented in the work of EMR adoption, 
an initiative co-led by our State government and our QIO. The 
Rhode Island organization is testing a medical home model that 
includes payment reform.
    Our Governor championed the work that led to the Wellness 
Councils of America naming Rhode Island as the first well State 
in the Nation, as measured by the percentage of the work force 
employed in award-winning well workplaces.
    We have every single ICU in every single hospital in the 
State participating in an improvement collaborative that has 
lowered deadly and costly central line infections by 47 percent 
in 18 months.
    Our insurers, most notably BlueCross and BlueShield of 
Rhode Island, have stepped up, and so have our doctors, 
hospitals, and pharmacies, our consumer advocacy groups, our 
State government and, most certainly our Congressional 
delegation, all of whom are working nonstop to advance our 
work.
    So yes, we are progressing but at a far slower pace than 
the crisis warrants. All of our initiatives are funded on a 
shoestring and depend heavily on the in-kind contributions of 
local participants and we are wearing them out. The funding 
sources are fragmented, each with their own set of deliverables 
and timelines which, while well-intentioned, can draw focus and 
energy away from critical business at hand.
    We are respectfully urging Congress to place more trust and 
higher levels of aggregated resources in our organizations like 
the Rhode Island Quality Institute and a number of similar 
organizations across the Nation, many of whom would challenge 
us for the designation of most likely to succeed. We would like 
you to join us in our model of shared responsibility and 
contribution and then hold us accountable for the results, just 
as our other stakeholders do. We will deliver.
    It is not a question of whether we can afford to spend the 
money to do this. We are already spending the money. The 
question is what we will buy with it. Unless we act, the money 
will be spent on more duplicate tests, avoidable 
hospitalizations, and the care required to mop up after the 
physical and emotional damage caused by medical errors and the 
consequences of uncoordinated care when we could be rapidly 
advancing toward a way out.
    On behalf of my colleagues in Rhode Island and across the 
Nation, I would like to thank you for devoting your time and 
attention to exploring the value of health IT and its role in 
reform. We stand ready as an energized, committed, and capable 
partners in maximizing its worth for all of our citizens.
    Thank you.
    [The prepared statement of Ms. Adams follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.245
    

    [GRAPHIC] [TIFF OMITTED] T2157.246
    

    [GRAPHIC] [TIFF OMITTED] T2157.247
    

    Chairman Conrad. Thank you.
    And now, Ms. Grealy, the President of the Healthcare 
Leadership Council. Welcome. Good to have you here as well.

  STATEMENT OF MARY GREALY, PRESIDENT, HEALTHCARE LEADERSHIP 
                            COUNCIL

    Ms. Grealy. Good morning, Chairman Conrad, Senator Gregg, 
members of the Committee. I want to thank you very much for 
this opportunity to testify on a subject that is so critical to 
the future of American health care.
    For the members of the Healthcare Leadership Council, the 
issues being discussed today are neither abstract nor 
theoretical. The hospitals, health plans, pharmaceutical 
companies, medical device manufacturers, health product 
distributors, retail pharmacies and the other sectors that make 
up the HLC membership are among the early adopters of health 
information technology. They are witnessing firsthand what 
health information technology can mean for patients and for the 
effectiveness of our health care system as a whole.
    The experiences of these companies and organizations form 
the impetus for the three points I would like to make this 
morning, points that are discussed in much greater detail in my 
full written statement.
    First, the closer we get to nationwide information 
connectivity between health care providers, the more we will 
improve both the quality and the efficiency of patient care. We 
are not saying that health information technology in and of 
itself is health care reform. What we are saying is that you 
cannot have optimal health care reform without the expansion of 
health information technology.
    The benefits of an interoperable information network, of 
having an electronic health record for every patient, are 
almost too numerous to mention. We know we can significantly 
reduce the medication errors that cost the health care system 
$76 billion each year. We can have a dramatic impact on the 
overutilization and misutilization of health care services. We 
can improve the ability of health care professionals to make 
informed decisions by placing critical data at their fingertips 
in real time.
    We can also make it possible for physicians to have ready 
access to the most current practice guidelines and achieve the 
full promise of evidence-based medicine while eliminating 
things like geographic disparities in care.
    We can take bold steps forward in making the concept of 
personalized health care through the use of genomic information 
a true reality.
    Mr. Chairman, the future is exciting and it is already 
happening, as exemplified by the specific HIT achievements of 
Healthcare Leadership Council member organizations detailed in 
my written statement.
    But that leads me to my second point, having to do with the 
obstacles standing between our status quo and this achievable 
future. Today, according to a RAND study, at best 25 percent of 
hospitals and 20 percent of physician offices in this country 
have transitioned from paper to electronic medical records. The 
primary reason for the slow evolution is not a mystery. At a 
time when health provider budgets feel the pressure from 
uncompensated care, disaster preparedness, staffing shortages, 
medical liability costs, and other factors, many hospitals--
particularly smaller community and rural hospitals--do not have 
the capital to make HIT infrastructure investments.
    We are not calling on Congress or the administration to 
write a blank check to overcome this obstacle, particularly in 
these challenging fiscal times. But we know that there are 
creative options that should be discussed such as revolving 
low-interest loan funds, matching grants, reimbursement 
incentives that are based on improved patient outcomes, and 
exceptions to the physician self-referral and anti-kickback 
rules that are preventing some hospitals from sharing their HIT 
investment with physicians.
    The fact is that the benefits of HIT should be available to 
every American patient and health care consumer. And that 
requires that every health care provider have the ability to be 
part of a nationwide information network.
    My final point, Mr. Chairman, goes to the issue of 
standards for such a network. Developing a multistate 
interoperable system depends on national technical standards, 
as well as national uniform standards for confidentiality and 
security. We have some work to do in this regard.
    With the existing HIPAA privacy rules, they do provide 
effective patient privacy protections but they currently stand 
alongside volumes of sometimes conflicting State laws, rules 
and guidelines. This is problematic as we try to ensure that a 
patient's health records can follow them wherever they go in 
our increasingly mobile society. We believe that Congressional 
action to establish a uniform privacy standard is vital in 
order to achieve this national health information network.
    Mr. Chairman, members of the Committee, over the last 2 
years, Congress has taken some very important steps and moved 
in a welcome bipartisan manner to achieve progress on this 
important issue of health information technology adoption. We 
believe that this momentum must continue if we are to realize 
health information technology's full potential in improving 
health care quality, lowering costs, and generating greater 
value and efficiency.
    Again, thank you for this opportunity and I will be pleased 
to answer any questions.
    [The prepared statement of Ms. Grealy follows:]

    [GRAPHIC] [TIFF OMITTED] T2157.264
    

    [GRAPHIC] [TIFF OMITTED] T2157.265
    

    [GRAPHIC] [TIFF OMITTED] T2157.266
    

    [GRAPHIC] [TIFF OMITTED] T2157.267
    

    [GRAPHIC] [TIFF OMITTED] T2157.268
    

    [GRAPHIC] [TIFF OMITTED] T2157.269
    

    [GRAPHIC] [TIFF OMITTED] T2157.270
    

    [GRAPHIC] [TIFF OMITTED] T2157.271
    

    [GRAPHIC] [TIFF OMITTED] T2157.272
    

    [GRAPHIC] [TIFF OMITTED] T2157.273
    

    [GRAPHIC] [TIFF OMITTED] T2157.274
    

    [GRAPHIC] [TIFF OMITTED] T2157.275
    

    [GRAPHIC] [TIFF OMITTED] T2157.276
    

    [GRAPHIC] [TIFF OMITTED] T2157.277
    

    [GRAPHIC] [TIFF OMITTED] T2157.278
    

    [GRAPHIC] [TIFF OMITTED] T2157.279
    

    [GRAPHIC] [TIFF OMITTED] T2157.280
    

    [GRAPHIC] [TIFF OMITTED] T2157.281
    

    [GRAPHIC] [TIFF OMITTED] T2157.282
    

    [GRAPHIC] [TIFF OMITTED] T2157.283
    

    [GRAPHIC] [TIFF OMITTED] T2157.284
    

    [GRAPHIC] [TIFF OMITTED] T2157.285
    

    [GRAPHIC] [TIFF OMITTED] T2157.286
    

    [GRAPHIC] [TIFF OMITTED] T2157.287
    

    [GRAPHIC] [TIFF OMITTED] T2157.288
    

    [GRAPHIC] [TIFF OMITTED] T2157.289
    

    [GRAPHIC] [TIFF OMITTED] T2157.290
    

    [GRAPHIC] [TIFF OMITTED] T2157.291
    

    [GRAPHIC] [TIFF OMITTED] T2157.292
    

    [GRAPHIC] [TIFF OMITTED] T2157.293
    

    [GRAPHIC] [TIFF OMITTED] T2157.294
    

    [GRAPHIC] [TIFF OMITTED] T2157.295
    

    [GRAPHIC] [TIFF OMITTED] T2157.296
    

    [GRAPHIC] [TIFF OMITTED] T2157.297
    

    [GRAPHIC] [TIFF OMITTED] T2157.298
    

    [GRAPHIC] [TIFF OMITTED] T2157.299
    

    [GRAPHIC] [TIFF OMITTED] T2157.300
    

    [GRAPHIC] [TIFF OMITTED] T2157.301
    

    [GRAPHIC] [TIFF OMITTED] T2157.302
    

    [GRAPHIC] [TIFF OMITTED] T2157.303
    

    [GRAPHIC] [TIFF OMITTED] T2157.304
    

    [GRAPHIC] [TIFF OMITTED] T2157.305
    

    [GRAPHIC] [TIFF OMITTED] T2157.306
    

    [GRAPHIC] [TIFF OMITTED] T2157.307
    

    [GRAPHIC] [TIFF OMITTED] T2157.308
    

    [GRAPHIC] [TIFF OMITTED] T2157.309
    

    [GRAPHIC] [TIFF OMITTED] T2157.310
    

    [GRAPHIC] [TIFF OMITTED] T2157.311
    

    Chairman Conrad. I thank all of the witnesses.
    I am going to defer today to Senator Whitehouse. And then 
on the second round I will defer to Senator Stabenow, as well, 
because they have really led the effort on this Committee. And 
so, in fairness, I would ask them to do the first rounds of 
questioning.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Mr. Chairman.
    And first let me welcome Laura Adams to the Senate Budget 
Committee. I think my colleagues can see from her testimony why 
it is that the Rhode Island Quality Institute has been such an 
extraordinarily successful experiment. And I want to 
particularly thank the Chairman for allowing us to go forward 
with this hearing.
    The Chairman is an extraordinary dedicated and articulate 
proponent of the need for addressing our health care problems 
before they get out of hand. He has described them as a tsunami 
of costs washing down on our country. I think that today's 
hearing helps illustrate that there are really two ways we can 
address this problem. We can wait until the tsunami is really 
on the shore and then we can apply fiscal adjustments to the 
problem, which are tax hikes and benefit cuts. And we are going 
to have one of the bloodiest and most ugly fights that this 
institution has ever seen when that day comes.
    Or we can get ahead of it and work on system reforms. But 
they do not enjoy the benefit of immediacy that a fiscal 
adjustment has. You really have to build an awful lot of 
infrastructure before they take hold. It could be really a 
decade until the full value of something we started today began 
to be realized, which means that the time really is now to 
start on this.
    I would like to ask Laura to comment on two things. We have 
been at this now for so long together, we kind of channel each 
other. So it is going to be a little redundant.
    But the observation that we share, I think, is that one of 
the big handicaps of getting through to system reform is the 
siloization of the present health care system and the tendency 
for participants in the system to try to defect to their own 
economic interests within that silo which do not coincide with 
the interests of the health care system as a whole.
    And so the trick, in many respects, is simply to find a 
forum where people can step out of their silo roles and move 
into a reform role, a leadership role, and start to think about 
ways to improve the health care system.
    Part of what the Rhode Island Quality Institute has done is 
simply to be that forum where all those CEOs can come together 
and have that plan. So I would like to ask Laura to comment, 
first of all on the forum function that she has experienced 
with the Rhode Island Quality Institute.
    And then also describe a little bit the resources that she 
has had to work with over 6 years. I would make the proposition 
that the Rhode Island Quality Institute and other agencies like 
it around the country are the R&D function for this critical 
problem that we have. And yet, they are essentially non-
resourced.
    So with respect to the forum and with respect to the 
resources, tell us what your experience is with the forum 
question and what you have been able to find to work with from 
an infrastructure point of view.
    Ms. Adams. When Senator Whitehouse convened the 
organization in 2001, I think that one of the most effective 
things he did was to convince this group that they are 
responsible for the performance of the health care system in 
that State. I mean, if not them, who else? When you look at 
every major leader from every major sector sitting around that 
table, we knew that if we did not like the performance of that 
health care system--and we did not--who did we expect to come 
and change it?
    Now one of the elements of magic of the Quality Institute 
is that everybody's behavior is public. So when you start 
laying out these issues publicly with each other and we start 
talking about and calling on others to take action, to change 
the system, it is very hard to decide to act in your own 
interests when you have the community watching you. All of our 
board meetings are open. Our committee meetings are open. 
Anyone can attend the Institute neetings. If you want to see 
who has contributed to the Institute, you check the website. 
Every dime we have ever gotten from anybody is listed on that 
website. We do not sign anybody contracts. We do not make laws. 
We do not direct business one way or the other.
    The only force we have is trust and a vision of the future 
that is far greater if we work collectively than the future we 
face if we work alone.
    So there has been tremendous power in having people's 
behavior public. It certainly causes people to act in the best 
interests of the community.
    The second thing is that we have had, I think, two non-
unanimous votes in the 7-years because we work hard to work 
through the issues. We do not force anybody to vote a certain 
way but we work on it until the issue is resolved and we can 
all live with the path that we are proposing.
    As far as the resource goes, yes, I am the President and 
CEO. But for the first five or 6 years of organization I was 
the only employee. And it was a little disappointing because 
obviously I could say--go get me a cup of coffee. Yes, ma'am--
it was a little unsatisfying. But we have a VP right after that 
and so I am happy to say that under my leadership the Institute 
doubled in size.
    We now have an assistant, so we have tripled in size in the 
last 18 months. I am very proud of that.
    But the initial thought about the organization was that 
what we did not want to create yet another organization in the 
middle of all of the silos. So we did not to build it out, 
staff it, and then have somebody say oh, the safety thing? Yes, 
that is going to be taken care of by group over there. What we 
wanted to say is we have a safety problem collectively in Rhode 
Island. What are we going to do about it?
    So what that has resulted in is probably about $5.5 million 
in local contributions to support these efforts that we are 
putting together. And I can tell you there is probably another 
$2.5 million in in-kind contributions coming from people. So a 
large number has skin in the game.
    But still the resources leave us wanting. We have so much 
yet to accomplish. We are unable to take on the payment reform 
that we need to address. We are unable to expand our health 
information exchange in the way we want to until we come up 
with further resources.
    Senator Whitehouse. About $2 million a year has been your 
average resource, and a lot of that is dedicated by the funding 
source to specific task?
    Ms. Adams. Exactly. We have had $1.7 million dedicated to 
our ICU effort. That returned, by the way, about $5.5 million 
on that $1.7 million. So the return on investment here is 
significant, as far as we are concerned. And that one is very 
well-established in terms of the data we have on that. We have 
been working with Johns Hopkins as our clinical lead on that 
for the first 2 years of that project and so those data, are 
incontrovertible.
    Ms. Adams. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you.
    Senator Gregg.
    Senator Gregg. Thank you. A lot of intriguing issues raised 
here.
    We are now, as a Senate, we have a health technology bill 
that has been passed by the HELP Committee under the leadership 
of Senator Kennedy and Senator Enzi, in which portions of the 
Medicare Quality Enhancement Act, which I mentioned earlier, 
are involved.
    I was wondering, Director Melvin, have you looked at that 
bill?
    Ms. Melvin. We have not looked specifically at that bill. 
We have tried to peruse some of the legislation that is out 
there to get a sense of where areas of emphasis have been 
placed.
    Senator Gregg. This bill is about to pass, hopefully. I 
understand there are holds left on it and we are trying to 
clear them. But essentially this bill will hopefully create a 
capacity of the Federal Government to begin to fund 
interoperability in the area of technology.
    The problem, as I see it, is that we all say we want 
interoperability but it is really a huge issue to get it. I 
know, I had a hospital in New Hampshire which was not a very 
big hospital--big by New Hampshire standards but not big by 
national standards. And they came to me and asked if I could 
earmark a grant so that they could get their hospital to be 
interoperable. I mean, basically their radiology department 
could not talk to the emergency room. The emergency room could 
not talk to pediatrics. Pediatrics could not talk to maternity.
    And just getting within the hospital interoperability was a 
huge issue.
    So I am interested, Ms. Adams, because I am impressed with 
the initiative you have started in Rhode Island and New 
Hampshire does not have such an initiative--I think it is a 
great initiative. How successful are you in just doing the 
local hospital interoperability efforts? Or is that not the 
focus of your effort? Is your focus more on quality?
    Ms. Adams. No, the focus of our effort is making sure that 
this entire State is connected because that undergirds any 
quality effort we are going to be successful at doing.
    Senator Gregg. And is it possible to do that? I mean I do 
not honestly know if it is possible for Southern New Hampshire 
to be able to communicate with Catholic Medical Center in 
Manchester. I just do not know. Is that possible in Rhode 
Island? Do you have Warwick communicating with Providence?
    Ms. Adams. What we are doing right now is establishing a 
state-wide health information exchange based on the best 
current standards that we have. I have to say that up to this 
point--I would say the last 18 months to 2 years--vendors have 
not been focused on standards. There was more a value in 
keeping your system proprietary and unable to communicate with 
anyone else. Then if you added on to the lab, you needed to buy 
their system. If you added on to the ED, you want to talk to 
it, you buy their system.
    Now we understand that any vendor that pursues that avenue 
is going to be out of business shortly because we all recognize 
now the destructive force that that has been in trying to 
communicate with each other.
    So in Rhode Island, we are fortunate to have one of our 
largest IDNs, integrated delivery networks, Lifespan, has 
achieved almost full interoperability between all of their 
entities.
    There is a discussion of a merger with them and Care New 
England, which would cause about 70 percent of our health care 
system to be merged and connected. Now we have the Westerly 
Hospital that received an earmark to get the very thing going 
that you are talking about, some interoperability and 
additions.
    But we also see that as something that falls under that 
health information exchange financial nut that we have to find 
the money for it.
    In Rhode Island, we are looking at a model of whoever 
benefits pays. So we do know that if you look at the pie 
diagram of who benefits from health information exchange and 
the value that comes from that, nobody's piece of the pie is 
any bigger than 27 percent and that is the problem.
    Senator Gregg. Actually, the IT bill which is hung up right 
now, that is the focus of it. We are basically going to say 
Federal funds only go to interoperable systems.
    And you are right what happens is that people want to 
predict their proprietary interests so there is an actual 
disincentive to be interoperable or has been historically.
    Ms. Adams. Not anymore.
    Senator Gregg. I guess my second question is are you also 
going to the issue of quality amongst hospitals? In other 
words, if there is a hospital in Rhode Island that does an 
appendectomy at half the cost of another hospital, are you 
looking at whether that appendectomy--the outcomes are as good 
and the difference in cost is disclosed?
    Ms. Adams. This is one of the things that we see as, once 
again, the high leverage value of something like a regional 
health information organization. When the State needs that kind 
of money to begin to pair cost and quality, there is no sense 
in creating yet another data base besides the exchange. You can 
leverage that exchange to do it.
    In Rhode Island, we will look to have the introduction of a 
patient safety organization bill this year in the legislature 
which will create an opportunity for us to share information.
    We had two suicides in hospitals in Rhode Island this year. 
The second suicide followed exactly the same pattern as the 
first suicide. Yet that first hospital had put good procedures 
in place to stop it. We did not have a mechanism for 
communicating it to our second hospital.
    Senator Gregg. So your patient safety bill is not going to 
limit information as some patient safety bills have. It is 
actually going to attempt to expand the availability and yet 
protect the patients?
    Ms. Adams. Yes. We introduced our privacy bill on Tuesday 
of this week. That privacy bill we put together with people 
like the Domestic Violence Coalition, ACLU, and others that we 
knew would hold our feet to the fire until they blistered on 
the issues of privacy and security. And we are very proud of 
that bill. It extends the protections far beyond HIPAA and we 
expect that bill pass.
    Senator Gregg. Sometimes that becomes a bigger problem than 
a plus.
    Ms. Adams. We very carefully looked at the architecture and 
spent 18 months figuring out how we can do this Rhode Island. 
At the same time, consumers have to trust this system or they 
simply will not opt-in. And if they do not opt-in, we have 
nothing. We have done a good job, we think, of developing a 
system that will allow us to operate the system at a price we 
can afford and still protect their privacy.
    Senator Gregg. Does anybody else on the panel have a 
thought on this issue of disclosure of quality in different 
provider groups? And how we make that quality more visible, 
transparent, and therefore more available to purchasers, 
quality and cost?
    Ms. Grealy. Senator Gregg, I think that really is one of 
the goals, information sharing and how we can improve the 
quality and safety of the care that is being provided. So we 
know that we have CMS driving toward value-based purchasing. We 
have private plans that are driving toward value-based 
purchasing.
    Senator Gregg. But you need specific information on the 
actual on the ground delivery. You have to know if hospital A 
or provider group A is delivering a service that has a quality 
issue or it does not have a quality issue but is less expensive 
than somebody else who is the same quality or maybe less. You 
have to know the specifics; right?
    Ms. Grealy. Right, I think that is----
    Senator Gregg. You have to have that available.
    Ms. Grealy. I think that is why this is such an important 
tool in making that information available in a way that you can 
do this comparative analysis, which I think is your point. How 
do we compare providers? We have guidelines. We have a whole 
host of organizations that are developing what are the 
appropriate practice guidelines, what is the best use of 
evidence-based medicine. And then I think the next step is how 
do we do this comparative analysis so that payers for health 
care as well as consumers of health care have that information 
available to them so that they can make that choice.
    Senator Gregg. And how do we do that?
    Ms. Grealy. I think by implementing health information 
technology. I think what you are hearing from this panel is 
that this is a tool that is so important in so many ways in 
terms of improving quality and safety but also in increasing 
the efficiency of health care. And so we need the funding to 
get these systems in place.
    We have organizations that are currently doing it. I think 
what you are hearing Rhode Island, light-years ahead of many 
other providers and systems. But we are seeing this throughout 
the country but they are still in their silos.
    And I have been impressed with my members like the Mayo 
Clinic, the Cleveland Clinic. When you talk to them, what do 
they want out of the system? We are doing it. They have made 
the investment. What they would like to see is how can we help 
smaller community hospitals? How can we help small group 
practices of physicians? How can we help rural providers do 
what we are doing?
    They made the investment, they did not expect to see a 
return on their investment, and they have been very pleasantly 
surprised that they actually have seen cost savings as a result 
of doing this. They now want to make sure that others can 
access the system so that we can share this information 
nationwide.
    And I think really achieve the goal that Senator Whitehouse 
was mentioning. If we do not do system reform to get control 
over making the system more efficient, then I think the only 
alternative we have is imposing across-the-board cuts, price 
controls, things that will not work.
    Senator Gregg. Have you looked at the IT bill?
    Ms. Grealy. Yes, and we are very supportive of that 
legislation and have worked very hard with Senators Kennedy and 
Enzi to try and get that legislation passed.
    Senator Gregg. Thank you.
    Chairman Conrad. Thank you, Senator. I am going to defer 
again to Senator Stabenow because she has played such a lead 
role on this Committee on this subject. We will turn to Senator 
Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman, very much for 
this important hearing. This has been a passion of mine. I 
think one of the very first conversations Senator Whitehouse 
and I had in his coming to the Senate was on this topic? And so 
it has been wonderful to work with you and to see the energy 
that you bring to this.
    I would say to my friend, Senator Gregg, that the answer is 
yes, in terms of being able to demonstrate quality and 
comparisons and so on, using health IT because we are actually 
doing that in Michigan.
    Mr. Chairman, we may even want at some point to have 
another hearing that relates more to the specifics on the 
quality pieces of sort of what has been demonstrated. There is 
something called the Keystone Initiative that was started by 
the Michigan Hospital Association, that has received national 
attention. Senator Whitehouse and I have also talked about that 
extensively, but where they are focused on certain benchmarks 
of quality, eliminating infections, now surgical procedures and 
so on. And they have had terrific results.
    But again, they go back to the ability to cut data and 
health information technology and it all goes back to the same 
thing that we are talking about now and issues around privacy, 
which are also something I would like to ask you about which 
are very important.
    We, though, in Michigan--and just to brag about Michigan 
because we have had a number of areas of leadership on this--
and frankly because we have the largest employers that provide 
employer-based health insurance in the country. And so there 
has been a real incentive, the auto industry and others to 
really focus on this.
    But we have had one area specifically where we have seen 
just tremendous results in just a couple of years. And that is 
around e-prescribing. We had the auto industry and BlueCross 
BlueShield and physicians and others that came together in 
2005. And since that time, they have had over 6 million 
prescriptions that were written electronically in Southeastern 
Michigan, the Detroit region. They have 2,500 physicians that 
are actively involved in this now, providing more than 282,000 
electronic scripts each month. What they have found, when they 
evaluated this after 2 years, is that it substantially improved 
patient safety. It was not just an issue of cost, as all of you 
know. It is an issue of safety.
    And they found that doctors were alerted about incorrect 
drug prescriptions, incompatibility with prescriptions that 
people were already on. They found that 423,000 prescriptions 
were actually changed or canceled by the doctor when they had 
better information by using e-prescribing, and that there were 
100,000 medication allergy alerts that went out that caused the 
doctor to be alerted and to be able to change the medicine. And 
they also found that 38 percent of the time the doctor changed 
the prescription to a lower-cost generic once they were given 
information about other medicines that were available that 
would address the same issue of concern.
    Plus you can read their handwriting better.
    So I say that only to say there is a tremendous amount of 
effort happening here and also among individual hospitals.
    But what I am leading up to is what I hear over and over 
again, I hear from major hospital systems in Detroit that are 
doing health information technology. I hear it as it relates to 
the e-prescribing effort, is that the most difficult part is 
physicians participating. So you have a hospital doing this and 
yet it is dependent upon the physician sharing information and 
being a part of this.
    And I am not being critical of them. They face Medicare 
cuts, Medicaid cuts every year. Then we say to them by the way, 
we want you to go out and buy this equipment, we want you to 
train your people, we want you to spend these resources, do 
these new systems. And the folks that will benefit the most are 
the Federal Government or others.
    And so I wondered if you might speak to the importance of 
incentivizing physicians and others to participate? And I would 
say, on that note, that there are two initiatives happening. 
Senator Snowe and I have had legislation for some time to 
provide incentives through Medicare for physicians that use 
health information technology to be able to help them be able 
to address the costs and be incentivized.
    And Senator Kerry and I, in the last Medicare legislation 
we were working on concerning physician payments, worked with 
colleagues on an e-prescribing effort that would provide an 
incentive payment to physicians as well as one-time grants to 
help them be able to get the equipment.
    So I wonder if you might speak to sort of--the saving comes 
to the providers and the Government and yet we are asking the 
providers, the physicians, to go through a tremendous amount to 
be able to make it happen.
    Ms. Adams. We see that problem as likely one of the most 
significant root causes of why we are stuck in the status quo. 
When you really think about the fact that a physician may put 
something in place that prevents a medication error, what that 
means for that physician is that patient will not be returning 
to the office numerous times for followup visits.
    They get paid by the visit, not for the continuous healing 
relationship that the IOM described, not for treating the 
patient at home and making sure that if they see their A1c 
hemoglobin is going up, their blood sugar is going up, that 
they intervene at home and keep them out of the office or 
hospital. For every patient they do not harm, that patient is 
not hospitalized, that money goes back to somebody else.
    I think it was Jim Reinertsen that was so eloquent when he 
said every step we take toward this collective vision of 
nirvana is one step physicians take toward insolvency. And then 
we wonder why they will not participate as actively.
    So in Rhode Island we have addressed it in a couple of 
ways. First of all, our major insurer, BlueCross BlueShield, 
stepped up huge. They put in a significant reimbursement rate 
increase but they split it in half. They said you get 50 
percent of it because you need it. And the other 50 percent you 
get if you go electronic, certified electronic. And if you do 
not, you do not get it. Because it is safer, better care, it is 
cheaper care. So we had a big incentive program there.
    They also put in a program called Quality Counts, which 
means that the first year is a pay for adoption. Not pay for 
performance yet, pay for adoption. So that system went into 
place also.
    We also have a group that we have assembled under the 
Quality Institute umbrella of the senior-most thought leaders 
physicians. We recognized that the pharmaceutical companies 
were just ingenious at figuring out how to identify thought 
leaders in communities, talk to them about prescribing certain 
medications, and those would sweep across that social system 
and any population they were trying to change.
    Now the physicians chafe at that idea but we should not 
throw the baby out with the bath water. That is a brilliant 
idea. So we are conducting a study right now with the same 
group that formulated that capacity for finding those opinion 
leaders, finding their communities of practice and making sure 
we understand those thought leaders in HIT Rhode Island, 
physicians. What are they saying? Are they saying yes, adopt or 
no, do not adopt? It helps us develop our strategies if we can 
find those physician thought leaders because really the tipping 
point and diffusion of innovations theory tells us that if you 
can convert 20 percent of the thought leaders, that innovation 
will continue through the population and you cannot stop it 
even if you wanted to.
    So we are doing a couple of different approaches--and we 
are also working on things like low-cost loans, whatever we can 
do, supports because we know that the biggest challenge for 
them after they get past the OK, I am going to buy it is they 
need their hand held every step of the way during the early 
part of the transformation. That is where the failure occurs 
most of the time.
    Ms. Grealy. Senator, I think there is another area and we 
have seen some progress in this. We have many hospitals that 
are willing to help physicians that are affiliated with them or 
even not affiliated with them. Under the Stark self-referral 
and the anti-kickback statute they can do that with their 
employed physicians and not be concerned about the penalties.
    But for those physicians that are not employed by the 
hospital it is a little more vague. And the penalties for 
violating these laws are quite severe. So I know that hospitals 
tread very cautiously there.
    There has been some new regulations that have helped 
clarify that. We probably could use more clarification in that 
area.
    But I think what you are hearing, and I think Rhode Island, 
you know, if we could just expand that model nationwide, it 
really is a shared responsibility. Providing incentives, and I 
think that absolutely is the way to go, provide that carrot. 
Having physician leadership. For every hospital leadership that 
has done this and done it well, it has been with great 
physician leadership and leadership at the top. So it is that 
cultural change, as well.
    And the low-cost loans. There is a variety of tools that we 
can use. Something that we can do on the regulatory side as 
well as the financial side.
    Senator Stabenow. Mr. Chairman, I hope we are going to be 
able to really address these things as we move forward, whether 
it is Budget or whether it is Finance, to really address those 
incentives that will allow this to move forward, through 
Medicare payments, through other things that will really make 
the difference.
    Chairman Conrad. You know, this is a situation where two 
committees have cross-jurisdiction. We have a responsibility as 
the authorizing committee. Finance has a responsibility in two 
areas, provide the money and as an authorizing committee, as 
well. And so we are going to have to work hand in glove in 
order to provide resources necessary to actually accomplish an 
outcome.
    Senator Whitehouse. Mr. Chairman, can I offer an 
observation to you?
    Chairman Conrad. Yes, absolutely.
    Senator Whitehouse. I would like to followup on what Ms. 
Grealy just said, that Rhode Island could be a model if you 
would expand it nationally. I think it is, obviously for our 
purposes, a very flatting point but also one that is worth 
considering is how you might do that.
    I think if you look at what identifying characteristics are 
that made Rhode Island successful, the key one was this 
question of having a place, a forum, a location, an 
organization where local leadership could get together and step 
outside of their siloed roles and start to think collectively 
about the direction of the system they were, until then, 
trapped in.
    I think that if you are going to try to take the Rhode 
Island system national, the best first step would not be to 
take what you do in Rhode Island and go to Michigan or to the 
Dakotas or to California or to Texas some place and say here, 
do this. It would be to try to facilitate that same process 
where the local leadership has the opportunity to get together 
and start making these decisions.
    Because there are other ways to do this and we know so 
little about what we are doing at this point that 
experimentation, health care federalism would really be, I 
think, valuable.
    So I just wanted to followup on Ms. Grealy's point because 
I think is a valuable one. But I really think it is important 
that we try to drill down to how you would make that happen. 
And I think counting on local leadership, where people trust 
each other, they see each other at the market. They go to the 
same church. They see each other at the football games when 
their kids are playing.
    Chairman Conrad. So we call it the grocery store.
    Senator Whitehouse. The grocery store.
    Senator Stabenow. I am sorry, we keep going back and forth 
here. But I would just echo that because on e-prescribing in 
Michigan, that is exactly what happened. Employers, BlueCross, 
hospitals, physicians, everybody came together to do something 
that was across lines. And so I think that is an important 
point.
    Chairman Conrad. Can I just make this observation, that the 
crisis is now. The crisis is now.
    I just tell you Senator Whitehouse described very aptly 
what is going to happen at some point. We are there.
    The next administration is going to walk into this town and 
they are going to have seen the Federal Government's debt go up 
$800 billion in the previous year. Not the $400 billion that 
all of the news media writes about. Wrong. That is not the 
problem. The deficit, that is all they can write about is the 
deficit.
    I do not know why the news media cannot write a four letter 
word, debt. They do not want to deal with that.
    I had one very prominent reporter tell me we do not write 
about the debt. It is too complicated. We do not know whether 
to write about the gross debt or the publicly held debt.
    Well, guess what? The gross debt is what the country owes. 
It is what is going to have to get paid back. And the gross 
debt of the United States, now $9 trillion, is going to go up 
$700 billion this year. It is going to go up $800 billion the 
next year. Nobody talks about it. Nobody mentions it. It is 
like the crazy cousin in the closet or what did Ross Perot talk 
about, the crazy aunt in the basement.
    It is unbelievable what is going on in this country, just a 
collective kind of hide the ball from the American public.
    The next administration is going to walk in here. At some 
point this will precipitate a crisis because we are borrowing 
this money, increasingly from the Chinese and the Japanese. And 
it is just a matter of time before the roof caves in.
    I had another senior colleague tell me well, that is what 
has to happen, we have to wait for the crisis. I love that. 
That is a great plan, let us wait for the crisis. But that 
apparently is what is happening.
    None of us knows when the crisis is going to occur, but you 
can just write it down. It is going to occur because there has 
never been a country ever that has been able to sustain itself 
by borrowing from abroad. And over half of our debt now is 
financed abroad.
    And guess what? The dollar is going down in value, which is 
exactly what you would predict. And at some point, those of us 
who are loaning the money and they are going to look at their 
holdings and they are going to say gee, we are holding all of 
these dollars, and the dollar is going down dramatically in 
value. Maybe this is not such a good idea. And then we have a 
big problem.
    Because if they make that decision, singly, collectively--
we have already heard warnings from Chinese finance ministers, 
Japanese parliamentary members, that they might have started 
diversifying out of dollar-denominated securities? Then what 
happens?
    To get the money you have to raise interest rates. And I 
will tell you, that is when it is going to get really ugly in 
this town because we are just in a financial dream world. We 
are just running up the charge card and hoping the bill never 
comes due.
    But it will. Absolutely, without question, it will come 
due.
    So that is why this subject is critically important and 
your observation, Senator Whitehouse, that you have to build to 
prepare, that is exactly right. Unfortunately, we are going to 
get caught in an unbelievable crunch.
    I sometimes think of it and I wonder what this town is 
going to be like when this realization hits.
    Senator Nelson. Mr. Chairman, did I not see a story 
recently where some stores in New York were only dealing with 
euros instead of dollars?
    Chairman Conrad. You have some European super model that 
will only take a contract in euros now because the dollar is 
going down in value and so she wants to get paid only in euros. 
Who would ever have believed we would be in a circumstance like 
that?
    I want to go to a question that was raised by something 
that you said, Ms. Adams, on infection that really caught my 
attention. An initiative through the use of information-
technology, as I took it--and correct me if I am wrong--that 
helped bring down the rate of infection I heard you say 57 
percent. Could you tell the Committee a little more about that? 
I would be very interested.
    By all accounts the infection rate in hospitals has always 
been a serious concern. But now it is a growing concern. We 
have infections in hospitals not seen before. What was done to 
so dramatically reduce the rate of infection?
    Ms. Adams. We took our inspiration from the Keystone 
project in Michigan. That is the project that originated this, 
and we replicated because we know that there is no sense in 
starting from scratch when somebody has done something 
dramatic. They have achieved results beyond what we have 
achieved. They have been going on I think 2 years longer than 
we have.
    What it entails is we have almost no feedback loops in 
health care. We do not know how often we are infecting people. 
We do not know how often we are harming people. We do not know 
what it costs. We have so little information to operate on, yet 
we keep imploring people to do better. They have no metric.
    So one of the most important cornerstones of our initiative 
was to get them a metric. How often are we infecting people? 
Let us standardize our definitions so we know it across the 
State.
    Then we know that there are certain interventions based on 
science. To keep people from getting a ventilator associated 
pneumonia, you have to keep their head of the bed elevated 30 
degrees. We have to find some way to measure to make sure that 
it is happening. And if it is not, then we have to find ways 
locally to make sure that that head of the bed says 30 degrees, 
even if it is making sure that the daughter knows that that 
head of the bed ought to stay 30 degrees. And anybody that 
leaves the room, nail them and tell them that mom needs to have 
her head of the bed up 30 degrees.
    But if we do not have those metrics that come back and tell 
us about our performance, we have no way of knowing how we are 
doing. And it is incredibly demotivating to staff to be--
sometimes we will devolve to such things as like the hand 
washing police and we will count how many times people have 
washed their hands. But we will not put up on the wall how many 
people have been infected by the fact that we are not washing 
our hands.
    Now when we put up there that it has been 66 days since the 
last infection, 67 days since the last infection, 68 days since 
the last infection, they wash their hands because they have a 
metric up there. But without information technology, we 
continue to try to deliver care in an information-free zone.
    Chairman Conrad. That is a very interesting point.
    Let me ask you, when we are talking about information 
technology, we are talking about deploying it within an 
institution. We are talking about deploying it across 
institutions. And then there is the question of where does the 
product go.
    Because I, as a consumer, if I have to make a decision what 
hospital I am going to take a loved one to--I just went through 
this with my daughter who had an emergency appendectomy over 
the Christmas holidays. You know, I went to the hospital where 
I went to school. I did not go to the medical school but I went 
to the school.
    But I have no idea--actually I had a wonderful experience 
there, so I was fortunate.
    Where would you find the basic information on something 
like infection rate that would be publicly available? Is there 
a place that a consumer could go and find out what is the 
consumer satisfaction? What is the infection rate? What is the 
survival rate of various surgical procedures? What is length of 
stay? What is cost?
    Is there any public source where you could readily find 
that information as a consumer?
    Ms. Adams. We have increasing opportunities for that now. 
In Rhode Island we have been doing public reporting on a 
certain set of outcomes. We have really been fortunate in 
having CMS advance that program of public reporting. We 
publicly report satisfaction in California, for example.
    There been a number of places that attempted to publicly 
report the outcomes of cardiac surgeries. Pennsylvania has 
become a marvelous job in beginning to become very transparent 
about this.
    It is a difficult science to do the measurement? And of 
course, the measurement also causes some interesting behavior. 
If you end up as the person with the highest mortality rate for 
cardiac surgery, we have seen physicians refuse----
    Chairman Conrad. Do they start to hide bodies?
    Ms. Adams. They refuse to take on the difficult cases or 
operate on more healthy people to get their average up. So in 
some ways we have to be careful about the programs themselves. 
But increasingly we are seeing those. There is Health Grades 
on--the Internet is becoming a rich source of opportunity to 
look to see.
    And also, hospitals that do not pay attention to bad 
outcomes, for example, and do not listen to the consumers and 
families that they have harmed will find their story being told 
on the Internet. I could give you five sites--I will not right 
now--where families have told their stories in aching 
excruciating detail about what happened to their loved one.
    If we pave a way for that information to be known in a 
format that is acceptable to all of us, patients and families 
find a way to make it known. It is word-of-mouth on steroids.
    Chairman Conrad. Ms. Grealy?
    Ms. Grealy. Senator, we are seeing great progress in this 
area. I think we have moved beyond providers not being willing 
to share this information. And I think they see that we now 
have an opportunity really to get in front of this. So you have 
the National Quality Forum. You have various projects going on 
where medical societies and other health care providers are 
getting together and determining what are the appropriate 
measures. And I think that is the important point.
    We want to make sure that we are measuring and reporting 
the right thing, that we are not penalizing providers that are 
taking the tough cases.
    But this movement is well underway. We are seeing great 
progress. CMS is helping to drive it. Private health plans are 
driving it. Consumers are now demanding this information. 
Providers get it. And now we are just trying to find what is 
the best format both for the provider as well as for the 
consumer.
    Chairman Conrad. And is this something you would anticipate 
would be available in a certain timeframe?
    Ms. Grealy. I think much of it is available already. What 
we need to do is get it more unified. So you can go to 
Leapfrog, you can go to the CMS website. There are a variety--
as Laura just said--of different websites that are available 
now. But I think everyone is trying to do this in a much more 
unified, uniform way. CMS is driving it to a great extent, as 
well as the private health plans.
    Chairman Conrad. Senator Whitehouse.
    Senator Whitehouse. I have a question and I would like each 
of you to answer it. President Eisenhower, not exactly a major 
league liberal lefty, decided that it was very important to 
build a national highway system. Now pretty much every American 
drives out of their driveway onto a publicly maintained road 
and we all accept that the roads should be publicly maintained. 
We are very comfortable with the idea of a huge Federal 
transportation budget that maintains that infrastructure. We 
all recognize that collectively, when we get together to build 
that infrastructure, we do ourselves a great common good 
because goods travel more cheaply and they travel more 
efficiently and the prices of goods go down and it is easier to 
visit grandma on the holidays. And for all of those reasons we 
get together and do it.
    And if somebody came to us and said well, the way we are 
going to do this now is we are going to make everybody 
responsible for the care of the roads and highways in front of 
their houses individually, you would end up with a nightmare. 
You would end up in potholes. You would end up with mud. You 
would end up with everybody trying to deflect from their 
responsibilities.
    What is it about the health information infrastructure that 
is different from say the highway infrastructure? We had a 
bridge fall in Minnesota. It was a terrible tragedy. We leapt, 
as a Senate, to go and build that new bridge and put that 
infrastructure back together.
    What is it about health information infrastructure that 
makes it so hard for us to see it as infrastructure like the 
highway system? Why don't we have a more prominent Federal role 
in it? The wave of debt that Chairman Conrad talked about, I 
use my eight pennies example because I keep hearing from our 
colleagues across the aisle about how bad earmarks are and how 
there is 8 billion too many of them.
    If a penny is $1 billion, that is the pile of what we save 
if we cut the earmarks in half, $8 billion. There is eight 
pennies.
    If you look at our long-term unfunded health care 
liabilities, it is a pile of pennies, my staff has calculated, 
that is 221 feet high. And what we spend on it through ONCHIT 
is $66 million in the president's budget. That is one-
fourteenth of this piece of penny. You would need a little 
clipper to clip one-fourteenth off.
    And when you put that against that, I do not get why do we 
do not see this as infrastructure, particularly with the 
savings available.
    Ms. Melvin. Senator Whitehouse, in the work that we have 
been doing at GAO, one of the things that we have recognized is 
that there are a number of initiatives that HHS is undertaking. 
There are initiatives related, I think in the same sense, to 
some of the discussion that we have had earlier relative to e-
prescribing, Rhode Island's experience so far. So there are 
ongoing efforts----
    Senator Whitehouse. But is it not fair to describe the HHS 
efforts as regulatory?
    Ms. Melvin. I think they are more from the position of 
trying to determine solutions and how they can move forward.
    The concern that we have had, and I think it goes to part 
of the reason that have not been able to perhaps come to some 
more definite statements or positions relative to 
infrastructure, is that what we have seen is that there has not 
been a national strategy, if you will, to really carry the 
initiatives forward. While there have been important progress 
made in a number of areas, even from the standpoint of what you 
have spoken of today, there are national trial implementations 
going on that do address some of the issues that, for example, 
Chairman Conrad mentioned relative to trying to get a handle or 
a better understanding of interoperability.
    The concern that we have is that there is no defined 
strategy that identifies the plan in terms of overall what it 
is that they are trying to accomplish that addresses all of the 
nuances that I think have been mentioned here today through the 
experiments of Rhode Island and other places, that there are 
not specific milestones for how to reach the objectives.
    And then ultimately, as was mentioned earlier, having 
outcome-oriented results measures that, in effect, allow them 
to look back at what it is that they set out to achieve, 
knowing definitely where they want to go to, making informed 
decisions based on the various activities that are being 
undertaken--and there are good projects in the works from what 
we can see. It is a matter of trying to utilize those projects 
in an effective way to get information that allows them to make 
informed decisions, whether it is on a public level----
    Senator Whitehouse. If you do not mind, the time is running 
out.
    Ms. Melvin [continuing]. Or a private level.
    Senator Whitehouse. I want to give the other witnesses a 
chance to answer, as well. Laura, Ms. Grealy, is this 
infrastructure?
    Ms. Grealy. I would agree it is infrastructure. It is a 
very complex, challenging problem. As I said in my testimony, 
we recognize the fiscal difficulty of doing this in a huge way, 
which is why we are really looking for what I would call seed 
money. There are a whole host of organizations, entities, out 
there that really could do this. They just need help with the 
initial investment.
    So we are not saying that the Federal Government has to 
finance this 100 percent, or that the private sector has to 
finance it 100 percent. But we think through a partnership--and 
some of the legislation that is out there, I think, really 
provides that.
    It would be nice to have the overall framework, kind of the 
map, so we know where we are headed and get this coordinated. 
But the movement is underway. And people are doing it and they 
are willing to make the investment. They just need the helping 
hand.
    Ms. Adams. My take on this is that it is a failure of 
market forces and people are putting way too much stock in the 
idea that market forces are going to fix it. Whenever I am 
speaking to employers and other people who look at health care 
as another industry, they will say nobody paid for my IT 
infrastructure, why should I pay for yours? They fail to 
understand that the benefits accrue to everybody else but the 
person who puts it in.
    And then I think the other concern that I have is things 
like competition does not work in health care. You get another 
MRI on the corner, you have another MRI on the corner. Having 
more does not drive down costs. It does not drive down the 
number of MRIs. It drives both of those up.
    When you look at things like our payment structure, the 
worst cardiac surgeon is paid the same as the best cardiac 
surgeon. We have no set of market forces and people rely on 
that.
    I think one of my greatest concerns, I would like to sound 
an alarm a little bit, on the issue of the relaxation of the 
Stark. Because what I think that that is going to do, in the 
absence of the group that you talked about, the community 
governance structure coming together, then what the relaxation 
of Stark allows us to do is say I am going to connect. But I am 
going to connect just with that orthopedic hospital that sends 
me referrals and just that one that sends me the referrals over 
here.
    The rest of you, patient-centeredness? That is your 
problem. And to get your little doctor on the corner linked, 
really not financially in my best interest.
    So we are going to see what John Glaser of Partners has 
described as RHIO 2.0, the default to the market structure. And 
we will once again have more duplication and it will fail 
again.
    So my concern is if we do not see it as the public good 
then we are headed toward--talk about the next festival of 
waste.
    Chairman Conrad. I think we should go to Senator Wyden 
because he has not had a round, if we can do that.
    Senator Wyden, welcome. Senator Wyden, of course, has been 
legendary in terms of leadership on health care. He has spent 
years trying to put together an alternative structure that we 
could look to for reform.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. And I would 
probably characterize it more as infamous rather than famous, 
but I thank all of you. I apologize, we have had a huge hearing 
for Oregon today in terms of forestry, and Senator Stabenow and 
Senator Whitehouse, of course, have had a tremendous interest 
in this, as well.
    I am so glad that you are here and that we are having this 
hearing because the history of this debate, of course, is that 
what gets most of the attention is cost. And if you look at the 
1993 discussion about the Clinton plan, there was oceans of 
debate about the costs of health care and virtually no 
discussion about what we are talking about here today which is 
quality and people, in particular being able to find affordable 
services and providers that are good quality.
    And what we do in the Healthy Americans Act is to try to 
take some steps in that direction, certainly not anywhere near 
as bold as Senator Whitehouse has been advocating in his good 
work. But we secure a way to pay for electronic medical 
records. A number of insurers have indicated that they would be 
supportive of that under the approach that we advocate.
    We use the Agency for Healthcare Research and Quality to 
publish nationwide by ZIP code information about the kinds of 
providers and services you are talking about.
    I want to talk about the role of the individual to start 
with in this because I think it is something that we have 
missed. And it is, to a great extent, a transparency issue. 
Right now in America, if you got an employer buying you 
$12,000, $14,000 of health care, and it is part of your 
compensation, you are basically in the dark about whether that 
purchase of health care for you really addresses the kinds of 
quality concerns that you all are talking about.
    So I think I would like to start, and maybe we can start 
with you Ms. Grealy, and go right on down the line. How 
important is it to you, in this effort to drive quality, that 
we show the individual how that money is being spent today?
    Because I think if individuals see, for example, that 
$14,000 or $16,000 is being spent on their health care 
benefits, I think the first thing they are going to say is darn 
it, I want to get more value for my money. I want to do some of 
these things Senator Whitehouse and Senator Stabenow are 
talking about, the e-prescribing and the sensible suggestions 
Senator Whitehouse is talking about.
    I think they are going to say I want to see that done so 
that my $14,000 is going to get more for me and my family.
    So starting with you, Ms. Grealy, how important is it that 
the individual see what the health care dollar that is being 
used in their name goes to?
    Ms. Grealy. We strongly support a patient-centered or 
consumer-centered health care system. In just talking with my 
members, who not only are health care providers and 
manufacturers of health care products and health plans, but 
they are also, in many instances, large employers. And more and 
more they are telling their employees: here is how much is 
being spent on your health benefits. And for every dollar that 
is being spent on your health benefits is a dollar that is 
probably not being spent on wages.
    So I think consumers are very interested not only in what 
is being spent on their health care, but I think we are trying 
to create more of that market force that is missing by getting 
consumers closer to the cost as well as the quality of their 
health care.
    That is why I think the whole discussion about transparency 
is so critical. We have to make sure that we are providing them 
good information. But we need to get the consumers much more 
involved, both in managing the costs of their health care as 
well as the quality. And of course, what can they do to make a 
difference in health care costs, which is managing their health 
better, as well, the whole disease prevention movement.
    I think this is a very exciting time. I feel like we are 
just on the precipice of making true health system reform, not 
just talking about costs but really talking about the system 
and how we can improve it. And the consumer just absolutely has 
to be part of that.
    We have not really spent much time today talking about what 
I think is the real critical problem here. Why do we need a 
unified electronic health record? It is so that parents like 
mine, who are in their 80's, that are seeing on average 10 
health care providers, that each of those providers know what 
is going on with them and that they have a better sense of what 
is the health care that they are getting.
    So again, I think there is a very critical role for the 
individual consumer and patient to play in this, and it is all 
about having useful information.
    Senator Wyden. Let us give your colleagues a chance at 
this. The question of transparency with respect to where their 
health care dollar goes today and how it might be better 
utilized.
    Ms. Adams. I would say that I think we ought to keep in 
mind the notion of the connection between quality and cost and 
be sure that if they get the cost information, they get the 
quality information.
    I was fortunate enough to learn and travel with W. Edwards 
Deming, a theorist who essentially brought Japan's economy back 
from World War II. And one of the things that Deming taught me 
about was the notion of price tag versus total cost.
    He was wearing a pair of shoes 1 day and an old engineer 
friend walked up and said hey, those are a great pair of shoes. 
How much did they cost you? And he said I have no idea, I am 
not done wearing them yet.
    His point was that there is a total cost and there is a 
price tag. My concern is if we show people price tag--we have a 
good study that just came out from Brown recently, in the last 
month, that showed even a small copay and the showing of the 
cost of a mammogram will cause some women not to go get that 
mammogram.
    Now we will understand that there is a price tag there and 
they may reduce the price tag but they will not increase the 
overall cost. So I think it is a very difficult conundrum.
    Senator Wyden. Just so we are clear, under the Healthy 
Americans Act all of those essential preventive services would 
not get a copay. What we are talking about here is just access 
to information so that you would be in a position to say boy, 
they are spending all this money in my name. Gosh, I would like 
to look around a little bit and see if we might get more for my 
money.
    Ms. Adams. Yes, and all I am saying is if we can tie that 
to quality, because I would like to know what my money is 
buying. Few of us would want to put our health care out for bid 
to the cheapest provider.
    Senator Wyden. That is for sure.
    Let's hear from the folks from GAO. You are from GAO, 
aren't you?
    Ms. Melvin. Yes, I am.
    From the work that we have been doing, it has been focused 
on the technology aspects. And certainly, driven by patient-
centric emphasis on having quality care to the patient. In the 
work that we are doing, we have seen that with the electronic 
health records the key is in being able to have information 
readily available regardless of the provider that the patient 
chooses to use.
    Hopefully, in terms of that intent, you would see that 
through the availability of that information, that hopefully 
that would translate into better care which ultimately makes 
the bottom line for the actual patient, makes it clear in terms 
of quality improvement.
    Senator Wyden. My time has expired and let me just ask one 
question that perhaps you could respond in writing. In the past 
we have really looked to the Agency for Healthcare Research and 
Quality to take the lead in terms of getting this kind of 
information out. I think there is certainly going to be a 
debate about whether we ought to reconfigure their role and 
have them take on additional assignments.
    If you could get back to us for the record what kinds of 
suggestions you could give us for the best way to use that 
premier agency with respect to information and data as it 
relates to quality, that would be very helpful.
    We may get another round and if so I will get a chance to 
get into it. But again I want to thank also my colleagues, 
Senator Whitehouse and Senator Stabenow. They have been the 
champs on this issue and have been educating me and I look 
forward very much to working with them.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Wyden. And thank you 
for your contribution to this committee.
    Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    Just for a moment on the issue of quality again in the 
Keystone project, just to followup. And I appreciate Rhode 
Island's work in working with what has really been a phenomenal 
initiative by the Medical Society in Michigan. Within an 18 
month period, they first focused on intensive care units, as 
you know, the intensive care unit and diseases? And within an 
18 month period actually saved 1,500 lives and $165 million. It 
was just extraordinary.
    So it is very exciting what can be done. It is very 
exciting what you are doing, as well. It is very exciting what 
the possibilities are.
    But if we are going to get ahead of this curve that the 
Chairman talked about and Senator Whitehouse talked about, it 
takes time to do this. So we have to start doing it so we have 
time to develop it and really see those results.
    I wanted to turn a little bit to the issue of privacy. We 
hear a lot of concerns. I find it interesting when I can go to 
the ATM. I bank online. I can go anywhere in the world to an 
ATM and be able to get cash, assuming I have some in the 
account. So we have security systems. We do this for financial 
services all the time.
    But there is a legitimate concern about health privacy and 
how we manage that, who owns that information and how do we do 
that and so on.
    It was interesting, I had a psychiatrist who was in the 
office for a meeting this week, a woman in psychiatry, talking 
about the fact that she was very concerned about health IT 
because there were medicines and physical ailments that she 
needed to know in treating her patients, whether they were on 
heart medicine, other kinds of things, that even though it did 
not directly relate to what she was doing, she needed that 
information from a safety standpoint in working with the 
person.
    And she talked about how her records are private, from a 
privacy standpoint, from a mental health or psychiatric 
standpoint, and that they have a firewall to protect 
information in her system, in the hospital that she works in.
    So I wondered if you might speak, I mean I personally think 
that having a password and some kind of an electronic system is 
actually much more secure than a file in somebody's filing 
cabinet that anyone could open up.
    But I wonder if you might speak to the security issues and 
the progress in dealing with these issues around privacy and 
security and how we tackle that. Because I personally believe 
that is one of the barriers publicly in moving forward, that is 
an initial comment that people have in terms of who will have 
my information? How will it be used? Will an insurance company 
use it in some way against me if I am looking for coverage? And 
all of those kinds of things.
    Ms. Grealy. Senator, I would like to respond. We have done 
a lot of work on the privacy issue. We head up a 
confidentiality coalition of over 100 groups and have been 
working on this for over 10 years. I think we have not done a 
very good job of educating the public about what protections 
are currently in place.
    As we began working on health information technology 
legislation, I felt like we were starting all over again, that 
the HIPAA privacy rule that we worked on did not exist.
    So I think we need to make sure we inform the public. 
Protections are in place. Your information cannot be disclosed 
to your neighbor, to your employer, to a reporter. And if it is 
disclosed without your permission, there are penalties. So we 
need to educate.
    We also need to educate people that, as you pointed out, 
your information is much more secure in an electronic health 
record and system because there is an audit trail, there are 
passwords, there are protections that you do not have if your 
record is just sitting in a file cabinet on a piece of paper.
    As I said in my statement, we would like to see more 
uniformity just to make it easier, as you are going from state 
to state, and not having to spend much time and much money 
trying to figure out those rules and regulations.
    But I think more importantly is just coming back, looking 
at this from the patient's point of view and assuring them one, 
your information is protected.
    But I think more importantly, why is it important that 
health care providers have access to your information? Why is 
it good for you? Why is it good for your children? Why is it 
good for future generations? And that is the case that we have 
to make.
    It is important that we have the information. We will de-
identify it when we are using it for research. We will not 
disclose it inappropriately. But we have to make them feel 
comfortable with how it is being used and, more importantly, 
how it is being protected.
    Ms. Adams. In the traditional Rhode Island way, we started 
with this about 2 years ago and got everybody and their brother 
together in the community to talk about it. We were educated 
quickly by people like the Domestic Violence coalition who said 
you talk about HIV and mental health as sensitive information. 
Well, for an abused woman who does not want her abuser to know 
she sought treatment, a cracked rib is sensitive information.
    So what we got those groups that felt most vulnerable by 
the idea of having their information on the Internet. And the 
legislation that we introduced in Rhode Island this week 
includes a couple of things such as it is voluntary. You can 
opt in or not.
    The second level of opt-in is you can OK, for this 
physician and that group and that group but not this one, that 
one, and that one. So there is the opportunity to direct your 
care.
    The ACLU was somewhat concerned because we did not allow 
yes, this lab test, no, not that lab test, that level of 
granularity. But our concern was for our providers that if they 
go into that information exchange and they do not know whether 
5 percent of the information on the patient is there or 95 
percent, it renders it worthless and we can stop now.
    So we did go with the you are all or you are all out.
    We did also set up a regulatory body because these groups 
like the Quality Institute, we are freestanding. We are not for 
profit. And I think their concern is wait a minute, you have a 
sustainability issue. So how do we know some pharmaceutical is 
not going to swoop in and offer you a bunch of money for our 
sensitive information and you sell our soul.
    Chairman Conrad. Can I interrupt for just a moment? Can I 
interrupt for just a moment?
    Could I ask Senator Stabenow to take over direction of the 
Committee? I have been called out for a moment.
    Senator Stabenow [presiding]. Absolutely.
    Ms. Adams. I think it was the concern that there be a 
regulatory body. And then obviously authentication and 
penalties because there is the situation and we do feel the 
need to communicate it to the community that--the situation 
like Mary Jones, the young girl that was beaten to death in New 
York and 34 providers in the New York hospital looked in her 
record. Well, there was an electronic fingerprint of that and 
those people were fired.
    We have not had that kind of protection before of who can 
peruse your record. And short of getting a dusting for 
fingerprints, we do not know who has been in your paper record. 
So we would agree that that notion of informing the public is 
critical.
    Ms. Melvin. In our oversight role, our work has also 
identified challenges associated with protecting personal 
health information as it relates to, for example understanding 
and resolving legal and policy issues on variations in State 
laws that relate to privacy. Also on ensuring, for example, the 
amounts of information necessary to be disclosed and giving 
patients the right to really decide whether there should be 
amendments to their information.
    What we have noted overall, which again goes back to the 
overall strategy that we have talked about, is there has been a 
need for an overall privacy approach in looking at this from a 
national perspective to make sure that there are plans and 
there are milestones and, again, measures for being able to 
really assess the extent to which privacy is being addressed in 
an effective manner.
    Ms. Adams. Could I correct my testimony? I said those 
people were fired in New York. They were disciplined.
    Senator Stabenow. Thank you. I think at this point, unless 
there are further questions, we will bring the hearing to an 
end. But we want to thank you very much for your testimony. 
This is an extremely important topic and I appreciate both the 
Chairman's commitment and Senator Whitehouse and others on the 
Committee. I hope that together we can move this and begin to 
move this.
    We have an opportunity under Medicare, with the effort that 
is going on that could very well happen this year in terms of 
incentives around e-prescribing. And then hopefully we can take 
that next step and as quickly as possible begin the incentives 
to be able to support what you are doing.
    So thank you very much.
    [Whereupon, at 11:33 a.m., the Committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T2157.312
    

    [GRAPHIC] [TIFF OMITTED] T2157.313
    

    [GRAPHIC] [TIFF OMITTED] T2157.314
    

    [GRAPHIC] [TIFF OMITTED] T2157.315
    

    [GRAPHIC] [TIFF OMITTED] T2157.376
    

    [GRAPHIC] [TIFF OMITTED] T2157.377
    

    [GRAPHIC] [TIFF OMITTED] T2157.378
    

    [GRAPHIC] [TIFF OMITTED] T2157.379
    

    [GRAPHIC] [TIFF OMITTED] T2157.380
    

    [GRAPHIC] [TIFF OMITTED] T2157.321
    

    [GRAPHIC] [TIFF OMITTED] T2157.322
    

    [GRAPHIC] [TIFF OMITTED] T2157.323
    

    [GRAPHIC] [TIFF OMITTED] T2157.324
    

    [GRAPHIC] [TIFF OMITTED] T2157.325
    

    [GRAPHIC] [TIFF OMITTED] T2157.326
    

    [GRAPHIC] [TIFF OMITTED] T2157.327
    

    [GRAPHIC] [TIFF OMITTED] T2157.328
    

    [GRAPHIC] [TIFF OMITTED] T2157.329
    

    [GRAPHIC] [TIFF OMITTED] T2157.330
    

                                 
