[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



                            PERSPECTIVES ON
                           LONG-TERM DEFICITS

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, JANUARY 21, 2010

                               __________

                           Serial No. 111-19

                               __________

           Printed for the use of the Committee on the Budget


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





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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania    PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio                     Ranking Minority Member
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon              MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas               MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida                  PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts     CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California
BOB ETHERIDGE, North Carolina        JIM JORDAN, Ohio
BETTY McCOLLUM, Minnesota            CYNTHIA M. LUMMIS, Wyoming
CHARLIE MELANCON, Louisiana          STEVE AUSTRIA, Ohio
JOHN A. YARMUTH, Kentucky            ROBERT B. ADERHOLT, Alabama
ROBERT E. ANDREWS, New Jersey        DEVIN NUNES, California
ROSA L. DeLAURO, Connecticut,        GREGG HARPER, Mississippi
CHET EDWARDS, Texas                  ROBERT E. LATTA, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon

                           Professional Staff

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














                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, January 21, 2010.................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     2
    Hon. Gerald E. Connolly, a Representative in Congress from 
      the State of Virginia, prepared statement of...............     3
    Hon. Robert B. Aderholt, a Representative in Congress from 
      the State of Alabama, questions for the record.............    53
    John D. Podesta, president and CEO, Center for American 
      Progress...................................................     4
        Prepared statement of....................................     6
        Report, ``A Path to Balance,'' Internet address to.......     6
        Report, ``Deal With It,'' Internet address to............     6
        Responses to questions for the record....................    55
    Maya MacGuineas, president, Committee for a Responsible 
      Federal Budget.............................................     9
        Prepared statement of....................................    12
        Responses to questions for the record....................    54
    Robert Greenstein, executive director, Center on Budget and 
      Policy Priorities..........................................    15
        Prepared statement of....................................    18
        Responses to questions for the record....................    54
    James C. Capretta, fellow, Ethics and Public Policy Center...    22
        Prepared statement of....................................    25
        Responses to questions for the record....................    53

 
                   PERSPECTIVES ON LONG-TERM DEFICITS

                              ----------                              


                       THURSDAY, JANUARY 21, 2010

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, Schwartz, Kaptur, Doggett, 
Blumenauer, Berry, Boyd, McGovern, Tsongas, Etheridge, 
McCollum, DeLauro, Edwards, Scott, Larsen, Bishop, Connolly, 
Schrader, Ryan, Garrett, Diaz-Balart, Campbell, Jordan, Lummis, 
and Austria.
    Chairman Spratt. I call the hearing to order and welcome 
our witnesses and others in attendance.
    A year ago, the economy was in free fall. In January alone, 
employers cut jobs by 741,000 employees. Americans had seen 
their retirement savings plunge by more than $2 trillion 
between the first quarter of 2008 and the first quarter of 
2009. And central to today's hearing, the record surpluses that 
existed in January of 2001 were turned into record deficits for 
as far as the eye could see. This was a legacy of the Bush 
administration to the Obama administration and to this 
Congress.
    While too many Americans continue to feel the pain of the 
recession, and we have much more work to be done if we are to 
rebuild our economy, it is clear that actions taken in the last 
year have pulled the economy back from the brink. GDP growth 
has turned from negative to positive. Job losses have steadily 
declined, and the value of retirement accounts have begun to 
recover. I believe the Dow went up two points yesterday alone.
    Focusing first on rescuing the economy has meant that 
additional costs to the budget have been incurred necessarily. 
Indeed, it is counterproductive to try to balance the budget in 
the midst of a recession, and a rebuilt economy is critical to 
reducing deficits.
    At the same time, the long-term budgetary situation that we 
are facing remains unsustainable. As the economy recovers, our 
focus must increasingly be on addressing the long-term fiscal 
challenges that we are facing, and that is why we are holding 
today's hearing.
    Next week, we will get the official view of the 
Congressional Budget Office on the long-term budget and 
economic outlook. Today, we are fortunate to hear from a number 
of outside witnesses who have been working to define the nature 
of the long-term problem and to suggest possible approaches to 
addressing it.
    I would like to welcome this morning John Podesta, CEO and 
founder of the Center for American Progress; Maya MacGuineas, 
president of the Committee for a Responsible Federal Budget; 
Bob Greenstein, founder and executive director of the Center on 
Budget and Policy Priorities; and James Capretta, who is a 
fellow at the Ethics and Public Policy Center.
    We welcome you this morning and look forward to your 
testimony. But before I ask you to testify, let me ask our 
ranking member if he would care to make an opening statement 
himself.
    Mr. Ryan. Thank you, Chairman.
    First, I want to applaud you, Chairman, for choosing to 
begin this year's budget season by focusing on our Nation's 
deficit and debt. We are, after all, the Budget Committee.
    Now, many of us here have warned for years about the 
unsustainable trajectory of Federal spending growth, 
particularly that of our largest entitlements, and what it 
means for America's economic and fiscal future. For a long 
time, these warnings seemed to fall on deaf ears, but there is 
a reason to think that might be changing.
    Americans from all corners of our Nation have become 
increasingly alarmed and angered by the explosion of spending, 
deficits, and debt they have seen come out of Washington, and 
they have a right to be.
    Consider: In a single year, this Congress has pushed 
through a trillion-dollar debt-financed economic stimulus, a 
budget that would double the debt in 5 years and triple it in 
10 years, and initiated the expansion of government control of 
the Nation's energy sector, financial markets, and the auto 
industry. But I think Americans are most alarmed by the 
seemingly relentless drive to jam through a new trillion-dollar 
entitlement and a government takeover of our Nation's health-
care sector.
    All told, the Congress and the White House last year pushed 
through legislation that will boost spending, taxes, deficits, 
and debt by unrivaled numbers. As alarming as today's $1.4 
trillion deficit is, our long-term debt projections are almost 
inconceivably worse.
    This past November, historian Niall Ferguson wrote in 
Newsweek that if we fail to come up soon with a credible plan 
to get our fiscal house in order, quote, ``The danger is very 
real that a debt crisis could lead to a major weakening of 
American power,'' end quote. And he pointed to historical 
precedents in which great empires collapsed under their 
indebtedness. We like to think this couldn't happen to us. But 
then we never thought General Motors would go bankrupt. We 
certainly never imagined that the Chinese would be lecturing us 
about fiscal prudence. But here we are.
    We must set a different course. And I think that starts 
with recognizing a few basic points.
    First, while it might be a great talking point for some, we 
didn't get to this point because the Federal Government was 
being starved by American taxpayers; we are here because 
Washington spends too much. Even if this Congress lets all of 
the 2001 and 2003 tax laws expire, throws people most onto the 
alternative minimum tax and resurrects the death tax, all it 
would accomplish is having imposed the largest tax increase in 
history in the midst of a recession because, according to CBO, 
Federal spending would still far outpace revenue.
    Second, the greatest factor in Washington's spending 
problem is the unsustainable growth of our largest 
entitlements--we all know this to be true--specifically in 
Social Security, Medicare, and Medicaid. And for every year we 
put off addressing it, the problem gets significantly worse. We 
need real, substantive entitlement reform proposals. I have 
offered ideas of my own, and others have as well. But we need 
to move beyond the debate and get to the business of actually 
reforming these programs. What I hope we hear today from these 
very insightful and impressive witnesses is what kind of 
fundamental entitlement reform they recommend to get this 
problem under control.
    And, with that, Chairman, thank you for having this 
hearing.
    Chairman Spratt. Mr. Ryan, before proceeding with the 
statements, let me ask unanimous consent that any Member who 
wishes to submit an opening statement may do so at this point.
    Without objection, so ordered.
    [The prepared statement of Mr. Connolly follows:]

  Prepared Statement of Hon. Gerald E. Connolly, a Representative in 
                  Congress From the State of Virginia

    Mr. Chairman, thank you for holding this hearing on the impact of 
long-term budget deficits.
    It is important to note that we did not invent the concept of a 
budget deficit. In fact, Congress, both Republican led and Democratic, 
has approved budgets in deficit in 74 of the past 100 years. Many on 
the other side of the aisle recently have taken the position that 
deficits are a bad thing, while simultaneously ignoring the significant 
contributions of their own actions to increase the national debt.
    Presumably, they hope that by ignoring the causes, they can 
continue with the same, fiscally irresponsible actions. In fact, while 
$479 billion of the current deficit can be attributed to the worst 
recession since World War II, more than $670 billion of the deficit is 
a direct result of three Bush and Republican leadership policies: tax 
cuts that weren't paid for, a prescription drug plan that wasn't paid 
for, and two wars that weren't paid for. That is the fiscal legacy that 
we inherited, but now the responsibility for America's fiscal stability 
lies with us. Although we did not create the deficit, we have a moral 
responsibility to address long-term deficits.
    Last year, under the leadership of Chairman Spratt, this Committee 
began a process that resulted in a Fiscal Year 2010 budget resolution 
that reduced the budget deficit by two-thirds over four years.
    This past July, the House of Representatives voted to reinstitute 
statutory Pay-As-You-Go legislation. When originally adopted in 1990, 
PAYGO led to four straight years of budget surpluses under President 
Clinton, starting in Fiscal Year 1998--the first surpluses in 30 years. 
This year, 24 Republicans joined us in fiscal responsibility. Although 
just one Republican on this committee joined us in fiscal 
responsibility.
    Moving forward, we must show that it is possible to have a reform 
agenda that is fiscally responsible. Without long-term fiscal 
responsibility, the prospect for long-term federal funding of 
worthwhile programs, especially Social Security and Medicare, dims.
    Although we already have taken a number of positive actions, I 
believe we must go further. In December I voted against using repaid 
and unused TARP funds for expanding stimulus efforts. This vote was 
taken on the same day that we voted to increase the nation's statutory 
debt ceiling--a move required lest government be forced to shut down 
before the end of the year. The unspent and repaid TARP funds represent 
the single largest opportunity for deficit reduction in our nation's 
history, and I believe that we must avail ourselves of this powerful 
tool rather than turning strictly to further spending and deficit 
increases.
    I look forward to the witnesses' testimony on how a renewed focus 
on long-term deficits can help ensure the long-term viability of 
essential government programs and operations.

    Chairman Spratt. I think the sensible way to proceed is 
from left to right, political and geographically, with Mr. 
Podesta.
    Mr. Podesta. I will take that as a compliment.
    Chairman Spratt. And let me say to you and all our 
witnesses, thank you for coming. We will make your statements 
part of the record so that you can summarize as you see fit.
    The floor is yours.

    STATEMENTS OF JOHN D. PODESTA, CEO, CENTER FOR AMERICAN 
     PROGRESS; MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A 
RESPONSIBLE FEDERAL BUDGET; BOB GREENSTEIN, EXECUTIVE DIRECTOR, 
  CENTER ON BUDGET AND POLICY PRIORITIES; JAMES C. CAPRETTA, 
            FELLOW, ETHICS AND PUBLIC POLICY CENTER

                  STATEMENT OF JOHN D. PODESTA

    Mr. Podesta. Thank you. Thank you very much. I will just 
summarize my statement. I want to make six quick points.
    First, the committee is faced with a very serious and very 
delicate challenge of addressing the truly dangerous long-term 
deficit outlook while also ensuring our economy recovers fully 
from the worst recession since the Great Depression.
    Both overcorrecting and undercorrecting pose serious 
threats to our economy. Failing to adequately address long-term 
deficits, on the one hand, threatens to result in a number of 
negative consequences, including rising interest rates and 
inflation that threaten the dollar. Overcorrecting, on the 
other hand, closing the spigot, in particular before the 
economy has fully recovered, would both jeopardize the economy 
as it currently stands and kill the prospects of job growth 
while making it harder, I think--and I want to underscore this 
point--making it harder over the long term to address the 
deficit outlook over the next decade.
    Second, I think it is worth noting how we got here. Of 
course, I see this, to some extent, from the perspective of my 
service as President Clinton's chief of staff, but we need to 
know how we got here so we can make sensible choices about how 
to go forward.
    In 1998, we had balanced the budget after inheriting a 
deficit of 4.6 percent of GDP. After the 2000 elections, we 
left the incoming Bush administration a balance sheet of a $236 
billion surplus, the largest surplus since 1948. And the 
Congressional Budget Office projected surpluses would reach 
$710 billion by 2009.
    By the time President Obama was sworn in, the deficit had 
already reached $1.2 trillion, a remarkable swing of 10 
percentage points of gross domestic product.
    Okay, now my microphone is on. I think you probably all 
heard me.
    And the question is, how did we create that 10 percentage 
points of GDP swing? Deep tax cuts, especially for high 
earners, combined with the wars in Iraq and Afghanistan and the 
major new spending programs, were undertaken without being paid 
for. The predictable result of cutting taxes while increasing 
spending at this rate was steep fiscal decline on a scale not 
seen since World War II, along with an unprecedented explosion 
of debt. Policies enacted during that period are responsible 
for more than half the deficits in 2009 and 2010.
    The recession, obviously, already also contributed to the 
erosion of near-term fiscal outlook. Tax revenues plummeted. In 
fact, the decline in tax revenues from 2008 was four times 
larger than new spending initiated since the inauguration of 
President Obama. Only 18 percent of the 2009 deficit is 
attributable to policies passed by this Congress.
    The third point I would like to make is that, 
notwithstanding how we got here, going forward, long-term 
deficits do pose substantial risk to the overall economic well-
being of the United States and to prospects for shared 
prosperity. These long-term deficits are driven largely by two 
underlying trends: the aging of the population, the rising of 
health care, combined with the chronic need for more overall 
revenue. These underlying trends threaten to overwhelm the 
Federal budget in the near future.
    Meeting this challenge will require a balanced approach 
that includes a variety of contributing positions. Primary 
amongst them must be policies to bring down the cost of health 
care. I know that prospects for reform may seem uncertain as we 
sit here this morning, but the economic health of our country, 
as well as the health and well-being of American citizens, 
depends on finding a way forward in a way that produces 
significant delivery reform, reduces the rate of health-care 
inflation, and makes health-care coverage affordable for 
families and businesses.
    In addition to controlling health-care costs, there will be 
a need for a renewed commitment to setting priorities, only 
spending taxpayer dollars on programs that work and building a 
smarter and more productive government that makes the most of 
every taxpayer dollar. We also need a sustainable and 
affordable national security policy and well-designed reforms 
to large entitlement programs, as Mr. Ryan suggested, including 
Social Security.
    My fourth point is that it must be acknowledged by everyone 
who is serious about improving the Nation's fiscal future that 
spending cuts alone will not solve the problem. The country 
will need more revenue. Any serious review of the budget 
numbers necessarily results in that conclusion. Balancing the 
budget by 2019 without raising any revenue and holding Medicare 
and Social Security debt service and defense harmless would 
require cuts of 70 percent in nondefense discretionary 
spending. I think that would be bad for the country, and it is 
politically unfeasible.
    Fifth, Congress can take action now to lay out a path back 
to fiscal sustainability. The Center for American Progress 
proposes an ultimate goal that is simple and straightforward: a 
completely balanced budget by 2020. Given the deep hole we are 
in, we can't get to balance immediately without doing great 
damage to our economy. So we proposed an intermediate goal of 
primary balance, which is when total revenues equal total 
spending, with the exception of debt service. A budget in 
primary balance would mean a fundamental return to responsible 
budgeting.
    We have issued a couple of reports, and we would like to 
include those in the record, if that is possible.
    [The report, ``A Path to Balance,'' may be accessed at the 
following Internet address:]

http://www.americanprogress.org/issues/2009/12/pdf/path_to_balance.html

    [The report, ``Deal With It,'' may be accessed at the 
following Internet address:]

  http://www.americanprogress.org/issues/2009/09/pdf/deal_with_it.html

    Mr. Podesta. But to reach these two goals, intermediate and 
ultimate, we are proposing specific annual targets that make 
steady progress in each year expressed as revenues as a share 
of spending, supported by a system of statutory mechanisms 
designed to enforce fiscal discipline that will make it 
difficult to deviate from that path.
    Missing the annual revenue-to-spending ratio target should 
trigger automatic reductions in spending that would affect both 
traditional programs and long-view tax expenditures. To achieve 
deficit reduction targets will require a statutory budget 
enforcement regime. Statutory PAYGO, enforced by sequestration 
process, was effective in the 1990s to create a balanced budget 
and create a surplus. It can serve us well again. I praise this 
committee and the House for reinstating statutory PAYGO. I hope 
that the Senate will follow suit.
    In order to really serve as a discipline on the process, 
PAYGO enforcement should be broadened to include not just 
spending but tax expenditures, in particular. Tax expenditures 
have the same impact on deficits as mandatory spending has had, 
and they have had a growing role and should not be held 
harmless if we are serious about enforcing PAYGO discipline. 
The point is not to actually have sequestration, but to force 
the discipline on the Congress and the White House.
    And, finally, my final point is that a deficit commission 
appears likely, and this could prove to be a useful step 
forward to addressing our deficit challenges. However, a 
commission without a clear mandate and specific goals is likely 
to fail. If the purpose of creating a commission is to have a 
mechanism to move forward on this extremely difficult issue, it 
is important to charge that commission with a clearly defined 
goal. As noted earlier, we believe an achievable set of goals 
for the commission could be primary balance by 2014 and a full 
balance by 2020.
    With that, let me thank you, Mr. Chairman. I will turn the 
mike over.
    [The prepared statement of John Podesta follows:]

       Prepared Statement of John D. Podesta, President and CEO,
                      Center for American Progress

    Mr. Chairman, members of the Committee, thank you for inviting me 
here today and giving me the opportunity to talk about the Center for 
American Progress's recent proposal for achieving fiscal 
sustainability.
    The position you are in today is not one I envy. This committee is 
faced with a very serious, and very delicate challenge--addressing a 
truly dangerous long term deficit outlook, while also ensuring our 
economy recovers fully from the worst recession since the Great 
Depression. To get it right, policymakers must perform the metaphorical 
equivalent of navigating the ship of state through an extremely narrow 
waterway.
    Both overcorrecting and undercorrecting pose serious threats to our 
economy.
    Failing to adequately address long term deficits, on the one hand, 
threatens to result in a number of negative consequences. High levels 
of government borrowing can reduce domestic investment, raise interest 
rates, and spur inflation; seriously hinder the ability to make 
important public investments; and potentially leave us unable to 
stimulate the economy in a time of future crisis. The threat of 
sustained deficits can also lead to strong reactions by economic 
actors--investors, consumers, trading partners--that increase the 
likelihood of additional financial turbulence and threaten the 
stability of the dollar.
    Overcorrecting, on the other hand--closing the spigot on the 
American Recovery and Reinvestment Act, in particular, before the 
economy has fully recovered--would both jeopardize our economy and kill 
the prospect of job growth, while also making it harder, over the long 
run, to address the deficit outlook over the next decade. Pursuing 
drastic and immediate deficit reduction when the economy has only 
recently returned to growth and unemployment is still at 10 percent 
would be an enormous mistake; fiscal retrenchment right now could lead 
to a double-dip recession. Those who would use current deficits as an 
excuse to curtail or prevent policies designed to speed the recovery 
are doing the country and future budgets a disservice. Recovery 
spending today is both necessary and entirely appropriate, even in 
light of the long term budget challenge. It accelerates the recovery. 
Taking these appropriate steps today, in order to bring the economy 
back to its full health, will put us in the strongest position from 
which to undertake deficit reduction over the longer term. Deficit 
spending in the near term will help produce a return to robust economic 
and employment growth, yielding significant dividends in terms of 
future deficit reduction.
    Again, the challenge at hand is to strike a delicate balance--to 
implement measures that will restore growth, create jobs, and bring the 
U.S. economy back to full strength while, at the same time, laying out 
a credible path for stabilizing, then reducing, U.S. debt levels. The 
Center for American Progress has proposed a roadmap for making steady 
progress towards fiscal sustainability between now and the end of this 
decade. But before looking forward, I'd like to provide some broader 
context on how we arrived in this position in the years since I served 
in the Clinton Administration.
    In 1998, we had balanced the budget after inheriting a deficit of 
4.6 percent of GDP. After the 2000 elections, we left the incoming 
administration a balance sheet that was $236 billion in the black--the 
largest surplus since 1948--and CBO projected surpluses would reach 
almost $710 billion by 2009 based on policies then in place.
    By the time President Obama was sworn in, the deficit had already 
reached $1.2 trillion, a remarkable swing of 10 percentage points of 
GDP since our Administration left office, and the debt had nearly 
doubled. How did we get from record surpluses to record deficits?
    The near-term deficits are primarily the result of fiscal 
deterioration occurring since 2001. Deep tax cuts, especially for high-
earners, dramatically affected the federal balance sheet, while the 
wars in Iraq and Afghanistan and major new spending programs were 
undertaken without being paid for. The predictable result of cutting 
taxes while increasing spending at this rate was steep fiscal decline 
on a scale unseen since World War II, along with an unprecedented 
explosion in debt. Under the previous administration, publicly held 
debt ballooned from $3.4 trillion to $6.3 trillion, which marks the 
largest increase in debt of any president in history.
    Multiple independent analyses conducted by the New York Times, the 
Economic Policy Institute, the Center on Budget and Policy Priorities 
and the Center for American Progress have all shown that huge portions 
of current and future deficits are directly attributable to the lasting 
effects of those policies. Policies enacted during this period are 
responsible for more than half of the deficits in 2009 and 2010; the 
cost of the Bush tax cuts alone, if not permitted to expire, will 
exceed $5 trillion over the next ten years.
    The recession has also contributed to the corrosion of the near-
term fiscal outlook. Tax revenues plummeted; in fiscal year 2009, they 
dropped to their lowest point since 1950. In fact, the decline in tax 
revenues from 2008 was four times larger than all new spending 
initiated since the inauguration of President Obama. Only 18 percent of 
the 2009 deficit is attributable to policies passed by this Congress.
    The country is in a weaker economic and fiscal position today not 
because of the American Recovery and Reinvestment Act that passed in 
2009, but because of fiscal policy and regulatory decisions made in 
previous years. Having said that, it is also clear that going forward, 
long-term deficits pose substantial risks to the overall economic well-
being of the United States and to prospects for shared prosperity. 
These long-term deficits are driven largely by two underlying trends: 
the aging of the population and the rising cost of health care. During 
the past eight years, these two trends went unaddressed, even as the 
dangers they posed to our long-term fiscal health became clearer and 
clearer. Combined with a chronic need for more overall revenue, these 
underlying trends threaten to overwhelm the federal budget in the near 
future. According to current projections, the federal budget deficit 
will remain well above four percent of GDP for at least the next ten 
years and will balloon even further afterwards. If we allow that to 
take place, publicly held debt will mushroom from around 50 percent of 
GDP currently to over 80 percent by 2019. The scale of these challenges 
means that there are no easy or simple answers. Meeting the challenge 
will require a balanced approach that includes a variety of 
contributing solutions. Primary among them must be policies that bring 
down the costs of health care. Let me underscore this point: there can 
be no return to fiscal sustainability without substantial health 
reform. While the prospects of reform may seem uncertain as we sit here 
today, the economic health of our country--as well as the health and 
wellbeing of American citizens--depends on finding a way forward on 
health reform that produces significant delivery reform, reduces the 
rate of health care inflation, and makes health coverage affordable for 
families and businesses.
    In addition to controlling health care costs, there needs to be a 
renewed commitment to setting priorities, only spending taxpayer 
dollars on programs that work, and building a smarter, more productive 
government that makes the most of every tax dollar. We will also need a 
sustainable and affordable national security policy and welldesigned 
reforms to large entitlement programs, including Social Security.
    Finally, it must be acknowledged by everyone who is serious about 
improving the nation's fiscal future that spending cuts alone will not 
solve the problem. The country will need more revenue. Any serious 
review of the budget numbers necessarily results in this conclusion. 
For example, balancing the budget by 2019 without significant cuts to 
certain priorities such as debt-service payments, defense spending, 
Medicare or Social Security and without raising any additional revenue 
would lead to cuts in the rest of the budget of close to 70 percent. 
Cuts of that magnitude are both unrealistic and unwise. Simply put, 
those who suggest deficit reduction can be achieved only through 
spending cuts or only through tax increases misunderstand the enormity 
of the challenge.
    It is also worth noting that the last time we faced a major budget 
problem in the 1990s, tax increases were a significant part of the 
solution, and the country enjoyed the longest period of continued 
economic growth in history. The supply-side economic policies pursued 
during the subsequent decade proved far less effective, whether 
measured by growth in the overall economy, job creation, or median wage 
growth. We believe that Congress can take action now to lay out a path 
back to fiscal sustainability. Many of the dangers of large, persistent 
deficits stem from the perception that the budget is permanently out of 
balance. A reasonable, realistic plan to get the budget back in the 
black would alleviate those fears. And while, as I've already 
mentioned, it would be extremely unwise to try for immediate fiscal 
retrenchment, setting out a path allows us to take meaningful, concrete 
steps toward the ultimate goal without risking economic backsliding.
    We propose an ultimate goal that is simple and straightforward: a 
completely balanced budget by 2020. During good economic times, there 
is no reason to run deficits. The default position of the federal 
budget should be balance, and the red ink should be reserved for 
recessions and emergencies. However, given the deep hole in which we 
currently find ourselves and the strength of underlying trends, we 
cannot rush to full balance right away. The magnitude of the problem is 
simply too large to try and solve it all in one fell swoop.
    That is why we have proposed an intermediate goal, in addition to 
the ultimate goal, that can be set in the near-term and which will, if 
reached, put the budget on much stronger ground. We believe that 
intermediate goal should be primary balance. Primary balance is when 
total revenues equal total spending with the exception of debt service 
payments. A budget in primary balance would mean a fundamental return 
to responsible budgeting--we would not be borrowing to pay for any 
government programs, services or public benefits. Furthermore, budgets 
in primary balance have historically resulted in a declining debt-to-
GDP ratio.
    To reach these two goals, intermediate and ultimate, we are 
proposing specific annual targets that make steady progress in each 
year. These targets are expressed as revenues as a share of spending. 
In fiscal year 2009, for example, federal revenues covered only 60 
percent of all spending. Our proposal has that ratio going up to 100 
percent over the next ten years, with targets in each individual year. 
These annual targets will need to be supported by a system of statutory 
mechanisms designed to enforce fiscal discipline that will make it 
difficult to deviate from the path. To accomplish this, we would 
recommend that missing the annual revenue to spending ratio target 
trigger automatic reductions in spending that would affect both 
traditional programs and tax expenditures. The point is not to trigger 
sequestration, but to ensure that the consequences of failure are clear 
and therefore avoided. Of course, the statutory regime should also 
include ``safety-valve'' measures to allow for flexibility if weak 
economic conditions persist or reappear.
    To achieve deficit reduction targets will require a statutory 
budget enforcement regime. It was, in part, through statutory 
provisions that included PAYGO that the budget discipline of the 1990s 
was achieved and the surpluses of that era accomplished. Statutory 
PAYGO enforced by a sequestration process has been effective in the 
past and can again serve us well as we address our fiscal challenges.
    The House is to be praised for reinstating statutory PAYGO and the 
Senate should follow suit. We believe, however, that in order to really 
serve as a discipline on the process PAYGO enforcement should be 
broadened to include not just spending but taxes as well-tax 
expenditures in particular. Tax expenditures have the same impact on 
deficits as mandatory spending, have had a growing role and should not 
be held harmless if we are serious about enforcing PAYGO discipline.
    A deficit commission appears likely and this could prove to be a 
useful step forward for addressing our deficit challenges. However, a 
commission without a clear mandate and specific goals is likely to 
fail. If the purpose of creating a commission is to have a mechanism to 
make progress on an extremely difficult issue, then it is important to 
charge that commission with a clearly defined goal. Otherwise, the 
commission is likely to do no better than any other process in getting 
us closer to a fiscally responsible budget. As noted earlier, we 
believe an achievable set of goals for the commission could be primary 
balance by 2014 and full balance by 2020.
    There is no doubt that we face serious fiscal challenges in the 
years ahead. Persistent deficits carry with them significant risks and 
simply cannot be tolerated in perpetuity. Acting hastily would also be 
dangerous and therefore substantial deficit reduction should be delayed 
until the economic recovery is stronger. But we can take steps now to 
mitigate many of the most serious risks that stem from our long-term 
budget woes. By adopting an appropriate path to fiscal sustainability, 
complete with annual targets, we will demonstrate a real commitment to 
getting the budget gap under control. In the near term, achieving 
primary balance will prevent our debt level from rising further and it 
will put the government in a much stronger position to realize the 
long-term goal of complete balance. Though the challenge is certainly 
daunting, it is not insurmountable. Adopting a path to balance, such as 
the one we have proposed, is a good first step toward meeting that 
challenge.

    Chairman Spratt. Thank you, Mr. Podesta.
    Maya MacGuineas?

                  STATEMENT OF MAYA MACGUINEAS

    Ms. MacGuineas. Thank you. Good morning, Chairman Spratt, 
Congressman Ryan, members of the committee. Thank you so much 
for the opportunity to appear here today.
    I am here to discuss the work of the Peterson-Pew 
Commission on Budget Reform, which in December released a 
proposal which included a six-step plan to address the growing 
Federal debt, which I will summarize in just a moment.
    The main points I would like to emphasize today are that 
what was once a long-term fiscal problem has become a more 
immediate one, which requires that we take action much sooner 
than we needed to a few years ago. We no longer have the luxury 
of time on our side.
    Number two, it is important to focus on stabilizing the 
debt so that it declines to a reasonable level and that it is 
no longer growing as a share of the economy. For many years, we 
have focused on deficits. The debt has now reached a level 
where it is about to hamper our fiscal flexibility, and that is 
something we think is important to focus on.
    Number three, policymakers must balance the need to act 
quickly to avert a fiscal crisis with the need not to 
destabilize the economic recovery. We recently have just 
started something, copying Greg Mankiw on the Pigou Club, 
called the Announcement Effect Club, which basically says there 
is a growing call of people to commit to a fiscal plan 
immediately in order to buy us time to reassure credit markets 
that we are serious about fiscal reforms. And that allows us to 
gradually phase in those changes to not, sort of, stave off the 
recovery as it is getting started.
    Number four, the best approach would be to immediately 
commit to and develop a credible plan to stabilize the debt and 
then to start phasing it in gradually once the economy is 
strong enough. We suggest starting in 2012, judging from 
projections about economic recovery right now.
    Number five, the policies that will stabilize the debt in 
the medium term and close the longer-term fiscal gap are 
somewhat different. Both will be needed.
    Number six, a credible plan will have to be aggressive 
enough to reassure credit markets.
    And, number seven, the economic risks of doing nothing are 
tremendous, likely leading either to a fiscal crisis or an 
ongoing deterioration of the U.S. standard of living.
    That the country faces these tremendous challenges is not 
news to anyone on this committee. And, under reasonable 
assumptions, the debt will grow as a share of the economy 
indefinitely. At some point, this will push up interest rates 
and interest costs as a share of the budget, requiring more 
borrowing and creating a vicious debt spiral.
    We receive increasingly regular warnings from credit-rating 
agencies, to what we hear from the Chinese officials worried 
about their investments in the U.S., to what we see happening 
in overleveraged nations around the world.
    The Peterson-Pew Commission suggests that Congress and the 
White House follow a six-step plan to right the fiscal course. 
The first step, then, would be to commit immediately to 
stabilizing the debt at 60 percent of GDP by the year 2018. 
Step two would be to develop a specific and credible 
stabilization package in this year, 2010. Step three would be 
to begin phasing it in in 2012. Step four would be to review 
progress annually and implement an enforcement regime to stay 
on track, quite like what we just heard with triggers and 
specific annual goals. Step five would be to stabilize that 
debt by 2018, but, given historical debt levels, we don't think 
that goes far enough. And over time, step number six is to 
continue to reduce the debt as a share of the economy over the 
longer term.
    So there are a few points I do want to emphasize.
    One, prior to the economic crisis, we at the Committee for 
a Responsible Federal Budget were worried about the long-term 
fiscal problems facing the country, driven primarily by the 
aging and health-care cost problems. But now, due to the 
deficits we ran before the recession, the effects of the 
recession, the policies put in place to deal with the 
recession, and a host of additional expensive policies that 
Congress and the White House support, the debt has grown 
dramatically, and it is on course to reach unacceptably high 
levels much sooner than what used to be a multi-decade problem.
    Policymakers will have to act quickly to reassure credit 
markets. There is no single right goal. But given that the 
average debt levels over the past were 40 percent of GDP, it is 
quite likely that aiming to stabilize the debt at, say, twice 
that amount would not be sufficient to reassure markets.
    So I am certainly not going to criticize any other 
approaches. I don't think there is any single right goal. And I 
think it is really important that people who share these 
objectives spend their energy, kind of, reinforcing the need to 
do something, rather than disagreeing about the details of what 
specifically needs to happen. And I think it is wonderful that, 
in the past couple months, a growing number of groups have put 
specific ideas on the table.
    I will point out two things.
    One, part of the reason we were able to respond to this 
economic crisis was that we had the fiscal flexibility to do 
so. Our debt levels were low when we entered this downturn, and 
that allowed us to borrow. We can disagree about whether the 
stimulus was necessary or whether it was right, but it allowed 
us to respond in many ways to what could have, I believe, 
potentially been a devastating economic crisis. If we had been 
running debt that was at 60, 70 percent of GDP, we never would 
have had that fiscal flexibility.
    Second, the kind of goals, the numbers that we are 
suggesting to stabilize the debt at 60 percent of GDP are 
certainly aggressive, but they are really only aggressive when 
you compare them to current policies. If you look at them 
compared to current law under the targets that we are looking 
at, you would not actually have to have deficits that are lower 
than current law until the year 2015. It certainly is going to 
be a heavy political lift no matter what, but we got ourselves 
into a very large problem, and it is going to take some pretty 
aggressive measures to reassure credit markets that we are 
serious about getting out of them.
    The time frame for a plan should not be too long, helping 
to mitigate the political risk that, at the first sign of 
improvements, policymakers jump ship and go back to the easier 
policies of cutting taxes and increasing spending. So our 
proposal lasting from 2012 to 2018 we think is a reasonable 
time frame.
    It is also likely that the policies that will be most 
palatable to bring the debt to a reasonable level over a 
reasonable time period are going to be different in the medium 
term than in the longer term. In the shorter term, we have to 
look for changes that can be implemented quickly. History shows 
that policymakers are more likely to cut discretionary spending 
and increase taxes to get immediate deficit reduction.
    If that turns out to be the case, we have to recognize that 
these changes will not keep the debt from going over the long 
term. In order to stabilize the debt, we will have to make 
changes to the drivers of the debt's growth, those programs 
that are expanding due to the aging of health-care costs, 
particularly Social Security and Medicare, and any package 
should include policies that meet both time horizons. 
Basically, everything has to be on the table.
    Congressman Ryan had to step out, so I am not going to 
respond to his challenge right now, but I appreciated it, that 
we need to get specific about entitlement reforms. And if there 
is a chance during discussion, I will put forward all sorts of 
specifics that people here may not want to talk about yet, but 
we are going to have to switch the discussion from, kind of, 
fiscal goals which are critically important now and get 
specific pretty quickly. So I am happy to jump in, if that is 
useful.
    Thank you so much for the opportunity.
    [The prepared statement of Maya MacGuineas follows:]

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

    Chairman Spratt, Congressman Ryan, and Members of the Committee, 
good morning and thank you for inviting me here today to share my views 
on bipartisan process proposals for long-term fiscal stability. It is a 
privilege to appear before this Committee.
    I am the President of the bipartisan Committee for a Responsible 
Federal Budget. Our Co-Chairs are Congressmen Bill Frenzel, Tim Penny 
and Charlie Stenholm, and the Board is made up of past Directors of the 
Office of Management and Budget, the Congressional Budget Office, and 
the Government Accountability Office, as well as Chairmen of the 
Federal Reserve Board and the Budget Committees, and other budget 
experts. I am also the Director of the Fiscal Policy Program at the New 
America Foundation, a non-partisan think tank here in Washington D.C. 
Today, I am here to discuss the work of the Peterson-Pew Commission on 
Budget Reform, which, in December, released Red Ink Rising: A Call to 
Action to Stem the Mounting Federal Debt, which proposes a six-step 
plan to address the growing federal debt.
    The main points I would like to emphasize today are:
     What was once a long-term fiscal problem has become a 
medium-term problem that requires that we take action much sooner than 
was needed a few years ago.
     It is important to focus on stabilizing the debt, so that 
it declines to a reasonable level and is no longer growing as a share 
of the economy.
     Policymakers must balance the need to act quickly to avert 
a fiscal crisis caused by our growing debt with the need not to 
destabilize the economic recovery.
     The best approach would be to immediately commit to and 
develop a credible plan to stabilize the debt, and to start phasing it 
in gradually once the economy is strong enough--we suggest starting in 
2012.
     The policies that will stabilize the debt in the medium-
term and close the longer-term fiscal gap are somewhat different--both 
are needed.
     A credible plan will have to be aggressive enough to 
reassure credit markets.
     The economic risks of doing nothing are tremendous--likely 
leading either to a fiscal crisis or an ongoing deterioration in the 
U.S. standard of living.
    That the country faces tremendous long-term budget challenges is 
not news to anyone on this Committee. It is not the massive trillion-
dollar-plus deficit of the past year that is so troubling, but that 
there is no plan to put the budget on a sustainable path in future 
years. Under reasonable assumptions, the debt will be growing as a 
share of the economy indefinitely; at some point this will push up 
interest rates and interest costs as a share of the budget, requiring 
more borrowing and creating a vicious debt spiral. If not addressed, 
this will ultimately lead to a fiscal crisis.
    Just last week, Fitch Ratings warned that if the U.S. does not take 
action, government debt by the second half of this decade could 
threaten the nation's AAA bond rating. And the increasingly regular 
warnings--from what we hear from Chinese officials worried about their 
investments in U.S. bonds, to what we see with over-leveraged nations 
around the world--provide a steady reminder of the urgency of this 
problem.
    It is within that context that the Peterson-Pew Commission on 
Budget Reform is calling for Congress and the White House to take 
immediate action to stem the growing federal debt. Our proposal is 
crafted both to accommodate the needs of the still-recovering economy, 
and reflect the tremendous risks posed by the large and expanding debt 
burden. We recognize that fiscal problems of this size cannot be fixed 
overnight or even in a year. Indeed, rushing the process could harm the 
economy, choking off the budding recovery. But to buy some breathing 
room, the United States must show its creditors that it is serious 
about stabilizing the federal debt over a reasonable timeframe. Both 
spending cuts and tax increases will be necessary.
    We recommend that Congress and the White House follow a six-step 
plan:
    Step 1: Commit immediately to stabilize the debt at 60 percent of 
GDP by 2018;
    Step 2: Develop a specific and credible debt stabilization package 
in 2010;
    Step 3: Begin to phase in policy changes in 2012;
    Step 4: Review progress annually and implement an enforcement 
regime to stay on track;
    Step 5: Stabilize the debt by 2018; and
    Step 6: Continue to reduce the debt as a share of the economy over 
the longer term.
    1. Commit immediately to stabilize the debt at 60 percent of GDP by 
2018.
    Congress and the White House should immediately commit to 
stabilizing the public debt at a reasonable level over a reasonable 
timeframe: we recommend 60 percent of GDP by 2018. Waiting too long 
could fail to reassure creditors--one of the primary objectives of 
acting quickly. The ``announcement effect'' of such a commitment, if 
credible, can have positive economic effects by signaling that the 
United States is serious about reducing its debt. We believe that the 
60 percent goal is the most ambitious yet realistic goal that can be 
achieved in this timeframe. The 60 percent debt threshold is now an 
international standard--regularly identified by the European Union (EU) 
and the International Monetary Fund (IMF) as a reasonable debt target. 
A more ambitious target could easily prove to be such a heavy political 
lift that lawmakers would not embrace it or it would not be credible. 
Given the significant risks of high U.S. debt, however, a less 
aggressive target might be insufficient to reassure markets. While 
cutting government spending or raising taxes too early could slow or 
reverse the economic recovery, other countries have shown that a 
credible commitment to reducing the debt prior to actual policy changes 
can improve creditors' expectations and diminish the risks of a debt 
driven crisis.
    2. Develop a specific and credible debt stabilization package in 
2010.
    A glide path for getting from today to 2018 is critical. So are the 
specific policies. Congress and the White House must agree on the 
necessary reforms and the timing for implementing them. We do not 
recommend a specific mix but believe that both spending cuts and tax 
increases will be necessary. Under the Commission's fiscal baseline, 
average annual deficits are projected to be about 6 percent of GDP. To 
meet the proposed goal, the average deficit would need to shrink to 
about 2 percent. For illustrative purposes, we propose a glide path 
that starts gradually with a deficit of 5 percent in 2012 and that 
requires a deficit of less than 1 percent by 2018. We allow seven years 
for the plan so that the impact of policy changes made in any single 
year is not drastic and does not stall the recovery of the economy.
    The magnitude of deficit reduction needed to reach the 60 percent 
goal depends on the level of debt when policymakers start. If no new 
deficit-financed policies were added to the budget and any extensions 
of expiring policies were paid for, deficits would average around 3 
percent of GDP, instead of 6 percent, and would only need to shrink to 
around 2 percent to meet the Commission's goal--clearly a more 
manageable scenario.
    3. Begin to phase in policy changes in 2012. Given current economic 
conditions, we recommend waiting to implement the policy changes until 
2012. Clearly, policymakers need to closely monitor economic conditions 
between now and then, but making aggressive changes any earlier could 
harm the economic recovery, particularly with unemployment reaching a 
25-year high in 2009. However, waiting any longer could undermine the 
plan's credibility and leave the country reliant on excessively high 
borrowing for too long with no plan in place to change course. Some 
policymakers will no doubt try to use the struggling economy as an 
excuse for delay. Keep in mind however, that not putting a plan in 
place could derail the economic recovery.
    4. Review progress annually and implement an enforcement regime to 
stay on track. Once a plan is adopted, it will be critical to have a 
mechanism to ensure that it stays on track. We suggest a broad-based 
companion enforcement mechanism, or a ``debt trigger.'' The trigger 
would take effect if an annual debt target were missed. Any breach of 
the target would be offset through automatic spending reductions and 
tax increases. The Commission recommends that the trigger apply equally 
to spending and revenue. There would be a broad-based surtax, and all 
programs, projects, and activities would be subject to this trigger. 
The trigger should be punitive enough to cause lawmakers to act but 
realistic enough that it can be pulled as a last resort if policymakers 
fail to act or select policies that fall short of the goal.
    5. Stabilize the debt by 2018.
    Reducing the debt to 60 percent of GDP will be no small feat. It 
will require small changes in the first year from the projected level 
of 69 percent to 68 percent but, more significantly, will require a 
dramatic deviation from the current debt path. Preventing that 
projected path is critical for the United States if it is to avoid the 
economic risks associated with excessive debt.
    But hitting a 60 percent target is, in and of itself, not a 
sufficient goal. What matters just as much--if not more--is that the 
debt does not continue to grow as a share of the economy thereafter. 
This makes deriving a package of revenue increases and spending cuts to 
bring the debt down to 60 percent even more difficult. It would be 
easier if policymakers could implement temporary measures, timing 
shifts, and short-term policies that did not address the major drivers 
of the budget's growth. This shortsightedness, however, would leave the 
debt on track to grow again after the medium-term goal was achieved. To 
be effective over the longer term, a stabilization package will have to 
include permanent changes to current policies and must be weighted to 
control the budget's most problematic areas.
    We believe the problem is so large that nearly all areas of the 
budget will be affected, and certainly both spending and taxes will 
have to be part of the ultimate package. Reforms in programs that are 
growing faster than the economy--notably Medicare, Medicaid, Social 
Security, and certain tax policies--afford the best opportunities for 
savings and will provide the greatest benefits to longer term debt 
stability.
    6. Continue to reduce the debt as a share of the economy over the 
longer term.
    Though preventing the debt from expanding again over the coming 
decades will be quite challenging given the demographic and health care 
cost pressures, we believe that policymakers must, over time, bring the 
debt down beyond the initial 60 percent target to something closer to 
the U.S. historical fifty-year average of below 40 percent. Fiscally-
responsible federal policies are necessary so that the government has 
the fiscal flexibility to respond to crises. Even though the United 
States had budget deficits when the recent economic and financial 
crises hit, the relatively low level of debt as a share of the economy 
gave policymakers the ability to respond quickly and borrow large 
amounts to respond to those crises without worrying about the federal 
government's ability to borrow. If the debt level had been at its 
current level, or where it is projected to grow to, responding to the 
economic crisis would have been much more challenging.
    We know that the policies to achieve any of these fiscal 
improvements are difficult, involving spending reductions or tax 
increases, and in all likelihood both. In the absence of a single 
fiscal goal, though, it is too easy for lawmakers to oppose any set of 
hard choices others suggest without offering alternatives.
    Implementing reforms that slow the growth of government spending, 
keep revenue apace with spending, and are conducive to economic growth 
will be critical to bringing down the debt levels further. Ultimately, 
this task will almost certainly require more than one package of debt 
reduction. The Commission hopes that Congress and policymakers will 
monitor the debt to ensure that it stays at a manageable level and does 
not grow faster than the economy. Ensuring the future fiscal health of 
the country depends on it.
    This year we will publish a detailed companion report with 
additional recommendations on reforming the budget process. That report 
will also propose budget process tools to help lawmakers reach and 
maintain a stable level of debt. We very much hope to work closely with 
the members of this Committee in developing this plan.
    And I would like to take the opportunity to elaborate on a few 
points I think are particularly important.
    Prior to the economic crisis, we, at the Committee for Responsible 
Federal Budget, were worried about the long-term fiscal problem facing 
the country, driven primarily by aging and growing health care costs. 
But as a result of 1) running deficits prior to the recession, 2) the 
lower revenues and higher spending due to the recession, 3) the policy 
costs of dealing with the recession, and 4) a host of new costs that 
both the administration and Congress support, the debt has grown 
dramatically and is on course to reach unacceptably high levels. What 
used to be a multi-decade problem is now at our doorstep.
    Policymakers will have to act quickly to reassure credit markets 
that the United States will soon shift course to a more sustainable 
fiscal path. This will require committing to such a change immediately; 
beginning to phase in changes as soon as the economy will tolerate 
them; and pursuing a fiscal goal that is sufficiently aggressive to 
reassure credit markets. There is no single ``right'' goal, but given 
that average debt levels over the past 50 years were below 40 percent 
of GDP, it is quite likely that aiming to stabilize the debt at twice 
the historical level, for instance, will not be sufficiently credible.
    Another risk of a fiscal plan that has a long timeframe is the 
political risk that once policymakers see signs of progress, rather 
than sticking to the plan, they will switch course and return to the 
politically more popular exercise of increasing spending and cutting 
taxes. Therefore, we believe the timeframe for a plan should not be too 
long. Annual debt goals combined with an automatic trigger mechanism 
will also help keep policymakers on track.
    The bottom line here is that time is a luxury we no longer have.
    It is also likely the policies that will be most palatable to bring 
the debt to a reasonable level over a reasonable time period are in 
many cases different than those that will keep the debt from growing 
again in the longer term. In the medium-term, we have to look for 
changes that can be implemented reasonably quickly. History shows that 
policymakers are more likely to cut discretionary spending and increase 
taxes to get immediate deficit reduction.
    These changes, however, will not keep the debt from growing over 
the longer-term. In order to stabilize the debt over the long-term, we 
will have to make changes to the drivers of the debt's growth, those 
programs that are expanding due to aging and health care costs--
including the largest mandatory spending programs, Social Security and 
Medicare.
    A reasonable package will have to include both the policies 
necessary to reduce the debt as a share of the economy over the medium 
term and keep it under control over the longer-term. The likely time 
horizon of policy changes only makes it more important to recognize 
that all areas of the budget will have to be on the table in order to 
craft a credible and effective debt stabilization package.
    I will stop here. We realize the immense difficulty of the task 
ahead of policymakers. Our board members have either been in Congress 
or worked closely with Members throughout their careers and know the 
political and policy challenges we now face--although frankly many of 
them are concerned that the challenge we face at this moment is the 
worst they have seen in their careers. For that reason, as difficult as 
it will be to develop a plan to put the debt on a sustainable course, 
there is no other option and that action to set the changes in motion 
must begin right away.
    Once again, thank you for the opportunity to appear here today and 
I look forward to your questions.

    Chairman Spratt. Thank you for coming.
    Robert Greenstein?

                 STATEMENT OF ROBERT GREENSTEIN

    Mr. Greenstein. I thank you, Mr. Chairman.
    Last week, the Center on Budget and Policy Priorities 
released our latest long-term budget projections. Our work 
isn't unique here. Over the last 8 months, new long-term budget 
projections and analyses have been issued by CBO; GAO; the 
Peterson-Pew Commission, as you just heard; a committee 
established under the auspices of the National Academy of 
Sciences and the National Academy of Public Administration; and 
a team of economists at the University of California and 
Brookings.
    What is striking is the degree of consensus across all of 
these analyses, not just on the numbers, in a sense, but on 
their significance and what they mean. Basically, all of these 
enterprises support the same conclusions on five key points.
    Number one, the deficits and debt will skyrocket in coming 
decades if current policies remain unchanged, and the debt at 
the levels projected ultimately would significantly damage the 
economy.
    Number two, that the continued rapid growth in per-person 
health-care costs is the single biggest reason for the 
projected increases in deficits and debt over the long term. It 
affects not only outlays for Federal programs but it also 
reduces tax revenue by making less and less of compensation in 
the form of taxable income.
    Number three, that the absolutely essential goal that must 
be met is to avoid a debt explosion, to prevent the debt from 
perpetually rising as a share of the economy. That is, as Maya 
just said, to stabilize the debt as a share of the economy. 
That is the bottom-line goal that has to be met.
    Number four, that it is not necessary to balance the budget 
to achieve the goal. As the National Academy of Sciences report 
notes, the debt can be stabilized at reasonable levels if 
deficits are held to somewhere in the range of 2 to 3 percent 
of the gross domestic product.
    And, lastly, it will almost certainly require a combination 
of changes in both revenues and spending to achieve this.
    Now, as John Podesta noted, we are not talking here about 
the deficits this year or next year. Deficits are absolutely 
necessary now to deal with the weak economy. In fact, I think 
more needs to be done to shore up the economy. We are talking, 
obviously, about deficits over the longer term.
    And dealing with the long-term budget problem, I would 
argue, should not be the concern just of deficit hawks or 
people thought of as green-eyeshades types. If the budget is 
not put on a sustainable path, it is my view that, over the 
long term, low- and moderate-income families will be among 
those who suffer the most from the inevitable erosion of the 
standard of living.
    Let me turn now to the question of what might be an 
appropriate fiscal target for the years ahead, the years that 
will be covered by the next budget resolution that this 
committee will write in the coming months.
    And before getting into the specifics, let me raise two 
concerns. One concern is the potential of not having a 
meaningful fiscal target at all. The other concern is setting a 
fiscal target that goes beyond what we need to stabilize the 
debt and is so severe that it is politically unattainable and, 
as a result of that, just gets blown away and is the same as 
having no target at all. That is what happened with the Gramm-
Rudman-Hollings law in the late 1980s.
    Now, three of the reports that I mentioned set a specific 
goal: ours, Pew-Peterson, and the National Academy of Sciences, 
in conjunction with their long-term fiscal forecasts. And in 
all of them, the goal is to stabilize the debt as a share of 
the gross domestic product over the coming years.
    In determining more specifically what that goal might be, 
we need to take two things into account. The first is we should 
not and cannot start cutting deficits in the next few years 
while the economy is still on its back. And the second is 
that--and you could take Social Security as an example; it will 
help focus one's mind on this. Many of the changes that are 
ultimately going to have to be made are going to have to be 
phased in over a number of years. Think about changes one might 
make in Social Security, and it becomes clear one would phase 
them in over a number of years.
    We recommend, based on this, stabilizing the debt in the 
years ahead by setting a target of reducing the deficit to no 
more than 3 percent of the gross domestic product in the years 
after the economy recovers. If one did that, that would result 
in--it would succeed in stabilizing the debt. The debt would be 
initially stabilized at slightly over 70 percent of the gross 
domestic product.
    Now, the Peterson-Pew Commission and the NAS panel set a 
target of 60 percent of GDP. And, in my view, that would be a 
very large mistake. Not only is it overly ambitious, more than 
is needed to stabilize the debt, but my concern is that it 
would be self-defeating because it would require targets so 
extraordinarily daunting that you wouldn't meet them.
    We ran the numbers yesterday and found that to get to 60 
percent of GDP by 2018 would require deficit reduction 
averaging $800 billion a year in tax increases and spending 
cuts each year from 2013 through 2018, and over the 10 years 
from 2013 through 2022, between $8 trillion and $9 trillion in 
tax increases and spending cuts. This doesn't count additional 
savings in interest costs on the debt.
    Maya noted that, under this path, you wouldn't have to cut 
deficit far below current law in the next few years, but 
current law isn't real, as you all know. Current law would 
entail a 21 percent cut immediately in physician payments, 
under the SGR; 40 million households within 2 years being added 
to the AMT; repeal of every one of the tax cuts, including the 
middle-class ones--or the expiration of all of the tax cuts, 
including the middle-class ones enacted in 2001 and 2003. No 
disrespect intended, but you aren't going to do that.
    So, my concern, again, is to set a target that gets to the 
goal, which is stabilizing the debt and avoiding a debt 
explosion, that is one you can enforce and you can meet.
    I would note that there is absolutely no evidence that a 
debt-to-GDP ratio of 60 percent, or any other particular 
percentage, is the particular target needed to avoid harm to 
the economy. The National Academies report is quite explicit 
that there is no magic number, there is no particular number. 
There is one piece of economic research on this that does find 
evidence that economic growth falters when government exceeds 
90 percent of GDP, and I don't propose we go that high. My 
point is simply we have to stabilize the debt. We have to have 
a path to get there, and it needs to be a path that can really 
be met.
    Now, what I am proposing, which is a target of deficits 
down to 3 percent of GDP, is really tough itself. The target 
that I am proposing would require spending cuts and tax 
increases of $400 billion a year, starting within a few years 
after the economy recovers. That alone would be really, really 
tough.
    So I think the history involving the Gramm-Rudman-Hollings 
law and the like suggests that if we set overly ambitious 
goals, we actually can have the unintended effect of making 
continued inaction more likely. If we recall the late 1980s, 
when we had a path under Gramm-Rudman of annual deficit targets 
getting down to zero that were not remotely realistic, what it 
produced was a cottage industry on both sides of the aisle of 
how to do rosy assumptions, how to print budget gimmicks in the 
budget, how to have a charade that we were meeting the targets 
in order to avoid sequestration. And when that didn't work, we 
just waived the targets or the sequestration away anyway.
    What we need is a path after the economy recovers that we 
can adhere to. Our first step is to avoid the debt explosion. 
For the long term, I would agree there would be desirability in 
stabilizing the debt at a level lower than 70 percent. Let's 
first achieve the goal of stabilizing. Once we get there, we 
can talk about the necessary steps it would entail to go 
further and whether the Congress is willing to take them.
    But my fear is one of continued inaction. Therefore, my 
recommendation is: Set the essential goal, stabilizing the 
debt, recognize what that means, deficits down to 3 percent of 
GDP, and figure out how to get there, putting everything, 
revenues and spending, on the table.
    Thank you.
    [The prepared statement of Robert Greenstein follows:]

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

    Mr. Chairman, Congressman Ryan, and members of the Committee, I 
appreciate the opportunity to appear here today to discuss the long-
term budget problem facing the United States.
    Last week, the Center on Budget and Policy Priorities released a 
new analysis presenting our latest long-term projections of federal 
spending, revenues, deficits, and debt under current policies and our 
conclusions about the changes that need to be made in those 
policies.\1\
---------------------------------------------------------------------------
    \1\ Kathy Ruffing, Kris Cox, and James Horney, ``The Right Target: 
Stabilize the Federal Debt,'' Center on Budget and Policy Priorities, 
January 12, 2010.
---------------------------------------------------------------------------
    It will be no surprise to any of you who have heard us testify 
before on the long-term budget outlook--or have heard from any number 
of other experts on this subject in recent years--that we conclude the 
United States faces a very serious deficit problem if current policies 
remain unchanged. The problem ultimately will threaten the economic 
health of the country and compromise the ability of the government to 
meet crucial national needs.
    Let me be clear. I am not talking about the large deficits we face 
this year or in the next few years. We all wish that the economic 
downturn and near meltdown of the financial system that have driven 
current deficits to such high levels had not occurred. But, given the 
circumstances we have been confronting, those deficits not only are 
acceptable but are the necessary result of those circumstances and the 
efforts required to shore up the financial system and put the economy 
back on a sound footing. If we had tried to hold down the deficit over 
the last year, or if we try to cut deficits before the economy is 
healthy enough to absorb such action--the Congressional Budget Office 
has projected that the U.S. gross domestic product (GDP) will not be 
back to its potential level until 2013 and unemployment will remain 
above its ``natural'' rate until 2014--the country will be worse off.
    The problem I am talking about is what we project will happen to 
deficits and debt in coming decades under current policies (and 
assuming the economy is healthy). We project that deficits will rise to 
more than 20 percent of GDP by 2050 and that debt will soar to the 
unprecedented level of about 300 percent of GDP by mid-century. (The 
highest level of debt experienced in the United States was 110 percent 
of GDP, at the end of World War II.) As the Congressional Budget Office 
and others have pointed out, over the long run, such high levels of 
debt would constrain the standard of living of residents of the United 
States and increase the risk of a financial crisis that could seriously 
disrupt the economy and the budget.
    I believe it is absolutely necessary for policymakers to address 
this problem, and the sooner the better (with the caveat that tax 
increases or spending cuts that would threaten the recovery should not 
be implemented until the economy is back on track). As the founder and 
Executive Director of an organization that is dedicated to promoting 
efforts to improve the lives of low- and moderate-income Americans, I 
want to stress that dealing with the long-term budget problem should 
not just be the concern of ``deficit hawks'' or ``green-eyeshade'' 
types. If the budget is not put on a sustainable path, it is likely 
that low- and moderate-income Americans will suffer the most from the 
inevitable erosion of the average standard of living in this country. 
And, if rising debt does trigger a financial crisis, programs that are 
crucial to the well-being of less-well-off Americans are likely to bear 
the brunt of draconian steps taken in that crisis atmosphere to reduce 
deficits and debt and reassure financial markets. No one with 
particular concerns about the well-being of low- and moderate-income 
Americans can afford to ignore the long-term budget problem.
                putting the budget on a sustainable path
    Now let me say more about the nature of the long-term problem and 
what has to be done to put the budget on a sustainable path. One of the 
striking things about this is the degree of consensus among budget 
experts--striking because there is so little consensus about most other 
budget issues.
    In the last eight months, budget projections and analyses of the 
scope of the fiscal problem over the long term have been issued not 
only by the Center on Budget and Policy Priorities, but also by CBO, 
the economists Alan Auerbach of the University of California at 
Berkeley and William Gale of the Brookings Institution, the Government 
Accountability Office, a commission supported by the Peter G. Peterson 
Foundation and the Pew Charitable Trusts, and a committee established 
under the auspices of the National Academy of Sciences and the National 
Academy of Public Administration.\2\
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, ``The Long-Term Budget Outlook,'' 
June 2009; Alan J. Auerbach and William G. Gale, ``The Economic Crisis 
and the Fiscal Crisis: 2009 and Beyond: An Update,'' September 2009; 
Government Accountability Office, ``The Federal Government's Long-Term 
Fiscal Outlook: Fall 2009 Update,'' October 2009; Peterson-Pew 
Commission on Budget Reform, ``Red Ink Rising: A Call to Stem the 
Mounting Federal Debt,'' December 2009; National Research Council and 
National Academy of Public Administration, ``Choosing the Nation's 
Fiscal Future,'' January 2010.
---------------------------------------------------------------------------
    These reports--produced by organizations and individuals with 
varied interests and outlooks--all support the same conclusions on a 
number of key points:
     That deficits and debt will skyrocket in coming decades if 
current policies remain unchanged;
     That debt at the levels projected would seriously threaten 
the budget, the economy, and the well-being of the people of the United 
States;
     That the continued rapid growth of per-person health care 
costs is the single biggest reason for the projected long-term 
increases in deficits and debt (with demographic changes--the aging of 
the baby-boom population--contributing to a significant but lesser 
extent to the projected increases);
     That the absolutely necessary goal of policymakers to 
avoid this outcome is to prevent the debt from perpetually rising as a 
share of the economy--that is, to stabilize the debt-to-GDP ratio;
     That it is not necessary to balance the budget to achieve 
this goal--that debt could be stabilized at levels projected for the 
middle of this decade if deficits are no more than about 3 percent of 
GDP or a bit less; and;
     That it will almost certainly require a combination of 
increases in revenues and reductions in spending to put the budget on a 
sustainable path. (The reports do not all say this explicitly, but it 
would be hard for a thoughtful reader to conclude that any of the 
reports suggest that solving the problem solely on the revenue or the 
spending side of the budget is feasible.)
    As I noted, this degree of consensus among budget analysts on such 
an important issue is striking. It is true that there is a great deal 
of uncertainty about what will happen to the economy and the budget in 
coming decades. Nevertheless, this consensus among a variety of 
analysts should give pause to anyone who is tempted to believe that it 
would be prudent to ignore the problem posed by the current budget path 
or to assert that we can ``grow our way out of it.''
                        setting a fiscal target
    Among the three reports that propose a specific fiscal target for 
lawmakers--the Center's report and the reports by the Pew-Peterson 
commission and NAS-NAPA committee--there is agreement that the general 
goal should be to stabilize the debt-to-GDP ratio within the next 
decade. The Center specifically calls for deficits to be reduced to no 
more than 3 percent of GDP by 2019, and preferably sooner. Given the 
need to avoid implementing cuts in the next few years that could 
undercut the economic recovery and to allow for a gradual phasing in of 
some cuts once they do begin, we assume that the debt would be 
stabilized at somewhat over 70 percent of GDP over the course of the 
decade. The Pew-Peterson commission and the NAS-NAPA commission both 
propose a goal of stabilizing the debt-to-GDP ratio at a lower level, 
60 percent of GDP.
    We believe that a goal of ensuring that debt is stabilized at 60 
percent of GDP in this decade is both overly ambitious and unnecessary, 
and as explained below, is likely to be self-defeating. Under current 
policies, we project that debt will be about 70 percent of GDP at the 
end of 2012 and that deficits in 2013 through 2018 will average about 
$1 trillion a year, or 6 percent of GDP. For debt to equal 60 percent 
of GDP at the end of 2018, the deficits in 2013 through 2018 would have 
to be cut by an average of about $800 billion a year (or 4 percent of 
GDP a year), including interest savings. This is an extremely ambitious 
goal. The largest deficit reduction efforts in the last three decades 
trimmed deficits by about 2 percent of GDP.
    More importantly, while it is necessary to stabilize the debt-to-
GDP ratio, it is not necessary to adopt a target of 60 percent. There 
is no evidence that a debt-to-GDP ratio of 60 percent represents a 
threshold above which the potential harm to the economy rises to an 
unacceptable level, and some evidence that that threshold is somewhat 
higher. There is little empirical basis for any particular debt-to-GDP 
target, although an analysis of historical international data by 
economists Carmen M. Reinhart and Kenneth S. Rogoff suggests that 
economic growth falters when government debt exceeds 90 percent of 
GDP.\3\ The NAS-NAPA report acknowledges this, stating that ``There is 
no magic number for the ratio of government debt to GDP * * *'' \4\
---------------------------------------------------------------------------
    \3\ See Reinhart and Rogoff, ``Growth in a Time of Debt,'' 
available at http://www.aeaweb.org/aea/conference/program/
retrieve.php?pdfid=416, forthcoming in American Economic Review, Vol. 
100 No. 2, May 2010.
    \4\ Choosing the Nation's Fiscal Future, p. 3.
---------------------------------------------------------------------------
    The Pew-Peterson and NAS-NAPA reports both cite the fact that the 
Maastricht Treaty set a debt-to-GDP ratio of 60 percent as a criterion 
for membership in the European Monetary Union. They do not cite 
evidence or economic analysis that supported the EMU's choice of that 
target, and they discuss neither the role of European politics in the 
choice of the target nor the criticism of the target in the economics 
literature as being arbitrary.\5\ Nor do they present any arguments to 
show why a criterion that was deemed appropriate as a condition for 
entry into the EMU in 1991 should be applied in the United States in 
the decades after 2010. The reports also do not address whether, even 
if that target might have been appropriate in 1991, it would still be 
appropriate today in light of the dramatic increases in government debt 
resulting from what has in many ways been the worst financial and 
economic crisis since the Great Depression.
---------------------------------------------------------------------------
    \5\ For instance, Willem Buiter has written that ``The Maastricht 
deficit and debt criteria were arbitrary and neither necessary nor 
sufficient for national fiscal-financial sustainability.'' In ``The 
`Sense and Nonsense of Maastricht' revisited: What have we learnt about 
stabilization in the EMU?'' http://www.nber.org/?wbuiter/sense.pdf
---------------------------------------------------------------------------
    The two reports correctly note that the International Monetary Fund 
also has used a 60 percent debt-to-GDP ratio target in its analyses of 
fiscal sustainability, but IMF staff have been clear that the criterion 
is arbitrary, noting ``On why we picked 60 percent, of course, there 
[is] no magic number, and that's sort of just an illustrative number. * 
* * Again, these are not targets. These are not ideal numbers. There's 
no rule that says that it's only sustainable if it's above or below 
60.'' \6\ In fact, IMF staff have recently suggested that in light of 
recent increases in debt, the date for achieving the target should be 
relaxed--allowing advanced countries that exceed the target in 2014 to 
gradually reduce the ratio over 15 years, reaching 60 percent by 
2029.\7\
---------------------------------------------------------------------------
    \6\ See ``Transcript of a Conference Call with IMF Senior Staffs on 
the Launch of The State of Public Finances: A Cross-Country Fiscal 
Monitor,'' July 30, 2009, in which an IMF staff member responds to a 
question about the 60 percent criterion. http://www.imf.org/external/
np/tr/2009/tr073009a.htm
    \7\ See IMF, The State of Public Finances: A Cross-Country Fiscal 
Monitor, July 30, 2009, p. 18.
---------------------------------------------------------------------------
    We believe Congress and the President should focus on bringing 
deficits down to about 3 percent of GDP in the years ahead and then 
keeping average deficits no higher than that level. Under one 
reasonable path, this would require average deficit reductions of 
nearly $400 billion in years 2013 through 2018. That would achieve the 
necessary condition for budget sustainability of stabilizing the debt-
to-GDP ratio (the debt would be stabilized at modestly above 70 
percent). Aiming to go further may actually have the unintended effect 
of making it harder to enact needed deficit-reduction legislation, by 
making the standard for success one that requires budget cuts and tax 
increases of such severity that they are unacceptable politically. (It 
also would increase the likelihood that deficit-reduction efforts--if 
successful--would seriously undercut programs that provide crucial 
services and benefits to millions of Americans, in which case the 
savings likely would not endure.)
    History clearly shows that overly ambitious budget goals can be 
counterproductive. For instance, the overly ambitious Gramm-Rudman-
Hollings balanced budget target almost certainly contributed to the 
decisions of President Reagan and the Congress in the mid- to late-
1980s to focus more on rosy economic assumptions that made it appear 
the targets would be achieved rather than on making real progress in 
reducing the deficit. The House of Representatives also clearly 
understood the problem of too-ambitious goals last year when it adopted 
a statutory pay-as-you-go rule that did not require the extension of 
middle-class tax cuts and other expiring current policies to be paid 
for. Adopting a strict rule that required any change in law to be paid 
for would ensure that the rule would be waived multiple times. That 
would undercut the rule's effectiveness in constraining any costly 
proposal with significant political support.
                securing savings over the coming decade
    One of the reasons we believe that the goal of holding debt to no 
more than 60 percent of GDP by the end of the decade is likely to be 
politically unfeasible is that very large savings in Social Security, 
Medicare (beyond the savings in the health reform legislation), and 
Medicaid will be extremely difficult to achieve over the next decade
    Most experts agree that we cannot hold the growth of Medicare and 
Medicaid costs over time below the growth of private-sector health 
costs. Since the public and private sectors use the same health 
providers and the same treatments, holding growth in the public sector 
to a much lower rate than growth in the private sector would lead 
either to rationing of health care by income or, more likely, to a 
substantial shift of costs to the private sector as providers raise 
prices for privately insured patients to compensate for lower public-
sector reimbursements.
    Efforts to reduce the growth of health care spending system-wide 
(both public and private) are the key to reducing Medicare and Medicaid 
costs in a sensible, compassionate, and sustainable manner. (It is 
important also to remember that rising health care costs not only raise 
federal spending directly but also increase deficits by lowering tax 
revenues below what they otherwise would be. Health insurance benefits 
provided by employers are exempt from tax, and when health care costs 
grow faster than the economy, the share of compensation that is exempt 
from taxation rises and the revenue base consequently shrinks.) 
Provisions included in the health reform bills passed by the House and 
Senate--including steps to begin changing Medicare reimbursement 
policies in ways that could serve as a blueprint for private-sector 
changes that would improve the efficiency of the health care system as 
a whole--represent a crucial first step in the effort to slow system-
wide cost growth. But, it will take time and further changes in the 
health system--based on knowledge that we gain in coming years but do 
not yet possess on how to achieve greater economies in health care 
without jeopardizing health care quality--to achieve the degree of 
reduction in the growth of health care costs that we ultimately will 
need to extract the required savings from Medicare. (I should add that 
because increases in health care costs are due to a substantial degree 
to advances in medical technology, many of which improve health and 
prolong life, it almost certainly will not be possible--or desirable--
even in the longer run to slow the growth of health care costs so much 
that it is no greater than the rate of economic growth.)
    Similarly, while there are sensible ways to achieve savings in 
Social Security, there are limits to how large those savings can be--
especially over the next ten years--without undercutting the crucial 
role of Social Security in reducing poverty and ensuring a decent life 
for people who are elderly or have disabilities. Social Security 
benefits under current policies are not as generous as some people 
assume. Social Security checks now replace about 39 percent of an 
average worker's pre-retirement wages, less than similar programs in 
other Western countries. And because of the currently scheduled 
increase in the ``normal retirement age'' (which operates as an across-
the-board benefit reduction) and the projected growth in Medicare 
premiums (which are deducted from Social Security checks), that figure 
will gradually fall from 39 percent to about 32 percent over the next 
two decades under current law.\8\ In addition, recent losses in 401(k) 
and other retirement plans that supplement Social Security make it all 
the more important to ensure that Social Security benefits are 
maintained at an adequate level. Furthermore, the changes in Social 
Security benefits that can be made without undercutting the goals of 
the program will need to be phased in gradually--as has been the case 
with the increase in the normal retirement age that was enacted in 1983 
and is still being phased in--so that savings will be small to start 
with but grow over time.
---------------------------------------------------------------------------
    \8\ Virginia P. Reno and Joni Lavery, ``Fixing Social Security: 
Adequate Benefits, Adequate Financing,'' National Academy of Social 
Insurance, October 2009.
---------------------------------------------------------------------------
    This means that while the largest share of the savings required 
over the long term will need to come from reductions in health care 
expenditures, much of the savings needed to stabilize deficits at no 
more than 3 percent of GDP by the end of this decade will have to come 
from increases in revenues and cuts in a wide array of smaller programs 
(i.e., programs other than Medicare, Medicaid, and Social Security), 
each of which can contribute only a small amount to the effort. There 
is clearly a political limit to what can be achieved in these areas.
    It should be noted that CBO's projections for the coming decade, 
our analyses, and budget data from recent years indicate that 
expenditures for programs other than Medicare, Medicaid, and Social 
Security--including entitlement programs other than the ``big three''--
will grow more slowly than GDP in the decades ahead. These programs 
consequently are not contributing to the long-term fiscal problem. For 
this reason, statements that we face a general ``entitlement crisis'' 
are mistaken. This does not mean, however, that programs other than the 
``big three'' should not be scrutinized for potential savings; they 
clearly should be.
                        beyond the coming decade
    If deficits are stabilized in the coming decade, Congress and the 
President can then consider next steps--whether the benefits of further 
reducing the debt-to-GDP ratio to 60 percent (or less) would more than 
offset any harm that the additional budget cuts and/or tax increases 
needed to achieve that reduction might involve. But it does not make 
sense to set a target today that is not necessary to achieve budget 
sustainability--and that is politically so difficult to meet that it 
would make continued inaction more likely. Instead, we should set a 
target that is ambitious and strong, but not so intensely excruciating 
as to be virtually impossible to attain.

    Chairman Spratt. Thank you, Bob.
    Mr. Capretta?

                 STATEMENT OF JAMES C. CAPRETTA

    Mr. Capretta. Good morning, Mr. Chairman, Mr. Ryan, and 
other members of the committee. Thank you for the opportunity 
to participate in this very important hearing on the Nation's 
long-term budget outlook.
    It is readily apparent that the Federal budget is on an 
unsustainable path. You have already heard quite a bit about 
that. From 1789 to 2008, the Nation accumulated $5.8 trillion 
in debt. According to the Congressional Budget Office, 
President Obama's 2010 budget plan would push the Nation's debt 
above $17 trillion by 2019. That is more than tripling what the 
government owes to lenders in just 11 years.
    Moreover, this rapid run-up in debt would occur just as the 
Nation is entering into a period of dramatic demographic 
transformation. In our latest long-run cost projections, CBO 
expects spending on the three main entitlement programs--Social 
Security, Medicare, and Medicaid--to rise from 9.8 percent of 
GDP in 2010 to 14.4 percent in 2030, or an increase of about 
4.6 percent of GDP in 20 years. To put that in perspective, 
that is like adding another program of the size of Social 
Security to the Federal budget over a period of two decades 
without any additional revenue to pay for it.
    The President has correctly argued that rising health-care 
costs, along with the aging of the population, is at the heart 
of the medium- and long-term budget problem. But there are many 
reasons why those who are concerned about the Nation's long-
term finances should be very concerned about the budgetary 
implications of the health-care bills now under consideration 
in Congress. Let me outline just a few of these reasons.
    First, Medicare physician fees. Both the President and 
congressional leaders have signaled that they will not allow a 
21 percent reduction in Medicare physician fees to go into 
effect in 2010 or later years.
    The original version of the House health-care legislation, 
released in July, included a permanent repeal of the planned 
fee cuts at a cost of $229 billion over 10 years. However, 
after the President announced a $900 billion limit on total 
spending in the bill, House leaders decided to drop this 
provision from the larger health-care legislation and pass it 
as a separate bill. Senate leaders then followed a similar 
course.
    Of course, passing it separately does not change its cost. 
It is still $200 billion in spending that must be either offset 
or borrowed from lenders, and it doesn't matter if the health-
care effort is passed in one bill or two; the total cost is the 
same either way.
    When a fix for physician fees is properly included in the 
total cost of what is being planned, both the House and Senate 
bills would flip from modestly reducing the Federal budget 
deficit over the next decade to increasing it by about $80 
billion.
    Two, substantial noncoverage spending in the bills. In 
September, the President said he wanted the bills to spend no 
more than $900 billion over 10 years. He didn't say that was 
for a net number, with tax increases offsetting part of the 
cost. Nor did he say it was a limit only for some of the 
spending in the health-care bill. And yet, when all the 
spending is included in a proper rack-up, both the House- and 
Senate-passed bills would far exceed the $900 billion limit the 
President himself has established.
    In the House bill, the gross cost of the Medicaid 
expansions and the entitlement to new premium subsidies in the 
exchange would cost $1.055 trillion over 10 years, according to 
CBO. In addition, the House legislation includes scores of 
other spending provisions, from everything from special 
payments to U.S. territories to Medicaid expansions.
    According to CBO, these provisions would cost about $230 
billion more over the next decade. Add $210 billion for a 
physician fee fix, and the cost of the House health-care effort 
reaches nearly $1.5 trillion between 2010 and 2019. The Senate 
plan's total cost approaches $1.2 trillion.
    Three, unrealistic Medicare cuts. There has been a great 
deal of discussion about reforming health-care delivery to 
painlessly root out unnecessary costs. But the bills as passed 
by the House and the Senate do not achieve any substantial 
savings with these kinds of provisions. Instead, they achieve 
the bulk of Medicare savings, which totals $467 billion over 10 
years in the Senate bill, from across-the-board payment rate 
reductions, including an automatic yearly cut in the inflation 
update for certain providers of care.
    The chief actuary of the Medicare program has warned that 
these arbitrary reductions could have serious consequences for 
beneficiaries' access to care, as they would push about one out 
of every five hospital facilities into insolvency. And yet, 
despite this warning, the House and Senate bills assume these 
cuts would continue in perpetuity and provide the offsetting 
savings needed for rapidly growing entitlement expansions.
    Number four, the CLASS Act. Both the House and Senate bills 
would stand up an entirely new entitlement program for long-
term care services called the Community Living Assistance 
Services and Supports Act, or CLASS Act. Eligible participants 
would be required to pay premiums in advance of receiving any 
benefit payments. Consequently, starting this new program from 
scratch would produce one-time savings inside the budget window 
from premium collections before any cohort of beneficiaries 
starts drawing benefits.
    But the premiums collected in the early years would also be 
needed to liquidate entitlement obligations later outside the 
10-year budget window. So, in a very real sense, the CLASS Act 
premiums are being double-counted. They are being used to pay 
for the health-care bill as well as deposited into an account 
to pay future long-term care benefits. If these premiums were 
only counted once, the 10-year deficit increase associated with 
the House-passed bill would go up by another $100 billion.
    Five, the true 10-year window. Although the House and 
Senate sponsors of the health-care bills argue that expeditious 
enactment is necessary, the key provisions to expand coverage 
would not go into effect until 2013 in the House bill and 2014 
in the Senate bill. But the spending cuts and tax increases 
would kick in much earlier. Looking at these bills over a true 
10-year window of full implementation reveals much higher 
costs. The Senate bill's provisions, even excluding the 
Medicare physician fee fix, would total $2.3 trillion over the 
period 2014 to 2023. The House bill's true 10-year cost would 
be of comparable magnitude.
    Six, the certainty of future entitlement expansions. Both 
the House and Senate bills assume the cost of the new 
entitlement spending coverage expansion can be held down with 
provisions which lock workers into employer-sponsored plans. If 
an employer offers qualified insurance to a worker, the 
employee really has no choice but to take it if he wants to 
avoid paying the penalty for going uninsured. They could not go 
into the so-called exchanges to get insurance subsidies with 
Federal tax support.
    These firewall rules would create large disparities in the 
Federal subsidies made available to workers inside and outside 
the exchanges. According to Gene Steuerle of the Urban 
Institute, a family of four with an income of $60,000 with 
employer-sponsored health care would get about $4,000 less in 
Federal support in the House bill outside the exchange than a 
similar family inside the exchange would get in 2016.
    And there would be many tens of millions more families 
outside the exchange than in it. According to CBO, today there 
are about 127 million Americans under the age of 65 with 
incomes between 100 and 400 percent of the Federal poverty 
line. But CBO expects only about 18 million people will be 
getting exchange subsidies in 2016.
    If enacted as currently written, pressures would build very 
quickly to treat all Americans fairly regardless of where they 
get their insurance. One way or another, the subsidies provided 
to those in the exchanges would be made more widely available, 
driving the cost of reform much higher than estimates currently 
indicate.
    Number seven, weak cost-control mechanisms. It has been 
argued by some that the bills include strong cost-control 
mechanisms which will slow the pace of rising costs even more 
than CBO currently estimates. That seems highly unlikely, 
however, given the compromises which have been made to get 
these provisions into the bills.
    For instance, many point to the so-called high-cost 
insurance tax in the Senate bill as a potentially important 
cost-control provision. But, in recent days, the White House 
announced an agreement with some of the Nation's leading labor 
unions to exempt all collectively bargained plans and State and 
local government workers from the excise tax through 2017. News 
reports indicate that this deal would reduce the revenue 
collected from this provision by 40 percent.
    But it seems much more likely that it would lead to a 
wholesale abandonment of the idea because of the inequities it 
would create. In effect, all non-union workers in the private 
sector would be potentially subject to the tax for a full 5 
years before unionized workers were. That will strike many 
Americans as patently unfair. If enacted, pressure would surely 
build on Congress to make the exemption available to all 
workers, thus gutting the provision altogether.
    Similarly, the Senate bill also includes an independent 
Medicare commission which could make recommendations to reduce 
Medicare payments to providers. And those recommendations would 
go automatically into effect if Congress did not act to pass 
provisions of the similar magnitude.
    Sponsors of the legislation have argued that this 
commission would help bend the cost curve. But the commission's 
mandate would be very limited. It could not make any 
recommendations which altered any aspect of insurance coverage 
for beneficiaries or reduce their hospital or physician 
spending through 2019. That doesn't leave a lot of room to 
implement meaningful changes which have a large impact on cost. 
Moreover, pressure would build to extend indefinitely the 
exemptions for hospitals and physicians and to make it 
available to other providers of Medicare-covered services, as 
well.
    Let me conclude. The Nation's long-term budget outlook is 
bleak, in large part because our health-care entitlement 
commitments far exceed the revenues available to pay for them. 
By 2019, the House- and Senate-passed health-care bills would 
add to these commitments by another $200 billion per year, and 
that commitment would grow, as CBO has told us, 8 percent 
annually thereafter. Moreover, the bills would unleash 
pressures for even more spending down the road. Meanwhile, the 
offsets used to pay for this spending would be much less likely 
to occur, and the cost-control provisions are not nearly robust 
enough to make a difference.
    Congress would be well-advised to take a step back and 
rethink this entire approach. Instead of passing an expensive 
health-care bill that uses $1 trillion in offsets to pay for 
more spending, it would be better to craft a sensible, 
consensus, long-term budget plan first which has as one of its 
core elements an affordable, bipartisan health-care program, 
one that truly does the job on costs and expands coverage as 
well.
    Thank you.
    [The prepared statement of James Capretta follows:]

            Prepared Statement of James C. Capretta, Fellow,
                    Ethics and Public Policy Center

    Mr. Chairman, Mr. Ryan, and other members of the Committee, thank 
you for the opportunity to participate in this very important hearing 
on the nation's long-term budget outlook.
    It is readily apparent that the federal budget is on an 
unsustainable path. From 1789 to 2008, the nation accumulated $5.8 
trillion in debt. According to the Congressional Budget Office (CBO), 
President Obama's 2010 budget plan would push the nation's debt above 
$17 trillion by 2019--thus more than tripling what the government owes 
to lenders in just eleven years.
    Moreover, this rapid run-up in debt would occur just as the nation 
is entering into a period of dramatic demographic transformation. 
Between 2010 and 2030, the population age 65 and older will rise from 
about 41 million to 71 million, which will drive up spending on the 
nation's three largest entitlement programs--Social Security, Medicare, 
and Medicaid. In their latest long-run projections, CBO expects 
spending on just these three programs to rise from 9.8 percent of GDP 
in 2010 to 14.4 percent in 2030, or an increase of about 4.6 percent of 
GDP in twenty years. To put that in perspective, that's like adding 
another program of the size of Social Security to the federal budget 
over a period of two decades without any additional revenue to pay for 
it.
    The president has correctly argued that rising health-care costs, 
along with the aging of the population, is at the heart of the medium 
and long-term budget problem. And he has also said, repeatedly, that 
one of the primary objectives of the health-care legislation which has 
been under consideration in Congress for the last year is to slow the 
pace of rising health entitlement costs for the federal government.
    It is also true that CBO has provided cost estimates which show 
modest deficit reduction from these bills--as written--over the period 
2010 to 2019.
    But these cost estimates are based on assumptions that are highly 
unlikely to hold up over time. Indeed, there are many reasons why those 
who are concerned about the nation's long-term finances should be very 
concerned about the budgetary implications of the health-care bills 
under consideration in Congress.
    Let me outline just a few of these reasons.
                        medicare physician fees
    Both the President and Congressional leaders have signaled that 
they will not allow a scheduled 21 percent reduction in Medicare 
physician fees to go into effect in 2010 or later years. The original 
version of House health care legislation, released in July 2009, 
included a permanent repeal of the planned fee cuts, at a cost of $229 
billion over ten years. However, after the president announced a $900 
billion limit on total spending for health-care in September, House 
leaders decided to drop this provision from the larger health-care 
legislation and pass it as a separate bill. Senate leaders then 
followed a similar course.
    Both the House and Senate bills are filled with provisions which 
would make changes in the Medicare program. It is hard to imagine what 
would justify taking this one change to the program and passing it 
separately from all the others. Of course, passing it separately does 
not change its cost. It's still $200 billion in spending that must 
either be offset or borrowed from lenders, and it doesn't matter if the 
health-care effort is passed in one or two bills. The total cost is the 
same either way. When a fix for Medicare physician fees is properly 
included in the total cost of what is being planned, neither the House 
nor the Senate version would reduce the federal budget deficit between 
2010 and 2019. Indeed, if something like the House version of the fix 
is including in the accounting, both the House and Senate bills would 
flip from modestly reducing the federal budget deficit to increasing it 
by about $80 billion over a decade.
             substantial non-coverage spending in the bills
    In September, the president said he wanted the bills to spend no 
more than $900 billion over ten years. He didn't say that was for a 
``net'' number, with tax increases offsetting part of the cost. Nor did 
he say it was a limit only for some of the spending in the health-care 
bill.
    And, yet, when all of the spending is included in a proper rack up, 
both the House and the Senate passed bills would far exceed the $900 
billion limit the president established for the initiative just a few 
months ago.
    In the House bill, the gross cost of the Medicaid expansions and 
the entitlement to new premium subsidies in the exchange would cost 
$1.055 trillion over ten years, according to CBO. In addition, the 
House legislation includes scores of other spending provisions, for 
everything from increasing payments to primary care providers to 
special payments to U.S. territories. According to CBO, these 
provisions would cost about $230 billion more over a decade. With a 
$210 billion physician fee bill, the total cost of the House's health 
care effort reaches nearly $1.5 trillion between 2010 and 2019.
    In the Senate legislation, the cost of the coverage expansion is 
$871 billion between 2010 an 2019. Other spending in the bill totals 
about $90 billion over ten years. With about $200 billion more for a 
permanent repeal of the Medicare physician fee cut, the Senate plan's 
total cost approaches $1.2 trillion.
                       unrealistic medicare cuts
    There has been a great deal of discussion about reforming health-
care delivery to painlessly root out unnecessary costs. But the bills 
as passed by the House and Senate do not achieve any substantial 
savings with these kinds of provisions. Instead they achieve the bulk 
of the Medicare savings, which totals $467 billion over ten years in 
the Senate bill, from across-the-board payment rate reductions, 
including an automatic yearly cut in the inflation updates for certain 
providers of care.
    The Chief Actuary of the Medicare program has warned that these 
arbitrary reductions could have serious consequences for beneficiaries' 
access to care, as it would push about one out of every five hospital 
facilities into insolvency.
    And, yet, despite this warning, the House and Senate bills assume 
these cuts would continue in perpetuity and provide the offsetting 
savings needed for a rapidly growing entitlement expansion.
                             the class act
    Both the House and Senate passed bills would stand up an entirely 
new entitlement program for long-term care services, called the 
Community Living Assistance Services and Supports, or CLASS Act. 
Eligible participants would be required to pay premiums in advance of 
receiving any benefit payments. Consequently, starting this new program 
from scratch would produce one-time ``savings'' from premium 
collections before any cohort of beneficiaries starts drawing benefits. 
But the premiums collected in the early years would also be needed to 
liquidate entitlement obligations later, outside of the ten-year budget 
window.
    So, in a very real sense, the CLASS Act premiums are being double-
counted. They are being used to pay for the health-care bill, as well 
as deposited in an account to pay future long-term care benefits. If 
these premiums were only counted once, the ten year deficit increase 
associated with the House-passed bill would go up by more than $100 
billion.
                        the true ten-year window
    Although the House and Senate sponsors of the health care bills 
argue that expeditious enactment is necessary to provide better 
services to the uninsured, none of the key provisions to expand 
coverage would go into effect until 2013 in the House bill and 2014 in 
the Senate bill. Meanwhile, many of the spending reductions, such as 
the cut in Medicare Advantage payment rates, would kick in much 
earlier, as would the tax increases. Consequently, both bills have ten 
years worth of spending and revenue ``offsets'' paying for only six or 
seven years worth of spending.
    Looking at these bills over a true ten year window of full 
implementation reveals much higher costs. The Senate bill's provisions, 
even excluding the Medicare physician fee fix, would total $2.3 
trillion over the period 2014 to 2023, with the coverage provisions 
fully in place. The House bill's true ten-year cost would be of a 
comparable magnitude.
           the certainty of future of entitlement expansions
    Both the House and Senate bills assume the new entitlement spending 
for coverage expansion can be held down with provisions which lock 
workers into employer-sponsored plans. If an employer offers 
``qualified'' insurance coverage to a worker, the employee really has 
no choice but to take it if he wants to avoid paying the penalty for 
going uninsured. They could not go into the so-called ``exchanges'' to 
get insurance subsidized with federal tax support.
    These firewall rules would create large disparities in the federal 
subsidies made available to workers inside and outside the exchanges. 
According to Gene Steuerle of the Urban Institute, a family of four 
with an income of $60,000 with employer-sponsored health care would get 
about $4,000 less in federal support in the House bill outside of the 
exchange than a similar family inside the exchange would get in 2016. 
And there would be many tens of millions more families outside the 
exchange than in it, according to CBO. Today, there are about 127 
million Americans under the age of 65 with incomes between 100 and 400 
percent of the federal poverty line, but CBO expects only about 18 
million people will be getting exchange subsidies in 2016.
    If enacted as currently written, pressure would build very quickly 
to treat all Americans fairly, regardless of where they get their 
insurance. One way or another, the subsidies provided to those in the 
exchanges would be made more widely available, driving the costs of 
reform much higher than estimates currently indicate.
                      weak cost-control mechanisms
    It has been argued by some that the bills include strong cost-
control mechanisms which will slow the pace of rising costs even more 
than CBO currently estimates. That seems highly unlikely however, given 
the compromises which have been made to get these provisions into the 
bills.
    For instance, many point to the so-called ``high-cost insurance 
tax'' in the Senate bill as a potentially important cost-control 
provision. But in recent days, the White House announced an agreement 
with some of the nation's leading labor unions to exempt all 
collectively bargained plans and state and local government workers 
from the excise tax through 2017.
    News reports indicate that this deal would reduce the revenue 
collected from this provision by 40 percent. But it seems much more 
likely that it would lead to a wholesale abandonment of the idea 
because of the inequities it would create. In effect, all nonunion 
workers in the private sector would be potentially subject to the tax 
for a full five years before unionized workers were. That will strike 
many Americans as patently unfair. If enacted, pressure would build on 
Congress to make the exemption available to all workers, thus gutting 
the provision altogether.
    Similarly, the Senate bill also includes an independent Medicare 
commission which could make recommendations to reduce Medicare payments 
to providers, and those recommendations would automatically go into 
effect if Congress did not act to pass provisions which would reduce 
spending by similar amounts. Sponsors of the legislation have argued 
that this commission would help bend the cost-curve system-wide.
    But the commission's mandate would be very limited. It could not 
make any recommendations which altered any aspect of insurance coverage 
for beneficiaries, or reduced hospital or physician spending through 
2019. That doesn't leave a lot of room to implement meaningful changes 
which have a large impact on costs. Moreover, pressure would build to 
extend indefinitely the exemptions for hospitals and physicians, and to 
make it available to other providers of Medicare-covered services as 
well.
                               conclusion
    The nation's long-term budget outlook is bleak in large part 
because our health-care entitlement commitments far exceed the revenues 
available to pay for them. By 2019, the House and Senate-passed health-
care bills would add at least another $200 billion per year to those 
commitments, and unleash pressures for even more spending down the 
road. Meanwhile, the offsets used to pay this spending would be much 
less likely to occur, and the cost control provisions are not nearly 
robust enough to make a difference.
    Congress would be well-advised to take a step back and rethink this 
entire approach. Instead of passing an expensive health-care bill that 
uses $1 trillion in offsets to pay for more spending, it would be 
better to craft a sensible, consensus long-term budget plan which has 
as one of its core elements an affordable, bipartisan health-care 
program, one that truly does the job on costs and expands coverage as 
well.

    Chairman Spratt. Each of you has referred to the idea of a 
deficit commission. I think you know the state of play right 
now; it appears there may not be the votes to pass the deficit 
commission by statute in the Senate. So the alternative of a 
Presidential executive order is being weighed and perhaps 
written at this point in time.
    Do you think that is a feasible approach to the problem? 
And are their process changes you would recommend to go along 
with that?
    We will start with you, Mr. Podesta.
    Mr. Podesta. Well, Mr. Chairman, I would note that the 
Republican leadership in the Congress seems to have already 
rejected the proposal that the President has put forward to 
create a bipartisan commission. I think that the structure of 
the commission that has been noted in the newspapers, which 
would require a supermajority vote, including the Republican 
appointees to the commission, gives some potential hope that 
you could find some bipartisan compromise on this question.
    I think if you look back at a couple of commissions in 
recent history, the so-called Greenspan Commission on Social 
Security, it really took the political will at the top level in 
both parties, President Reagan and Tip O'Neill, to really bring 
that commission to a result that mattered. Bob Ball's recent 
posthumously published comments on that, I think, are 
instructive on that.
    And if you take a look at another more recent commission 
that President Bush appointed that was chaired by Senators 
Breaux and Connie Mack on taxes, that commission was sort of 
dead on arrival because I think it didn't have the support from 
even the people that appointed it, including President Bush. 
So, really, it is going to take, I think, a structure that 
builds in a result in which both parties participate, and it is 
going to require political will.
    And then, finally, I would say, as I said in my opening 
statement, that it is going to require one other thing, which 
is that if you just sort of charge this commission with saying, 
``We have a big problem; try to figure it out,'' I don't think 
that is a recipe for success. It really needs a target that it 
needs to hit, in which case then I think people can debate what 
the best way to get to those targets are.
    Chairman Spratt. Ms. MacGuineas?
    Ms. MacGuineas. Yes, so----
    Chairman Spratt. Well, let me ask one additional question 
of each of you. If you are proposing entitlement--would you 
propose just entitlement reform, or would you each apply the 
idea of a commission, by whatever source of authority, to 
include everything with deficit-reduction goals, as you put it, 
Mr. Podesta?
    Mr. Podesta. As I noted, I would say that was critical. And 
I think there is a fair amount of agreement, at least amongst 
the three of us on this side of the table, that having a goal 
of stabilizing the debt-to-GDP ratio--we go further in the out-
years and try to achieve a real balanced budget, which would 
begin to reduce the debt-to-GDP ratio. I think those are the 
metrics of success. And doing that across the platform of the 
entire Federal budget and the Federal Government is more likely 
to be successful than just narrowing this to a Social Security 
commission or, if health care stalls, a Medicare commission.
    Chairman Spratt. Ms. MacGuineas?
    Ms. MacGuineas. So, I would describe myself as kind of a 
Johnny-come-lately to the whole commission bandwagon. For a 
long time, I really did stick with the notion that Congress 
should just do its job and that outsourcing this was 
unnecessary. However, as time has marched on and we haven't 
made any progress, I have come to believe that a commission is 
the right way to go, if there is congressional buy-in. It is 
never going to work if people don't buy into it.
    I felt that, with a statutory commission, there was a good 
chance of that moving forward. And I have been hoping that we 
would see progress on that. And I was hoping that the White 
House would lend its support to a statutory commission to move 
that forward. It looks like that is not going to happen. So the 
question is, how do you feel about an executive commission? 
Clearly, the bipartisan political will on this is breaking 
down, or has broken down.
    And I see the arguments on both sides. I can see a strong 
argument that this is more about political cover than really 
doing anything. I can also see that it is critically important 
to have some mechanism in place. It is not impossible that we 
have a fiscal crisis this year. And it really concerns me that, 
if there is no mechanism to be moving forward on it, what are 
we going to do?
    So would I like to have that commission there working on 
the problem? Absolutely. But if there is not bipartisan buy-in, 
we know that it is not going to work, and there are risks that 
it could backfire. Oftentimes in policy, we see that when the 
best specific ideas get put on the table too early and one 
party sort of brings them out, the other party beats up on 
them, and you kind of toxify what should be the policy 
decisions that we are talking about.
    So if people aren't going to support it, no, we shouldn't 
go forward. But I would say to anybody who is not supporting an 
executive commission, then what? What are we going to do? What 
kind of fiscal goal are we going to commit to? What kind of 
budget is this committee going to be able to put forward? We 
can't just have the answer be nothing.
    So, in terms of the second question, if it were a 
commission what would I suggest, I certainly am somebody who 
says ``everything on the table.'' The way I look at this 
problem, you can tell I am kind of a squishy center independent 
because I see both sides of all these issues.
    But the problem, if you look at the numbers, it is a 
spending problem. There is not a question that the growth in 
the budget is on the spending side. However, if you sit down 
and you try to come up with a plan to achieve a reasonable 
fiscal goal, as we did over months, I don't see how you do it 
without increasing revenues. I don't think it should be the 
biggest part of a plan, but I think it is going to have to be 
part of the plan. Anyhow, I welcome anybody who can show how 
you do it on either side of budget, just through revenues or 
just through spending. I think you start with everything on the 
table.
    But then again, I will also back up and say, if we can't 
get buy-in for a commission, maybe we should start smaller and 
just focus on something like Social Security reform. Really, my 
bottom line is: Whatever works. We have to do something. And 
the world is watching, and if they see us not moving and 
failing at anything we try, that is going to be a terrible 
signal to send.
    Chairman Spratt. Mr. Greenstein?
    Mr. Greenstein. Well, the commission question is one I have 
a long interest in, having been a commissioner the last time we 
had a deficit-reduction commission, the Kerry-Danforth 
Commission in 1994. Obviously, that commission did not succeed.
    Commissions are no panacea. In the right circumstances, 
they can be useful. I am in agreement with virtually everything 
John said and much of what Maya said, as well.
    I have been frustrated by the recent debate on the 
commission because it has focused on the wrong questions, in my 
view. It is focused on, should it be statutory or can the 
President support it, and does it need a fast track?
    Let's look at the Greenspan Commission. It was not 
statutory; it was appointed by President Reagan. It did not 
have a fast track. And, in fact, you will find that what the 
Greenspan Commission brought out closed two-thirds, not all, of 
the 75-year gap under the projections at the time, and the 
Congress actually bit the bullet and put the additional changes 
in. It went beyond the commission to do the 75-year solvency 
under the projections that were used at the time.
    The other thing one should note about the Greenspan 
Commission is it started from an agreement from both parties 
that both benefits and revenues would be on the table as part 
of the discussion there.
    I don't understand the argument that, if there is a 
statutory commission, it will have a much greater chance of 
success than if there is a presidentially appointed commission. 
In fact, I think, if anything, it is probably a little on the 
other side. And the reason I say that is, with all due respect 
to Members, if you had a commission that was Members only of 
18, hard for me to see 14 of 18 agreeing to a package that has 
both spending and revenues in it.
    I actually kind of like the idea of having some former 
Members, who aren't facing the voters again and aren't facing 
primary challenges from the wings of their party, seeing if 
they can at least get the ball started by coming up with some 
things covering both spending and taxes that they can agree 
upon.
    And I actually think that--and the Greenspan Commission is 
instructive here--that the idea of a fast track, where you are 
not allowed to do amendments, is counterproductive. It would 
reduce the chances that whatever a commission came up with 
could pass. Think of any piece of legislation most of time that 
is controversial, that involves hard choices, that gores some 
oxes, that you work on, either party, you often have to make 
adjustments at the end to get those final votes to get over the 
top. If you were moving a major piece of legislation and you 
denied yourself the ability to adjust anything to get over the 
top, the chances that you wouldn't get the votes to pass it 
would go up.
    So I am really baffled by this idea that if it is statutory 
and you can't amend it, it would succeed, but if the President 
appoints it and it doesn't have a prohibition on amendments, it 
would fail. I think, if anything, the evidence, particularly 
looking at the Greenspan experience, goes the other way.
    The final point is the one John made and Maya also made, 
which is the most important of all. The other thing we learned 
from Greenspan and from Bob Ball's amazing chapter on the 
commission, which I recommend everyone read, is that the 
commission had initially failed to reach agreement. And what 
then happened was, through their representatives, President 
Reagan and Tip O'Neill said, let's go, sort of, just take a 
sub-group, about five members of the commission, and see if 
they can work out an agreement, putting everything on the 
table, on Social Security. They worked out an agreement and 
brought it back to the commission, which then ratified it and 
took it to the Hill, which then actually enlarged it and passed 
it.
    The moral of the story is, if the leaders of both parties 
don't want a commission to succeed, if the leaders of both 
parties aren't willing to put both parts of the budget, taxes 
and spending, on the table, the chances that it is going to 
have a successful outcome are going to be low. But if the 
leaders of both parties are willing to do that and want to use 
a commission as a mechanism to make progress, then it can be a 
useful mechanism.
    Chairman Spratt. Thanks, Bob.
    Mr. Capretta?
    Mr. Capretta. Yes, I guess I am somewhat agnostic about 
commissions. I think context is crucial. And I am somewhat 
concerned that the environment today is not going to be 
particularly conducive to a successful launch of a commission.
    I think it is going to look and feel to a lot of people 
like, especially with regard to the health-care effort, that 
here we are in the middle of a bruising and very polarizing 
battle about what to do about health care in the United States 
that has very dramatic implications for the Federal budget and 
the long-term budget, and so it looks and feels a little bit 
like, let's lock in this big program and then, after the fact, 
come back and have a commission to try to get our budget in 
order. And I think if that is the way this proceeds, that will 
look to a lot of people as just backwards. In other words, you 
know, if you want to draw in both sides to have a sensible 
budget plan, it ought to incorporate a sensible health-care 
plan and not the other way around.
    And so, I think that is why right now there is great 
instability around the notion of drawing a bipartisan 
commission together, because we are in the midst of a very 
intense struggle over what to do about health care, which has 
big implications for this.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. Ms. MacGuineas, I will start with you because I 
want you to know we all do like you and respect you. How about 
let's go into debt. I am looking at historical tables here. You 
know, our debt per GDP kind of ranged in the 40s, and the 30s 
in the 1990s and the beginning part of this decade, and then 
because of the crisis and all of these other things, we are up 
in the 60s. The CBO's most recent estimate, which is, I think, 
their July or August baseline, you know, puts the debt right 
now at 64.9, 65 percent. And then we close the budget window at 
82 percent. So you are saying we should get to 60 and then stay 
there and get down from there. Obviously, no one has a 
disagreement with that. How do you propose doing it? And you 
mentioned you'd be happy to throw some specifics out there. Let 
me just throw you the line there. How would you get at 60 and 
stay there and get below and what specifics would you do?
    Ms. MacGuineas. Okay. Well that is a very easy question. 
Thank you, Congressman Ryan. This should be no problem. Here's 
a budget blueprint. It is an appendix to our report because it 
is not a set of policies that our commissioners support.
    Mr. Ryan. Is this the Red Ink Rising report you are talking 
about?
    Ms. MacGuineas. Yes, it is.
    Mr. Ryan. Yeah, that came up with procedural devices, 
right?
    Ms. MacGuineas. Yes it did, but we also have an appendix 
that is on the Web site that shows, illustrates what it would 
take to get there because I think it is very important if you 
are going to say this is what you want to do, to show the kinds 
of policies it would require.
    So that is why I have wrestled with these numbers for quite 
some time. And let me tell you, you have to do everything to 
get there. So I will just tick through these things, and 
anybody whose interested in looking at it, I am sorry I didn't 
bring it, it is on our Commission Web site, and I will actually 
send it to the committee. But we talk about every area of the 
budget specifically. We recommend that in defense you reduce 
certain weapons systems, you get rid of--I am sorry--that would 
save about $100 billion a year, outdated programs, 
discretionary spending caps which can save a remarkable amount 
of money. We actually focus so much on mandatory spending at 
our group and in the budget committee, you can save a lot of 
money from discretionary spending caps, and I think we have to 
take those seriously in the coming years.
    Agriculture, everybody, who, I guess, is not a member, but 
every budget wonk's favorite thing to point out. And then you 
move on to Social Security. I would specifically, and I 
actually came out a couple of years ago with two colleagues, a 
Republican and a Democrat, with a bipartisan Social Security 
plan. The types of things we recommended are speed up the 
increase in the retirement age and increase it a little bit 
further and index it. Slow the growth of benefits on the high 
end.
    Mr. Ryan. What kind of indexes, progressive indexing you 
are talking about?
    Ms. MacGuineas. We did, not quite as much as progressive 
indexing, and we don't call it that because that is one of 
those good ideas that had become toxic, so you learn that you 
have to rename good ideas something else. But you slow the 
growth at the high end, right? You guys know how to do that.
    Mr. Ryan. I don't think the progressives like us calling it 
progressive indexing.
    Ms. MacGuineas. I think it is a very good idea. I think you 
want to protect the people at the low end of Social Security, 
and you want to scale back benefits for people who can afford 
it. Overall, and again I need to clarify, I am not talking for 
the Committee for Responsible Budget. My own view is you can 
reduce benefits for people across the board, or you can reduce 
them for people who need them less. I think means testing is 
something that needs to be in the discussion a whole lot more 
than it is currently. Slowing the growth of benefits for Social 
Security, increasing the premiums for Medicare for folks. I 
always get angry calls from my father right after I testify or 
talk about these ideas, but they need to be part of the 
discussion. And you need to be protecting the low end where 
people really rely on these programs. When it comes to health 
care, we are going to have to do more than is in the current 
health care bills. I was very optimistic about the notion of 
bringing in all the things that would gradually slow the growth 
of health care, but it is not surprising that much of that 
which is hard has gotten watered down, and we are going to have 
to go, I don't think anybody questions this anymore, farther 
than the current health care reforms would be able to get at 
some of the real problems in the budget.
    On tax policy, I think a great place to start is looking at 
the tax base. We have almost $1 trillion a year in tax 
expenditures. These are very inefficient ways to basically 
spend through the tax code and I think reforming tax 
expenditures is very necessary. There are certain ones that 
should possibly be removed, deduction for State and local taxes 
for instance, there are things that should be capped, the home 
mortgage interest deduction, another one that is tough to talk 
about in polite circles, but is not a great policy, and the 
health care tax expenditures, tax exclusion should be looked 
at.
    Even that is got going to get you far enough. I don't think 
we can go blindly and extend all the tax cuts. I think we need 
to think about whether that is the right policy and if so, how 
we would offset those costs. I believe an energy tax is 
something that we should be looking at, and then something that 
hits both sides of the budget is changing the way we do 
indexing, moving to the superlative CPI, which is the kind of 
thing that would both have a change in the tax brackets and 
slow the growth of benefits on a lot of things.
    So basically, you have to go through the budget. You have 
to include everything. There are a lot of other policies that I 
think should actually reform budget priorities. I think the way 
that we tax is not conducive with economic growth. I think we 
want to look at things like shifting towards consumption bases, 
reforming the corporate income tax, but I don't think we can 
talk about doing these in any way other than that is revenue 
enhancing. When we have done tax reform before it has been 
revenue neutral.
    Now I think we have to focus on economic growth and a 
better Tax Code, but we are going to have to raise more money. 
On the spending side of the budget, I think we spend way too 
much on consumption and not enough on investment, so I would 
shift a lot of spending priorities more towards things with 
higher returns. So that is probably a much longer list than you 
even wanted, but I do feel an obligation for all of us on the 
side who sit there and talk about how important this stuff is 
to show and illustrate it is not easy. Everybody's ox is going 
to get gored, and that, you know, no matter how much we can 
come up with specifics, we will probably need to do more. But 
we have to be realistic about the magnitude of the problem.
    Mr. Ryan. Adding those up in my mind, that still doesn't do 
it. But they are obviously good big ideas. But do those things, 
using the conventional scoring, get you to 60 and go down?
    Ms. MacGuineas. Indeed they do. I will send this to the 
whole committee.
    Mr. Ryan. Mr. Capretta, because I want to be careful of my 
time here. There is no question that our fiscal future is tied 
to health care. Everybody understands that. Everybody on the 
panel would agree with that. You have done a very good job of 
exposing sort of the true costs of this particular bill, what 
it really costs when reality is applied to the analysis. And I 
would be happy to debate anybody on that. But this bends the 
curve up, not down, and I know you would agree with it, but the 
question is could we do health care reform that actually 
achieves the objective we want to achieve, meaning more access 
to affordable health care, you know, for people with 
preexisting conditions, achieving the objectives of insuring 
the uninsured. Could we do that while also doing a good job on 
the budget, while also advancing our concerns and our goals of 
reducing health care as a percentage of GDP, the debt as a 
percentage of GDP and literally bending the cost curve down, 
not up? Is there a way to do that while also advancing the 
priorities of health care reform and the priorities of budget 
balance?
    Mr. Capretta. I think the answer is yes, although we do 
need to approach this whole subject with a certain amount of 
humility. It is a vast health care system, very complicated, 
and the idea that we are going to, in one idea enacted in one 
year, fix whatever problems we perceive in perpetuity is 
unrealistic, so we are going to be at this for a while. Now, 
having said that, I think the central question, CBO has 
testified a number of times to this committee and other 
committees over the last 4 or 5 years that there is a vast 
amount of waste in the health care system. And I think lots of 
people agree with that. There is care that is provided that is 
not needed or too costly or there are errors, the quality isn't 
as high as it could be. So there are ways to improve the 
productivity of the health care system. Indeed, that is really 
the central question in the whole debate.
    Mr. Ryan. Such as?
    Mr. Capretta. Well, let me get to this. I mean, what 
process--we are not going to be able to decide right now how to 
do it from Washington, how to practice medicine out in the 
United States. But what we do, what we need to do is decide 
what process has the best chance of driving out unnecessary and 
inefficient care? What process will drive up the productivity 
of how physicians and hospitals actually care for patients, and 
the quality as well? That is really the question. What process, 
because we are not going to make all the decisions all at once. 
You have to set up a process that will continually do this, 
drive productivity every year. And the bills, as currently 
written, you know, for maybe sometimes good reasons, lean very 
heavily toward a governmental process that essentially the 
Federal Government will lead a research effort, will use 
Medicare payment policy, will try to drive a regulatory policy 
to get out unnecessary care.
    I find that incredibly--it is unrealistic from my point of 
view that that will ever work. In fact, if you look at the 
history of the Medicare program, what happens when we try to 
use a governmental process to drive cost control, the 
government ends up just applying across-the-board payment cuts 
because it is very difficult for the political system to pick 
winners and losers in the health care system, and say you are 
not providing good care, so therefore you are not going to get 
paid anymore.
    Those are the kinds of tough decisions you have to do to 
drive out unnecessary costs. But the political system cannot do 
that easily at all.
    Mr. Ryan. And even with all that Medicare grows at faster 
than 7 percent.
    Mr. Capretta. That is correct, because of volume. So what 
we do through the political process is we apply arbitrary 
across-the-board cuts to every licensed provider whether or not 
they are providing high quality care or not. I find that to be 
exactly the wrong way to go about this. What we need to do is 
much more like an FEHB-type system or a Medicare part D type 
system where the government is providing important oversight 
and consumer protections, but the resource allocation decisions 
are made decentrally by consumers and the suppliers of 
services. I don't think that the innovations that are necessary 
to make our health system more productive and less costly are 
going to come from Washington. It is going to actually come 
from physicians and hospitals practicing medicine around the 
country.
    So my recommendation would be to focus on ways of reforming 
our entitlement policy and tax policy to move control back more 
toward the beneficiaries and consumers, much like your road map 
actually recommended.
    Mr. Ryan. Thanks for the plug. I have lots of questions, 
but in concern of the time I will ask them later.
    Chairman Spratt. Thank you, Mr. Ryan. Ms. Schwartz.
    Ms. Schwartz. Thank you very much. And I first want to 
start by thanking our chairman for having this hearing. As we 
begin the budget process, and of course, we will hear from the 
President on a proposed budget for this year, our understanding 
of the seriousness and our commitment to understanding and then 
being able to deal with the seriousness of the debt we are in, 
and of course, the annual deficit is something that this 
committee has taken seriously, and I thank the chairman for 
giving us some time to focus on it.
    I also want to thank the panelists for not only explaining 
some of it but also giving us some ideas about how to move 
forward because otherwise it is pretty daunting. I did want to 
just very briefly really be clear about how we got into this 
because as Democrats, in particular, we take seriously this 
deficit and we want to deal with it and we want to act fiscally 
responsibly. But we also want to understand how we got here, 
and if we don't understand that, we won't be able to look 
forward further. I particularly wanted to say that we have been 
in this situation not as bad but we have been in this situation 
before. I am going to ask Mr. Podesta to speak about this 
because he was very involved when President Clinton came into 
office. We have been in this situation before.
    We have inherited a deep debt and a budget that didn't and 
fiscal policies that actually were not sustainable, simply not 
having enough revenue to meet our obligations and relying on 
borrowing. And we are in a much worse situation than we have 
been ever before, both because we now are keenly relying on 
borrowing to just sustain our annual budget at all. It is 
almost, this year we are up to 40 percent of our revenues come 
from borrowing. And under the Bush administration, doubled 
borrowing. And I think we have some charts on this. I don't 
always rely on charts but I know we have some where under the 
Bush administration we relied on borrowing, we doubled it from 
$3.4 trillion to $6.3 trillion, and almost all of that is 
foreign borrowing.
    And I think that as Ms. MacGuineas mentioned, that that is 
a huge cost and a risk because they can increase those interest 
rates and they can also stop lending to us and all of that is 
really very, very risky. We are now spending about 5 percent of 
our spending, our expenditures go to debt interest payments. 
Now any American family can understand this. If you are 
borrowing way more than you should and you are paying interest 
rates, even when we are paying low interest rates, it is a huge 
problem for us going forward. So our commitment is clear but we 
should also understand that we have inherited a deep debt. We 
have to raise the debt ceiling. And in addition, we have 
inherited a financial crisis that makes it important for us to 
respond to that financial crisis.
    But, you know, a year ago we were seeing 700-plus jobs a 
month lost, financial institutions essentially on collapse, and 
housing industry, in a collapse as well. So we believe that we 
have stabilized some of those really serious economic 
situations in this country. I appreciate the fact that you have 
also recognized it is going to take us a while to get ourselves 
out of this very, very deep recession and deep fiscal crisis. 
So I did want to just, and I was going to ask maybe, start with 
Mr. Podesta, if he would, really both reaffirm that, in fact, 
the deep decline in revenues, some of that from tax cuts under 
the Bush administration, they literally had a policy of 
reducing revenues through deep tax cuts and increasing spending 
at the same time. We heard about two spending pieces that were 
not even mentioned except for the part D, which was a good idea 
except unpaid for, and that was a huge problem to not 
anticipate what it would cost even though they seemed to know 
it, and also to, and of course, two wars, which is a huge--that 
was off budget.
    But also some policies they know they were never going to 
use. The AMT was pointed out, Mr. Greenstein pointed out that 
we were not really going to apply the AMT to 30 or 40 million 
Americans, but still that made the budget look better than it 
was. And, you know, we need to, what we want to do is deal 
realistically and we have, even in this last year, done a 
really budget that reflects war costs and the reality of the 
future. So could you just briefly, both confirm that, in fact, 
my analysis of how we got here is correct, and then insights on 
how we, and I appreciate some of the very concrete ideas 
already. But first as a commitment to deal with this and 
secondly, understanding that it is going to take a while for us 
to get ourselves out of this mess that we inherited, but some 
strategies of the Clinton administration and to turn that 
around, in 8 years, turned around the economic situation in the 
country and the budget, and left this Bush administration with 
a surplus, which, of course, has now been turned into an 
enormous debt. So I don't think you have too much time but if 
you could answer that that would be much appreciated.
    Mr. Podesta. Well, I think that really underscored the 
point that it takes some courage, it takes some political will 
or takes compromise to move it this forward. But as my 
testimony notes, when President Clinton came into office the 
debt, I am sorry, the deficit was 4.6 percent of GDP. We 
obviously brought that down to a balanced budget and created a 
surplus which we passed off to President Bush. That included 
the restraint on programmatic expenditures in addition to a 
change in receipts particularly in 1993 when the President, 
with, by one vote in both the House and the Senate passed a 
budget plan that put us on the path towards that balanced 
budget which was completed in 1997. I would just note, what did 
that mean for the American people, not just what did it mean to 
the Federal balance sheets. 23 million jobs were created. 
Compare that to the 8 years of President Bush, 2 million jobs 
were created. GDP growth rate was higher. Median income went 
up, didn't stay flat. Wages kept growing for all parts of the 
wage spectrum. So it has direct effects on the well-being of 
the American public. And by the way, I think that the President 
also managed to cut taxes even in that original bill for people 
at the low end of the wage skill, which I would recommend, as 
was done at the beginning of this year, that the expansion of 
the earned income tax credit and the child tax credit be 
extended as you think about the needs going forward.
    And what happened in 2001? We had two major tax cuts while 
we were engaged in two wars that were, as you noted, where sort 
of the real costs were hidden in the budget process. The 
defense budget has now more than doubled from where it was in 
2001. I think particularly the decisions, again, this is policy 
decision, but sort of disguising the long term cost of the war 
in Iraq was both a strategic mistake for the country, and I 
think obviously we are paying a huge price going forward with 
that.
    So that was just a dramatic turnaround, 10 points of GDP on 
the deficit side. And it has created a debt balloon. And I 
would just finish with one thing. As we look at these massive 
numbers that we have been talking about in terms of the 
deficits and payments on the debt, fully a quarter of them are 
attributed just to the debt accumulated during the last 8 years 
of the Bush administration.
    Ms. Schwartz. Thank you. I believe my time is up, but I 
think that is important history and does help us moving 
forward, and look forward to the material you are going to send 
us and tackling this. Thank you.
    Chairman Spratt. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. First of all, just 
one little anecdotal comment about commissions. In my home 
State of California where we have had a continuous budget 
crisis since 2002 the Republican governor and Democratic 
legislative leaders appointed a bipartisan commission that had 
business people and union leaders and think tank people and all 
that. They couldn't even agree amongst themselves on the 
commission with a unanimous suggestion on how to resolve the 
budget, and so there was a majority report and a minority 
report that came out of the commission which was summarily 
rejected by both Republicans and Democrats elected to the 
legislature.
    So, the commission thing sounds good, but I generally think 
we need to do our jobs as a Congress, and that punting it there 
doesn't always solve the problem, at least in my home State of 
California it hasn't so far. The one question I would like to 
ask and discuss is, given the severity of the problem, which 
there is, I think, unanimity on that, given the difficulty of 
the solutions, which involve changing programs dramatically, 
reducing spending, raising revenues, whatever, isn't the one 
thing we ought to not be doing what we have been doing lately. 
If we have entitlements that we already can't pay for, 
shouldn't we not be adding new entitlements?
    If we have all kinds of unfunded mandates and so forth on 
States that are having trouble, shouldn't we stop doing more 
unfunded mandates? If we are looking at problems with 
discretionary spending and things we have to reduce, shouldn't 
we stop creating new programs, now agencies, new commissions 
and new discretionary spending? Wouldn't the very first thing--
and because clearly this won't solve the problem in and of 
itself. But shouldn't the very first thing we should do be to 
stop creating any new spending program or any new entitlement 
or any new thing?
    Now, one more comment and then I will let the panel comment 
on this. But I know some of you have mentioned PAYGO. But let 
me suggest that amongst the problems with PAYGO might be, if, 
in order to solve this problem long term we have to raise 
taxes, cut spending or some combination thereof, then every 
time we add new spending and pay for it by cutting some 
existing spending, or raising some taxes, we use up some of the 
capacity to solve the long-term problem and I would argue, some 
of the fiscal capacity, but also some of the political capacity 
to solve the long term problem when those revenue increases or 
spending cuts could be used to solve the overall problem.
    So rather than PAYGO, I would like to suggest we have, we 
put instead in place ``spend stop'' and that we just stop that 
as a start, so that then we can deal with the long-term 
problem; and open that to whoever would like to comment.
    Mr. Capretta. Well, first, I totally agree with your point 
of view so--I am not sure the other panelists will, but from my 
perspective, this conversation has a little bit of a surreal 
aspect to it because we are in the middle of a very long 
struggle over a health care bill that would vastly expand 
health care entitlements which is actually, Social Security is 
a big part of the problem, but the health care entitlements 
even I would admit are even a bigger part of the problem. And 
so we are going to add, which they have been growing, CBO has 
told us repeatedly, the health care entitlements have been 
growing at a rate of 2\1/2\ percentage points, a little bit 
less now, but more than two percentage points per year faster 
than GDP growth on a per capita basis since 1975, so that is a 
very long period of time.
    And then the bills that are under consideration would add a 
new entitlement on top of it which essentially would grow at 
that same rate. They are not saying that this would, the bill 
would slow the pace of this new entitlement down to GDP growth. 
It would actually grow faster than the economy. And so I think 
you are exactly right, that, you know, all this concern about 
debts, mounting debts, mounting deficits are very much 
interrelated with the entitlement problem and the health care 
bill in particular would exacerbate that on very questionable 
assumptions about cost control later, which, as I outlined in 
my testimony, I am very dubious about.
    Mr. Campbell. Let me get some other comments. And it is not 
just health care. I mean, we are expanding all kinds of things 
every week in this place. Yes. Mr. Greenstein.
    Mr. Greenstein. I am obviously in sympathy and in sync with 
the goal of long-term deficit reduction. But I would have 
problems with the particular remedy as you mentioned it. For 
example, you said spending stop. You didn't include revenues in 
there. As Maya MacGuineas noted, we now have close to $1 
trillion a year of tax expenditures which are effectively 
spending or subsidies that are delivered through the Tax Code. 
If you were to do a one-sided control, what you would do is 
greatly increase the incentives for lots of lobbies of 
spending.
    Mr. Campbell. Okay. So you do both.
    Mr. Greenstein. But more fundamentally, the problem I have 
with this approach is the economy is constantly changing, the 
world is constantly changing. There will be new needs. They 
will require at various points, various new things in spending 
or taxes. The right remedy, I think, is not to ignore changes 
in the world that have to be responded to and say you can't do 
anything new, but to say the new things that are done have to 
be in a larger context where we are setting priorities so we 
are able to do them and do long term deficit reduction at the 
same time. And with regard to PAYGO, I think PAYGO is an 
essential first step. It is a necessary but far from sufficient 
condition.
    Mr. Campbell. Okay. Ms. MacGuineas.
    Ms. MacGuineas. Thank you for your question. I share your 
concerns. I think that it is not the moment to be adding new 
programs. And I also think it is not the moment to be extending 
or cutting taxes further. So I look at this from both sides. I 
think that and to wait on health care is a dangerous thing 
right now. And I will say out front my board of directors, I 
have all different perspectives of the people, how they feel 
about where we are on health care. Some would like to see this 
not go forward, some would very much like to see it go forward.
    I think one of the arguments I was sympathetic too is that 
in health care reform you could really put a lot of cost saving 
mechanisms into a health care bill and you needed to include 
some form of a sweetener to allow those things to go forward. 
The problem is that the sweetener has grown, and the cost 
savings have shrunk. And the other problem, more broadly is 
that, we, over the past years, have given so many of the 
budgetary sweeteners away that we are really left with very few 
things left to help grease the wheels of some of these tough 
fiscal choices.
    So we did prescription drugs without reforming Medicare. 
That was a very large mistake. It looks to me like we may well 
be about to extend a lot of expiring tax cuts without using 
that as the hammer to force the big budget deal. I think that 
would be unwise. So I would stop on both sides of the budget 
and not do those things until we focus on the fiscal issues. I 
would also say, about things not to do, I would ask that 
Members of Congress not promise not to do other things. I think 
anybody who puts forward a productive idea that would help 
close the fiscal gap we should say, thank you for that idea, 
rather than saying I promise not to do things. But I think the 
list of priorities has to be make sure the economy recovery 
sticks, make sure we quickly pivot and focus on fiscal 
consolidation issues, and then and only then can we really look 
at other priorities that any of us might have. I would like to 
see more spending on certain investments in the next 
generation. I would like to see corporate income tax cuts, but 
I would not like to see those kinds of things on either side of 
the budget until we have the fiscal situation done first.
    Mr. Podesta. I want to give you a kind of specific example 
of why I think the approach that you outline has flaws and has 
problems. It sort of assumes that what we are doing now is all 
good and anything we could think up is actually not more 
effective, more efficient, and actually will create greater 
productivity in government. And I will give you a specific 
example and relate it to your own State.
    Ms. Kaptur [presiding]. Excuse me, Mr. Podesta. We are 
going to have to ask you to summarize quickly. We would like to 
move on.
    Mr. Podesta. The Race to the Top Fund that was included in 
the Recovery Act that the Secretary of Education has 
implementing has caused massive changes across the States 
already, including in the State of California where the State 
was moribund in its ability to try to effectuate change in the 
way teachers are compensated in the State. Just that one input 
has caused the State of California which can't seem to do 
anything, to pass a law that really is, I think pushing the 
edge of reform in education.
    So I think we want to weed out the bad things, enhance the 
good things, I think that is why PAYGO discretionary caps make 
sense because you can pick and choose between the best and the 
worst. And maybe at some point, I will come back on health 
care.
    Ms. Kaptur. Thank you so very much. Mr. Doggett of Texas.
    Mr. Doggett. I think the predicament that each of our 
witnesses has described is hardly surprising. Much of us 
opposed with vigor the fiscally irresponsible policies of the 
Bush-Cheney administration, which squandered the surplus that 
they began with and converted it into trillions of dollars of 
debt, borrowing during those Bush-Cheney years, more money from 
foreigners than had been done by all presidents, all 
administrations in American history up to the time that they 
began their borrowing spree. Indeed, there were some groups and 
some Republican commentators here in Washington who actually 
advocated during the Bush-Cheney years that driving the debt up 
was a very good thing because it would assure that once 
Democrats were back in power, we would be limited in doing 
anything about health care, about education, or any of our 
other social responsibilities.
    And I will have to say that, as irresponsible as that 
Republican strategy was, it has almost proven to be an 
effective way to restrain our answers, our attempt to answer 
the tremendous health care problem that we face today. I 
listened with interest to the questions to you from my 
Republican colleagues. It seems to me they are pursuing the 
same strategy they have in the past. When we look at a lake 
level down in Central Texas, we consider not only the water 
that is flowing out, but the water that is flowing in. They 
want to focus only on the expenditure side, which does need to 
have careful evaluation given the predicament that they have 
left us in, but they don't want to focus on the revenues 
flowing into the Treasury.
    Indeed, to the extent they focus on it, they would continue 
the Bush tax cuts which helped get us into this situation. 
Indeed, almost $2.5 billion of the problem we face today is a 
direct result of the Bush tax cuts and another $1.5 trillion is 
the interest we will be paying on the tax cuts that we have 
already incurred to date. And if we follow the Republican 
directive, the ideologically driven goals of the Republicans 
are that Wall Street titans and bankers just haven't gotten 
enough tax breaks and that what we need to do is to invest from 
the Treasury another $5 trillion over the next few years, don't 
have that flowing into the Treasury, but use it to extend 
permanently the tax breaks to the wealthy few.
    Let me ask you, Mr. Podesta, your feeling about extending 
all of the Bush tax breaks and denying the Treasury the 
revenues that they would produce.
    Mr. Podesta. Well, I think this would be a terrible 
mistake. You just dig the hole deeper if that is what would 
happen. One of the challenges you have right in this year is 
what to do about the estate tax which has now, as a result of 
the inability of the Senate to act, now gone to zero. But I 
think that going forward, I think what the President has 
proposed makes sense, at least in the short-term, which is to 
extend the middle class tax cuts and to extend the tax cuts 
that were included in the ARRA. As I said, I particularly point 
to the EITC and the child tax credits that were included there. 
But 95 percent of the American public had tax relief in that 
bill. But not to extend the high end tax cuts that were 
included in the 2001, 2003 bills.
    Mr. Doggett. You and two of our other witnesses have 
referenced tax expenditures. And as you know, with no new taxes 
as the first commandment of politics here for the last decade 
or so, we have increasingly used tax expenditures, rather than 
direct expenditures. For example, and I plead guilty myself. I 
authored a $13 billion tax cut that was part of the Economic 
Recovery Act for Higher Education to help people go to college. 
Don't you believe that all of these tax expenditures need to 
have the same rigorous examination as to how effective they 
have been, whether it is higher education or research and 
development or any of the other expenditures for taxes that are 
outlined in the Senate budget documents that are part of the 
true budgets of the Federal Government.
    Mr. Podesta. I would completely agree with that. And I 
think Ms. MacGuineas would as well. And I think that we look 
forward to working with you on that. I think one of the other 
ideas that we have put forward in our proposal is if there is a 
sequestration mechanism built into a budget path going forward 
that tax expenditures along with spending be included in that.
    Mr. Doggett. Mr. Greenstein, during the last several 
decades, the amount of revenues that corporate America 
contributes to our Treasury have gone steadily downhill with 
corporate tax loopholes, with various other gimmicks they use 
internationally. Don't we need to ask our corporations to pay a 
fair share of the cost of addressing the Federal problems, the 
fiscal problems that you have outlined today?
    Mr. Greenstein. We have a very interesting situation with a 
corporate tax. One often hears it said that the corporate tax 
rate in the United States is higher than in most other western 
countries, and that this puts us at a competitive disadvantage. 
Well, the marginal rate is high in the United States relative 
to most other countries, but the effective tax rate is not. 
What we basically have is a kind of the worst of both worlds. 
We have a plethora of special interest corporate tax 
expenditures that erode the tax base, and then we couple that 
with a higher rate than a number of other countries have.
    President Obama, in his first budget proposed, I thought, a 
series of courageous and excellent policy measures to close 
some of the most egregious, unproductive and most special 
interest corporate tax loopholes, and so far, nothing's really 
happened on those up on Capitol Hill. Frankly, if we were able 
to broaden the base enough and to close enough of those 
unwarranted tax expenditures, you could actually use some of 
the money to lower the marginal corporate rate and some of the 
money for deficit reduction.
    But I think the corporate tax area is definitely an area 
with a focus on the tax expenditures, that will need to be one 
of the contributors to a long term deficit reduction.
    Ms. Kaptur. The gentleman's time has expired. I would like 
to move on to Ms. Lummis of Wyoming, please.
    Mrs. Lummis. Thank you, Madam Chairman. I know it is really 
fun to talk about what President Clinton did, working with a 
Republican Congress. But I would really like to focus more in 
the future with my questions. And my first is for Ms. 
MacGuineas. You cosigned a report called Red Ink Rising. And it 
states that the long-term budget problem is primarily a 
spending problem. If we, as policy makers, choose not to 
control spending, but, instead, focus on raising taxes to meet 
the spending requirements in the coming decades, what would be 
the effect on the economy?
    Ms. MacGuineas. I don't think there would be any 
disagreement from anybody of any political persuasion that you 
cannot close the fiscal gap exclusively or even primarily on 
the revenue side because it would have too damaging an effect 
on economic growth. Now, people differ about where they think 
marginal tax rates become problematic. I am not worried about 
where they are today. But we are talking about, and I wouldn't 
mind seeing those rates go up somewhat. I think that is one of 
the things that should be in the tax mix.
    But that is a small amount that I think we could afford 
before you start really taking a hit on productivity and 
economic efficiency if you start talking about closing this on 
the revenue side, you are going to slow growth. And there are 
two things that help you stabilize the debt, policy choices 
that bring down spending or increase revenues, but also 
economic growth, the denominators, the GDP. And I am always 
worried about excessive promises. You know, certainly cutting 
taxes isn't going to raise revenue and close the gap. But you 
want to tax smartly.
    Likewise, I am starting to get very worried about people 
talking about spending that is going to promote economic 
growth. So if we just spend the right way that is going to grow 
the economy. You know, we can't have sort of false promises. We 
do want to focus on economic growth but there is no magic 
recipe there for growing the economy. But what we do know is 
that excessively high tax rates will slow growth. You want to 
be careful about bringing rates too high.
    But you also want to be really careful about your tax 
bases, and that is why I think that we should be looking at 
broadening the base, reforming the bases in many places, and 
thinking about taxing more of things that you want less of such 
as pollution or consumption, not taxing more of things that you 
want more of. In the end, this gap is huge. You are not going 
to be able to close all of it by anyone thing. Everything is 
going to be in the pot.
    Mrs. Lummis. Okay. Thank you. Another question. We have 
been issuing record amounts of debt, last year, about $2 
trillion, this year could be about $2 trillion. The Federal 
Reserve has monetary policy at full throttle. And we have all 
acknowledged, you have all acknowledged that, you know, we are 
on a dangerous path. And before I start talking to you about 
the guide path that you have worked on, how would you rate the 
risk that we are beginning to reduce confidence globally in the 
debt that foreign countries are buying from us?
    Ms. MacGuineas. It is a great question. We are actually 
going to hold a conference in a couple of months on what would 
a fiscal crisis look like because there is so little 
understanding of how it actually would play out in markets. And 
similarly to that, there is so little understanding about what 
point we will hit the tipping point. All we know is that you 
don't want to find out by reaching it.
    But we can disagree on what level of debt you need to 
stabilize at or how much more we can afford to borrow. And 
anybody has to have enough humility to say we don't know which 
point we are going to hit that. One of the problems is that we 
are not the only country running large deficits and that there 
is an amount of global savings that is available. Obviously 
that can change depending on what rates you pay. But we are 
going to have to pay higher rates to attract more capital. I 
would say that the interest, the changes that you risk are 
twofold. I think it is more likely that we have a slow 
deterioration in the standard of living, sort of the lost 
decade problem. But there is still a significant risk that we 
have a spike that can lead to a vicious debt cycle because 
interest rates are growing faster than the economy as a whole. 
Nobody knows.
    We have tried to model it with the best models out there 
can't predict, given this situation, at what point we will hit 
the level, and so we know we need to be reassuring all along 
the way. Get ahead of the crisis as quickly as we can. I wish I 
had a specific right number.
    Mrs. Lummis. And another question for you. With regard to 
your report, Red Ink Rising, and the glide path down to 60 
percent of GDP, how did you derive that number? I think that 
that is kind of what Europe's focused at. What happens if we 
suddenly and in a less robust number like 65 or 70, or try to 
push it to a more robust number, say 50 percent, 40 percent?
    Ms. MacGuineas. And we and other folks who have recommended 
60 percent have been clear that there is no one answer. 60 
percent just because of momentum behind that number has become 
the international standard. And what we are focusing on is 
trying to come up with a plan that would reassure global credit 
markets. It seems like, given that all numbers arbitrary, you 
want to go with what the global standard is becoming. So 60 
percent is a reasonable number. If somebody said we are going 
to stabilize the debt at 65 percent by 2018, we would be 
thrilled.
    Frankly, I think that we are far less worried about us 
picking too aggressive a goal and doing too much on deficit and 
debt reduction than we are about not doing enough. So let's 
push this as far as we can as a starting point, understanding 
that it may well get watered down over time.
    Ms. Kaptur. Thank you very much. The gentlelady's time has 
expired. I would like to announce for the members that within 
the next few minutes we will be called for votes. There are 
likely to be five votes. I would suggest that we will continue 
the hearing. If some members want to leave after questioning 
and come back, and we will call on people in the order that 
they have come to the hearing. Thank you very much. Congressman 
Blumenauer.
    Mr. Blumenauer. Thank you, Madam Chair. Actually, I find 
this hearing a little encouraging because I think we are fast 
approaching the same situation relative to the deficit and 
spending as we are, for instance, in health care. Something's 
going to happen with health care because the system is no 
longer sustainable. It is slowly getting out. Some of us think 
we have maybe reached that tipping point, but it is going to 
happen much quicker, I think, because of the problem, the 
magnitude of the problem, and the awareness that is developing. 
I think you have illustrated here a broad cross section of 
opinion where some things can happen. There is a glide path. I 
am of the opinion that when the politicians stop talking about 
how bad the problem is and how we got here, we can do a little 
of that, and really start sitting down and talking about what 
the solutions are going to be, it is not going to look that 
much different than what happened in 1983 when we got down to 
cases and we were able to solve it. It is not beyond our 
capacity and things like Social Security are out there long 
enough in the future that you can slowly bend that curve and be 
able to make a very significant difference. And the health care 
piece and Medicare, I think is likely to happen sooner rather 
than later for forces beyond our control.
    And when you mentioned agriculture, I mean, I am thinking 
our distinguished ranking member, Mr. Ryan, and I have been 
part of a bipartisan effort that could make a big difference in 
terms of deficit reduction and actually be fairer to most 
farmers and ranchers, and we are going to get there in part 
because of deficit pressure, in part because the public is 
becoming aware of how concentrated those benefits are and how 
they are shortchanging people. And there were opportunities. We 
actually had, the administration absolutely made a misstep in 
terms of how they calculated a proposal, but there was daylight 
there. One thing you haven't talked about is another deficit 
that is financial and that is our infrastructure deficit. We 
have a highway trust fund that is in deficit for the first time 
in history, and we are having to shore it up with general fund 
revenues, adding to the deficit. And I wonder if you could, 
perhaps, talk for a moment about the role that user fees might 
be employed to help shore up the Federal balance sheet. At the 
same witness stand that you appear, we have had representatives 
from the U.S. Chamber, truckers, the Triple A, small business, 
contractors come in and say, raise the gas tax. The 
administration has, in its last budget, and I think maybe in 
this next budget reinstatement of the Superfund tax which was a 
logical user fee that was used to clean up this toxic waste in 
every State in the union. And there appears to be significant 
support, actually, pollster Frank Luntz, a Republican pollster, 
found across-the-board support, Republicans, Democrats, and 
independents for a modest increase in fees to deal with 
infrastructure like water and transportation.
    It appears to me that this speaks to ability to pay, to 
direct benefit and economic redevelopment. Any thoughts that 
any of you have about the potential of going back and looking 
at user fees to help shore up this in a non ideological and 
possibly even bipartisan support? Remember, Ronald Reagan, in 
the midst of the recession in 1982, supported a 5 cent gasoline 
tax increase.
    Mr. Podesta. Well, I think there is, that is a very--first 
of all, I hope you are right, Mr. Blumenauer. I kind of share 
your enthusiasm for finding the capacity to come together on 
some of these issues. And I think that it is clear that our 
infrastructure's in terrible shape in some places and needs 
vast improvement. And there is a wealth of user fees to support 
that. But the most important perspective on that is that it 
enhances productivity and enhances new job creation, 
innovation, et cetera. I think there is a role for the physical 
infrastructure which you have concentrated a good deal of 
attention on. I would also point to the energy infrastructure 
of this country, and to deal with the energy security problem 
we have through, imports of oil versus the capacity I think to 
tap vast reserves of natural gas in this country and move to 
more clean productive energy.
    And one way maybe this is not usually thought of as a user 
fee. One way to, I think, finance that is through a, we call 
so-called green bank or the energy deployment administration, 
to use fees from the provision of credit in that infrastructure 
to create capacity and I think that would enhance innovation 
productivity.
    Ms. Kaptur. The gentleman's time has expired.
    Mr. Blumenauer. I am very interested in the other members. 
Maybe we could follow up either in writing or I could visit 
with the other members of the panel to get their opinions.
    Ms. Kaptur. I thank the gentleman for his courtesy. And we 
will turn to Mr. Garrett of New Jersey.
    Mr. Garrett. Thank you. And before I begin, can you bring 
up the chart that was up before? I guess it was the majority's 
chart with regard to the history. There we go. So before I get 
into my comments maybe I will throw this out to Mr. Podesta, 
for example. Because when I look at this chart, I don't have my 
long glasses on here with me. But no one could look any of that 
blue up there which really should be red, I guess. But what 
strikes me from my angle where I am sitting right here is that 
spike at the end. So remind me, who was in control of the House 
and the Senate? Who was in control of Congress during that 
period of time when I am seeing that spike on that chart over 
there?
    Mr. Podesta. Well, you know, I think that----
    Mr. Garrett. The Republicans or Democrats?
    Mr. Podesta. Mr. Garrett, I think that the Democrats took 
control in 2006 because the American people were quite 
frustrated and unhappy. And I think they are still frustrated 
and unhappy as was indicated in Massachusetts just this last 
week. But I think if you look at that big spike in debt, it is 
a combination of the matters that I mentioned. The wars, the 
tax cuts and then the meltdown that was the result of an 
economy that just went haywire.
    Mr. Garrett. Thank you. And you are using my time. But I 
appreciate your answer.
    Mr. Podesta. I apologize.
    Mr. Garrett. That is fine. I just bring up to set the 
record straight because the other side always wants to go back 
and I want to work in a bipartisan manner to say we really 
should be going forward. But to set the record straight, thank 
you. It was under a Democrat Congress. And if the Democrat 
Congress is not able to rein it in, then maybe things will 
change in 2010. But let me change the direction here. I serve 
on Financial Services. We spend a lot of time on the bond 
market and what is going on there. It was in December of this 
past year that Moody said that debt from the U.S. and UK has 
been now set apart from other triple A rated countries.
    It is now classified in a weaker category than before. It 
is now called resilient and not resistant. The report said that 
in the worst case scenario, the U.S. could lose its Triple A 
rating in 2013 if growth slows, interest rates decline, and 
perhaps most relevant to today's hearings, if the government 
fails to address these problems that we are discussing today. 
Their chief international economist said the question of 
potential downgrade of the U.S. is not inconceivable.
    So if you could bring up my chart now, this is from the 
Peter G. Peterson foundation, just very briefly, this looks at 
what we have been talking about here for the last 7 years with 
regard to entitlement spending which the ranking member has 
been talking about, I won't say ad nauseam, but for a lot. It 
shows you what? It shows you that all those entitlements, 
everything that all of you have been making the point on are 
just going through the roof, but revenue has been remaining 
essentially flat during this period of time. It goes up and 
down, what have you, which brings us to the problem. So let me 
just throw this question out to Mr. Greenstein. You made the 
comment, and I thought it was interesting, to say that we have 
to come up with a plan. Everyone here sort of says that. You 
made the comment when I first came in here saying that we 
really can't do it right now because of the economic morass 
that we are in right now. But we have to wait until we get out 
of it.
    If we wait until we get out of it before we make some of 
these fundamental changes, very briefly because my time is 
almost up, can you say won't that potentially have a 
devastating impact just like Moody's and others are saying, on 
our bond rating and maybe not ever be able to pull out of it if 
our bond rating goes down and our interest rates go up.
    Mr. Green. Let me clarify. I would favor taking action now. 
I would favor, however, that that action not actually be 
implemented until the economy recovers. You could pass 
legislation now that makes changes in taxes and spending that 
starts to take effect, say, in 20----
    Mr. Garrett. I appreciate that. But you also, and Ms. 
MacGuineas was also very honest about your assessment of how 
Congress responds is that we don't take the actions today. We 
push off in any of our budgets later on, so even if we had 
those actions in writing now, both of you sort of made the same 
comment, that when those things, when push comes to shove a 
couple of years down the road, when doc fix eventually has to 
go into effect, the political pressure would be at that point, 
5 years down the road, repeal that.
    Mr. Greenstein. No, I disagree with that. We actually did a 
major study about a month or 2 ago of every savings measure 
enacted under Republican and Democratic Congresses and 
Presidents in the Medicare program from 1990 forward. This is 
encouraging. Of the changes made under the bipartisan agreement 
in 1990 under the first President Bush, 100 percent of the 
Medicare savings provisions stuck and became law. Of the 
Medicare savings provisions enacted in 1993, 100 percent stuck. 
Of those enacted in 1997, 77 percent stuck. Now, the main thing 
that didn't was the sustainable growth rate with the Medicare 
physicians. But it should be noted that when that was enacted 
in 1997, it was expected to have only very small effect. It was 
badly designed and it didn't work.
    And by the way, under the Republican Congress, you made 
some Medicare and Medicaid savings in the Deficit Reduction Act 
of 2005 and those stuck. So I think the record shows you can 
enact--if you can enact them they can stick if they are well 
designed.
    Mr. Garrett. Thank you.
    Ms. Kaptur. The gentleman's time has expired. Congressman 
Edwards of Texas.
    Mr. Edwards. Thank you, Madam Chair. I would like to begin 
by just making three personal points. First, I am glad we are 
having this hearing. I commend Chairman Spratt because I think 
deficits threaten our economic feature, our children and 
grandchildren's future, and even the political independence of 
our country as we become more and more indebted to foreign 
nations.
    Secondly, I believe the ultimate solutions have to be on a 
bipartisan basis because, frankly, I don't think either 
political party, despite all the rhetoric, has the political 
will or even the political capability of making all the tough 
decisions alone, just as the 1983 fix for Social Security 
required bipartisan effort and I want to be one of those that 
will work and look for a genuine bipartisan effort. I would 
like to hear from my Republican colleagues, if you don't 
support any tax increases, where would you cut the budget? What 
are your ideas? And maybe we can find there is more common 
ground than we have done in the past and we have all spoken 
past each other.
    Thirdly, I agree with Ms. Lummis that we ought to focus 
more on the future than in the past. I would add a foot note to 
that. I don't think we can ignore the past or we could be 
doomed to repeating the mistakes of past. And let me just say 
up front, both parties have been guilty. But for those who 
started out this hearing pointing the finger primarily at 
Democrats, let me just say for the record, that when President 
Bush 41 left office we had the largest deficit in the history 
of the country to that point, $292 billion.
    When President Clinton left office 8 years later we had the 
largest surplus in American history. And when President Bush 43 
left office, 8 years after that, we once again had the largest 
deficit in American history, by a magnitude of four times the 
previous larger debt of any other administration in his 
father's administration.
    Having said that, frankly, there is enough blame to go 
around. And let's not ignore the past. But let's figure out a 
way to move forward and look for some common ground. On the 
issue of not wanting to repeat the mistakes of the past, I 
would like to see if any of the panelists could add any 
specificity to how much the deficit would be increased with the 
passage of some of the additional tax cuts that have been 
discussed in Congress. Specifically, do any of you know how 
much the deficit would be increased over a 10-year period if we 
made all the Bush tax cuts of 2001 and 2003 that are temporary, 
if we made all of those permanent? Any ballpark number? It 
doesn't have to be exact, but any idea?
    Mr. Greenstein. It is several trillion. I don't remember 
the specifics number. It is several trillion dollars over 10 
years.
    Mr. Edwards. Several trillion dollars if we made all of 
those temporary tax cuts permanent. What if we had the complete 
repeal of the estate tax? I think we had a debate on that 
recently. Democrats supported continuing the present level of 
estate tax exemption of I think 1\1/2\ million for an 
individual, three million for a couple. I may be mistaken. I 
think my Republican colleagues supported complete repeal of the 
estate tax.
    How much would the complete repeal of the estate tax cost 
over a 10-year period.
    Mr. Greenstein. Over a 10-year period from, like, 2012, 
which is the first year you get the full effect, through 2021, 
including added interest payments on the debt, it is close to 
$1 trillion.
    Mr. Edwards. So that would increase the deficit by $1 
trillion.
    Mr. Greenstein. I think it is a little under $1 trillion, 
but it is close to $1 trillion, if I remember.
    Mr. Edwards. Okay. Some have proposed cutting the corporate 
income tax rate by 5 percent. Do any of you have any numbers, 
any X percent cut in the corporate tax rate would increase the 
deficit by Y billion dollars?
    Mr. Greenstein. I don't have the figure in my head. We can 
get that for you.
    Mr. Edwards. Oh, okay. How about, the proposal has been 
made to eliminate capital gains. And I voted for capital gains 
tax reductions as a way to encourage investments. But given the 
massive deficits we are facing, any idea how much eliminating 
the capital gains tax would add to the Federal deficit?
    Mr. Greenstein. I don't know the figure. It would be 
massive. And the reason it be would massive is, if you had no 
capital gains tax at all, you would have an absolute explosion 
of tax sheltering. You would have an extraordinary incentive 
for people to convert ordinary income into capital gains.
    Mr. Edwards. And, Mr. Greenstein, I have tremendous respect 
for your leadership and the work you have done over the years. 
I wish we had followed your advice more than we have at times.
    I would just take issue on one point. And I might have 
misunderstood you, but I think you said we have to be careful 
not to do too much on the deficit in the short run. And I 
understand the problem we are facing with a slow economy. I do 
think we have to earn back the trust of the American people. So 
I think it is essential this year in our discretionary budget 
that we not just talk about processes and processes and 
entitlement spending. I think we need to make some tough 
decisions on discretionary spending in order to begin that 
process of earning back their trust. Until we earn back the 
American people's trust so we can get control of the deficit, 
we won't be able to solve the problem.
    Mr. Greenstein. I don't disagree with that. And, again, as 
I clarified with Mr. Garrett, my comment is: Things that would 
really have big impacts on aggregate demand you don't want to 
put into effect when you have a 10 percent unemployment rate. I 
actually think it would be useful to begin to enact some of 
those things this year, if one could politically, but to have 
them take effect after several years.
    At the discretionary level, on the issues we are, kind of, 
talking about, perhaps one of the best things could be if we 
could do some things we need to do and, as John Podesta 
suggested earlier, find the money to pay for them by shaving 
the lower-priority things within the discretionary budget.
    Ms. Kaptur. I thank the gentleman. His time has expired.
    And we have a series of votes on now. This one will be 15 
minutes. We have time, I think, for both Mr. Boyd's and Mr. 
Connolly's questioning. And that is respectful of our 
witnesses, as well.
    Congressman Boyd?
    Mr. Boyd. Thank you, Madam Chair.
    I thank all of you for coming.
    Mr. Capretta, I have had the opportunity to sit with the 
other three witnesses on occasions, and I understand a lot 
about where they are philosophically about how to deal with 
some of these issues. And you have quite an impressive resume. 
I was quite intrigued, after reading that resume, that you 
spent your time and testimony tearing apart two health-care 
bills that many of us think will have a funeral soon anyway. 
And I want to delve a little bit more into some positive 
contributions that you may make, given the fact that you spent 
several years in the White House in the OMB office.
    And can you tell me, relative to all of these issues that 
have been laid out, budget issues that we are facing today--
Medicare, SGR, AMT, estate tax, Tax Code issues, all of those 
issues, budget deficits--specific things that you could suggest 
that you all developed, advocated for, and implemented during 
the time that you were in the White House? So maybe we can take 
some of that as a lesson and advance it here.
    And let's start with the SGR.
    Mr. Capretta. With regard to the SGR, it was done on a 
year-by-year basis, actually, during the Bush administration.
    Mr. Boyd. So there was never any attempt to develop a long-
term fix in the SGR when you were in the White House?
    Mr. Capretta. At that time, I am not sure, actually, if we 
did develop one. I am not positive. I haven't thought about 
that in quite a while.
    Mr. Boyd. Okay. I think I am pretty sure. Probably didn't.
    What about the alternative minimum tax? I mean, that is a 
policy baseline issue that we know that this Congress and the 
American people would not stand for sunsetting.
    Mr. Capretta. Actually, I do recall that the Bush 
administration--I wasn't involved in it, but the Bush 
administration did propose trying to deal with the AMT through 
a broader tax reform initiative they tried to get going. There 
wasn't a lot of bipartisan interest in doing it, but there was 
a proposal.
    Mr. Boyd. But it was not part of the 2001 or 2003 tax 
program.
    Mr. Capretta. No, a permanent fix on that was not in those 
bills, that is correct. But the President did propose to try to 
deal with a permanent fix in the larger tax reform initiative 
that, quite frankly, didn't get a lot of traction. But that was 
where they----
    Mr. Boyd. Right. But the one that did get traction, it was 
not in?
    Mr. Capretta. It was not in the 2003.
    Mr. Boyd. Okay. What about the estate tax? Now, we know--
well, maybe everybody here doesn't know what a mess the estate 
tax is. But an estate tax which graduated the exemption from 
2002 until now. Now the estate tax is gone, and then it comes 
back at the end of this year at the 2000 levels.
    What about the estate tax? Was there any advocacy?
    Mr. Capretta. I am not familiar enough with the estate tax 
to answer your question. I am sorry.
    Mr. Boyd. Okay. What about other parts of the Tax Code? So 
have you got anything that you can point to that we can take 
out of this hearing that will be productive and not tearing 
down something that somebody else has proposed, but would be 
productive for us to advance so that we can fix this long-term 
fiscal crisis that we are entering that many of us have been 
saying for years was coming?
    Mr. Capretta. That is a good question. I have two things to 
offer.
    First of all, you might recall that, after President Bush 
was re-elected in 2004, he did try and spent a lot of his 
personal time trying to get a Social Security reform program 
enacted. And he tried to do it on a bipartisan basis.
    In fact, he endorsed and proposed the largest change on the 
spending side of Social Security a President has ever proposed 
by putting progressive indexing actually on the table. It would 
have solved entirely the Social Security problem in one piece 
of legislation. We would be in a lot better shape today if 
Congress had taken up a bipartisan Social Security plan in 
2005.
    In addition----
    Mr. Boyd. That was a year that--back to what Mr. Garrett 
said----
    Mr. Capretta. I have one more thing.
    Mr. Boyd. Who controlled the House and the Senate in early 
2005?
    Mr. Capretta. It was Republicans. I don't think----
    Mr. Boyd. I wanted to make sure that I understood who you 
were blaming here.
    Mr. Capretta. It is very clear, though, that a Social 
Security reform program is going to need bipartisan support. 
And the leadership of the minority party at that time made it 
very clear they were not interested in doing a Social Security 
plan. So, I mean, I am not trying to be the one who blames, but 
if you go back and look at the record, President Bush did put 
on the table a long-term plan to fix Social Security, the 
Congress did not take it up, and that was largely due because 
there was not bipartisan support for it.
    On the Medicare program, you asked me about the Medicare 
program, at the time the Medicare drug benefit was enacted, 
there was a major effort to try to build into that--and 
President Bush personally pushed for it--larger reforms in the 
underlying Medicare program. Again, to get some bipartisan 
support for that drug benefit, actually it was the minority 
party that insisted those larger reforms be left out of the 
package.
    Mr. Boyd. And my time is up, Mr. Capretta, and I appreciate 
your being here and your testimony. But I also would remind the 
Members that, when that reform was done, the Republicans 
controlled the White House and the Senate and the Congress--and 
the U.S. House.
    And I yield back.
    Ms. Kaptur. I thank the gentleman for respecting the time 
limit in the interest of our colleagues.
    Congressman Scott of Virginia?
    Mr. Scott. Thank you, Madam Chairman.
    Let me just ask a couple of questions.
    Mr. Podesta, on chart number two, the policy that created 
the blue during the Clinton administration, did you have a 
commission to enable you to do that?
    Mr. Podesta. No.
    Mr. Scott. If a commission got the budget straight one 
year, what would happen the next year--if you need a commission 
to get you straight to begin with----
    Mr. Podesta. Well, I think what we had, Mr. Scott, to your 
point, is we had statutory PAYGO, we had budget caps, we had 
budget discipline. The Congress was able to, in that context, 
first time only the Democratic votes and on a bipartisan basis, 
fix the problem. But it took leadership, and it took, you know, 
political courage.
    Mr. Scott. But the point is, if you fixed it once, you 
would need an ongoing commission----
    Mr. Podesta. I suppose.
    Mr. Scott [continuing]. If you didn't have the leadership.
    The second is chart number four. How many jobs a month do 
you need just to keep up with the population?
    Mr. Podesta. I think about 175,000.
    Mr. Scott. And you were able to create jobs and maintain 
fiscal responsibility during the Clinton administration?
    Mr. Podesta. Yes. As I noted earlier, 23 million jobs were 
created in the United States during those 8 years.
    Mr. Scott. Was that an accident or because of policy?
    Mr. Podesta. I think it was the result of policy that 
invested in people and technology and good stewardship with 
respect to freeing up credit by controlling the deficits that 
the government was running.
    Mr. Scott. And you were able to do that while maintaining 
fiscal responsibility?
    Mr. Podesta. Absolutely.
    Mr. Scott. You would have paid off the national debt held 
by the public, what, by 2 years ago?
    Mr. Podesta. Yes.
    Mr. Scott. Thank you.
    I yield.
    Ms. Kaptur. I thank you very much, Congressman Scott.
    And we just have a couple minutes left. I wasn't able to be 
here for your testimony directly. I have read it. And we thank 
you so very much on behalf of the membership.
    As a member of the Defense Subcommittee of Appropriations, 
we had testimony yesterday that I will just reference to you as 
you do your own research because I found it quite interesting. 
In the Defense Appropriations Authorization Act of 2008, there 
was a requirement that DOD report back to the Congress on 
insourcing and outsourcing of contracted services. And because 
defense is such a large share of annual spending, the only 
department that has thus far reported back is the Army.
    And if we compare a Federal civilian employee in Army to a 
contracted employee, their estimates show--this is GAO now--
that the contracted employee costs an additional $44,000 to the 
Government of the United States. They did not report back on 
the military side, only the Federal civilian side at DOD. Navy 
and Air Force have not reported back. And I asked for the 
information, which they did not have; they don't believe anyone 
has it.
    But we have to do something about defense spending. If I 
look at my career here in the Congress going back to the 1980s, 
it was the defense buildup, unpaid for, that then yielded us 
what we had to deal with in 1993, when Mr. Podesta and others 
took leadership and we were able to balance the budget by the 
end of the decade of the 1990s.
    Now we are in the same position, conducting two wars, not 
paying for them. And the difference between insourcing and 
outsourcing is incredible. We don't have, from what we were 
told yesterday, the budgetary information so that we can make 
good decisions as Members. I just place that on the table for 
you because it affects everything as we try to dig ourselves 
out of this terrible debt situation that we do face.
    So I just wanted to place that on the table. I have no 
questions of you at this point. We thank you so very much for 
making a very constructive contribution as we begin our year 
here of 2010. And I thank Congressman Scott for remaining until 
we adjourn the hearing.
    Thank you.
    I ask unanimous consent that Members who did not have the 
opportunity to ask questions of the witnesses be given 7 days 
to submit questions for the record.
    [The information follows:]

   Question for the Record Submitted to Mr. Capretta by Mr. Aderholt

    1. You have suggested that political pressure would force Congress 
to increase entitlement spending and expand subsidies for health care. 
Political pressure in Massachusetts led to a very clear and blunt 
rejection of the health care takeover in the bills under consideration. 
Wouldn't it be better to try some separate reform bills and see how the 
government and the market can work together, and then use that 
knowledge for further reform in the future? Do you believe entitlement 
reform may need to be passed before health care reform?
                                 answer
    You are right. From the Massachusetts election and polling data, it 
is very clear that most Americans do not want any version of the bills 
currently under consideration in Congress to pass.
    What I meant in my testimony is that, if a version were to pass, it 
would create serious inequities that would be costly to fix later. Some 
low wage workers would get very generous insurance subsidies, while 
others would not. The difference would be worth several thousand 
dollars in many instances. Those getting less help would rightly 
complain of their unfair treatment, and Congress typically responds in 
such circumstances by extending the more generous entitlement to more 
people.
    I agree entirely that it would be far better for Congress to pass 
commonsense reforms and then see how they work before proceeding with 
the kinds of sweeping measures now under consideration. One way to do 
that would be to allow the states to use their Medicaid funding much 
more flexibly to experiment with different reform approaches.
    Also, as the testimony provided during the hearing demonstrated, 
the federal government cannot afford the health care entitlement 
programs already on the books, much less another one with rapid cost 
growth. I believe the problem of rapidly rising costs system-wide is 
driven in large part by the design of the government's existing 
programs. In particular, Medicare's structure encourages high volume 
and fragmentation in the way services are delivered. That drives up 
costs for everyone. What's needed first is a reform program that brings 
more financial discipline to the existing health entitlement programs, 
especially by giving the beneficiaries more control over the dollars. 
That will translate into a more efficient way of doing business, and 
make it more affordable to provide subsidized coverage to others.

  Question for the Record Submitted to Mr. Greenstein by Mr. Aderholt

    The Center for Budget and Policy Priorities (CBPP) states there is 
no ``general entitlement crisis.'' The Social Security board of 
trustees expects the system to begin running a deficit in 2016 and 
public opinion polls show that fewer than 50 percent of respondents 
believe Social Security can meet its long term commitments. How is this 
not a crisis? Would you not suggest some reform to entitlements?
                                 answer
    I'm afraid there is a misunderstanding here of what my testimony 
said. I believe my testimony said that all of the growth in federal 
spending projected as a share of GDP in coming decades is due to 
Medicare, Medicaid, and to a smaller degree, Social Security. I noted 
that all entitlements other than these three will, as a group, grow 
more slowly than GDP and thus do not add to the long-term fiscal 
problem. This, I said, is why there is not a ``general'' entitlement 
crisis--the issue is the projected growth in Medicare, Medicaid, and 
Social Security (which I call the ``big three'' entitlements) and an 
inadequate revenue basis, not all of the entitlement programs in the 
budget. I certainly believe, and my testimony indicates, that reforms 
in health care and Social Security will be necessary and should be 
made, along with tax reform.

  Question for the Record Submitted to Ms. MacGuineas by Mr. Aderholt

    The Committee for a Responsible Federal Budget suggests a ``debt 
trigger'' that sets off automatic tax increases and spending reductions 
if benchmarks are not met. The Committee also suggests that the trigger 
apply equally to spending and revenue. During the hearing, you 
suggested that some cuts in defense spending would be necessary. Can 
you please go into greater detail regarding which programs will receive 
less funding? If certain benchmarks are not met, will the funding of 
our troops and national defense will be reduced?
                                 answer
    Thank you for the question. The trigger would work as follows. 
Annual debt targets would be established as part of a debt 
stabilization plan in order to ensure that a plan stayed on track. 
Simply pledging to meet certain targets would likely not be sufficient 
to reassure financial markets-there have been too many past examples of 
insincere budgetary promises.
    If a target were missed, the trigger would be pulled and any breach 
of the target would be offset through automatic spending reductions and 
tax increases. We recommend that the trigger apply equally to spending 
and revenue. There would be a broad-based surtax, and all programs, 
projects, and activities would be subject to this trigger. Past 
automatic policy changes failed in part because so many programs were 
exempt from the trigger and it was so easy to bypass the restrictions.
    A debt trigger should be punitive enough to cause lawmakers to act 
but realistic enough that it can be enacted as a last resort if 
policymakers fail to act or select policies fall short of the goal. 
Using the broadest base possible would prove far more effective in 
keeping a plan on track since a broader base expands the political 
consequences of policymakers failing to meet targets, creating an 
incentive for Congress and the White House to craft their own fiscal 
policies, rather than relying on a formula to meet their debt targets. 
Certainly it would be possible, and desirable, to design the trigger to 
exempt ``emergency spending'' which would include all war spending, 
though not other areas of defense.

   Questions for the Record Submitted to Mr. Podesta by Mr. Aderholt

                                                 February 19, 2010.
Representative Robert Aderholt,
House Budget Committee, U.S. House of Representatives, Washington, DC.
    Dear Rep. Aderholt: Thank you for the opportunity to share my views 
on the country's long-term fiscal outlook in front of the House Budget 
Committee last month. Attached are answers to your questions that were 
submitted for the record.
    Once the economy has fully recovered, putting the nation on a more 
sustainable fiscal path will be critical for achieving stable economic 
growth. As I mentioned in my testimony, it is the responsibility of 
today's policymakers to develop a credible path forward.
    The scale of the challenge demands an intellectually honest 
approach that starts with a sober assessment of why the fiscal outlook 
has deteriorated since the budget surpluses achieved during President 
Clinton's second term. After the 2000 elections, the Bush 
Administration inherited a $236 billion surplus, the largest since 
1948. By the time President Obama was inaugurated, the deficit had 
reached $1.2 trillion, a swing of 10 percentage points of GDP over just 
eight years.
    This dramatic deterioration of the federal budget was due to the 
decision to cut taxes, which cost $2.5 trillion over ten years, while 
spending over a trillion dollars on the wars in Iraq and Afghanistan in 
addition to $800 billion on the new Part D prescription drug plan. When 
the recession hit, it caused a further decrease in tax revenues and 
required emergency spending, worsening current year deficits. Virtually 
all of President Obama's spending to date is due to the $787 billion 
American Recovery and Reinvestment Act.
    The causes of the long term deficit, however, are threefold: the 
projected rise in federal health care spending, which will surpass 
private spending by 2012; the macroeconomic and budgetary effects of an 
aging population; and a chronic shortfall in revenues. For policymakers 
serious about reigning in long term deficits, health care reform is a 
necessary first step towards achieving long term fiscal sustainability.
    Beyond health care, deficit reduction will require hard decisions 
on both the spending and revenue sides of the balance sheet. A process 
for making these decisions, along with annual deficit reduction 
targets, will be necessary to address the challenge at hand. I applaud 
the President's decision to create a bipartisan commission to develop a 
path to bring the federal budget into primary balance by 2015, a goal 
similar to that laid out in the Center's Path to Balance report.
    Again, I appreciate the opportunity to appear before the Committee 
and correspond with you on this important issue. Please contact me if I 
can be of additional assistance. Thank you.
            Sincerely,
                                           John D. Podesta.

                                question
    1. Your organization, the Center for American Progress, recently 
published ``A Path to Balance: A Strategy for Realigning the Federal 
Budget.'' This report stated that 52 percent of the current deficit can 
be attributed to past polices of President Bush, twenty percent to the 
economic downturn, 12 percent to other reasons, and only 16 percent to 
President Obama's policies.
    Perhaps in the interest of fairness, you can explain how you came 
up with these percentages, and also I would like to ask you for an 
adjusted figure. Which is, if one subtracts the funding spent on 
homeland security and the department of defense, how much of the 
remaining deficit would be attributable to the period of President 
Obama's Administration?
                                 answer
    Our estimate that approximately 16% of the current deficit can be 
attributed to President Obama's policies comes from an earlier analysis 
appended to this document, ``Who's to Blame for the Deficit Numbers?''
    That analysis was based on a careful review of the thrice-yearly 
Congressional Budget Office reports on the economic and budget outlook 
for the United States. In each of those reports, the CBO details how 
and why its projections have changed since its previous release. By 
studying each of these reports, beginning in January 2001 when CBO was 
projecting a massive surplus for fiscal year 2009, we were able to 
track the change in the federal bottom line and ascribe those changes 
to various factors: specific legislative policies, changing economic 
conditions, and technical modifications. This produced a clear picture 
of the causes of 2009's historically large deficit.
    Specifically, legislative changes undertaken under President Bush 
were responsible for about 40% of the fiscal deterioration. The 
financial rescue legislation, the so-called TARP law, that President 
Bush signed was responsible for 12% of the deterioration and another 
20% can be attributed to higher spending and lower revenues that 
resulted from the onset of the Great Recession. Policies passed under 
President Obama are the cause of only 16%.
    The Center for American Progress was not the only institution to 
carry out an analysis of this kind. David Leonhardt of the New York 
Times conducted a similar analysis and came to similar conclusions. He 
attributed 53% of the 2009 deficit to policies begun under President 
Bush. A report by the Economic Policy Institute found that only 8% of 
the deficit in 2009 could be attributed to the American Recovery and 
Reinvestment Act, while more than 40% was due to President Bush's 
policies. The Center on Budget and Policy Priorities estimated, in a 
paper released in December 2009, that more than 55% of the deficit was 
caused by policies begun under President Bush. Finally, it is 
worthwhile to remember that the Congressional Budget Office was 
projecting a 2009 deficit of $1.2 trillion before President Obama even 
took office, indicating once again that most of the fiscal damage had 
already been done.
                                question
    2. For many years the discretionary budget has been in the $900 
billion to $1 trillion range. The budget request for FY10 was 
approximately 3.5 trillion dollars, which was on top of a stimulus bill 
of almost one trillion dollars. Many departments received double digit 
increases. Won't this kind of domestic spending create an extravagantly 
large deficit?
                                 answer
    President Obama's fiscal year 2010 budget requested $1.26 trillion 
in discretionary budget resources. Of this total, $663 billion was for 
the Department of Defense, and $52 billion was for the Department of 
State and other international programs. The remaining $545 billion that 
was requested in domestic discretionary spending was equivalent to 
about 3.7% of GDP. As a comparison, under President Bush, the federal 
government spent an average of about 3.5% of GDP on this category. More 
than half of the increase over President Bush's levels is attributable 
to increased spending necessitated by the 2010 census, as well as a 
larger request for the Department of Veteran's affairs.
    The budgetary impact of this small increase in domestic 
discretionary spending was almost negligible. In fiscal year 2010, the 
federal budget deficit is projected to be about $1.5 trillion. Had 
President Obama requested no increase in domestic discretionary 
spending from 2009 levels, it would have reduced the deficit by less 
than 2.5%, and would have reduced overall spending by less than 1%. 
Furthermore, in President Obama's latest budget, he requested a level 
of domestic discretionary spending that would amount to 3.3% of GDP, 
below that which was spent under President Bush.
    It should also be noted the American Recovery and Reinvestment Act 
was not ``almost one trillion dollars.'' The total cost of the Recovery 
Act was estimated at $787 billion over ten years. Claiming that the 
bill costs $1 trillion inflates the real cost by more than 25%. 
Moreover, tax cuts and tax reductions accounted for about $280 billion 
of the cost of the Recovery Act. All together, ARRA increased domestic 
discretionary spending by about $260 billion, not the $1 trillion 
implied by the question.
    Finally, the Recovery Act and small increases in domestic 
discretionary spending are simply not the causes of our long-term 
deficit challenge. Within five years, all discretionary spending will 
be at a lower level, as a share of GDP, than it was at any point in the 
last ten years. The deficits we face going forward are driven by 
increasing health care costs, an aging of our population, and a 
persistent lack of revenues to pay for the services and benefits that 
the American public demands.
                                question
    3. Would you be in favor of reforming Fannie Mae and Freddie Mac, 
and perhaps other federal legislation, to ensure that lenders are not 
pressured to make home loans to sub-prime borrowers and to prevent 
another melt down in the home mortgage industry?
                                 answer
    For well over a year, CAP has been leading and convening a group of 
experts that we call the Mortgage Finance Working Group to consider 
reforms to the mortgage finance system in this country. Minimizing 
systemic risk is a central premise of what a restructured secondary 
mortgage market will require, and to achieve that goal, among others, 
reform must address all players in the housing finance system. This 
includes tight regulation of all issuers of mortgage backed securities, 
for the bulk of subprime mortgages were securitized directly through 
Wall Street institutions that were never subject to risk oversight. 
Indeed, it was pressure applied to thinly capitalized mortgage brokers 
by Wall Street for mortgages with certain yields that could be packaged 
for sale as MBS immediately after origination that was the source of so 
many of the bad loans we have seen fail. By bypassing depository 
institutions with Community Reinvestment Act obligations and 
regulations, minority borrowers and those in underserved communities 
often got higher priced loans (ie, subprime) than they might have 
otherwise qualified for.
    Just as we favor reforms of Fannie and Freddie, either in their 
current form or their successor entities, to more tightly regulated 
risk management, we must ensure a level playing field so that bad money 
does not drive out good. This is not to absolve the GSEs of mistakes: 
The GSEs badly failed in balancing long term safety and soundness 
against short term market share and profitability objectives. In this 
way, they contributed to the crisis.
    The affordability goals mandated by Congress do not appear to have 
had a significant impact on GSE activity. Federal Reserve economists 
have estimated that the Underserved Area Goals contributed only an 
incremental 3.4 percent in lending activity, or 23 originations per 
Census Tract, in eligible neighborhoods from 1997 to 2002. Even as the 
goals were ratcheted up, they appear to have only a limited effect on 
Fannie Mae and Freddie Mac purchases and total credit flow. Moreover, 
Comptroller of the Currency John Duggan has stated unequivocally, ``CRA 
is not the culprit behind the subprime mortgage lending abuses, or the 
broader credit quality issues in the marketplace. Indeed, the lenders 
most prominently associated with subprime mortgage lending abuses and 
high rates of foreclosure are lenders not subject to CRA.''
    Rather, the growth in subprime, Alt-A, and exotic mortgages 
coincides with a dramatic growth in unregulated private label 
securities. Up until 2004, private label security issuance was a stable 
20 percent of the overall market. That share skyrocketed to over half 
the market in 2005 and 2006, even overtaking MBS issuance by Fannie and 
Freddie. Similarly private asset-backed security (ABS) issuers, finance 
companies, and REITs accounted for 55% of the increase in home mortgage 
debt holding between 2003 and 2006, compared to 14% for the GSEs and 
agency-backed mortgage pools.
    The shift is also evident in the share of mortgage originations. 
The years in which the worst performing loans were originated--2005 and 
2006--were the years when the GSE's share of originations was at its 
lowest in the past two decades. With FHA at a mere 2%, the government-
related market was still less than 30% in 2006.
    Thus, while one of the central goals of reform must be to minimize 
systemic risk, focusing solely on the GSEs would leave the door open to 
many bad actors engaging in the same types of behavior that lies at the 
heart of the housing crisis.

                Who's to Blame for the Deficit Numbers?

         By Michael Ettlinger, Michael Linden,* August 25, 2009

    The revised deficit numbers reported by the Congressional Budget 
Office and the Office of Management and Budget today show a lower 
deficit than previously estimated for 2009, with higher deficits for 
2010 and beyond. Political opportunists will be busy looking for 
chances to score points over these numbers--pinning the dismal fiscal 
picture on the Obama administration.
---------------------------------------------------------------------------
    *Michael Ettlinger is the Vice President for Economic Policy and 
Michael Linden is the Associate Director for Tax and Budget Policy at 
American Progress.
---------------------------------------------------------------------------
    The real story is, however, fairly obvious. The policies of the 
Bush administration, which included tax cuts during a time of war and a 
floundering economy, are clearly the primary source of the current 
deficits. The Obama administration policies that are beginning to give 
the economy a needed jumpstart--the American Recovery and Reinvestment 
Act in particular--place a distant third in contributing to the 2009 
and 2010 deficit numbers. The deficit picture for the years beyond 
still needs to be painted.
    To come to these conclusions, we calculated the relative importance 
of the several factors contributing to the 2009 and 2010 deficits by 
looking at the impact in those years of various policies. A detailed 
description of our approach is at the end of this column. Below is the 
percentage share of the major contributing factors to the total 
deterioration from the surpluses projected in 2000 to the current 
deficits according to our analysis. The policies of President George W. 
Bush make up the largest share, followed by the current economic 
downturn, and then President Barack Obama's policies.


    Before explaining these further, it should be said that the 
generally worse deficit numbers reported today aren't all that 
surprising. Since the last projections in May, it's been plain that 
this recession has been worse than most analysts thought. With a weak 
economy comes lower tax revenue and higher safety net expenditures--
with the loss in tax revenue causing the lion's share of the deficit 
problem. The effects of a deeper recession have a long-lasting impact. 
Even as growth is restored, it is growth from a reduced starting 
point--a smaller economy in 2009 usually means a smaller economy than 
previously predicted for several years hence.
    Encouragingly, there have been signs of late that the 
administration's policies to end the recession are starting to take 
hold. Without such efforts, the picture would be much gloomier, 
particularly in the short term. One piece of good news is that the 
government is no longer expecting to spend another $250 billion 
rescuing financial institutions through the Troubled Assets Relief 
Program--which explains the improved deficit picture for 2009. And the 
projections for deficits in future years would be far more pessimistic 
if the American Recovery and Reinvestment Act policies were not 
starting to get traction.
    As for the deficit's cause, the single most important factor is the 
legacy of President George W. Bush's legislative agenda. Overall, 
changes in federal law during the Bush administration are responsible 
for 40 percent of the short-term fiscal problem. For example, we 
estimate that the tax cuts passed during the Bush presidency are 
reducing government revenue collections by $231 billion in 2009. Also, 
because of the additions to the federal debt due to Bush administration 
policies, the government will be paying $218 billion more in interest 
payments in 2009.
    Had President Bush not cut taxes while simultaneously prosecuting 
two foreign wars and adopting other programs without paying for them, 
the current deficit would be only 4.7 percent of gross domestic product 
this year, instead of the eye-catching 11.2 percent--despite the weak 
economy and the costly efforts taken to restore it. In 2010, the 
deficit would be 3.2 percent instead of 9.6 percent.
    The weak economy also plays a major role in the deficit picture. 
The failure of Bush economic policies--fiscal irresponsibility, 
regulatory indifference, fueling of an asset and credit bubble, a 
failure to focus on jobs and incomes, and inaction as the economy 
started slipping--contributed mightily to the nation's current economic 
situation. When the economy contracts, tax revenues decline and outlays 
increase for programs designed to keep people from falling deep into 
poverty (with the tax impact much larger than the spending impact). All 
told, the weak economy is responsible for 20 percent of the fiscal 
problems we face in 2009 and 2010.
    President Obama's policies have also contributed to the federal 
deficit--but only 16 percent of the projected budget deterioration for 
2009 and 2010 are attributable to those policies. The American Recovery 
and Reinvestment Act, designed to help bring the economy out of the 
recession is, by far, the largest single additional public spending 
under this administration.
    The cumulative cost of the financial sector rescue, mostly 
initiated under President Bush in response to the financial markets 
collapse, is also significant--contributing to 12 percent of the 
problem. A variety of other changes, described in the methodology 
section, are also contributors.
    For the longer term, it's a bit disingenuous to assign any 
responsibility for the deficits. That's a story yet to be told, and CBO 
and OMB provide a selection of numbers to choose from for the long run. 
Much will depend on how the economy fares. If the Bush tax cuts, 
scheduled to expire at the end of 2010, were to be continued in their 
entirety there would be large deficits. If, as the Obama administration 
has proposed, they are only extended for those making under $250,000, 
then they still contribute to the deficit but not as substantially.
    There are a number of similar budget items that have a long history 
for which one can, with equal legitimacy, assign responsibility to 
either their originators or current policymakers for continuing them. 
New Obama program initiatives, it's important to note, contribute 
little to future deficits. The administration has insisted that its 
additional spending, especially on health care, be fully paid for with 
savings elsewhere in the budget and additional revenues. In fact, to 
address our budget challenges it is critical to reform health care 
which, through Medicare, Medicaid, and other programs, is the single 
biggest budget headache in the long run.
    Regardless of responsibility, of course, the long-run deficit 
situation is one that needs to be addressed.
                              methodology
    Contributors to the nation's fiscal situation in 2009 and 2010 (in 
billions of dollars), as measured against surpluses projected in 2001:


------------------------------------------------------------------------
                                        2009                 2010
------------------------------------------------------------------------
President Bush's policies.....       -$923 billion        -$918 billion
Current economic downturn.....       -$426 billion        -$469 billion
President Obama's policies....       -$225 billion        -$497 billion
Financial rescues begun by           -$422 billion        -$123 billion
 President Bush...............
All other.....................       -$302 billion        -$262 billion
------------------------------------------------------------------------

    Three times each year, the Congressional budget office releases 
revised estimates of its budget projections going forward 10 years. In 
each of these revisions, the CBO describes how its current estimate has 
changed from its previous estimate, and why. By studying these 
estimates, we can attribute the change in the federal bottom line to 
various factors: specific legislative policies, changing economic 
conditions, and technical modifications.
    Specifically, in January of 2001, just as President George W. Bush 
was taking office, the Congressional Budget Office projected that in 
fiscal year 2009, the federal budget would enjoy a $710 billion 
surplus. Today the Congressional Budget Office says that the budget 
will have a $1.6 trillion deficit, a swing of $2.3 trillion. Our 
analysis looks at the component causes of that swing.
    Note that this is somewhat different than determining the sources 
of the deficit--the numbers we derive add up to more than the deficit 
because they include loss of surplus. It is reasonable, however, to 
allocate the costs pro-rata between the surplus reduction and the 
deficit increase. Thus, the percentages presented above can be fairly 
characterized as the percentage contribution of each factor to the 
deficits for each year.
    In order to determine what caused that swing, we allocated changes 
in CBO's projections to one of five categories.
    To President Bush we attributed all changes that CBO marked as 
``legislative'' from its January 2002 update until its September 2008 
update. We then modified this total in several ways. First, we 
subtracted more than $40 billion due to later revisions in CBO's 
estimate of the costs of Medicare Part D. CBO categorizes these changes 
as ``technical.''
    Second, we added about $60 billion in costs stemming from the 
economic stimulus of 2008 that CBO also classifies as ``technical.'' 
Finally, we adjusted downward the current cost of President Bush's tax 
cuts. CBO's estimates of the cost of President Bush's tax proposals for 
2009 and 2010 were based on its economic assumptions for those years.
    Because the economy is worse than CBO expected at the time it made 
those estimates, the cost of those tax cuts is also somewhat smaller 
than expected--as the tax system in general is producing less revenue, 
the cost of enacted tax reductions is less. To account for this, we 
adjusted the cost estimates of both the Economic Growth and Tax Relief 
Reconciliation Act and the Tax Increase Prevention and Reconciliation 
Act (the Job Growth and Tax Relief Reconciliation Act had no budgetary 
effect for 2009 and 2010) by the same ratio as CBO's GDP projections at 
the time and current projections. This adjustment has the effect of 
reducing the amount of the fiscal deterioration attributable to 
President Bush. We believe this is more generous to the former 
president's contribution to the current problems than a similar 
analysis recently conducted by The New York Times.
    The impact of the current economic downturn was calculated by 
summing all of the changes attributed to ``economic factors'' in CBO's 
estimates from January 2008 through August 2009. To these we added 
revenue adjustments made in January and March 2009 that CBO classifies 
as ``technical'' but describes as being mostly due to economic changes.
    To President Obama, we attributed all legislative changes since 
CBO's March 2009 update.
    The ``financial rescues begun by President Bush'' category consists 
of expenditures stemming from TARP and the Federal Deposit Insurance 
Corporation, and from CBO's decision to bring Fannie Mae and Freddie 
Mac onto the federal books.
    The remaining causes, including the economic changes from 2001 to 
2007, CBO's technical changes not accounted for elsewhere, and policies 
enacted at the very end of 2008 (such as Alternative Minimum Tax 
relief) were allocated to ``all other.'' We added $100 billion in 
additional expenditures for 2010 because CBO's baseline does not 
include an additional AMT ``patch'' for fiscal year 2010, though such a 
``patch'' is exceedingly likely.

    Ms. Kaptur. And the committee is now adjourned.
    [Whereupon, at 12:12 p.m., the committee was adjourned.]

                                  
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