[Senate Hearing 111-107]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-107

              CONCURRENT RESOLUTION ON THE BUDGET FY 2010

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              


          January 8, 2009--THE CBO BUDGET AND ECONOMIC OUTLOOK

   January 15, 2009--THE DEBT OUTLOOK AND ITS IMPLICATIONS FOR POLICY

  January 21, 2009--ADDRESSING SHORT- AND LONG-TERM FISCAL CHALLENGES

 January 28, 2009--FEDERAL RESPONSE TO THE HOUSING AND FINANCIAL CRISIS

 January 29, 2009--THE GLOBAL ECONOMY: OUTLOOK, RISKS AND IMPLICATIONS 
                               FOR POLICY

   February 10, 2009--KEY ISSUES AND BUDGET OPTIONS FOR HEALTH REFORM

  February 11, 2009--POLICIES TO ADDRESS THE CRISIS IN FINANCIAL AND 
                            HOUSING MARKETS

    March 10, 2009--THE PRESIDENT'S FISCAL YEAR 2010 BUDGET PROPOSAL

 March 11, 2009--THE PRESIDENT'S FISCAL YEAR 2010 BUDGET PROPOSAL FOR 
                        THE DEPARTMENT OF ENERGY

              July 16, 2009--THE LONG-TERM BUDGET OUTLOOK










                                                         S. Hrg 111-107

          CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2010

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

          January 8, 2009--THE CBO BUDGET AND ECONOMIC OUTLOOK

   January 15, 2009--THE DEBT OUTLOOK AND ITS IMPLICATIONS FOR POLICY

  January 21, 2009--ADDRESSING SHORT- AND LONG-TERM FISCAL CHALLENGES

 January 28, 2009--FEDERAL RESPONSE TO THE HOUSING AND FINANCIAL CRISIS

 January 29, 2009--THE GLOBAL ECONOMY: OUTLOOK, RISKS AND IMPLICATIONS 
                               FOR POLICY

   February 10, 2009--KEY ISSUES AND BUDGET OPTIONS FOR HEALTH REFORM

  February 11, 2009--POLICIES TO ADDRESS THE CRISIS IN FINANCIAL AND 
                            HOUSING MARKETS

    March 10, 2009--THE PRESIDENT'S FISCAL YEAR 2010 BUDGET PROPOSAL

 March 11, 2009--THE PRESIDENT'S FISCAL YEAR 2010 BUDGET PROPOSAL FOR 
                        THE DEPARTMENT OF ENERGY

              July 16, 2009--THE LONG-TERM BUDGET OUTLOOK


                               _______


                  U.S. GOVERNMENT PRINTING OFFICE
50-922pdf                 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001







                        COMMITTEE ON THE BUDGET

                  KENT CONRAD, NORTH DAKOTA, CHAIRMAN

PATTY MURRAY, WASHINGTON             JUDD GREGG, NEW HAMPSHIRE
RON WYDEN, OREGON                    CHARLES E. GRASSLEY, IOWA
RUSSELL D. FEINGOLD, WISCONSIN       MICHAEL ENZI, WYOMING
ROBERT C. BYRD, WEST VIRGINIA        JEFF SESSIONS, ALABAMA
BILL NELSON, FLORIDA                 JIM BUNNING, KENTUCKY
DEBBIE STABENOW, MICHIGAN            MIKE CRAPO, IDAHO
ROBERT MENENDEZ, NEW JERSEY          JOHN ENSIGN, NEVEDA
BENJAMIN CARDIN, MARYLAND            JOHN CORNYN, TEXAS
BERNARD SANDERS, VERMONT             LINDSEY O. GRAHAM, SOUTH CAROLINA
SHELDON WHITEHOUSE, RHODE ISLAND     LAMAR ALEXANDER, TENNESSEE
MARK WARNER, VIRGINIA
JEFF MERKLEY, OREGON

                Mary Ann Naylor, Majority Staff Director

              Cheryl Janas Reidy, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
January 8, 2009--The CBO Budget and Economic Outlook.............     1

January 15, 2009--The Debt Outlook and Its Implications for 
  Policy.........................................................    89

January 21, 2009--Addressing Short- and Long-term Fiscal 
  Challenges.....................................................   181

January 28, 2009--Federal Response to the Housing and Finacial 
  Crisis.........................................................   245

January 29, 2009--The Global Economy: Outlook, Risks and 
  Implications for Policy........................................   337

February 10, 2009--Key Issues and Budget Options for Health 
  Reform.........................................................   425

February 11, 2009--Policies to Address the Crisis in Financal and 
  Housing Markets................................................   495

March 10, 2009--The President's Fiscal Year 2010 Budget Proposal.   555

March 11, 2009--The President's Fiscal Year 2010 Budget Proposal 
  for the Department of Energy...................................   655

July 16, 2009--The Long-term Budget Outlook......................
    1............................................................

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Conrad......1, 89, 181, 245, 337, 425, 495, 555, 655, 761, 821
Ranking Member Gregg.....................9, 92, 191, 251, 345, 563, 766
Senator Session................................................432, 501
Senator Bunning................................................320, 738
Senator Enzi...................................................547, 618
Senator Feingold.................................................    87

                               WITNESSES

Tim Adams, Managing Director, The Lindsey Group................386, 388
Richard Berner, PhD, Managing Director and Chief US Economist, 
  Morgan Stanley.................................................93, 97
Honorable Steven Chu, Secretary, US Department of Energy.......661, 664
Robert A. Dennis, Assistant Director for Macroeconomics Analysis.    11
Douglas W. Elemendorf, PhD, Director, Congr253, 256, 434, 437, 831, 833
Honorable Timothy F. Geithner, Secretary, US Department of the 
  Treasury...........................................503, 509, 769, 773
Douglas Holtz-Eakin, PhD, President, DHE Consulting, LLC.......152, 155
Simon Johnson, PhD, Ronald Kurtz Professor of Enterpreneurship, 
  MIT Sloan School of Management and Senior Fellow, Peterson 
  Institute for International Economics........................346, 349
Honorable Peter R. Orszag, Director, US Office of Management and 
  Budget.......................................................566, 569
Rudolph G. Penner, PhD, Senior Fellow, The Urban Institute.....217, 219
Robert D. Reischauer, PhD, President, The Urban Institute......204, 209
Honorable Alice M. Rivlin, PhD, Director, Greater Washington 
  Research, The Brookings Institution..........................192, 195
Brad W. Setser, PhD, Fellow for Geoeconomics, The Council on 
  Foreign Relations.............................................361,364
Allen Sinai, PhD, President and Chief Global Economist/
  Strategist, Decision Economics, Inc..........................101, 105
Robert A. Sunshine, Acting Director, Congressional Budget Office.11, 19

                     ANSWERS TO QUESTIONS SUBMITTED

Chairman Conrad..................................................   624
Ranking Member Gregg.............................................   641
Senator Bunning................................................622, 746
Senator Crapo..................................................625, 743
Senator Ensign...................................................   753
Senator Enzi...................................................629, 881
Senator Feingold...............................................322, 639
Senator Graham...................................................   755
Senator Murray............................................325, 650, 739
Senator Nelson.................................................653, 751
Senator Warner...................................................   324

               ADDITIONAL MATERIALS AND CHARTS SUBMITTED

Senator Cardin...................................................   620
Senator Crapo....................................................   730
Steven Chu.......................................................   703



 
                  THE CBO BUDGET AND ECONOMIC OUTLOOK

                       THURSDAY, JANUARY 8, 2009

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Wyden, Feingold, Lautenberg, 
Cardin, Whitehouse, Gregg, and Sessions.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I would like to welcome everyone to our first Budget 
Committee hearing of the year. Today we will focus on CBO's new 
budget and economic outlook. Our witness today is Robert 
Sunshine--what an apt name for what we confront--the Acting 
Director of the Congressional Budget Office. Director Sunshine 
has been leading the CBO since late November when former 
Director Peter Orszag was nominated to be the head of the 
Office of Management and Budget in the new Obama 
administration.
    We hope to have Doug Elmendorf formally appointed to the 
CBO Director spot soon. We have taken the necessary action 
here. We await our House colleagues' action. We hope to have 
that concluded, as I say, very quickly.
    Director Sunshine has been with CBO for about 33 years, 
almost since the agency was established. His years of work at 
CBO have been outstanding. We could not ask for more exemplary 
work than the work of Bob Sunshine. He is a great asset to the 
Congress and to our Nation, and we deeply appreciate your 
moving this forecast forward so that we would have available 
the most recent, relevant information to Congress as it begins 
its deliberations on the economic recovery package and as we 
begin the budget process for the year--a budget process that is 
truly daunting.
    Director Sunshine is joined today by Robert Dennis, CBO's 
Assistant Director for Macroeconomic Analysis. Assistant 
Director Dennis has been with CBO for almost 30 years, and, 
again, we want to thank you for, I know, the extraordinary 
effort that has gone into producing this forecast well ahead of 
the normal schedule. Thank you for your service to the country 
as well.
    Unfortunately, the news you are bringing, through no fault 
of your own, is not good. The new deficit projections, as I 
said yesterday, are jaw-dropping. This is one of the worst 
budget forecasts I have seen in my life. President Obama is 
walking into a fiscal disaster of stunning proportion, coupled 
with an economic downturn of unknown duration and depth, but 
one that I think we can already forecast will be longer than 
any other downturn since the Great Depression and not exceeded 
in severity since the Great Depression.
    Let me just go through a couple of charts to put in 
perspective what we confront, if we could. In job loss, we have 
lost, from January through November of last year, over 2 
million jobs. And, economists' estimates for December are of 
deep concern, an expected job loss approaching 700,000 for 1 
month.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Second, some economists are now forecasting that we will 
reach a level of unemployment of 10 percent. That is up from 
the 6.7 percent now. If we went to a level of 10 percent 
unemployment, that would mean an additional 5 million people 
losing their jobs.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    We have also seen a very dramatic deterioration in our 
budget picture. CBO's new estimates show that the deficit in 
2009 will be over $1.2 trillion--$1.2 trillion. That is 
assuming the extension of certain tax cuts, the alternative 
minimum tax reform, and ongoing war costs. It does not include 
any money for the economic recovery plan. This is more than 2-
1/2 times last year's record deficit. And, again, that is 
before we adopt any economic recovery plan.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    It is important to remember that the increase in debt in 
2009, as distinct from the deficit, will be even greater. We 
believe the increase in the debt before any economic recovery 
package will be in the range of $1.6 trillion. So we could 
easily reach an additional debt, once an economic recovery 
package is put in place, of $2 trillion in 1 year alone. To put 
that in perspective, our current gross debt of the United 
States is about $10.6 trillion. And CBO's 10- year outlook 
confirms that with current policies, such as the tax cuts 
extended, alternative minimum tax reform, and ongoing war 
costs, we will see record deficit for years to come.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Our Nation is building a wall of debt that is certainly 
sobering and I think should give us all pause. Gross Federal 
debt is now estimated to reach $11.6 trillion in 2009; and if 
we add in current policies, such as the tax cuts extended, the 
alternative minimum tax reform, the ongoing war costs, it could 
rise to over $21 trillion by 2019. Again, that is without any 
economic recovery costs included.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Our long-term outlook is even more serious. The combination 
of the retiring baby-boom generation, rising health care costs, 
and inadequate revenues will explode deficits to clearly 
unsustainable levels. CBO's latest long-term budget outlook, 
which was released in December of 2007, shows that the Federal 
debt could climb to more than 400 percent of gross domestic 
product by 2058. We are at about 70 percent gross debt to GDP 
now.
    Without any new policies, just the extension of current 
policies, we see the debt to GDP approaching 100 percent by 10 
years from now. But if we stay on this course, we see the debt 
then soaring to 400 percent of GDP by 2058. This is utterly 
unsustainable. The bipartisan fiscal task force that I have 
proposed, along with Senator Gregg, could be the basis for a 
process that I believe will be needed to tackle our long-term 
fiscal challenges. I am open--and I am certain Senator Gregg, 
who can speak for himself, is open--to other suggestions, but I 
believe that what we have proposed is something that is badly 
needed.
    Here are the highlights of the task force proposal: It 
would be tasked with addressing our long-term fiscal 
imbalances. It would consist of lawmakers and administration 
representatives. Everything would be on the table. The panel's 
legislative proposal would get fast-track consideration, and 
Congress would have to vote on the proposal. It would be 
designed to ensure a bipartisan outcome.
    I do not pretend that this is the magic bullet that solves 
all of our problems, but as I look ahead, it is becoming 
increasingly apparent that we simply cannot allow our fiscal 
condition to continue to drift downward. That way lies American 
economic decline. And so I think it is critically important 
that we face up to these long-term imbalances and look at both 
the spending side and the revenue side of the equation.
    In announcing his economic team in November, President-
elect Obama said, ``Short term, we have got to focus on 
boosting the economy and creating jobs. Part and parcel of that 
is a plan for a sustainable fiscal situation long term.'' He 
has that exactly right, and that is precisely what Senator 
Gregg and I are calling for. Our Nation's economic future will 
remain at risk until we confront the long-term fiscal challenge 
before us.
    Let me just add, if there is any doubt about the importance 
of facing up to these long-term imbalances, the news that was 
spread across the front page of the New York Times today on 
``China Losing Taste For Debt From U.S.'' ought to be a warning 
signal to us all. China has now become our biggest creditor, 
and this article says very, very clearly that China is losing 
taste for debt from the United States. If they pull back from 
taking on U.S. debt, what are the ramifications for our 
economy? What would be the effect on interest rates? What would 
be the effect on economic growth?


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    With that, I turn to my colleague, my very able colleague, 
the Ranking Member of the Committee, Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and thank you for 
those sobering words. And I want to join you in thanking the 
CBO team here. You had to work very hard during the holidays. I 
know your families were impacted by that, and we very much 
appreciate that work, and the product that you have brought 
forward, although stark and obviously a product that causes us 
all pause, is something that we needed to hear. And we thank 
you for getting it to us quickly.
    Picking up on the Chairman's comments, we are facing 
something that is totally unique that we have not confronted as 
a Nation before, at least certainly in the post-World War II 
period; and our running room, so to say, is limited. Whereas 
maybe in the earlier times we had more capacity to deal with a 
situation like this, right now our options are limited.
    There are a couple numbers that jump out at me, and I want 
to sort of second everything the Chairman said, especially 
relative to the approach that should be taken here regarding a 
bipartisan initiative to try to get our hands around the out-
year costs of entitlements. But a couple numbers that really 
jumped out from your report are that it looks like we are going 
to see spending in 2009 at about 24.9 percent of GDP, which 
would be the highest level since 1945; and it looks like tax 
revenues will be at about 16.5 percent of GDP, which will be 
one of the lowest levels since the 1950's. Those two numbers 
lead inevitably to disaster and cannot be tolerated for an 
extended period of time.
    I do greatly respect much of what has been said by 
President-elect Obama on how they intend to address this issue 
relative to the stimulus package. And I just want to highlight 
my concerns, and I sense, at least, that the representation is 
that they are also the concerns of Larry Summers and Treasury 
Secretary Designate Geithner.
    The reason the budget deficit is going to balloon so 
dramatically--can we put up that chart there?
    This sort of shows it: $1.186 trillion is CBO's estimate, 
not counting the stimulus. And if you put the stimulus on top 
of it, you are headed toward $2 trillion.
    The reason that occurs is in large part two changes 
compared to CBO's baseline issued in September 2008: one is the 
radical drop in revenues, and two is the expenditures which 
occur as a result of our attempt to at least soften the impact 
of this extraordinarily difficult economic time through 
spending, which is deficit spending, by the Federal Government. 
I think it is critical that on the second item, which is the 
spending--we make sure that all that spending that we 
undertake, whether it is in the stimulus or whether it is by 
TARP or whether it is in the basic budget process, but 
especially the stimulus and TARP, be one-time events which, 
when they are finished, will have added to our capacity as a 
Nation to compete and be more productive in the global 
marketplace.
    The TARP is actually an investment in assets, that should 
be returned to the taxpayer as the economy turns around and we 
get these assets paid back to us, maybe even with interest and 
make a little money. The stimulus package, on the other hand, 
is in large part a payment out of the treasury, but it should 
be one-time payments. It should not be initiatives that expand 
the base of the Federal spending and increase programmatic 
activity that goes beyond the stimulus event; and it should be 
focused primarily on things which are going to return us to a 
more competitive Nation in the area of infrastructure and in 
the area of tax policy, which appear to be the two primary 
thrusts of the emerging stimulus bill, along with the payments 
to the States, which I have a whole separate set of issues 
with.
    So I am hopeful that as we hear your thoughts on this, you 
can give us your ideas as to what type of mechanisms and what 
type of initiatives we should put in place in order to make 
sure that when we jump from a $1.186 trillion deficit this year 
up to $1.8 trillion as a result of the stimulus, that number 
comes down almost as fast as it goes up in the out-years as we 
move away from the stimulus package by having it be a one-time 
event with very strict enforcement of sunset rules and things 
like that.
    This is obviously such a unique situation and the problem 
is so dire for our Nation that we cannot approach it in a 
partisan way. There are a lot of ideological issues here. You 
know, as a conservative, I obviously have an inherent dislike 
of having the Government expand dramatically and having, 
obviously, deficits of this size. But I also recognize that in 
this type of economy, something has to be done, and if the 
Government is sort of the spender of last resort here, it just 
has to be done right. And it is my attitude, and I think it is 
the attitude of our party on our side of the aisle within the 
Senate, that we want to be cooperative here because we realize 
the seriousness of the situation, and we are hopeful that we 
can reach some bipartisan initiatives which will address the 
short-term problem, which is the slowdown, and at the same time 
address the long-term problem, which is the looming fiscal 
crisis of the baby-boom generation.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Gregg.
    Mr. Sunshine, we will turn to you, and, again, you have the 
thanks of this Committee and you have the thanks of the Senate 
for working through the holidays to develop this forecast well 
ahead of the normal schedule to help us deal with the decisions 
that must be made. Again, our thanks.

STATEMENT OF ROBERT A. SUNSHINE, ACTING DIRECTOR, CONGRESSIONAL 
   BUDGET OFFICE, ACCOMPANIED BY ROBERT A. DENNIS, ASSISTANT 
              DIRECTOR FOR MACROECONOMIC ANALYSIS

    Mr. Sunshine. Thank you, Mr. Chairman, Senator Gregg, 
members of the Committee. I am delighted to be here today to 
present CBO's latest budget and economic projections. I suppose 
I would be more delighted if I had lots of good news to 
communicate, but as you know, that is not the case. The budget 
outlook for this year and for at least the next couple of years 
is not at all encouraging. The first chart here shows exactly 
what is going on.
    As a share of the economy, we expect the deficit this year 
to be the largest recorded since World War II. Assuming no 
changes in tax or spending policy, and that is assuming no--
taking into account no possible stimulus legislation, we 
project that the deficit will total $1.2 trillion, or 8.3 
percent of GDP. A stimulus would add to that.
    Now, the baseline then shows some improvement as the 
deficit drops to 4.9 percent in 2010 and levels off at around 1 
percent of GDP in the out-years. But that is not a prediction 
of what is going to happen because, as we know, the baseline 
makes certain assumptions about the continuation of current 
law. So it assumes that there is no AMT fix. It assumes that we 
continue spending on military activities like those in Iraq and 
Afghanistan, only $68 billion a year that we have funded for 
this year. It assumes that the 2001 and 2003 tax cuts expire, 
which pumps up revenues in the out-years. So that it is a 
benchmark, a measure of what we think would happen under 
current law, not necessarily a prediction that within a few 
years we will be down to a deficit of 1 percent of GDP. It is 
very likely, as we all know, that some policies will differ 
from the ones that I have just described.
    The question then is: Well, how did the deficit get to be 
that big? $1.2 trillion is an enormous number compared to any 
other deficits that we have seen, and there are a small number 
of major factors that account for that. One of the most 
significant ones is on the revenue side of the budget. Because 
of what has happened to the economy, we have a revenue decline 
of $166 billion from last year to this year. That is a drop of 
6.6 percent. That is a combination of the recession, drops in 
the stock market, and as a matter of fact, what happens is not 
only are revenues lower than they were last year, they are 
lower than they were 2 years ago. And if revenues had, say, 
gone up by 4 or 5 percent a year over the 2-year period, what 
you might expect in a more normal kind of environment, they 
would be $300 or $400 billion higher this year. And that has a 
very significant impact on the deficit.
    The second big piece is the Troubled Asset Relief Program, 
which was enacted last fall, and we have $180 billion in 
outlays in the deficit estimate for that program. Now, that is 
potentially $700 billion of purchases--that is a program that 
involves potentially $700 billion of purchases, but we do not 
record those--as specified in the law, we do not record those 
on a cash basis. We record those on an estimated present-value-
loss basis. So our estimate assumes that all $700 billion of 
that program is carried out, and we estimate a net loss of 
around a quarter, about 25 percent, ultimately, on those 
transactions. That $180 billion represents most of that loss, 
and we have a little bit showing up in 2010. So that is the 
second big piece. You have a big drop in revenues. You have 
$180 billion in outlays for TARP.
    And then the third really big piece is that we have 
incorporated in these estimates over $200 billion, roughly $240 
billion for Fannie Mae and Freddie Mac. These entities have had 
a close relationship with the Government for many years. They 
were created by the Government. They have been called 
``Government-sponsored enterprises.'' We are now taking them 
over, and CBO believes that the link is now so close and so 
clear that the activities of Fannie and Freddie belong in the 
Federal budget. It was, in fact, a reasonably close call before 
now, but now it seems clear to us that that is where they 
belong. We ultimately do not make that decision. The Office of 
Management and Budget will make that decision. But we have 
included them in the numbers here, and we have included about 
$200 billion for the net loss on the difference between assets 
and liabilities of those entities when we took them over and 
another roughly $40 billion for their activities this year.
    That is a potentially confusing number because that is not 
the same number as the amount that the Government will actually 
have to put into those entities in cash. They are very 
different concepts. The cash concept has to do with the way the 
entities account for their profits and losses and what their 
balance sheets look like. The $200 billion number is a more 
credit reform, long-term type calculation. We are not 
estimating that the Government will have to infuse $200 billion 
into those entities this year. The estimate is, I believe, $18 
billion for this year. So that is sort of a confusing number, 
but it adds over $200 billion to our deficit. So those are the 
three biggest pieces, and together they add $700 or $800 
billion to the deficit.
    Even without Fannie and Freddie, if you took that $240 
billion out of the deficit number, you would still have a 
deficit of $966 billion, and it would still be the largest 
deficit as a percentage of GDP since World War II. So it makes 
the deficit look substantially bigger, but the deficit is still 
very large, regardless of whether you count Fannie and Freddie 
in the numbers or you do not.
    There are other smaller factors--they are only small in 
comparison to these very large factors--that are adding to the 
deficit this year. Costs of unemployment compensation are up by 
$36 billion. Nutrition assistance, food stamps--what we used to 
call food stamps--is up by $11 billion. Social Security, 
Medicare, and Medicaid are up by $111 billion, almost 9 
percent. There was a very big cost-of-living adjustment in 
benefits from Social Security this year because earlier last 
year the inflation rate was quite high. And deposit insurance 
costs are up by several billion dollars.
    On the other hand, the one bit of good news is that Federal 
interest costs are down because the interest rates on Federal 
debt are now so low.
    Chairman Conrad. Is that the sunshine in this forecast?
    [Laughter.]
    Mr. Sunshine. Yes. A little bit. A little bit. So those are 
the major changes.
    Now, here is the difference between--this actually is 
similar to the slide that Senator Gregg put up where we compare 
the deficit that we estimate now with the deficit that we 
estimated last September. Again, lower revenues, the TARP 
spending, and the impact of Fannie and Freddie account for 
virtually all the change in our deficit since last September.
    Now, as the Chairman has pointed out, this is having an 
enormous impact on the public debt. We estimate in our report 
that the debt held by the public will reach 50 percent of GDP 
in 2009. That is the highest since sometime in the 1950's. The 
debt held by the public was very large as a percent of GDP in 
World War II, and it gradually declined over the following few 
decades. But it has not been at 50 percent since sometime in 
the 1950's, and we have estimated it will hit 54 percent in 
2010.
    Chairman Conrad. Can I just stop you on that point? Because 
people listening to this may be confused. I talked about 70 
percent debt to GDP currently. You are talking about 50 
percent. We should make clear to those listening that you are 
talking about debt held by the public. I am talking about gross 
debt, the total debt that we have. That is the reason for the 
difference. It is not a disagreement between us. We completely 
agree when you use the same measure.
    Mr. Sunshine. Yes, that is correct. For example, the Social 
Security trust fund balances are invested in treasury 
securities, and that is counted as part of the gross debt, and 
the figures I am talking about exclude that kind of debt, 
intragovernmental debt, debt that we owe ourselves because we 
have made promises to do certain things in the future. And we 
have been focusing on the debt when the Government borrows 
money from the public.
    The highest that figure has been in recent years, it was 49 
percent in the mid-1990's, so we are not yet at a point where 
it is dramatically different from our experience in recent 
decades, but it is--well, more than at the high end, it is 
above the high end of anything we have seen.
    Chairman Conrad. What is your number for the gross debt 
percentage to GDP?
    Mr. Sunshine. About 70 percent.
    Chairman Conrad. That then is the number I am using, 70 
percent. So we are in agreement on that. And when I look at 
your forecast, when I look at an extension of current tax 
policy, alternative minimum tax reform, as well as war costs, 
we are approaching 100 percent of GDP on the gross debt in 10 
years. And that would take us to a level approaching where we 
were after World War II. I think after World War II we were 125 
or 126 percent of GDP.
    Mr. Sunshine. Yes, it was over 100 percent.
    The next slide I think makes the point that you have been 
making, and it is similar to the one you showed, Mr. Chairman. 
This is a projection of debt held by the public from our long-
term projections that we did last fall. We have two scenarios 
because there are all kinds of different assumptions one can 
make about what it means to continue current policy. One is 
what is probably viewed as a relatively conservative assumption 
as to what the current policy means. The alternative fiscal 
scenario, the higher one, assumes things like an SGR fix, 
discretionary spending growing at the rate of GDP, an AMT fix, 
continuation of existing tax cuts. Either one produces a result 
in terms of debt held by the public out a few decades, the 
lower one more than 200 percent of GDP, the upper one much 
higher than that. And as CBO Directors for quite some time have 
been saying, you know, we are on a path that is an 
unsustainable path from the Nation's fiscal policy perspective. 
It is caused to a significant degree by the rising costs of 
health care and Federal health programs. It is caused also by 
the aging of the population. And it is a tough problem. 
Assuming--and I expect we will--we get by the difficult short-
term situation that we are in, whether it is in a year or 2 
years, this problem will still exist. And, at best, we will not 
have exacerbated it, and in trying to deal with the short-term 
problem--well, we may have exacerbated it in trying to deal 
with the short-term problem, but we are almost certainly not 
making it much better.
    Chairman Conrad. If I could just interrupt you there, too, 
and say that is why the words of Senator Gregg are wise 
admonitions, that while we do short-term things to lift the 
economy, we have got to guard against doing things that would 
make our long-term circumstance worse. And that is what I hear 
you saying today.
    Mr. Sunshine. That is correct. That is correct.
    Having given all that good news about the budget, let me 
just touch on some of the key economic factors just so we can 
have a clear picture of what they are.
    We estimate that real gross domestic product will decline 
by 2.2 percent in 2009. That is also the largest single-year 
decline in real GDP in any year since World War II. And we have 
relatively slow growth in 2010, only 1.5 percent. The overhang 
of the financial crisis, the loss of wealth, and the various 
other factors that have contributed to the recession we think 
are going to not lead to a sharp uptick in growth that you 
sometimes see after a recession. So we have 1.5-percent growth 
in real GDP in 2010.
    By our estimate, this recession will last until the latter 
part of this year, which means that is at least 19 months since 
it started a year ago December. That will make it the longest 
of any of the post-war recessions. The longest of those was 16 
months. A number of other recessions were much shorter than 
that.
    This will also be in our estimate the deepest recession. By 
deep, we mean the extent to which the economy is performing 
under its capacity. And we estimate that over the next 2 years, 
the economy will average 6.8 percent--GDP will average 6.8 
percent below its potential.
    We have the unemployment rate peaking early in 2010 at more 
than 9 percent. The unemployment rate tends to peak after the 
recession is over and then hedge down. It keeps going up for a 
little while. It is not that long ago, early in 2007, when we 
had an unemployment rate of 4.5 percent. It seems like a long 
time ago. In the past 50 years, the unemployment rate has hit 9 
percent only twice: one in 1975 for a month, and then for a 
period in 1982 and 1983.
    The next slide shows the gap that I have been talking 
about, with the smooth upper line being the potential gross 
domestic product, if the economy is functioning on all 
cylinders; and the bottom curly line shows what we estimate 
will happen, and the gap between them is the lost output as a 
result of the economic circumstances. It is also an indication 
of how much ground you have to make up, but also how much room 
you have to work with in terms of stimulating the economy 
before you start running into the constraints of an economy 
that is operating close to potential. Now, ultimately in our 
baseline we project that the economy will return to close to 
potential over several years out, but it does not get there 
until somewhere around 2014 or 2015.
    This is a comparison what this recession will look like in 
our view with what the typical previous recessions have looked 
like. We are now about a year into the recession. In previous 
recessions, the average business cycle, the recession is 
actually over by now. Usually they last two or three quarters 
and they are over. That would be the average business cycle. 
Here we are already more than 12 months into the recession, and 
we have not even hit the worst part yet. So we projected there 
will be a much longer recession and the recovery will be quite 
gradual. And so we will get 4 years out where we ordinarily get 
2 years out. It will take us 4 years to get to the point of 
recovery that we ordinarily get 2 years after the recession has 
begun.
    That has some ramifications for the kinds of steps one 
might think about taking to address it--and, in fact, whether 
one thinks you ought to take steps to address it. One caveat, 
though, I need to remind the folks in the room is that if you 
compare our economic assumptions with those of other 
forecasters, they are done on a different basis. Most of the 
forecasters make assumptions about what the Government is going 
to do, and they will assume some kind of stimulus package in 
their forecasts. As always, in doing our baseline we assume no 
further legislative action. So other forecasts may look more 
positive than ours in part because they assume that there is 
some kind of legislative action on the part of the Congress.
    I would like to touch briefly on the question of stimulus. 
This was not addressed in our report yesterday, but I thought 
it was important that we talk about it.
    In the absence of any changes in policies, we estimate that 
the economy will produce $1 trillion less in output per year 
than its estimated potential in 2009 and 2010. That is that 
gap. And it is significantly less than its potential in 2011 
and 2012.
    Many economists believe that a stimulative fiscal policy is 
desirable under these kinds of conditions. Recessions are 
characterized by a self-reinforcing cycle. Firms cut production 
and they cut employment because of a fall-off in sales, and 
then people have less income and they have less confidence, and 
they are more stressed financially; they buy less. Companies 
have lower sales; they cut more people. And you can get a self-
reinforcing cycle.
    A fiscal stimulus can dampen that cycle by increasing 
spending, whether it is by households, by businesses, or by 
governments. Some degree of fiscal stimulus occurs 
automatically when the Federal budget goes into a deficit, the 
big revenue shortfall that we talked about, additional spending 
on unemployment compensation, food stamps. Those things all 
help offset the decline in demand in the private sector.
    The Government has the option of providing additional 
stimulus, either on the tax side by reducing taxes or by 
increasing payments to individuals or by conveying resources to 
State and local governments, or by doing things itself, by 
buying goods and services itself.
    The Fed is also stimulating the economy. The Fed has been 
very aggressive and innovative in providing economic stimulus. 
But there still remains the question as to whether the things 
the Fed has done will be sufficient to both stabilize the 
financial system, which it shows signs of doing, and providing 
a significant boost to demand in the economy. Ultimately we 
need to do both, and it is not clear that the very aggressive 
actions by the Fed will actually succeed in doing both.
    Another way of thinking about it is even if one thinks that 
the CBO forecast is not too bad, we can live with it--and it is 
not a terribly optimistic forecast--things could be worse. I 
mean, there is no great science to forecasting the economy. 
Economists have a very difficult time predicting turning 
points. The outcome could be better than we predict, but it 
also could be worse. And one can also think about taking 
legislative action as a kind of insurance policy to ensure that 
it--or to try to ensure that the situation does not turn out 
worse and hopefully it turns out a little better.
    There are three key criteria that we think need to be 
applied in thinking about fiscal stimulus. The first is 
timeliness. It is important that the effects of the stimulus 
occur when the need for the stimulus exists, when you have that 
gap, which means that, since we are already in the recession, 
one probably ought to do it quickly, and one ought to do 
things--if you want to have an effect on closing that gap, one 
ought to do things that take effect quickly. That means if it 
is getting money into the hands of people or businesses or 
governments, if it gets into their hands 2 years from now, that 
is probably not--it is not going to help with the big gap in 
the economic output.
    It does not have to take effect during the technical period 
that we call a recession, because if we have weak growth 
following the recession, it may also be helpful to stimulate 
the economy then. But what you do not want it to do is you do 
not want it to kick in when the economy is growing rapidly and 
the output is getting close to potential.
    A second key criterion is that it is desirable that the 
policies be cost-effective, that you get bang for the buck. The 
most effective policies in that regard put money, resources in 
the hands of households or firms or governments that will spend 
them. If people save--saving in the long term is a really good 
thing for the economy, but saving now is not a good thing for 
the economy. And if we put the resources into the hands of 
individuals or firms or governments that do not spend them now, 
then you do not get bang for the buck in terms of economic 
stimulus.
    There is another tradeoff. The other tradeoff is if you 
push too hard to spend things quickly, you might not spend them 
wisely, because sometimes it takes time to think out carefully 
exactly what one--whether it is infrastructure projects or 
other kinds of things, to determine exactly what are the most 
productive ways to spend those things and what kinds of 
projects are the right ones. And so you have a tradeoff between 
the desire to spend money quickly and the need to be thoughtful 
about how we spend it.
    There are some potential policies that simply change the 
timing of spending, and that if we simply accelerate certain 
types of things, like accelerated depreciation, for example, it 
would ultimately be a cost to the Government anyway, but move 
them from a time period when we need the fiscal impact less to 
a time period when we need the fiscal impact more. That 
actually has very little net cost to the Government, but it may 
be helpful in terms of stimulus.
    So timeliness, cost-effectiveness, and then something that 
we have already talked about, you want to avoid doing things 
that significantly exacerbate the Nation's long-term fiscal 
problems. Policies that may be very desirable and helpful in 
the short run may not be beneficial or may even be harmful to 
addressing the Nation's long-term fiscal challenges.
    Fiscal stimulus adds to the Federal debt. For every $100 
billion in Federal debt, the future taxpayers will probably 
wind up paying about $5 billion a year in interest costs. Large 
deficits, persistent deficits, slow economic growth--they 
reduce national savings, they reduce capital accumulation, and 
they reduce over the long term the economy's capacity to 
produce. Spending, on the other hand, if one finds ways to 
stimulate the economy in ways that enhance the Nation's 
productivity over the future, that can offset some of that 
problem.
    Then, as the Chairman has pointed out, a large increase in 
debt poses risks. At some point investors here and abroad may 
decide that they have enough treasury securities and they are 
not interested in having a lot more. It may then start costing 
us a lot more to finance our Federal debt.
    We risk losing some flexibility in future financial crises. 
Right now we can borrow lots of money, and we are, and it has 
been very helpful. But at some point, you may reach a point 
where the debt is sufficiently large that that is not so easy 
to do or it is very expensive to do.
    And, finally, spending or tax changes that are enacted that 
are intended to be temporary may or may not be easy to reverse 
later. Programs and policies take on a momentum, a life of 
their own, and it is certainly possible to enact things where 
all intention is that they be temporary, but they may not turn 
out to be temporary.
    Chairman Conrad. We have certainly seen that.
    Mr. Sunshine. So those are the three main criteria, we 
think, that the policymakers ought to think about in addressing 
fiscal stimulus.
    Before I conclude, I would just like to thank two groups of 
people, a brief commercial. One group of people is the 
Committee staff on both sides of the aisle who have been very 
helpful and supportive and encouraging to me and to CBO during 
this transition period, and we appreciate their guidance and 
their support and their help. And I would certainly be remiss 
if I did not mention, as you have mentioned, the enormous 
amount of hard work that the CBO staff has put in over the past 
couple of months, working over the holidays to produce this 
report, producing the two very large health reports in 
December, and as well as a whole lot of other estimates and 
reports that have been going out. There is a very dedicated 
group of people that are not in this room that have made all 
those things possible, as well as some dedicated people who are 
in this room, and I am--and I hope you are--very grateful to 
them for doing that.
    Chairman Conrad. We are indeed.
    Mr. Sunshine. I am happy to answer any questions.
    [The prepared statement of Mr. Sunshine follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Let me ask you this: You have painted a 
pretty bleak outlook here. What is the risk that this downturn 
will be even more severe than you have described?
    Mr. Sunshine. I think any of our economic forecasts are in 
the middle of a band of possible outcomes, and there is at 
least as likely--a greater likelihood that they will be--the 
outcome will be worse than we described as that it will be 
better. I mean, that is the kind of forecast we try to do.
    Chairman Conrad. Yes.
    Mr. Sunshine. So that would argue that there is probably a 
50-percent chance in our estimate that it would be at least 
somewhat worse than we predicted.
    Chairman Conrad. Let me just say that my experience with 
forecasts is they almost always miss at the turning points; 
that is, when things are going up, they underestimate how well 
things are going on the up side; when things are going down, 
they almost always underestimate how severe the downturn. And I 
used to have the responsibility for forecasting revenues for my 
State, and it is a very persistent pattern over time. It is 
part of human nature, I think. And so it seems to me there is a 
strong possibility, at least, that this downturn is more severe 
than you describe. I have had forecasts passed on to me by some 
in corporate America that see an even sharper downturn than is 
generally acknowledged.
    What are the risk factors that you see that could lead to a 
more severe downturn?
    Mr. Dennis. Senator, maybe I can take that question. 
Clearly, one of the biggest risk factors is what developments 
are in the financial sector. There have been absolutely 
terrible things happening this fall, really very surprising 
things that few people were able to predict before they 
happened.
    Things seem to be improving a little bit right now. The 
cost of borrowing that banks have to pay to each other to 
borrow overnight, which is one of the main indicators that we 
and others look at, that remains very high but has come down 
from the extraordinarily high levels that existed a month or so 
ago. So there are some signs of improvement there.
    Nevertheless, I think we are very conscious of the fact 
that there has been a lot going on that we did not predict, and 
that really is a severe cause of possibilities of----
    Chairman Conrad. Well, let me ask one specific, if I could. 
We saw the unemployment for December rise very dramatically. 
The increase in unemployment for December was far higher than 
any forecast that I have seen. What does that tell you in terms 
of the potential for this to be a more serious downturn?
    Mr. Dennis. Certainly we saw both a very large increase in 
unemployment--a reduction in employment in November, and then 
another one looks as though it is coming in December, judging 
from yesterday's report from ADP. So those numbers are actually 
consistent with the forecasts we have given you, so they do not 
give you--they are not an indication that things would be worse 
than our forecast. But they do indicate the very severe decline 
that is occurring right now.
    Chairman Conrad. OK. Senator Gregg.
    Senator Gregg. Thank you.
    I want to get back to the economic stimulus and how it 
should be structured. I agree wholeheartedly with a lot of what 
you said, especially your last point that there cannot be long-
term expenditure.
    We did this $160 billion stimulus at the beginning of 2008, 
and a lot of it was basically a cash payment to people in hopes 
that they would expand consumption, but that did not happen. I 
tend to think that this recession is so unique in our history 
that the traditional Keynesian approach of just putting money 
in people's pocket and hoping that they spend it to turn the 
economy around is not going to be all that constructive. I 
think the most constructive thing we can do is look at the 
underlying causes, which are that our economy is not as 
productive and as competitive as it needs to be, and that we 
need use this situation to help us restructure the economy and 
make it more competitive; and that the majority of the 
initiative here should not be the expectation that we are going 
to be able to promote personal consumption, because I do not 
think that is going to happen. I think we could take all the 
TARP and all the stimulus, take $1 trillion and put it into 
consumption, I do not think it is going to affect the slowdown 
all that much, because I think people are in such a shell right 
now because of their concerns about the future that they are 
just simply going to save it or they are going to pay down 
credit card debt or they are going to do something that does 
not expand the economy.
    So I think it makes more sense for us to use these dollars 
that we are going to put into the economy to restructure the 
economy. I mean, there is going to be a downturn more 
significant and severe than we have ever had since World War 
II. But as we come out of it, and we will, our restructured 
economy should be productive and more efficient. And so I would 
tilt heavily toward investment that created that type of a 
return versus stimulus that promotes consumption. Now, I 
understand it is classic economic theory that you put 
consumption on the table first to try to energize the economy.
    Do you accept that theory at all? Or are you guys still in 
the place that consumption is what is needed?
    Mr. Sunshine. Well, I think broad-based, for example, tax 
rebates, you run a serious risk, at least from the stimulus 
point of view, that a significant number of people will not 
spend them. The rebate last year, we had estimated that 40 
percent of the amounts would be spent within 6 months. We do 
not know whether that turned out to be the case of not. It 
might have been less than that.
    There are signs that the people are really pulling back and 
being very cautious, so the best way to get bang for the buck 
in terms of consumption is to target the money to the people 
who are most likely to spend it, whatever in your view that 
might be, whether it is unemployment benefits or other kinds of 
things that people who are most likely to be short of resources 
or credit-constrained. If bolstering consumption is a high 
priority, then that is the best way to do it, is to target it 
to the kinds of people who would spend it.
    Another option that makes sure it gets spent is the 
Government spends it on--whether it is infrastructure, other 
kinds of investments that hopefully would enhance the future 
productivity of the economy.
    Do you want to add something, Bob?
    Mr. Dennis. No. I think that is fair, and I do want to 
emphasize that we do not actually know yet what the impact was. 
There are some academic papers that address that question. One 
of them that we are aware of suggests a somewhat lower, 30 
percent rather than 40 percent, spendout rate from it. But 
there are certainly concerns about that paper, too. So we 
really await the real studies.
    Mr. Sunshine showed a graph earlier that showed that at the 
beginning of this recession there was a bit of an upturn in 
GDP, which is unusual in recessions. If we believe that our 
assumption of about 40-percent spending was about right, then 
what the stimulus would have done is give us that little bit of 
upturn at the beginning instead of having a GDP approximately 
flat for the first year of the recession.
    Senator Gregg. Well, maybe, but I think we should heavily 
tilt the stimulus package toward investment-based activity--you 
know, bridges, roads, infrastructure, fiberoptics, whatever--
that is going to give us a return. There may not be an 
immediate construction event, but in the long term, it is going 
to make us so much more competitive.
    You talked about a big chunk of the increase in the deficit 
results from bringing GSEs onto the balance sheet. Is it $250 
billion?
    Mr. Sunshine. $240 billion.
    Senator Gregg. $240 billion. Does that presume that that is 
sort of lost money? Or do we presume that we are going to get 
that back as an investment?
    Mr. Sunshine. No, that is net-present-value kind of 
calculation. That captures the gap between their assets and 
liabilities by our estimate.
    Senator Gregg. But we do not really know that. I mean, if 
the economy starts to recover and people start paying their 
mortgages, that number is going to drop pretty radically, 
right?
    Mr. Sunshine. It could turn out better or worse than that.
    Senator Gregg. Better or worse.
    Mr. Sunshine. Yes.
    Senator Gregg. Do you still perceive that the underlying 
generator of our really critical situation is the mortgage and 
housing industry? Do you see that, do your economists see that 
as being still the major problem? Or do you see this as having 
compounded into other things, credit cards and other areas?
    Mr. Sunshine. Well, we can ask the economist.
    Mr. Dennis. It looks as though the recession has taken on a 
dynamic of its own. One thing to remember is that both the 
financial problems and also now the economic downturn is 
worldwide. It is all over the place. So we are going to be 
losing exports as well.
    The loss of consumption means that there is much less 
incentive for businesses to invest, so you have got that 
dynamic going on as well. You see investment falling. One of 
the things we watch carefully is an index of architects' 
billings which suggest that commercial construction, which has 
held up relatively well, is going to join the parade of things 
that are going to be very weak.
    There are all of these sort of normal dynamics of recession 
that are particularly strong at this time simply because the 
initial loss was large. We have lost a very large amount--
consumers have lost a very large amount of wealth. That is also 
pushing down our consumption.
    These are all ordinary mechanisms. Then you have got to add 
the question of possible credit constraints on top of that, and 
this is where you get into things like credit cards and so 
forth. We are not really forecasting that those things will get 
a lot worse, but they could. That is one of the risks.
    Senator Gregg. That is interesting.
    Should the stimulus package have in it aggressive 
enforcement mechanisms to discipline it, such as a hard sunset 
with supermajorities, such as entry tests as to whether or not 
spending on infrastructure has got a return value, for 
example--Main Street beautification versus building a bridge? 
Should we have that type of enforcement mechanism within the 
stimulus package?
    Mr. Sunshine. As a taxpayer, I have some fears about what 
can happen when one suddenly throws large sums of money that--
where one increases by large percentages the amount of money 
that the Federal Government or governments as a whole are 
spending in certain areas. The Federal Government is spending 
$60 billion a year, something like that, on infrastructure. So 
if we are talking about tens of billions of dollars, we are 
talking about a big increase in the amount that the Federal 
Government is contributing. And we are also talking about a lot 
of concern about making sure it is spent on things that are 
shovel-ready, that can start quickly.
    As a taxpayer, I am not always sure that the things that 
are shovel-ready are necessarily the most important or most 
productive projects, and that it would seem desirable from that 
perspective for there to be various safeguards and controls 
built in to try and ensure that if we are going to put a lot of 
money into some of these kinds of things, that we spend it 
well, because I think there is a risk--particularly since there 
is such an emphasis on speed, there is some risk that we will 
not spend it well.
    Senator Gregg. I will take that as an enthusiastic yes from 
a taxpayer.
    [Laughter.]
    Mr. Sunshine. CBO speakers are not supposed to give 
enthusiastic yeses.
    Chairman Conrad. Let me just enthusiastically endorse what 
the Ranking Member has talked about in terms of the targets of 
a stimulus package. I tell you, I thought the rebate thing was 
largely a bust. I have seen the paper, or my staff has, about 
only 30 percent of the money was actually spent. And however 
laudatory it is to save, to pay down debt, that does not 
stimulate the economy in this circumstance.
    I am very, very concerned about some of these things that I 
hear about and read in the newspaper might be in this package. 
For example, a jobs credit, that strikes me--if I am a business 
person, it is unlikely, if you give me a several-thousand-
dollar credit, I am going to hire people when I cannot sell the 
products they are producing. Why am I, if I am an automobile 
manufacturer, going to hire more people when the cars are not 
selling? That to me is just misdirected. I would much prefer, 
sign me up enthusiastically for what Senator Gregg has 
described as investment that is going to make us more efficient 
and more competitive. And I would put in that category--energy 
would be at the top of my list; infrastructure, and I think we 
absolutely should distinguish between types of infrastructure. 
There is certain infrastructure investment that will pay long-
term dividends. There are others that are nice things but do 
not really improve our economic competitiveness. And then 
housing. Housing is still in the doldrums, still sinking. I 
just cannot fathom why that would not be part of this package.
    Senator Gregg. Maybe the Budget Committee should come up 
with a useful set of criteria to help some of our fellow 
colleagues work on that.
    Chairman Conrad. Yes, I think that would be a very useful 
thing that we could do.
    Senator Lautenberg.
    Senator Lautenberg. Thanks, Mr. Chairman, and thank you 
both for being here, Mr. Sunshine and colleagues. The empty 
seats certainly do not indicate the concerns registered in the 
Senate. Unfortunately, I guess there is a lot going on that 
prevents us from being here, as I had another Committee 
meeting, but I think----
    Chairman Conrad. Senator, maybe I could just say, you have 
made an observation here that is important for us probably to 
relate. The Finance Committee is meeting right now, all 
members, on a stimulus package. So there are a fair number of 
our Committee members who are right now in that discussion.
    Senator Lautenberg. Yes, we have had a very important 
discussion environment, and so it goes around as we are here.
    Mr. Sunshine, your agency predicts a dramatic economic 
slowdown. That is consistent with the views generally expressed 
by knowledgeable people; GDP dropping by 2.2 percent in 2009. 
You also cite prolonged struggles in the housing market and 
financial markets. Yet CBO comes along and then says in 2010 
and 2011, we are going to see some growth.
    Now, how do these things square? What is the basis for that 
conclusion that we are going to see economic growth resumed in 
2010? And included in your answer, I would like you to just 
tell us whether or not you are expecting infrastructure 
changes. I am not just talking about highways and roadways. I 
am talking about the financial infrastructure of the country. 
So, if you would, please.
    Mr. Sunshine. We have not built any legislative changes 
into our forecast in terms of whether it is financial 
infrastructure or other kinds of things. I will leave the 
technical details to Mr. Dennis. I would say the U.S. economy 
is, at its fundamental, a strong economy, and it hits these 
bumps in the road, and there is, you know, weakness in demand, 
and there are some things that occur and we have recessions. 
But ultimately, as the various--the economy by its very nature 
has an ability to recover. Now, what it has to recover from 
this time is more severe than what it usually has to recover 
from. We have had an enormous loss of wealth on people's parts. 
We have had the great strain in the credit markets, people 
having trouble being able to finance their homes and get all 
other kinds of borrowing.
    But, fundamentally, the economy will turn around, and the 
question that we have to grapple with as forecasters is when. 
Will it turn around in 6 months? Will it turn around in a year? 
Because the fundamental dynamics of the economy are such that 
it does turn around.
    Did you want to give a more technical answer to that?
    Mr. Dennis. Not a more technical answer, but maybe just one 
other point. We do not try to forecast what changes are going 
to occur in the financial markets, but we are certain that 
there will be changes, that the financial markets a year from 
now will not look as they do now and will not look----
    Senator Lautenberg. They will not look at?
    Mr. Dennis. As they do now, and----
    Senator Lautenberg. As bad----
    Mr. Dennis. We hope they do not, and also after the 
recession, the financial markets will not look the way they did 
before the recession. We would not expect, for instance, to see 
the subprime market work the way it did before. There may well 
be changes in the securitization of mortgages and the rules 
that go along with that. There are a number of different things 
that we would expect to change. Maybe there will be different 
regulation of banks. All sorts of things are likely to change. 
We are not sure what precisely are the contours of that. We do 
expect that there will continue to be some uncertainty about 
the financial markets persisting for quite a long time, and 
that is one of the reasons why our forecast is that the 
recovery from recession will be somewhat slower than is usual. 
Maybe the analogy would be to go back to the headwinds that 
Chairman Greenspan talked about a couple of recessions ago.
    Senator Lautenberg. Slower than----
    Mr. Dennis. Frequently----
    Senator Lautenberg. Is a year from now a quick or a slow 
pace?
    Mr. Dennis. Well, I am really thinking about after the 
recession; that is, there is a recovery period after the 
recession where we frequently have growth rates on the order of 
6 percent, and that is not our forecast. We have got them more 
like 4 percent, which is only a little bit faster than the 
growth of potential in the economy.
    Senator Lautenberg. I heard Mr. Sunshine talk about his 
concern as a taxpayer. We all do the same thing here and are 
concerned about Government spending. Did I hear you correctly?
    So how do you feel about the stimulus as a general thing? 
Not having been here, I am sorry that this might be repetitive.
    Mr.Sunshine: I mean, CBO does not, of course, make policy 
recommendations. We pointed out in our report that the economic 
situation now is of the type where fiscal stimulus might be 
beneficial, that the economy is operating at a very large 
percentage, from a historical perspective, below its potential 
capacity. And there is a great loss of output occurring as a 
result of that.
    It is also not clear that the very aggressive actions on 
monetary policy and the various things that the Federal Reserve 
is doing to stabilize the financial system, whether that will 
be sufficient both to stabilize the financial system and to 
stimulate the economy and create additional demand because of 
the constraints of the financial system. So using the various 
criteria one thinks about, as the situations with fiscal 
stimulus might be desirable, most of them apply in the 
situation perhaps better than in many other situations.
    The other condition is that we expect the period of either 
recession or slow growth to be longer than in most situations, 
because in a short recession, by the time you implement fiscal 
stimulus, it can easily be too late, and you actually--and the 
stimulus kicks in after the recession is over and does more 
harm than good.
    If, in fact, you think there is going to be a long period 
of either recession or slow growth, that makes a stronger case 
for doing things that can kick in, in 6 months or 8 months or a 
year.
    Senator Lautenberg. Can I ask for just kind of a yes or no 
type answer? Do you think that we could get along without a 
stimulus package or a stimulus injection in the economy?
    Mr. Dennis. Our economic forecast does not assume a 
stimulus package, so I think that is a judgment that you would 
have to make.
    Senator Lautenberg. Yes, but you are making a forecast.
    Mr. Dennis. Right.
    Senator Lautenberg. You are taking the data from which you 
make your conclusion. By the way, do you use any of the labor 
statistics that we see now coming on a regular basis in terms 
of your forecasts of job growth, income levels, et cetera, et 
cetera? Do you use that kind of mechanism in developing your 
forecasts?
    Mr. Dennis. We absolutely do, yes.
    Senator Lautenberg. Which index do you use; do you know? Is 
it the Bureau of Labor Statistics?
    Mr. Dennis. We use a lot of things. We look at the Bureau 
of Labor Statistics stuff. We also, for instance, looked at the 
report yesterday that tracks payrolls that gives us----
    Senator Lautenberg. What is the firm?
    Mr. Dennis. ADP. It gives----
    Senator Lautenberg. I am one of the founders of that firm.
    [Laughter.]
    Senator Lautenberg. And Alan Greenspan came to the Fed from 
our board. And I worked for over 20 years to get that index 
going, and I could not get the team to do it. Finally, now that 
I am far enough away--but they got it done, and I think----
    Mr. Dennis. We thank you very much.
    Senator Lautenberg. I am pleased that that company that was 
started with nothing--and I do not want to take too much time. 
I do want to, but I will not.
    [Laughter.]
    Senator Lautenberg. But the company that was started by 
three young people from Paterson, New Jersey, without any 
resources at all now produces an index that provides the 
freshest data that are available. It is weekly calculations, 
what incomes are, what terminations there are, what new hires 
there are. And I am not looking for an endorsement, I promise 
you, because they do not sell it. They give it away. In my day, 
I would have sold that information.
    You have said--and I think I heard you correctly--that you 
do not include the stimulus package in your forecast.
    Mr. Dennis. That is correct.
    Senator Lautenberg. Then a stimulus package ought to blow 
the top of things, if stimulus works at all. Can stimulus be a 
negative thing in our change of direction?
    Mr. Dennis. We would anticipate that a stimulus, unless it 
was designed in a very odd way, would be a stimulus as to the 
economy, yes. How much stimulus there would be would depend 
very much on the design of the package.
    Senator Lautenberg. Mr. Chairman, I have taken advantage of 
the time. Are we----
    Senator Gregg. I wish I were Chairman, but the Chairman has 
left and asked me to watch the time, and I----
    Senator Lautenberg. I am being nice.
    [Laughter.]
    Senator Gregg. That is very kind of you. Very kind.
    Senator Lautenberg. Am I out of time?
    Senator Gregg. I think so.
    Senator Lautenberg. OK. Thank you. I will submit some 
questions for the record, and I appreciate it. Thank you.
    Senator Gregg. I would like to second your support of ADP 
and the great job you did in creating that company. I was a 
stockholder at one time of that company. Very excellent income.
    Senator Sessions.
    Senator Sessions. Thank you, Senator Gregg, and I thank 
Chairman Conrad for the hearing and for the nice discussion 
that we have had.
    Mr. Sunshine, I particularly appreciate the fact that you 
have explained our economy in a dispassionate way. You do not 
seem to be totally panicked, but instead appropriately 
concerned, and in a way that the average person could 
understand. I hope a lot of people have heard that.
    I saw an article in USA Today, when this thing began that 
kind of began to show these problems and it made the comment 
that an economy built on excessive Government debt, excessive 
personal debt, and a tremendous trade deficit is not a healthy 
economy. It does seem to me that the debt problem, the 
leveraging problem, is out there across the economy, I think as 
you suggested, Mr. Dennis, more than just the mortgages. Many 
people with big credit card debts and personal debts have taken 
out second mortgages reducing their home equity. And we have 
been living on that debt.
    Is it true, Mr. Sunshine, that this increasing debt has 
been the fuel that has sort of created some of this bubble?
    Mr. Sunshine. I certainly----
    Senator Sessions. If we can use that phrase, ``bubble.''
    Mr. Sunshine. I think we certainly saw it in the housing 
area in particular. The availability of new kinds of mortgages, 
the availability of mortgages to people without careful checks 
as to whether they could afford to pay them, coupled with low 
interest rates during that period, drove housing prices higher, 
put people in homes that they could not afford to pay for. And 
part of the process we are going through now is getting back to 
a more normal kind of situation. And I think some of that kind 
of reliance on debt has occurred in other sectors of the 
economy as well.
    Senator Sessions. Well, I have been working with Senator 
Kennedy--which has not yet reached fruition--on a plan to 
create a universal savings plan in addition to Social Security 
for every worker in America. And we were aware a little over a 
year ago that the savings rate in America was below zero, a 1-
percent erosion of a person's net wealth every year because 
they were spending their wealth down.
    Well, when the price of your house drops and you have been 
already eroding that equity or increasing your debt, we get in 
a circumstance that is not healthy, I think. Now I understand 
that already the savings rate is 3 percent. I talked to one 
economist yesterday who said they are projecting it could rise 
to 8 percent--which in the short run might be bad, but in the 
long run might be healthy.
    Would you agree with that, Mr. Sunshine?
    Mr. Sunshine. That is right. Ultimately, in order to have a 
more productive economy, we need over the long term more saving 
and more investment than we have historically had. As you 
pointed out, there is a conflict between what we might need in 
the very short term and what we need in the long term. But the 
need for greater saving and investment over the long term is 
clear, particularly in view of the long-term budget/fiscal 
problems that we face as a Nation.
    Senator Sessions. Well, I could not agree more with that, 
and I just know that we have got to work out--so, first of all, 
to take the panic out of the situation, it would seem to me 
that we are going through a recession that might also be called 
an adjustment, a readjustment to a more normal saving/
expenditure/consumption scenario based on the net income that 
Americans have. And this is very painful for us right now, but 
it is not all bad. And at some point, as we come out of this, a 
recession or an adjustment gives us the potential to begin an 
economic growth that could carry us for years to come. Is that 
the hope, Mr. Sunshine, would you say?
    Mr. Sunshine. That is definitely the hope. I mean, our 
economy and other economies go through bubbles of various 
types. We have had some before. The housing bubble was an 
enormous one and spread throughout the economy and struck at 
the financial system as well, and we are going through an 
adjustment. And, in fact, you know, we predicted house prices 
will continue to decline because they have to get back to the 
point where the level of house prices corresponds to the level 
of people's income so that they can afford to buy them. And 
ultimately the housing market will not settle until we get some 
kind of equilibrium between where people's incomes are and 
where house prices are. And the economy has to go through that 
adjustment.
    Senator Sessions. You mean we just cannot pass a law and 
make the housing prices stay where they are and not adjust?
    Mr. Sunshine. That would be tempting, I suppose.
    Senator Sessions. Well, I mean, we do need to understand 
that. I do believe that we have sort of been in a panic mode. I 
did not support President Bush's ``send out the check'' 
program, and I think the chart that was shown earlier indicated 
that it did not do much for the economy. I did not support the 
TARP program, but I know the reason it was passed, and it was a 
difficult decision to oppose it. And I have heard a number of 
economists recently say that the way it was executed has not 
really solved the toxic mortgage problem. We have still got to 
deal with that, regardless.
    We do not need to make mistakes in the future, as you have 
said. Whatever stimulus we undertake should be a stimulus that 
works. I notice you made the comment, Mr. Sunshine, that we 
have got a $60-billion-a-year infrastructure program. It is 
something I have been looking at before this hearing. Many of 
the proposals are, ``Oh, well, we will just spend $350 billion 
in the next 2 years on roads and highways, and nobody can 
object to that, and that will be very popular. OK?'' But $350 
billion is $175 billion a year. That would be nearly three 
times the current rate of expenditure for infrastructure from 
the Federal budget. And I just cannot imagine that can be spent 
efficiently, and there are just not enough cement mixers to 
make it work without surging prices unnaturally. So we have 
really got to be careful about that challenge.
    I do not know if my Chairman is coming back. Do you expect 
him--oh, I see. Senator Whitehouse, I would be pleased--my 
time, I think, is up. I would--maybe one more thing.
    Senator Whitehouse. Senator Sessions, there is only me 
waiting, so feel free to take your time and continue to the end 
of your questions.
    Senator Sessions. All right. I think it is very 
instructive--very instructive--when we consider the enormity of 
what we are doing, to consider what you said earlier, Mr. 
Sunshine, that basically Freddie and Fannie need to be on the 
Federal budget. They are Federal programs. I do not know if we 
have ever discussed that in any open, rational way in this 
Congress. But it is just one of the huge things that is 
occurring at this point in our history without much discussion 
by our political leaders. We have just got to pay more 
attention to it.
    And with regard to the debt that Senator Gregg spoke about, 
I was very troubled, and President Bush was criticized greatly 
for a $412 billion deficit in fiscal year 2004, the largest 
since World War II. It dropped to $161 billion in 2007. We were 
making some progress. Last year it was $455 billion, the 
largest ever. And now you are projecting, with no stimulus 
package, a $1.2 trillion deficit this year and a $1.8 trillion 
deficit if the stimulus package passes. And I guess I would 
just say those concerns add cost in the long run to this 
economy. Those debts are burdens this economy is going to have 
to carry, and we should keep this thing as lean and as 
productive as absolutely possible.
    Thank you. I would yield my time to my colleague.
    Senator Whitehouse. Thank you, Senator Sessions.
    For people who are still watching, I guess I would like to 
make an initial point, which is that this discussion matters a 
great deal not just to CBO economists and Senators on the 
Budget Committee and economists around the world. It is not a 
hypothetical future problem. It has very immediate and real 
consequences. One of them is in the last year's budget that we 
approved, there was $260 billion in interest expense to pay for 
this deficit. And we have calculated that for that $260 
billion, you could provide universal health care in America. 
And on top of the universal health care you could provide in 
America, you could double Pell grants for kids going off to 
college in America. And on top of universal health care and 
doubling Pell grants, you could double the Head Start program. 
And on top of universal health care and doubling Pell grants 
and doubling the Head Start program, you could fix 95 percent 
of the bridges that have been identified as needing repair in 
this country.
    That is what you could do with that $260 billion, and I 
would say that if you were President and you came out with 
universal health care, doubling of Pell grants, doubling of 
Head Start, and repairing 95 percent of the bridges that need 
repair in this country, that would be a pretty good success to 
be able to claim. And we prevent it, we prevent ourselves from 
accomplishing it by running these deficits and facing that 
interest expense. The interest expense is likely to get worse 
rather than better, as interest rates begin to increase and as 
the underlying deficit explodes, so that real cash budget 
annual cost of this thing that affects people in their lives 
and homes is very significant.
    The second point that I would like to make is that we have 
calculated in my office with the support of the Budget 
Committee staff, that the Bush administration ran up a $7.7 
trillion net deficit compared to CBO projections of the budget 
on the day that the Bush administration took office, and that 
$7.7 trillion, that is a 7, and then another 7, and then 11 
zeroes, if anybody wants to try to write that down. I mean, it 
is a frightening number. I am from Rhode Island. We barely get 
into billions. $7.7 trillion blown in essentially robbed money 
taken away from the American people to the extent they are 
entitled to a balanced budget is a big number, and that, by the 
way, is the number before the bailouts began. The bailouts have 
only added to it.
    So in the boom economy, at the time when common sense and 
prudence dictate that we should have been setting money aside 
and protecting ourselves economically, we made--or the Bush 
administration in particular made reckless financial decisions 
that have made it, I believe, much more difficult for us to 
respond to this now. If we were running a surplus and we were 
going into this, we would be in much better shape, and we had 
surpluses anticipated for this period until the Bush 
administration came along. The Clinton administration left in 
good fiscal shape this country, perhaps partly because when 
they came in, they had in the campaign office that famous 
slogan, ``It's the Economy, Stupid.'' I would suggest that if 
we were to discuss ``It's the Economy, Stupid'' now, we would 
want to add ``It's Health Care,'' because there is this 
catastrophically large health care liability that we are facing 
out there. And if we do not get our arms around a significant 
delivery system reform of the health care system quickly, then 
we are going to be swamped by that in ways that I think make 
today's concerns, as serious as they are, look mild by 
comparison.
    The last point I will make--and then I will throw it to you 
to comment on any and all of them as you please--is that as 
long as we are looking at infrastructure investment and a 
stimulus, and as long as we are looking at a very substantially 
bad deficit picture for our country going forward, it strikes 
me--and I guess I will make this a question to you.
    It strikes me that if we are going to have to do stimulus 
spending to protect the economy from much deeper disaster than 
would happen otherwise, and if we are in a very bad deficit 
environment, it makes sense to do as much of the stimulus as 
you can for infrastructure on two grounds:
    One, you probably are going to have to pay for the stuff 
anyway, sooner or later, so why not do it now and front-load it 
into the stimulus?
    And, two, when you are done with it, you have a tangible 
asset. In a probably non-economic or accounting sense, you are 
actually taking kind of a cash asset or expenditure of the 
country and moving it to become a tangible asset of the 
country's and not making the country any worse off, assuming 
that you are spending wisely. If you are spending very wisely, 
you could actually make it much better off because it can be a 
wise capital expenditure.
    So starting with your comments on how stimulus investment 
in infrastructure is a better--or worse, if you think so--
stimulus investment in our deficit environment and commenting 
on any of those other points, the floor is back to the experts. 
I appreciate your testimony, and I join everybody else in 
thanking you for how hard you worked in holiday timeframes to 
get us to this point.
    Mr. Sunshine. Thank you. I think stimulus infrastructure 
investments have value in this kind of environment because of 
what we have talked about before in terms of the long-term 
fiscal problems facing the country. And if you can do things 
that both stimulate the economy and make it more productive in 
the long term, that is the best possible combination. The 
challenge is to find the infrastructure investments that 
actually do that, and that is not so easy when you are trying 
to do it quickly and trying to infuse a lot of money into the 
program. But if you can do it right, infrastructure 
investments, many of them, do have a positive return, and they 
do enhance the productive capability of the economy.
    Senator Whitehouse. Let me ask you a little bit about that, 
because it strikes me that a stimulus has two effects. It has a 
cash effect of putting money out into the economy quickly, but 
presumably it also has a confidence effect. There are evidently 
200 projects backed up in Rhode Island, which is not a very big 
State, for water infrastructure that amount to $900 million. If 
you are involved in companies that support that kind of 
construction, if you are a carpenter or in the cement business, 
if you are an electrician and plumber and involved in all of 
that, it strikes me that if you know that we can get 200 
projects working, that there is going to be $900 million spent, 
you may not have that money in your paycheck right away; but if 
you are working on those projects and you know that they are 
going to be seen through and they have got the Federal 
Government behind them, you might just take that creaking 
washing machine and go out and buy a new one just on the 
confidence that you have a job through this period. And I would 
love to hear your comment on the difference between the 
immediate cash effect of stimulus and the confidence effect of 
stimulus when it is related to a job and somebody can say, 
``Whew, OK, I am going to get through this all right. I am not 
going to have to freeze my personal spending. We can get the 
new washing machine.''
    Mr. Sunshine. Often one of the concerns we raise about 
infrastructure investment in a short recession is you have got 
to be careful if, by the time they actually start spending the 
money, you miss the recession and it happens too late.
    Senator Whitehouse. Not likely to happen now.
    Mr. Sunshine. But in the period we are talking about now, 
there is much more time than we would--unfortunately, there is 
more time for that to happen. And I think your point is well 
taken that the expectation or the certainty that there will be 
projects or--I mean, some of these projects actually take a 
year or 2 years or 3 years to do. So it is not just someone 
going out and getting a job for a month. It is someone knowing 
that there is this project going on for 2 or 3 years. And that 
is, I think, a lot different than getting a check once.
    Mr. Dennis. Can I just add that there is another confidence 
effect, too, and that is that the company, the construction 
company that might be involved may be much more likely to buy 
another truck or----
    Senator Whitehouse. Cement mixer, yes.
    Mr. Dennis [continuing]. A road sweeper or something if 
they are confident they are going to be able to use it.
    Senator Whitehouse. I appreciate it. I have gone over my 
time, which I was doing happily and willingly because I was at 
the end of the line here. But one of my very distinguished 
senior Senators, Senator Wyden of Oregon, has appeared, so I 
will yield the floor, and given his seniority, I will also 
yield the gavel to Senator Wyden of Oregon.
    Senator Wyden [presiding]. I thank my friend, and I always 
miss hearing Senator Whitehouse on the budget, and I will catch 
up.
    Senator Sessions would like to ask I think at least one 
additional question, and then I will wrap it up. Senator 
Sessions?
    Senator Sessions. If you need to go first----
    Senator Wyden. No, why don't you go first.
    Senator Sessions. Just one little issue--which is not so 
small, I guess--that is, the impact of the debt and the trade 
situation with China that our Chairman Senator Conrad raised, 
``China Losing Taste For Debt.'' It just notes in this New York 
Times article today--or yesterday, that the trade surplus in 
China this year is $20 billion a month, whereas last year it 
was $50 billion a month. It is that surplus, is it not, that 
they have utilized much of to purchase securities in the United 
States?
    Mr. Dennis. Yes.
    Senator Sessions. That is the substance from which they are 
able to do it.
    Mr. Dennis. Yes.
    Senator Sessions. So we can see they will be buying less. 
Of course, we are talking about a $1.8 trillion addition to the 
debt in 1 year, this year, based on your projections. I would 
like to inquire a little bit more about how this impacts us. 
Isn't it true that right now, Mr. Sunshine, we are benefiting 
from very low interest rates?
    Mr. Sunshine. That is correct. Very low.
    Senator Sessions. Very low. Unprecedentedly low. Have you 
made projections about how those interest rates might grow? And 
is there a danger that they could surge beyond what we would 
normally expect to be the case?
    Mr. Sunshine. Well, I think we project them to return to a 
much more normal level over the next 2 or 3 years. We have not 
projected an extraordinary uptick in the interest rates over 
this period to beyond what one would consider normal.
    Senator Sessions. But the money has got to come from 
somewhere. So if all nations are showing a reduction in their 
surpluses--of course, we have a trade deficit--it could create 
a situation, could it not, that we might see a surge from 
extraordinarily low to maybe extraordinarily high interest 
rates to finance this debt around the world?
    Mr. Sunshine. I mean, we have a 3-month treasury bill rate 
over the 2011-14 period going back up to 3.8 percent--it is now 
less than a half--and going up to 4.7 percent over the latter 
part of the 10-year period.
    Senator Sessions. And what is the interest on the debt 
today, the $10 trillion or so that we have today?
    Mr. Sunshine. About $200 billion.
    Senator Sessions. $200 billion.
    Mr. Sunshine. Again, it is unusually low, Senator, because 
the interest rates on the short-term debt are so low.
    Senator Sessions. And what do you project on your out-years 
for the interest payment on the debt?
    Mr. Sunshine. We have going out in the later part of the 
10-year period around $450 billion a year.
    Senator Sessions. $450 billion every year, Mr. Chairman, on 
the interest on the debt, is equivalent to almost an entire 
cost of the 5-year Iraq war. And if the interest rates were to 
go higher and some of that debt has been locked in low, it may 
well begin to inch up even more in the out-years.
    That is some of the reason, one of the reasons, I assume, 
that you are concerned about increasing debt.
    Mr. Sunshine. Again, part of the problem is not the 10-year 
period by itself, but what happens in the following 10 years 
and the following 10 years. And we are not in a situation where 
we can, well, it is OK if we have some high debt now, things 
will get better. We are in a situation where things are going 
to get worse unless actions are taken to change the nature of 
our fiscal policy.
    Senator Sessions. The fundamental nature of our fiscal 
policy.
    Thank you, Mr. Chairman. This was a sobering discussion, I 
thought, and I am glad to participate and have that time.
    Senator Wyden. And I appreciate my colleague's thoughtful 
questions.
    Mr. Sunshine, CBO has correctly identified health care 
spending as the biggest driver in long-term Federal spending 
growth. At the same time, CBO has now proved that it is 
possible to significantly expand health care coverage and do it 
in a revenue-neutral way if you changed the incentives that 
drive behavior in the American health care system. And I say 
CBO has proved this because that was what was done in the 
analysis that the agency sent to myself and Senator Bennett 
last May. The agency analyzed our Healthy Americans Act, a 
piece of legislation cosponsored by, on this Committee, Senator 
Gregg and Senator Crapo and Senator Stabenow and Senator 
Nelson. We very much appreciated working with the agency on 
that bill.
    But what I want to ask about is the tax provisions, Federal 
tax provisions of health care. It is the single biggest item of 
health care spending. It comes to about $247 billion. This is 
stemming, of course, from the systems set up after World War II 
when there were wage and price controls. And, in my view, it is 
absolutely key that it be changed because it rewards 
inefficiency and is regressive in nature.
    My question to you is: Is there any other area of Federal 
spending--and this is, of course, a tax expenditure--that is 
close to being as big, No. 1, and, two, as readily available 
for expanding coverage as that particular set of provisions--
the provisions that make it a write-off for business and tax-
free to the worker? Is there any other provision of Federal 
spending or tax expenditure that is close to being as big or as 
readily available to expand coverage?
    Mr. Sunshine. Just on the tax side?
    Senator Wyden. Yes.
    Mr. Sunshine. I do not know the answer to that.
    Senator Wyden. I do not believe there is anything close.
    Mr. Sunshine. Mortgage interest is big, but that is not 
something one would want to use for this kind of purpose.
    Senator Wyden. With respect to health care. And the 
reason----
    Mr. Sunshine. Oh, no. That is by far the biggest impact 
with regard to health care, sure.
    Senator Wyden. The reason I am asking the question is I 
read both of the CBO budget books with respect to health care. 
A couple of times my spouse had to nudge me to keep me awake.
    Mr. Sunshine. I can understand that.
    Senator Wyden. They are wonderful documents, but it is 
dense. I cannot find anything in the health care arena--
certainly mortgage interest and the like--that is as close to 
being as large and as readily available to expand coverage. And 
I gather now on the basis of your answer you agree.
    Mr. Sunshine. That sounds right.
    Senator Wyden. OK. In terms of provisions that change the 
incentives that drive behavior in health care markets, are 
there any other major provisions?
    Mr. Sunshine. I am not sure I understand the question.
    Senator Wyden. Well, I could see how if you put copays on a 
particular service, that would, for example, change behavior 
and the incentives in the system. But I did not see any in the 
CBO books that were as close to as large as the Federal tax cut 
provisions.
    What I am trying to get my arms around is we are going to 
try to pass a bipartisan health reform bill, and in tough 
economic times, you are going to have to find major sources of 
money in order to facilitate a transition. And I do not see 
anything as close to the amounts in the Federal tax provisions 
that we are discussing. Is that right?
    Mr. Sunshine. That sounds to me like, yes, a very 
significant pot of resources that one can think about in terms 
of changing incentives that face people.
    One thing that is clear to me from the work we have done on 
health care is that you cannot address the problem just by 
tinkering around the edges. And we have a book full of ways, 
many of which are tinkering around the edges, some of which are 
fairly significant changes. But if you want to change both the 
effectiveness of the health care system and the coverage of 
people, I think the only way you can do it is by making very 
significant changes in the whole structure of the system. Minor 
tinkering will not take that curve that I showed earlier in the 
hearing and bring it down.
    Senator Wyden. Well, what else moves health care markets in 
a major way besides the Tax Code? I mean, that is what we want 
to do. That is what the bipartisan sponsors of this legislation 
want to do. And it does allow us to meld together democratic 
thinking and Republican thinking. I mean, Democrats have 
fought--and, in my view, correctly so--to get everybody 
covered. It is the moral thing to do, and it is also the 
economic thing to do, because if you do not do it, the people 
who are uninsured shift their bills to the insured. So 
Democrats have been right there, and Republicans, in my view, 
have contributed significantly to this effort to fix the 
markets and particularly to make sure that health care is not 
just handed off to the Federal Government. I do not see 
anything that does that more quickly than making changes in the 
Federal Tax Code, and I want to, before we wrap up--and as I 
say, we have been very grateful for our work with all of you. I 
think you have probably given us more hours than everybody else 
combined on this task. I want to see if there is anything else 
that makes markets here.
    Mr. Sunshine. I do not know if it is in terms of money. In 
terms of one has to focus on the incentives that face all the 
players in the system, the people that provide the services and 
people who use health care services. And we need to look at 
ways to encourage providers to use the most effective methods 
and to not use things--not to overuse techniques or services. 
You need to encourage users to be prudent in how they use the 
system. And I think the structure of the tax system has an 
effect on that. The extent to which people understand or 
perceive that they are paying for health care in various ways 
that right now are sort of invisible to them, and making those 
visible and providing people incentives to choose among health 
care plans in ways that give them the most effective health 
care but do not encourage them to buy lots of expensive health 
care that they might not necessarily need.
    Senator Wyden. What I found striking about the two CBO 
budget books on health is that there were a number of modest 
steps--steps I happen to support. I mean, certainly if you are 
well off, there ought to be some copays. You know, Donald Trump 
will be on Medicare before too long, and certainly he should 
face some payments for his Medicare that someone with a very 
modest income should not. So CBO essentially outlines some 
options like that.
    CBO also outlines some options, for example, in terms of 
health information technology. I think in the short term it is 
probably in the vicinity of $10, $12 billion worth of savings 
in terms of implementing reforms in that area as we get rid of 
paper records and make it easier for doctors not to repeat 
tests and that sort of thing.
    But none of that comes close to the kind of market-making, 
incentive-changing activity that you will see by reforming the 
Tax Code as it relates to health care the way four members of 
this Committee are seeking to do.
    Does your colleague want to add anything on this point? Or 
do you want to be spared and pretty much liberated to go to 
lunch here?
    [Laughter.]
    Mr. Dennis. I am not sure I have anything to add, Senator.
    Senator Wyden. OK. Mr. Sunshine, we may have colleagues who 
want to ask questions for the record. We appreciate your work 
and hope that you will be staying on, because I think you 
perform a great service to the country at CBO, and particularly 
your new approach in terms of health care is particularly 
welcome. I have always felt that the history of health reform 
is that Members of Congress, like those of us on the Healthy 
Americans Act, we go off in our offices, and we draft these 
pieces of legislation, we propose them, and eventually they go 
off to CBO to die, and they die a sort of unglamorous, obscure 
kind of death. But the fact that CBO has been willing to work 
with Members of the U.S. Senate on a bipartisan basis, 
particularly on these matters of changing the incentives that 
drive the behavior in the health system, which we all 
understand is the biggest single driver of health costs, is 
enormously important. So, from my standpoint, be excused 
knowing we are very grateful for the approach that we have seen 
in recent years where the agency has been willing to work with 
Senators on both sides of the aisle on these tough issues.
    Mr. Sunshine. Thank you. We have a very capable and much 
larger health analysis staff than we used to have, and we look 
forward to working with you and the other members in figuring 
out good ways to address the Nation's problems in this area.
    Senator Wyden. And I will close by saying your thinking is 
clearly spreading in the Congress. I was thrilled that Chairman 
Baucus, who has done very good work on this health reform 
issue, has also put out in his White Paper, a very constructive 
document on health reform, his interest in looking at the tax 
side of health care. So your efforts are paying off. Senators 
with gavels in their hands, like the Chairman of the Finance 
Committee, are paying attention to your work, and we thank you 
for it.
    You are excused. We are adjourned.
    [Whereupon, at 11:50 a.m., the Committee was]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




            THE DEBT OUTLOOK AND ITS IMPLICATIONS FOR POLICY

                       THURSDAY, JANUARY 15, 2009

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

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. I want to welcome everyone to the Budget 
Committee today. The hearing this morning will focus on the 
debt outlook and its implications for policy. We have a 
distinguished panel of witnesses. They are: Dr. Richard Berner, 
the Managing Director and Chief U.S. Economist at Morgan 
Stanley; Dr. Allen Sinai, the President and Chief Global 
Economist and Strategist at Decision Economics; and Dr. Douglas 
Holtz-Eakin, well known to this Committee as a former Director 
of the Congressional Budget Office, who is now President of DHE 
Consulting. And we welcome you all. We especially want to 
welcome back our friend, Dr. Holtz-Eakin, who did such a 
professional job at the Congressional Budget Office, and we 
thank him for his service.
    I am pleased that all of you could be with us today. I look 
forward to your testimony. As I have stated before, I believe 
that the buildup of Federal debt is the single biggest threat 
to our Nation's long-term economic security. Obviously, we have 
a near-term threat in this sharp slowdown, and first things 
first. We have to deal with that. We have to put in place an 
aggressive economic recovery program. But at some point we are 
going to have to pivot and face up to this burgeoning debt.
    The main questions I would like to discuss with our 
witnesses today are: Does the current buildup in U.S. debt 
threaten the creditworthiness of the United States? Is there a 
tipping point where the debt becomes too large in proportion to 
the size of our economy? And what would be the consequences to 
the economy and to the budget of a bursting or a deflating of a 
debt bubble at some time in the future?
    Again, I want to make very, very clear that we understand 
on this Committee fully the need to have an economic recovery 
package that will add to deficits and debt in the short term. 
But this Committee also has a responsibility to our colleagues 
and to the country to put a focus on the unsustainability of 
our current fiscal condition, especially in the long term. 
Given the retirement of the baby-boom generation, given the 
sizable additions to the debt that have already occurred, we 
need to help our colleagues understand what the risk is of a 
failure to address our long-term imbalances.
    The news we received from CBO last week about the deficit 
was jaw-dropping. We faced one of the worst budget forecasts I 
have ever seen. CBO's new estimates show the deficit in 2009 
will be $1.2 trillion, but that is before any economic recovery 
plan. And, of course, the increases in the debt will be even 
more. I believe when it is all said and done that we will 
probably add somewhere close to $2 trillion to the national 
debt this year alone.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In fact, we are building a wall of debt. Gross Federal debt 
is now estimated at $11.6 trillion by the end of 2009, and if 
we add in current policies, such as extending tax cuts, the 
alternative minimum tax reform that must occur, and ongoing war 
costs, we could easily see the debt rise to over $21 trillion 
by 2019. And that would amount to well over 90 percent of gross 
domestic product in that year.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Here are some of the major initiatives that are being 
considered that could further add to that debt: one, the 
economic recovery package--and, again, I want to acknowledge 
the necessity of doing that; two, additional tax cuts; three, 
health care reform; and, four, additional defense spending.
    Our long-term debt outlook is even more daunting. Here is a 
chart from CBO's long-term budget outlook, which was released 
in December of 2007. It shows what will happen to Federal debt 
over the next 50 years. With the retirement of the baby-boom 
generation, rising health care costs, and the permanent 
extension of the President's tax cuts, Federal debt will climb 
to more than 400 percent of GDP by 2058. That is clearly, 
utterly unsustainable.
    Our debt, in addition, is increasingly financed abroad. In 
2008, 68 percent of the increase in publicly held debt was held 
by foreigners. This presents another risk factor for our 
economy. If at some time these foreign entities stopped buying 
U.S. debt, interest rates would have to increase in order to 
attract the capital necessary to float the boat.
    Here are the top foreign holders of our U.S. debt as of 
earlier this year. We now owe China $653 billion; Japan, $586 
billion; the United Kingdom, $360 billion; the so-called 
Caribbean banking centers, $220 billion; oil exporters, $188 
billion; and on and on it goes.
    I would like to remind everyone of a point made by the 
former GAO Comptroller, Mr. Walker, early last year. He said, 
and I quote: ``I believe we have a five- to 10-year window of 
opportunity to demonstrate to our foreign lenders that we are 
going to get serious about this. Five to 10 years, and it is 
closing. And I think it is closer to five than to 10. Keep in 
mind, we are the largest debtor nation in the history of 
mankind, and it is getting worse, not better.''
    I would just indicate that about 2 weeks ago a major 
financial figure in this country called me and told me that he 
is concerned that while he strongly supports the need for an 
economic recovery package in the short run, if we fail to 
address these long-term imbalances, the currency could 
collapse. I hope that this hearing today can help us all better 
understand the risks that are being run and what we need to do 
to address them.
    With that, I want to turn to my colleague, Senator Gregg, 
for his comments.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and thank you for 
gathering this exceptional panel to discuss this absolutely 
critical issue which you have focused on for a long time and 
which I wish more of our colleagues were focused on. It is 
really the fiscal tsunami that is going to overwhelm our 
capacity as a Nation to be prosperous.
    I have one chart I want to put up, because our debt is 
going to be driven by a simple fact, which is spending. This 
chart reflects where spending is going under the present 
programs we have in place that are already on the books and on 
which the people who will benefit from them already depend. And 
that means that spending as a percent of gross national product 
would go up to almost 31 percent, which is sort of the 
corollary chart to the one that the Chairman showed on the 
debt. And that is just not sustainable either. The Federal 
Government has historically taken about 20 percent of the gross 
national product in spending. Maybe we can take a little bit 
more, but we sure cannot take 31 percent of the gross national 
product and spend it.
    And so as we know around here, making the tough decisions 
is a little hard to do, especially when it comes to controlling 
spending. But that chart says unequivocally that, as Willie 
Sutton used to say, ``That's where the money is.'' So we need 
to get that under control.
    So I will be interested in the panel's thoughts on the debt 
issue, but I will also be interested in the panel's thoughts on 
whether or not that spending chart is what is driving the debt.
    Thank you.
    Chairman Conrad. Thank you, Senator Gregg, and thank you 
for your leadership across a broad range of issues facing this 
country.
    We are very fortunate to have somebody of Senator Gregg's 
experience and judgment helping us in this time of crisis. You 
know, I do not usually spend time commending members of the 
other party, but I do want to acknowledge Senator Gregg's 
leadership at this extraordinarily difficult time.
    Senator Gregg. Well, the feeling is obviously mutual, Mr. 
Chairman. You have been the voice in the wilderness for a 
little while. That is probably because you went to school in 
New Hampshire.
    [Laughter.]
    Senator Gregg. But, hopefully, there will be people 
gathering around your voice.
    Chairman Conrad. Well, you and I together are trying.
    Dr. Berner, we are delighted to have you. Dr. Berner is the 
Managing Director and co-head of Global Economics and the Chief 
U.S. Economist at Morgan Stanley. Again, thanks for being here, 
and please proceed.

STATEMENT OF RICHARD BERNER, PH.D., MANAGING DIRECTOR AND CHIEF 
                 U.S. ECONOMIST, MORGAN STANLEY

    Mr. Berner. Chairman Conrad, Ranking Member Gregg, and 
other members of the Committee, I am very pleased to be here. 
Thank you for inviting me to this hearing to discuss the debt 
outlook and its implications for policy.
    As you noted, we are at a crossroads for America's economic 
challenges, both immediate and long term. Our short-term 
challenge is to end the recession and promote recovery. Our 
long-term challenges are to promote a responsible fiscal policy 
and to reform our entitlement and other programs so they are 
sustainable.
    The tension between these short- and long-term challenges 
will play out in financial markets. Fiscal stimulus and other 
measures likely will require the Treasury to issue $4 trillion 
or more additional Federal debt. For now, investors are buying. 
Treasuries are safe, inflation is falling, private credit 
demand is weak, and the Fed may buy longer-term treasury debt.
    Federal debt held by the public starts at a low level in 
relation to GDP, as you see in my first chart: only about 40 
percent of GDP at the end of fiscal year 2008. But this is 
changing quickly. The debt-to-GDP ratio will rise toward 60 
percent by fiscal year 2013. Barring action to fix our 
entitlement programs----
    Chairman Conrad. Dr. Berner, could I just stop you there?
    Mr. Berner. Sure.
    Chairman Conrad. Because I know those who might be watching 
this are wondering why did Senator Conrad talk about debt going 
to over 90 percent of GDP and you are talking about 60 percent 
of GDP, and we should just explain to those who are listening 
that I am talking about the gross debt of the United States; 
you are talking about the publicly held debt. And the 
difference simply is publicly held debt is precisely what it 
sounds like--debt held by the public. The gross debt of the 
United States includes the money that we owe the various trust 
funds, most notably the Social Security Trust Fund.
    Thank you. I apologize for that interruption.
    Mr. Berner. Thank you for that, Senator.
    Chairman Conrad. I know people would be confused.
    Mr. Berner. Thank you for that, Mr. Chairman. Yes, the 
gross debt would be quite a bit larger. From a market 
perspective, my guess is that the Federal debt held by the 
public is very important, but looking at the gross debt is 
equally important.
    Barring action to fix our entitlement programs, as you 
noted, that ratio that I alluded to earlier will jump to over 
100 percent by fiscal year 2022. History shows that such a jump 
in debt may boost debt service at the expense of other needs 
and with not much to show for it. Indeed, the Japanese 
experience--and on this chart, you see the ratio of Japanese 
Government debt to their GDP--shows the danger of assuming that 
fiscal stimulus alone can solve a financial crisis. Until the 
Japanese authorities got it right after 10 years of building 
bridges to nowhere, their economy was mired in a lost decade.
    At the same time, one measure of our creditworthiness 
already does show some deterioration. U.S. sovereign credit 
default swap spreads have widened to about 60 basis points, or 
six-tenths of a percent--that is the red line in this chart--
from about 10 basis points last summer. Now, obviously, in 
comparison with other economies which are much less 
creditworthy than we are--we are still the gold standard in 
financial markets--the story is quite different. And the global 
financial crisis has contributed to the rise in all of these 
spreads. But this is something, I think, that bears watching. 
So the simple message is that you ignore global investors at 
your peril.
    In contrast, the right policies to end the crisis and to 
address long-term needs will be a win-win. A growing economy 
will give us the resources to provide for future needs, and 
crafting an exit strategy from short-term stimulus and a 
credible road map for longer-term reform will reassure 
investors that we are on the right track.
    To promote recovery, we must ensure we get the most bang 
from the buck, for every buck that we spend. I will talk about 
some key elements.
    First, let us talk about recovery. It is critical to 
diagnose how we got into recession. Losses at banks, non-banks, 
and investors have eroded their capital and promoted the 
deepest credit crunch in our lifetimes. Think of this as the 
S&L crisis--a crisis of solvency times ten. My colleague Betsy 
Graseck estimates that baseline losses for the U.S. financial 
system, which you see on this chart, could eventually total 
$1.5 trillion and easily run to $1.9 trillion. This loss of 
capital to support good and bad loans has forced lenders to 
shrink their balance sheets. The credit crunch has spread to 
the broader U.S. economy and beyond our borders.
    As you see in the previous chart, the tightening of lending 
standards from the Federal Reserve survey over on the right-
hand side of this chart reflecting those losses indicates the 
magnitude of this credit crunch, which is unprecedented. The 
upshot is likely to be the deepest recession in the post-war 
period.
    Now, history suggests that financial crises take time to 
fix, and history also suggests that policies that go directly 
to the cause of the crisis are most effective. As you debate a 
new fiscal stimulus package, therefore, keep in mind that tax 
cuts and stepped-up infrastructure outlays, whatever their 
merits, do not get to the causes of this downturn. They mainly 
tackle its symptoms.
    In my view, two critical ingredients are still missing from 
the policy menu: first, cleaning up the lenders' balance 
sheets; and, second, mitigating mortgage foreclosures. Lenders 
will start lending again when they feel secure about their 
balance sheets. Of course, we want to return to responsible--
not reckless--lending. Likewise, mitigating foreclosures is 
necessary to stem the slide in home prices, slow credit losses, 
and reduce the pressure on household wealth.
    The Fed, the FDIC, and the Treasury are taking important 
first steps to attack the credit crunch. The next step must be 
an aggressive effort to fix balance sheets. In my view, a good 
bank/bad bank solution is the most effective one. The bad bank 
is an entity or fund set up to liquidate segregated bad assets. 
Investors will see in the good bank a new, cleaner balance 
sheet, which has two key benefits. Clarity on asset quality is 
needed to attract private capital. That is what we need to 
restore the health of our financial system. A clear split will 
also enable the managers of the good and bad banks to focus 
exclusively on their respective businesses. This is like the 
Resolution Trust Corporation, the RTC, of the early 1990's.
    The Troubled Asset Relief Program embraced those goals, but 
buying troubled assets really does not work. Pay too much and 
put taxpayers at risk. Pay too little and lenders will not 
participate. That dilemma should not bar action, but such a 
plan may take time to implement, especially with fiscal 
stimulus plans demanding our immediate attention. In that 
context, a halfway house that could help clarify the nature of 
the policy commitment and of the assets themselves might be a 
step forward. It would involve financing or warehousing the 
troubled assets separately from the financial institutions in a 
special purpose vehicle, or SPV, and I have some details on 
that in my testimony.
    Foreclosures, in turn, are costly and disruptive. They 
threaten home prices and market functioning and, thus, weaken 
housing and the economy. The best options for relief are 
simple: act quickly and spread the pain broadly among 
borrowers, lenders, and taxpayers. I like Christopher Mayer's 
proposals for a modern Home Owners Loan Corporation combined 
with lower interest rates and changes in the securitization 
law, and an industry fund to reimburse services for expenses. 
Fed Chairman Bernanke urges realistic principal writedowns with 
loss-sharing arrangements. The FDIC's foreclosure mitigation 
process seems a reasonable standard in that regard. So those 
are two things that are missing.
    What about getting the most bang for the buck? How should 
we do that? First, policies that directly address the cause of 
the financial crisis are likely to be most effective in fixing 
it. Second, I favor providing insurance backstops and financing 
facilities because they restore market functioning and enable 
policymakers to leverage the taxpayer moneys they put at risk. 
Finally, for traditional tools such as tax cuts or increased 
spending, I favor policies that will offer the most direct 
stimulus.
    No single policy will fix the financial crisis. I have 
described some of the necessary ingredients. Note that balance 
sheet clean-up would vastly increase the potency of capital 
injections that we might get from the taxpayer as a potential 
stimulant.
    Regarding financing facilities and insurance backstops, 
note that some approaches are more potent than others. Dollar 
for dollar, I believe that treasury contributions to capital in 
a structure like the TALF--or the Term Asset-backed Lending 
Facility--that the Fed has proposed and which will begin 
operation in a month or so, are far more potent than asset 
purchases because every dollar from the taxpayer goes to 
support $10 of assets. The municipal bond and commercial 
mortgage-backed securities market could benefit from such a 
structure.
    Restoring insurance backstops that have long facilitated 
the functioning of financial markets could be especially 
helpful today. Like lenders, mortgage insurers have good and 
bad books of business. Cleaning up the bad book and 
recapitalizing the insurers to get back to providing mortgage 
insurance would be a potent tonic for mortgage securitization. 
Likewise, cleaning up the insurers of municipal bonds, many of 
them the same entities that ensure mortgages, would pay big 
dividends for that market whose troubles have further impaired 
the ability of strapped State and local governments to obtain 
financing.
    Mr. Chairman, I believe that recently you suggested just 
such a proposal.
    Last, traditional fiscal policy tools will be far more 
potent in the midst of a financial crisis if steps are taken to 
address the crisis itself. And I favor those options which 
would offer the most direct fiscal stimulus. Some of them might 
involve taxes, some of them would involve infrastructure 
spending, and some might involve grants to State and local 
governments, particularly FMAP or Medicaid relief. Some view 
those as less potent than others, but it seems to me that those 
are the decisions we have to make.
    Mr. Chairman, thank you very much for your time, and I 
welcome your questions.
    [The prepared statement of Mr. Berner follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    

    Chairman Conrad. Thank you, Dr. Berner. Thank you for your 
thoughtful testimony.
    Dr. Allen Sinai is the Chief Global Economist and President 
of Decision Economics, someone who has appeared before this 
Committee in the past, and we always appreciate his insights. 
Welcome, Dr. Sinai.

  STATEMENT OF ALLEN SINAI, PH.D. PRESIDENT AND CHIEF GLOBAL 
         ECONOMIST/STRATEGIST, DECISION ECONOMICS, INC.

    Mr. Sinai. Thank you very much, Mr. Chairman. There is a 
long testimony which will be in the record. I am going to 
depart from that and focus on the questions you posed at the 
beginning. I may weave some of the material of the testimony 
into that.
    You asked three questions. Let me preface, before I answer 
or attempt to answer those--the creditworthiness of the U.S. 
Government, the future of that; tipping point; deflating of the 
debt bubble--with just a few words about the current state of 
the U.S. and global economies. We have had, I think, a long 
previous global economic and financial boom that was 
characterized by commodity, real estate, financial asset price 
bubbles, booms and bubbles, imbalances, long-time imbalances 
and excesses, in the U.S. particularly on the consumer side and 
the financial side. And that is now all unwinding. These things 
do not go on forever.
    You mentioned tipping point. We have a series of tipping 
points that we have exceeded now, and we see it in the abrupt, 
sudden, sharp, stunning declines in economic activity, not just 
in the U.S. but in the euro zone and Japan, and, with respect 
to global output, over 90 percent of global output. And this is 
a boom, bust, bubble-bursting episode that transcends anything 
that has gone on post-1930's. It is a unique business cycle 
situation, and that is why it scares so many of us. We have not 
seen it before to this extent. And I think that is why we have 
seen the Federal Reserve and the Federal Government take 
unprecedented steps and put the U.S. Treasury at risk in the 
way that it has by attempting to support the financial system 
and credit--that is, the Federal Reserve and to some extent the 
Treasury--and the other measures that treasury has taken with 
regard to this. As a result, our budget is extremely exposed, 
and we still need more help.
    The outlook for 2009 is--ex an Economic Recovery Program 
because we do not exactly what that is going to be yet--real 
GDP down about 2, 2.1 percent on an annual basis. That is close 
to the decline, projected by CBO. We are in the heart of 
decline now. The economic news is the ugliest it will be, 
particularly the jobs count. And outside the United States, for 
the 47-country global aggregate that we monitor and forecast, 
we are projecting global growth to be down half a percent. On 
our records, which go back to 1980, we have never seen that. So 
the global dimension of this is notable. That feeds back, hurts 
U.S. exports, and prolongs this downturn. It is likely to be 
the longest, almost already is--at best, 20 months; at worst 27 
or 28 months. And with Dick Berner I would agree; it is going 
to end up as the deepest peak to trough since the 1930's.
    Now, the creditworthiness of the U.S. Government in this 
situation--Is it at risk? you asked. Yes, unequivocally yes. We 
do not see that now because the rest of the world is going 
through quite a bit of turmoil, and the U.S. is the gold 
standard. It is a safe haven. The dollar is a safe haven. And 
all investors are fleeing to quality. Financial institutions 
are essentially holding the treasury securities that they 
obtained for purposes of survival and capital requirements. 
There is a huge demand for treasuries, and we have yet to see 
the onslaught of the huge volume of treasury financing that is 
going to come, on deficit projections that we have for this 
year, without stimulus, $1.4 trillion in fiscal year 2009 and 
$1.1 trillion or $1.2 trillion next year. I think that exceeds 
the CBO estimates. There is a big cyclical element in that, but 
all the other, the Government support, TARP, all of that is in 
those numbers.
    If you add on to that an $800 billion--$400 billion a 
year--Economic Recovery Plan, we would say the deficit this 
next fiscal year would be closer to $1.8 trillion and $1.4 
trillion next year. And beyond that, not much different as 
things now stand from $1 trillion plus a year all the way out 
to 2018.
    By the way, in Table 11, on page 39 of this very long 
testimony, we did produce for you our deficit projections 
without an Economic Recovery Plan prospect, and the gross 
Federal debt that is the concept as you defined it, Mr. 
Chairman, gross debt held by the public as a percent of GDP. 
Without an Economic Recovery Program, we would be 7 or 8 years 
from now at about 90 percent. If we add on an Economic Recovery 
Plan of about $800 billion and the implications of that further 
on for infrastructure under current law, we would project over 
a 100 percent gross debt-to-GDP return by 2016. That gets us 
into World War II gross debt-to-GDP figures.
    There is no way to think that the creditworthiness of the 
U.S. Government is not at risk and at stake on projections, in 
the best of circumstances, that give us these kinds of Federal 
Government debt ratios. There is just no way to think that the 
creditworthiness of our country is not at stake. When we see a 
central bank using its balance sheet, the way the Federal 
Reserve has, there probably is no other choice and I am 
supportive of what is going on--the balance sheet of the 
Federal Reserve is highly exposed, and it is part of the 
Government. And so, yes, emphatically yes. It does not solve 
the problem, but the answer to your first question is yes.
    As for a tipping point, this is very difficult. Some years 
ago, as a junior author with Robert Rubin and Peter Orszag, we 
wrote a paper about financial and economic disarray in terms of 
the exposure of the U.S. on the deficits, international and 
Federal Government, and the private sector debt accumulation, 
particularly in the consumer sector, at that time fledgling 
exposure in the housing sector, and talked about in that paper 
how it could be devastating. But we could not say when.
    Well, we have arrived at that point now, 4 years after we 
wrote that paper in 2004. I kidded Mr. Rubin at that point. I 
said, ``Don't make that a near-term forecast because systems 
have a way of avoiding this for a long time. But eventually it 
will happen.''
    I think what we see now worldwide is, in part, that 
financial and economic disarray, particularly focused around 
the consumer whose excesses in real estate, fed by the 
financial system, got us to a situation where now the American 
consumer is facing a seismic shift in the conditions around 
consumption, which sets the growth path for the United States 
on an anemic plane for years now. I think Americans understand 
that. There is not money now to spend and borrow, accumulate 
debt, the way we have done for so many years, and even decades. 
It just is not there. Consumption that is 70 percent of the 
economy.
    So a tipping point with regard to the debt and deficit 
ratios and the forward look at these kinds of fiscal exposures 
is tough to call. But I think when we get through this 
downcycle and do all that we are going to do worldwide to get 
us out of it--lots of actions outside the United States, not 
just in the United States--then the U.S. will be extremely 
exposed, relatively speaking, to the financial markets, and 
particularly our treasury market will be exposed, the dollar 
would be exposed. And that is where you would see it first, in 
the financial markets, our currency not favored, no longer a 
safe haven, as it is now; no longer a flight to treasuries, a 
flood of treasuries instead, with the only buyers for those 
treasuries, relatively speaking, us. And probably one of the 
biggest buyers will have to be the Federal Reserve, whose 
proportion of treasuries in its portfolio now is very low. So 
they can buy treasuries and buy treasuries and buy treasuries. 
And I think they are going to do that as part of their 
American-style quantitative easing.
    But down the road, if it turns out that the Federal Reserve 
is the only buyer of a flood and huge volume of treasury 
financing coming from the United States, long-term treasury 
yields will skyrocket and the dollar will plummet. That will 
reverberate, take down our stock market, and of that kind of 
financial distress will reverberate back to our economy and 
diminish the standard of living of Americans as far as the eye 
can see.
    I do not know when because we do not know when all of this 
current trouble is going to resolve. We do have time. And in 
the policies that are set in discussion of an economic recovery 
program, it will be very important to look down the road and 
not just pay lip service in terms of getting the deficits and 
debt under control far out, but to actually think about that in 
the deliberations mechanisms by which you can set those 
deficits and debt-to-GDP ratios in a different direction. 
Today, I do not have the answers on how to do that.
    PAYGO, which was one answer before, is an option. It is a 
little hard to apply PAYGO near term if we think the economy 
may go down 2 percent in 2009. You do not want to apply PAYGO 
at a time when the economy is spiraling down. But long run, 
something like revisiting and reinstalling PAYGO is one 
possible option. Others have to do with bigger issues. Health 
care and the costs of health care, a major drawdown of our 
financial resources, resolving, as Dick talked about, the 
financial system problems, which is draining our treasury. What 
we do about energy--these are huge issues. They are hugely 
levered for the U.S. economy and the budget of the United 
States and not easy to tackle.
    Finally, deflation and a debt bubble, your third, the 
answer to your question on tipping point. It will happen if we 
do not do anything and build into the plans that we are now 
dealing with for bringing our economy back and our financial 
system back. If we do not now build in mechanisms to shift that 
out-year prospect in advance, we will regret it immensely, and 
the tipping point will come.
    We have a debt bubble deflating now. The issue is: Are we 
going to get a deflationary spiral and a debt deflation 1930's-
like process? Our odds on that are about 15 or 20 percent; that 
is to say, we are now going to go through, we think, 3 to 6 
months of deflation. It is not what we mean by the deflation 
that involves the deflationary spiral and a debt deflation 
process. But one of the early signs is that there is a near 
zero interest rate with inflation expectations declining, 
raising real rates, already showing up. Debt deflation, a 
deflationary spiral, further deflation of a debt bubble that 
has burst and is coming down, signs of consumers taking down 
debt finally, would put us into a 1930's--I would not say we 
will have another Great Depression, but it would be the modern-
day counterpart to that.
    That is a risk we are monitoring. We are quite nervous 
about it. Best odds are that the stimulus of the Federal 
Reserve and other central banks around the world and the fiscal 
stimulus, economic recovery program stimulus of the United 
States and from around the world, will keep us out of a 
deflationary spiral, but I could not say that with the degree 
of certainty that I would want to. In such a situation, which 
is probably the thrust of your question, the burden of the debt 
of the United States would be even more onerous if the dollar 
went through a major decline on our financial fragility at the 
Government level. That, too, would be punishing with regard to 
the debt.
    The bright spot is at the same time that the Federal 
Government debt is rising and deficits are rising, the U.S. 
private sector will save more, particularly households, and you 
will get some offset. The personal savings rate will very 
likely go up to 5, 6, maybe even 8 percent as we return to a 
more normal situation with the consumer. The mirror image of it 
is very anemic consumer spending and a very weak economy.
    Thank you very much.
    [The prepared statement of Mr. Sinai follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. I am thinking about whether I should say 
``thank you.'' That is pretty sobering testimony, but it is 
really what I anticipated because we had a chance to review 
your paper from 2004, and we will come back to the questioning 
round after we hear from Dr. Holtz-Eakin, who I again want to 
welcome back to this hearing room and again thank him for his 
service to the country. You know, those of us in politics 
rarely admit we were wrong, but I was wrong about Dr. Holtz-
Eakin. I did not support his confirmation, which I now regret 
because he proved himself to be a consummate professional at 
CBO. And, again, we welcome you back, Dr. Holtz-Eakin.

    STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., PRESIDENT, DHE 
                        CONSULTING, LLC

    Mr. Holtz-Eakin. Well, Mr. Chairman, thank you for the 
opportunity to be here again, and it is great to be back with 
the Budget Committee, Senator Gregg, Senator Wyden. Thanks for 
the chance to talk today.
    I have said many times that you cannot say too frequently 
and too apocalyptically describe the long-term budget outlook 
of the United States. But having just listened to the two 
previous witnesses, I am not sure I want to repeat all the 
things that I have written down in my testimony. So let me just 
make a couple of brief points.
    The starting point for this discussion has to be the long-
term budget outlook, which you mentioned in your opening 
remarks, and the driving force in that long-term budget 
outlook--the spiraling up of the debt-to-GDP ratio--is driven 
by the spending in Federal programs. And there is no sensible 
and feasible way to tax your way out of that problem, and the 
notion that somehow you can resort to tax increases to solve 
this is simply misplaced. We have to recognize that it is a 
spending problem and recognize that, indeed, this is a threat 
to the United States. And it has been there for a while. We 
held hearings on it, and you are familiar with the basic 
problem.
    It carries with it costs, some of which I think are pretty 
readily understood; others I think have missed recognition. 
Obviously, the more debt you have outstanding and the interest 
costs of servicing that debt limits flexibility in times of 
emergencies, such as the times we find ourselves right now. We 
have less flexibility than we otherwise would because of the 
debt outstanding.
    It also has direct economic costs that I will not belabor 
but which are real. It reduces the saving in the United States, 
reduces the wealth accumulation. That translates directly into 
inability to have higher standards of living, higher real wages 
for our workers, hurts our ability to compete around the 
world--all things that we are cognizant are happening, but seem 
to be unwilling to go back to some of the root causes, which 
are the large spending programs and the deficit accumulation 
that comes with it.
    And it also gets in the way of doing the very things we 
need to do. If you think back to recent discussions, 
independent of what you thought were the merits of various 
Social Security reform proposals a few years back, the 
transition costs, the large debt that one would have to incur 
to do those reforms, gets in the way of pursuing those reforms. 
The same is true for tax reforms that we recognize the need in 
the United States. It will be true for health care reforms, 
which are imperative in the United States.
    The more debt we have outstanding, the less palatable those 
transition costs will be. It will be harder to do the things 
that everyone in this room knows we need to do. And those are 
characteristics that have been around for a while, and now we 
find ourselves in a situation where we are laying on top of 
that the imperatives of the near-term economic outlook and 
addressing it.
    I want to just make the point that, you know, if we were to 
undertake a $1 trillion stimulus and increase the debt-to-GDP 
ratio by about 10 percentage points, if it was genuinely 
stimulus--by which I mean you turn it on and then turn it off, 
which is what stimulus is; that means cutting the spending back 
and raising the taxes; not to belabor the point, things that do 
not happen very easily in this town. If you undid it 
immediately, it would take 5 years of average economic growth 
to get you back to where you started in terms of debt to GDP. 
So you have to put on hold necessary major reforms for 
something like 5 years, and that is if you do it on a textbook 
basis and do not continue to run up the debt.
    So this is a ``high degree of difficulty'' enterprise that 
is being discussed right now in the Congress, and I want to 
note that it will have implications for the ability to do other 
important reforms.
    I think that it is important to echo the point that Dick 
Berner made, that there is a distinction in my mind between 
stimulus, fiscal policy of higher spending and lower taxes 
aimed at an industrial-style recession, and the financial 
market interventions to restore the functioning of credit 
markets and other things. I am focusing my remarks on the 
stimulus per se.
    Any near-term increase in debt that comes from stimulus 
should be paired with a clear, as Dick put it, ``exit 
strategy'' that will convey that the Federal Government is 
going to put itself on track to deal with the debt increase. 
And that will provide some confidence to global capital markets 
that would not otherwise be there. It has been a perennial 
puzzle as to why any international investor who ca look at the 
long-term budget outlook remains so confident in the 
creditworthiness of the U.S. Government. There is no reason why 
we should continue to simply hope it continues on without 
changing. We should take steps to address it.
    What does that mean for the near-term rise in debt that is 
likely to come with stimulus? I think you do not make your 
problems worse. So, No. 1, you should not put into a stimulus 
exercise new spending programs that are not going to go away. 
You have to be realistic about the outlook, and this is not the 
place for downpayments of large new spending programs that are 
not going to be offset somewhere. And, instead, you want to 
focus on things that do go away, and there is a long tradition 
of automatic stabilizers, things like unemployment insurance, 
food stamps, supplemental nutrition programs, which expand as 
the economy deteriorates, but then also contract automatically 
as it improves. And to the extent spending is in this exercise, 
that is a great place to concentrate it because you will get 
the exit strategy right automatically.
    I think that it puts a premium on tax cuts because we 
really know that we have a spending problem. If we are going to 
do things quickly, doing them on the tax side makes sense to 
me. And getting high-quality ones, again, is the goal in that.
    And I also think it suggests that you ought to, as part of 
this exit strategy, think about issues like reforms to spending 
programs that improve their transparency. I like the idea of 
making sure that the bill is posted prior to any passage. 
People can scrutinize it clearly, see where money is going, 
what tax cuts they are, what spending programs they are.
    I like the idea of taking this opportunity to actually 
address basic problems in the budget process, notions of 
unrealistic baselines where we pretend that the Medicare 
program is going to automatically contract with draconian cuts 
to physicians. You know, we need to have an honest presentation 
of where we are with a level playing field between taxes and 
spending. We can come back and talk about that. I think that is 
something that ought to be part of this discussion--and, 
obviously, dealing with the entitlement programs. It has been 
the elephant in the room for years. It remains there. We do 
need to come to terms with them, but doing that in the context 
of a budget process that is more functional.
    For example, it is a little thing, but I think it would 
send the right signal if the Congress passed the fiscal year 
2009 appropriations bills and did the regular budget process in 
a timely fashion before it turned to this new exercise in 
writing checks, which, again, I just want to emphasize, are not 
without costs, and the sort of notion that somehow this is a 
costless exercise of $1 trillion is what I find troubling in a 
lot of the public discussion.
    So I want to echo some of the comments of the witnesses 
before me about how important this issue is. The obvious need 
for long-term entitlement reform remains the paramount issue, 
and layering on top of it a poorly executed $1 trillion deficit 
over the next couple of years is something that I would find 
very troubling.
    [The prepared statement of Mr. Holtz-Eakin follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    

    Chairman Conrad. Thank you. Thank you for your thoughtful 
testimony, Dr. Holtz-Eakin, and, again, welcome back.
    Dr. Sinai, I would like to go back to that paper that you 
wrote, co-wrote in 2004. In that paper you warned of the risk 
of a fundamental shift in market expectations and the loss of 
confidence that could occur when large, unsustainable budget 
deficits are projected. You stated, ``It is impossible to know 
when this type of fundamental shift in market expectations 
might occur.'' But you noted that, ``If such a shift does 
occur, the consequences of the resulting fiscal and financial 
disarray would be substantially more negative than the standard 
projections of sustained budget deficits would predict.''
    That really caught my attention because, as I have 
discussed with economists of every philosophical stripe in 
these recent weeks and months, it has come back to me over and 
over that we are in uncharted territory here, that nobody can 
be certain of what the reaction might be once recovery is 
underway and all of these treasuries have to be rolled over, 
and the United States may find itself in an extremely difficult 
situation with respect to financing this debt.
    Could you help this Committee better understand what you 
see as the potential risk? What are the implications of that 
risk?
    Mr. Sinai. Well, I think in the last of your comments, you 
really have it right because we will have a recovery in the 
U.S. economy and in the world economy probably in 2010 of some 
sort. And then if you put yourself at that time and look at--as 
Doug reminds us, once you build in through increased deficits 
the debt that goes with it, the deficits might come down some, 
but the debt is still there and it keeps accumulating. And 
depending on the pace of growth of GDP, you have an increasing 
burden, along with the interest charges on it. And in a 
recovery, interest rates would go up, so the interest charges 
on that debt would be bigger. And if you were to step back and 
just play a hypothetical game, what would the world look like, 
you would look at a country with--for the G-7 countries, 
perhaps ex Japan, the most exposed government financial 
situation of any in the history of mankind with regards to 
deficits and debt to GDP and the interest charges on that debt, 
a country hamstrung for this reason and unable to spend the 
money--because it is not there--to do some of the major 
societal things we need to do. Just no leeway. We probably 
would have very little foreign exchange. We do not have much 
foreign exchange surplus now.
    Around the world, you would probably look at a country like 
China right now with huge amounts of foreign exchange, so far, 
so far as we can tell, doing a lot of good things on policy, 
probably going to have a recession but nothing like what is 
going on in other countries. Now the third largest country by 
the bean counters, ours as well, in the world, dominating Asia, 
and looking ahead asking if I am an investor, where do I put my 
money.
    Now, many of these countries have sovereign wealth funds. 
Those countries that have developed huge foreign exchange 
surpluses over the years, and because of our current account 
deficits, we have not. And so they are going to have to invest 
those moneys, and they will look around the world, and we will 
have a much greater supply of treasuries out there in the 
market. Where will they invest? Their charge is to get 
competitive returns. Well, even if the Federal Reserve buys all 
our treasuries and keeps interest rates low--those returns will 
be very low--they will not be there. We will have to buy it. 
And if we have to buy it in this country, then we have to save 
to buy it. We cannot spend. And if we do not buy it, interest 
rates go up. The stock market goes down. And that reverberates. 
Getting to how does this work, it reverberates back on 
hamstringing the economy. Financial institutions do poorly on 
situations of rising interest rates and falling stock prices. 
Look at where we are now. Balance sheets of financial 
institutions shrink. Our financial system, however it looks at 
that point, will be compromised.
    In the U.S., if you step back and look at it, in that 
situation it is a bit of a caricature comment. We will look 
like a banana republic.
    Chairman Conrad. You know, I wish, Dr. Sinai, that every 
colleague of ours in the House and the Senate, and I wish every 
American could hear the description you just gave, because what 
you have just done is connect the dots for people. What happens 
if certain things occur? What is the effect on the economy?
    You know, I guess one of my greatest frustrations is around 
here people look at all this, many of my colleagues--I just get 
the sense that this is just numbers on a page and it is not 
connected much to real people's lives; and those of us who 
raise these concerns are almost seen as somehow in some other-
worldly state in which we are not really connected to real 
people's lives.
    This is connected to real people's lives. This is not 
numbers on a page. And all those people--I have colleagues say 
to me, ``You know, Kent, when you talk about being concerned 
about these deficits and debt, you do not seem to be concerned 
about what is happening to that guy out there that is losing 
his job and cannot make the car payment, cannot make the house 
payment.''
    And there is a disconnect--I really feel it very strongly 
here--between what we are doing as a country here in terms of 
our fiscal policy and our monetary policy and how it affects 
real people's lives. These things are directly connected.
    If anybody thinks this stuff is just numbers on a page, 
they have--if you are right, Dr. Sinai, if you are right, Dr. 
Berner, if you are right, Dr. Holtz-Eakin, they are in for one 
hell of a surprise. And it is not going to be a happy one.
    Let me just go quickly. In the Outlook section of the 
Washington Post this last weekend, there was an article written 
by a Greg Ip of the Economist magazine--I do not know if you 
saw it--talking about the issue of U.S. Federal debt. And after 
discussing other countries that have defaulted, the article 
stated, ``...it would be ridiculous to put the United States in 
the same company as Russia, much less Zimbabwe. Nonetheless, 
even if Washington never defaults, it can still suffer if 
questions about its ability to repay affect its 
creditworthiness and thus its cost of borrowing.''
    He went on to say and conclude, ``The best way to keep 
those chances remote``--that is, of a default or the harmful 
effects of doubts about the creditworthiness of the United 
States--``is for policymakers to vow to get the deficit down 
once the recession is over--and mean it.''
    I would ask each of you, what is your reaction? Do you 
agree with that assessment? Or what is your reaction, Dr. 
Berner?
    Mr. Berner. Thank you, Mr. Chairman. I do agree with that 
assessment, and I would just enunciate principles that I think 
are pretty familiar to you that we need to tell voters we have 
a serious fiscal problem and a limited time in which to deal 
with it. And in that regard, your recommendation with Senator 
Gregg for a bipartisan fiscal task force I think could be an 
important platform for making that known.
    You must elevate the issue and make it tangible. You must 
commit to realistic goals and a rough outline and the game plan 
needed. A promise is one thing, but I think people want to see 
some concrete and specific ideas of where we are headed.
    I share Doug's concern that the budget process is broken. 
We need to fix it. We need to work with the administration to 
break down the compartmentalized decisionmaking that seems to 
hold nobody accountable in the budget process.
    I agree with Doug it would be great if we could get bills 
passed, if we could show that the budget process is once again 
working. We have to be honest about the numbers that we use 
instead of using numbers that people can question.
    The discipline in PAYGO I think would be an important thing 
to reinstate. I think people have to be willing to put all 
options on the table, and last but not least, you know, if 
there are, let us hope, some revenue windfalls, do not spend 
them. If there are savings from budgeted programs, let us not 
look at that as a kitty into which we can dip. We should save 
those and use them to make a credible commitment to really 
bring the debt and the deficit down.
    Chairman Conrad. Thank you.
    Dr. Sinai, what do you say about Mr. Ip from the Economist, 
his assessment?
    Mr. Sinai. I think balancing the budget in some sense over 
the business cycle is a good framework. Business cycle 
downturns can last a long time, a short time. When you are on 
an upswing, you will get a lot of surprises and revenues that 
will make life easy. The discipline in spending that Doug talks 
about throughout ups and downs in the business cycle is 
absolutely essential. That has been missing for years here. I 
think it is going to be missing even in this economic recovery 
program in the hurry-up fashion and the panic over what is, 
arguably, a very bad economic and financial situation. It is 
almost as if no one is asking how much anything is costing. The 
moneys are being spent by the Government at the taxpayer's 
expense, without as much thought as I would like to see go into 
it with regard to the longer-run issues and by-product of what 
we have to do in the near term.
    So the bipartisan commission one setting a fiscal framework 
in the new world that the U.S. lives in, globalized world, 
makes some sense. And thinking of a balanced budget framework 
over the course of time, and in advance--and I do not have 
detailed answers other than PAYGO, but in advance, building in 
triggers that would reverse stimulus as certain conditions 
arose and having that part of legislation so that Congress gets 
stuck, as they did when we did PAYGO; they had no choice, is a 
way to go.
    Chairman Conrad. If I could just say this: I am a strong 
advocate of PAYGO, but to me this is way beyond what PAYGO can 
do. PAYGO is a tool, certainly an imperfect one, as Senator 
Gregg has reminded us of many times. But it is a tool. But what 
to me is required here are policy changes. We have entitlement 
programs the promises of which simply cannot be kept. And we 
have a revenue system that, too, I think is broken, badly out 
of date, largely written 50 years ago, and we are in a totally 
different world. We have a tax system that was written when the 
United States was dominant, and we did not have to worry about 
our international competitive position. Now we do.
    If one were going to write a tax system in light of the 
United States being in a tough, competitive circumstance, we 
certainly would not write this one.
    Dr. Holtz-Eakin, what is your reaction on this notion that 
we have to--once we get through this current downturn, we have 
to pivot and get serious about the long-term imbalances?
    Mr. Holtz-Eakin. I think it is dead on the mark. But as you 
do the pivot, I--you know, Greg Ip suggested balance the 
budget. I would suggest that, you know, the first thing, find 
ways to turn off the spending you have turned on, whether that 
is sunsets or the structure of the programs themselves; and, 
second, you pivot to reducing Federal spending in the long 
term. That is the problem. And balancing the budget is not the 
same thing as addressing the long-term spending problems, so 
you have to find a pivot that says that if you are going to put 
something on the books that is longer in duration than, say, a 
year, it has to come at the expense of these commitments for 
long-term entitlement spending. And that is saying something 
that is arithmetically easy and politically, you know, as 
difficult as you can imagine. I know that. But that is the only 
way you will convey to financial markets that you are not going 
to allow the debt to continue to rise, and that is the only 
way, as a result, to build confidence as opposed to simply try 
to hold onto what we have.
    Chairman Conrad. Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman, and I thank the 
panel for being so blunt and stark, because I think we need to 
be blunt and stark.
    I noticed Dr. Berner, that you suggested that the stimulus 
package should have at its core not spending or tax cuts, but a 
restructuring of mortgages. Is that what you are proposing to 
get to the bottom-line real estate issue and also a 
restructuring of the bad debt structure of our banking system? 
Is that correct?
    Mr. Berner. Senator Gregg, my proposal would be to help 
clean up the balance sheets of our financial institutions. They 
need to be able to raise private capital and get back on their 
feet. To some extent, that is going to involve liquidating some 
of the institutions that are insolvent, without any question. 
And the sooner we can get on with that process, which is 
proceeding very, very slowly, the better off we will be in 
fixing the financial crisis and the recession that has resulted 
from it.
    Senator Gregg. How do you suggest you liquidate these 
institutions?
    Mr. Berner. Well, we have a well-established procedure set 
up by the FDIC. Prompt corrective action under the law that was 
passed back in the early 1990's for liquidating institutions 
that are troubled really has, I think, given us a clear road 
map to do that.
    The problem with what we are doing right now is injecting 
capital from the taxpayer into institutions. Without making 
strenuous efforts to clean up their balance sheets, the risk is 
that that capital will disappear in further losses and further 
impair our financial system and those institutions.
    So our financial regulators and you and Congress I think 
need to be more aggressive about ring fencing the bad assets 
and about using the moneys that have already been allocated for 
that purpose to separate them from banks' balance sheets and 
let the chips fall where they may.
    Senator Gregg. I would be interested in the panel's views 
regarding something Dr. Sinai talked about--the deflationary 
future here. There is a lot of talk that what the Fed is trying 
to do is actively inflate the money supply. And it obviously is 
not taking hold because the economy is contracting so quickly.
    Do you think the Fed should be pushing an inflationary 
policy where they basically try to inflate our way out of this?
    Mr. Sinai. Our Federal Reserve is in a very tough position. 
It has two goals: sustaining the economy and price stability. 
And on the economic side, it is a dire situation. And the 
credit function has collapsed, the credit function is not 
working within the credit system and outside, to those who 
would borrow the money and spend.
    So I think essentially what the Federal Reserve is evolving 
toward is not only being a lender of last resort to banks--then 
it became a lender of last resort to primary dealers--it now is 
moving toward becoming a lender of last resort to the private 
sector, because the private sector is not getting credit. And 
that is in line with the growth objective of the Federal 
Reserve, and for the moment, putting aside inflation as a 
concern--because we have more deflation right now than we have 
inflation--it seems to be a proper--this part of the shifting 
of the weight on what they are doing seems to be proper.
    This is uncharted territory. I think without the actions 
the Federal Reserve has taken with regard to funding the 
commercial paper market through an entity and funding the 
mortgage-backed securities market buying the debt of GSEs, and 
soon the $500 billion levered--$200 billion levered program, 
$20 billion of taxpayer money from TARP, to the Fed, the bank. 
It is like a private sector bank. It is going to lend in the 
private sector, 3-year terms, make good loans. They will 
probably do a better job at it than many of our banks have done 
and will not take quite the same risk. So I am in favor of 
that.
    And I am in favor of the Federal Reserve extending what I 
call the American-style quantitative easing, because they 
cannot cut rates anymore, to buying treasuries in order to keep 
mortgage rates low and because somebody is going to have to buy 
treasuries someday when our Treasury issues all this debt.
    There is a long-term inflationary risk, and certainly there 
is a moral hazard issue with regard to this, but moral hazard 
and the long-term inflationary risk pales in comparison to the 
really awful economic and financial situation we see now in the 
world. And I think we have to give them leeway on this 
experiment.
    It is long-run inflationary. It is a central bank in a 
debtor country doing incredible things to inflate their way out 
of the problem. It is the political system, the Government, in 
bed with the central bank and vice versa doing that, in the 
private sector doing deals to--and taking bad stuff on the 
balance sheet of the Fed.
    I do not know that there is another choice than this in the 
situation. I was not there when all of this was concocted up. 
There are always other choices. But I think we have to be 
supportive given the circumstances we face today of this move--
moves by the Fed.
    Mr. Holtz-Eakin. I just want to echo the closing part of 
that, which is it is basically an inflationary stance. It is an 
aggressively inflationary stance. The Fed is targeting, has 
talked about targeting different maturities of treasury 
securities. Those are being issued because we are running 
deficits. In the old days, they would have called this 
``monetizing'' the deficit. They are printing money to pay the 
Government's bills, and that is what they are doing. And it 
comes with a moral hazard. And I would commend to anyone 
interested to read Robert Samuelson's recent book, ``The Great 
Inflation and Its Aftermath,'' which documents how the kinds of 
things that we are talking about today--fiscal stimulus, 
interventions to reduce unemployment, having empathy for people 
who genuinely are struggling in hard times, but not thinking 
about the consequences of repeatedly promising to people that 
you can take care of them as a Government when, in fact, you 
cannot.
    What it led to was tremendous inflation in the United 
States, sub-par economic performance, no real improvement in 
unemployment, and the need for a wrenching 1982 recession in 
order to put things back in order.
    So the idea that we are doing these things one time because 
circumstances dictate it, I understand that argument. But the 
next time things start to look even a little wobbly, you will 
hear the same arguments again. And to do it on a regular basis 
has great risk.
    Senator Gregg. Thank you.
    Did you want to add something?
    Mr. Berner. Senator, I would just add one more thing to 
that, and one of the things that has not been discussed here is 
once we finish cleaning up our financial system--and that is 
probably going to take several years to do--the need for a new 
financial architecture, for a new financial regulatory scheme 
is pressing. And, you know, as the new administration comes in, 
a lot of people in the administration have thought about it. I 
am sure you both have, you all have. That is a pressing need so 
that we never get back in a situation like this one again and 
putting at risk the kinds of things that we are now putting at 
risk with the extraordinary policy measures that are now being 
taken.
    That will enable us to build shock absorbers into the 
system that will prevent us from--or limit the risk that w will 
have a situation like this once again.
    Mr. Sinai. This is an extraordinary short-run situation. 
The Federal Reserve does not have an exit plan for what they 
are doing. They understand the chances they are taking, and I 
think they have made the calculations it is worth taking those 
chances when you array the loss of jobs versus the moral hazard 
and deflation versus inflation risk. And they have made--most 
of them have made their judgment, which I support. But I do not 
want to lose millions of jobs. I will take a chance on moral 
hazard, and I will take a near-term--I will take a risk on 
inflation and come back to visit it later on.
    You know, human beings, decisionmakers, have only so much 
time, and they do not have an exit plan. Chairman Bernanke 
talked about one the other day, which was very, very 
superficial, very, very light. We do not have an exit plan on 
an Economic Recovery Plan. We are focused on economic recovery. 
We are focused on helping out the financial system. The global 
situation, there is almost no time and space to think about how 
one will exit from this for the Federal Government, what you 
were talking about in terms of the long-run issues.
    I think exit plans have to be part of the initial 
discussions of the short-run actions we have to take for 
emergency situations. And I would simply encourage you to do 
what you are doing with regard to both our central bank and the 
budgetary situation, that we think about the exit plans, and to 
the extent possible, plan what we would do under certain 
conditions so we can exit from the way we have put not only our 
Government at risk from a credit point of view, but the 
institution of central banking in this country at risk.
    Chairman Conrad. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I want to commend 
you and Senator Gregg on putting together this panel, because I 
think it is doing exactly what you are talking about, is to 
take these issues which so often just look like charts and 
graphs and cold numbers, and then bring them down to the real 
world. And I also share your view about the importance of these 
three witnesses in particular.
    My rule has always been in this town, when Doug Holtz-Eakin 
has something to write about and something to say, I pay 
attention. And this has been an excellent panel, and I 
appreciate all three of you and your comments.
    Mr. Berner, I want to turn to you particularly because of 
your recommendations with respect to banking. You note in your 
testimony that banks will start lending when they feel secure 
about their balance sheets, and the next step must be an 
aggressive effort to fix the banks' balance sheets.
    Here is the way it is coming to Members of the U.S. Senate, 
really on a daily basis. It happened to me yesterday. Folks 
running small businesses come to us and say: You all gave $700 
billion--first installment $350 billion, perhaps the vote 
tonight on $350 million more--to these financial institutions. 
I am creditworthy. I have never done anything wrong. I cannot 
get a loan.
    Some of them are in bridge funding now and really scary, 
scary things that go right to the heart of being able to keep 
their doors open. In fact, probably the most ominous sign with 
respect to the credit freeze is even SBA loans have dropped 
dramatically, and these are guaranteed loans. These are loans 
where the Government is saying, look, we are going to be there 
to give you that extra measure of security.
    Now, Senator Conrad and I, as part of our other activities 
here in the Senate, will be looking at some of these issues on 
the Finance Committee. And one provision that has been under 
discussion is a retroactive extension of the net operating loss 
rules that would also go to financial institutions. And I am 
thinking about the prospect of my future conversations with 
these small businesses going--and my guess is these are going 
to be fairly spirited exchanges that will, in effect: ``Ron, 
excuse me, you gave them $350 billion the first round; they did 
not lend to us. Now you are talking about giving them extra tax 
breaks on top of that to claim losses, and we still do not have 
any assurance of actual loans being made to us and other small 
businesses?'' And my guess is those conversations will be 
punctuated by some words that we are not going to repeat in 
public hearings.
    So my first question to you is: Is there any sensible way--
and I characterize that kind of sensible because I can think of 
a bunch of ways that would not make sense--to in some way 
connect institutions that get money, that claim these net 
operating loss incentives, to their actually making loans? In 
other words, you spend a lot of time with markets. We are pro-
growth Democrats. We are committed to the ability of our 
markets to recover. We have also got to explain when all this 
money is shoveled out the door that in some way it is connected 
to the incredible angst and fear they have now where they 
cannot get money.
    So my question is: Give us your thoughts about sensible 
ways in which getting this money, the tax incentives, actually 
be connected to getting the money into the hands of these small 
business people.
    Mr. Berner. Thanks, Senator, for your question. I 
mentioned, besides a program to help clean up banks' balance 
sheets--and that is going to require discipline on the part of 
the institutions themselves and from the Congress and from our 
regulatory officials. But one of the things I also mentioned 
was foreclosure mitigation. Foreclosure mitigation is a huge 
problem. I am sure you saw that foreclosures rose--started 88 
percent last year, and it is something that is tearing at the 
fabric of American society. And I think that we have made some 
efforts to mitigate foreclosures. The efforts need to be a lot 
more aggressive, and I am sure will be in the future.
    But there is no question in my mind that having a sensible 
program of foreclosure mitigation that shares the losses among 
the borrowers, the lenders, and to some extent the taxpayer, if 
that is needed to make the process work, is going to be 
something that helps free up our capital markets.
    Senator Wyden. But connect that to the small business 
process of their getting money.
    Mr. Berner. Sure.
    Senator Wyden. I think your idea, by the way, is a sensible 
one, and the Obama administration, to its credit--Senator 
Conrad and I have been hearing encouraging news on this point--
wants to do that, and I think there will be bipartisan support 
for it. Connect that to this Main Street business that has been 
creditworthy, that has never once by any of the traditional 
standards done anything to warrant cutting off their credit. 
How will they get credit out of these next steps that could be 
adopted as part of TARP, as part of tax reform, the issues we 
are dealing with here.
    Mr. Berner. Right. That is the next step, because if we 
have a sensible plan for foreclosure mitigation, together with 
the steps that we have already taken to promote market 
functioning that the Fed has taken, which have started, only 
started to restore the functioning of financial markets. Then 
we can start the credit process going again and have lenders 
lend again.
    Remember, there has to be a sequencing involved in getting 
the credit markets started. We have had some progress in 
funding markets, so-called short-term money markets. The 
unsecured inter-bank lending markets are starting to improve 
thanks to the efforts of the Fed and other central banks who 
have been very aggressive in providing both liquidity and 
financing facilities to the financial markets.
    Allen mentioned the Commercial Paper Funding Facility, 
which has been very constructive and instrumental in that 
regard. Those are the first steps of the process. The next 
step, if we can start slowing down the foreclosures and slowing 
down the imbalance between supply and demand in the housing 
industry, that will start to stem the losses and combined with 
an effective program, I think, to clean up bank balance sheets. 
And remember, the foreclosure mitigation itself involves an 
effort to do that because you are taking the troubled loan off 
the books of the lending institution.
    Senator Wyden. I want to ask one other----
    Mr. Berner. That is--excuse me, Senator, that is going to 
restart the credit markets.
    Senator Wyden. I want to ask one other question. 
Respectfully, I just do not think there is enough time for all 
of this sequencing. My guess is I am going to go back to my 
office, and I am going to have another call on my desk from 
another small business asking me to call their lender and for 
me, in effect, to tell them, gosh, we are going to have this 
process, and it is going to start with foreclosure mitigation, 
and then we are going to go this and that, and maybe sometime, 
some way, somehow there is going to be help for you.
    I just say respectfully I hope that you and your colleagues 
who are the best in the business will come up with more 
aggressive, more immediate approaches. I want them to be 
sensible; but, again, to be shoveling all this money out the 
door, not having it lent to small businesses, looking at 
additional tax breaks, it does not pass the smell test to, in 
effect, not have some bold new approaches.
    One last question----
    Chairman Conrad. Could I just interrupt on that point, 
Senator? I just came from North Dakota. I have a big event 
every year I call ``Marketplace for Entrepreneurs.'' We had 
several thousand people there. We had Mark Zandi, the chief 
economist at Moody's, as the keynote speaker there this year. I 
tell you, I have heard in the last few weeks, and especially in 
this last day and a half at home, the concern that you are 
raising here over and over and over. People with a $2 million 
deal, people who have done tens of millions of dollars of 
development in the State very successfully, a $2 million deal, 
40-percent equity, strong cash-flow, AAA tenant--no ability to 
get financing.
    A guy with a $12 million credit line, never been late in a 
payment, never missed a payment. The bank calls up, pulls his 
credit line--not because of anything he has done, but because 
their capital is so impaired, they have to shut down credit 
lines to existing good customers. And this guy is in, you know, 
a strong business.
    I tell you, this is of deep concern, the point that you are 
raising about the ripple effect extending from these major 
institutions out on the Main Streets of cities and towns all 
across America. And, you know, I tell you, I came back very 
sobered after this set of conversations.
    Mr. Berner. Senator Wyden, Chairman Conrad, if I could just 
respond to that. I share your concern. In my testimony, I said 
that, you know, this financial crisis is not going to easily 
get fixed. It is going to require aggressive action and 
cooperation of the financial services industry without 
question.
    When we look at the capital of financial institutions, I 
mentioned that what needs to be done is to clean up balance 
sheets so that lenders will have confidence that they can lend. 
That is something that your intervention can help. The NOL 
carryback does have a financial benefit in the sense that it 
will help raise tier one capital ratios. What investors care 
about most is the ability of institutions to raise capital on 
their own, to restart the lending process and to get them 
functioning again.
    So I see the need for two things that are very important. 
One is balance sheet cleanup. That is not going to happen 
overnight. The Fed knows that. We know that. And that is why 
the Fed is instituting--and I recommended that other asset 
classes like the municipal bond market, the commercial 
mortgage-backed securities market also be--that we use 
financing facilities for those markets in the short run to 
break the back of the credit crunch and to start the flow of 
credit to the small business people that you are worried about 
once again.
    But to fix this problem, we need balance sheet cleanup, we 
need a new regulatory architecture, and we need to set our 
financial institutions back on the right course after having 
been on the wrong course for several years.
    Senator Wyden. Market economics has always been about 
chicken-and-egg. You make investment decisions, and if they are 
the right ones, promising things happen and the markets get 
better, and then there are more investment decisions that make 
sense all across the country every day.
    But balance sheet cleanup to the people that Chairman 
Conrad heard from in North Dakota and that are calling me on a 
daily basis does not really resonate in a way that leaves them 
feeling that their Government is moving boldly. What they would 
like us to do in a lot of respects is almost sort of pretend 
that we can run financial institutions here and we can adopt 
all kinds of rules and pretty much micromanage everything that 
goes on at Morgan Stanley and the like.
    I am not suggesting that is the way to go here, but I am 
saying that we need people like yourself and the most 
influential people in the field to figure out bolder, more 
aggressive, more immediate ways to help these small businesses, 
and particularly if additional money is going to be made 
available, which I believe will happen, and some way to connect 
that to immediate changes that happen on Main Street--not 
changes that are down the road when the balance sheets get 
corrected.
    Mr. Berner. Right.
    Senator Wyden. But changes that happen very quickly after 
that legislation is passed. Let me ask you about one--excuse 
me. One of your colleagues----
    Mr. Sinai. Senator, the banks will never put that money out 
in the timeframe that you want to the people who you are 
talking to. They have bad balance sheets. They got themselves 
in a position with bad balance sheets. They devised the 
financial instruments, the so-called toxic securities, that 
were sold to lots of investors. It toppled when the real estate 
boom and bubble burst.
    We do not need to clean up the balance sheets of the 
existing financial institutions that have, to a certain extent, 
got us where we are at. They need us to clean up their balance 
sheets to live and survive. What we need are new banks with 
clean balance sheets who have capital, who can go lend to the 
people you are talking about who are worthy borrowers and not 
to make the mistakes that Wall Street made and the road that 
Wall Street took us down in the last 8 to 10 years.
    It is not in their interest when they get the funds, and as 
a shareholder of one of those institutions, it is not in our 
interest to make a loan to a small business person if their 
survival is at stake on shrinking balance sheets that 
compromise their capital on a mark-to-market basis every day. 
They simply will not do it. The Federal Reserve, I think, has 
realized that, and that is why they are stepping into the 
private sector as a bank.
    Now, I can give you a way to do it. I think the last time I 
did this, two of the most liberal economists in the world, way 
on the left of the spectrum, liked my idea. I am not sure 
anybody else does, but, you know, we could create--this is a 
hypothetical, caricature example, because you are right on. If 
you vote these--money from TARP to clean up the balance sheets 
of the financial institutions with the trickle-down effect to 
the ordinary homeowner who is losing a job and a home at the 
same time is not going to fly. I am a taxpayer. I wear that 
hat. That is not going to fly. I would not vote for that. I 
would not release that money for that purpose.
    If those moneys were used to do something about the housing 
market, to mitigate, to help compensate me for taking a haircut 
and writing down my loan, or if I am a lender doing the same 
thing, and make more balanced demands upon housing, so housing 
prices will stop falling, and then all that stuff on the 
balance sheets of those banks which are tied to this asset 
residential real estate, those complex securities for which we 
cannot find a market because there are thousands of them and we 
cannot find price discovery, then those values would stop 
declining, and the balance sheet would be helped. The TARP 
money is better used setting up an entity, a Government entity 
like we did in the 1930's to buy and sell houses in the private 
market, take a bunch of them off, take the supply down, provide 
tax incentives to homebuyers to buy a house, and to stop the 
decline in housing prices. And then the levered stuff built on 
that asset in an extraordinary, unbelievable boom that nobody 
on the regulatory side really watched and it came tumbling 
down, we would work our way out of it.
    As a taxpayer, I do not support $350 billion--and I did not 
at the beginning. The plan that was presented to the Democratic 
leadership of Congress by Secretary of Treasury Paulson and 
Chairman Bernanke, there were no hearings on that plan. It was 
misguided from the start. It was not directed at the problem. 
The problem is housing. You will not get the results you want 
from that money. You cannot unless you can in legislation tell 
the banks exactly what to do with the money. I do not think you 
can do that.
    What is going to happen is our banking system as we know it 
is going to change. All the major financial institutions are 
going to shrink immensely. There will be new, smaller banks 
with clean balance sheets that will enter, and over time the 
person you are talking about, the good credit risk, will get 
money but from a different place.
    Senator Wyden. The Chairman has been gracious to give me 
all this time, and my sense is we ought to send you three off 
to the Chairman's conference room to come up with this kind of 
package, because you are giving us some sensible ideas. And I 
think your last point is really one to wrap up on. You are 
really leading us to a fresh start and a start that says the 
primary obligation now is to look at these kinds of loans that 
will help small business and the people with mortgages that 
need assistance. I think that is the way to go. I don't know if 
we are going to get to vote on it in time, but I thank all 
three of you. And if you put together a package under the 
Chairman's auspices, I am going to be very interested in it.
    Chairman Conrad, thank you for all the time.
    Chairman Conrad. Yes, sir, Senator Wyden.
    I would like to close this out by asking each of you, if 
you had the power to put together a plan to deal with both our 
short-term circumstance and our longer-term circumstance, what 
would the elements of that plan be? Obviously, I am asking here 
in a truncated way, but if you were giving advice to the 
President-elect, if this responsibility were turned over to 
you, what are the things that you would want to make first 
principles? What are the things that you would want to make 
certain were addressed?
    I will start with you, Dr. Berner.
    Mr. Berner. Thanks, Mr. Chairman. As I indicated in my 
testimony, I would start with the cause of the problem that we 
are in right now, the short-term problem. I would focus on 
fixing the financial crisis, and I would use some of the tools 
that I indicated.
    Second, there is no question in my mind that fixing the 
crisis is going to take time, even if we use additional moneys 
and additional programs to offer assistance to small 
businesses, to the other markets that I mentioned, the 
municipal market, for example, which is depriving States and 
localities of the ability to finance themselves, and that is 
going to cause more pain in our economy if we do not do 
something about that.
    Third, you know, I fully endorse Doug's view that we need 
to look at ways to enhance and to augment our automatic 
stabilizers in order to cushion the blow from this problem, 
because I think we need to be realistic and say this is not 
going to be fixed overnight, despite our best efforts and 
intentions to fix it. So extended unemployment insurance 
benefits and, you know, other things that we can sunset fairly 
quickly once the pain is diminishing--those are all useful.
    But most important, I think, from the perspective of this 
hearing, I think, is let us make a commitment to really work 
on--taking the opportunity in this crisis--our longer-term 
budget and economic challenges. If we miss that opportunity, it 
just seems to me the clock is really ticking on the window that 
we have to do something about that. Let us use this crisis in 
order to really make a commitment in a sensible way, to be 
realistic, to come up with a game plan to address those long-
term problems. Those are some of the elements.
    Chairman Conrad. Very good. Thank you very much for that.
    Dr. Sinai.
    Mr. Sinai. Well, that is, Mr. Chairman, a very, very deep 
question, and probably some of the things that I might suggest 
would be way too radical for the political system at this time, 
including new banks and new things.
    One of the things with the economic recovery program which 
is going to be coming, you have to be very, very careful about 
the spending side of that. It is about 60 percent now--it looks 
like 60 percent spending and 40 percent taxes. I tend to 
prefer--though it takes longer for tax reductions to lift the 
economy, I tend to prefer tax reductions as a Keynesian-type 
stimulus rather than spending increases, for all the reasons we 
know. Once there they have a life of their own. There are 
issues about efficiency, and there is a real strong movement in 
Washington now on spending on the infrastructure side, and I am 
concerned about that. I would prefer the mix to be more tax cut 
oriented. The lags are longer, but we have to remember that tax 
cuts for individuals or for business--I would favor them for 
individuals, permanent ones--have a financial side to it, and 
our consumers are financially distressed as well as spending 
distressed, and a dollar of money that goes to a household--
some of it is saved, some of it is spent. That which is saved 
goes to repairing balance sheets, which are impaired, and 
prevent consumers from spending. That would probably help speed 
that up.
    The other issues about the long run, you know, there is a 
sequencing problem, and our society and economy and financial 
system went through a metamorphosis. What it is like 3 years 
from now I do not think any of us can figure today. It is not 
going to be the same. Citigroup is an example. It is shrinking 
down to meet the size of the market. Hopefully there is enough 
time for it to do that before its survivability ends or the 
Federal Government has to put $100 billion into Citigroup 
rather than what they have put in. It is a never-ending 
sinkhole, taxpayer money into major financial institutions, 
without putting some major strings attached to that.
    So I would punt on your question and respectfully ask Matt 
or somebody to trigger me to spend a little time thinking about 
it, and I would be happy to write a short set of suggestions to 
you, because I have not really given that kind of framework 
question the kind of thought time that it deserves.
    Chairman Conrad. Well, let me just tell you, that is very 
much on our plate here. We are having discussions about these 
questions right now, and the incoming administration 
understands, at least they have told me they understand, once 
the economic recovery package is put in place and once economic 
recovery begins--and I think everybody understands that is 
months down the road, and it may be a pretty tepid recovery 
when it begins--that we then have to face up to these long-term 
imbalances, because the baby boomers have begun to retire 
already.
    One place where I might have a variance with--Dr. Holtz-
Eakin, you say it is just the spending side of the equation. 
That is one place I strongly disagree. Deficits and debt are a 
function of the imbalance between spending and revenue. I do 
not know how you cannot deal with both sides of the equation. 
And while I would be quick to acknowledge the biggest share of 
this has to be done on the spending side, there is no way, as 
you describe--there is where I would agree with you. Anybody 
who think you are going to tax your way out of this is in a 
total dream world. That is not going to happen. The political 
system will not support it, and the imbalance created just on 
the spending side of the equation is so strong, if you go to 
the out-years here, with the baby-boom generation coming on, 
that spending has to be a central component.
    But I do not know how you deal with this without looking at 
both sides of the equation, spending and revenue. And we have a 
revenue system that is broken itself. I mean, we have this 
massive tax gap. We have these abusive tax havens offshore. The 
Permanent Subcommittee on Investigations says we are losing 
$100 billion a year on these offshore tax havens. We have these 
abusive tax shelters where companies in the United States are 
buying foreign sewer systems and depreciating them on their 
books for U.S. tax purposes, and leasing the sewer systems back 
to the European cities that built them in the first place. My 
God, we have a system that was designed largely 50 years ago 
that is almost irrelevant--almost irrelevant to the reality we 
confront today of a United States that is no longer completely 
dominant, and we have to worry about our competitive position. 
We are running a $700 billion trade deficit. You know, at some 
point here, we have really got to get serious, and the time has 
come.
    Anyway, I will give Dr. Holtz-Eakin an opportunity.
    Mr. Holtz-Eakin. Let me start with the latter comments and 
basically say I think we are saying the same thing. We know the 
budget projections. We know the spending growth. There simply 
is no way to avoid coming to terms with that spending growth. 
My concern is that the thing that you can do quickly is raise 
taxes, and if you attempt to do that early in the reform 
process--you know, 2010, 2011--people somehow think the 
pressure is off, they have solved the problem. They are wrong, 
of course, and worse, ramping up this tax system is going to 
damage the economy. This is a bad tax system that needs reform. 
So you start jacking up marginal rates and all the really 
inefficient things that will come out of that, you will do more 
harm than good. And that is my concern about tax increases. I 
understand the budgetary arithmetic about both sides, but I 
think we ought to focus on the real problem and educate people 
on where it is.
    In terms of your first question about the near term, I 
finally found someone who agrees with me, and I am never going 
to let Allen Sinai testify alone again, because I absolutely 
think--you know, you have two different problems: a financial 
crisis and a sort of industrial traditional recession. In 
dealing with the financial crisis, you have to fix the TARP. 
The TARP has done two things, and other efforts will reinforce 
this. Because the use of the TARP has shifted through time--it 
has been extended now to car companies--and because the rules 
for who qualifies and what you get are not clear, there is not 
a private sector institution that has any incentive to clean up 
its balance sheet. It just wants to sit there and wait and hope 
they get rescued. That is a terrible set of incentives. And if 
you build new programs on top of it, they will wait for the 
next program, too.
    The only way to clean up the private sector balance sheet 
is acknowledge your losses, become a clean entity, and you go 
raise capital and make loans.
    So I think Allen is right about how the dynamics work on 
this, and I think fixing the TARP is an imperative for the 
financial market. I have roundly----
    Chairman Conrad. Can I----
    Mr. Holtz-Eakin. Let me finish here. I have been roundly 
criticized for the notion that the TARP should be devoted to 
buying up mortgages, and I am shocked to hear other people 
think this. I mean, this you can do fast. I have a mortgage for 
$200,000. My house is now worth $150,000. That mortgage is the 
problem. It is a problem for me as a homeowner. It is a problem 
for the bank that originated it. It is a problem for everybody 
who has a securitized piece of it.
    Let that person go in, get a new loan for $150,000, 
whatever the market value will bear, chip in the rest, get rid 
of the other mortgage. What does that do? It puts cash on 
balance sheets. It keeps people in their houses. It addresses 
the housing problem itself. It is just as expensive as you 
can--I mean, that is the problem. It is very expensive. And you 
will help some people who do not deserve help. There will be 
people who get that help who knowingly took a mortgage they 
could not support. That is the tradeoff you have. But I think 
that is something you should do.
    And on the fiscal stimulus--and then I will answer your 
question--keep it simple. You know I do not believe in spending 
a lot of new money. If you are going to start infrastructure 
programs, put them through authorization, appropriations, do 
due diligence. Do not jam them in a stimulus bill.
    Help people who are out of work, get them some money, beef 
up the automatic stabilizers. And I think a big tax cut is 
important, so what is our biggest tax? Payroll tax. Everyone 
pays it. It is an enormous burden, particularly on lower-income 
individuals. Get rid of the payroll tax. Sure, that is going to 
trigger Social Security reform, but you have to do that anyway. 
So help people. And the payroll tax is the single most potent 
thing you could address. It would help the labor market. It 
would help people. I would have a big payroll tax cut.
    Chairman Conrad. OK. Very thoughtful. Let me ask you this, 
and if I could ask each one of you in turn. Tonight we are 
probably going to face a vote on extending--well, it will be a 
resolution of disapproval with respect to the second half of 
the TARP money. Would you vote to allow the second half of the 
TARP funding to be available to the next administration? You 
understand under the law, even though this administration has 
asked for it, they would not be able to spend any of it. It 
would only be available to the incoming administration.
    I will start with you, Dr. Holtz-Eakin. How would you vote?
    Mr. Holtz-Eakin. I would disapprove of giving the funds, 
and I would force the new Secretary of the Treasury to appear 
before Congress and explain with precision how those funds will 
be used, rather than broad, ambiguous authorities that have 
been stretched through time, and, you know, basically an 
operating plan that involves hiring your friends off Wall 
Street. I do not think that is the way this should happen.
    Chairman Conrad. All right. Dr. Sinai?
    Mr. Sinai. The question is if you vote so the TARP is given 
to the President-elect, that is just the existing legislation 
around the TARP and the potential way that it might be used, it 
is the status quo. Yes, I wouldn't support that. I wouldn't 
support that. I would go along with Doug and start the clock 
anew with the new administration really quickly coming to you 
and asking for those funds and finding out exactly what they 
plan to do with them. The kind of thing that didn't happen the 
first time Congress was shotgunned into supporting this 
program.
    Chairman Conrad. Dr. Berner?
    Mr. Berner. Mr. Chairman, I think, you know, we are looking 
at an administration that comes in 5 days from now, and it is 
certainly imperative that we get from the new administration a 
detailed blueprint of exactly what they plan to do with the 
money.
    My recommendations, as I said, would be to use those funds, 
and perhaps others if they are needed, for foreclosure 
mitigation, because I think that goes a long way to helping 
homeowners. And it goes a long way to cleaning up troubled 
assets.
    I also think that we are going to need, as I indicated, to 
clean up the balance sheets of institutions and to liquidate 
those that are insolvent. That is the only way we are going to 
get our financial system back on track.
    As far as the vote is concerned, I think you should demand 
and should get accountability for those funds, and if that 
means postponing the vote, so be it.
    Chairman Conrad. All right. The great thing about the U.S. 
Senate is when the vote is called, there is no postponing it. 
There is no wishing that it had been done a little different 
way. You vote. And we are held accountable.
    I thank each of these witnesses. You have been very helpful 
and very thoughtful with respect to your recommendations to 
this Committee, and what you have said here today will be 
shared with our colleagues. And we very much appreciate the 
effort and the energy and the thoughtfulness that you have put 
into your presentations here today. I hope this Committee can 
call on each of you again in the future for your assistance.
    We appreciate it very much. Thank you. The Committee stands 
adjourned.
    [Whereupon, at 11:46 a.m., the Committee was adjourned.]


           ADDRESSING SHORT- AND LONG-TERM FISCAL CHALLENGES

                      WEDNESDAY, JANUARY 21, 2009

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

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to welcome everyone to the Senate Budget Committee. 
Today's hearing is entitled ``Addressing Short- and Long-Term 
Fiscal Challenges.'' We have a distinguished panel of witnesses 
with us today, all of whom are former Directors of the 
Congressional Budget Office. They are:
    Dr. Alice Rivlin, who in addition to being the founding 
Director of the CBO, was also Director of the Office of 
Management and Budget, and a Vice Chair of the Federal Reserve, 
and is now Director of the Brookings Institution Greater 
Washington Research Program. Welcome.
    Dr. Bob Reischauer, President of the Urban Institute, and, 
again, a former head of the CBO. During my tenure here on the 
Budget Committee, we had the services of Dr. Reischauer, and he 
enjoys a great deal of credibility, as do all of the members of 
this panel.
    And Dr. Rudy Penner, Senior Fellow at the Urban Institute.
    Thank you all for being here.
    Our Nation faces really extraordinary short- and long-term 
fiscal and economic challenges. In the short term, we face the 
worst economic crisis since the Great Depression. Our first 
priority must be to get our economy moving again and to put 
people back to work. And it is clear that getting our economy 
moving again will require the passage of an economic recovery 
package that will further aggravate our deficit and debt.
    But over the longer term, the combination of the retiring 
baby-boom generation, rising health care costs, and inadequate 
revenues are projected to explode Federal debt to an absolutely 
unsustainable level. So, in addition to addressing the current 
economic downturn, I believe it is essential that we begin the 
difficult work of putting our budget back on a sound long-term 
fiscal course. Our economic security will remain in jeopardy 
until we confront this problem.
    Let me begin by just briefly laying out what I see as the 
budget challenges that we face.
    First, the news that we received from CBO earlier this 
month about the deficit was jaw-dropping. We face one of the 
worst budget forecasts I have ever seen. CBO's estimates show 
the deficit in 2009 will be $1.2 trillion, and I want to 
indicate that is before any economic recovery package. That is 
before any other new policy.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    As a share of the economy, the deficit will reach 8.6 
percent in 2009. That is well above the 6 percent of GDP that 
we saw in 1983, the previous post-World War II high. That 
eventually led to major deficit reduction efforts, and CBO's 
numbers show that under current policies deficits will remain 
at 4 to 5 percent of GDP for the remainder of the next 10 
years.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Let me just say parenthetically, my staff several weeks ago 
ran the 10-year numbers. They brought them to me, and I said, 
``These can't be right. Please run them again.'' They said, 
``Well, Kent, we have run these three times already. These are 
the numbers.'' And I tell you, anybody that looks at our long-
term circumstance can't help but be sobered.
    This absolutely requires a response. We are building a wall 
of debt. Gross Federal debt now is estimated to be $11.6 
trillion at the end of this year. If we add in current 
policies, such as extending the tax cuts, AMT reform, and 
ongoing war costs, we could see the debt rise to over $21 
trillion by 2019. That approaches 100 percent of GDP.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    And here are some of the major initiatives that are being 
considered that could further add to our debt: the economic 
recovery package, additional tax cuts, health care reform, 
additional defense spending. All of these are very much in 
place. So our long-term debt outlook is even more serious than 
the numbers reveal.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Here is a chart from CBO's long-term budget outlook, which 
was released in December of 2007. It shows what will happen to 
Federal debt over the next 50 years with the retirement of the 
baby-boom generation, rising health care costs, and the 
permanent extension of President Bush's tax cuts. Federal debt, 
if unchecked, would climb to 400 percent of GDP by 2058 if we 
stay on those trend lines. Clearly, that is unsustainable.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The explosion in debt we are seeing is coming at the worst 
possible time--right as the baby-boom generation is preparing 
to retire. We are facing, as this chart shows, a demographic 
tidal wave, and it is important to remember that within the 
decade, by 2018, more than half of the baby boomers will reach 
the early retirement age of 62.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    So some of my colleagues have said to me, ``Well, yes, the 
baby boomers have started to retire, but it is going to be a 
long time before most of them are eligible for Social Security 
and Medicare.'' Oh, wish that that were true. No, no, no. Very 
quickly here, we are going to face the dramatically increased 
costs of the retirement of the baby-boom generation.
    But this is far more than a demographic issue. Rising 
health care costs pose a tremendous threat. Rising health care 
costs are exploding the cost of Federal health programs, and 
private sector health care spending has also exploded. Taken 
together, public and private health care spending will reach 37 
percent of GDP by 2050.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Now, let me just conclude by saying Senator Gregg and I 
have come together in a collegial, bipartisan, bicameral way to 
propose a fiscal task force that would have these following 
elements:
    It would be tasked with addressing our long-term fiscal 
imbalances. It would consist of a panel of lawmakers and 
administration representatives. Everything would be on the 
table. The panel's legislative proposal would get fast-track 
consideration, and Congress would have to vote. It would be 
designed to ensure a bipartisan outcome.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Let me just stop there and say that if others have a better 
idea, we are all ears. One thing that is going to be 
unacceptable is to refuse to face up to this circumstance. I 
was delighted to see President-elect Obama indicate that he 
intends to hold a Fiscal Responsibility Summit in February. 
Representatives of the President-elect were in contact with me 
as recently as yesterday indicating that they want to work 
together with Senator Gregg and myself, and others who are 
interested, to structure this bipartisan summit on our fiscal 
future. And they see this as the beginning of a process to 
identify a plan to take on these long-term imbalances.
    The President-elect has said so publicly and has committed 
clearly to a course of addressing these issues and taking them 
on. He told me in a phone call about 10 days ago that he knows 
this is not going to be fun and it is not going to be easy, but 
that it simply must be done. This can can no longer be kicked 
down the road.
    With that, I want to call on my very able colleague, the 
Ranking Member of this Committee, Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. Thank you again for 
your introductory comments, which were right on point, as they 
have been for a long time relative to this problem; and your 
comments about what lies over the horizon--well, it is not over 
the horizon anymore. On the immediate horizon almost is the 
retirement of the baby-boom generation and the costs which are 
going to be put on the Federal Government which are not 
sustainable in their present structure. And then, of course, we 
have the immediate crisis, which is extraordinary, and nobody 
in our lifetime has seen anything like this. Obviously, if you 
lived through the Great Depression you may have seen it, but 
nobody else has seen it.
    And so it is great to have this very talented and 
exceptionally experienced panel here today to talk about how 
they quantify this problem and what they see as the best 
approaches to addressing it. My view is that the approach that 
we have laid out in our joint effort, which is to create a 
procedure to get to a resolution of these issues rather than 
putting policy on the table first and having it shot down by 
all the different interest groups, which always take sides 
around this town. We would rather set up a process to get to 
that policy, which requires decisions and then requires action 
that is the best approach.
    As you said, it has to occur sooner rather than later, and 
I was extremely encouraged by the President's Inaugural Address 
yesterday and by his comments obviously prior to that. But he 
is clearly willing to take this on, and that is good news, 
because we need the Presidential leadership, and I certainly 
congratulate him and his team for raising this very high on 
their agenda with all the other issues they are confronting in 
the short run here relative to the economy and the 
international problems, especially in the Mideast.
    So let us hope we can contribute to that with this hearing 
today, which I know we will be able to get some more 
information out there that will be useful in moving this 
process forward. I look forward to hearing from our witnesses.
    Chairman Conrad. Thank you, Senator Gregg.
    We will welcome back to the Committee Dr. Rivlin. Thank you 
so much for taking your time to be with us and to give us the 
benefit of your insights. Please proceed.

  STATEMENT OF HON. ALICE M. RIVLIN, PH.D., DIRECTOR, GREATER 
         WASHINGTON RESEARCH, THE BROOKINGS INSTITUTION

    Ms. Rivlin. Thank you, Mr. Chairman. and Senator Gregg and 
members of the Committee. I am delighted to be here because I 
recognize the Committee leadership of this Committee in 
focusing attention on the long-as well as the short-run 
challenges of the budget. And I am glad you are keeping the 
fires burning here.
    I strongly share the Committee's perception that the future 
viability of the United States economy depends on policymakers' 
ability to focus on two seemingly contradictory imperatives at 
the same time: The immediate need to take actions which will 
mitigate the impact of the recession and help the economy 
recover--actions that necessarily require big increases in the 
budget deficit; and the equally urgent need to take actions 
that will restore fiscal responsibility and reassure our 
creditors that we are getting our fiscal house in order--
actions to bring the future deficits down.
    I stress the word ``actions'' because I do not believe it 
will be sufficient to pay lip service to the long-run challenge 
while focusing only on the deficit-increasing responses to the 
current financial and economic crisis. Congress and the 
administration must work together on actual solutions to both 
problems at the same time.
    I have in my prepared remarks some comments on the economy. 
They are gloomy, and I do not think I need to reiterate them 
except to say that I am one of those who think that the 
forecasts coming out of the CBO and other worthy forecasters 
are likely to be too optimistic. The forecasts themselves may 
well get worse by the next time the Committee meets.
    You do need an anti-recession package. It is clear that 
this recession is going to be very bad, and the Government 
should act quickly to mitigated the downslide with spending 
increases and revenue cuts that will stimulate consumer and 
investor spending, create jobs, and protect the most vulnerable 
from the ravages of recession. We used to call this 
``stimulus''--temporary spending or tax relief to jump-start 
the economy. It has now been merged into a broader concept of 
recovery package and investment in future growth. But I think 
an important distinction should be made between a short-run 
anti-recession package--what we used to call ``stimulus''--and 
a more permanent shift of resources toward public investments 
in future growth. We need both.
    The first priority is an anti-recession package that can be 
both enacted and spent quickly, will create and preserve jobs 
in the near term, and will not add significantly to long-run 
deficits. It should include temporary aid to States in the form 
of an increased Medicaid match and block grants for education 
and other purposes. Aiding States will prevent them from taking 
actions to balance their budgets--cutting spending and raising 
taxes--that will make the recession worse.
    The package should also include temporary funding for State 
and local governments to enable them to move ahead quickly with 
genuinely shovel-ready infrastructure projects, including 
repairs, that will employ workers soon and improve public 
facilities.
    Another important element of an anti-recession package 
should be substantial transfers to lower- and middle-income 
people, because they need the money in this situation and will 
spend it quickly. This objective would be served by increasing 
the Supplemental Nutrition Assistance Program, unemployment 
compensation, and the earned income tax credit. Helping people 
who lose their jobs to keep their health insurance and aiding 
distressed homeowners would also belong in this anti-recession 
package.
    On the tax side, my favorite vehicle would be a payroll tax 
holiday, because payroll tax is paid by all workers and is far 
more significant than the income tax for people in the lower 
half of the income distribution. Moreover, it would be fairly 
easily reversible.
    But the anti-recession package I believe should be 
distinguished from longer-run investments needed to enhance the 
future growth and productivity of the economy. We need those, 
too. If our economy is to grow sustainably in the future, we 
need to modernize our transportation system to make it more 
efficient and less reliant on fossil fuels. We need to assure 
access to modern communications across the country and invest 
in the information technology and data analysis needed to make 
medical care delivery more efficient and effective. We need a 
well-thought-out program of investment in work force skills, 
early childhood education, post-secondary education, science 
and technology.
    Such a long-term investment program, however, should not be 
put together hastily and lumped in with the anti-recession 
package. The elements of the investment program must be 
carefully planned and will not create very many jobs right 
away. Since a sustained program of public investment in 
productivity-enhancing skills and infrastructure will add to 
Federal spending for many years, it must be paid for and not 
simply added to already huge projected long-term deficits. That 
means either shifting spending from less productive uses or 
finding more revenue. Over time, Congress could reduce 
commitments to defense programs and weapons systems that 
reflect outmoded thinking about threats to U.S. security, 
reduce agricultural subsidies, and eliminate many small 
programs that have outlived their original priorities. Reform 
of the tax system--including making the Tax Code simpler and 
fairer and increasing reliance on consumer taxation--could 
produce more revenue with less drag on economic growth.
    None of this would be easy, but the resources to pay for 
large permanent increases in Federal spending must be shifted 
from somewhere as the economy returns to full employment. 
Congress will only be able to accomplish this reallocation of 
resources if it reinstates some form of long-run--say 10-year--
PAYGO and caps on discretionary spending. I understand the 
reasons for lumping this all together, but I do not think it is 
a good idea.
    Now, I do not need to reiterate for this Committee the 
challenge of the long-run deficits. You have stated them very 
well yourself, Mr. Chairman. The question, I think, is whether 
to approach this from a procedural point of view or from actual 
actions. I actually think that you need to do both.
    In this situation, if the Congress and the administration 
together could take some actual actions quickly to mitigate the 
long-run upward trend in the deficit, it would be dramatic and 
useful. This crisis may have made Social Security less of a 
political ``third rail'' and provided an opportunity to put the 
system on a sound fiscal basis for the foreseeable future. And 
I would advise you to do that as quickly as possible.
    Vigorous efforts should also be made to make Medicare more 
cost-effective and slow the growth of Medicare spending, which 
contributes so much to projected deficits. While restraining 
health spending growth should be a major feature of 
comprehensive health reform, Medicare is an ideal place to 
start. Medicare is a large payer for health services and should 
play a leadership role in collecting information on the cost 
and effectiveness of alternative treatments and ways of 
delivering services, and designing reimbursement incentives to 
reward effectiveness and discourage waste.
    Fixing Social Security and taking aggressive steps to 
control the growth of Medicare costs would be visible evidence 
that Congress and the new administration have the courage to 
rein in future deficits. But the Congress also needs to restore 
discipline to the budget process, not use recession or the 
financial meltdown as excuses for throwing fiscal 
responsibility to the winds just when we need it most.
    As you have said, this is not a partisan matter. I am very 
encouraged, as you are, by the President's willingness to focus 
on the issue of the long-run budget deficits. I think the joint 
plan of the two of you for a fiscal task force is a good one. 
In my opinion, we need action on many fronts at once, including 
a strong anti-recession package, immediate steps to reduce the 
contributions to future deficits of Social Security and 
Medicare, and agreement on reforms of the budget process that 
will force the Congress to confront long-run spending and 
revenue choices.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Rivlin follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you, Dr. Rivlin. Thank you for your 
wisdom.
    Dr. Reischauer, it is very good to have you back, and you 
have been too long absent. Thank you for being here.

  STATEMENT OF ROBERT D. REISCHAUER, PH.D., PRESIDENT, URBAN 
                           INSTITUTE

    Mr. Reischauer. Mr. Chairman, Senator Gregg, and members of 
the Committee, I appreciate the opportunity to return before 
this Committee, and I, too, want to applaud the leadership and 
efforts that you as individuals and the Committee as a whole 
have shown in the effort to focus attention on the significant 
issues that face our budget and to do this in a constructive 
and bipartisan manner.
    I will submit my prepared statement for the record and 
summarize it for you today.
    Chairman Conrad. Maybe I can just interrupt you for a 
moment to indicate that General Walker, the former head of the 
General Accounting Office, has joined us--somebody that in his 
previous capacity as head of the General Accounting Office 
testified frequently before this Committee and who enjoys great 
credibility before this Committee. We just want to welcome him 
back to the Senate Budget Committee.
    I apologize for interrupting, Bob.
    Mr. Reischauer. It was a well-deserved interruption.
    It is well understood that we face two serious problems, 
and, unfortunately, the remedies for them are diametrically 
opposed. First, we have the short-run or immediate problem 
associated with the economic recession. I am not a forecaster, 
but my gut tells me that Alice's judgments on the consensus 
forecasts are right. I think it is more likely that the 
recession we are in is going to be deeper, longer and more 
difficult to get out of than those forecasts show, than the 
other options, which things will be better.
    I say this because the roots of this recession are really 
different from any other that we have experienced in the post-
war period. The main difference is that we have a financial 
services sector that is in tatters, and it has to be repaired. 
And you have to go all the way back to the pre-Depression era 
before you find similar kinds of situations.
    Second, the stimulus that we are providing or are likely to 
provide is the traditional medicine that we have applied to 
different kinds of recessions. It is likely to be less 
effective to this recession because its roots are different.
    And, third, it is worth noting that this is really the 
first recession that we have had when world economies have been 
as integrated as they are today and capital markets are 
electronically connected throughout the world. This makes 
responses very much more rapid and much more global than they 
have been in the past. So I, as I said, am dubious that this is 
not going to be a worse recession.
    To battle this recession, we are going to have to have tax 
cuts and spending increases of an unprecedented magnitude, and 
that is going to lead to higher deficits and a significant 
expansion of the debt held by the public.
    The second problem we face, as you have noted and Alice has 
spoken about, is the long-run fiscal sustainability problem. 
This existed, of course, long before the current recession. In 
fact, if you look at the projections from 6 months ago, you see 
that under a continuation of current policy, we were headed 
toward having deficits as a percent of GDP that were larger 
than at any time in the post-war period when we weren't either 
in a war or in a recession. And from my way of thinking, it was 
not necessary to look out 50 years or 75 years to get nervous 
about this situation. We had about 7 to 10 years to begin 
fixing the problem, and if we did not move forward in that 
window, the risks, I think, would be quite unacceptable. So to 
solve this problem, we obviously need spending restraint, 
health care reform, and a judicious increase in taxes.
    What has happened with the current recession is that we 
have received a wake-up call. We have been reminded of the 
risks that one runs when you seek to live beyond your means and 
delay hard choices and reforms that we know are unavoidable. 
Unfortunately, the debt that will be added and the size of the 
deficits over the next few years have shortened the window of 
time that we have to deal with the long-run problem. We 
probably have consumed what is the equivalent of 5 to 10 years 
of policy procrastination, and so that window that I talked 
about before has been compressed significantly.
    Fortunately, there is little debate over the primacy of 
dealing with the immediate economic problem first, and there is 
broad bipartisan acceptance of the need to adopt measures that 
will put us on a fiscally sustainable long-run path.
    The real debate that is emerging is whether we should deal 
with these two problems sequentially or concurrently. Many 
people will argue that we should deal with the problems 
sequentially--address the short-run problem first and then, 
when it is well in hand, turn to the sustainability challenge.
    One reason to follow this approach is that if the economy 
does not recover, it would be both undesirable and 
counterproductive to take the steps needed to bring spending 
and revenues into line over the longer run.
    The second argument is that the measures needed to put the 
budget on a more sustainable long-run path could reduce the 
effectiveness of whatever short-run stimulative policies we 
enact. For example, a higher fraction of any tax cut might be 
saved in anticipation of tax hikes scheduled for the future, or 
businesses may be reluctant to expand their capacity knowing 
that a period of fiscal restraint lay ahead. What is needed, 
the argument would go, is a single clear message from public 
officials that their full attention and efforts are directed at 
economic recovery.
    Third, there is a great deal of uncertainty not only about 
when the economy will be in the midst of a strong recovery and 
capable of sustaining some kind of restraint, but also what the 
new economy might look like. The housing, automobile, State and 
local government, and financial sectors might look quite 
different than they did in 2007, and that should affect our 
views of how fiscal restraint should be meted out.
    Strong as these considerations are, I would urge you to 
take action to deal with the two problems concurrently. There 
are at least three good reasons for following this approach.
    First and foremost, we need to instill confidence in 
prospective lenders that we understand that we must and are 
willing to put our long-run fiscal house in order. The credit 
market turbulence of the last 6 months should convince everyone 
of the importance of confidence, the suddenness with which it 
can be lost, and the difficulty in regaining it once lost.
    In recent years, we have depended very heavily on the 
willingness of foreigners to buy treasury securities. In fact, 
if you look at the period from December 2000 to September 2008, 
fully 74 percent of the $2.5 trillion net increase in privately 
held treasury securities was purchased by foreign and 
international interests. Looking forward, we have to ask 
whether these interests will be both willing and able not just 
to repeat their recent participation but to double or triple 
their efforts, which is what will be required given the size of 
our projected deficits.
    Some of the factors that explain foreigners' ability and 
willingness to invest huge sums in dollar-denominated assets 
have weakened in recent months. For example, oil is now closer 
to $40 a barrel than $140 a barrel, and some oil exporters will 
no longer have the large dollar surpluses to invest in our 
securities. The trade surpluses of the Asian exporting nations 
have diminished as the recession has slashed demand for their 
products. And their economies have weakened as well, so they 
are devoting more of their resources to stimulating their own 
economies.
    Finally, a portion of the huge gains made from trading 
financial instruments, real estate, and equities sought, in the 
past, the security of treasury securities, and those profits, 
of course, are no more. Prospective purchasers of our debt 
instruments will be looking for some assurance that we will 
address, in a serious fashion, our long-run fiscal imbalance. 
They want to be assured that they will not experience excessive 
inflation in the United States or excessive exchange rate risk. 
It would be prudent to provide such assurance as we are asking 
them to dig deeper into their pockets to help us support the 
fiscal stimulus that we are about to engage in.
    While Treasury borrowing rates have been at historic lows, 
we should not be fooled by this. This is largely the result of 
a flight to safety and liquidity, and it will disappear, I 
think, quite quickly when the economies around the world begin 
to bottom out and expand again. So I think we are running huge 
interest rate risk if we do not provide the confidence that we 
are going to deal with our long-range budget problems.
    The second reason to take action now to put the long-run 
budget on a more sustainable path is that it may be politically 
more viable to enact future restraint at a time when 
significant amounts of more immediate pleasure are being 
allocated through the stimulus package.
    The third reason for acting concurrently is that this 
appears to be one of those very rare moments in history when 
seeking sacrifice for the common good may be politically 
viable. We are a Nation that has elections every 2 years, and 
it turns out that there is never a good time to ask for 
sacrifice as a result. There is always a reason to delay.
    We are going to see a situation, no matter how much we 
promise that the stimulus package is temporary, in which the 
beneficiaries of that package are going to get their appetites 
whetted for a continuation of this spending. They will, in many 
cases, be able to argue that whatever has been provided in the 
next year or two really has met only a fraction of the unmet 
needs that have developed over the last couple of decades. And 
they will say that the positive impact of the stimulus will be 
negated if the spending is cutoff.
    We have a new President, as several of you have mentioned, 
who is committed to addressing the long-run problem. The public 
seems to accept his call for responsibility, and there is a new 
mood of bipartisan cooperation on Capitol Hill. All these 
things together I think make this a propitious time to act.
    By acting, I want to make it clear that I do not mean that 
we need to impose restraint immediately. That would clearly be 
foolhardy. What we need to do is make the decisions now, adopt 
measures that can slow the growth of spending or increase 
revenues over the long run. There is a wide range of measures 
that could provide additional assurance. At one end of the 
spectrum, of course, there are the promises, the solemn 
commitments, the pledges to submit budgets or pass budget 
resolutions that exhibit fiscal discipline. But if we look at 
history, we realize that these tend to be forgotten, evaded, or 
reinterpreted and, therefore, offer little in the way of 
credible assurance.
    At a second level, there are budget process changes. I, 
like many others, endorse proposals to reinstate statutory 
discretionary spending caps in PAYGO, but you have to remember 
that these tools are designed to reinforce spending and tax 
restraint that has already been enacted. They are designed to 
keep the fiscal situation from getting worse, not make it 
better. Biennial budgets, joint budget resolutions and so on, I 
think, are more likely to offer opportunities for delay and 
conflict than to be vehicles to ensure that tough decisions are 
made.
    Summits, bipartisan task forces, and base-closing 
commission-type entities can serve as effective mechanisms for 
defining politically viable packages of spending cuts and 
revenue enhancements when the will to act is present or the 
action is unavoidable. To be effective, however, they must be 
accompanied by strict timetables and ironclad procedural 
requirements that the Congress vote up or down on the package. 
And here I applaud the measure that the Chairman and Vice 
Chairman have introduced, which I think meets the test of an 
effective approach.
    The highest degree of assurance that we can provide 
creditors, of course, would come from substantive legislation. 
Such legislation does not really require a large dose of 
sacrifice at any point in time. Small incremental changes made 
over a long period can be quite effective and be politically 
palatable. The poster child for this approach is the increase 
from 65 to 67 in the age of normal retirement, which was part 
of the 1983 legislation to strengthen Social Security. It first 
affected those turning 62 in the year 2000, and it will be 
fully phased in for those turning 62 in 2022. When this change 
began in 2000, there was hardly a peep. Nobody realized it was 
happening, and that offers, I think, a lesson for how one might 
go about dealing with some of the problems that we face.
    If we wanted to send a clear signal that we are committed 
to putting the budget on a more fiscally sustainable path, 
Congress could enact measures that would apply a more accurate 
inflation index to both entitlement benefits and the parameters 
of the Tax Code starting several years from now. Additionally, 
you could index the normal age of retirement in Social Security 
and the age of Medicare eligibility to increases in adult life 
expectancy. Such measures alone would be far from sufficient to 
solve the long-run budget challenge, nor are they necessarily 
the most desirable way to bring our spending more in line with 
our resources. But they are simple, their impact is widespread, 
and they are very gradual in effect. Furthermore, I think they 
would send a clear and strong message to our creditors about 
our commitment to long-run fiscal responsibility.
    While some may want to craft a larger and more appropriate 
package of measures, that task may prove to be very difficult 
given the demands that the current economic crisis will place 
on policymakers. Should such a package emerge after one adopted 
these simple measures that I have suggested, the Congress could 
easily reverse its decisions on those original things. Congress 
has an ability, I think, to drive backward that exceeds its 
ability to drive forward, and so undoing painful legislation is 
quite easy.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Reischauer follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you, Dr. Reischauer.
    Dr. Penner, thank you so much for being here. Please 
proceed.

STATEMENT OF RUDOLPH G. PENNER, PH.D., SENIOR FELLOW, THE URBAN 
                           INSTITUTE

    Mr. Penner. Thank you, Mr. Chairman. Mr. Chairman, Senator 
Gregg, and others, thank you very much for the opportunity to 
testify, and I, too, congratulate this Committee for their 
efforts in the difficult pursuit of fiscal responsibility.
    The prevalent theme in recent discussions of stimulus is 
that the risk that we shall do too little exceeds the risk that 
we shall do too much. But I think that we must ask how much of 
too much we can tolerate. The risks of overdoing it are severe 
and, in my view, are not emphasized enough in the current 
discussion.
    I have several concerns regarding the proposed stimulus 
package: first, that the combination of highly expansionary 
monetary and fiscal policies may lead to an excessive boom.
    If you believe the CBO forecast and the consensus on which 
it is based, most of the stimulus from this package will come 
after the trough in the recession. In other words, we must 
think of the stimulus package not as something that will ease 
the rise in unemployment but, rather, as something that will 
accelerate the recovery. If the Fed must put on the brakes, 
another recession would be possible.
    On the other hand, if, as Alice and Bob suggested, the CBO 
forecast is wrong, I think we will know that fairly shortly. If 
the economic decline starts to accelerate in this quarter, then 
I think we are in severe trouble. For the CBO forecast to be 
right, the rate of decline either has to stabilize or ease very 
quickly. My favored solution would be to have a much smaller 
stimulus package but have other weapons in the wings to use if 
the decline exceeds the CBO expectations.
    My second concern involves the speed with which the 
national debt is being increased. As Bob suggested, that could 
cause a very rapid rise in interest rates on treasuries, or in 
a worst-case scenario, create another bout of instability in 
international financial markets. The debt increase that we 
expect is extraordinary. Relative to GDP, the debt will 
increase in 2009 considerably more than twice the past post-war 
record, which occurred in 1983. The debt is going to increase 
at least 50 percent over the next 2 years. In other words, we 
are going to ask foreign and domestic investors, both private 
and government, to increase their holdings of debt by that 
amount. And the question is: How much of an interest rate 
increase will be required?
    Now, even if bad things do not happen to interest rates, we 
know one thing with certainty, and that is that the interest 
bill on the debt is going to soar and become a budget problem 
in itself.
    Like my two colleagues, I think it is very important to 
improve confidence for the long run, and that does mean 
tackling the long-run budget issues simultaneously with trying 
to stimulate the economy. And I think in the very short run, 
you hear a lot of discussion of the Congress actually 
increasing whatever package the administration puts forward. 
That would be a huge risk, in my judgment, and, if anything, 
the Congress should try to trim back the package.
    My third concern is that the Federal, State, and local 
bureaucracies may not have the capacity to efficiently manage 
the huge increase in spending that is being contemplated. Just 
to put it in perspective, the Federal budget for physical 
investment has been running about $120 billion a year. If you 
look at the House plan just issued, it is hard to classify some 
of that spending. But I think the increase for physical 
investment must be something of the order of $140 billion over 
2 years or, in other words, about a 60-percent increase. That 
is just a gargantuan increase for the bureaucracies at various 
levels of Government to swallow.
    My last worry is that a significant portion of the spending 
increases and tax cuts in the package will become permanent, 
despite the best efforts to prevent that from happening. What 
we are talking about here are huge increases in the budget, and 
if they are truly, truly temporary, they will have to be 
followed by huge cuts later. That is going to be enormously 
difficult.
    So, again, to summarize my conclusions, it would be nice to 
have a smaller package with some tranches of further stimulus 
in the wings if necessary. But I think, again, just to repeat, 
the most important thing is that the Congress not increase the 
proposed package significantly.
    While the budget problems that the Nation is going to face 
in the long run were clearly articulated by your opening 
statement, Mr. Chairman, the huge increase in the debt that we 
shall experience in the short run makes the task of reforming 
the budget much more difficult and more urgent. However, our 
short-run problems also present a golden opportunity. Short-run 
difficulties often make people more willing to accept longer-
run reforms. Sweden, Canada, Germany, and Japan have all 
undertaken fundamental reforms in their social security systems 
in response to short-run crises.
    Nevertheless, entitlement and tax reform are excruciatingly 
difficult politically. It will take a departure from normal 
procedures to make any progress. Therefore, Mr. Chairman, I 
think you and Senator Gregg are to be congratulated for 
suggesting a bipartisan commission that would make proposals 
that would then be considered as a package and voted up or 
down. I also think, as in your commission, it is appropriate 
that it consist of elected officials and a few high-level 
officials from the administration, because I think only elected 
officials can really solve this problem.
    I believe that the only competing process that might have a 
chance of success is a bipartisan summit such as the one that 
fashioned an enormously important budget deal in 1990. And I 
think that maybe a summit has a few advantages over a 
commission that are more fully outlined in my full testimony.
    Nevertheless, I think it may be worth giving the commission 
idea a trial run. Although soaring health costs present the 
most serious budget problem by far, it may well be advantageous 
to tackle Social Security reform first. Possible reform options 
are well known, and we know a good deal about their effects. If 
it proved possible to fashion a bipartisan reform of Social 
Security using a commission such as you suggest, the two 
parties might develop the trust necessary to take on the more 
difficult challenges of health and tax policy reform.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Penner follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you, Dr. Penner. Thank you all.
    I would like to wade right in. You know, this is what I 
would call a ``target-rich environment.'' Everywhere you look 
we have got a challenge, and everywhere you look we have got an 
opportunity.
    First of all, I want to thank all of you for your kind 
words about what Senator Gregg and I have proposed. I think it 
is absolutely imperative that we go down this path of 
addressing both the short term and the long term. I no longer 
believe putting off a plan for the long term is viable. We have 
simply had too much ground lost as a result of this remarkable 
downturn.
    At the same time, I am extremely concerned about our 
approach with respect to the short term. And let me indicate 
why I am concerned.
    Between the second tranche of TARP or the second half of 
TARP and what has come over from the House, I do not personally 
see that we are maximizing the potential to deal with the 
short-term downturn. Why not? First of all, because I do not 
think we are dealing effectively with the housing crisis; 
second, because I do not think we are yet dealing effectively 
with the financial sector, and we simply cannot have a typical 
recovery without the financial sector being healthy.
    I said the other day in an interview--and I noticed that 
Mr. Stephanopoulos used this to challenge Mr. Axelrod in his 
show--that I was somewhat skeptical about the notion that we 
would get the reduction in unemployment that many are 
forecasting as a result of this economic recovery program. And 
I said that because most of the modeling is based on a 
financial sector that is relatively healthy.
    Our financial sector is not healthy, and so the typical 
modeling that shows the reductions in unemployment I think are 
just misplaced; and that we have got to go back and focus 
effectively on stopping the collapse in housing prices; and, 
second, to get the financial sector back in the credit markets 
and lending.
    I would just ask each of you for your observations or 
reactions to those statements. Dr. Rivlin?
    Ms. Rivlin. I share your concerns, and I said in my 
prepared statement, I do not think we have models that will 
cope with this situation. Models have been calibrated on the 
experiences of the last several decades since World War II, and 
especially more recently, and as you pointed out, they just do 
not tell us what happens when the financial sector is not 
functioning.
    So getting the financial sector functioning does seem to me 
to be a priority, and the question is how to do it. I did not 
think that the original idea of the TARP was very quickly 
workable. By the ``original idea,'' I mean taking the toxic 
assets off the books. Nobody knew how to value them, so I think 
the direct injection was a better idea as a first pass. But it 
has not gotten the banks really lending again, so now I think 
that taking the toxic assets into something like a bad bank is 
probably a good next step. It is going to be expensive, and we 
do not know how quickly it will work.
    I agree with you that we are not going to see much recovery 
until housing prices stop falling. But that is very hard to 
fix. We built too many houses. People were overleveraged, and I 
think housing prices, no matter what we do, are likely to fall 
further before they bottom out.
    That leads me back to feeling that a truly temporary but 
quite aggressive stimulus is actually a good idea to mitigate 
the damage and get some money into the hands of people who will 
spend it. But I do think it will be temporary--should be 
temporary, and that we should not load into the same package a 
lot of long-run spending, which, however worthy, ought to be 
paid for.
    Chairman Conrad. I would just say in comment to your last 
statement, I have looked now at CBO's estimate of the economic 
recovery bill coming over from the House. Fully 62 percent of 
it does not spend out until after 2 years.
    Ms. Rivlin. Yes, and that is not stimulus. It is something 
else.
    Chairman Conrad. Yes. Whatever one calls it, it is not what 
Senator Gregg and I have tried to send as a message to our 
colleagues as appropriate, that it be temporary, that it be 
targeted, that it be timely. I mean, 62 percent of the outlays 
is after 2 years.
    Mr. Reischauer, your observations on the larger question?
    Mr.Reischauer. My observation is your diagnosis is 
absolutely right on the money. The problem here is we do not 
know what the appropriate prescription is. We know that what we 
have tried so far has not worked as well as we would want, and 
when we look at some of the alternatives, we are hesitant 
because we see problems of moral hazard, there are problems of 
rewarding the undeserving. We have a financial sector that is 
stressed, and the American people are understandably reluctant 
to pour huge amounts of their tax money into these 
organizations, the leaders of which have benefited 
disproportionately during the last decade by engaging in 
excessive risk taking. And they ask, you know, why should we 
save these folks, although the strength and health of our 
economy depends on the financial sector regaining its health.
    So I think we have just a very difficult challenge ahead of 
us. I do not think there is a magic bullet out there. As I 
said, this is different from anything we have experienced in 
modern history. And it is going to probably lead to 
considerable dissatisfaction, both in Congress and in the 
public, about the steps we take.
    Chairman Conrad. Let me just say, I want to make sure that 
I do not leave a misimpression out there. When I talked about 
the CBO analysis of the House package, it is not the whole 
House package. It is the appropriated accounts. But, you know, 
that is over $350 billion of the $825 billion. But I do not 
want to leave a misimpression out there that I was talking 
about the whole House package. I am talking about the 
appropriated accounts. And I must say I find it very troubling. 
We are talking about 62 percent of that actually spending out 
not until 2011 and beyond.
    Mr. Reischauer. I think some of this comes right down to 
what Alice has been warning about, which is that this is a 
package that includes both true stimulus and long-run 
investment. And it is that long-run investment that is going to 
play out over a longer period of time.
    Chairman Conrad. Dr. Penner, what would be your response? 
And then we will turn to Senator Gregg.
    Mr. Penner. Well, like my colleagues, I think you have 
diagnosed the problem accurately. It was the fall in housing 
prices that really brought down this financial house of cards 
that we had constructed over the years. And dealing with that, 
I think it is very difficult practically to deal with 
foreclosures themselves, because presumably you do not want to 
bail out the investors. Moreover, I am told that more than 10 
percent of foreclosures, people just walk away and do not leave 
any forwarding address. And then you have a very large group of 
people that just cannot be helped. They are so far over their 
head that if you try and help them, they will foreclose yet 
again.
    So I do think that you have to focus on house prices. As a 
fiscal conservative, I never thought I would be making 
suggestions like this, but I do think we have----
    Chairman Conrad. Don't feel bad. We are all in the soup.
    [Laughter.]
    Mr. Penner. Now we essentially own Fannie and Freddie, so 
they can be used to bring down mortgage rates. Some have 
suggested bringing them down as far as 4 percent to try and 
kick-start the housing market. I would even contemplate a tax 
credit for homebuyers, perhaps restricted to first-time 
homebuyers.
    I, too, am just very dubious about trying to stimulate the 
economy with infrastructure expenditure. We have known since 
the 1940's how hard it is to get such investment going in a 
timely fashion. So whatever your judgment as to whether we need 
it or not, I agree with Alice. It should be considered as a 
separate package. And if we need it, we should be willing to 
pay for it.
    Chairman Conrad. Senator Gregg.
    Senator Gregg. Thank you. Thank you, Mr. Chairman. I want 
to thank the panel. I find myself in agreement with so much 
that has been said. Let me try to just sort of summarize the 
problem as I see it, though. And I am not talking about the 
long-term problem. I am talking about the short-term problem.
    Because this is such a unique downturn, unique recession in 
our history, I do not think classic Keynesian approaches are 
going to resolve the issue. I think we have to figure out where 
the Government can be most constructive in addressing the core 
problems, and I think the No. 1 place is in housing and the No. 
2 place is in financial institution stability. And they tie 
together, obviously, very directly.
    The question is: Shouldn't this stimulus package--in my 
opinion--be restructured along the lines of taking the vast 
majority of funds and putting them into an effort to 
restructure the housing situation to the extent that the 
Government can impact that by lessening foreclosures and by 
looking for owner occupants, and by forcing down the price of 
the face value of the mortgage in some sort of RTC structure or 
the FDIC proposals or something like that?
    And, second, as we move down the road here, we are not 
going to get the economy going again until the American people 
have confidence that there is a better tomorrow financially for 
them. That is the bottom line. And they are not going to have 
confidence there is a better tomorrow for them financially 
until their home price stabilizes. And the banks are not going 
to be able to control the price of their assets and be able to 
maintain their capital until mortgage prices stabilize.
    So I do think the Government has to step into this mortgage 
issue much more aggressively than we have, and the stimulus 
package is one of the ways I would do it, both with a tax 
credit and also with a very aggressive initiative, funded 
through either the FDIC or the Comptroller. It would be 
different than the RTC, but it would be the same concept.
    Second, I think we have to clarify to the marketplace that 
we are not going to go to the English model here, because I 
think one of the reasons we are having problems with the 
marketplace is there is such uncertainty about where the 
Government is going to go with all this money that they are 
putting into these financial institutions. And nationalization, 
which is the English system, simply undermines the capacity to 
ever get private equity into the market to stabilize this. So I 
think we have to be very careful as we put all this money in 
that we use vehicles that publicly state we are not going to 
pursue nationalization as an option here.
    And, third, my sense is we have got to monetarize a lot of 
this. We have got to set inflation targets and accept the fact 
that for a period here we are going to have to inflate and 
publicly state that that is our purpose, because this 
deflationary spiral that we may be headed into is more severe 
than an inflationary event of a short term, hopefully. We have 
got to figure out how we back out of it, and there ought to be 
a stated end game to how you back out of it.
    Now, you folks may disagree with all that, but I would like 
to get your comments on those three approaches: focus on 
figuring out a way to stabilize the price of the real estate 
through addressing aggressively the mortgage foreclosure issue; 
second, address the issue of the financial system, making it 
clear that we are not going to nationalize and, therefore, we 
give the option for private dollars to follow us in and the 
markets stabilize enough so they are willing to; and, third, 
whether or not we need to monetarize the debt--get the 
inflation rate up.
    Ms. Rivlin. Shall I start on this daunting task of 
answering?
    I basically agree with your feeling that we have got to 
stabilize housing prices and we have got to try lots of ways of 
doing it. I do not think there is any one magic answer, nor is 
it necessarily going to work right away. I think housing prices 
are probably going to fall further. And even if we----
    Senator Gregg. Should we be focusing the stimulus, since it 
is all outside the 2-year window anyway, on housing as opposed 
to the other things that are making up the majority of the 
stimulus spending?
    Ms. Rivlin. I would focus quite heavily on housing, but I 
would not eliminate the things that we need to get some money 
out there quickly to people who are hit hardest by the 
recession and will spend it.
    Senator Gregg. I like your idea of a holiday on the FICA 
tax. I think that makes a lot of sense. But we have seen 
historically from our last stimulus package that that is saved, 
it is not spent, because people do not have confidence.
    Ms. Rivlin. Well, the last stimulus package was partly 
saved, and it was a different kind of thing. But I think you 
can count on some spending--increases in the transfer programs 
will be spent quite quickly. If you raise food stamps, that 
goes to people who need it really badly, and they are going to 
spend it. And the parts of the stimulus package that gp tp 
vulnerable people--increasing unemployment, raising the EITC--I 
would do.
    Let me come to nationalization. I agree. I do not think we 
have any tradition here of wanting the Government to run the 
banks. What we have to do is make clear what the relationship 
of the Government to the financial institutions that it is 
bailing out is going to be in the future. And we have not made 
that clear. We cannot hand over a lot of taxpayer money to 
financial institutions without some rules about what they have 
to report and what they have to do. I think the public is going 
to demand that, and the new administration, I assume, is going 
to try to get that clearer. But we are not a country that would 
like to have the Government running the banks. I do not think 
anybody in the government wants to run banks at the moment.
    [Laughter.]
    Ms. Rivlin. On reflation, we do not know how to do that. 
The Federal Reserve has been creating billions and billions and 
billions of reserves on the books of the banks, and we are 
getting money out there every way we know how. But you do not 
get reflation unless somebody wants to spend it. And at the 
moment that is not happening.
    Chairman Conrad. Dr. Reischauer.
    Mr. Reischauer. It is certainly necessary to stabilize 
housing prices, but we want to stabilize them at a level that 
is sustainable, and we have to recognize that housing prices 
got way out of line with underlying incomes over the previous 5 
or 6 years. In part, that was due to innovations in credit 
markets that allowed people to borrow huge amounts of money 
with very small monthly payments, temporary though some of them 
were. We do not want to create another artificial situation. We 
can use, explicitly use Federal resources to subsidize mortgage 
interest to some degree, but as I said, we do not want to re-
create, in a slightly different form, the problem that we had 
before.
    With respect to the threat of nationalizing the financial 
system, I agree with Alice; I do not think that is really 
anywhere on the card sheet right now. We are not a country that 
turns in that direction, although with respect to certain 
financial institutions, like Fannie and Freddie, an argument 
could be made that they should become nationalized entities. 
You know, I am not convinced it is the right set of arguments, 
but I think a case can be made.
    On the last issue, I do not spend sleepless nights worrying 
that we are going to enter into a deflationary spiral and 
suffer the consequences that Japan did. A huge fraction of the 
reduction in price levels over the last 7 months has been 
because oil has fallen from $140 to $40 a barrel. It obviously 
cannot fall another $100. I do not think we have the underlying 
productivity rate of increase of Japan. And a lot more of what 
we do now is service sector types of activities.
    And so while we might have some years of relatively low 
inflation, I do not expect to see years of zero inflation or 
slightly negative inflation.
    Chairman Conrad. Dr. Penner?
    Mr. Penner. Well, I agree that we have to do something 
about housing prices. I already talked about that before. I 
also think that there should be some tax cuts in the stimulus 
program. I have been a little concerned that much of the 
discussion involves changing withholding rates, which really 
dribbles out the tax cut over a long period of time. I would 
act much more quickly with lump-sum injections into the 
economy.
    We have to recognize that not much of that will be spent. 
Studies of the 2002 experience suggests that about 40 cents out 
of every dollar is spent the first quarter. There is much more 
disagreement about what happens in the second quarter. But 2002 
involved an acceleration of a permanent cut, so just a 
temporary one would probably have less impact. Nevertheless, I 
think it is----
    Chairman Conrad. If I could stop you on that, this is 
something we are talking about right now. Do you have any sense 
what you get on a temporary cut?
    Mr. Penner. Well, I think immediately it would be less than 
40 cents.
    Chairman Conrad. You know, there is some talk--there is a 
study that is going around that a lot of us have talked about 
that on the rebate program that was previously done, only 30 
percent of that was spent in the first quarter.
    Mr. Penner. Yes, I think that is quite a reasonable 
estimate. There seems to be a consensus developing. But I also 
agree with Alice that I think you get more bang for the buck, 
if you expand the safety net--SSI, food stamps, unemployment 
insurance, the EITC--you will get more bang for the buck than 
the initial 40 cents.
    With regard to the financial markets, in the early 1990's, 
the Swedes faced a situation almost identical to what we are 
facing today, and I think their experience really warrants a 
study. The one thing that they did which we did not do 
initially is that they made the rules very explicit right from 
the beginning. It was a very transparent kind of bailout. Now, 
I have enormous----
    Chairman Conrad. Can you tell us about--this is also 
something--you are really on kind of a hot-button subject, 
because a lot of discussion right now--Swedes in 1991-92, 
housing collapse, they put money, they put capital into the 
banks. Can you tell us what the conditions were that applied to 
the extent that you know them?
    Mr. Penner. I do not know them with great precision, but 
they performed what they call triage. They divided their banks 
into hopeless--the one extreme--which were essentially taken 
over by a government-type entity, I guess like the RTC; ones 
that were healthy and did not really need much help; and then a 
group in the middle where assistance would make the difference 
between life or death for the bank.
    Now, how exactly they defined those three categories, I 
just do not have the information on that. But they did it very 
quickly and effectively, and in the end, they actually made a 
profit on the whole deal, as they were able to sell off----
    Chairman Conrad. Now, they took equity positions.
    Mr. Penner. Yes.
    Chairman Conrad. My understanding is they did not allow 
healthy institutions to use government funds to buy other 
healthy institutions. My further understanding is that they 
required--to the extent institutions received Government funds, 
they had to demonstrate conclusively that they expanded their 
extension of credit; and, third, that they restricted bonuses 
to executives in firms that required government assistance.
    To your knowledge, were those conditions applied? This is 
what I have been told.
    Mr. Penner. I did not know about the last one, but it was 
my understanding that the first two were, in fact, applied.
    Turning to the question of inflation and deflation, I guess 
I agree with Bob. I do not see a huge deflationary threat out 
there. We may well have falling price levels for a short period 
of time, but I do not worry a lot about it being built into the 
system as it was in Japan.
    On the other hand, I think we do have to look at what the 
Fed is doing with some care. We are increasing bank reserves at 
Zimbabwe-type rates. I have not looked in the last couple of 
weeks, but the last time I looked, the annual rate of growth 
since September was over 500,000 percent.
    So I think that is worrisome. Optimists say, well, they can 
vacuum them up very quickly. A wag said they will vacuum them 
up with a Hoover. But I am just not as confident, and it is 
just extraordinary the rate at which the whole Fed balance 
sheet has exploded.
    Senator Gregg. I thank you for your thoughts and your 
input, and that is what I was looking for. These are ideas. 
There are so many ideas floating around here. We are trying to 
get some reading on them. But, again, I want to thank you for 
the strength of your statements today. I think they have been 
exceptional.
    Ms. Rivlin, you and I--when I sat down at that end of the 
Committee, you used to testify regularly, and I sometimes 
disagreed with you. But today I found what you were saying to 
be right on, on so many things, as with all of you, that I just 
hope somebody else is listening to you. So good luck. Keep 
talking and keep those ideas out there.
    Thank you.
    Chairman Conrad. Senator Whitehouse.
    Senator Whitehouse. Thank you very much, Chairman.
    I would like to--I usually ask questions of witnesses, 
particularly witnesses as distinguished and knowledgeable as 
yourselves, but I would like to take this opportunity to make a 
point, because I think the discussion of sequencing of the 
economic recovery, addressing Social Security, for instance, 
and addressing health care is one that we could make a terrible 
mistake about if we did not understand the situation correctly, 
and for your sake, because you talk about this all the time, 
and to give me a chance to explain, I would just like to share 
how I see it, and if you disagree, you have certainly time to 
respond. So it is a question in that sense.
    But I feel very strongly that, as has been said here, the 
health care problem is, I think, to use your words, by far the 
biggest problem that we face, and I see us having two very 
distinct toolboxes with which to address that problem.
    One is the traditional bloody fiscal toolbox with its saws 
and clamps and those sorts of things. In less graphic terms, it 
is paying providers less when I think most providers feel they 
have been stretched pretty thin by Federal payments already, 
perhaps even intolerably thin, by putting an even bigger burden 
on our American industry to support the health care system when 
I think most folks believe that they are already sustaining an 
uncompetitive burden in comparison with other States that have 
more efficient systems; by throwing people off health care 
coverage when we already have close on 50 million people 
without health care coverage; and by thinning out the benefits, 
even though the No. 1 reason for bankruptcy, at least until 
this recent crisis, in families has been that their coverage 
wasn't any good and their health care emergencies put them into 
bankruptcy. So those are very, very bad ways to solve the 
fiscal problem of health care. They enjoy really only one 
advantage, and that is that they can be applied immediately, so 
you can wait.
    The other toolbox involves bringing our health information 
infrastructure into the 21st century, investing in it and 
overcoming the market failure that has prevented that 
technology from deploying itself. It is investing in quality 
improvements where those can be shown to reduce costs, which 
over and over again they can, and investing in prevention where 
it can be shown to reduce cost, which over and over again it 
can, and reforming the way the system is paid for so that it 
sends the right signals and we are not always trying to push 
custard up the hill when we are reforming the health care 
system but you get virtuous cycles running and it starts to 
improve itself.
    That is a nice toolbox to be working out of, because it 
doesn't create those terrible harms to families, those terrible 
social costs, those terrible consequences. It actually makes 
health care better and more efficient and more transparent and, 
I would argue, considerably less expensive.
    The problem is that that has a pretty significant 
administrative run-up before it can be really effective. We 
don't even have the governmental administrative architecture in 
place right now to deploy those ideas effectively. They are 
just ideas out there.
    So I am really concerned that if we talk about this 
sequentially, first, we are going to deal with the economic 
problems, then we are going to look at Social Security, then we 
are going to look at health care, by the time we get around to 
looking at health care, we are too far down the road. I think 
we need to look at health care literally first if we are going 
to get into that first toolbox because the effects that we are 
looking for aren't going to be found right away, and I think 
anyway that beguiles people away from that notion leads us to 
an extremely dangerous precipice in the relatively near future 
when we have a fiscal imperative, what the Chairman and the 
Ranking Member frequently call a tsunami, coming at us on the 
one hand and really impossible political choices that that 
bloody toolbox produces, and we will have left ourselves no 
choice by not taking action now with the systemic reforms that, 
I think, beckon us to a much, much brighter and better day.
    So I would love to have you respond to that.
    Ms. Rivlin. I agree with you the increase in health care 
costs is driving the long-run problem and is the most important 
thing to tackle, and also that this is the moment to get 
started on improving the delivery system and the quality. That 
is going to take up-front investment in health information 
technology. It better be smart investment. There is a lot of 
potential for waste here. But we need to gather the information 
to find out what treatments are effective, to change 
reimbursement so that it rewards effectiveness and not waste, 
and that needs to be started now. I am encouraged, actually, 
that there is a lot of talk now, and more than talk, proposals, 
for doing the up-front investment. That is very important.
    I do think there are some things in the old toolbox, 
though, that ought to be used and that the Congress has had 
very little courage in addressing Medicare particularly. There 
is no reason why durable medical equipment shouldn't be subject 
to competitive bid. Rejecting that, with all due respect, 
gentlemen, is ridiculous. The Congress has gone too easy on the 
pharmaceutical companies. Some changes there could bring down 
costs in the near future and be useful.
    But I don't think that either you do this or you do that. 
You have got to do all of these things. We do need to tackle 
the deteriorating situation in the economy in the ways we have 
just been talking about. We need to get on top of the long-run 
budget problem. Simultaneity is necessary.
    Senator Whitehouse. Thank you.
    Mr. Reischauer. I think you have analyzed the problem 
correctly. I would caution, though, that if we went on an all-
out campaign to develop what I call the infrastructure needed 
for a reformed health system, that the savings that might 
result from that, from the reformed system, wouldn't begin to 
appear for probably 10 years, that this would be a cost 
increase, and an increase well worth making if you are sure you 
are going to get to the promised land.
    One positive note is that the bill that was considered by 
the House does have very substantial amounts of money for 
comparative effectiveness, for IT, for various other elements 
of this and the administration under Peter Orszag's leadership, 
I think is very interested in pursuing this, as well. So I 
think we have a glimmer of hope that we might start out on the 
right path, but it is going to be a long time before, with the 
appropriate infrastructure, a reformed payment system can 
translate into a new and different kind of delivery system that 
will end up both improving health and costing less money than 
we otherwise would spend, not less money than we spend now 
probably.
    Senator Whitehouse. Mr. Chairman, I have gone over my time, 
but would you mind if Mr. Penner answered, as well, the same 
question?
    Chairman Conrad. No, I would--Senator Sessions, is that all 
right?
    Senator Sessions. That is fine.
    Senator Whitehouse. I appreciate it. Thank you, Senator 
Sessions.
    Chairman Conrad. And, Senator Sessions, I will add to your 
time. Thank you for your accommodation.
    Mr. Penner. I will be very brief. When we argued for a 
sequential response, as in my full testimony and Alice and I 
didn't mean a long dragged out response. We talked about doing 
Social Security and the stimulus very quickly. But I would see 
getting to health care very quickly after that. But we do have 
to recognize that it is an extraordinarily complex problem, 
that unlike Social Security, we don't have good estimates of 
the effects of various options that might improve things.
    I don't fancy myself as being a health expert, but those 
that I know talk about the need to do a whole lot of little 
things to improve incentives and I think there are a lot of 
things we can do, even just focusing on the Medicare program. 
So it is bound to be a much more drawn-out process than dealing 
with Social Security.
    Chairman Conrad. I thank the gentleman for his courtesy. 
Senator Sessions, we will add to your time commensurately.
    Senator Sessions. Thank you, Mr. Chairman. I want to thank 
you for setting a tone of honest inquiry into one of the most 
difficult challenges we face. President Obama is committed to 
thinking through and trying to find some new ways to deal with 
these problems. That does not mean we deny reality, though, so 
we have got to deal with the reality and help bring sensible 
legislation to his desk. Out of the thousands of things he has 
to deal with, some realities are not going away.
    I ran an ad in this last campaign. I got a lot of favorably 
feedback from it. It just simply said, there is no free lunch. 
Debts have to be repaid. Like Julie Andrews' line in ``The 
Sound of Music,'' ``Nothing comes from nothing. Nothing ever 
could.''
    Spending more money today to stimulate the economy comes 
from somewhere, and we are either going to raise taxes or do 
other things or inflate the currency.
    Dr. Reischauer, the Chairman showed us a very troubling 
article, from the New York Times consistent with what you, 
indicated, I think, that said that the trade surplus for China, 
who has been buying so much of our debt, dropped from $50 
billion a month last year to $20 billion a month. And assuming 
they increased some of their domestic spending, even if they 
wanted to buy from us, they are not going to have the money, 
and neither will the OPEC nations, as you indicated.
    Does that not indicate that we are likely to have to pay 
higher interest rates to attract the kind of capital we need to 
fund this new spending? Dr. Reischauer, I will ask you, since I 
think you----
    Mr. Reischauer. I think that is the case, and to the extent 
that Americans begin buying Treasury securities, that means 
they are going to save more and consume less, which is 
something in the long run we want to encourage, but in the 
short run, detracts from aggregate consumer demand and makes 
the recovery even slower.
    Senator Sessions. Well, I worked with Senator Kennedy and 
we came close--Mr. Walker back there participated some--in 
creating a savings program just last year. At that time, saving 
in America was below zero. We were spending our savings rather 
than saving. Now, I think it is up to 4 percent or so as people 
have been faced with the realities. So that in one sense is 
good, but it does reduce sales at the store.
    Isn't this--Dr. Reischauer, I will just stay with you--
isn't this a natural readjustment, that we are just going to 
have to go through some of this and it is going to be painful 
and there is no way we in government can throw around enough 
money to stop this adjustment?
    Mr. Reischauer. I think the answer to that is yes. It is 
why the three of us and many on this committee have been 
arguing for many years that when times are good is when we 
should be making these adjustments and these transitions. You 
can't live beyond your means forever and when reality comes and 
smacks you in the face is usually the worst time to make these 
sorts of adjustments because the consequences are substantial.
    Senator Sessions. Dr. Penner, you used these words. Housing 
brought down this financial house of cards, I believe was the 
phrase you used. I remember the letter Mr. Greenspan wrote to 
the Banking Committee in favor of Freddie and Fannie reform. In 
2005, my colleague, Senator Shelby, fought hard to get that 
reform. It failed. He predicted financial disaster, really, in 
the financial markets. It was a very, very strong letter. I 
read a book recently written in 2006. It predicted the housing 
collapse. And the Wall Street Journal just had six economists 
or financial gurus who predicted the collapse in a front-page 
article.
    So what was this house of cards that collapsed? Can you 
simply, for the American people, tell us what it was that got 
us to this point that we are in a very painful circumstance 
now?
    Mr. Penner. Well, sir, in the good old days of Jimmy 
Stewart, you had savers on one side and they put their money in 
a bank and the bank lent it out to possible home buyers and 
businesses and so forth. What happened over the years is that 
Jimmy Stewart's bank no longer kept the loans. They sold them. 
The securities that were based on these loans, particularly 
mortgage loans, got so complex, people didn't understand what 
was backing the security.
    The securities, in turn, were purchased largely with 
borrowed money. Leverage exploded, and that meant that a very 
small decline in the ultimate price of a house would, as soon 
as a mortgage foreclosed or went delinquent, wipe out the whole 
equity of a highly leveraged purchaser. So it could destroy 
that particular lender. Even worse, we then created a whole 
business of insuring these securities against default in an 
unregulated way and the insurers turned out not to have 
anything behind their contracts, at least in the case of AIG.
    So it was, in my view, a huge house of cards. I think I 
have heard Paul Volcker say that he doesn't think all of this 
financial engineering could have possibly been worth it in 
terms of the ultimate reduction in mortgage rates you got at 
the end of the chain. I am not sure of that, but certainly any 
reduction in those mortgage rates was very small relative to 
the kinds of risks that people took along this complicated 
chain that was created between the ultimate saver at one end 
and the ultimate investor at the other end of the chain.
    Senator Sessions. Dr. Sunshine, our CBO Director, testified 
before this committee not too long ago. I thought he did a good 
job and was impressive. I think Dr. Rivlin and Dr. Reischauer 
said they thought this was going to be a deeper recession than 
he predicted. But taking his numbers and those of the top 
people in the Obama administration, they are projecting without 
a stimulus package, as I understand their numbers, the 
unemployment rate not reaching 10 percent. It reached almost 11 
under the Reagan recessions, which laid the foundation for 20 
years of economic growth, I think.
    But I will ask your opinion. Don't we need to be careful 
that we don't throw a lot of good money for very little benefit 
if we have a realistic expectation that the economy will find 
its own footing and come on back? You seem to be pretty 
optimistic since you are concerned about inflation.
    Mr. Penner. Well, I think it is a concern, which I 
enunciated. I think it is interesting to compare the response 
to the 1982 recession, when, as you say, unemployment went up 
to 10.8 percent, to this one. In 1982, there was essentially no 
monetary stimulus because Paul Volcker was still busily 
fighting inflation and double-digit rates on 90-day Treasuries 
persisted long beyond the trough of the recession. The only 
fiscal stimulus, which was kind of complicated, came from the 
Reagan tax cuts. They were very large, but I think it is 
fascinating that we took some of those back at the very trough 
of the recession with the TEFRA bill in 1982.
    So we are responding very, very differently to something 
that so far looks to me very much like the 1982 recession, at 
least in terms of the percentage fall in unemployment, and that 
is why I suggested that there was a risk on the other side that 
we overdo it.
    Senator Sessions. Would either of you like to comment on 
that? Dr. Rivlin?
    Ms. Rivlin. I think the question is, is this 1980-1982 or 
is it 1933, and it may be something in between. I mean, the 
problem with relying on the 1982 response was we did not at 
that time have a total meltdown in our banking system and we 
don't know whether that fact and the credit crunch will greatly 
worsen the chances of recovery. The Chairman said that earlier. 
I don't know. I don't think anybody knows. That is the problem.
    Senator Sessions. Thank you, Mr. Chairman.
    Chairman Conrad. Could I just say that our analysis, and 
the reason I said what I said publicly, is because I believe 
the models that we are using now cannot capture the difference 
in the threat that we face. I just don't think these models 
that are based on the financial sector being relatively unfazed 
fit the current circumstance.
    And so these models that say that instead of 11 percent 
unemployment, we will get 2 percentage points less with the 
economic recovery package, and by the way, I believe strongly 
in an economic recovery package. I have got issues with this 
one. But I believe we need it, but I don't believe we are going 
to get the same bang for the buck that you normally would given 
the damage that has been done to the financial sector. Our 
analysis shows, in fact, that we only get about half the bang 
for the buck that the traditional models show.
    Now, we will see who is right and who is not right, but, 
you know, I have, and I am sure Senator Sessions, who is here, 
that you are hearing every day in your office from business 
people back in Alabama and people around the country you know. 
I have just had one of the leading businessmen in my State here 
for the inaugural. He has got major banking interests as well 
as real estate development interests. I will tell you, this 
credit crunch is real and it is having a ripple effect way 
beyond what we had seen in the 1982 downturn. That is what I 
believe.
    Senator Sessions. I agree, and I talked to a businessman 
recently and was shocked to see how severe he got caught in a 
financial situation and how severe that could have been for 
him. But loans for automobiles are being advertised as zero 
percent. I talked to a young couple recently. They are going to 
save about $300 by refinancing their mortgage at four-and-
three-quarters percent or something like that. So there is some 
money out here.
    I just don't know what the answer is. I agree. I am 
perfectly willing to admit that. And you and I joked before, 
but we have got this cycle in America, including President 
Bush, well, I believe in free market. I am inclined to say you 
either believe in it or you don't. Somebody said in the decline 
of a nation's values and old verities, they affirm the old 
verities verbally while they are doing exactly the opposite. So 
I am a little worried that some our principles, we have so 
panicked that we may be going too far.
    Let me thank you again, because your hearings have gone to 
the core of the problem we face. I am quick to say I don't know 
the solution, but I have not seen any other hearings in the 
Congress, House or Senate, that I am aware of that are 
discussing the core problems we are facing and how we got into 
this mess and what it is going to take to get out of it. Thank 
you for your leadership.
    Chairman Conrad. Well, I thank you, Senator, and I thank 
the members of this committee who have been responsible. The 
one eternal verity I think you and I can agree on is debt has 
to be paid back. I come from a background, my grandfather owned 
bank stock in the Great Depression. My grandfather was a 
newspaper publisher. In those days, you had unlimited 
liability, so when there was a run on the bank, you weren't 
limited by the amount of your investment. That wasn't the limit 
of your liability. And so the banker, when there was a run on 
the bank, would call and my grandfather would have to take down 
another $5,000, another $10,000, didn't believe in going 
bankrupt. It took him 9 years to recover after the recession, 
to pay all of his bills and the interest due.
    I think people in my State are acutely aware of debt, 
because we are an agricultural State, and debt can be a great 
help. Debt can be an incredible burden. And when you have too 
much debt, there are real consequences. You know, agriculture 
is very cyclical and so we have seen up close and personal, and 
I used to be the Tax Commissioner of my State, so I have seen 
it very personally, people coming in who had taken on too much 
debt and how it absolutely crushed them.
    So this is not an academic exercise to me. I am very 
concerned about debt. I am concerned about national debt, 
corporate debt, individual debt. And while I recognize being 
able to get credit and buy a home when you have got 20 percent 
down, that is a wonderful thing, to be able to have a home for 
a family. I also know if you take on too much debt how it can 
crush people. I have seen it, and it is not pretty.
    And I am extremely concerned about the trajectory of events 
here, and that is why we are having these hearings. We are 
going to continue to do it. We are going to keep a spotlight on 
these things and we are going to insist that our colleagues 
think about these issues.
    I want to thank this panel very much for your taking the 
time and extending your energy and your effort to helping us 
better understand these issues. I can't imagine a more 
distinguished or credible panel than one that involves the 
three of you. So thank you very much for your contribution to 
this committee and to the Congress and to our country.
    Ms. Rivlin. Thank you.
    Mr. Reischauer. Thank you.
    Mr. Penner. Thank you.
    Chairman Conrad. The hearing stands adjourned.
    [Whereupon, at 11:46 a.m., the committee was adjourned.]


          FEDERAL RESPONSE TO THE HOUSING AND FINANCIAL CRISIS

                      WEDNESDAY, JANUARY 28, 2009

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

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to welcome our witness, the new Director of the 
Congressional Budget Office, Dr. Douglas Elmendorf. This is Dr. 
Elmendorf's first appearance before our Committee. 
Congratulations on your selection. I do not think we could have 
done better.
    I was pleased to join the House Budget Committee Chairman 
John Spratt in recommending Dr. Elmendorf to be the CBO 
Director, and I am delighted that he has now taken his position 
at the helm of the agency. Given the extraordinary fiscal and 
economic challenges facing our Nation, it is more important 
than ever that we have someone of Dr. Elmendorf's stature 
leading CBO. I think it is fair to say that, on a bipartisan 
basis, those of us who were involved in the interviews--the 
House Republican Ranking Member, the Senate Republican Ranking 
Member's staff, the Chairmen of the two Committees--were 
delighted that we had somebody of Dr. Elmendorf's quality.
    Our hearing today focuses----
    Senator Gregg. And the Ranking Members.
    Chairman Conrad. And so were the Ranking Members, Senator 
Gregg says, and I really do think that represents the feeling 
of all of us after the intensive interview process.
    Our hearing today focuses on the Federal response to the 
housing and financial crisis. Dr. Elmendorf has done extensive 
research and writing on both housing and financial market 
policy, so it is particularly appropriate that he is our 
witness.
    Before I go further, I notice that Senator Merkley has 
joined us, a new member of the Committee. We want to welcome 
Senator Merkley. Senator Merkley previously served five terms 
in the Oregon Legislative Assembly representing House District 
47 within the Portland city limits. He also served as the 67th 
Speaker of the Oregon House of Representatives. He has a B.A. 
in International Relations from probably the most outstanding 
university in the United States, Stanford University--other 
than North Dakota State and UND--and has a Master's in Public 
Policy from the Woodrow Wilson School at Princeton. In addition 
to the Budget Committee, he will serve on Banking, EPW, and the 
HELP Committee. Welcome.
    Senator Gregg. Mr. Chairman, I would also like to welcome 
Senator Merkley, and I would just note that if he wants to come 
over to our side, we will give him a chair that works.
    [Laughter.]
    Senator Merkley. Mr. Chair, it is a delight to be here, and 
particularly to be here for a hearing on housing, which is so 
important to citizens in this country. Thank you.
    Chairman Conrad. We are delighted that you are here.
    With that, I want to just proceed briefly and then turn to 
Senator Gregg for his opening statement.
    I think we all understand that we are in the midst of the 
worst economic downturn our country has faced since the Great 
Depression. We have lost nearly 2 million private sector jobs 
in just the last 4 months, and we do not see that trend 
changing anytime soon.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In response, Congress and the administration are working on 
an economic recovery package. Here are highlights of the plan 
that is now under consideration.
    It is designed to jump-start the economy, create jobs, lay 
a foundation for long-term economic growth. It includes 
investments in infrastructure, energy, health, and education. I 
would just say parenthetically that those are the investments I 
am most interested in and most supportive of.
    It includes tax cuts for middle-class workers, families, 
and businesses. Last night, in the Finance Committee, we 
considered certain additional incentives for businesses that I 
hope will be incorporated in the mark before it comes to the 
floor. We received assurances from the Chairman of the Finance 
Committee that there will be improvements in that area before 
the mark comes to the floor, and also that the housing credit 
will be substantially strengthened.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I offered an amendment last night to make the $7,500 
housing credit apply to not just first-time purchases, but 
other purchases as well, although certainly not second homes or 
vacation homes, because I think it is going to need more 
impetus to help us get the housing sector back on track and 
clear the inventory that is out there.
    It also includes increases in food stamps and unemployment 
insurance benefits, which have, I think we all understand, a 
strong stimulative effect because those moneys flow very 
quickly.
    Unfortunately, I believe the economic recovery package as 
it is now structured does not adequately address the underlying 
housing and financial market crises that sparked the downturn 
in the first place. Senator Kerry and I had an op-ed that was 
recently published in the Wall Street Journal on this matter. I 
believe the economic models that predict lower unemployment as 
a result of the package assume generally healthy housing and 
financial sectors where credit flows. That clearly is not the 
situation we now face.
    The housing crisis is continuing. One out of every five 
mortgages is underwater, meaning that the home is worth less 
than the remaining balance on the mortgage. Some say it is as 
much as one in every four. And one out of every ten mortgages 
is delinquent or is in foreclosure, and the credit crisis 
continues.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    News over the weekend with respect to European financial 
institutions as well as our own should serve as a warning 
signal to us all. I noted in the Washington Post this morning a 
review of the major banks all around the world and their 
precipitous drop in value. That has significant warning signals 
attached to it, and we need to pay attention.
    The chart I am showing now shows that about half of U.S. 
banks indicated they became less willing to make consumer 
installment loans in the final months of last year. Banks have 
not been that unwilling to lend in over two decades.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The weaknesses in the housing and financial sectors are 
creating a vicious cycle. Credit remains largely frozen, lack 
of credit causes layoffs, job losses trigger foreclosures, 
foreclosures hurt bank balance sheets further, and credit 
tightens even more. And the bad news on all these fronts hurts 
confidence, causing consumers to retrench further. So 
economists have told us we must address this underlying housing 
and financial market crisis for the stimulus package to be as 
effective as it might be.
    In his testimony before this Committee earlier this month, 
Richard Berner, the Managing Director and Chief U.S. Economist 
for Morgan Stanley, said this: ``As you debate a new fiscal 
stimulus package, keep in mind that tax cuts and stepped-up 
infrastructure outlays, whatever their merits, do not get to 
the causes of this downturn. They mainly tackle its symptoms. 
In my view, two critical ingredients are still missing from the 
policy menu: first, cleaning up the lenders' balance sheets; 
and, second, mitigating mortgage foreclosures. Lenders will 
start lending again when they feel secure about their balance 
sheets. Likewise, mitigating foreclosures is necessary to stem 
the slide in home prices, slow credit losses, and reduce the 
pressure on household wealth.''
    The final point I would like to make is that as we consider 
how best to respond to our current economic downturn, we need 
to simultaneously prepare to pivot to address our long-term 
fiscal challenges. As I have said before, our Nation's long-
term economic security will remain in jeopardy until we address 
the long-term fiscal imbalances that threaten to overwhelm the 
Federal budget in the years ahead.
    Now, fortunately, President Obama is committed to tackling 
this long-term problem. In a Washington Post interview earlier 
this month, he announced he intends to hold a Fiscal 
Responsibility Summit in February to focus on this issue. He 
said then, ``What we have done is kicked this can down the 
road. We are now at the end of the road, and we are not in a 
position to kick it any further. We have to signal seriousness 
in this by making certain some of the hard decisions are made 
under my watch, not someone else's.''
    With that, just before I turn to Senator Gregg, I want to 
indicate that Senator Warner has joined us as well. Senator 
Warner is also new to the Committee. I want to welcome him.
    Senator Warner has been both a successful high-tech 
entrepreneur, having co-founded the cellular telephone company 
Nextel, and served as the 69th Governor of the Commonwealth of 
Virginia. During that time, he chaired the National Governors 
Association and was named by Time Magazine as one of America's 
five best Governors. He is also a former Senate staffer, 
familiar to many of us. Many of us consider him a friend, 
having worked for both Senators Abe Ribicoff and our colleague 
Chris Dodd. Senator Warner has a law degree from Harvard Law 
School--which we will not hold against him--and an undergrad 
degree from George Washington University. Welcome, Senator 
Warner.
    Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Let me join you, Mr. Chairman, in welcoming 
Senator Warner. It is always nice to have former Governors on 
the Committee and in the Senate because they bring intuitive 
logic and thoughtfulness.
    It is also nice to welcome Senator Alexander back. Sort of 
like Halley's Comet, he has returned to the Committee.
    [Laughter.]
    Senator Gregg. And we are honored.
    I want to associate myself with the Chairman's remarks once 
again. I find myself doing that a lot recently. I think his 
definition and analysis of the problem is right on, that we 
need stimulus badly, but we need it in the right places. And 
the place where we need it is on the problem, and the problem 
is to get some value in the real estate markets so that we can 
give people confidence again, because most people's primary 
asset is their home, and if they do not feel that their home 
has the value that they have invested or that they are paying a 
mortgage on, then they lose their confidence in their future. 
And, of course, the price of real estate and the ability to 
maintain real estate prices is critical to the financial 
industry which does the lending, and they have to be able to 
value their assets. So they need to be able to have a fixed 
value on their real estate portfolio, and in this economy that 
has been hard to get.
    So, like the Chairman, I am disappointed that the stimulus 
initiatives that we are seeing so far--which, as the Chairman 
mentioned, were marked up in Finance and were marked up in 
Appropriations, where I am a member--did not address in a more 
aggressive and robust way the issue of real estate prices and 
how we keep people in their homes and how we reduce 
foreclosures.
    Also, I am concerned that so much of the stimulus package 
is really outside the next 2 years. CBO has estimated, I 
believe, that over 50 percent will be spent out in 2011 and 
beyond on the appropriations side. And that is not good. I 
mean, we would like to get this money out the door sooner. The 
administration has said--and I respect Mr. Orszag's 
representation--that they are going to restructure this in a 
way that allows them to get 75 percent out the door in the next 
18 months. I hope they can do that, but I tend to have more 
confidence in the CBO estimate, to be honest with you, because 
CBO is a fair arbiter on this issue.
    So I believe that there are some adjustments which we can 
make in this stimulus package which would hopefully make it 
stronger and better. We do need a stimulus package. We need it 
badly. But we need it to be on point, and the point is that we 
have to get real estate prices and the real estate portfolios 
stabilized.
    In addition, I want to express my appreciation for the 
outreach that the administration has done in this area. 
Yesterday, the President came to our conference, which is 
chaired by the Senator from Tennessee. He made an excellent 
presentation, I thought, and a substantive presentation, and 
addressed his approach and what they are planning to do in a 
very comprehensive way and in a way that gave me a lot of 
confidence that they are on the right track. But in that 
context, he talked about a three-legged stool, essentially, one 
of which is the stimulus; another of which is initiatives in 
the area specifically of stabilizing real estate prices, 
probably using the FDIC, although he was not that specific; and 
the third is the issue of cleaning up the balance sheets of the 
financial industries, again, probably through using a bad bank, 
although he was not that specific.
    However, we have not seen the second two legs of the stool, 
and, thus, all we have to look at is the stimulus package, and 
the stimulus package as it is presently structured does not 
accomplish what I think needs to be done in that area. So we 
are going to be interested in your views on this. I think this 
is at the core of the present problems we confront.
    I also want to second, of course, the ending of the 
Chairman's statement which reflected the need to address the 
long-term fiscal health of our Nation by addressing the 
entitlement issues, which is critical, and now is a good time 
to do it. You know, we are in crisis. People are sober. There 
is a sense of community here that often does not exist in the 
Congress. There is a willingness to work across aisles. So let 
us move on that issue right now while the iron is hot and while 
we can get things done and while there is a good will to do 
that. And, again, I congratulate the President for stepping up 
and saying that he intends to do that, but I think sooner 
rather than later is the watch word on that.
    So we look forward to your comments, Dr. Elmendorf. Thank 
you.
    Chairman Conrad. I thank the Senator for his comments.
    Before we turn to Dr. Elmendorf, I would also like to 
welcome back to the Committee Senator Alexander, a very able 
and valued member of this Committee in a previous iteration. 
And we are absolutely delighted to have him back. This is such 
a critical time for this Committee and the Congress. We really 
need all hands on deck, and we need the best ideas of everyone. 
And we are very fortunate to have the best ideas of a new CBO 
Director here this morning.
    Dr. Elmendorf, please proceed.

      STATEMENT OF DOUGLAS W. ELMENDORF, PH.D., DIRECTOR, 
                  CONGRESSIONAL BUDGET OFFICE

    Mr. Elmendorf. Thank you, Chairman Conrad, Senator Gregg, 
and members of the Committee. I am very pleased to be here for 
my first testimony before this Committee as Director of CBO and 
welcome the opportunity to talk with you about the turmoil 
facing our housing and financial markets and the options that 
policymakers have for addressing those problems. I want to make 
three points today.
    First, turmoil in the housing and financial markets will 
continue for some time, even with additional policies, but 
especially without them.
    Second, to generate a strong economic recovery, a wide 
majority of economists believe that both large-scale fiscal 
stimulus and focused financial and having policies are needed 
at this time.
    Third, ensuring the availability of credit for qualified 
borrowers will require a multifaceted strategy that addresses 
the set of problems facing the financial system.
    Let me elaborate on these points.
    First, the trauma affecting our housing and financial 
markets has a long way left to run. Conditions in the financial 
system have improved in some important ways in recent months. 
For example, the interbank market for short-term loans, which 
had essentially seized up in the fall, is now operating more 
smoothly again. Risk spreads in the market for commercial paper 
have decreased. And interest rates on conforming 30-year 
mortgages have fallen a good deal.
    However, these improvements do not reflect a return to 
normalcy by private markets and institutions but, rather, the 
aggressive policy actions taken by the Federal Reserve and 
Treasury. Moreover, despite these actions, for many borrowers 
credit is more expensive and more difficult to obtain than it 
was a few years ago.
    As the Chairman's chart indicated, banks continue to 
tighten lending standards and terms for loans to both 
businesses and families. And the situation is likely to get 
worse before it gets better. According to some analysts, U.S. 
banks may experience another nearly $500 billion in losses on 
top of the $500 billion in losses they have already recognized.
    Challenging conditions are likely to persist for some time 
in the housing and mortgage markets as well. Home sales remain 
weak, and construction activity continues to decline sharply. 
With a large glut of unsold properties, home prices will 
probably fall a good deal further, pushing the value of more 
borrowers' homes below the value of their mortgages. And as 
more of these underwater borrowers suffer income losses in the 
recession, rates of delinquency and foreclosure will rise 
significantly further.
    A second point is that most economists think that further 
policy actions to restore the health of the financial system 
and the housing sector are needed. Broad-based fiscal stimulus 
will help the financial system to some extent by boosting 
incomes, and thereby reducing loan defaults. However, this 
indirect effect will not be sufficient to eliminate future 
losses by banks, much less to rebuild the financial system from 
the losses already suffered. So policies focused directly at 
the housing and financial problems are a crucial complement to 
stimulus, as Chairman Conrad and Senator Gregg have pointed 
out. Without such action, the economic recovery will almost 
certainly be more halting, and there would remain a larger risk 
of further economic decline.
    Third, an effective policy to ensure the availability of 
credit to all qualified borrowers will require a range of tools 
addressing the whole collection of problems that we face. To 
deal with the faltering financial system, analysts have 
proposed several, possibly complementary, strategies. One is to 
inject additional equity into institutions, perhaps by 
continuing the Capital Purchase Program under the TARP. This 
approach was widely supported by economists, primarily on the 
ground that it would give the banking system the capacity to 
absorb further losses and continue making loans without 
requiring the Government to set a price for particular troubled 
assets.
    Unfortunately, the extent of losses and the fog of 
uncertainty surrounding who exactly has suffered losses and to 
what extent may mean that broad-based equity injections are not 
the most cost-efficient way to continue to address the 
problems.
    Therefore, another strategy is to address the troubled 
assets directly. This could be accomplished in several ways: by 
the Government buying assets, by the Government guaranteeing 
assets, or by the Government facilitating a division of assets 
into so-called good banks and bad banks. Any of these steps 
could help to clarify the true condition of banks' balance 
sheets by removing the difficult-to-value assets, and by 
removing those problems, help bank managers to focus on new 
loans rather than old problems.
    The key disadvantage of this set of approaches that focus 
on troubled assets is that it requires the Government to set a 
price for buying the asset or for a guarantee.
    Yet another complementary strategy is for the Government to 
increase its own lending to households and businesses. This 
could include new programs or expanding existing programs, such 
as the Federal Reserve's commitments to buy mortgage-backed 
securities and consumer loan-backed securities. The essential 
idea here is simply to provide public credit until the 
financial system is sufficiently healed to provide enough 
private credit.
    To deal with the problems of mortgage foreclosures, the 
Government again could take different approaches. One is to 
subsidize mortgage modifications to make mortgages more 
affordable to borrowers holders. For example, the Government 
might help pay to write down mortgage principal or to reduce 
mortgage interest rates. The two principal challenges here are 
that mortgage forbearance--modifying mortgages for people in 
need--will encourage additional defaults. And the second 
problem, these sorts of subsidies are likely to be very 
expensive.
    Another approach under consideration is to reform 
bankruptcy law. This would lead to more modifications at little 
Government expense, but the reform of bankruptcy might also 
crimp the future supply of mortgage credit.
    Yet a third possibility is for the Government to reduce 
mortgage interest rates broadly. This would help both people 
trying to refinance unaffordable mortgages and new homebuyers 
trying to obtain mortgages.
    The Federal Reserve has acted, as I said, over the last 
several months to buy mortgage-backed securities. That has 
helped to bring down mortgage rates, as I mentioned, but more 
could be done in this area.
    Let me just sum up by saying that economists and financial 
experts widely agree that the financial markets are likely to 
remain severely stressed for some time, and additional action 
is desirable now to promote their recovery and, hence, the 
economy's return to vigorous growth.
    Thank you. I am happy to take your questions.
    [The prepared statement of Mr. Elmendorf follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you very much for your excellent 
testimony, Dr. Elmendorf, and, again, thank you for your 
service.
    Let me turn very directly to some of the possibilities you 
mentioned with respect to dealing with the housing crisis and 
the continuing troubles in the financial sector. When the Farm 
Credit System faced a crisis in the 1980's, we were told the 
Farm Credit System was insolvent, that unless we acted, the 
whole system would come down. And I remember at that time the 
advice I had received from Carl Pohlad, who was the owner of 
the Minnesota Twins--but that did not have anything to do with 
his expertise in banking. He was also probably the largest 
private banker in our region of the country, headquartered in 
Minneapolis.
    Carl Pohlad asked me to his office when we were going 
through the S&L bailout consideration, and he had a stack of 
financial reports up the wall of his office. He had done more 
due diligence on S&Ls than probably any other person. And he 
said, ``Kent, whatever you do, don't take these properties into 
Government hands.'' He said, ``Inject money into the 
institutions, require them to rework the bad loans, and have 
them do the workouts. They know a lot more about these loans 
than any Government agency will. Government can do a lot of 
things. It does not manage property well.'' And so he said, 
``Whatever you do, don't take title, don't take these 
properties into Government hands.''
    And, unfortunately, we went a different direction with the 
S&Ls. I was one of a handful that voted against it on that 
basis. Then in the farm credit crisis, we followed that advice. 
We did not take title. We injected capital into the system, and 
we insisted that they rework the existing loans, and ultimately 
it did not cost the taxpayers a dime. In fact, we made a little 
bit of money--a very little bit, but a little bit. And I am 
wondering if those same principles do not apply here.
    Now, maybe you can help me understand. Why wouldn't it be 
better--if we form a bad bank, we are going to take ownership 
of those assets. If instead we provide guarantees and then 
insist on them doing the workouts--they have got the network 
across the country to do them. They know more about what is in 
those loan portfolios than we are ever going to know. Why 
shouldn't those principles guide us in this circumstance?
    Mr. Elmendorf. I think, Mr. Chairman, that nearly all 
analysts would agree that for the Government to be trying to 
specifically run banks on a day-to-day basis to manage those 
assets would not be the most efficient approach. So having a 
guarantee is one way, as you say, to keep those assets in the 
hands of the banks.
    I think if we set up, if the Government were to help set 
up, to subsidize the creation of good banks and bad banks, that 
does not mean necessarily the Government would directly run the 
bad banks. When the Federal Reserve took over part of the 
portfolio of Bear Stearns last spring, they own it, but as far 
as I understand, all the decisions involving it are made by one 
private management firm with which the Federal Reserve Bank of 
New York has contracted to run that portfolio. So it is at 
least an arm's-length transaction in which economists or 
analysts at the Federal Reserve Bank of New York are not making 
specific decisions about how to manage individual assets. Not 
to say that a good bank/bad bank is necessarily better. I 
understand that there are ways to keep that a little bit 
removed.
    I think with a guarantee, one thing, of course, to be very 
careful about is that that has costs to the Government as well, 
and as you and your colleagues make these kinds of decisions, 
you need to recognize--and CBO will try to provide estimates of 
the cost--the guarantees are costly, certainly in a risk-
adjusted sense. It is not obvious whether the Government will 
lose money or how much, but the expectation of that, given the 
risks, is a real cost that should be recognized, as it has been 
in our budgeting regarding the TARP and the decision to put 
Fannie Mae and Freddie Mac into conservatorship and so on.
    Chairman Conrad. Let me just stop you on that point, 
because I absolutely recognize that guarantees cost money. And 
I am not one who has ever believed that we are going to make 
money on these deals. I did not believe it at the beginning. I 
do not believe it now. But my experience with guarantees has 
been they cost less than us taking over the asset and trying to 
manage it. And, you know, that is just the experience that I 
have had, and that guarantees, if there is recovery or when 
there is recovery--all of us believe there will be recovery at 
some point--you know, you will get a bounce-back in those asset 
values and that those guarantees that are put in place, partly 
to restore confidence, will wind up costing you a fraction of 
what the nominal value is.
    Mr. Elmendorf. I think the confidence point is extremely 
important. We need to find a way to get private capital flowing 
back into the financial system. The Government does not want to 
be responsible for providing all the resources or making all 
the decisions, and private capital is important both for the 
funds involved and because it gives the private sector some of 
the decisionmaking about which firms are viable, which firms 
are following successful long-term strategies. But I think the 
confidence is important.
    One virtue that some analysts see in a good bank/bad bank 
approach is that it firmly separates the problems from the past 
from new loans going forward. And I think a risk of guarantees 
is that they would not be sufficient--the separation would not 
be sufficiently clear, and that would hinder banks' raising new 
capital and focusing their energies on their future business. 
And I think that would be an important aspect of pursuing a 
guarantee strategy, is to make it sufficiently clear what the 
remaining banks' risks are as a way of drawing in other 
capital.
    I would also just add quickly that the experience of our 
country in larger crises like the S&L--not larger than this 
one, but fairly large up until now--like the S&L crisis, or 
other countries with very large financial crises, like Japan or 
Sweden, they end up being expensive for the Government. There 
are very few examples of important financial crises that are 
enduredwithout governments ending up spending a good deal of 
money.
    Chairman Conrad. Well, I must say I was directly involved 
in the farm credit crisis, and one thing I would like is to 
have you go back and have your people take a look at that, 
because it worked and it did not cost taxpayers money. And we 
faced the insolvency of the entire Farm Credit System at the 
time.
    Very quickly on another matter, because my time is just 
about out, the housing crisis to me screams out for more 
aggressive steps, including an expanded credit for people 
buying homes. As you know, we have in the House package $7,500. 
It does not have to be repaid, but it applies only to first-
time homebuyers.
    In your analysis, does a credit of that type affect 
behavior?
    Mr. Elmendorf. Oh, yes. I think that a credit that reduces 
the cost of buying a home will lead to more homes being 
purchased. I do not know offhand how important quantitatively 
we think that sort of credit would be.
    I think it would be very difficult to reverse the slide in 
house prices overnight. As you know, we have a tremendous glut 
of unsold homes. We are entering worse economic conditions in 
this year than we had even last year. So I think we should not 
think that we can turn that on a dime. Efforts to support 
housing demand, those certainly help.
    And I think the other consideration there, of course, is 
the duration of this additional support for the housing sector. 
We have as a country provided a number of important supports 
for housing demand through the tax deduction of mortgage 
interest, through Fannie Mae and Freddie Mac and a variety of 
features of the financial system. I think it is a fair question 
about how much public policy we want to be focused on 
increasing housing demand over the long term. But certainly in 
the short term, more housing demand would help to turn house 
prices back up sooner than otherwise and help to turn housing 
construction back up sooner than otherwise.
    Chairman Conrad. This credit would only be through August 
of this year.
    Senator Gregg.
    Senator Gregg. Dr. Elmendorf, shouldn't any stimulus 
package not add to the long-term baseline? Shouldn't it be 
basically focused on the immediate problem, be temporary, be 
targeted, and have a horizon which is definable rather than be 
a baseline builder in the out-years, 5, 10, 15 years from now?
    Mr. Elmendorf. Yes. CBO has enunciated several criteria for 
effective fiscal stimulus, that the stimulus be timely, that it 
occur during a period of economic weakness.
    I want to emphasize here that as CBO looks out into the 
future and as most economists look out to the future, we see 
the period of economic weakness persisting for some time. We 
are looking for a shortfall in output relative to potential 
output of a trillion dollars this year and next year, and more 
than half of that in 2011. So the period of weakness we think 
will be quite long, but not 5 years or 10 years.
    We also talk about specific criteria about cost-effective 
and about not worsening the long-run fiscal imbalance.
    Senator Gregg. Now, you mentioned about five different 
approaches to fixing the housing industry, and you talked about 
the pluses and minuses of each one and came to the conclusion 
that none of them were perfect. And that you might want to try 
a variety of them and a mixture of them, potentially.
    But as I look at the stimulus package as it has come to us, 
virtually none of them are tried even though on the stimulus 
package we are spending almost a trillion dollars. And the 
number that I heard--I do not know this to be accurate--is that 
we have got about a trillion dollars of assets that are not 
performing and that that is what we need to work through the 
system, essentially.
    So wouldn't it make more sense to take this stimulus 
package and refocus it or at least focus a larger percentage of 
it on the issue of housing if we want to get to the underlying 
problem that is driving the economic slowdown?
    Mr. Elmendorf. I think most economists would say that all 
of the above are needed, that both fiscal stimulus to spur 
demand and targeted housing and financial policies are 
appropriate.
    You are right, this stimulus package, as it has been 
considered in the House and the Senate, addresses the broader 
goal of boosting demand for goods and services in the economy. 
It does not do very much--the Chairman mentioned some pieces, 
but it does not do very much to arrest the housing and 
financial problems. I do not think that is the case of people 
not understanding the need for other policies, but simply doing 
one piece at a time. But that is a matter of legislative 
strategy that I am not an expert on.
    Senator Gregg. Well, of course, we only have so much debt 
that we can issue. At some time people are going to start 
saying we have issued too much debt, and if we are going to use 
a trillion dollars on this stimulus package, I think it would 
be helpful if we used a fair amount of that trillion to address 
the housing industry, which is what I see to be the core 
problem.
    Another proposal that is out there to stimulate the housing 
industry that I find attractive is to develop a national 
program, which could probably be run through Fannie Mae and 
Freddie Mac, where we would essentially create a mortgage rate 
of 4 percent. For a period of a year and a half or 2 years, you 
could get a mortgage, a 4-percent 30-year mortgage, which would 
essentially be subsidized by a percentage point from the 
Federal Government.
    Have you looked at that as a way of stimulating the housing 
industry? And if you have, do you think it would?
    Mr. Elmendorf. CBO is in the process of studying some 
particular version of that proposal. We have not completed the 
analysis. I think it would certainly stimulate housing demand. 
As I said to Chairman Conrad, anything which brings down the 
cost of buying a house is going to lead to more demand for 
housing, and that would have salutary macroeconomic effects at 
the moment.
    I think the considerations that we will discuss when we 
report officially on this proposed legislation are, No. 1, it 
would be costly for the Government. Private mortgage rates are 
currently about 5.5 percent. If the Government issues mortgages 
essentially at 4 percent, that is a one-and-a-half-percentage-
point subsidy, essentially. And the cost of that should be 
recognized, of course.
    Senator Gregg. Well, it would be a cost, but as a practical 
matter, if you opened the window for, say, a year and a half to 
clear out inventory, I think in the long run the benefit to the 
economy would overwhelm the cost because you would start to 
stabilize housing prices, which is at the essence, in my 
opinion, of our problem.
    Another point that you made that I want to follow up on is 
thatyou said we need to find a way to get private capital into 
the banking system. That is absolutely essential, in my 
opinion. So as we address the fixing of this problem, we should 
not do anything that essentially chills the future willingness 
of the private markets to come in and replace the Federal 
Government;s current investment in the banking system.
    Mr. Elmendorf. Right.
    Senator Gregg. We want the private market to come in and 
essentially start taking the equity positions, start lending 
money, and bringing capital into the system rather than have 
the Federal Government or the Fed Reserve be the supplier of 
capital. Correct?
    Mr. Elmendorf. Yes, I think absolutely.
    Senator Gregg. Now, so when you have people--for example, 
unfortunately, the Speaker of the House and an economist from 
Columbia, my alma mater, where some people are a little 
misdirected on some issues of fiscal policy--who suggest that 
we should nationalize major institutions in the financial area, 
such as Sweden did and such as it appears England may do with 
the Royal Bank of Scotland, my view is that that is an 
extraordinarily counterproductive statement to make in this 
market and will have a massively chilling effect on the 
willingness of private capital to participate. We are a 
capitalist system. We are obviously experiencing fairly 
significant distress, but we have at our core our great 
productivity, and our great strength is that people take risks 
and invest. And language about nationalization undermines that 
atmosphere, doesn't it?
    Mr. Elmendorf. I think concern about the future actions the 
Government might take or not take is an important factor in 
holding back private capital from entering the banking system 
now. And one of the virtues of trying to lay out a strategy, a 
clear plan for how to proceed is that it alleviates that 
uncertainty.
    Senator Gregg. So I would hope people would be more 
tempered in their responses, even if they are economists at 
academic institutions.
    Thank you.
    Mr. Elmendorf. Thank you.
    Chairman Conrad. Thank you, Senator Gregg.
    Senator Merkley? I would just say to the new Senators that 
we operate on an early bird rule in this Committee. So Senators 
who are here first get first recognition, even if they start at 
the end of the table, which is exactly where I started, Senator 
Merkley.
    Senator Merkley. Thank you very much, Mr. Chairman. It is a 
delight to be here. I had an opportunity to work for the 
Congressional Budget Office for a number of years, preparing 
briefings for Congress, and I am delighted to be reading 
similarly well-prepared work here now years later.
    Mr. Elmendorf. Thank you, Senator. The quality of this work 
is a credit to the people sitting here in the first row behind 
me.
    Senator Merkley. Great. I keep telling my staff: ``On that 
question, call up the CBO analyst who is working on it. We will 
get some good information.'' I hope I do not overload them with 
requests.
    Are you familiar with the details of the FDR strategy when 
we were in a similar challenge with the dropping value of 
houses and mortgages underwater?
    Mr. Elmendorf. I know a certain amount about the Home 
Owners' Loan Corporation--is that what you are referring to?--
that bought up a large amount of outstanding mortgages and then 
refinanced them.
    Senator Merkley. Yes. Are there insights there as we face 
this challenge?
    Mr. Elmendorf. I think there are. The situation, of course, 
was quite different. Although our current outlook is as bleak 
as it has been in this country since the Depression, it is not 
at all comparable to what it was in the mid-1930's when HOLC 
was doing its business. I believe the delinquency rate on 
mortgages at the time was pushing 50 percent as opposed, 
perhaps, to the 10 percent that we see today.
    But I think it is instructive in terms of magnitude of the 
effort that a lot of mortgages were bought, a lot were 
refinanced, and that many different aspects of policy were at 
work, of course, at that time, but the HOLC seems to have been 
part of what turned the housing market and the economy back up 
again.
    I think the thing one should be careful about is that the 
HOLC seems not to have lost the Government money on a cash 
basis, and that would be a desirable outcome of interventions 
we might consider now, but I think would not be the best 
estimate of the outcome of policies we might pursue now.
    Senator Merkley. Thank you. The general parallel, as I 
understand it, is that we had mortgages that had two problems: 
one is they were callable, and the second is that they were 
often 10-year balloons, and by reissuing 30-year mortgages, it 
stabilized families and stabilized the economy and stabilized 
the downward pressure on houses. I am interested in learning a 
little bit more about some of the other details, how they dealt 
with the underwater mortgages and so forth for insights.
    In your presentation, at least in the written portion, you 
go into a lot of the details about the challenges of getting 
current lenders to renegotiate. The owner of the loan has sold 
the cash-flows. The owners of the various cash-flows might sue. 
You can perhaps provide immunity, but you might create 
constitutional property problems.
    It just seems to me like it is such a complicated 
direction, in terms of moving quickly to address the millions 
of mortgages that are challenged, that we cannot move fast 
enough and figure it out and that it is probably a sand pit.
    Do you see any hope for going that direction and really 
being able to incentivize lenders? Or is it pretty much it is 
just too many complexities?
    Mr. Elmendorf. You are certainly right that speed is of the 
essence, and you are certainly right that the mortgage 
modification process is complicated in a way that works against 
our being able to do anything very quickly. That is a true 
challenge.
    I think that more Government subsidy, however, will 
encourage more action, and yet more Government subsidy would 
encourage yet more action. I think the challenge that you and 
your colleagues face in making those choices is that it is also 
much more expensive the more subsidy one provides. And there is 
a tradeoff there, I think, between, on the one hand, the speed 
and number of people helped, but then against the budget cost 
of that.
    Senator Merkley. As I have wrestled with this, I have 
wondered what is the--for those who own portfolios of 
mortgages--assuming those are marked down in their books to 
some fraction of the value, do we have a sense of what that is?
    Mr. Elmendorf. So far, world financial institutions have 
taken about a trillion dollars, have recognized officially 
about a trillion dollars of losses. Much of that is on 
mortgages or mortgage-related securities. I do not know the 
exact number offhand, but we can give you an estimate. And of 
that trillion dollars, about half has been borne by U.S. 
institutions, which is the $500 billion that I referred to.
    Looking ahead at prospective losses, analysts are looking 
for a fair amount of further mortgage losses, but also much 
more in loss on commercial real estate and on consumer loans, 
due partly because--importantly due to the weakening economic 
conditions and the effect of the recession.
    Senator Merkley. I was thinking more in percentage terms, 
but let me just tell you the thought I was playing with. If a 
portfolio mortgage is marked down to 80 percent of its value, 
could you have a situation where the Government buys those 
mortgages at 80 percent, that they proceed to then guarantee 
private loans that refinance those mortgages, and so the 
Government essentially gets paid back every penny, and yet the 
family ends up stabilized with a fixed-rate, 30-year mortgage, 
and yet we do not experience, if you will, the massive sort of 
expenditure requirement that I know that many Members of the 
Senate are concerned about?
    Mr. Elmendorf. I think the problem here is that a pool of 
mortgages will be marked down in value based on some 
expectation of how many families will end up defaulting and 
what the losses on those defaults and foreclosures will be. But 
then when it comes to dealing with individual families, whoever 
controls the mortgage--private lenders now or the Government at 
some point--needs to decide whether to renegotiate that 
mortgage or not.
    For a family that would otherwise go into foreclosure, 
modifying the mortgage to mark down the principal amount is 
going to be advantageous to the lender. On the other hand, for 
the families that will keep paying interest on their mortgage 
anyway, marking down the principal, and thus the mortgage 
payment, is disadvantageous to the lender.
    So if the lenders could isolate the families that will end 
up defaulting, then renegotiating, modifying those mortgages 
would be useful. But if the only alternative is to modify all 
of the mortgages, all the ones that will go into foreclosure 
and all the ones that would not otherwise, then it gets very 
expensive per foreclosure. So as we noted, 10 percent of 
mortgages now--I think a little under 10 percent--are seriously 
delinquent or in foreclosure. Anything which is done for those 
10 percent of the mortgage holders, which is very helpful to 
them, will look helpful to the other 50 or so million 
households.
    That is a fundamental problem in this sort of modification, 
and it is a problem that private lenders face, and it is a 
problem the Government would face as well. And that is why it 
is hard to limit the losses that are realized, because you are 
in a sense helping other families that would like to be helped 
and might deserve to be helped, but would otherwise keep 
paying.
    Senator Merkley. Well, and that is exactly the reason I was 
asking what the average percentage markdown is on the pool, 
which takes into account the entire extent of mortgages from 
those that are healthy to those that are not.
    Another approach would be to basically buy out existing 
mortgages for those who are going under to have the new loan, 
the new first mortgage, be equal to the value of the house, to 
have the homeowner then also carry a silent second mortgage for 
the difference between the value of the first mortgage and, if 
you will, what they owed previously, perhaps with a shared 
appreciation model. In this case, the family still owes the 
same amount, but it is structured in such a fashion that they 
are much more likely to succeed and stabilize the family.
    Is that an approach you all have worked through your models 
as to how that might be implemented?
    Mr. Elmendorf. I am not sure whether we have analyzed that 
particularly. I think how that changes the incentives of the 
families involved depends a lot on how the second mortgage is 
structured. So I understand your point about it being a shared 
appreciation mortgage.
    I think those sorts of modifications certainly have 
potential, but we would need to work through the specifics. 
Obviously, in this sort of situation, the details matter a lot, 
and we would need to work that out specifically.
    Senator Merkley. I will just close by saying I look forward 
to working with CBO, that I think that there are many 
challenges to figuring out a pathway to move quickly, that is 
fair to our taxpayers, and yet addresses the significant impact 
on failing mortgages on this downward cycle, and figuring out 
the right path will be critical not only to stabilizing 
millions of families, but to reversing the downward collapse of 
the economy.
    Thank you very much.
    Mr. Elmendorf. Thank you, Senator.
    Chairman Conrad. Thank you, Senator.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Chairman Conrad. Can I just say, Senator Bunning, you know, 
I think you would be a $20 million man in today's baseball 
market.
    Senator Bunning. Well, since I cannot throw, it does not 
make any difference.
    Welcome, Dr. Elmendorf.
    Mr. Elmendorf. Thank you.
    Senator Bunning. Thank you for being here.
    Can I ask you about Fannie and Freddie specifically? At 
what point do bailed-out liabilities like Freddie and Fannie 
need to be brought--when do they need to be brought onto the 
Federal books of the Government? In other words, how should we 
treat the new taxpayer liability from recent investments in 
financial firms?
    Mr. Elmendorf. What CBO has done regarding Fannie and 
Freddie is to estimate the difference between the value of 
Fannie and Freddie's assets and liabilities at the time they 
were placed in conservatorship, and that differnece has been 
incorporated into our estimate of the budget deficit, and we 
put that--so we have already accounted for that. It is around 
$200 billion. And if our estimates turn out to be right, then 
there will be no further reckoning in the budget.
    Of course, to the extent that we have underestimated or 
overestimated the amount of the difference, then we will make 
that adjustment down the road.
    Senator Bunning. Does that go with the same other different 
entities that--let us put it this way, rather than ``bailout'' 
since nobody likes to use those words around here--that we have 
invested, the Federal Government has invested in like Citicorp, 
like AIG, like--I mean, we have equity. We have a piece of 
paper, but there is no assurance that that piece of paper is 
going to be worth anything, particularly I look at some of the 
continuing liabilities that seem to accumulate with bailed-out 
entities or reinvested entities. And instead of shrinking, they 
seem to be growing. We started at $85 billion at AIG, went to 
$150 billion, now we are at $200 billion. And the same thing 
happened at Citicorp. So I ask the same about that.
    Mr. Elmendorf. We have made the same sort of calculation 
for the moneys expended through the TARP program. We looked at 
the--as you know, the Government has taken preferred shares in 
a number of companies.
    Senator Bunning. Yes.
    Mr. Elmendorf. We have looked at the yields on the 
preferred shares of those companies trading in the private 
market as a private market measure of the risk involved, and we 
have used that risky interest rate, essentially, to discount 
the flows that we expect to get if all goes well. But, of 
course, the risk adjustment means that it might not go well, 
and it is out of that risk-adjusted present value calculation 
that we determined that for the entire--and looking ahead to 
what might be done with the rest of the TARP, but for the 
entire $700 billion that was authorized last fall, we estimate 
that the total cost of that to the Federal Government in this 
risk-adjusted present value sense is about $200 billion. That 
was also in our estimate of the budget deficit for this fiscal 
year.
    So part of the reason why our estimate of this year's 
budget deficit was so high, $1.2 trillion, and higher than some 
analysts had predicted we would announce, is because of 
incorporating our estimate sort of a one-time basis of the 
expected costs for both Fannie Mae, Freddie Mac, and for the 
capital injections under the TARP.
    Senator Bunning. Let me switch gears on you just a little 
bit. Your predecessor, Peter Orszag, took a great deal of 
interest in the danger of unchecked entitlement spending. Do 
you share his views on this? If not, could you elaborate the 
differences?
    Mr. Elmendorf. I most absolutely share his views and I 
think all of our views about the dangers of the fiscal path the 
country is on. And we understand, I think all of us, that the 
rising cost of the health entitlements and of Social Security 
have put the Government budget on an unsustainable course.
    Senator Bunning. OK. Current CBO practices assume that any 
law that increased spending will be permanent. On the other 
hand, current CBO practices assume that any tax decrease will 
not be permanent. Do you have any plans to address this 
inconsistency?
    Mr. Elmendorf. I am not yet an expert, Senator, on the 
logic underlying all of the scoring practices that CBO has 
followed over the years, so I am aware of the statement that 
you make, but I cannot offer at the moment a full justification 
of them. I think we are always interested--our goal is to be as 
transparent as possible about what is happening in the Federal 
budget and to offer as--and when we offer budget forecasts, to 
make those forecasts as revealing as possible. And that means 
both perhaps our judgments about what is going to be useful to 
this Committee, to Members of the Congress, to members of the 
public.
    So I am happy to talk with you about those issues in the 
future, but I do not have any plans to make changes at this 
time.
    Senator Bunning. I would like to get back to something that 
the prior Senator brought up, the new Senator from Oregon. 
There occurs when you make an adjustment in mortgages and you 
adjust from 100 percent say to 75 percent, there occurs a 
capital gain to the unfortunate person that gets that. 
Yesterday, we tried in Finance to erase or to mitigate some of 
the circumstances of that--unsuccessfully. We are still working 
on it with the help of Senator Conrad, obviously, who brought 
the bill--or the amendment to the bill that we were working on, 
the stimulus package. But there is nothing, unless we change 
the tax policy, that can eliminate, if you adjust those 
mortgages from 100 percent to 80 or 75 percent, from that 
capital gain that now has to be paid on the forgiveness unless 
we adjust, as Senator Conrad had suggested yesterday, a tax 
holiday or allowance for that capital gain to be taken out.
    You realize when we passed the Freddie and Fannie unlimited 
Federal Government assistance and the $300 billion in FHA 
assistance, we thought we were actually solving a problem. But 
we put too many restrictions on the FHA money, and we have only 
had 111 people--can you believe that?--out of 5 million that 
are in trouble with their mortgages apply for that FHA 
assistance. We have got $300 billion sitting there to help them 
with their mortgages. We have only had 111 ask for assistance.
    Do you have some suggestions--I am almost finished with my 
time--on how we could adjust that?
    Mr. Elmendorf. I think the changes are already underway to 
try to improve the deal, if you will, from the perspective of 
private lenders. But it is another reflection of the intrinsic 
problem here, which is that if a set of homeowners bought 
houses for $200,000 apiece and they put 10 percent down, so 
they borrowed $180,000, and now the price of the house has 
fallen below the $180,000, that nobody wants to admit to the 
loss in that. And if we think the crucial way to keep people in 
their homes is to get the value of the mortgage they owe down 
below the new value of the house, which evidence suggests is 
important in keeping people in their homes, then either the 
private lenders have to agree to write down the amount that 
they are going to receive--and, again, that makes sense for 
them for people who would otherwise, in fact, default, but not 
for all those who would otherwise keep paying, and it is hard 
to distinguish them. Or the Government needs to come up with 
that money to help subsidize the writedown. That is a very 
expensive business.
    What happened in the Hope for Homeowners Program was that 
the effective Government subsidy, when all the different 
provisions were sliced and diced, was pretty small, a couple 
percent, and that is partly why CBO, in fact, estimated that 
the take-up would not use nearly the $300 billion, although the 
take-up has been even lower than CBO and other analysts 
expected.
    Senator Bunning. Way lower.
    Mr. Elmendorf. Yes.
    Senator Bunning. Well, we have to adjust that so that more 
people can be available for that.
    Mr. Elmendorf. Right. But there are a number of ways to 
change the parameters in that program that could induce more 
take-up, and I think most people would think that would be a 
constructive----
    Senator Bunning. Thank you very much, Doctor.
    Mr. Elmendorf. Thank you, Senator.
    Chairman Conrad. Thank you, Senator Bunning, and thank you 
for your reference to what we attempted to do last night. We 
did get a commitment from the Chairman to work with us. I think 
it is very, very important what Senator Bunning was talking 
about, if I could just give briefly an example.
    If you have a million-dollar issue, you have got a million-
dollar commitment, and you renegotiate to $800,000--and this 
can happen in a mortgage; it can happen in a business loan--
that creates a $200,000 taxable event. And that is one of the 
problems that is locking up business activity right now.
    So we are hopeful that we are going to be able to make some 
progress on this before we get to the floor. It is very costly. 
The amendment that I offered last night costs $14 to $16 
billion, was the estimate. I personally think it is one of the 
things that is going to have to be done.
    We will go next to Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and I look forward 
to working with you and Ranking Member Gregg on this Committee.
    I would also quickly add that you gave me a kind 
introduction. I also, when I was Governor, loved charts and 
graphs, so I hope I can participate in those activities as 
well.
    Dr. Elmendorf, thank you. I know we have got a vote, so I 
have three separate areas of questions: first around 
transparency, second around the housing market, and third 
around the credit markets. And I know we may be short on time.
    First, on transparency, I am really happy to see your 
presentation because one of the things that has driven me crazy 
on particularly the already existing actions is the lack of 
transparency to the American people about how these dollars 
have been spent or invested. And folks in Virginia think that 
the first round of the TARP we have totally flushed it down the 
toilet, when in reality hopefully we may have some discount, 
but there may be some return. I see there are 214 institutions 
we have invested in. You have laid out some of the terms and 
conditions of the major institutions.
    Why couldn't we have a website that would portray by 
institution what we have invested, what the terms and 
conditions are, and how we are doing based upon other like kind 
preferred shares, for example, so that the American people 
could track our investments on a daily basis? You obviously 
have been able to do that. Could that not be done by the 
administration or by someone to get this information out?
    Mr. Elmendorf. Yes, I certainly think it could be.
    Senator Warner. I know we pressed the new economic team of 
the President to do that, but this is the first time I have 
actually seen this kind of data out there. So it is very 
helpful.
    Second, and following up on both Senator Bunning's and 
Senator Merkley's comments on the question of the housing area, 
as we think about mortgage writedowns, whether through the 
cramdown process of bankruptcy or renegotiation, what are the 
challenges and how much of this is a new area? Because we have 
had not only a dramatic increase of securitization, but as we 
have taken these loans and sliced and diced them in so many 
ways and added so many new instruments trying to adjust that 
last 2 to 5 to 10 percent of debt with some of the CDOs and 
other things off to the side, that even if you do not have, 
one, the single party to negotiate with across the table and, 
two, even if you then do have an ability to renegotiate down, 
how that differential between--using the Chairman's example of 
the 100 down to 75, how that loss is spread so they do not end 
up with years of lawsuits. Has anyone been looking more closely 
at the mechanics of that process?
    Mr. Elmendorf. A lot of people have been working on it. I 
think the basic problem is that when all the securitization and 
further complications took off, people did not anticipate 
needing to renegotiate the mortgages. So the servicing 
agreements do not deal with it very effectively. They are not 
always clear about what rights the servicer has. They provide 
no mechanism for the servicer to be paid for the extra costs 
that they incur in trying to modify mortgages. And that is a 
mistake that is hard to remedy now.
    But I think beyond that, as I said, even if it were just 
Jimmy Stewart the banker across the desk from an individual, 
there is still the problem that whether that individual is 
going to--many of those individuals who are underwater will 
keep paying, even without modification. Some will not. I think 
all the mortgage plans that are being discussed try to find 
some way to identify the ones who will not be able to pay and 
help only them. But it is difficult to target it that well, and 
that is partly why the costs get large.
    Senator Warner. One of the things that was talked about, 
earlier you heard a lot of conversation about but you hear less 
now, is the question of mark-to-market accounting rules and 
whether there ought to be some kind of holiday so that as these 
financial institutions do not have to continually re-mark down 
their portfolio, perhaps even below what the actual asset value 
is, which ends up meaning that if we do recapitalize, those 
dollars cannot be used to lend out, they have to be kept on 
reserve. You got a feeling on any of that mark-to-market 
debate?
    Mr. Elmendorf. I think there is some diversity of views 
among experts on that. But I think the majority of experts 
actually lean toward maintaining mark-to-market rules.
    One of the key problems now is the lack of clarity about 
what institutions' financial condition really is, and the more 
we move away from mark-to-market accounting, for all of the 
flaws of whatever the current marks would be, the less clarity 
that we get. And one of the virtues, for example, people see in 
the Swedish plan was that they enforced mark-to-market strictly 
and through that mechanism seemed to have revealed which 
institutions were viable and which were not, and they closed 
the ones that were not, and they supported the ones that were.
    So I think, on balance, most analysts actually favor the 
mark-to-market rules, despite all the various problems, as the 
most effective way to gain clarity about what is going on now 
as a way to then move forward.
    Senator Warner. And I know our time is short, but one last 
question on the credit markets. It seems to me that one part of 
the debate that has been missing, at least from the legislative 
standpoint, has been that as we think about the President's 
reinvestment plan, one of the areas that has stymied job growth 
and reinvestment opportunities is the freezing of the municipal 
and any other kind of public bond markets, whether your housing 
authority markets, your local school division, or your State 
transportation bonds. And I for one think, you know, these are 
projects that are ready to go, and with the appropriate risk 
assessment, you know, that the Fed or the TARP could--funds 
could be used to either be purchasers or to be insurers of last 
resort and jump-starting that public market. We have done a lot 
in the commercial paper area, but jump-starting those public 
financing markets could have job benefits, would have community 
benefits, and if we put the right type of insurance on this, 
would not have great exposure in terms of public funds.
    Have you all looked at those public bond markets?
    Mr. Elmendorf. I think you are just right that those 
markets are suffering from some of the same problems afflicting 
other parts of the financial system, have received less policy 
attention. I believe that the Federal Reserve is more 
restricted in what it can do regarding those securities. The 
clause of the Federal Reserve Act that refers to their extra 
powers under unusual and exigent circumstances does not refer 
to loans to other governments. It refers to loans to private 
borrowers. So I am not a lawyer, and I do not know exactly, but 
I think that there are limitations on what they can do, and it 
may be part of why they had not pushed ahead in that 
direction----
    Senator Warner. Not the Federal Reserve, but the TARP 
pressed.
    Mr. Elmendorf. But the TARP could take action.
    Senator Warner. The irony is that these are projects that 
are ready to go, that have a readily identifiable ability to be 
repaid--and yet they are not being put to bed and being funded.
    Mr. Elmendorf. Yes, I think that is right, sir.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you.
    I would just say to colleagues there are about 5 minutes 
left in the vote, so I think we better take a recess. I think 
that is the most appropriate thing because I do not know if 
Senator Murray may have additional questions. I do.
    Mr. Elmendorf. OK.
    Chairman Conrad. So if you do not mind, we will take a 15-
minute recess.
    Mr. Elmendorf. I will be right here. Thank you, Mr. 
Chairman.
    [Recess.]
    Chairman Conrad. The hearing will come back to order. I 
apologize to Dr. Elmendorf. As you know, in the Senate when a 
vote is called, we respond, and it is always somewhat 
unpredictable, when a major bill is on the floor, when votes 
might occur. They are telling me that we may face another vote 
at 12:10. So I think in fairness to my colleagues, I will not 
go to my second round until everybody is finished a first 
round. Senator Nelson has joined us. Are you ready to go, or 
would you prefer--you would defer to Senator Warner.
    Senator Warner, if you would like to go to your second 
round?
    Senator Warner. Mr. Chairman, I will let you go first--you 
could say I am getting used to this when I said, ``Mr. 
Chairman, I will let you go first.'' I would be happy to follow 
in any order you would ask.
    [Laughter.]
    Chairman Conrad. OK. I will go to my second round and try 
to be brief about it.
    Dr. Elmendorf, the great concern I have as I look at where 
we are with respect to the second half of TARP and the economic 
recovery package, is that we, in effect, have been siloed in 
these two pots of money without sufficient coordination between 
the two. And when I review what I believe are the needs for the 
financial sector and housing--and I am repeatedly told, well, 
don't worry about those being addressed in the economic 
recovery pot because they will be addressed in the second half 
of TARP. And I look at what remains in the second half of TARP, 
less than $350 billion, which is an extraordinary sum of money. 
But when I look at losses in the financial sector that I am 
told may be approaching $1.9 trillion, and we have put out $350 
billion so far, that is a yawning gap.
    Can you help us understand your sense of how big and how 
deep the hole is and how much of it may have to be covered by 
Federal--by taxpayer resources?
    Mr. Elmendorf. I am happy to offer a qualitative sense of 
that. Estimates of the total losses to be suffered by financial 
institutions vary widely. Numbers that I have seen--not that we 
have generated at CBO, but from outside analysts whom I 
respect--talk about perhaps $2 trillion, as you said, of losses 
by worldwide financial institutions, about half of that by U.S. 
institutions, and about half of that already recognized by 
them. That leaves about $500 billion of losses yet to be 
recognized, by this estimate, in addition to the fact that even 
without further losses, institutions are already obviously 
suffering from loss of capital and inability to do new lending.
    So I think the gap that remains in terms of the 
recapitalization needed by the banking system exceeds the 
amount of money left in the TARP, I think by a good margin, not 
even counting the fact that part of the TARP will probably go 
to mortgage foreclosure relief, as I understand it, and perhaps 
to other targeted issues.
    So the remaining gap is wide. Certainly hundreds of 
billions of dollars of additional capital will be needed that 
is not available through the TARP. I think the crucial question 
is how much of that can come from the private sector and how 
much will need to be Government funds. That depends on how the 
program is structured, and that is, I think, very difficult to 
judge.
    For all the discussion that is in my testimony and other 
places about the need for a strategy now, in fact--and we need 
one--in fact, it will still be very uncertain just how this 
will play out and what will happen. But I think the odds are 
that more money will be needed than has been authorized so far 
in the TARP, probably to the tune of hundreds of billions of 
dollars.
    Your colleagues will, of course, get to decide, but I think 
that is what will be presented to you.
    Chairman Conrad. Let me just say that is very much in line 
with my own kind of back-of-the-envelope calculation here from 
what I have been able to ascertain, and the problem is it seems 
to me the number is growing on us, because things continue to 
fall away. They continue to fall away in housing. The latest 
Shiller index shows that. They continue to fall away from us in 
terms of the financial sector. Senator Warner and I were just 
talking about the story in today's paper about the dramatic 
loss of valuation in the major banks around the world. It 
really is stunning.
    Mr. Elmendorf. A stunning picture, wasn't it?
    Chairman Conrad. Stunning. A stunning picture of what we 
face around the world. And so, you know, I wrote a letter to 
the administration, to Mr. Summers and Mr. Geithner, and I told 
them I worry very much that there are not enough resources in 
this package to deal with the housing crisis, continuing 
housing crisis, the financial sector, and the need to give lift 
to the economy, and that I am very concerned that they are 
going to come back here in several months and say we need this 
additional several hundred billion dollars. To me, we would be 
much better off, if that is the case, to reconfigure part of 
the economic recovery package to better address these other 
needs and/or to add resources to TARP and to do it now, because 
I think the mood around here for additional substantial 
packages is diminishing.
    You know, we have been through the rebate, which I do not 
think worked well at all. The best estimate we have is 40 
percent of that money got injected. Then TARP, basically the 
first two phases of TARP, which, frankly, I do not think worked 
particularly well, although I think they averted a total 
collapse. Maybe you could give us your estimates on that. What 
would have happened absent the injection of capital provided 
for in TARP 1?
    Mr. Elmendorf. I think that absent that injection of 
capital, the financial system would really have broken apart in 
a way that we have not seen, at least since the Great 
Depression in this country. It is very hard to know if we do 
not have historical experience here to compare it to, really. 
But I thought the period between the collapse of Lehman 
Brothers and the move toward the TARP was a frightening one in 
terms of the financial system. And a strong financial system is 
a key foundation stone of a strong economy.
    So I think it was very worrisome. I think it is hard to 
know where the TARP--what the TARP money did because we do not 
observe the world without it. Moreover, it is hard to track, 
impossible to track any actual dollar that is injected into a 
large complex institution and see exactly what that dollar 
accomplished. But I think the sense on the part of some people 
that the TARP did not work because we have not fixed all of the 
problems in the financial system I think is misleading, and 
there are certainly particular aspects like interbank lending 
where conditions have markedly improved, and that is the thing 
closest to the institutions the TARP was designed to help.
    Chairman Conrad. Are you referencing there the TED spread?
    Mr. Elmendorf. Yes.
    Chairman Conrad. That improved quite dramatically. It was 
nine times what was typical at the height of the crisis. It has 
improved substantially from there, but it is still nowhere near 
normal.
    Mr. Elmendorf. Right.
    Chairman Conrad. And, yes, my own belief is, absent the 
first TARP, the system would have collapsed. And I believe the 
Dow would be probably in the 4000 range today if we had not 
done it. I believe that the point that many make--and I have 
made--that we did not get the expansion of credit that we would 
have hoped for also perhaps does not take account of how 
serious the impairment of capital was to these major 
institutions. And absent those injections, they would have been 
calling good loans right, left, and sideways to rebuild 
capital. Is that your----
    Mr. Elmendorf. I think that is exactly right. They have 
lost a lot of capital, and on top of that, they are trying to 
reduce their leverage in response to the greater risks in the 
world. The combination of those things would lead, without 
public policy, to a very sharp decline in total loans 
outstanding, on the order of trillions of dollars. And to 
offset that, that is the basic reason for trying to intervene 
in the financial system now.
    So I think the judgment of most economists is that the TARP 
money did as much as the few hundred billion dollars would do, 
and that is a stunning statement given the amount of money. But 
it reflects the scale of the problem.
    Chairman Conrad. Well, I do think that is part of the 
problem here, yes, $350 billion is a staggering amount of 
money. Staggering. But you put it up against the losses in the 
banking sector in this country alone approaching a trillion 
dollars, and that is a mighty deep hole to fill.
    Senator Sessions.
    Senator Nelson. Would the Chairman yield and let me do a 
followup to that question right there?
    A variation of your question is: What if the first tranche 
of $350 billion had been used just to go to mortgages, where 
would we be?
    Mr. Elmendorf. I think we would be in a better place in the 
mortgage market, but a much worse place for the financial 
system and economy as a whole.
    Senator Nelson. Why is that?
    Mr. Elmendorf. Because bank lending is important for all of 
the pieces of economic activity. It is important for mortgages, 
but also very important for consumer loans of other sorts, and 
extremely important for business activity--and not just 
business investment of the sort we might think of needing a 
loan for, but even for regular business operations. I think all 
of that was endangered by the breakdown in the banking system 
that we were witnesses to last fall. And I think the TARP 
money, in the judgment of most analysts, avoided a real 
calamity in the financial system as a whole, and thus in the 
economy as a whole. But as you were pointing out, Senator, it 
did not do much directly about the mortgage problem.
    Chairman Conrad. Senator Sessions.
    Senator Sessions. Well, you know, I was home with my 90-
year-old aunt this weekend. She has macular degeneration and 
cannot read the paper, but listens to the news. And she said, 
``You all don't know what you are doing up there, do you?''
    And you say this, Mr. Elmendorf, but I've just got to tell 
you, a lot of people think the first $350 billion did very 
little. And, in fact, we were told one thing, and within a week 
we were doing another. And so for anybody to suggest that this 
has been a very, very carefully constructed expenditure is--I 
do not see how they can make that case. Wouldn't you agree it 
has been hit or miss?
    Mr. Elmendorf. My 75-year-old mother has a similar reaction 
as your 90-year-old aunt, Senator. I did not say that it was 
well constructed or carefully considered. I think it was an 
emergency response to an emergency.
    Senator Sessions. Well, I know the excuse is, well, it was 
an emergency so we do not care, we did something, and that is 
politically of value, and nobody can prove it wouldn't have 
been a lot worse if we hadn't. But I will leave that issue 
aside.
    You have worked in the CBO and you have worked in the 
Treasury and you have worked, I believe, in administrations 
before, and at Brookings, which is a well-respected 
institution. So I would just ask you, you fully understand that 
Republicans and Democrats, liberals and conservatives, free 
market and Government interventionists have to depend on CBO's 
numbers, and that integrity and honesty and consistency is 
expected of you, do you not?
    Mr. Elmendorf. Yes, I understand that. We take that 
responsibility very seriously at CBO.
    Senator Sessions. And I appreciate that, and I would just 
ask you, are you committed to that service to America?
    Mr. Elmendorf. Yes, absolutely. I am honored to have the 
opportunity, and I would not have been interested in this job 
if that was not the role that I wanted to play, Senator.
    Senator Sessions. Thank you. And I am sure you are 
committed to that and all, but we are a little nervous around 
here about the way money is being thrown around. And the 
Chairman is asking some very serious questions.
    Looking at CBO's budget outlook, they are showing that in 
2014, which I guess is 4 or 5 years from now, that the net 
interest on the debt--that is on page 16 of Budget Outlook that 
you sent out that I am looking at. It has $392 billion, almost 
$400 billion. In the next year, it is $418 billion in interest 
on the debt alone.
    Now, Mr. Chairman, I know the Bush administration was 
savaged for the money that it spent on the war in Iraq. That is 
about $500 billion over the whole time of the Iraq war. So we 
are going to be at an annual interest payment of around $400 
billion in 5 years. And that does not include the stimulus 
package, the $900 billion stimulus package, which we have 
gotten some recent numbers from CBO on that. I guess it shows 
$38, $37 billion more by 2014. So we are really at about $430 
billion per year by 2014.
    Can you share any thoughts with us on the impact of that, I 
guess in the financial markets, what kind of uncertainties that 
creates? I know you have projected an interest rate for this, 
and you do the best job you can to project, and we do not know 
for certain. But what are the factors that impact the interest 
rate we might be paying on our debt 4 or 5 years from now?
    Mr. Elmendorf. At the moment, Senator, our country is 
experiencing a bit of a reprieve in terms of the financial 
market scrutiny of our long-term budget imbalance, and the 
reprieve is coming because investors around the world are 
scared of risks in many private financial assets, and U.S. 
Treasury securities are still viewed as the gold standard. So 
people are moving money into Treasury securities from other 
U.S. assets and from other assets around the world. That has 
actually helped to hold down our interest rates for the moment. 
It is undoubtedly a temporary reprieve, and no one can be sure 
when the reprieve will be lifted.
    Senator Sessions. These are about as low as we have ever 
had historically in modern times?
    Mr. Elmendorf. They are very low. And most analysts expect 
that as the economy in this country and around the world 
emerges from the recession, the fiscal imbalance will start to 
register more prominently in the minds of investors, and that 
they will become more leery of investments in this country and 
will not want to hold so much Treasury debt, and at that point 
interest rates will rise.
    There is a risk of that happening at any point. It is a 
matter of confidence in many ways, and of all the things that 
economists model badly, confidence is one of the worst.
    So there is a risk at any point that people could get 
concerned, more concerned than they are. I think people 
understand these numbers in an intellectual sense. I do not 
think it is operating on their investment decisions at the 
moment because they are more worried about something else. But 
at some point, they will become more worried about this, and at 
that point, the consequences for the U.S. economy will become 
more apparent. And I think that is why CBO has said one of the 
criteria for effective fiscal stimulus is to not worsen the 
long-run imbalance in the budget, and that is partly because of 
the long-run costs but also because of the risk that if the 
long-run imbalance is viewed as drifting even further out of 
control, we could be sparking some concern and, thus, sparking 
some more immediate reaction that would cutoff part of the 
recovery.
    Senator Sessions. It seems to me that it is pretty much a 
temporary thing that people would loan money to the Government, 
buy bonds and treasuries, at an interest rate of less than 1 
percent, because they eventually will just want more return. 
And also, the capital surge around the world, from oil in the 
Middle East, for example, is way down, so other countries' 
ability to buy even if they wanted to buy would be down. The 
Chairman showed a New York Times article that said China's 
surplus dropped from $50 billion a month to $20 billion, so 
even if they wanted to buy, they do not have as much money to 
buy.
    So are those factors that might cause a spike in interest 
rates?
    Mr. Elmendorf. Those factors are certainly relevant. I 
think the thing which is providing the funds is that consumers 
and businesses around the world are doing less spending. So 
think of our consumers who suffered big losses, perhaps, in the 
value of their homes, big losses in any stocks that they hold. 
That is trimming consumption considerably. That is part of what 
is leading us deeper into this recession. But, also, it does 
raise saving a bit at the moment. The personal saving rate is 
rising a little in this country. So it is the move toward less 
spending and more saving around the world that has provided the 
funds to buy our debt. But you are absolutely right that the 
decline in incomes people are experiencing is working the other 
direction.
    Senator Sessions. Thank you. Mr. Chairman, I appreciate our 
Director, and like Mr. Sunshine, I can understand his answers.
    I thank you for that. Sometimes around here, our experts 
are awfully obtuse.
    Chairman Conrad. I would say to the Senator that in the 
interview process, which is, as you know, conducted by the 
Chairmen and Ranking Members of the Committees and our staffs, 
I think you would have been very, very pleased with Dr. 
Elmendorf. He is a straight shooter, tells people when he does 
not know the answer. As you know, his job is not to give us 
policy advice.
    Senator Sessions. Right.
    Chairman Conrad. But to give us analytical advice, and I 
tell you, I think I can speak for all four of us. It was an 
impressive set of interviews.
    Senator Nelson.
    Mr. Elmendorf. Thank you, Mr. Chairman. Thank you, Senator.
    Senator Nelson. For this next tranche of $350 billion, what 
would you prefer it to go into, a Federal guarantee protecting 
the banks against the losses on assets that are backed by the 
failing mortgages, or would you want to set up some kind of 
Government institution to buy the toxic assets?
    Mr. Elmendorf. Well, as the Chairman just said, I do not 
offer policy advice, but I can tell you, I think, some of the 
consequences of choosing different courses of action here.
    Without significant injection of Government funds to 
subsidize mortgage modifications, the pace of modifications 
will remain small relative to the number of people heading into 
foreclosure. At the same time, without substantial injection of 
Government funds into the banking system, the banks will remain 
preoccupied with their past losses. Private capital will stay 
on the sidelines, fearing both the unknown in the banking 
system and the unknown of possible future Government action. 
And with the banking managers trying to keep their heads above 
water and private capital not coming in, bank lending will be 
significantly restricted, and that will raise the cost of 
credit and lead to less private spending.
    Senator Nelson. So your answer is basically we are going to 
have to do both.
    Mr. Elmendorf. I think that is the experience we have seen 
in other countries. The savings and loan crisis cost us 
basically 2 percent of GDP. But as large as that seemed at the 
time, that is not as significant as the problem that we face 
now. And other countries that have faced serious financial 
crises have spent very large amounts of money to get out, and 
those that have waited to do it have spent more and spent 
longer in that period of recession or severe economic weakness.
    Senator Nelson. Look backward and tell me with the problem 
having been to begin with the bad mortgages that were 
securitized and sold throughout the financial system, if our 
first response had been let us send this money in there to buy 
up these toxic assets, when would that have worked without 
having to go and start bailing our banks in the continuum of 
time as the problems unfolded last year?
    Mr. Elmendorf. At the time, when I was a private agent 
making recommendations, I was one of, I think, a chorus of 
economists who supported the idea of equity injections into 
banks instead of asset purchases. The logic was essentially 
that setting the price for the assets was a very difficult 
business. Much of the toxic securities are not widely traded, 
so market prices are not available. And deciding how much to 
pay would matter very consequentially for the cost to 
taxpayers, the benefits to bank owners, and might matter 
differentially across bank institutions. So we----
    Senator Nelson. OK. Wouldn't that then necessitate having 
the savings and loan approach that we had, go in and buy up 
those bad assets and hold them then until the price came back 
up?
    Mr. Elmendorf. One important difference in the savings and 
loan situation is that at the time, the assets came to the 
Government automatically in the sense that we had a FDIC 
guarantee of deposits, when institutions failed, to honor the 
guarantee. The FDIC put the money up--and in the savings and 
loan, as well, of course, the FSLIC at the time--put the money 
up, and the assets came to the Government. And they were 
managed in a way that I--there were debates, in fact, about how 
quickly the assets should be sold, but managed in a way to try 
to maximize taxpayer return.
    The harder issue now, I think, at the moment is at what 
price one brings those assets into the Government. One can wait 
for the banks to fail, and then in a sense we get them all 
automatically. But I think the concern among most observers is 
that we do not want to wait because that pulls the economy down 
faster. So it is deciding the price to go out and get them or, 
another way, that would be how much to charge for the 
guarantee. And I think there is a tough tradeoff. We do not 
want to benefit the managers and owners who made bad decisions. 
On the other hand, if we let them sort of stew in their own 
mess, then we run the risk of driving the economy further into 
the ground. And that is what makes that decision of what to pay 
hard.
    The virtue of equity investments was that you could do a 
lot of money very quickly without making those choices. I think 
in retrospect that did work to stave off immediate collapse, 
but it does not solve all the problems. That is why we are back 
here today.
    Senator Nelson. If you had a Federal guarantee protecting 
banks against those losses that are backed by the bad 
mortgages, would that then not require the Federal Government 
to put capital into banks and, therefore, the nationalization 
of banks?
    Mr. Elmendorf. I think it could avoid putting in capital 
now. Of course, the essence of the guarantee is we might have 
to put money in later. And CBO is in the process of developing 
techniques for estimating the cost of guarantees. So that cost 
could be substantial--I mean, very uncertain but potentially 
expensive down the road.
    I think the issue on ownership, the economists who have 
advocated equity injections did it not because they wanted the 
Government to be the owner of the banks in terms of running the 
banks. Most of the proposals were very explicitly not for 
majority stakes or direct control. It was viewed as a way of 
putting money in that would be roughly evenhanded across 
institutions and could be done quickly.
    But you are absolutely right; the more of that that is 
done, the larger the stake that the Government takes, the more 
the Government becomes the de facto owner. And one implication 
of this picture that the Chairman referred to that showed how 
much the market value of banks has shrunk over time is that, in 
fact, the sorts of money that we are talking about them needing 
would buy a very significant share of the equity of some 
institutions.
    So that is, I think, an increasing challenge. As more money 
goes in, then the share that the Government owns goes up. Then 
the issues you raise become even more acute.
    Senator Nelson. So if you buy up the toxic assets or, in 
the alternative, you guarantee the toxic assets, you are still 
saying that we are probably going to need to put money into 
banks anyway, which means we are going to get preferred shares 
and so forth for the Federal Government.
    Mr. Elmendorf. Eventually, I think that is right. The 
essence of the problem is that they have lost, and to make the 
system move on, money needs to be added.
    Senator Nelson. That is bad news, Mr. Chairman, and I just 
want to say--so the newly confirmed Secretary of the Treasury 
is basically--it looks like he is going to have to take this 
course.
    Mr. Elmendorf. I think that is the expectation of most 
observers, yes, sir.
    Senator Nelson. Either guarantees or buying them up and 
injection of capital into the banks.
    Mr. Elmendorf. Yes. I would just say I think the third 
possibility related to guarantees and buying the assets would 
be what has been described as a good bank/bad bank approach.
    Senator Nelson. Right.
    Mr. Elmendorf. In which the bad assets are separated out, 
but then at that point the Government needs to provide some 
financing for that.
    Senator Nelson. And how much is this going to add to our 
national debt, Mr. Chairman?
    Chairman Conrad. My own belief is hundreds of billions 
beyond the commitments that have already been made. Hundreds of 
billions.
    I tell you, I do not perhaps want to talk about it in this 
setting, but other conversations I have had over the weekend 
with respect to the financial sector, very sobering stuff.
    Mr. Elmendorf. Yes.
    Chairman Conrad. Senator Sanders.
    Senator Sanders. Thank you very much, Mr. Chairman, and 
welcome, Dr. Elmendorf.
    Mr. Elmendorf. Thank you, Senator.
    Senator Sanders. And I apologize for not being here 
earlier. I want to ask you mostly questions about the financial 
crisis, and then I want to ask you another question about how 
CBO makes their accounting assessments.
    Question No. 1: Between 2001 and 2007, commercial banks 
alone--not investment houses, just commercial banks alone--made 
some $700 billion in profit. A lot of money. Now, as a result 
of the greed, recklessness, perhaps illegal behavior on the 
part of Wall Street, they are coming to the taxpayers for huge 
bailouts, and we have no idea how much that is going to end up 
costing.
    A very simple question. The average guy goes out and has a 
lot of luck, he wins the lottery, makes a lot of money, puts 
the money in the bank. Bad times come. He said, ``Well, good 
news. I won the lottery. I have a lot of money. I will pay off 
my debts.'' These guys have made unbelievable sums of money. 
Then through their greed and recklessness, they created a 
terrible crisis, and now we have to bail them out. Where did 
all their profits go?
    Mr. Elmendorf. As you know, Senator, the banks have paid 
out profits in the form of dividend payments to shareholders.
    Senator Sanders. Yes.
    Mr. Elmendorf. They have paid salaries to managers.
    Senator Sanders. Yes.
    Mr. Elmendorf. That money is not directly recoverable 
legally, but I certainly understand the frustration that the 
American people feel at the situation.
    Senator Sanders. Yes, they sure do. In other words, some 
people became incredibly rich, and then when things got bad, it 
is the average Joe who has to bail them out. And somehow or 
another, we have to deal with that, and that is why, by the 
way, in terms of the first bailout, I proposed--I voted against 
it. I proposed the surtax on people whose families had at least 
a million dollars in income, because they are the people who 
benefited from Bush's economic policies in general. All right.
    Second question: Taxpayers provide all of these, I guess, 
``capital injections'' into these banks. We are talking $350 
billion plus more in the next tranche. And people go to these 
banks, news reporters go and say, ``Tell us what you are doing 
with this money.'' And the banks say, ``Oh, well, we thank the 
public very much for bailing us out, but we do not want to tell 
you what we are doing with the money.''
    ``Are you using this money to lend it out to small 
businesses to create jobs?''
    ``None of your business. We will do with it as we want to 
do with it.''
    All right. So my question to you is: Why is there not--why 
haven't we forced transparency and demanded that these banks 
lend out the money as they were supposed to do rather than 
perhaps use it for bonuses, for mergers, acquisitions, et 
cetera?
    Mr. Elmendorf. I think as an analytic matter, Senator, it 
is very difficult to track what happens to a dollar that goes 
into a very large and complicated institution. A lot of money 
goes in and a lot of money goes out of these banks. Knowing 
what was done with a particular dollar is really, I think, an 
almost unanswerable question.
    There is also a broader problem, which is that we do not 
know what would have happened otherwise. So economists talk a 
lot about the counterfactual situation.
    Senator Sanders. Right.
    Mr. Elmendorf. Without the money, what would have happened?
    Senator Sanders. But don't you think if I give you--you 
come to me and you say, ``Look, I need a lot of help,'' and I 
am saying, ``OK, I am a nice guy. We are going to bail you 
out.'' Don't I have a right to have--understanding what you 
said--you telling me, ``Well, look, in general this is what I 
am doing. I know you wanted us to make loans to loosen up 
capital.'' Don't you think we have a right to know a little bit 
more than these banks are telling us?
    Mr. Elmendorf. I think certainly the Government can set the 
conditions that it wants on these injections, and it did set 
some, of course, as part of the legislation authorizing the 
TARP. There will in some cases be a tradeoff between the speed 
with which actions can be taken and the care with which they 
are taken. And I think one of the--when the TARP was being 
debated, of course, there was a great sense of urgency, I 
think, in the minds of most people watching the financial 
system, and that may be one reason why more discussion was not 
made at the time of these issues.
    Senator Sanders. With the exception of our friend Bernie 
Madoff who pulled off a remarkable--again, it is 
incomprehensible how you could pull off a $50 billion Ponzi 
scheme in this day and age without being detected by the SEC. 
Do you believe that Wall Street leaders engaged in illegal 
behavior and that some of them should end up behind bars in the 
coming years?
    Mr. Elmendorf. I think it is very appropriate to prosecute 
people who have broken laws. I am not a lawyer. I do not really 
know securities laws. So I am not a good judge of what has 
happened. I think where there is lawbreaking, it should be 
addressed.
    Senator Sanders. Well, that goes without saying, but, you 
know, people break the law, we generally try to prosecute them.
    I think there is an outrage on the part of the people, Mr. 
Chairman, that is not necessarily perceived here in Congress. 
The recklessness, the greed, I suspect the illegal behavior of 
maybe a few hundred, a few thousand people has impacted and 
destroyed the lives of millions of people in this country. And 
in my view, they have got to be held accountable, and I am 
concerned that because they are rich and powerful, they do not 
get the same treatment as the average criminal. But I think we 
have got to address that issue.
    Chairman Conrad. Senator, if I could just interrupt, and it 
will not come out of your time, just on this issue, I think you 
are right. I think we will find lawbreaking. I think we will 
find criminal wrongdoing. I think people should go to jail.
    I have written the Attorney General, and I have asked that 
in every one of these cases where Government funds are infused 
that there be an investigation and that people be held to 
account. There have got to be prosecutions of criminal 
wrongdoing, and it is breathtaking.
    Senator Sanders. It is.
    Chairman Conrad. I think we are going to find a lot.
    Senator Sanders. Do you know the what problem is, Mr. 
Chairman? It is that the amount of money is so huge that nobody 
can get their hands around it. If somebody robs $50,000, we 
understand the problem. What are we talking about? Trillions of 
dollars? What is a trillion dollars? Nobody in America 
understands what that is.
    So the problem is so big that I think we have not focused, 
as the Chairman said, on potential illegal behavior and what we 
are going to do to these people.
    All right. Let me ask you another question. We have talked 
primarily about TARP funds, but there is another huge source of 
funding from the Fed, which I think you estimated to be over $2 
trillion--$2 trillion, a few bucks here or there adds up--which 
is going out to whom? I mean, I do not quite understand how 
over $2 trillion can be lent out--Mr. Chairman, I am not quite 
sure that we know who is receiving this money. We do not know 
what the terms are. How do you lend out $2 trillion of Federal 
funds through the Fed and nobody knows anything about this? Dr. 
Elmendorf?
    Mr. Elmendorf. Well, the way you do it is that you try to 
save a financial system that consists of tens of trillions of 
dollars, hundreds of trillions of dollars of derivatives 
outstanding--I mean, the numbers are very large. We have a very 
large economy with a very, very large financial system.
    I agree with you that making clear to Members of Congress 
and to the public what the money is doing is important. I am 
not--I do not, of course, want to speak for the Federal 
Reserve. I think in many cases the terms are disclosed when 
they have released new--when they have announced new 
facilities, as they call them, to lend to particular 
institutions with particular types of collateral or----
    Senator Sanders. Let us not get too complicated here. Does 
anybody know, has it been made public, who has received this 
$2.3 trillion and under what terms? Is that public information?
    Mr. Elmendorf. I think some of that is public and some is 
not. So some of the institutions that have received help are 
disclosed. Others are not.
    Senator Sanders. But don't you think it is a little bit 
weird and a little bit undemocratic that the taxpayers of this 
country are providing help--maybe it is good, maybe it is bad, 
maybe it is right. How do you know there are not huge conflicts 
of interest? How do you know you are not giving money to your 
friends if we do not know anything about it? We argue here, we 
have 2-hour debates on a 450 million dollar appropriation. You 
are talking about trillions of dollars. I do not know--maybe 
the Chairman does. I do not know if you have information--you 
do not have information either.
    I mean, I think it is incomprehensible, but tell me why you 
thought it makes sense.
    Mr. Elmendorf. Again, obviously you could ask members of 
the Federal Reserve Board to come testify to you and to explain 
what they have been doing. I think one argument that is worth 
keeping in mind for not disclosing everything is concern about 
the stability of institutions. One of the reasons why the 
Federal Reserve's discount window, which stands ready to lend 
to institutions at an announced rate, does not have a lot of 
institutions that turn up is because those institutions are 
concerned that revealing their borrowing will cause a run of 
sorts on the institution.
    Senator Sanders. Well, I do understand all that.
    Mr. Elmendorf. One advantage of the Federal Reserve's 
facility that did not reveal who was getting those kinds of 
loans, one of the first things they did was the institutions 
would feel free to come without risking that kind of----
    Senator Sanders. I really do understand that, but on the 
other hand, I think the average person would think it is 
incomprehensible, again--of course, that is the word we keep 
using about this whole financial disaster--that trillions of 
dollars are being lent out without transparency or 
accountability.
    All right. Let me switch gear and take you to a more 
mundane subject. We are off of this huge financial disaster. 
There has been a criticism of the CBO for a number of years--
and I know you have a tough job. You have to assess how much--
if I introduce legislation, how much is it going to cost the 
taxpayers? That is fair enough.
    The problem that you have is sometimes legislation is 
introduced which will cost a certain amount of money, but it 
actually will save money. I will give you an example.
    We are going to introduce very shortly legislation to build 
a number of--to greatly expand the number of community health 
centers around this country focused on primary health care, 
preventative health care. A lot of studies out there suggest 
that by keeping people from going into an emergency room, 
keeping people from going into a hospital, cuts back on 
Medicaid, cuts back on Medicare expenditures, not to mention 
expenditures in the whole health care system, that really you 
save substantial sums of money.
    So if I introduce this and the cost goes--what it will cost 
us is going from $2 billion to $8 billion over a 5-year period, 
how do you assess--I think we can make the case that we are 
saving taxpayers money. How do you put that into your equation 
in analyzing how much that legislation costs or saves?
    Mr. Elmendorf. Our objective is very clearly to include all 
of the ramifications of legislation in our reports to you. I 
was just meeting for the first time the day before yesterday 
with people at CBO who estimate costs for SCHIP--heading 
toward, I guess, being just CHIP--and one of the very important 
factors they keep track of is how people move between Medicaid 
and SCHIP depending on the rules and how the States respond, 
how private individuals respond. We keep track of people moving 
from private insurance, looking at how employers respond----
    Senator Sanders. But if we do something----
    Mr. Elmendorf [continuing]. And we try to incorporate all 
of that.
    Senator Sanders. Do you do things like saying, oh, if a 
person would go to a doctor early and not end up with a 
terrible illness that we have to spend $100,000 in the hospital 
for, that is a saving?
    Mr. Elmendorf. Yes.
    Senator Sanders. Do you guys throw that into the equation?
    Mr. Elmendorf. Yes. That is certainly one of the 
ramifications that we are trying to capture.
    Senator Sanders. OK.
    Mr. Elmendorf. Now, we do not always have evidence 
consistent with the intuition that we or others----
    Senator Sanders. No, and I----
    Mr. Elmendorf. But where we can find evidence, we work very 
hard to incorporate as many different effects in the 
interconnected world as we can.
    Senator Sanders. The criticism, Mr. Chairman, has been that 
it is pretty easy, if my bill goes from $2 billion to $8 
billion, we are spending $6 billion. That is pretty clear. But 
we are also saving substantial sums of money, and I understand 
that part of it is a little bit harder to determine. But I hope 
you give serious thought and build into your analysis the 
savings as well as the expenditures.
    Mr. Elmendorf. We absolutely do everything in that 
direction that we can.
    Senator Sanders. Good.
    Chairman Conrad. I would say to the Senator, the lights are 
not on signaling a vote, but a vote is on. For some reason, the 
lights on the clock are not functioning properly, and my timer 
is not functioning properly, so we have some electronic 
problems going on here. So we will draw to a close. I thank 
you.
    Senator Sanders. I am finished. Thank you very much, Mr. 
Chairman.
    Chairman Conrad. I understand. I thank very much the 
Senator for his able questioning.
    Let me just say my own belief is not only was Madoff 
engaged in a giant confidence game, in a giant Ponzi scheme; I 
believe part of the derivatives market will prove to have been 
the same thing, these very exotic insurance instruments used to 
try to guard against downside risk in overly leveraged 
financial institutions. And, you know, where do all these 
losses come from? They come from companies not having the 
capital to back financial guarantees that they made. That is in 
part what has occurred here, and that is over in the question 
of derivatives and debt swaps.
    I think we have a Ponzi scheme of staggering proportion 
going on. I have questioned people who are in the business. I 
asked them a year ago, some of them in these firms, did anybody 
have any concept of how much risk was out there? And they 
asserted to me they did not. People who were in the top 
management of these instruments in global firms. I asked them 
if any of them could understand--did top executives understand 
the formulas that were being used to assess risk? They hired a 
bunch of Ph.D. economists, whom I have high regard for, who 
wrote formulas. I asked my staff about a year ago to bring me 
some examples of these formulas. And I must say, I could not 
make head nor tail out of them. I have a Master's in Business 
Administration. I have always been very good in math. I could 
not make head nor tail out of them.
    And I said to some of the executives I was with, ``Do the 
executives in these firms really understand these formulas?'' 
Because I would guess most of them have the same business 
training I do. No. They did not understand these formulas. And 
these formulas clearly did not assess risk properly. And yet 
they are making hundreds of billions of dollars of bets around 
the world, and now these chickens come home to roost.
    I am extremely concerned about what I am hearing about the 
financial system. That is why I think we have got to refocus on 
the need to effectively deal with that and the housing crisis. 
If we do not, I do not see how recovery occurs, and I 
personally do not believe we have yet grappled with this in the 
most effective way. And I would give you the chance to respond 
to these observations.
    Mr. Elmendorf. I agree with everything you have just said, 
Senator. I think there are at least two important points you 
have raised.
    One is that--and not to minimize the illegal actions that 
were taken by people, but that most of the problem, in the 
judgment of analysts, is not what was illegal and done anyway; 
it is what was legal and not understood and was done. It is an 
immensely complicated business, and lots of people took a lot 
of risks they did not understand.
    The second point----
    Chairman Conrad. Let me just make a second point.
    Mr. Elmendorf. Yes.
    Chairman Conrad. Have you looked at any of these formulas 
that were written to assess risks with respect to debt swaps 
and derivative instruments?
    Mr. Elmendorf. I have seen some of them.
    Chairman Conrad. Do you understand----
    Mr. Elmendorf. Senator, I do not understand them either, 
despite my training. You know, to be clear, when we tell you 
that we estimate the cost of the TARP injections to be about 
$200 billion, that answer comes partly out of those sorts of 
complicated financial formulas. We have people at CBO who are 
experts at financial economics, which I am not. But one 
appropriate caution about our numbers is that they are based on 
models, drawing on historical data, that can be wrong in just 
the way we have watched the private investors be wrong.
    Chairman Conrad. Let me say on that point, if I could, I 
personally believe the CBO forecast is overly optimistic. I 
used to have the responsibility of forecasting revenue for my 
State, and I had that responsibility for 6 years, and I have 
seen repeatedly forecasters are wrong at the turns. It is just 
human nature. We all--I am not being accusatory here. This is 
human nature, and I have experienced this myself as a 
forecaster. At the turns, you always underestimate the upside 
and underestimate the downside. And I think the CBO forecast 
suffers from that flaw, which I think all forecasters are 
suffering from. My own belief is the downturn is going to be 
more prolonged and sharper than most of these forecasts 
capture. And I will not ask you to defend the forecast because 
that was made before you were in this position. But I make that 
observation. That is my own belief.
    We really have very substantial responsibility to the 
American people on our collective shoulders, and we have got to 
do a much better job than we have done thus far in fashioning 
answers. That is my belief.
    Thank you very, very much for your testimony here today, 
and thank you very much for taking on this responsibility. We 
all recognize around this table that you could make a great 
deal more money in the private sector and that you bring to 
this work real distinction and great credibility. And we are 
delighted, and I can speak for Republicans and Democrats who 
were involved in the selection process. You really shined 
through.
    Thank you very much.
    Mr. Elmendorf. Thank you, Mr. Chairman. We at CBO look 
forward to working with you and the rest of the Committee.
    Chairman Conrad. We look forward to it as well.
    The Committee will stand adjourned.
    [Whereupon, at 12:23 p.m., the Committee was adjourned.]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




    THE GLOBAL ECONOMY: OUTLOOK, RISKS, AND IMPLICATIONS FOR POLICY

                       THURSDAY, JANUARY 29, 2009

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Nelson, Stabenow, Sanders, 
Whitehouse, Warner, Merkley, Gregg, Graham, and Alexander.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order. I want to 
welcome everyone to the Budget Committee this morning. Today's 
hearing is titled ``The Global Economy: Outlook, Risks, and 
Implications for Policy.''
    We have a very distinguished group of witnesses this 
morning. They are Dr. Simon Johnson, who was formerly the Chief 
Economist at the International Monetary Fund and is now a 
Professor of Entrepreneurship at MIT Sloan School of 
Management, and a Senior Fellow at the Peterson Institute for 
International Economics. Dr. Johnson testified before our 
Committee in November, and we are very pleased that he is back 
with us again today. Dr. Brad Setser, a Fellow for Geoeconomics 
at the Council on Foreign Relations. And Tim Adams, who was 
formerly the Under Secretary for International Affairs at the 
Treasury Department and now is a Managing Director of the 
Lindsey Group. Welcome to you all. I am delighted to have you 
before the Committee this morning.
    Let me begin by providing a brief overview of the problem 
that we now confront. The first thing I was handed as I walked 
in this morning was this article--today's Financial Times--
entitled ``Economic pain to be `worst for 60 years,' '' a 
warning that 50 million people could lose their jobs globally. 
That is a pretty sobering story.
    I think all of us know we are in the worst economic 
downturn our country has seen since the Great Depression. We 
have lost nearly 2 million jobs in the last 4 months.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The housing crisis that has been central to the downturn is 
continuing. One in every five mortgages is underwater. Some 
even assert one in every four homes is underwater, meaning the 
home is worth less than the remaining balance on the mortgage. 
And one out of every ten mortgages is either in default or 
delinquent.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    And the financial market crisis that resulted from the 
housing crisis is also continuing. Credit remains very much 
locked up, although it has improved in some ways from what we 
saw in November. This chart shows that about half of U.S. banks 
indicated they became less willing to make consumer installment 
loans in the final months of last year.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    We also saw in the press this morning a review of 
commercial real estate, tens of billions of dollars just in 
this area that is going to come due over the next 5 years 
because it was financed initially at a time of record 
refinancings and initial financings that were done through 
mortgage securitizations. And the question is: How are those 
properties going to get extended in terms of their financing?
    As the title of this hearing suggests, this is also a 
global economic crisis. It is not limited to our shores. In 
just the last 3 months, the IMF's forecast for world GDP growth 
has fallen from 2.2 percent to a half of 1 percent, and I 
believe that is overly optimistic.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    That represents the lowest level of worldwide economic 
growth since World War II. The downturn has been spreading from 
country to country and is getting worse.
    Here was the headline in the Washington Post last weekend: 
``Downturn accelerates as it circles the globe. Economies worse 
off than predicted just weeks ago.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The world's biggest and traditionally most stable financial 
institutions have been rocked by this crisis. This graphic in 
the Washington Post yesterday depicted the dramatic decline in 
value of leading banks throughout the world.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The loss in global wealth represented by these numbers is 
simply stunning. I look forward to hearing from our witnesses 
today on the implications of this global meltdown and how it 
should impact our policy decisions here.
    I believe the key to our recovery will be our ability to 
address the housing and financial market crises as well as 
giving lift in the short term to our domestic economy. The 
recovery package now being considered I do not believe will be 
as effective as it needs to be if we do not address those 
underlying problems. And the great concern that I have, as I 
look at this package coming over from the house--and I couple 
it with what is available in the TARP fund--I am very concerned 
that we are insufficiently addressing the housing downturn and 
the continuing lockdown in our credit markets. So I believe we 
have all got to bend our best efforts to improving this 
package.
    I have no doubt, none at all, that a recovery package is 
necessary, and a large recovery package is necessary. At the 
same time, I believe it does need to meet the three tests of 
timely, temporary, and targeted. And I believe it is absolutely 
imperative that we make certain that these investments that are 
made provide the biggest bang for the buck possible.
    I think there are elements of the House package that just 
do not meet that test. And I am also most concerned that we are 
going to find 4 months from now the administration coming back 
to us and asking for hundreds of billions of dollars more to 
deal with the financial institutions of the country.
    So that is a focus I want to put on this hearing today and 
ask these distinguished witnesses to address as we get to the 
questioning period.
    With that, I would turn to Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. Thank you once 
again for your excellent outline of the issue, and I, as you 
know, agree 100 percent with your assessment that the present 
stimulus package is not on target. The problem is real estate. 
We need to fix the problem now, and we need to put value into 
the real estate markets, which will give homeowners confidence 
that their asset is worth what they paid for it, or a 
reasonable amount, and that they can afford the mortgages which 
they are paying on it, and, equally important, that the 
lenders' value of these assets is able to be stabilized so that 
they can assess where they stand relative to their capital 
situations, which is one of the big problems.
    So the problem is real estate. This is the nail we should 
be hitting, and yet we appear to be taking the hammer and 
moving over and trying to hit some other nails, which are 
significant but are not necessarily that relevant to the 
immediate problem.
    So I would hope we could rewrite the stimulus package, and 
I would hope we could do it in a positive and bipartisan way by 
moving some of the funds that are going to go into the long-
term baseline for the purposes of programmatic activity that 
should be undertaken in the usual appropriation process, and 
moving those dollars now over and onto the issue of addressing 
the real estate issue. And then if they are in the 
appropriations process, if those committees wish to--within 
your budget, of course, limitations--address those priorities, 
they will be able to.
    On the international front, I would be interested to hear 
from the panel today, because my sense is that this is--we are 
not going to get out of this slowdown through international 
efforts, that basically the ability to turn this around is 
going to require that America basically proceed in a coherent 
and thoughtful way, hopefully in conjunction with our trading 
partners. But as a very practical matter, we are the most 
cogent entity and we are the biggest economy, and, therefore, 
we have the responsibility to move forward.
    But I am going to be interested to hear what our excellent 
panel has to say on the issue of where these other economies 
are going. What is happening in Japan, what is happening in 
China, and, obviously, what is happening in the European 
Community is very important to us. And so I thank you for 
convening this excellent panel of talented individuals, and I 
look forward to hearing their comments.
    Thank you.
    Chairman Conrad. Thank you, Senator Gregg, and we will 
begin with Dr. Johnson. Again, welcome back. We are delighted 
you are here. Please proceed.

 STATEMENT OF SIMON JOHNSON, PH.D., RONALD KURTZ PROFESSOR OF 
 ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF MANAGEMENT, AND SENIOR 
     FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

    Mr. Johnson. Thank you very much, Senator Conrad.
    Let me start by making three brief remarks about the global 
economic situation and then go on to talk about policy 
implications for the United States. I think both you and 
Senator Gregg nicely outlined some of the very pressing 
dilemmas before us.
    But to begin with the global situation, let me say 
something about what is happening in Europe, particularly in 
the euro zone, something about emerging markets, and something 
about what seems to be happening to global savings or attempted 
savings around the world.
    The first point I would like to make about the euro zone 
and Europe is that while we are quite justifiably focused on 
the financial dimensions of the crisis in the United States--
and we are very worried about real estate and about banking, 
obviously--these issues exist in Europe, but it has become a 
much deeper problem for many sovereigns there, for many 
countries, because it has become a fiscal issue. And this is 
for several reasons that we can talk about further later in the 
session if you are interested.
    The basic point is that these European countries started 
out with a lot more debt to GDP than did the United States. Let 
me just take Greece as an example--not to pick on Greece. There 
are other countries in a similar category. But Greece had a 
debt to GDP at the beginning of this crisis around 90 percent. 
Now, Greece is going to have to undertake some financial 
bailout. It is going to suffer a loss of revenue through the 
recession, and it is pushing its debt level into an area where 
the financial markets regard the possibility of default or 
missing payments by Greece to be a significant probability. And 
that affects not only Greece; it affects other relatively weak 
euro zone sovereigns. Portugal, Ireland, Italy, Greece, and 
Spain are all considered to be more or less in the same boat.
    Now, there are related problems in East-Central Europe that 
we can expand on. I think most of the countries there are going 
to require some form of IMF assistance before we are done with 
this situation. I think the programs and the program structure 
that has been adopted for East-Central Europe is not ideal and 
may cause further problems down the road.
    Of course, the financial entities with the greatest 
exposure to East-Central Europe are West European banks. 
Austria has a very large banking presence in Eastern Europe; so 
does Sweden and so does Greece.
    The problems in Europe are not confined to the euro zone. 
Similar problems apply also in the United Kingdom where we are 
expecting a very rapid deceleration in growth. There is a large 
financial sector relative to GDP, and the ability of the 
government to manage its way through this process without 
nationalizing the banks and without taking on a great deal of 
responsibility, which they cannot afford that possibility, 
remains very much on the minds of the financial markets. It is 
one reason why the pound continues to weaken and U.K. interest 
rates continue to rise.
    So that is the problem in Europe and the euro zone. It is a 
fiscal problem. The financial crisis has become a fiscal issue 
in Europe. If you like to think of it in these terms, you could 
say that is what we must avoid at all costs in the United 
States. We have to maintain fiscal integrity so that people do 
not worry about the AAA credit rating in the U.S., as they are 
beginning to worry, for example, in the United Kingdom.
    I think these euro zone problems are--we talked about them 
a little bit in November when I appeared before this Committee, 
but they perhaps were not completely evident. I think now there 
is more agreement that these problems are developing fast and 
2009 is going to be a very difficult year for Europe. And this 
is reflected to some degree in the marking down of the official 
growth forecasts, for example, from the IMF yesterday. I still 
think those forecasts are rather on the high side, personally.
    The second set of global issues around emerging markets, 
here I think there is still a lack of realization of the 
severity of the problems. It is very difficult for any emerging 
market government to roll over its debt right now. They are all 
suffering a severe, rapid drop in their exports. The figures, 
the projections for international trade, which have been 
provided by the World Bank a little while ago and by the IMF 
yesterday, I think are definitely on the optimistic side. We 
are seeing a fall in both the exports of manufacturers and in 
the exports and prices for commodities. And this is going to 
affect, again, most emerging markets partly through their 
financial systems but, again, through their fiscal systems.
    And my third point is that this adds up to a global pattern 
with regard to spending and savings around the world. I think 
that while there have been--and this speaks to a point in the 
question raised by Senator Gregg a moment ago. There have been 
calls for a global fiscal stimulus and for other countries to 
join the United States in trying to sustain the global economy 
through a large discretionary fiscal package of 2 percent of 
GDP, is actually the call from the IMF.
    I think that is really--whether or not it is a good idea, 
it is not going to happen. I think the fiscal position of 
almost all countries in the world is sufficiently difficult 
that they will not be able to come through with that kind of 
fiscal expansion. In fact, I think many of the countries, 
including the ones I just mentioned, will be looking at some 
form of fiscal austerity in order to reassure the financial 
markets that their government debt is going to be fine and that 
they should not be worried about potential sovereign default.
    The one exception, of course, is China. China does have 
room, longstanding room for fiscal stimulus, and I think they 
will do something substantially less than the headline numbers 
suggest, probably on the order of 2 to 3 percent of GDP per 
annum for the next couple of years. That is a significant 
fiscal stimulus. It is helpful for the Chinese economy. I do 
not think you will notice it at the global level. China is 
about 6 percent of the world economy at market exchange rates, 
so we are talking about 3 percent or 6 percent. That is the 
rounding error in the measurement of world GDP.
    So in terms of a global approach, it will not come, I 
think, through the fiscal side, and if anything, we are going 
to be hard pressed because most countries want to cut back and 
most people, including households and corporates in most 
countries, want to cut back. And most governments outside the 
United States also want to cut back. So what we are seeing is a 
big move toward attempted increased savings, which is 
distinctly reminiscent of what happened in Japan during the 
1990's.
    In Japan, during that decade, most of the private sector 
tried to increase its savings. There was a big slowdown. The 
government, of course, tried repeated fiscal stimulus without, 
at least initially, addressing the problems of the banking 
system and without addressing the problems in the real estate 
sector. And that was not very successful.
    The saving grace in Japan, of course, during the 1990's was 
they could export, so their export sector remained quite 
strong. That is not an option for the world as a whole, 
obviously. And I think we are facing quite seriously the 
prospect of a lost decade at the global level. The private 
sector, I would say, sees the recession as something of a U-
shape, with the recovery occurring at some point in 2010. The 
official sector, including the IMF and the World Bank, are 
still with more of a V-shape, so a fairly rapid recovery 
beginning in the second half of 2009.
    I would submit to you that it is much more likely to be an 
L-shape, so we go down a considerable distance, and then we 
really struggle to recover. There may be moments of incipient 
recovery. Japan had several in the 1990's. But they never 
really took hold, at least until they cleaned up their 
financial system. And I think it is the combination, I would 
stress, of a fiscal stimulus and sufficiently dramatic and 
comprehensive action to really recapitalize the banking system 
and remove in some form--and we could discuss the various 
reasonable possibilities--remove in some form the toxic assets 
from the banks' balance sheets, or at least remove them from 
the concern facing new investors in those banks.
    But I would also in closing like to pick up on Senator 
Gregg's point. I do completely agree that while we are 
addressing--while we are providing fiscal stimulus and 
addressing the financial system, we must not lose sight of 
housing. And I think there are some very sensible ideas out 
there in terms of refinancing packages that would reduce the 
risk of mortgage foreclosure and also try and break this death 
spiral of foreclosure, forced sales, lower house prices, 
leading to more foreclosures. There is no question at all that 
unless and until we get our hands on that fundamental, we are 
going to face substantial downside risks.
    Thank you very much.
    [The prepared statement of Mr. Johnson follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Dr. Setser, welcome. Am I pronouncing your 
name correctly?
    Mr. Setser. Very close, yes.
    Chairman Conrad. How do you do it?
    Mr. Setser. ``Setser.''
    Chairman Conrad. Great. Welcome.

 STATEMENT OF BRAD W. SETSER, PH.D., FELLOW FOR GEOECONOMICS, 
                THE COUNCIL ON FOREIGN RELATIONS

    Mr. Setser. Thank you. Chairman Conrad, Senator Gregg, 
members of the Committee, it is a tremendous honor to be asked 
to testify before you today.
    As we all know, the U.S. economy began to slow in 2006 as 
home prices peaked and residential investments started to fall. 
It entered into a recession at some point in the last year. 
However, for a while, at least at the surface, the world 
economy remained relatively healthy. Unfortunately, hope that 
the excesses of the housing and credit boom of the past few 
years could be unwound gradually disappeared last autumn, and I 
think it is fair to say--and this is consistent with Dr. 
Johnson's testimony--that the extent of the slowdown in global 
activity now underway is hard to overstate.
    The latest forecasts suggest that U.S. output will contract 
at a 5-percent or more annual pace in the fourth quarter of 
2008. That would be one of the sharpest falls in recent U.S. 
history. It would also probably be one of the smallest falls 
when you look around the global economy. The fall in Europe 
looks to be comparable. The data from Japan already out 
suggests a 10 percent of GDP annualized contraction in the 
fourth quarter. Korean output contracted an annualized 20-
percent pace in the fourth quarter. Chinese output growth looks 
to be close to flat, which is an enormous deceleration. And to 
the extent that the commodity exporters are doing better, it is 
only because they have been able to draw on the resources saved 
when commodity prices were high this summer.
    Global output, not just U.S. output, likely fell in the 
last quarter of 2008, and I share the assessment of Senator 
Conrad and Dr. Johnson that the IMF's forecast for mildly 
positive global growth is optimistic.
    Arresting the sharp fall in output I think requires a 
significant adjustment in policies. The Obama administration 
and the Congress are currently working on a stimulus package, 
which I think is essential to support output as private 
spending and investment contracts. And further efforts such as 
recapitalize the American financial system I agree are likely 
to be necessary. Comparable policies need to be adopted in all 
major economies with the capacity to do so. China I would note 
in that regard, but also Germany.
    In my testimony, though, I want to focus less on the 
adjustment in the global output and the changes in the forecast 
to the global output, and a little bit more on the tremendous 
changes now underway in the global pattern of trade and the 
global pattern of capital flows. But first I want to state a 
couple of things about the global forecast.
    The IMF's forecast generates slightly positive global 
growth because it assumes that growth in the emerging world 
will remain positive, although at a much lower pace than in 
past years. That portion of the forecast strikes me as the most 
optimistic portion of the forecast. As I mentioned earlier, the 
fall in output in Korea in the fourth quarter was stunning. It 
was not quite as large as the fall in output at the peak of 
Korea's crisis in 1998, but it was not that much smaller.
    The deceleration in Chinese growth suggests that China is 
entering into a recession, largely because of its own internal 
dynamics, at the same point in time that the global economy is 
entering into a recession.
    Some leading indicators for Russia suggest a contraction in 
Russian output comparable to the contraction in 1998 during 
Russia's crisis--
    And even Brazil, which entered into this crisis with 
perhaps the best position, at least on the financial side of 
any emerging economy, and the strongest domestic basis for 
growth, looks to be slowing sharply.
    Broadly speaking, wherever you look it suggests a 
significant contraction, not an expansion, of emerging market 
output, perhaps a larger contraction than in the industrial 
world.
    The second point is the shift in the pattern of global 
trade, and I think the simplest way to describe it is that the 
expansion, which was quite strong, of imports and exports 
globally with trade growing has gone into reverse, and it has 
gone into reverse in an extremely strong way. In my written 
testimony, I describe the fall in trade as ferocious. I think 
that is fair. Taiwan's exports in December were down 40 
percent. Korea's and Japan's exports in December were down 20 
percent. Germany's exports in November were down 10 percent.
    Why does this matter for the United States? Well, one, I 
think it indicates that the fall in U.S. and European output--
after all, the U.S. and Europe are on the receiving end of 
Asia's exports--is going to be quite significant. So some 
degree of the slowdown in Asia is a leading indicator of the 
slowdown in the United States. But, second--and I think I agree 
with Senator Conrad on this--it also suggests that, together 
with the recent dollar appreciation, hopes that exports will 
provide additional support for the U.S. economy are, 
unfortunately, likely to be unfounded, that the deceleration in 
exports in the U.S. over the next several quarters is likely to 
be quite significant, and I think all leading indicators of 
export growth point in that direction.
    Now, evaluating whether imports or exports on the non-oil 
imports and exports side will fall faster is difficult given 
the scale of the changes now underway. The only thing I think 
we can state with some degree of certainty is that the fall in 
commodity prices will have a significant impact on the U.S. 
trade deficit. A $50-a-barrel average oil price compared to a 
$100-a-barrel average oil price generates, assuming no big 
contraction in U.S. exports to the oil-exporting economies, a 
$200 to $250 billion improvement in the current account 
deficit. So the U.S. trade deficit and current account deficit 
are poised to fall, which implies, if that forecast is true, 
the U.S. will be relying less on the rest of the world for 
financing than it has in the past.
    That gets to my third point, the shifts in the pattern of 
global capital flows. Over the past several years, there has 
been three broad trends. One is that U.S. and European private 
flows both ways were growing at a quite rapid pace. Second, 
U.S. private investors were increasingly putting money into the 
fast-growing emerging world, so there was a significant private 
outflow into the emerging world. And then, third, the emerging 
economies were adding tremendous sums to their reserves and to 
their sovereign wealth funds. At a peak, they were probably 
adding $400 billion a quarter or $1.6 trillion a year, a huge 
sum, in the process absorbing much of the debt that the United 
States issued.
    The simple way to describe what has happened is that all of 
these flows have gone into reverse. The transatlantic flow has 
essentially stopped, is now actually negative, with Americans 
selling assets and Europeans selling assets, and generating net 
financing for the U.S. because the U.S. has been selling its 
foreign assets faster than foreigners have been selling their 
American assets.
    The private flows into the emerging world have gone into 
complete reverse, and correspondingly, reserve growth in the 
emerging world has effectively stopped.
    Now, this has not immediately translated into a fall in 
demand from the emerging market central banks for treasury 
bonds, I know a central concern of this Committee, because 
emerging markets have reallocated their portfolios away from 
riskier assets toward the treasury market. However, given the 
scale of the fall in emerging markets' reserves, that 
reallocation process will eventually come to an end, and the 
extent to which the U.S. will be drawing on emerging market 
reserve growth for financing will fall. To my mind, that is not 
a bad thing. I would be far more worried about an expansion of 
the fiscal deficit. If that expansion of the fiscal deficit 
corresponded not with a fall in private investment in the U.S. 
that the public sector was offsetting but, rather, required 
that the U.S. draw on the savings of the rest of the world. But 
the sustainability of the improvement in the U.S. current 
account deficit hinges not just on the policies that we adopt 
here, but on policies that are adopted elsewhere in the world.
    I know that the scale of treasury issuance that the current 
deficit implies is stunning. I think we are all stunned by the 
scale. I would just also note that the scale of the fall in 
global output that we are trying to counteract is equally 
stunning.
    Thank you.
    [The prepared statement of Mr. Setser follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Yes, this has been a happy morning so far.
    [Laughter.]
    Chairman Conrad. Well, Tim, we are going to count on you to 
lift us up. Tim Adams, formerly the Under Secretary for 
International Affairs at the Treasury, and now Managing 
Director of the Lindsey Group. Again, welcome to the Committee.

  STATEMENT OF TIM ADAMS, MANAGING DIRECTOR, THE LINDSEY GROUP

    Mr. Adams. Thank you, Mr. Chairman and Senator Gregg and 
members of the Committee. I wish I could cheer you up. What I 
will do is avoid repeating the flurry of statistics that you 
have heard here today. They are all in my testimony as well. 
They are accurate and they are sobering, and they will probably 
get worse before they get better. And it does not matter if you 
are looking at Norway or New Zealand or Nigeria or the Czech 
Republic. This is a crisis which has engulfed the entire global 
economy, and we should think about that as we try to craft 
solutions--solutions which will require a global response.
    And policymakers have responded in extraordinary ways, and 
they should be applauded. Central bankers, Ben Bernanke and 
others, have taken unimaginable policy adjustments--cutting 
rates to zero. The Bank of England has cut rates to its lower 
level in over 300 years, and they have employed their balance 
sheets in ways which we never thought possible or possibly 
prudent, but we have to do so now in order to manage downside 
risk.
    Fiscal policy as well, we are seeing around the world 
countries, where possible--and Dr. Simon Johnson noted that 
there are many countries unable to pursue additional fiscal 
stimulus. Those who have are doing so, and doing so in a large 
manner, but need to do more.
    Despite these best efforts, we are going to have a very 
tough 2009 and probably a very tough 2010. Banks will remain 
unwilling to lend. Consumers will remain unwilling to borrow, 
unable to borrow, businesses probably unlikely to borrow, and 
the emerging market conditions which have been outlined earlier 
will remain in place and probably become more acute. There is a 
great sucking sound coming out of the emerging markets, and 
that is capital being withdrawn. We saw just in the last 3 
years $1.3 trillion worth of bank lending into corporates in 
the emerging markets. That is now a trickle. Foreign direct 
investment has gone to a trickle. That means an additional drop 
in activity, and probably widespread corporate bankruptcies in 
many emerging markets, and it will be interesting to see how 
the sovereigns, the governments in those emerging markets 
respond to those bankruptcies.
    So what do you do? Well, there are a variety of things, Mr. 
Chairman. I believe we do need a large fiscal stimulus program. 
I agree with you about your concerns regarding what the House 
passed. And I agree with your phrase of ``temporary and timely 
and targeted.'' And I am not sure the House bill meets that 
standard.
    And I am less worried about the overall level, although we 
certainly need something on the order of 3 or 4 or 5 percent of 
GDP. It is the composition that matters. We need to get the 
spending into the system and get it in immediately, and I want 
to echo what former Congressional Budget Office Director Alice 
Rivlin said yesterday, that maybe what we ought to do is 
separate this bill into two pieces--that which can actually, 
the majority of which can get into the spending cycle this 
year, and a lot of other worthy projects that do not get put in 
place for a number of years, set them aside and come back and 
look at those in a more methodical and intelligent fashion.
    We also need to stabilize housing--you noted that and 
Senator Gregg noted that--the critical underlying piece of our 
economic crisis, and we need to stabilize banking and we need 
to do that by getting the toxic assets off the balance sheets 
and into some other form or other vehicle, and that magnitude 
could be somewhere between $1 trillion and possibly $3 or $4 
trillion. So I suspect the administration will come back to 
this Committee and to Congress for additional funding.
    We need to shrink from the IMF. Simon noted that we have 
seen in our experience in a number of programs that the Fund 
has put in place, a number of funding programs. I think these 
are critical. The IMF, which appeared to be out of business 24 
months, is now back in business and working 24/7 in order to 
address the macroeconomic challenges that we are seeing around 
the world. The previous administration sent to Congress an IMF 
reform package. I would urge the members of this Committee to 
look at that package, and I would urge this body and Congress 
to pass that reform package as soon as possible. It is not 
perfect. There are things I would love to see different to it. 
But it is what it is. It was negotiated multilaterally, and we 
need to give our stamp of approval to the Fund. Irrespective of 
how you may have felt about previous actions, we need to give 
this institution the resources and stature to do the job it is 
currently doing.
    We need to address global imbalances. The growth model that 
has been in place over the past 10 years where excess savers 
around the world--namely, in Asia--ship us their savings; we 
use the savings to live beyond our means--namely, by buying 
products from those places. That model is broken, and it is not 
coming back. And we need to think about what model is going to 
drive us out of this cycle, because the U.S. consumer is not 
going to lead us and, as we heard from Dr. Setser, nor is 
exports. So we need to think collectively about what is the 
growth model and how do we return to an expansionary phase in 
this cycle.
    And, last, stabilize the long-run fiscal outlook for the 
country. We are going to issue a tremendous amount of debt over 
the next 2 years, and if you look at CBO's I think optimistic 
analysis, we will add $3 trillion in deficits over the next 10 
years. The Concord Coalition says it is $10 trillion. It does 
not really matter--$3 trillion, $10 trillion. After a while, 
the numbers are staggering. And we do run the risk of the world 
choking on the amount of treasuries we are going to push out 
the door. And also remember that a whole host of other 
countries are going to be pushing their bonds out the door as 
well. So the competition for loanable funds is going to be 
enormous, and the implications are great.
    I would just again add that we need to act with enormous 
speed, but we need to act wisely. We need to spend money 
wisely. We need to focus on the short term and deal with the 
problems the Chairman and Senator Gregg noted--housing and 
banking--but we need to make sure that we keep an eye on the 
long term so that we do not undermine our ability to function 
in the future.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Adams follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you very much.
    I now have a blow-up of the article in this morning's 
Financial Times: ``Economic pain to be `worst for 60 years.' ''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In that article, they note that the losses in the financial 
sector in the United States, they have increased their 
estimates--this is the International Monetary Fund--increased 
its estimates of credit losses on U.S.-based assets from $1.4 
trillion to $2.2 trillion. You know, yesterday we were talking 
in this Committee about a trillion dollars, $2 trillion 
globally, $1 trillion here. That leads me, Dr. Johnson, to my 
first question, if I could.
    With respect to the economic recovery package that has come 
from the House, have you had a chance to review it?
    Mr. Johnson. Yes, sir.
    Chairman Conrad. How would you evaluate it in terms of 
being responsive to the crisis that we are in?
    Mr. Johnson. I think it is responsive, I think it is 
certainly attempting to be responsive. I have been arguing, I 
think at least since November when I previously appeared before 
this Committee, that fiscal stimulus would not be sufficient. 
So I think, you know, while we can certainly have, continue to 
have a debate about the composition of the exact level--I think 
I suggested slightly lower numbers in November--what worries me 
most of all is, I think, what you and Senator Gregg and the 
other speakers have all alluded to, which is: What are we doing 
about banking exactly, and with what money? And what are we 
doing about housing and, again, with what money?
    So I think my current position would be not to focus too 
much or get bogged down in a debate on the fiscal stimulus. I 
think you could adjust a little bit one way or the other, but I 
would keep it roughly as it is. Remember, the effect on 
financial markets if it gets stuck or if it gets massively cut 
back would be, I think, quite negative.
    Instead, I think you should take up the points that I think 
I have heard you make over the past few weeks, actually, 
Senator Conrad, which is let us think about the financial 
system now, let us think about it comprehensively and on a 
complete scale, rather than coming back in 4 or 5 months and 
saying, Oops, you know, we did not right-size the package last 
time and we regret it.
    Now, obviously, the scale of these things is a little bit 
different because fiscal stimulus is money you spend and then 
it is gone; whereas, money that you put into the banking system 
is hopefully an investment on which you will not lose the full 
amount. But I think these global loss figures that you are 
talking about are consistent with the view that there are a 
total amount of losses to be absorbed in the U.S. financial 
system of around between $1 and $2 trillion for U.S. residents. 
Obviously, the $2.2 trillion is based on a particular view of 
where we are in the global cycle. The main reason the IMF 
numbers have gotten worse is the cycle continues to surprise 
them in terms of the debt and the associated losses.
    Chairman Conrad. It continues to surprise them on the 
downside.
    Mr. Johnson. On the downside. Yes, absolutely. So their 
methodology I think has held up very well, but their take on 
the macroeconomy has, unfortunately, been rather too sanguine 
of late.
    Now, if we were to just take these rough rules of thumb, 
how much would you need to provide or think through? I think 
you have to consider losses for U.S. residents between $1 and 
$2 trillion. And the question is: How much of that is absorbed 
by the Government in the form of higher debt, ultimately? And 
how much of that can be transferred to somebody else? The 
equity holders, of course, have already lost their stake, and 
it may be unwise to push too much onto creditors given what we 
saw after the failure of Lehman.
    Now, but in order to manage that process of losses of $1 to 
$2 trillion, you probably need an operation, a Government-
backed recapitalization and some form of clean-up of the 
balance sheet of these banks that will be considerably larger. 
I think I would put that--let us go at the working capital the 
Government would need for this operation--between $3 to $4 
trillion, which is a large amount of money, I understand, but 
that is not the total budget cost. It is not how it would be 
scored for your budget. It is not what you would expect to 
lose. It is the amount of money you would need to provide in 
terms of being able to recapitalize properly and withdraw in 
some form the toxic assets.
    Chairman Conrad. Let me stop you on just that point. What I 
just heard you say is that we would need working capital to 
deal with the financial crisis alone of $3 to $4 trillion? Did 
I hear you right?
    Mr. Johnson. Yes, sir.
    Chairman Conrad. $3 to $4 trillion.
    Mr. Johnson. Some of which would be provided, could be 
provided by the Federal Reserve; some of which would need to 
come out as, I think, a new budget appropriation on top of the 
full $700 billion for the----
    Chairman Conrad. And how much would you see--you know, we 
have had $700 billion in the Troubled Asset Relief Program. How 
much in addition to that would you view to be necessary from 
appropriated accounts?
    Mr. Johnson. Well, I think it would depend on how much you 
are comfortable with the Fed, the role the Fed would play in 
this. I think if you could capitalize a vehicle with a total 
capital of, let us say, $500 billion and let the Fed leverage--
provide the financing to leverage up the rest of it. Basically 
you are saying that there is a backstop from the taxpayer of 
$500 billion, and more capital will be provided if there are 
larger losses.
    Chairman Conrad. This $500 billion, if I can interrupt, 
would be on top of the $700 billion already provided?
    Mr. Johnson. Well, as I understand the accounting of the 
$700 billion, there is about $320 billion left, although some 
of it was being spent this morning when I was coming in here, 
so I may not have the latest numbers on that. They say there is 
about 300 or slightly under 300 available there. I think I 
personally would take around about 100 for a housing refinance 
package, which leaves 200 from that. And then in the meantime--
--
    Chairman Conrad. Another $300 billion?
    Mr. Johnson. Yes, another----
    Chairman Conrad. That is exactly the number I used 
yesterday in a meeting of Committee Chairmen, that we might 
well need another $300 billion, that we might expect the 
administration to come back to us in months with a request for 
another $300 billion.
    Mr. Johnson. I think we are independently arriving at a 
very similar conclusion on that.
    Chairman Conrad. Yes. Dr. Setser, what is your assessment 
of what is needed? What kind of overall resources are needed 
for the financial sector alone? And if you want to comment on 
the housing sector as well, Dr. Johnson mentioned $100 billion 
for the housing sector. What is your assessment of what would 
be needed?
    Mr. Setser. I have not looked in detail at the housing 
sector, so I will refrain from commenting on a subject which I 
do not feel like I have the full expertise on. I think a lot 
depends on the size of the financial sector recapitalization, 
as Dr. Johnson mentioned, on how much of the refinancing for 
that comes from the Fed or comes from other vehicles as opposed 
to how much comes from the appropriated funds which are used to 
buy bad assets, the toxic debt, the original proposal of the 
TARP.
    I think you probably need to remove a very substantial sum 
of bad assets off the balance sheet of the banks in addition to 
providing new capital on top of the capital that has already 
been provided, because I think you would likely want to buy 
those toxic assets at a level which is probably a little bit 
below the level that many banks hold those assets on their 
books.
    Now, you can come up with creative ways of coming up with 
the financing for that large purchase of assets. Not all of it 
has to come from appropriated funds, although clearly, as Dr. 
Johnson mentioned, there needs to be a substantial pool of 
appropriated funds to provide the capital, the equity to 
backstop that facility.
    And so I am thinking, you know, you would want to remove $1 
to $2 trillion of bad assets off the books of the banks' 
balance sheets. I think that requires a rather substantial pool 
of resources to back it up, probably at the higher end of that.
    Chairman Conrad. OK. Let us say that it is the range that 
you have given, $1 to $2 trillion. How much capital would we 
need to deal with that level of problem? How much equity--and, 
obviously, the only place that equity is going to come from is 
here.
    Mr. Setser. My personal----
    Chairman Conrad. Twenty percent?
    Mr. Setser. I have not given that question the level of 
thought that I should. My personal preference would be to have 
more come from appropriated funds and less from the Fed, but I 
understand the constraints that exist. But I think that would 
be, to my mind, the better--the less leverage you use, the 
better. On the other hand, given the constraints on the use of 
taxpayer money, there is a strong incentive to make use of 
leverage.
    Chairman Conrad. So, Mr. Adams, what is your assessment?
    Mr. Adams. I think that is absolutely right. If you allow 
the Fed to use its balance sheet and leverage to deal with 
probably the worst-case estimate, then you probably need $600 
billion in appropriated funds. If we try to avoid using the 
Fed's balance sheet which is being used for a variety of 
purposes, and given what we heard from the Fed earlier this 
week, it will be used for even additional purposes going 
forward, then you will need to make up that difference with 
even more appropriated funds.
    So, at a minimum, you are talking about $500 billion, 
probably, and north of there, depending on whether you want to 
do it straight up or through the Fed.
    But you are absolutely right, we have to stabilize housing. 
Chairman Bair of the FDIC has had several great proposals 
initially costed out at about $50 billion. I assume that is 
more given the deterioration in the housing market. But until 
we stabilize housing, until we stabilize the banking sector, it 
is tough to do much of anything else. And I go back to your 
point earlier on the fiscal stimulus and repeat the phrase is 
``timely, temporary, and targeted.'' The key is composition, 
and the key is getting it out into the economy now. And only 
$170 billion of this package is actually spent in 2009.
    Chairman Conrad. Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman, and I thank the 
panel for sobering but very lucid comments here.
    Let me pick up here. We basically have broken it into two 
issues here. One is the stimulus which is presently before us, 
and the other is the next event in this exercise, which will be 
an attempt to stabilize the financial balance sheets of our 
financial system, and that will involve, it sounds like in your 
estimates, a very significant new appropriations depending on 
how much gets leveraged by the Fed. And the Fed leveraging is 
essentially an expanding of the money supply, and they can do 
it. I mean, they can do $1 trillion. They can do $2 trillion. 
It is just a question of when that comes back to hit us as 
inflation, and certainly in the short run, that is not going to 
be a problem. But in the long run, that is always an issue.
    So I guess my question is this: Since we have the stimulus 
sitting here, which is now up to almost--well, if you throw in 
interest, it is over $1 trillion. It is $1.2 trillion if you 
calculate the interest in the stimulus. Shouldn't we take some 
chunk of this, since it is sitting there right now ready to 
move, and move it over at least to address the housing issue, 
the $100 billion that Dr. Johnson was talking about, or some 
element of the housing issue to start taking pressure off that 
account which we know is at the core of the problem housing and 
financial system? And there are two or three good ideas out 
there that I have heard about, but I would be interested if you 
folks have additional ideas that we might be able to use 
stimulus funds for.
    One is for the Federal Government to create a 4-percent, 
30-year mortgage and open a window on that for 18 months, and 
we basically subsidize the difference between 4 percent and 5.5 
percent, or whatever the rate is. And that costs us--I do not 
know how much, but I suspect it is less than $100 billion.
    Another is to significantly expand tax credits to first-
time buyers so that we create a huge incentive for the owner-
occupant, for people to go out and buy a house and reduce 
inventory.
    Another is to fund directly the FDIC initiatives in 
mortgage forbearance that historically FDIC has not been funded 
directly. They have always gotten--and they have a resistance 
philosophically over there to direct funding. But maybe it is 
time to put $40 billion in the FDIC for mortgage forbearance. 
It is my understanding that they would represent that a $40 
billion funding would allow them to basically renegotiate 
upwards to 4 million loans which are on the verge of 
foreclosure.
    I would like your comments on those three as options that 
we should maybe use the stimulus package money for, taking 
money away from, for lack of better words, what is in the 
stimulus now, which is long-term expenditures which should have 
gone through the appropriation accounts, and instead have 
basically been put in there because certain appropriators have 
an interest in those Government activities, and any other ideas 
you have. I will start with you, Dr. Johnson, because you 
specifically alluded that you had a series of ideas in the real 
estate area.
    Mr. Johnson. Thank you. Yes, I think--let me take the 
second part of the question first, what to spend it on, and 
then I will come to how much should you take from the stimulus, 
if any.
    I think, you know, your point about--your other point in 
your introduction about inflation is very important. We have 
to, you know, not take around the fact--off the fact that 
inflation can come back, and I think distortions in the credit 
market would play a role in that. And, you know, I think while 
the 4-percent, 30-year mortgage refinancing is appealing, it is 
hard to see that we necessarily exit from that very smoothly. 
Once the Government gets into subsidizing massive general 
credit programs like that, I worry down the road about 
inflation----
    Senator Gregg. Well, I am talking about putting a hard 
sunset on it. You know, it takes 67 votes to extend the program 
at the end of 18 months.
    Mr. Johnson. I think if it was a very hard sunset, the 
hardest that you can do, then perhaps that is worth----
    Senator Gregg. A 100-percent vote.
    [Laughter.]
    Mr. Johnson. OK. But you understand, the point is that 
anything that gets the Government into the business of more 
permanently providing credit or underwriting credit I think is 
something that I would worry about. And I think that the FDIC 
initiatives scaled up to some degree--and I think there is also 
some good ideas there about how you use Fannie Mae and Freddie 
Mac, who do now work for the Government after all, and who do 
take over in the process when people default on assured 
mortgages, they take those mortgages out of the pool. They pay 
insurance to the holders of the securities. And then they have 
to deal with those mortgages, and they have to deal with those 
properties themselves. And you can, I think, take FDIC type 
ideas on forbearance and apply those to the mortgages that come 
in that fashion through Fannie Mae and Freddie Mac. Again, it 
is a question of spending some money, but $50 to $100 billion, 
I think, spent in this fashion would send a very powerful 
signal. And I think it would force us to get more deeply 
engaged with breaking this downward death spiral on house 
prices.
    Now, as for whether you should take it out of the stimulus, 
you know, I honestly think $50 billion here or there, the 
current stimulus level, does not really matter. That is not 
going to be the decisive factor in whether the economy turns 
the corner anytime soon. But I think if you start scaling the 
stimulus down dramatically, that may send the wrong signal to--
--
    Senator Gregg. I am not talking about scaling it down. I am 
talking about the same number and moving it over to the target 
real estate instead of the long-term issues of education or 
health care or whatever is in there that are traditional 
appropriated accounts.
    Mr. Johnson. Personally, I would have preferred if the 
administration had come up with two separate initiatives so you 
could see very clearly there is a fiscal stimulus designed to 
target current spending and there is a housing piece designed 
to refinance mortgages. But given that that is not where we 
are, then I think I would be supportive of taking as part of 
the total fiscal stimulus amounts--let us say $50 billion--and 
finding ways to use that to restructure or refinance 
particularly problematic mortgages, the 2005-2007 vintages of 
subprime or Alt-A mortgages or ARM, adjustable rate mortgages 
that seem likely to move into foreclosure. At the moment, we 
wait for mortgages to--we wait for people to default, and then 
we try and figure out what we should do about it. Clearly, we 
should be getting ahead of that, including you need a program, 
a properly funded program to do that.
    Senator Gregg. Dr. Setser, do you have any views on how to 
approach the stimulus and real estate?
    Mr. Setser. I do have some views on--unfortunately, I do 
not support moving funds out of the stimulus into this kind of 
initiative. I think that the process underway in the economy 
and the contractionary forces are such that you need to do 
both, and I am not in favor of reducing one to do more of the 
other.
    Goldman Sachs has estimated that the adjustment on the 
private side of the economy, the balance between savings and 
investment, is going to be a contractionary force around 6 
percent of GDP this year. And that is because savings is going 
up because of the fall in household wealth, and it is also 
because investment is going down.
    I think that drag is so strong that you need to put money 
into the economy through the fiscal stimulus, and so I would 
prefer to see the housing stimulus done on top----
    Senator Gregg. Well, if only 50 percent of the money on the 
stimulus on the appropriated accounts is going to get into the 
economy within the next 2 years, is that accomplishing the 
goal?
    Mr. Setser. The more money that could be injected into the 
economy, the more quickly, and the more effective the stimulus 
would be.
    Senator Gregg. Thank you.
    Mr. Setser. On housing, I have--you know, I am probably the 
only person here who does not actually own a home, so I have a 
somewhat different view about falling home prices than those 
who do. And I would note that I think historically the problems 
that we got into have in some sense had to do with the fact 
that we tended to subsidize borrowing to buy homes as a part of 
the process of subsidizing homeownership. And so I would prefer 
initiatives that did not subsidize borrowing quite as much, and 
they found other ways to limit the scale of the losses to help 
people keep their homes. Some forms of loan modification are 
useful in that regard.
    And then also I would note here--and this goes a little bit 
to the subject of the theme of this hearing--that the borrowing 
rate on the conforming mortgages has come down because the 
spread on conforming mortgages has come down because the agency 
bond spread has come down, and that is because of the signals 
that the Federal Reserve sent that it was going to buy up some 
of these agency bonds in the market. And what that actually did 
was it offset a move by China and other large central banks out 
of that portion of the market.
    So I think we have seen a big fall in agency rates that 
will over time, without any additional appropriations, help to 
provide additional mortgage financing in the long end.
    Senator Gregg. If you could make yours brief so that we do 
not tie up more time. I am sorry.
    Mr. Adams. Yes, I support the 4 percent. I think CBO is 
trying to cost that out, and I look forward to that estimate.
    Yes, I support the FDIC proposal, and, yes, I support the 
idea of taking some of those spend-out programs that do not 
kick in until 2012 and 2013, taking those funds and applying 
them to these programs.
    Chairman Conrad. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. I have got a 
couple of questions about the financial structure, although one 
thing I share Senator Gregg's concern that we grapple with this 
real estate issue. My hope would be, as someone who somewhat 
reluctantly supported the second tranche of the TARP funds, 
there were some indications from the administration that they 
were going to be talking about that $80 to $100 billion into 
housing relief and foreclosure relief, and the sooner they get 
the details of that proposal out, I think the better.
    I want to focus my approach on the banks. Thinking back to 
the Chairman holding up the Washington Post's chart from 
yesterday morning in the Business Section that had all of the 
banks, not just U.S.-based banks but all across the board, one 
of the things I am trying to sort through in my own mind is 
these banks have made, at least in retrospect, inappropriate 
decisions in some cases. We are looking at how we recapitalize 
them. And while I hate to see the decline in all these bank 
share prices, don't we have to in a sense let some of the 
balance of this equity wash its way out? Don't the existing 
equity holders have to continue to take some hits? So that we 
think about this recapitalization mostly being driven totally 
by the Government, there is an awful lot of money sitting on 
the sidelines right now in T-bills with not good returns. I 
hope that we think about not just a Government-only sponsored 
recapitalization, but how we get the private sector investors 
back in.
    The first question is: Are there examples from around the 
world avoiding what I think we would all want to do, 
nationalization of the banks the way the U.K. has done with the 
RBS, that we can let the market work its way, continuing with 
the existing equity holders, somehow guarantee that interim 
period before we get the private sector investors, one, back to 
the table? And, second, so I can get both of my questions out, 
and then all of you can respond, we have been, again, thinking 
about this bad bank idea and how we get these toxic assets off 
the balance sheets. One of the things I have not heard 
discussed is, if we think about a lot of other traditional 
corporate entities who may have a bad line of business or a 
toxic asset on their balance sheet, oftentimes they will take 
it off their balance sheet, spin it off into a separate equity 
holding with separate shares of stocks, manage it themselves so 
the Government would not have to take it over. And if, for 
example, the Citi's and the B of A's rolled out their toxic 
assets into a bad bank that would be off balance sheet, that 
would have a separate corporate structure that they would 
retain some level of ownership in, wouldn't that free up at 
least the private side, then we might need some guarantee on 
those toxic assets? But wouldn't that also make it easier, 
again, for private sector resources to flow into the existing 
good bank now and not again have the Government end up owning, 
managing, and operating, which it does not do a very good, a 
bad bank? So in any order you would like.
    Mr. Johnson. Senator Warner, I completely agree with the 
general sentiments you are expressing there, which is we need 
to get the private sector to invest in the banks, and obviously 
the existing equity holders have been largely wiped out. And as 
you say, there is plenty of money waiting on the sidelines. So 
private equity, for example, would be my leading candidate.
    They will not come in, I do not think, until they feel both 
that the general macro economy, you know, is somewhat more 
clear, and also that the specter of nationalization is 
completely off the table. So they might have to feel the 
banking sector has turned the corner that they are not going to 
get wiped out. And I----
    Senator Warner. And, Dr. Johnson, does that mean, though, 
that we have to actually then--I do not want to take it to the 
absurd level, drive out all of the existing equity that are 
currently there before they will get that confidence level?
    Mr. Johnson. No. No, you do not have to drive out all the 
existing equity, but the question is exactly this level of 
uncertainty around the toxic assets. So let us say you say to 
them come in now, you know, we, the Government, will help you 
find decent terms, and, you know, given the way these banks 
have been run, we will put a lot of pressure on through the 
regulators to sell. They are still going to worry about the 
liabilities they are taking over or their responsibility for 
these bad assets. And that is a tough problem to solve. You 
discussed a couple of ideas that I think would work in terms of 
splitting the balance sheet and providing some sort of backstop 
guarantee, so this was done in the Citigroup 2 deal in November 
before Thanksgiving. It was also done for UBS in January.
    I think the scale of both deals was insufficient. They did 
not cover enough of the balance sheet, so it did not 
sufficiently reassure the market. Also, the macroeconomy has 
continued to turn down since then. But I think that is an 
approach----
    Senator Warner. Again, just a clarifying question. In both 
those cases, the banking institutions did not spin out those 
bad assets. While we guaranteed them, they did not spin them 
out into a separate entity that would then allow kind of a 
cleaner bank to----
    Mr. Johnson. Right. That is hard to do because you are 
still--the creditors--you know, under existing--unless you can 
change the law quite quickly, the existing creditors have a 
claim on the good--you cannot say to them, OK, you get this, 
you now have a claim on the bad bank and not on the good bank. 
It is all intertwined. It is very complicated to split it in 
that fashion and to sort of remove--you have to use--this is 
where you are using the Government guarantee, so you are 
requiring the bank to take the first loss in both the Citigroup 
2 deal and in the UBS deal that they did in Switzerland. And 
then the Government basically is going to have to absorb the 
rest of the losses.
    Now, the problem with that deal is it is not very 
transparent. You do not know exactly what the value proposition 
is to the taxpayer there. And I personally would prefer more 
upside for the taxpayer, for example, in the form of 
recapitalization, the Government gets compensated with 
warrants. They cannot exercise those warrants themselves. They 
cannot get voting stock for the Government. But they can sell 
them to people who are on the sidelines and, therefore, 
basically sell controlling stakes in these banks to other 
private parties. That I think would promote the right kind of 
restructuring and change of management that you would need at 
these banks.
    Senator Warner. Just to be clear again, so that if the 
Government came in with this recapitalization, they could then 
clear a secondary market of these securities so that private 
investors could come in and take the place of the Government?
    Mr. Johnson. Exactly.
    Senator Warner. And then take the place of the Government--
if there were no management controls in those shares, you would 
have to allow them then to convert into some level of 
management and oversight if the private sector came in. Is that 
right?
    Mr. Johnson. Yes. So I think what we are talking about is 
ways to get a co-investment with the Government and the private 
sector when there is a real timing issue. The private equity 
wants to wait on the sidelines until deals are getting done and 
they can sort of see resolution of the banking sector problems. 
But, of course, you need to bring a few guys in early. So what 
is the right way to incentivize that? And what is the right way 
to make sure that the Government gets sufficient--the taxpayer 
gets sufficient upside?
    Senator Warner. Please, gentlemen.
    Mr. Setser. I think the key to bringing in private money is 
convincing private investors that there are not bad assets 
lying around on the bank's balance sheet, which they are 
putting--so that they limit the risk, so they are putting money 
in and they are going to get hit with a big loss on the 
existing bad assets. And there are a lot of different ways of 
accomplishing that goal, but almost all of them require the use 
of public financing.
    I personally prefer those structures which fully remove the 
bad assets off the balance sheet. But then if you do that at a 
price that is appropriate for the taxpayers, you run the risk 
of leaving the remaining bank without sufficient equity. And 
then I think you have to find a structure which could involve 
private money for coming into the new bank that is left behind. 
But that new bank will also likely need some form of public 
sector recapitalization, the best I can judge.
    Mr. Adams. Senator, I would recommend you probably have to 
do both, especially using a ring fencing insurance mechanism 
for whole loans, which it is much more difficult to value in 
price. So I was just using a combination.
    I like the idea of taking the assets cleanly off the 
balance sheet so that private investors have at least a better 
sense of what they are getting. I agree with you there are tens 
of billions of dollars of private equity sitting on the 
sidelines ready to invest in financials. But the other issue, 
too, is the regulatory uncertainty. Congress this year will 
rewrite sweeping financial regulations. We do not know what 
that looks like.
    So in some ways, you really do not even know what you are 
buying if you are going in and buying a financial now, and you 
do not know what kind of financial regulatory structure under 
which you are going to have to operate.
    So sending early signals about the contours and composition 
of what a regulatory change might look like could remove some 
of that certainty.
    Senator Warner. I know my time has expired, but perhaps 
later one other question I would love to have goes into the 
real estate section. As we think about all of these mortgage 
modifications related issues, I would be interested--and, 
again, perhaps you can get back to me on this. The fact that we 
have taken these mortgage instruments and so sliced and diced 
them, so securitized them, so created all these ancillary 
obligations with the credit default swaps and all the other 
tools out there, doesn't that really make it dramatically 
harder, even if you have got the right program in place, to 
actually process the mortgage modification? Because you are 
going to be stuck with years of lawsuits unless you can do some 
major make-good.
    Senator Stabenow [presiding]. And we will leave that answer 
for another time.
    Senator Gregg. The answer is yes.
    [Laughter.]
    Senator Stabenow. Senator Alexander.
    Senator Alexander. Thank you, Madam Chairman. Thank you all 
for coming. I have two questions, and I will state them first 
and then make a little preference.
    First, shouldn't we really be doing all this at once--
housing, banks, stimulus--so we can see the whole picture and 
how much we are being asked to appropriate from the tax payers? 
And, second, are there any lessons, since this is a global 
discussion, from the rest of the world about how large our debt 
level ought to go? What are the reasonable limits?
    Now, let me make my preference. As I notice looking around 
the room here, every one of us used to deal with real money. In 
other words, we worked for the State government. We were either 
Governor or Speaker of the House or something else. And as I 
have looked at the stimulus package, it is just staggering to 
me. The State of Tennessee is about to get $4 billion from the 
Federal Government for this so-called stimulus package. If we 
got $4 million, we would consider that nice. If we got $40 
million, that would require a 2-day meeting to discuss what to 
do with it. Four hundred millions is as much as a new State 
income tax would bring in, and the last Governor who suggested 
that got run up into the Smoky Mountains and no one would even 
have dinner with him.
    This is $4 billion--$4 billion. And in the House, they just 
stuck in almost $100 billion over the next 2 years to increase 
the Federal Medicare match, which is bound to go into the 
baseline over the years. And if I am not mistaken, it is as 
much money as we spent on the entire appropriation for the new 
Part D Federal Medicare prescription drug program for all the 
seniors in America. This is a huge amount of money we are 
talking about.
    Maybe it is just my old Governor background, but the idea 
of saying, well, we need a trillion dollars, and then just let 
us spend it with whatever comes to mind, just strikes me as 
very irresponsible. Especially when I hear all of you say, it 
seems to me, that inevitably we need to appropriate--that means 
raise taxes; that really means borrow money--so that we can 
properly capitalize something to take the toxic assets out of 
the banks. That might be another four, five, six, seven, eight 
hundred billion dollars. You were really saying, Dr. Setser, as 
high as we could go and tolerate so that we do not use too much 
of the leverage of the Federal Reserve. And then there seems to 
be general agreement that we ought to do something effective 
about housing, and that might be another few hundred billion 
dollars.
    So why should we not be thinking about this all at once? 
Two or three or four hundred billion dollars for housing, four, 
five, six, or seven hundred billion dollars for toxic assets, 
and then an amount for stimulus with some strict definition of 
what we mean by stimulus. And I think it would be helpful to us 
to learn also from you what lessons can we learn from the rest 
of the world about how high our debt level ought to be before 
people, as one of you said, start choking on the notion of 
buying treasury bonds.
    Mr. Adams. Indeed, Senator, we should think about this in 
an integrated fashion, and if you want to address consumer 
confidence, which is now at an all-time low or the lowest since 
they have been tracking the numbers since 1967, there is a 
certain desire to want to have a shock-and-awe approach to it 
to at least get consumers' attention that, in fact, 
circumstances may change, and they may change soon.
    So you are absolutely right, Senator. We should think about 
it in a comprehensive, integrated approach, and that is 
certainly what the new administration has indicated they want 
to do. And I would hope that over the next few days or week 
they roll out something that looks comprehensive.
    Senator Alexander. Well, we will have already borrowed a 
trillion dollars.
    Mr. Adams. Yes, sir. That is why we need to stress that 
these things need to be looked at as pieces of a broader whole, 
and I think that is exactly what we are trying to do here 
today, Senator.
    On your other question about how much is too much, well, we 
do not really know. Some of it is a function of near-term 
deficits, but it is also a function of your longer-term fiscal 
viability. We benefit from having the world's reserve currency. 
We benefit from having the gold standard bonds of fixed-income 
instruments, and that benefit accrues to us for a whole host of 
reasons. But there is nothing set in stone that that has to 
continue in perpetuity. We have to manage our resources in a 
very sober fashion, and what I am worried about is not the 
trillion-dollar deficit we will run this year, but our long-run 
fiscal outlook that will add trillions over the next 10 years 
and trillions between now and mid-century. And I think that is 
when markets begin to start pricing into expectations that our 
instruments are not as worthy as they once were. And people 
will probably continue to buy them, but at what level, at what 
price. And we will probably have to pay a higher return. We 
will probably have to bribe creditors to buy more of our debt. 
And I did say that we are going to choke on debt. The world is 
going to be flooded with treasuries over the next 24 months, 
and we have to hope that there are enough borrowers out there, 
enough creditors to lend us money.
    Mr. Setser. I think I understand the concerns about the 
scale of borrowing, but I would just note that we are dealing 
with an economic contraction of unprecedented scale. We are 
dealing with a mortgage problem, excesses of, you know, numbers 
of underwater mortgages of unprecedented scale. And we are 
dealing with problems in our banking sector, not just the S&Ls 
or a portion of the banking sector, but the core of the banking 
sector of unprecedented scale.
    International comparisons suggest that getting out of any 
of these combined crises are extraordinarily costly, and we 
should be cognizant of that. But I do not think there is an 
alternative, unfortunately.
    When it comes to assessing the level of debt, it is a 
function of both the stock of debt, but also, obviously, the 
interest rate on the debt. Right now the interest rate has come 
down, so the projected interest costs for 2009 and 2010 are 
actually a little bit lower than they were in 2007 because of 
the large fall in the average interest rate on the debt stock.
    I think you have to start to worry when the two start 
interacting in a way so that the stock is going up and the 
interest rate is going up, and you are facing ever rising 
interest costs.
    Forty percent debt-to-GDP for most industrial countries 
does not raise a lot of concerns. Sixty percent for major 
industrial countries with a lot of credibility--and I think we 
remain such a country--does not generally raise a lot of 
concern. If you get to the 80 to 100 percent of debt-to-GDP 
ratio--and by here I mean marketable debt-to-GDP--I think you 
start to get into worries.
    Senator Alexander. Where are we today?
    Mr. Setser. Forty-something.
    Mr. Johnson. Forty-one percent is the current estimate of 
private sector holdings of U.S. Government debt. The CBO says 
by the end of 2010, it will be 54 percent before the fiscal 
stimulus. I would guess you figure on 8 percent from the 
stimulus if it does not get out of hand, so that is 62 percent. 
Cleaning up financial systems around the world of this kind of 
scale or fiasco costs between 10 and 20 percent. That is in 
addition to net private holders of Government debt. So that 
pushes us close to 80 percent of GDP. Now, that is a high level 
of debt, without any question.
    And I think to answer your question, Senator Alexander, we 
should be considering all these things together. We have to. I 
hope the administration is putting together ideas and proposals 
on how they use the TARP funding that will address the housing 
and maybe the financial sector issues at the same time. I do 
not think that is enough, and that was the discussion with 
Senator Conrad earlier. I think an additional appropriation 
will be necessary to deal with at least the financial sector 
problems, and perhaps the housing problems, depending on what 
approach you want to take. And I think you do need to consider 
it as an integrated whole, because it is just one level of 
Government debt, and it is one Government, one confidence in 
the Government, one credit rating, and that needs to be 
safeguarded. And, of course, I think--and this is the point Tim 
was making a moment ago--Social Security and Medicare reform 
becomes incredibly important in this context, because we have 
eaten up all the safety buffer that we had before. All the 
ability to sort of postpone resolution of those issues, it is 
gone.
    Greece started, as I said before, with 90 percent of GDP, 
and I chose the example of Greece exactly because that is where 
the United States could end up, and that would not be a good 
place.
    Senator Alexander. Thank you.
    Senator Stabenow. Thank you. I will take my turn at this 
point and then turn it to Senator Graham.
    Thank you very much for very sobering statistics and 
information. I do want to start by just indicating to my friend 
from Tennessee that if Tennessee would like to forego the $4 
billion they are receiving in the stimulus, the State of 
Michigan at 10.6 percent unemployment, and rising, would be 
happy to accept that. So we can maybe work something out there.
    More broadly on the stimulus, I think it is important to 
say that the reality is our country, our Government should have 
acted sooner on the issues that are in front of us. I remember 
having conversations 2 years ago with extremely knowledgeable, 
credible people in the housing industry, raising red flags 
about what was happening in the subprime market, indicating 
that exactly what has happened would have happened if we did 
not act boldly. There were proposals. They were not supported. 
The actions were not taken. And we are where we are.
    And so we are now at a point where there are not easy or 
good answers, and it is an incredibly difficult and a huge 
crisis that we are trying to work our way out of.
    But I think it is also fair to say we have to do something 
different. The same philosophy that put us here will not get us 
out of here, in my opinion, which is why we are trying to do 
some things different. They may work--well, we certainly hope 
they work. I believe they will work. But it will not be 
perfect, probably. But we also I believe, need to act as 
quickly as possible to begin this because every day the numbers 
get worse and worse and worse, and inaction is not going to 
help.
    So I would love to see us do it all at once. I think we 
have to look at the big picture. But given the fact that it 
does take time to do it, I would much prefer that we get going. 
And I certainly think that the people in this country want us 
to get going.
    A couple of questions, more back to the good bank/bad bank. 
I know you have talked extensively about that. But I wonder. We 
have talked a lot about taking the toxic assets off of the 
books, creating the bad bank and so on. There are those who 
would argue that we should do the reverse: capitalize a good 
bank, and with a time limit. I understand the implications of 
that, but with some several-year time limit and that going that 
way rather than taking the bad assets off the books and then 
having to recapitalize the banks that are left, it is a 
different way of looking at it. And I have not really heard you 
specifically talk about that, whether or not that make sense to 
attempt the reverse and create a good bank rather than creating 
a bad bank.
    I wonder if someone--Dr. Johnson?
    Mr. Johnson. Sure, I can take that. Yes, I think there are 
a number of good ideas out there, and I think the whole idea is 
that we could get going quickly, by the way. I am not saying we 
should sit around for 3 months and discuss this. We need to act 
quickly. We have been sitting around for 3 or 4 months, 
actually, and we have not made a lot of progress so far.
    So I think you could think about putting capital into 
either new banks--you could charter banks, and you could 
charter them and sell them to the private sector, for example, 
if you felt that was an issue. Or you could find ways to put 
additional capital or to enable this strong--some of the strong 
local regional banks that do not have these problem assets, you 
could find ways to enable them to scale up their activities.
    The problem is that you would still have these very large 
banks looming over the economy, and there would still be the 
question of what are you going to do about a Citigroup or 
potentially about a Bank of America. And until you address that 
issue, there is a systemwide concern with regard to financial 
markets and the financing of business. And there is a budget 
concern also. So who is going to pay for the clean-up of those 
banks eventually?
    And the market is quite good at this kind of the logic 
where they say, well, nothing is happening, it is going to get 
worse, and then they are going to nationalize. Unless you show 
them there is--I think nationalization would be a disaster in 
this country. I really do not think that is the way you want to 
go. But unless you show the financial market there is a 
credible alternative for dealing with the problems, yes, you 
can say, look--if you wanted to, you could say we will try and 
get more of the new lending out through other channels, but we 
also have a strategy for dealing with these existing banks. We 
are not just going to pretend they are not there. I think as 
long as you do not lose sight of that, then various approached 
would be fine.
    Senator Stabenow. OK. Dr. Setser?
    Mr. Setser. I generally agree. I think the core advantage 
of putting--on the assumption that we put capital into all 
banks, including the existing banks with bad assets that would 
need large sums of additional capital and would really 
recapitalize in a way that would be convincing and allow them 
to continue to lend, I think you are effectively saying that 
the Government would become the largest equity owner of several 
of the major banks in this country, which is a reasonable 
policy approach if you are willing to accept the consequences 
of that policy approach.
    What it does not--it avoids having to set a price on the 
toxic assets because you are putting equity into the banks, the 
banks still keep the toxic assets on their books. That has the 
advantage of you do not have to figure out what the right price 
is. It has the disadvantage of no one knows what the price is, 
which tends to make it harder to get new capital into the 
banking system, and I think it runs the risk of creating a 
situation where those who are running these large banks with 
all these bad assets are going to just sit around and do 
nothing and hope everything gets better, because if everything 
gets better and they have marked the toxic assets down to some 
level, then they can get them--mark them back up, get a big 
profit. And, you know, if things get even worse, well, what is 
the worst that happens? Well, the Government puts in more 
money.
    So it does not necessarily provide a resolution inside the 
banks on what to do with the toxic assets. So my guess is you 
need to do both.
    Senator Stabenow. OK. And I do have one other question, 
but, Mr. Adams, did you want to comment on this?
    Mr. Adams. No.
    Senator Stabenow. All right. To followup on what Senator 
Gregg was talking about in terms of a proposal that we have 
heard in terms of low mortgage subsidizing of, you know, 4-
percent, 30-year mortgages with a sizable tax credit for first-
time homebuyers was the philosophy of saying rather than just 
focusing on mortgage foreclosure mitigation, but let's gets 
people buying houses again, let's get people who can buy houses 
to buy houses, and doing it that way.
    I wonder if you might just speak a little bit more about 
that. I know, Dr. Johnson, you were saying you would be 
concerned about the long-term implications of the Government 
coming in and subsidizing interest rates and so on. But the 
idea of--rather than--and I know we need to do some of both, 
but not just focusing on foreclosure mitigation, but how do we 
get the general economy, the housing economy going again so 
that people who can purchase homes will purchase homes and we 
will start the economic activity around housing that we have 
been missing.
    I wonder if any of you would comment on that. Mr. Adams?
    Mr. Adams. Yes, Senator, I like the idea. I think it is 
bold, it is clean, it is broad-based, and I think it will prove 
effective. We do not know the costs, and we do not know the 
costs in pure budget terms, and there is a variety of ways of 
doing it. Again, the Fed could use their balance sheet. Someone 
will have to subsidize the difference between the market rate 
and whatever rate, 4, 4.5 percent. And I know this idea has 
been kicked around.
    In fact, I think we need to make a threshold decision we 
are either going to do it or not do it because I think what you 
do is you paralyze a lot of buyers who are sitting on the 
sidelines thinking, well, I might go buy a home, but I am going 
to wait and see if this 4.5 percent thing materializes.
    On the first-time homebuyers' tax credit, I think the 
problem is first-time homebuyers just cannot get access to 
credit, so even if they have a tax credit, first you have got 
to have someone who is willing to extend you credit to actually 
buy the home, to get the mortgage. And that is where the real 
problem is.
    So I think we have got to unfreeze the financial system, 
and we can do that in a variety of ways. But I like the 4, 4.5 
percent approach, and I like the FDIC approach of addressing 
the foreclosures and the wave of foreclosures we are going to 
experience throughout this year.
    Senator Stabenow. Thank you.
    Mr. Johnson. If I could just add one comment to that.
    Senator Stabenow. Yes.
    Mr. Johnson. When I worked at the IMF, the IMF was the 
custodian of fiscal prudence and warnings for lots of countries 
around the world. One of the big things that you would always 
warn governments about is getting too involved in the credit 
process.
    Now, I take Senator Gregg's point that perhaps in the U.S. 
it is different. Perhaps the U.S. really can make this 
absolutely watertight in terms of any kind of influence or 
directed credit or, you know, various kinds of things that in 
189 countries in the world this would go badly off track. But I 
do want to raise that flag and tell you it is extremely 
dangerous from that point of view. That is the international 
experience.
    Senator Stabenow. Thank you very much.
    Senator Graham.
    Senator Graham. Thank you. This is an amazing country where 
people like me will decide these things.
    [Laughter.]
    Senator Graham. I mean, I say that very openly and 
honestly. The political system is better than the alternative, 
but as I sit here and listen about the different options and 
combinations, I am thinking as a politician, now what I sell 
people back home? Because this is not going to work forever. We 
have got probably one more shot at this.
    The TARP, you were very brave, by the way. I voted for it 
the first time. Do you think the first $350 billion was wisely 
spent?
    Mr. Setser. I guess I will take that. It probably was not 
spent as well as it could have been, but I think we have to 
contemplate the consequences of not putting money into the 
banks. And I think the consequences of that, to be blunt, would 
have been the failure of several major institutions.
    Senator Graham. Dr. Johnson?
    Mr. Johnson. No, I think the money was largely wasted. I 
think the support provided by the Federal Reserve to the 
financial system in September and October was decisive and 
excellent. I give them full marks. The TARP I money was largely 
wasted.
    Senator Graham. OK. Mr. Adams?
    Mr. Adams. I think the money should have been used for what 
it was sold to be used----
    Senator Graham. Now, can I interrupt? That is the problem 
that I have got, is that I was told A and they did B. I think 
we need to investigate whether or not they were honest with us 
to begin with, because we are not going to do this a bunch more 
times. That is a technical term, but we are not going to do 
this a lot, because people are running out of trust and 
patience with us up here.
    So I was told we are going to get these bad toxic debts off 
the books. That made sense to me. I did a news conference in 
South Carolina in front of a Fannie Mae house that was in 
foreclosure saying that we are going to buy this house and 1 
day the economy is going to get better; the house will sell, 
and we will get some of our money back. The next thing I know, 
they are giving money to every bank in the country, some of 
them who do not even want it, and nothing much has happened. So 
we got a second chance at the next $350 billion.
    So from the financial point of view, would you urge the new 
administration to take the next $350 and deal with the toxic 
asset problem or the housing problem?
    Mr. Johnson. Well, my recommendation would be to do both, 
and I think--you have to recapitalize the banks, and I think 
that is what we were just discussing. But if you do not remove 
the toxic assets, then the capital is going to be impaired 
right the get-go and the private sector will not come in and 
help you.
    Senator Graham. Well, see, that is what we need to know, 
because $350 billion will not allow you to do both. And we are 
going to get into this deal of, well, you spent $350 billion 
more, what the hell happened with it? So we need to let 
people--we need to make sort of a systematic approach to this. 
If you have got $350 billion that is going to be required to 
two things, not one, and it does not get you to where you want 
to go, we need to tell the people in America that $350 billion 
is not the solution.
    It is sort of like political triage here. The $350 billion 
is best spent how, Dr. Johnson? If you had to pick, what would 
you do with the $350 billion?
    Mr. Johnson. Well, as I said, I do not think you have $350 
billion left. I think it is down to about $300 billion.
    Senator Graham. Three hundred, whatever number.
    Mr. Johnson. I think that I would use $100 billion of that 
to capitalize a housing refinance scheme of the kind that we--
--
    Senator Graham. Do you all both agree with that?
    Mr. Adams. Yes.
    Senator Graham. OK. So $100 billion of the $350 billion, 
this panel agrees should go into the people that are in 
foreclosure, right?
    Mr. Johnson. That is right, foreclosure mitigation.
    Senator Graham. OK. Now, there is the other aspect of 
housing, the excess inventory. In 1974, we had a tax credit 
that allowed a lot of inventory back then to be washed out 
because people could use the tax credit to make a downpayment. 
Do you suggest we look at that component of it, trying to come 
up with a hook to get people to buy this excess inventory, a 
one-time good deal?
    Mr. Adams. Yes, Senator. I do not know the budgetary costs 
of that particular program, but it is certainly worth looking 
at.
    Senator Graham. I think it is like $74 billion, but we are 
getting that scored.
    And the third thing is the 4 percent. Now, the thing that 
attracts me to most of that is I think people really will like 
it, and they will like me.
    [Laughter.]
    Senator Graham. And that is part of what we do up here, if 
we----
    Chairman Conrad. Senator, that is a stretch.
    Senator Graham. Yes.
    [Laughter.]
    Senator Graham. Well, it is the closest they will ever to 
come to liking me. But the point is that from a political point 
of view, we have got to get people who have done it right to 
feel like they are getting something out of this. And you do 
not own a house, do you, Dr. Setser? My goal is to get you into 
a house. So if I had a 4-percent mortgage and I looked at the 
difference between what I owe on my current mortgage and 4 
percent, that would be hundreds of dollars a month that I would 
have. If you repeat that a million times over, that helps the 
economy doesn't it? I mean, that just does not help housing. 
That is really freeing up a lot of money that would be going 
into the mortgage banking system that hopefully could go into 
the general economy. So is it a two-fer?
    Mr. Adams. It certainly will help household cash-flows, 
which are under stress, and will be more under stress as the 
year progresses. And it makes those assets, those homes, the 
value of those homes for the purpose of being on the balance 
sheet, the banks more viable and more accurate. So you are 
getting a two-fer.
    Senator Graham. So that is what I am going to tell people 
back home, not only by lowering your mortgage rate, that is 
good for you, it is good for the economy and it may address our 
bottom-line problem with the financial institutions more 
directly by having some of these assets.
    Mr. Setser. Let me, if I could add something, since I am 
the targeted audience for this 4 percent.
    Senator Graham. Yes, you are.
    Mr. Setser. I think what I would worry about is, you know, 
on one level it might make all of you a little bit too popular, 
in which case you would keep it on forever, and that would not 
make Dr. Johnson happy. But it would make me happy because then 
I would know that the price of the home was going to stay high 
forever.
    Now, if it is going to go away, I think what I would worry 
about is I would still be buying at too high of a price because 
of the overhang, because I think, you know, frankly, home 
prices got too high relative to incomes. And I worry a little 
bit about policies that are directed at sustaining an 
unsustainably high level of home prices, fully knowing that if 
you keep home prices up, you help the banks.
    Senator Graham. Well, you have got to understand this: 
Everything we are doing, no one likes to do and it is 
unprecedented. I mean, if we are--that is no longer the test. 
There are things that the Federal Reserve is doing I never 
dreamed they would do. There are things I am voting for I never 
dreamed I would do.
    So an 18-month window that would be a hard window makes 
sense to me. If we are going to treat this problem as a global 
financial crisis of historic proportions, I think Republicans 
and Democrats have to embrace things that we would never 
embrace before. And I do not like the idea of going into the 
marketplace and setting a Federal Government rate. That bothers 
me greatly. But it does seem to generate some solutions to more 
than just the housing problem. It seems to create a stimulus 
effect of its own by giving people more disposable income. It 
seems to migrate to the banking problem, to the financial 
institution problems. It seems to have a reach far beyond just 
making me popular. And I am being very serious about that. It 
seems to be able to connect the dots on many of these problems, 
but by itself is not enough.
    Dr. Johnson?
    Mr. Johnson. A couple things. Sorry to be a little 
negative.
    Senator Graham. That is all right.
    Mr. Johnson. Because it seems to be going in a direction, 
an attractive direction or you, but two things.
    First of all, close to 50 percent of all refinanced 
mortgages or mortgage that are rescheduled by the lender, close 
to 50 percent of them go into default within a year. So there 
is a question of if you want to do a broad refinancing package, 
which is what you are talking about, or do you want to have 
something take your limited dollars and use that in a more 
targeted way to deal with----
    Senator Graham. Well, you do both. I mean, the people that 
are in default, we have come up with ways to basically 
renegotiate your mortgage--and I know my time is up. Fifty-2 
percent of those who got refinancing went back into default; 48 
percent made it out. That is pretty good. I mean, I look at it 
as the glass half-full.
    What I am talking about is people who are not in default, 
people like myself, people probably here at this table, that 
would take advantage of this one-time good deal. It would 
generate some revenue into the financial systems, and it would 
create some cash-flow for the American consumer that would help 
us down the road.
    And I would just end with this note. When it comes to the 
financial institutions, I think the first $350 billion was 
wasted. And I do not know how you identify these toxic assets, 
but if we could do something like Senator Warner suggested 
where the Federal Government does not have to do it all by 
itself and take all the risk and get some of the capital off 
the sidelines, I think we would be well served in that 
financial part.
    I would just end with this note. What I want to take from 
this hearing is go back to people in South Carolina and say 
that $350 billion was not well spent, the next $350 billion can 
be better spent, but it is not nearly enough; $850 billion can 
be rearranged, but probably at the end of the day, that is not 
enough.
    Is that fair to say?
    Mr. Johnson. That is fair.
    Senator Graham. Thanks.
    Chairman Conrad [presiding]. I would say to the Senator, I 
think this hearing has been very powerful, both about the 
seriousness of the challenge that we confront, that it is 
global, it is deep, it is worsening, and that we are going to 
have to do far more, especially with respect to housing. And 
the question is: Where are those resources going to come from? 
And we are going to have to do far more about the financial 
sector.
    There is simply no way to have full economic recovery when 
housing continues on a downward trajectory, especially at this 
rate, and certainly it cannot happen without the financial 
sector being strengthened. All of the models that talk about 
job generation are based on the concept of a basically healthy 
financial sector, and we do not have that. And somehow it has 
got to be restored, and obviously, based on this hearing, it is 
linked to dealing with the toxic assets, isolating them in some 
way, and clearly we need the multiplier effect of Government 
funds unlocking private funds to help us lift this boat. And I 
think that is the clear message from this hearing from all of 
our witnesses that housing has got to be better addressed, that 
the financial sector has certainly got to be better addressed, 
and it is going to require hundreds of billions of dollars over 
and above what has been so far allocated.
    Senator Whitehouse.
    Senator Whitehouse. Mr. Chairman, let me make one quick 
point and then ask a question that follows up on what Senator 
Graham was getting at.
    The quick point is that my office has calculated that the 
Bush administration has added nearly $8 trillion to the 
national debt versus where the budget was planned to go the day 
he took office--$8 trillion. And nobody had a peep to say about 
that this entire time. I mean, you ask most Americans, they do 
not even know that that is the kind of damage that was done.
    We are looking at a $50-plus trillion entitlement liability 
against which we have put zero, not a nickel; $35 trillion of 
that is Medicare alone. So as alarming as some of these numbers 
are--a trillion, 2 trillion, 3 trillion, 4 trillion--faced with 
the clear and present danger that we now have of global 
economic collapse, the idea that we would now nickel-and-dime 
over $3 or $4 trillion when we let Bush blow twice that, and 
when we have got more than 10 times that looming at us, most of 
it just in health care alone, you cannot have your priorities 
in sync if you feel that way. That is my point.
    My question follows up on what Senator Graham was saying 
about in a democracy in particular, the economy and the polity 
connect. And public faith has to be maintained, or else this 
whole thing falls apart.
    What experience do you all have with how governments did in 
other countries when there were these national economic 
wipeouts? In particular, if they were elected governments? And, 
in particular, if we got into situations where there was the 
widespread perception of scandal, of favoritism, and injustice? 
And I ask this question because I put two things in 
counterpoint.
    We fought like the devil--and some people like Senator 
Stabenow fought as hard as she could--to try to support the 
American auto industry. And we are fighting over maybe $18 to 
$30 billion. The whole industry depended on that, and we had a 
huge colossal fight here about that.
    The Wall Street Journal has reported that there is deferred 
executive compensation of the books of the Wall Street banks 
that are getting TARP money of $40 billion, and the woman who 
wrote that article says that that is a bottom-line number. If 
we are willing to put a whole industry at risk and we do not 
even have a means to look at $40 billion in deferred executive 
compensation, that if there were a bankruptcy would have been 
paid off at pennies on the dollar, because these banks have a 
public utility function, we cannot let that happen, so as a 
side bonus we are going to let their executives walk away with 
$40 billion? That kind of stuff I think puts us at very grave 
risk of a catastrophic loss of confidence in Government as the 
pain really begins to sink in and people's tolerance for this 
nonsense evaporates.
    So I would love your thoughts on not just the economic part 
of this, but what does this do to governments?
    Mr. Johnson. I think that I agree very much with the 
sentiments that you are expressing, Senator, and I think you 
are exactly right. What we typically see when a country gets 
into a crisis and tries to engineer or reform its way out of it 
in various ways is various kinds of scandals pop up, and this 
is, you know, the case in Eastern Europe, it is the case in 
Western Europe, pretty much all around the world. And these 
scandals, you know, really touch a nerve because public money 
in some form is wasted. Maybe the amount of money that has been 
wasted is small relative to the total endeavor, but it really, 
really annoys people and bothers them, and governments fall. 
Usually we are talking about a parliamentary system of some 
kind so the government can fall and a new government can come 
in. And I would say that scandal-generated government turnover 
is the No. 1 or No. 2 cause of governments falling in these 
kinds of situations.
    So I think you obviously have a rather different system of 
government here. The Government cannot fall in the same way. 
But you can have an enormous amount of----
    Senator Whitehouse. Every 2 years it can.
    Mr. Johnson. Good point. But in the meantime, you can have 
an enormous amount of political and social backlash, and you 
can have a great loss of confidence in the Government. You 
know, to be honest, that is one reason I worry about this 4-
percent mortgage refinancing deal. So that is a nice deal to 
make people very popular, but if you start to see any kind of 
scandals coming out in and around--I am not sure what dimension 
of that program, you could see how the whole thing would start 
to feel, you know, pretty negative for a lot of people.
    Senator Whitehouse. Dr. Setser?
    Mr. Setser. Well, I read, I guess yesterday, that Wall 
Street paid out the sixth highest level of discretionary 
bonuses in its history, and it clearly did not have its sixth 
best year in history. The fact that some strong understanding 
was not reached with the banks at the time when equity was 
given to those banks, particularly those banks that were in the 
deepest trouble, which were known, that they would not 
significantly reduce the amount of discretionary bonuses, 
reduce dividends, take their own internal resources and use 
those resources toward recapitalization, was, I think, a 
tremendous mistake.
    And when I say that I think the $350 billion was used 
necessarily, I think it was used in a way that was necessary 
given the fact there was not enough money to do what was 
originally proposed, which was use the appropriated funds to 
buy the toxic assets off the banks. You could not buy them at a 
price that would leave the banking system solvent and buy 
enough of them with $700 billion. So you were left choosing 
between bad options.
    I think the challenge now is to provide a big enough frame 
of reference, of resources, so that you can actually do what is 
needed, and what actually is needed, you need to sort of go 
through the banks, force them to value their assets at a 
realistic level. Those banks that do not pass necessary capital 
requirements and cannot get additional capital in the market at 
that level will have to be provided, taken under the public 
wing, and other banks will be recapitalized, and the bad assets 
will be moved off the balance sheet.
    Senator Whitehouse. You are back on to the economic 
question. My question to the panel was about what happens to 
governments when there is scandal in all of this and what is 
the experience. If you have something to say to say to that, I 
would love to hear it. If not, I would love to hear from the 
next witness.
    Mr. Setser. Let me just note that in many countries a 
democratic election which installed a new government provided 
the basis for the recovery. Think of Korea in 1998 when the 
election of a new President, President Kim Dae Jung, allowed 
Korea to move on from the past to focus on what needed to be 
done. And then it ultimately hinges on whether the new recovery 
program works. If it does not, then----
    Senator Whitehouse. New government.
    Mr. Setser. New government.
    Mr. Adams. Senator, you tend to have social and political 
turmoil. Just pick up the paper today, yesterday, the day 
before. Eastern Europe, Central Europe, Iceland has a new 
government today because of the financial crisis that they have 
endured. We have seen social unrest in Russia and China. And 
there are thousands of other incidents that do not make the 
with post every. So indeed, we are seeing it, and I submit we 
are going to see more of it over the coming year, which has 
implications for U.S. foreign policy as well.
    Back to State, it goes without saying that there has been 
excessive compensation. The market will take care of some of 
that. Guidelines from Congress will take care of some of that. 
The industry itself has come up with a set of self-regulatory 
standards which I think will address it. And I know there is 
some response on Wall Street, well, maybe we will lose some of 
this talent. That is fine. Maybe they will become teachers and 
engineers and doctors.
    Senator Sanders. Talent. Did you say talent? Some of the 
genuses who got us to where we are today, we may lose those 
guys? OK. I just wanted to be clear.
    [Laughter.]
    Senator Whitehouse. Mr. Chairman, I would like to make one 
observation off of this, and that is that if we look at 
government, writ large, basically there is stuff that 
government should never do. And then there is stuff that 
government can do within its authority, constitutional, 
statutory.
    There is a big range of government power that we can only 
deploy if the person who it is operating on has the right to a 
due process hearing. All the way back to Mrs. Fuentes and her 
stove in the Supreme Court case of Fuentes v. Shevin. Because 
we do not have bankruptcy eligible in these areas because of 
the public utility aspect of all of this, and because we have 
not built an alternative judicial or quasi-judicial place to 
get these determinations made, what we have done as a country 
is unilaterally disarmed all of the powers of government that 
bear on these individual property rights, and we right now are 
in incapable, literally, except by persuasion--we can get our 
colleague Carl Levin to lean on Tim Geithner, to lean on 
Citigroup to junk their $50 million French luxury jet that they 
were buying. But you cannot win this battle waiting for one 
thing at a time to pop up and then leaning on people. We simply 
do not have the structure now to address what I believe are 
going to be socially disabling injustices in this system as we 
stand. And I appreciate the extra time to make that point.
    Chairman Conrad. Let me just add, I think it is important. 
There was reference to the first $350 billion by Senator 
Graham, and I did not want to let this hearing go by without 
saying my own view. If the first $350 billion had not gone out, 
I believe the financial system would be in collapse today. I 
believe the Dow would probably be at about 4000. So while I do 
not think it was deployed in the most efficacious way, I 
believe--there is no question in my mind, and the testimony 
before this Committee yesterday was very clear on this point. 
Without that first $350 billion, the financial sector would 
have collapsed. And I think that needs to be on the record.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    Several of you alluded to the choice of using appropriated 
money versus having the Fed finance the additional 
capitalization of our financial sector. And I want to get a 
little clearer sense of the advantages and disadvantages of 
those two approaches, if any of you could comment on that.
    Mr. Johnson. Sure. I think the point we talked about 
earlier in terms of the capital you need for one of these 
financial transactions. So there is some money--if you have a 
housing refinance scheme, I think that will be leveraged using 
access to the Fed in some form, and I think you do the same 
thing with the approach to the banking system.
    You have to engage in a level of nominal transactions, the 
amount of mortgages being refinanced, for example, that is 
substantially in excess of what you could lose in any----
    Senator Merkley. Yes, and I was referring to the financial 
sector. I assume this was the recapitalization of the banks 
that was being referred to in terms of additional 
appropriations versus using the Fed. And I assume by the Fed, 
we are talking about the Fed lending directly into the banks. 
But if you want to add any kind of description of how that 
exactly would work, that would be helpful.
    Mr. Johnson. Yes, I think you would have the Fed--you would 
have the Government set up an organization like the Resolution 
Trust Corporation of the 1980's, and the Fed would lend--so it 
is a Government-owned corporation. The Fed would be lending to 
a Government-owned corporation, which is a completely safe 
loan. And that will provide you with a level of nominal 
transactionability for this RTC that you would need in the bank 
recapitalization and the toxic asset removal.
    So if you buy toxic assets at market prices, which is what 
I would strongly advocate in this situation--I think it is 
completely doable, and the only thing that is fair to the 
taxpayer--then you should expect to lose some money on some and 
make money on others. The total amount of loss would be far 
less than the amount of money needed to buy those toxic assets 
from the financial system. So, therefore, it is fair to 
capitalize this organization at some safe level, so cover the 
level of losses that you and the CBO think could be incurred, 
and then use Fed lending to this entity in order to scale up 
the operations.
    Senator Merkley. Do you picture in that--what type of 
interest rate exists between the Fed and this Government entity 
in that type of situation?
    Mr. Johnson. Well, I think that is a very interesting 
question. Of course, you are just transferred from one branch 
of Government to the other, and you obviously have a say over 
what the Fed does with its profits ultimately, anyway. So I 
think that you would be lending at something close to the rate 
at which the Government--the Government entity would be able to 
borrow at a rate close to what the Treasury can borrow at. 
Essentially, it is a form of Treasury borrowing, but from the 
Fed in this instance rather than from the public.
    Senator Merkley. Anyone else want to jump in on this?
    Mr. Setser. I would be interested in Dr. Johnson's 
reactions to this since I can take this an opportunity to learn 
as well as to pontificate. But, you know, I think the Fed 
already has extended a very large amount of credit to the 
financial sector, so you can envision a world where, in 
effect--and that is being lent to a financial sector that has 
bad assets on its balance sheets to intermingle with some good 
assets. We are talking a sum in like the trillions of Fed 
credit to the financial sector.
    If the Fed, in effect, shifts from financing----
    Senator Merkley. Can I clarify that? That is really lent at 
the Fed rate, which has been close to zero. Is that correct?
    Mr. Setser. It would have been lent at a little bit higher 
rate than that because it would have been lent against a range 
of assets. It would not necessarily be zero, but at very low 
rates, yes. And, you know, it would be lending to the 
Government presumably at a fairly low rate. The RTC entity. But 
if you can envision a world where, in effect, the Government 
ends up buying the bad assets and some of the credit that the 
Fed has extended to the financial sector to support those bad 
assets now is now extended to this RTC-type entity, and so, in 
effect, it allows the Fed to exit from its existing bad loans, 
and so there is not a huge net extension of Fed lending.
    Now, personally I would prefer to do it in as clean a way 
as possible with the least amount of embedded leverage on the 
Government's balance sheet as is possible, so to have more from 
appropriated funds and less from the Fed, because I think it is 
just more honest. But I understand the constraints that lead 
you to, in effect, set up an institution to go out in this case 
and borrow from the Fed.
    Senator Merkley. So in the absence of political issues, you 
are saying that it would be much better policy to have a direct 
appropriation to fund such an entity.
    Mr. Setser. That would be my view, yes.
    Senator Merkley. Do you share that, Mr. Adams?
    Mr. Adams. Well, Senator, I think there is certainly a 
limit to how much the Fed can expand its balance sheet without 
causing concern, both near term and long term, as to what the 
effect is going to be. Are we simply going to inflate our way 
out of this by printing money? And if we are, that has 
implications for debt holdings around the world, our ability to 
issue new debt, and has implications for our currency.
    So I think it is imperative for the Fed to think about what 
that limit might look like, although I am not sure it is 
knowable until you get there. And then how do we optimize the 
amount of room left given all the other missions that the Fed 
has decided they are going to take on, and some of it 
articulated in the Fed minutes just of 2 days ago.
    So you could use some of this appropriated money to cover 
the credit risk, the cost of credit defaults, because the Fed 
cannot take credit risk, and allow the Fed to use its balance 
sheet to leverage up. It is one way of doing it.
    The other is the way Dr. Setser noted, which is a full, 
front-on appropriation. It is just a function of how much you 
think the world is going to tolerate an expanded Fed balance 
sheet.
    Senator Merkley. Well, and in that context, a number of 
years ago Warren Buffett announced that he was moving a lot of 
his assets into foreign currency because of the anticipation of 
a potential run on the dollar. And right now the dollar is 
stronger in part because the rest of the world is ailing along 
with us. But is there a risk here that we are expanding our 
monetary policy in a way which means when the rest of the world 
recovers that we might be much closer to such a potential run, 
countries decided not to hold the dollar as reserve currency? 
Or is this a risk that you feel is pretty remote? And maybe 
just real short answers because I want to slip in one more 
question before my time runs out if I can.
    Mr. Setser. I would start to worry much more about that 
risk when the current account deficit starts to expand. Right 
now I think the current account deficit is coming down. But 
should the current account deficit expand, resume its expansion 
as it was before, not contract, and the Fed be rapidly 
expanding its balance sheet and interest rates in the U.S. be 
very low, that would be a set of circumstances where I would 
start to worry.
    Mr. Adams. Senator, we should comport ourselves in a way to 
minimize the potential downsides to our currency, both short 
term and long term.
    Mr. Johnson. I think the dollar is heading toward a 
depreciation for the reasons you are alluding to, and I am not 
as worried about it as I think you are.
    Senator Merkley. OK. I wanted to--and, Mr. Johnson, I 
wanted to direct this to you because of your concern about the 
4 percent. I once ready a study that analyzed the 4-percent 
loans to veterans coming back from World War II, and it said it 
was probably the most cost-effective investment this Government 
ever made for a host of reasons--because of the fact that it 
stabilized families, created a financial foundation from which 
those families succeeded. Those families then proceeded to 
spend a lot of money repairing their houses, so on and so 
forth. And so there is kind of a precedent for the Government 
getting involved in lending or setting a price on lending.
    So I wondered perhaps if you could expand on this. Now here 
I am thinking about the fact we are talking about the Fed 
lending what I think may come into the trillions directly into 
the financial world and maybe something less than a trillion 
through a Government entity. Why not have the Fed investing and 
lending directly to homeowners and stabilizing those 
homeowners, having the upside on the demand for products within 
our economy and so forth? I am trying to get a little better 
sense of your concern on this.
    Mr. Johnson. Obviously, the U.S. Government has been 
involved in the housing market, in effect, and the cost of 
housing for a very long time. The program you mention is a good 
example. Fannie Mae and Freddie Mac, of course, are exactly 
designed with the sort of Government backing to keep the costs 
of borrowing down for people up to a certain level of mortgage.
    The problem is, I think, with all of these programs that 
they are very hard to contain and control. Targeting the 
veterans after World War II, that is clearly a self-limiting 
group of people because the veterans come back and that is it. 
Right?
    The problem would be in 18 months, I think the economy 
might be starting to recover. Things, you know--we see green 
shoes throughout the world economy, and then people--and the 
program, of course, will be popular because you are putting 
money in people's pockets. How could you possibly withdraw it 
at that point? The potential for it to become open-ended and 
for--I have absolutely no problem with the Government 
supporting the economy in various standard and innovative ways 
right now. But what worries me is if you open the door to a 
big, never-ending commitment or entitlement, a new kind of 
entitlement program, then I think that is very difficult and 
very dangerous, and I hope you go there with some trepidation.
    Senator Merkley. Thank you all for your expertise and your 
insights. My time has expired, Mr. Chair. Thank you.
    Senator Sanders [presiding]. Thank you. Senator Conrad had 
to leave, so I will be chairing this for a little while.
    Let me begin. The title of this hearing is ``The Global 
Economy: Outlook, Risks, and Implications for Policy.'' Before 
I ask you questions about the financial bailout and the crisis 
on Wall Street, let me ask your comments on another issue.
    Compared to many other major industrialized countries, we 
do a pretty bad job in protecting the needs of ordinary people. 
Among other things, we have the highest poverty rate among 
industrialized nations. Certainly 18 percent of our kids are 
living in poverty. We have the highest infant mortality rate. 
We have the largest gap between the very rich and everybody 
else. The top one-tenth of 1 percent earn more income than the 
bottom 50 percent. We are the only Nation in the industrialized 
world not to guarantee health care for all people. Our people 
work the longest hours of any other people in the world. We 
surpassed Japan a while ago. There are jobs out there now which 
provide zero vacation time for people.
    So in terms of when a major economic crisis comes, somebody 
loses their job today, they are losing their health care, given 
the fact that we have done such a poor job in protecting the 
needs of working families and children, are other countries in 
some ways better prepared to deal with a severe economic 
downturn than we are? Dr. Johnson?
    Mr. Johnson. Yes, almost all other industrialized countries 
are better prepared. And it is interesting that we have to go 
through a discussion of a discretionary stimulus to provide 
additional forms of support, and I hope that is part of what 
will end up in the final stimulus package, addressing the kinds 
of issues you are talking about. In most other countries, that 
is part of what they call the automatic stabilizers. So that if 
you take France or Sweden or even the U.K., when the economy 
turns down and people lose their jobs, these additional 
benefits are available.
    Now, you can question if they are sufficient. I would not 
want to give you the impression that poor people get off easily 
and that this is not a terrible tragedy throughout the 
industrialized countries. But the countries that have the same 
sort of problems that we are talking about here are more 
emerging markets. They are countries that are at a half or a 
third of our income level, where, you know, people do not even 
register to be unemployed because there are no benefits that 
come with that, and they just have to go live with family 
members or find some sort of survival strategy.
    So I think you are right to identify this as a substantial 
problem, particularly if we think this is not a 6-month 
recession. If it is a V-shape--I think this is one reason why 
the officials are staying on the side of this optimistic view. 
If it is a V-shape recession, you do not have to worry too much 
because the jobs will come back. But if it is a U or if it is 
something longer lasting, then these are going to be first 
order of problems that have to be confronted, just as they had 
to be confronted in the 1930's.
    Senator Sanders. Any other comments? Dr. Setser?
    Mr. Setser. I will just second what Dr. Johnson said.
    Senator Sanders. I apologize for being late, but I have not 
yet learned how to be in three places at the same time. There 
is legislation we are working on. But let me ask you this: My 
understanding is that we have spent $350 billion on the first 
bailout. We have authorized the expenditure of another $350 
billion. I gather all of you are in agreement that more money 
is going to have to go to the Treasury. I should point out I 
voted against both of those bailouts for a variety of reasons.
    And then, as I understand it, the Fed now has already lent 
out over $2 trillion. Does that sound right? And some of you at 
least were suggesting that the Fed may be asked to lend out or 
should be in a position to lend out many trillions more. Is 
that correct?
    Mr. Johnson. Yes.
    Senator Sanders. Now, I have a car, an old Saturn, which I 
think I paid $12,000 for 5 years ago. And if I go to my 
mechanic today and the guys says, ``Well, you know, Bernie, 
your car is in pretty bad shape. It is going to cost you 
$10,000 to repair your $12,000 car,'' I would say, ``Well, 
let's junk it. I am going to get a new car.
    At what point, how much money do you throw down a rat hole 
before you say, wait a second, maybe it is a good idea to do 
something radically different? I think Mr. Merkley was talking 
about a moment ago using some of this money to provide low-
interest housing loans all over this country. I mean, if we 
took $3 trillion, you could rebuild America in a very 
substantial way. Why should we put $3 trillion more into an 
institution which has been corrupt, dishonest, reckless, 
immoral? Is that what we have to say to the American people? 
Dr. Johnson?
    Mr. Johnson. Well, I think you are asking a very good 
question, Senator. And I think one way to think about it would 
be exactly to say at what point would you be willing to 
nationalize the banking system of the United States. And that 
would be a totally--and by the way, in many other countries, 
industrialized countries, that is exactly what they would do at 
this stage of the game.
    Now I happen to think in the United States that would not 
go very well. But while I share, I think, and have spoken in 
public very similar sentiments to the ones you are expressing 
about the incompetence, and worse, the greed of Wall Street and 
the amount of damage that is done to us, I have also worked in 
a lot of countries around the world where the government has 
tried to run the banking system and it has not gone that well.
    So we are between the devil and the deep blue sea here. And 
I think my inclination is we stick with the devil for a little 
bit longer. We kind of know how we operate and we think we can 
get a handle on it. I may be wrong. Perhaps we come back and 
debt-to-GDP is 80 percent and we are in a terrible global 
depression. Perhaps at that point we nationalize the banking 
system and I say that I was wrong and you were right.
    I think my inclination, and Tim Geithner said yesterday, is 
we have had a private banking system for a long time in this 
country. It has kind of worked OK most of the time, we are 
trying to stick with it. I am supportive of that. But it is a 
risk. There is no question. It might go sadly wrong.
    Perhaps we should be nationalizing at this point.
    Senator Sanders. I personally do not know what the answer 
is. But I think your average American is saying that--these are 
people losing their homes, their jobs, their health care. And 
they are saying oh, OK, we will give these crooks who have 
caused this crisis trillions of dollars more. That makes a lot 
of sense. That is a good thing to do. And by the way, of 
course, in one way or another, we are quite confident they will 
manage to get personal bonuses and their fancy yachts or 
whatever they get.
    Yes, Dr. Johnson?
    Mr. Johnson. So just to be clear, the schemes that I am 
proposing for recapitalizing the bank system would involve new 
owners and those new owners would almost certainly throw out 
the guys who got us into this trouble. I think wholesale change 
of the management of the major banks, to me, would be 
absolutely essential to moving forward.
    But I do take your point that still people may not really 
understand this, they may not deeply--they may not appreciate 
what we are doing.
    Senator Sanders. Other comments on that?
    Mr. Setser. Well, we have gotten ourselves into as you, I 
think appropriately, described it, Senator, an enormous mess. 
And I think whenever the political system or the financial 
system has to sort out who takes losses, it is an ugly process. 
And there are, broadly speaking, three groups that can take 
losses: the people who lent money to the banks, the creditors, 
the depositors, money market funds, international bond holders. 
We tried that with Lehman and we made a policy decision 
afterwards that the consequences of that were so severe that we 
could not go forward with that.
    Which leaves to groups: the equity holders and the 
taxpayers. The equity holders, I think, should take a very 
large hit. They have taken a significant hit. They probably 
should take more. If they sell their assets at a low price, 
that will happen.
    And then you are left with only one group left. And while I 
fully support the general sense that the economy that we have 
had over the past eight or even longer years has not worked as 
well as it should, we also have this overhang of bad debt that 
we are going to have to deal with one way or another.
    Senator Sanders. Mr. Adams?
    Mr. Adams. Senator, the American people should be outraged. 
I am outraged at what has transpired and the cost of fixing 
this program. Unfortunately, if we are going to have a vibrant 
world class economy, we need a vibrant world class financial 
sector. And I agree, we need to make a whole host of suggested 
changes to management. We need new leadership. I think we will 
get that. We have gotten it. We will get it more over time.
    It is painful to watch the amount of money that we have got 
to spend in order to make it a vibrant system, I agree. But I 
think it is a necessary cost to ensure the economic viability 
of our country.
    Senator Sanders. You know, Dr. Setser, you used the word 
``We got into a mess.'' I do not think that is quite fair. We 
did not get into this mess. A relatively small number pushed us 
into this mess. And I think that what we are looking at may 
well be--you tell me, you know more about this than I do--the 
most, maybe since the Depression anyhow, clearly the most 
severe financial crisis that we have had.
    And in truth, and again please correct me if I am wrong, 
this was really created by a pretty small number of people who 
were not content to make 15 or 20 percent a year. They had to 
make 40 percent a year. They were not content with earning $100 
million, they have to earn $500 million. They were not content 
with having $1 billion, they need $3 billion.
    You are not talking about millions of people. And I kind of 
resent sometimes the rhetoric that I hear from all over the 
place, ``Well, we created this problem.'' No, we did not create 
this problem, frankly. You did not. I did not. A handful of 
people created, through excessive greed and dishonestly 
creating all of these esoteric financial tools which nobody 
understands. You have got trillions of dollars of credit 
defaults, swaps out there. No one knows what that means.
    So I guess the concern is A, how do you hold these people 
accountable? And then I just have strong doubts about going 
back to a system which any way resembles the system that we 
had. And I understand all the reforms that people are talking 
about. I am just not even clear that that is enough.
    And I take Dr. Johnson's point--the word nationalization, 
to me, does not frighten me. But I understand that the 
Government does not do things particularly well, as well.
    So we have that difficulty of not trusting the people who 
have got us here, not trusting Government to do the right 
thing, and we have got to figure out way out of that.
    Dr. Johnson?
    Mr. Johnson. I think, Senator, one way to take your totally 
justified anger and channel it, if we are still working within 
the private banking system, is to think about breaking up the 
big banks. I actually think these big, global financial 
supermarkets are the buggy whip of our age. I think they are a 
great idea whose time has long passed and we should get rid of 
them.
    And actually, I would suggest that when--if the Government 
comes in with capital, which I think it has to do, and the 
Government comes in with the right to determine who are the new 
controlling owners, I think you have to demand that--you should 
actually have some pretty strong antitrust provisions attached 
to that. Break up the banks.
    I think we need a world class competitive banking system, 
as Tim Adams said. I do not think they have to be big banks. 
And they certainly should not be so big they can get us--
``they'' can get ``us'' into this much trouble.
    Senator Sanders. Thank you for raising that issue. When I 
opposed the first bailout, and I was on the floor, what I said 
was if an institution is too big to fail, then an institution 
is too big to exist. And that I think we have to take a very, 
very hard look at this.
    But what is heartbreaking, and I spent 16 years in the 
House and two in the Senate, is I have heard these fierce 
debates. Some of us want to do something to help children get a 
decent early childhood education. And hours after hours of 
debate, $50 million, we cannot afford to do that. We cannot 
afford--right now on the floor of the House we are talking 
about a few billion dollars to provide health care for kids 
that do not have any health care. Oh, we cannot afford to do 
that.
    And yet, we are glibly talking about trillions of dollars 
to do what? Is it going to build any homes, create any 
factories? It is to bail out an institution which has fallen 
apart because of the greed.
    So if you do all that, what? We are back to where we were 
before. It is heartbreaking.
    But I think, Dr. Johnson, your point about right now, you 
suggesting that we should end--right now, we should deal with 
this too big to fail by not allowing institutions to be too big 
to fail. Is that what you are saying?
    Mr. Johnson. That is what I would make a condition. I am 
sure the Government is going to have to ultimately come in and 
recapitalize the banking system in some form or another. I 
think you should insist on that as a provision of that 
recapitalization, the breakup of these monsters.
    I think too big to exist is a very good line and you should 
stick to that.
    Senator Sanders. OK. Any other comments that anyone wants 
to make?
    Well, you have been here for a long time and we thank you 
very much. Thank you.
    The hearing is adjourned.
    [Whereupon, at 12:10 p.m., the Committee was adjourned.]


            KEY ISSUES AND BUDGET OPTIONS FOR HEALTH REFORM

                       TUESDAY, FEBRUARY 10, 2009

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

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    Senator Gregg is not going to be with us this morning, for 
obvious reasons. He is the President's designee to be the next 
Secretary of Commerce, and I want to say in this Committee what 
I have said elsewhere publicly, and that is that Senator 
Gregg's nomination to be the Commerce Secretary represents a 
great loss for the U.S. Senate and a great gain for the Obama 
administration. But it also represents a significant loss for 
this Committee. It is going to be very hard to replace Senator 
Gregg's knowledge, his understanding of economics, and his 
dedication to getting America back on track fiscally. And so 
when I heard the news, I had very mixed feelings. I thought the 
Obama administration is certainly doing itself a favor, but I 
will very much miss the partnership we have had on this 
Committee with Senator Gregg, and I think all members on both 
sides feel that same way.
    This morning I want to welcome CBO Director Elmendorf back 
to the Budget Committee. Today's hearing will focus on health 
care reform. Specifically, we will examine some of the key 
issues and budget options that CBO presented in two reports on 
health care released last December. The reports represent the 
culmination of more than a year of work by the strengthened CBO 
health care team assembled by our former CBO Director, Dr. 
Orszag, who is now the Director of OMB. I want to commend the 
CBO staff for their outstanding work, and I want to thank 
Director Elmendorf for presenting the agency's findings to us 
today.
    Let me begin by providing really a brief overview of the 
challenges that we face. The news that we received in January 
from CBO about the deficit was dramatic and serious. We face 
one of the worst budget forecasts that I have ever seen. CBO's 
estimate showed the deficit in 2009 would be approximately $1.2 
trillion, and that is before any policy changes, before any 
economic recovery package or other changes in policy. And, 
frankly, I have stated and I believe that that forecast itself 
is overly optimistic. And that is, I think, increasingly the 
conclusion of others as well, that this fall-off in the economy 
has intensified in the last several weeks. We saw in the 
January jobs number that nearly 600,000 people lost their jobs 
in the last month alone.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I have shown this chart many times because I think it is so 
important to make the point that we are building a wall of 
debt. The debt of the United States doubled over the last 8 
years. It is set to, I believe, double again in the next 8 
unless we change our long-term policy. I believe it is 
absolutely essential, once we have economic recovery underway, 
that we pivot and take on our long-term imbalances, created 
largely by the entitlements but also contributed to by the 
revenue base.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Our long-term budget outlook is extremely serious. This is 
the Congressional Budget Office's long-term debt outlook as it 
was released in December of 2007. It shows just how serious our 
long-term outlook was before the current economic downturn and 
before adding in all of the Government's economic recovery 
measures. The combination of the retiring baby-boom generation, 
rising health care costs, and inadequate revenues is projected 
to absolutely explode Federal debt to more than 400 percent of 
GDP by 2058. That is completely unsustainable.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I hope colleagues in other committees, in other positions 
of responsibility--Jeff, why don't you come here? I am asking 
Senator Sessions to come and join me here.
    Senator Sessions. Judd will not be here today?
    Chairman Conrad. Senator Gregg, as I announced earlier, 
will not be here today. Senator Sessions, as I understand it, 
will succeed him in the role of the Ranking Member of this 
Committee. We want to welcome Senator Sessions. It is a little 
bit premature to do it because Senator Gregg is still a member 
until his confirmation. But in anticipation of the change, I 
think it is appropriate that Senator Sessions sit in the 
Ranking Member's chair and participate. We appreciate very much 
his contributions to this Committee.
    I was just making the point about how unsustainable our 
current budget trajectory is. There is not a single economist 
that I know that believes 400 percent of GDP as a debt level is 
tolerable. This is not just a demographic issue. Rising health 
care costs are exploding the cost of Federal health programs, 
and private sector health spending is also exploding. Taken 
together, public and private health care spending will reach 37 
percent of GDP by 2050 if we stay on the current trend line.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Here are some of the key sources of growth in health care 
spending. There is limited evidence of what works and limited 
adherence to best practices. There is a lack of care 
coordination. Advances in medical technology, including 
prescription drugs, medical devices, diagnostic tools, and 
surgical procedures, are driving up costs. There is widespread 
geographic variation, sometimes as much as five times the usage 
for particular procedures in one part of the country versus 
another part, with absolutely no evidence that they get 
improved outcomes as a result. And there is an increased demand 
for health care with a higher prevalence of diseases like 
obesity and diabetes and more advertising directly to 
consumers. I cannot turn on the television without being 
bombarded with drug ads for various things. I was stunned--I 
guess maybe I should not say I was stunned, but kind of taken 
aback. The other night I was watching, and they said you take 
this drug and the risk is death. And then they went through the 
drug, and they said there are some other problems with this, 
and another set of factors that might lead to death. And I 
thought,``Wow, you talk about a risk/reward ratio.'' I am not 
sure I would want to be taking that.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I am encouraged that we are beginning to address the 
sources of the growth in health care spending. The 
administration has made very clear that they want to tackle 
this problem. In fact, the economic recovery bill includes an 
important down payment on health care reform with investments 
in health information technology, comparative effectiveness 
research, and prevention and wellness efforts. But we all know 
it is going to take much more.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    There are more steps that must be taken to truly bend the 
cost curves of health care. For example, the CBO reports 
identify a number of payment reforms that could be taken to 
slow the spending growth in Medicare and other Federal health 
programs: one, bundling payments for hospital and post-acute 
care to improve coordination; second, reducing Medicare 
payments to hospitals with high readmission rates; third, 
incentivizing physicians, hospitals, and other providers to 
better collaborate; fourth, using bonuses and penalties in 
Medicare to promote the use of health information technology; 
and, finally, setting payment benchmarks for Medicare Advantage 
plans equal to traditional Medicare.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    It is important to remember that making these reforms does 
not mean lowering the quality of health care. In fact, research 
suggests that some areas of the country that spend less on 
health care actually provide better health care. My own State 
is an example. We are in the top 5 percent in health care 
outcomes. We are at the very bottom in reimbursement. And 
interestingly enough, that is pretty consistently the case in 
Northern tier States. A study by Dr. Fisher at Dartmouth found 
that an astonishing 30 percent of health care spending may not 
contribute to better health care outcomes. That is a stunning 
calculation.
    Here is what Dr. Fisher wrote in a health journal: 
``Although many Americans believe more medical care is better 
care, evidence indicates otherwise. Evidence suggests that 
States with higher Medicare spending levels actually provide 
lower-quality care. We may be wasting perhaps 30 percent of 
U.S. health care spending on medical care that does not appear 
to improve our health.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Thirty percent of U.S. health care spending translates into 
$700 billion a year. That is real money. We cannot eliminate 
all the unnecessary spending, but we have to try.
    With that, I want to turn to Senator Sessions for any 
opening remarks he would want to make, and, again, I want to 
welcome him to the Ranking Member's chair, and at the 
appropriate time, when Senator Gregg has been confirmed, we 
will be able to make this all official.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Mr. Chairman. I am pleased to 
be here, honored to have perhaps the opportunity to serve in 
this position. I have got to tell you, Judd Gregg was a great 
Chairman and a great Ranking Member, and you have been a great 
Ranking Member and a great Chairman. So I look forward to 
working with you in the way that the two of you have. You have 
not always agreed on everything. We both have political 
pressures that we have to deal with. But, fundamentally, it is 
time for all of us to get together to work for the good of this 
country. And I know you are deeply committed to that, and the 
facts do not lie. You have been raising them over and over 
again. They speak for themselves, and we have got to do better.
    This hearing I think is important, and I appreciate, Dr. 
Elmendorf, the work you have been doing so far, and the 
information that you have given us. This $52 trillion shortfall 
in Medicare and Medicaid over the next 75 years is something 
that requires real attention, and I appreciate the fact that, 
Dr. Elmendorf, you are starting now to think about what kind of 
policy changes may be out there, how you are going to score 
those so that when we make a decision, we will have good 
information on which to make that decision.
    Thank you, Mr. Chairman. I turn it back to you.
    Chairman Conrad. Thank you, Senator Sessions.
    One final point I want to make to the colleagues who are 
working on health care reform. I think they have got a heavy 
burden to carry to make the argument that we should add 
substantial costs to health care when we are already spending 
16 percent of our gross domestic product in this country--that 
is $1 in every $7 in this economy--already in health care. That 
is nearly double most other industrialized countries. So those 
who advocate spending hundreds of billions of dollars more I 
think have a very heavy burden to carry. And I hope that 
message is heard outside this hearing room.
    With that----
    Senator Sessions. Mr. Chairman, could I just say, I had 
physicians up from Alabama yesterday and talked to a number of 
them. You know, they are small businesses. Several of them told 
me that. And I thought about one of the difficulties in this 
economy that we have all learned is uncertainty is very bad. So 
if they want to add a nurse or add a wing onto their clinic and 
the law says they are going to lose 20 percent of their 
reimbursement rate next year, that just confuses their whole 
system. And we know why we are not permanently fixing the 
Medicare reimbursement rate. We are not doing it because it 
scores at about $300 or $400 billion over the next 10 years. 
And so we just pretend that next year it is going to drop 20 
percent, and it is not going to drop 20 percent.
    I think that is a legitimate criticism of those of us in 
Congress. We ought to be able to at least tell them what they 
can expect to receive. As one of them said, ``Don't call it 
`reimbursement.' It is my pay, and you are talking about 
cutting my pay 20 percent next year.'' And we cannot do that. 
We are not going to do it.
    So those are just some of the things that I think maybe the 
Budget Committee can contribute to working on.
    Chairman Conrad. Thank you very much.
    Dr. Elmendorf, again, welcome back. Thanks again for taking 
this responsibility as Director of the Congressional Budget 
Office at this especially challenging time, and please proceed.

      STATEMENT OF DOUGLAS W. ELMENDORF, PH.D., DIRECTOR, 
                  CONGRESSIONAL BUDGET OFFICE

    Mr. Elmendorf. Thank you, Chairman Conrad, Senator 
Sessions, members of the Committee. I appreciate the invitation 
to testify this morning about the opportunities and challenges 
that the Congress faces in addressing two policy goals: 
expanding health insurance coverage and reforming the health 
care system to make it more efficient.
    To assist the Congress in its deliberations on these 
topics, CBO has recently produced two major reports, as 
Chairman Conrad indicated. One, titled ``Key Issues in 
Analyzing Health Insurance Proposals,'' examines the principal 
elements of reform plans that CBO believes would affect our 
estimates of the effect of those plans on insurance coverage, 
on Federal costs, and other outcomes. The companion volume, 
titled ``Budget Options for Health Care,'' examines 115 
discrete options to alter Federal programs, affect private 
insurance markets, or both.
    Drawing on these reports, my testimony today makes four key 
points:
    First, proposals could achieve near universal coverage by 
combining three key features: mechanisms for pooling risks, 
subsidies, and mandates or processes for facilitating 
enrollment.
    Second, a substantial share of health spending contributes 
little, if anything, to the overall health of the Nation, as 
the Chairman pointed out. But reducing spending without also 
affecting spending that does improve health is challenging.
    Third, despite these challenges, many analysts would concur 
with the importance of several approaches, including providing 
stronger incentives to cut costs and reward value, and 
generating and disseminating more information about the 
effectiveness of care.
    Fourth, many steps that analysts would recommend might not 
yield substantial budget savings or reductions in national 
health spending within a 10-year window.
    Let me discuss these points briefly in turn.
    First, achieving near universal health insurance coverage 
would require three principal features. To start, mechanisms 
for pooling risks, both to ensure that people who develop 
health programs can find insurance, and to make sure that 
people do not wait until they are sick to get insurance 
coverage. Options for pool risks include strengthening the 
employment-based system, modifying the market for individually 
purchased insurance, or creating a new mechanism such as 
insurance exchanges.
    Beyond pooling risks, achieving broader coverage requires 
subsidies to make health insurance less expensive for 
individuals and families, especially those with lower income 
who are most likely to be uninsured today. However, for reasons 
of equity and administrative feasibility, it is difficult for 
subsidy systems to avoid providing new subsidies to people who 
would buy insurance even without those subsidies.
    In addition to pooling risks and subsidies, achieving 
broader coverage would require either an enforceable mandate to 
obtain insurance or an effective process to facilitate 
enrollment in a health plan. An enforceable mandate would 
generally have a greater effect on coverage rates, but without 
meaningful subsidies, it could impose a very substantial burden 
on many people.
    Without changes in policies, CBO estimates that the average 
number of non-elderly people who are uninsured will rise from 
more than 45 million this year to roughly 54 million a decade 
from now.
    My second point was that a substantial share of spending on 
health contributes little to our health, but reducing this sort 
of spending without also affecting services that do affect 
health is difficult. As we all know, spending on health care 
has grown much faster than the overall economy for decades now, 
with studies attributing the bulk of that cost growth to 
improvements in medical treatments and technologies. This 
imposes an increasing burden on the Federal Government, as well 
as State governments and the private sector. The principal 
driver of the unsustainable Federal budget outlook, as the 
Chairman noted, is growth in per capita health costs, not 
population aging alone. And in the private sector, the growth 
of health costs has contributed importantly to slowed growth in 
wages because workers give up other forms of compensation to 
offset the rising costs of health insurance.
    Third, there are a number of approaches for improving 
efficiency and controlling costs about which many analysts 
would probably concur. To start, many analysts would agree that 
payment systems should move away from a fee-for-service design 
and should instead provide stronger incentives to control costs 
and reward value.
    A number of specific alternative approaches could be 
considered, including fixed payments per person, bonuses based 
on performance, or penalties for substandard care. But the 
precise effects of these alternatives are uncertain. 
Policymakers may thus want to test various options, for 
example, using demonstration programs in Medicare.
    Many analysts would also agree that the current tax 
exclusion for employment-based health insurance which exempts 
most payments for such insurance from both income and payroll 
taxes dampens incentives for cost control because it is open-
ended. Those incentives could be changed by replacing the tax 
exclusion or restructuring it in ways that would encourage 
workers to join health plans with higher cost-sharing 
requirements and tighter management of care.
    Moreover, many analysts would agree that more information 
is needed about which treatments work best for which patients 
and about what quality of care is delivered by different 
doctors, hospitals, and other providers. But absent stronger 
incentives to improve efficiency, the effect of information 
alone on spending will generally be limited.
    Fourth many steps the analysts would recommend might not 
yield substantial budget savings or reductions in national 
health spending within a 10-year window. There are several 
reasons for this. In some cases, savings materialize slowly 
because an initiative is phased in. For example, Medicare could 
reduce payments to hospitals that have a high rate of avoidable 
readmissions. But Medicare would have to gather information 
about readmission rates and notify hospitals before this 
approach could be implemented.
    In other cases, initiatives that generate savings have 
costs to implement. For example, expanding the use of disease 
management can improve health and may be cost-effective, but 
may still not generate net spending reductions because the 
number of people who are receiving services is much larger than 
the number who would avoid expensive treatments later.
    In still other cases, the Federal budget does not capture 
the reductions in national health spending. For example, if the 
Government provides a preventive service for free, national 
health spending might decline, but Federal spending might still 
rise because the Government would be paying for a lot of 
preventive services that would be administered anyway.
    In other cases, incentives to reduce costs are lacking. For 
example, proposals to establish a medical home might have 
little impact on spending if the primary care physicians who 
coordinate care in such a system are not given financial 
incentives to economize on their patients' use of services.
    And, last, for a wide range of possible reforms, limited 
evidence on the effects is available. Studies generally examine 
the effect of discrete policy changes, but typically do not 
address what would happen if several changes were made at the 
same time.
    I began the testimony by referring to the opportunities and 
challenges that you face. I think the opportunity is that there 
is considerable consensus that we need patients and providers 
to have stronger incentives to control costs and that we need 
better information about the quality and value of the care that 
is provided. The challenge is that there is much less consensus 
among analysts about precisely which programmatic changes can 
move us most effectively in the direction of enhancing 
incentives and improving information.
    Thank you. That concludes my prepared remarks. I am happy 
to take your questions.
    [The prepared statement of Mr. Elmendorf follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    

    Chairman Conrad. Thank you. Dr. Elmendorf, thank you for 
your testimony. I want to get to a point that has really struck 
me ever since I began studying health care, and that is, about 
5 percent, roughly 5 percent of the Medicare population uses 
half of the budget. So roughly 5 percent, maybe a little bit 
more than that, depends year to year, use half of all the 
money, and they are the chronically ill.
    When I went to business school and you found a statistic 
like that, you know, you focused on it like a laser. Half the 
money going to only 5 percent of the patient base. And a number 
of years ago, they did a study with about 20,000 patients. They 
put a case manager on every one of the cases. These are people 
that are chronically ill. They have multiple serious 
conditions. And they found by that simple act they dramatically 
reduced the number of prescription drugs they were taking, they 
dramatically reduced hospitalization, they dramatically reduced 
the number of duplicate tests that patient population was 
subjected to, and they saved substantial amounts of money and 
got better health care outcomes.
    When we did the Medicare prescription drug bill, I tried to 
get funding to dramatically ramp up the number of people, 
because what we do not know is it works with 20,000 patients, 
but what happens when you go to 250,000--which is what I wanted 
to see tested. Can we manage that?
    Have you looked at this whole question of care 
coordination? And what is your assessment of how rich the ore 
is there to be mined?
    Mr. Elmendorf. I think the ore is potentially very rich. 
You are exactly right about the distribution of spending. A 
small share of beneficiaries are responsible for a large share 
of all Medicare spending. Of course, this is true in health 
insurance in general. Most people get through a year needing 
very little medical care, and some need a great deal of medical 
care. So a certain amount of that skewness in the distribution 
of benefits is natural in health insurance, but it does raise 
the possibility that better management of the care for those 
people could substantially reduce health spending. And there 
are instances, as you note, where reductions in spending have 
been considerable.
    But as you say, the challenge is trying to apply that on a 
broader scale. That means several things. Part of it is to 
empower providers to manage patients' overall care. So it 
means--for example, in our review of possible options for 
health care reform, we talk about bundling of post-acute care 
with care given in hospitals in terms of Medicare's 
reimbursement. So currently Medicare will reimburse a hospital 
for a patient, but when the patient leaves the hospital, then 
other providers will submit separate claims for reimbursement. 
So it is possible that bundling the original services, the 
original acute care services and the post-acute services under 
one bucket with one reimbursement would then empower the 
hospitals presumably to manage that care in a better fashion.
    So we have to empower providers to have that influence over 
patients' overall care, but then we also need to be sure that 
the Federal Government provides incentives for those providers 
to, in fact, economize on care. So coordinating care better is 
almost certain to improve health. Whether it saves money in the 
Nation as a whole, or the Federal Government, depends on 
whether there are specific incentives in the coordination to 
economize unnecessary services and for the Federal Government 
to capture some of the savings from that.
    Chairman Conrad. Let me just say this study that was done 
is very interesting. The first thing they did is go into 
people's homes, get all the prescription drugs out on the 
table. On average, they found these people were taking 16 
prescription drugs. And after a review, they were able to cut 
it in half.
    I went through this same exercise with my father-in-law, 
and sure enough, we get around the kitchen table, and he was 
taking 16 prescription drugs. We get on the phone to the 
doctor, and we were able to cut it in half. And I said to the 
doctor, ``How does this happen?'' He said, ``You know, Kent, he 
has got a heart specialist, he has got a lung specialist, he 
has got an orthopedic specialist, he has got me as a family 
practice doctor. Everybody is prescribing. He is getting drugs 
from the corner pharmacy, from the hospital pharmacy, from the 
pharmacy at the beach, he is getting them mail order. He is 
sick and confused. His wife is sick and confused. We have got 
chaos.'' And chaos costs money.
    Mr. Elmendorf. One very important aspect of Medicare, which 
is really done on a fee-for-service basis now in most cases, is 
physicians, and it is exactly what you say. My mother is a 
Medicare patient with a large collection of specialists and a 
large collection of overlapping treatments. And finding a way 
to make the physicians work together both to improve health and 
save spending is the challenge. And we review some options in 
these books about organizations to do that. We call them 
``bonus-eligible organizations.'' They are sometimes called 
``accountable care organizations.'' They are groups of 
physicians. A medical home is an idea where a primary care 
physician would be the principal doctor. You are one's medical 
home, if you will. And that physician then has more 
responsibility and potentially has some financial incentive for 
ensuring that you see just the doctors you need and have just 
the tests that you need.
    Again, that has the potential of improving health and 
reducing costs, but these ideas have not been tried very 
widely, and that is why it is unclear which specific ones will 
be most effective, even though I think there is a general 
consensus about moving in this direction.
    Chairman Conrad. It seems to me that it is just common 
sense that if you have got everybody in different silos and you 
do not have care coordination, things are going to be far more 
expensive. And, frankly, about the last thing somebody who is 
sick wants to do is a bunch of duplicate tests and duplicate 
visits to doctors' offices. That is not in anybody's interest.
    I have very little time left. Let me just ask with respect 
to--I have always been intrigued by the German system. Maybe 
that is because I am part German. But I have always been 
intrigued by their system, which is, as I understand it, you 
get the coverage largely based on where you work; it is 
employment related. People are put in large purchasing pools so 
they have leverage in the negotiation to get good rates. And 
the government's role is to make certain that those who could 
not be otherwise covered, their employers are too small or the 
people have insufficient income, that is the government's role. 
But that is the limit of the government's role.
    Have you studied that system at all? And what is your 
assessment of it, if you have?
    Mr. Elmendorf. I have not studied that system carefully, 
and I do not know if CBO has. I think the issues that you raise 
are the key issues, which are: How do you pool people and what 
sorts of subsidies are provided to whom? But in addition to the 
financing, there is also this very important question about how 
health care is delivered. And you noted yourself tremendous 
variation across regions of this country in terms of the way 
physicians and hospitals practice medical care.
    The reasons for the differences across regions are not 
completely clear, and what it is that works and does not work 
in certain places is not completely clear, and that is the 
difficulty in squeezing that out. Other nations do spend much 
less on health care as a share of their GDP than we do, without 
suffering evident deterioration in their health. But it is 
separating the wheat from the chaff in health care that is a 
key challenge.
    Chairman Conrad. Thank you.
    Senator Sessions.
    Senator Sessions. Thank you very much.
    Dr. Elmendorf, thank you for your foresight and for laying 
the groundwork for developing the information that will help 
this Congress deal with one of our biggest crises, which is 
health care. I do not think the present system is working. I do 
not think it is working well. But I have to tell you that I do 
not know how to fix it.
    Senator Wyden has got a very promising idea. He has talked 
to me about it. Others have ideas. And so it is something we 
have got to wrestle with.
    Just to tie down those numbers, I see that health care 
premiums have gone up 78 percent between 2001 and 2007, whereas 
workers' earnings have risen only 19 percent. It seems to me, 
would you not agree, that that is an unsustainable trend?
    Mr. Elmendorf. Yes, sir.
    Senator Sessions. And looking at your charts--and Senator 
Conrad has talked about this over the years, but just with 
regard to Medicaid and Medicare, Medicaid over 75 years is 
projecting a $36 trillion shortfall. Is that right?
    Mr. Elmendorf. That sounds right, yes.
    Senator Sessions. And Medicaid, a $16 trillion shortfall, 
so a $62 trillion shortfall there. If something does not 
change, the taxpayers will have to just pick that up by higher 
taxes and more payments into the system. Is that fundamentally 
correct?
    Mr. Elmendorf. That is right. As long as health spending is 
growing faster than GDP, then it will continue to soak up an 
ever increasing share of our output and an ever increasing 
share of the Federal budget.
    Senator Sessions. Which diminishes the amount of money that 
families would have for housing, for clothing, for schooling, 
for automobiles, and everything else.
    Mr. Elmendorf. Yes.
    Senator Sessions. This is an unhealthy trend, I guess you 
would agree.
    Mr. Elmendorf. Critically unhealthy, yes.
    Senator Sessions. With regard to the physicians and their 
reimbursement rate, would you agree that they have a legitimate 
concern that they need certainty in their future? And do you 
happen to have the numbers close by as to what it costs this 
year to fix their reimbursement rate to keep it from falling as 
compared to what would happen if Congress does not act? I think 
we have got about a 20-percent expected reduction in their 
payments next year if we do not act.
    Mr. Elmendorf. There will be a 21-percent reduction in this 
coming year, and then 5-percent reductions annually for years 
to come. One of the options that CBO addresses--or a set of 
options as ways of adjusting that, if one were to eliminate the 
sustainable growth rate mechanism, this feature of the law, and 
hold beneficiaries harmless from the increases in premiums, 
that would cost $556 billion over the next 10 years.
    Senator Sessions. Well, that is a stunning number, and that 
is obviously why we have not put it in the budget. We hope it 
will go away, but fundamentally it is not going away unless we 
do develop some new processes for containing costs. And I hope 
that we can.
    You talk about your analysis. I would suggest--and maybe 
you can elaborate on it. You are concerned about unintended 
consequences and things that might appear to result in X may 
result actually in X plus Y. Tell me about, let us say, 
preventive medicine. There is a belief that we can save 
considerable amounts of money by investing more in preventive 
medicine.
    Now, I fully recognize that preventive medicine can make 
the quality of a person's life better and maybe their 
employment better. But with regard to actual reduction of cost, 
is there some doubt about that how much it would reduce cost?
    Mr. Elmendorf. On your general point, Senator, the health 
care delivery system and the health care financing system are 
both incredibly complex, and changes to any part of those 
systems could reverberate through the systems in ways that are 
very difficult for analysts like those at CBO to anticipate. I 
think that is a legitimate concern in approaching health care 
reform.
    On preventive medicine, there seem to be some forms of 
preventive medicine that are cost-effective--we should do more 
of them--and others that are not cost-effective, and we should 
not necessarily do more of them.
    Senator Sessions. When you say cost-effective, are you 
considering the benefit to a person's health or are you just 
saying the total net cost to the Government is not a savings or 
it might be some savings?
    Mr. Elmendorf. I meant cost-effective including the effects 
on people's health. Obviously, it is hard to value that. But as 
experts have looked at a range of medical care and a range of 
preventive services, it seems there are some things that we are 
just not doing enough of relative to their benefit/cost ratio 
and others that we should be doing much less of.
    Senator Sessions. And we have data that would help us make 
that decision already, or do we need more data?
    Mr. Elmendorf. We have those data for some preventive 
services and not for others. There is a whole list of possible 
preventive services for which the experts, the task force 
simply throws up its hands and says we do not know enough yet 
about the value. I will mention one specific example: flu shots 
for older Americans. It is recommended for older Americans to 
get flu shots. Well less than half get them. If you were to get 
flu shots to virtually all older Americans, that would prevent 
a number of people from getting the flu and having very serious 
consequences, but it would be expensive because you have to 
give shots to a lot of people who do not now get shots.
    So there are some direct savings in terms of the care. 
There also is some offsetting costs in terms of giving the 
shots. That direct offset is about a third of the financial--
now this is a financial benefit to the Government calculation. 
There are some direct savings to Medicare by not having to 
provide intensive care for people who get the flu. About a 
third of that is offset by the extra cost of giving people the 
flu shot. And, moreover, just from a purely financial point of 
view, people who do not get the flu live to get other disease 
and maybe die from the other diseases. So there are indirect 
costs to Medicare down the road because somebody who is saved 
from the flu today can live several more, hopefully healthy, 
years but might get sick with something else inside the 10-year 
budget window.
    So the 10-year budget savings are essentially zero, even 
though it is a very effective means of increasing health. And 
that is one of the examples of how it is that things that are 
good to do by a whole range of metrics do not necessarily 
address the Government's budget problem.
    Senator Sessions. Information technology is likewise 
potentially beneficial, but perhaps not as much as some have 
expected and had hoped to see?
    Mr. Elmendorf. CBO believes that over time essentially all 
providers will have health information technology at their 
fingertips for patient records, for electronic prescribing, for 
guidance in their clinical decisions. The proposals that have 
been on the table are generally to accelerate--to provide 
penalties or bonuses to encourage providers to accelerate that 
adoption.
    We think that would have some beneficial effects on health 
and would save the Government some money. I think the biggest 
possible savings come from combining that sort of technology 
with incentives to use it in a way that reduces excess 
utilization of care and coordinate care and so on. So it really 
is the--as I said in my comments, the information is very 
helpful, but would be much more helpful if it comes with 
incentives to use it in certain ways.
    Senator Sessions. Well, I hope that we can--I think it is 
inevitable and necessary that we move to that, and I think it 
has the potential to avoid misprescribing of drugs and other 
things.
    Mr. Chairman, I would agree with you. In my personal 
family, my mother and her sister, when you get them back with 
the doctor and sit down, they make a lot of changes, often 
reducing medicines and coming out with better results. So that 
is, I am sure, a true picture of some of the errors we are 
making in health care.
    Thank you.
    Chairman Conrad. Thank you, Senator Sessions.
    I am going to turn to Senator Wyden, but before I do, I 
just want to say how much I appreciate the exceptional work 
that Senator Wyden has done on health care reform. I think his 
group now is 13 Senators, about evenly divided between 
Republicans and Democrats, who have come together around a 
comprehensive health care reform proposal and one that is 
fiscally responsible and one that scores that way with the 
Congressional Budget Office, which is a rarity around here.
    So, Senator Wyden, thank you for your very good work.
    Senator Wyden. Mr. Chairman, thank you for your kind words, 
and let me also pick up on a point you made in your opening 
statement, and that is, Chairman Conrad indicated that it is 
important to be cautious about the idea of going out in this 
health reform debate and spending vast sums of new money right 
out of the gate. And, boy, I sure share your view.
    We ran the numbers, Dr. Elmendorf, with the CBO figures. 
You all indicated that we are going to spend $2.5 trillion this 
year on health care. There are 305 million of us. If you divide 
305 million into $2.5 trillion, you could go out and hire a 
doctor for every seven families in the United States. You could 
hire a doctor for every seven families, pay the doctor $235,000 
and say, ``Doctor, this year your job will be to take care of 
those seven families.'' Whenever I bring this up with the 
physicians, they say, ``Where could I go to get my seven 
families?'' Because it is obvious, as Chairman Conrad pointed 
out, we are spending enough. We are not spending it in the 
right places.
    Let me, if I might, going again to the CBO budget books, 
unpack, I think, the best ways to find money quickly to 
responsibly pay for health reform. And in your budget options, 
9, 10, and 11 deal with the Federal tax rules. This is the 
biggest sum of money that is being spent on health care today, 
just under $250 billion. It rewards inefficiency and 
disproportionally favors the most affluent.
    Now, my first question to you is I note that not only does 
CBO score this as making substantial savings, but on page 5 of 
your testimony this morning, you say something that I have not 
seen before, which is that the savings from modifying the 
Federal tax code would actually grow in the years ahead.
    Could you amplify a little bit on that? Because I thought I 
had been scouring the books on this point, but I think that is 
really something of a breakthrough, because your original 
document showed it makes substantial savings, and now today you 
are arguing that it will save even more down the road?
    Mr. Elmendorf. Senator, you are right about the size of the 
tax expenditure, if you will. The exclusion of employer-paid 
health insurance from income taxes costs the Government about 
$145 billion currently, and the exclusion from payroll taxes 
costs the Government about $100 billion currently. Those 
numbers are larger as one looks down the road. This is not 
something that we invented now, although perhaps we brought it 
to a wider attention. All tax provisions grow to some extent 
over time because the economy grows and prices rise. But the 
value of this exclusion grows with health care spending over 
time. So our estimate of the value of this provision, I think 
more specifically the way the Joint Tax Committee estimated 
some of these options, has it growing over time with health 
care spending, because whatever employers end up putting into 
health insurance does not count as taxable income.
    Senator Wyden. I asked Dr. Orszag this, but because this is 
your first appearance here, I feel compelled to ask you as 
well. The President made two pledges in his campaign that it 
seems to me in the health area bring Democrats and Republicans 
together. And we do have seven members of this Committee as 
cosponsors. We are working with Chairman Kennedy and Chairman 
Baucus; Senator Alexander is a cosponsor--a number of 
colleagues on both sides of the aisle. And the President said, 
one, he wants to make sure that everybody can keep the coverage 
they have, and we have that actually in a section called 
``Guaranteeing you can keep the coverage you have.'' The second 
is he said that he wants to make sure middle-class people do 
not get clobbered with new taxes on their health care.
    Based on my analysis and what Dr. Orszag has said, it would 
be possible to keep both of the President's pledges in a 
bipartisan bill and, based on your figures in 9, 10, and 11 of 
the CBO option report, still have a substantial amount of new 
money available for health reform. Do you share Dr. Orszag's 
view on that point?
    Mr. Elmendorf. I agree with Peter that, in principle, one 
can use the pool of money generated by these exclusions from 
payroll and income taxes and increase health insurance coverage 
very substantially. But I want to be clear. Options 9, 10, and 
11 in our book lead to reduced insurance coverage that in those 
options there are substantial budget savings, but actually less 
insurance coverage.
    Now, one can vary the parameters one chooses. The issue 
here is that as one restricts the exclusion by taxing that 
compensation in some way, one then raises the relative cost of 
health insurance. That is the idea in many people's minds. That 
is what makes people then scrutinize health spending more 
carefully because it is more an apples-to-apples comparison 
with other goods they might want to buy. But it is also true 
that raising the relative cost of health insurance induces some 
people not to buy health insurance unless there are other forms 
of subsidy provided or mandates or something else.
    So those options alone do not accomplish your objective, 
but there are other options I think one could pursue that would 
expand health insurance coverage and not do so on the----
    Senator Wyden. That is a fair point, and it also fleshes 
out the score that the Chairman referred to for our 
legislation, because in our legislation not only do we let 
people keep what they have, we have written it so that everyone 
would be able to get a mid-range Federal employee package, and 
that would be a guarantee because of other savings. What I have 
tried to do, what you have confirmed in principle, is that 
there is such a large amount of money there in the Federal tax 
rules that you do free up a substantial amount for expanding 
coverage, and I appreciate your characterization. You are not 
here to testify on particular bills, and Dr. Orszag was not 
either. But, in principle, there is enough money to expand 
coverage.
    One last point, and that is on this question of purchasing 
health care more efficiently. I think as you get into this, 
there are really kind of three parts to this. One is you have 
to have a data base that in some way is in a position to look 
at the behavior of health care providers. Second, you have to 
do what President Obama is doing, which is to set in place a 
system of electronic medical records. But at the third level, 
you have the really difficult, painful judgment, which is at 
some point Medicare and the private sector cannot reimburse for 
expensive services that are not of much value. Those strike me 
as the three pieces of a strategy to squeeze out the 
inefficiency.
    I would like your reaction on that and any other thoughts 
about what it is going to take to make the system more 
efficient.
    Mr. Elmendorf. I agree with and I think most analysts would 
agree with your emphasis on information and on incentives, and 
the information serves a number of purposes, as you mentioned. 
Part of it is to ensure that if an individual doctor is 
treating a patient, he or she can see what else has been done 
to that patient--what other drugs they may be on, what other 
doctors they have seen, what other tests they have had. Also, 
technology that stores and makes information available can 
provide guidance to doctors. It is called ``Clinical Decision 
Support.'' So if a patient presents to a doctor with certain 
characteristics, the doctor can get some guidance from the 
system in many cases about what treatments might be most 
effective.
    Technology is very important, but I think you are 
absolutely right, one needs incentives to go with that. The 
challenge with the incentives--as you said correctly, you do 
not want to reimburse for procedures that are not useful or 
beneficial. The challenge is we do not know what procedures are 
most beneficial, on average. And even if we did, or when we do, 
we will not know who they are most beneficial for. There are 
very few medical procedures that are good for nobody. It is not 
a case that there is a whole branch of a hospital which never 
does any good for anybody. The problem is that there are 
procedures that will be useful, and particularly cost-
effective, for some people in some circumstances and not for 
others.
    So it is distinguishing--it is much more complicated than 
saying Medicare will not pay for something and will pay for 
something else. It is trying to set it up so that Medicare pays 
in the cases when it is useful and not when it is not. And that 
is a much harder set of rules to write. It is always changing. 
We have new procedures, we have new learning about what works 
and does not work. And ultimately mistakes will be made. There 
will be people--one can say this procedure is not worth doing 
because it only helps 1 in 100 people and it is very, very 
expensive. So a cost/benefit calculation says that is not worth 
doing, we can improve health more by wellness programs or 
something else. But if you are the 1 in 100, that is not going 
to be much consolation, and that kind of choice is very 
difficult.
    Senator Wyden. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Welcome, Dr. Elmendorf.
    Mr. Elmendorf. Thank you, Senator.
    Senator Bunning. I want to get on health information 
technology. It seems to make sense from a quality and 
efficiency standpoint. Many people seem to argue that it will 
save the health care system a lot of money. In the book ``Key 
Issues in Analyzing Major Health Insurance Proposals,'' CBO 
seems skeptical, at least, that substantial cost savings will 
occur. Can you walk us through what the potential benefits and 
shortfalls are of implementing health information technology, 
especially from the cost perspective?
    Mr. Elmendorf. In the options that CBO has estimated the 
budgetary effects of, there are savings to the Government, but 
as you are noting, the bulk of those savings come from the 
penalties themselves. So the way these options work is that 
there might be some bonus for adopting health information 
technology soon and a penalty for not adopting it. And the 
biggest budgetary effects come from the bonuses that are paid 
or the penalties that are collected. The savings from reducing 
unnecessary utilization of health care are comparatively small, 
and I think the principal reason for that is that providing the 
technology by itself does not ensure that the technology is 
used effectively. And one needs to combine the technology with 
incentives to make cost-effective decisions if one wants a 
cost-effective outcome.
    I think there are other issues, I should say as well. 
Although a lot of work has been done in developing health 
information technology, we are not at the point where we know 
how to move the data around quickly and efficiently enough. 
There is development work underway, but it will take some time.
    There are places, for example, the Veterans 
Administration's hospitals, where health information technology 
has been used to very strong positive effect, but applying 
that--the VA system is a closed system, a particular set of 
rules. Applying that broadly across the whole medical 
profession with all the variation will take time to figure out 
as well. So some of that is delay, and some of that I think is 
needing the incentives as well.
    Senator Bunning. Being from a very rural State--Kentucky--
some of our doctors think that information technology is the 
savior on cost reduction, because we only have like three or 
four major centers of hospitals. So the transfer of information 
between critical care centers in the rural areas and the major 
hospitals in either Louisville in northern Kentucky or 
Lexington or Owensboro, for instance, they argue the fact that 
if we could transfer the information back and forth quickly, we 
could reduce the costs dramatically.
    What do you say to that?
    Mr. Elmendorf. I think that is quite possible. I think that 
is an important use of health IT that I did not mention, but I 
think it is an important one. The problem that CBO faces in 
putting numbers in a book like this is that we have to rely on 
evidence from cases where certain changes in health care have 
been used, and there are a lot of possible changes, and some 
things have been tried, but many have not been tried, or have 
not been tried in the combination that people are thinking 
about them.
    So the fact that we score something having a certain value, 
it does not mean that we know that is the effect. In many 
cases, the uncertainty that we face is very large, and I think 
there are cases, as you suggest, where there may be benefits 
that we have not incorporated. There may be other cases where 
some studies have been very positive in ways that will turn out 
not to be transferable to other contexts, and we will get less 
savings than we have written down.
    Senator Bunning. OK. As the cost of health care increases, 
so do the number of uninsured. CBO estimates that the number of 
uninsured will reach 54 million by the year 2019. Today there 
are about 45 million.
    With this increase in the uninsured, what will the impact 
be on the Federal and State health care programs?
    Mr. Elmendorf. That is our estimate of people who will end 
up without insurance. There are people who will be--over this 
next decade who will lose employer-sponsored insurance and who 
will move on to Federal programs or Federal/State programs 
directly. The uninsured receive care about 60 percent of as 
much care as people who are insured in this country, and those 
costs are borne in some different ways. Part of that is that we 
make payments from Medicare and Medicaid to hospitals with a 
disproportionate share of patients who do not have insurance. 
Another part of the way those costs are borne is that hospitals 
economize on their services that they provide, on the amenities 
they provide. And there is another small piece, analysts 
estimate, that is borne by private insured patients.
    So I think the bulk of the extra cost will be taken up by 
hospitals in ways that involve some reduction of services and 
some reduction of amenities.
    Senator Bunning. Don't you think those with private health 
care insurance pay up the difference to help cover those that 
are uninsured?
    Mr. Elmendorf. There is certainly a logic to that, but the 
evidence suggests that that cost shifting is comparatively 
small. In fact, hospitals are charging private payers all they 
can charge them anyway, and----
    Senator Bunning. Yes, I know they are.
    Mr. Elmendorf. And so that----
    Senator Bunning. From experience.
    Mr. Elmendorf [continuing]. Changes in the government 
payments, for example, to providers, to hospitals under 
Medicare, changes in those payments don't seem to have a strong 
effect on the payments the private insurers make for the 
hospitals. So from that evidence, it seems that changes in 
uncompensated care would have some effect, but not the 
predominant effect on private insurance.
    Senator Bunning. Last question. In terms of health care 
reform, many people are advocating for a law mandating health 
coverage as a way to ensure everyone is covered. From CBO's 
perspective, would mandating health care insurance lead to 
universal health care coverage?
    Mr. Elmendorf. No. I was very careful in my testimony to 
use the phrase ``near universal coverage'' and to say that 
accomplishing that requires, I think in the view of all 
analysts, a combination of approaches, pooling of risks, 
subsidies in some form, and either a mandate or processes to 
facilitate enrollment. So even the combination of those will 
not lead to truly universal coverage because people slip 
through the cracks of systems. And any one piece of those 
proposals is not likely to lead to even near universal 
coverage.
    Senator Bunning. Thank you, Doctor.
    Mr. Elmendorf. Thank you, Senator.
    Chairman Conrad. Thank you, Senator Bunning.
    Next, we will go to Senator Whitehouse. Before we do, I 
just want to say that Senator Whitehouse comes to this 
committee with considerable experience in dealing with health 
care funding crisis at the State level and that experience has 
already been of considerable help to this committee. Senator 
Whitehouse?
    Senator Whitehouse. Well, thank you, Chairman, and what a 
beautiful segue to my question, which was going to have to do 
with our relationship with you. During one of the reforms that 
I managed in Rhode Island, we had an actuarial firm looking 
over our shoulder so that we could quantify the savings that we 
needed to take out of a system. In my experience, there were 
things that the actuarial firm recommended because they could 
quantify them, because actuarial science lends itself to the 
calculation of that particular mode of reform. And there were 
other things that they couldn't evaluate.
    And we had to make a policy decision, and in one case, we 
decided to not go the path where they could quantify the reform 
because we just felt it wouldn't work, and instead we did 
something that they gave us literally zero credit for. And they 
said to us, look, you are probably doing the right thing here, 
but because we don't have that experience you talked about, 
because we can't look back at proven evidence, we are disabled 
from telling you officially that this will work.
    And what I worry about is that we are headed into, I think, 
a fiscal crisis that is going to make the current economic 
problem look like a picnic. I mean, if you look at $35 trillion 
in unfunded Medicare liability bearing down on us inevitably, 
and we are fighting now over a $700 or $800 billion bill as if 
that were the end of the world, $35 trillion is just enormous 
and we have to get after that.
    I have two concerns about your actuarial science. One, 
there is a limited amount of evidence, and so you are very 
limited in what you can sign off on in terms of scoring. And 
two, areas that we have been talking about, like health 
information infrastructure and investment in quality reform 
that saves money and reimbursement reform, end up being 
dynamically inter-engaged.
    We had a witness who came here and said--used an example of 
a toaster. You test putting the toast in the toaster and you 
take it back out. It didn't work. You test putting the lever 
down. It didn't work. You test plugging it in. It didn't work. 
Nothing made toast. Nothing will work. But if you plug it in 
and put the toast in and then push it down, boom, toast.
    So there is a second worry, which is that it is very hard 
for somebody in your position with the professional 
restrictions that you have to operate under to try to quantify 
those dynamic interactions that can make the difference between 
an information technology system that just sits on doctors' 
desks and another one that saves potentially, according to 
RAND, $350 billion a year.
    What do we do about that? And does there need to be some 
new entity of some kind establishment that can provide the kind 
of dynamic oversight that we need for these dynamic 
interactions between the different types of solutions necessary 
to turn this around in the short period of time before the $35 
trillion hits us and then we are in trouble that makes today's 
troubles look like they are troubles in a minor key? I count on 
you through this, and how much do your limitations make you a 
partner but not a complete guide in all of this?
    Mr. Elmendorf. I agree entirely with your concern, Senator. 
CBO is going to draw on existing evidence about the effects of 
changes and that evidence will be weak in many cases, and it 
will be particularly weak in cases that involve the 
interactions of several policy changes.
    We have a fair amount of evidence related to incremental 
changes on policies that have been in place for a long time, 
because almost everything has been moved up and down and you 
can see how the world has responded to that. We have very 
little evidence about interlocking changes in the complex 
health care system. I don't think that our numbers should be 
the ultimate determinant of the policies that you and your 
colleagues will vote for and against.
    Senator Whitehouse. We will have to make some leaps of 
faith based on our best judgments.
    Mr. Elmendorf. Yes. Now, however, let me say I think we can 
be of great service to you in judging what leaps are worth 
taking.
    Senator Whitehouse. Yes.
    Mr. Elmendorf. There are leaps the faith that lead the 
people falling into the chasm and there are leaps of faith that 
have at least a passing chance of grabbing hold on the other 
side. Our expertise, I think, can be very valuable to you in 
judging what leaps to take.
    As I said, I think there is a fairly broad consensus about 
some of the overall direction that the health care system 
should move in to make it more effective and cost efficient. 
Much less agreement about specifically what steps will do that. 
Is it medical homes? Is it accountable care organizations? Is 
it greater bundling of hospitals' care and post-acute care? Is 
it health IT? Is it--there is a whole list of these 
possibilities. I think there is a tendency in discussions of 
health care to view one of them as a silver bullet or to 
dismiss it as a failure because it is not the silver bullet.
    I think, in fact, most analysts believe that we need to try 
a set of policies. Some will be duds or even counterproductive. 
Others will turn out to be more effective than we anticipate. 
And that trying, though, will mean doing things that we--some 
of those things we should anticipate will fail, and that is 
this leap of faith that I think needs to be taken. But again, 
choosing what leaps to take, I think, we can be very important. 
Not all leaps are the same, and how far you leap and choosing 
ways of doing demonstration projects and changes to have a 
long-run goal--which is a quite different system perhaps, but 
moving there incrementally so that indirect effects on the rest 
of the system can be evaluated--are ways of reducing the risk 
associated with those leaps.
    Senator Whitehouse. And if you are going to not only take 
those leaps, but then have to manage and evaluate them to see 
which ones were productive and which ones were not, and if you 
are looking at delivery system reform across the health care 
system and not just isolating Medicare and Medicaid patients, 
where presently in the U.S. Government is there an authority 
that can effectively oversee that set of dynamic changes on a 
going forward basis?
    Mr. Elmendorf. So I think the changes in Medicare are 
important, not just for their--not just because Medicare itself 
is a large program----
    Senator Whitehouse. No, no, trying to do it systemwide and 
reach beyond Medicare and Medicaid.
    Mr. Elmendorf [continuing]. But also, I think, as an 
example that it sets in two levels. One is that physicians who 
adopt health IT because Medicare makes them for Medicare 
patients will use it----
    Senator Whitehouse. I have got 22 seconds left----
    Mr. Elmendorf [continuing]. For other----
    Senator Whitehouse [continuing]. So I would love to have 
this discussion with you, but let us assume the premise of my 
question, which is that we are trying to do a delivery system 
reform that goes outside of just the Medicare and the Medicaid 
patient. Do we presently have an authority in government that 
can oversee the dynamic process of engagement?
    Mr. Elmendorf. No.
    Senator Whitehouse. OK. Thank you.
    Chairman Conrad. Senator Alexander is next, and before he 
starts his questioning, I want to thank him and the bipartisan 
group that he has meet Tuesday mornings. They have been very 
focused on the long-term issues that confront the country with 
the budget and the complete unsustainability of our current 
course. I just want to thank him for all the focus and the 
effort that he has put into that effort.
    Senator Alexander.
    Senator Alexander. Thank you, Senator Conrad. I have two 
questions. One is about the relationship between entitlement 
reform and health care, and the second is about Medicaid, and 
excuse my voice a little bit.
    The bipartisan breakfasts, to which Senator Conrad 
referred, has had three straight meetings on entitlement reform 
and the new Director of the Office of Management and Budget, 
your former colleague, came today. It was supposed to be a 
discussion about the President's interest in entitlements and 
it ended up being almost all about health care reform.
    I asked to rejoin the committee so that I could support the 
Conrad-Gregg effort to find some process by which we could 
restrain spending on entitlements in the future, and now 
Senator Gregg has been abducted and I don't know what we will 
do, but we will find a way to go forward. But one of the 
initial questions we have got to deal with and the President 
does and the Congress does, too, is what comes first? There are 
different views on that.
    My instinct is this, that if you are going to try to 
restrain a system that is growing at a rate as big as the 
medical system in this country is, taking 18 percent of GDP, 
that is such a big change that we can't just restrain it. 
First, we have got to fix it.
    And so my question to you is, don't we have to fix, or do 
whatever we are going to do to Medicare and Medicaid and the 
health care system before we impose on it the kinds of 
restraints that will control the growth of its cost?
    Mr. Elmendorf. I think there is certainly a risk that if 
one simply ratchets down in a mechanical way the spending on 
health care----
    Senator Alexander. For example, if we just tell the doctors 
who visited Senator Sessions that we are going to cut them to 
60 percent for the next 10 years and we are not going to change 
it every year, I don't see that that is even possible.
    Mr. Elmendorf. So I think that mechanical changes without 
adapting the system to try to weed out the less useful medical 
care and keep the more useful care, I think does raise a 
substantial risk of taking out good, cost-effective medical 
care. But I think most analysts would also suggest that changes 
are needed along a whole variety of dimensions in our health 
care financing and delivery system and that probably the right 
process is not one thing at a time, but trying a set of things 
at once and seeing how they work and seeing what can be done 
better.
    Senator Alexander. Well, I think the entitlement issue, 
though, is more of a process problem than a policy problem. We 
have got to find a way to force ourselves to deal with 
restraining growth in such important programs. And because the 
Speaker doesn't like the Conrad-Gregg idea and the Chairman of 
the Finance Committee doesn't like it, we are probably going to 
have to come up with a very gross, blunt method of putting a 
cap of some kind on the amount of money we can spend on the 
entitlement programs. It is such a blunt thing that if we do it 
without making the changes that you just mentioned, we will 
literally be saying to the doctors in Alabama that it is 60 
percent this year and 50 percent next year and we really mean 
it because we have got a big cap on the way we do things today. 
That is just my instinct.
    Now, here is my second question. In my early years as 
Governor, in the 1980's, I asked for an appointment with 
President Reagan and I asked him if he would swap Medicaid for 
kindergarten through the 12th grade. In other words, I thought 
the State and local governments ought to be in charge of K 
through 12 and not expect the Federal Government to do 
anything. But more importantly, it struck me that Medicaid was 
grossly inefficient with two bosses and the Federal Government 
was always coming up, even then, with requirements for who we 
had to cover without much regard for the difference in the 
amount of money available in Tennessee as compared to 
Connecticut.
    Medicaid was even in the 1980's beginning to distort State 
budgets in a way that Washington didn't appreciate. That is 
even worse today, and without getting into a long thing about 
it, the real reason college tuitions at State universities are 
rising so rapidly is because the Medicaid program goes up so 
rapidly, and Governors, such as the former Governor of 
Virginia, sit there and have to spend this much on K through 
12, and has got a court order about corrections, and has got a 
certain amount of money for roads, and gets down to the end of 
it and it is either the University of Virginia or it is the 
Medicaid program. And if the Federal Government is writing all 
the rules about the Medicaid program, it ends up being the 
Medicaid program. So State funding for the university goes 
down, tuitions go up, and then Congress meets and decides to 
put a whole bunch of rules on the universities because they 
don't understand why all that happened.
    So what I would like to do is get rid of the Medicaid 
program. And what I want to ask you is the putting of $90 
billion into this recovery package that is coming toward us for 
the next 2 years for States for Medicaid going to take away 
from us the option of considering whether a new system of 
health care ought to just get rid of the Medicaid program and 
deliver health care to everyone in a different way.
    Mr. Elmendorf. I think you are right that the joint 
Federal-State control over Medicaid can be problematic in 
various ways. I would note one advantage, however, of the State 
control, which is that there is a variation in Medicaid 
programs across States and that is a bit of the experimentation 
process that I have described in which some States have tried 
to expand coverage in different ways. Massachusetts, for 
example, under a Medicaid waiver, has pushed a very expansive 
program for health insurance and that is a situation that 
analysts are learning a lot from.
    And more generally, I think, the underlying question is 
even if the program were moved to be a strictly Federal 
program--without changes in the way that it operates, 
reimburses physicians or who is eligible or something else--the 
costs are simply being swapped, as you said, and there can be 
organizational advantages in some cases of a swap, but it is 
not by itself a solution of the overall spending burden.
    Senator Alexander. But State budgets are so relatively 
small compared even just to the Federal spending on Medicaid. 
For example, in Tennessee, the State tax dollars collected a 
year are about $12 billion and the Federal dollars that go to 
the State are about $14 billion. Just in this new legislation 
that is the stimulus bill, we are adding $4 billion to the 
State of Tennessee over 2 years and its annual State taxes are 
only $12 billion in 1 year. So Tennessee is getting about $2 
billion of Medicaid money over 2 years.
    I am not arguing about the stimulus bill so much as to say 
that even if we brought all of the health care spending to a 
central place, it would be a great act of federalism, in my 
opinion, because it would strengthen States and allow them to 
do a better job of other issues and it would help us better 
organize health care. I agree with you. There is some 
experimentation that is valuable. But it is a very expensive 
way to allow for State-by-State experimentation when you 
compare our TennCare program and the disaster it has been in 
Tennessee with the Massachusetts program.
    Mr. Elmendorf. If I can just say, I think you are right, 
Senator, that what you are describing at the State level is 
what the Federal Government is finding in some ways and what 
the private sector is finding, which is that the rapid growth 
of health costs are driving so many other decisions that it has 
become such an overwhelming part of the activities of the 
government and the activities of the economy as a whole in a 
way that seems to be distorting priorities, and I think that is 
one of the imperatives that many people see for reform.
    Chairman Conrad. I thank the Senator.
    Now, we are going to Senator Warner. Let me just say before 
he proceeds that he comes to us as not only a former Governor 
of Virginia, but also somebody very successful in the business 
sector, so he brings a special perspective to these health care 
issues. And I can tell you, last week the single most 
interesting hour I spent was in a meeting with Senator Warner, 
Senator Kerry, and with Larry Summers talking about the fiscal 
sector. I wish all of our colleagues could have been part of 
that session, because it was a real insight into our options 
and how serious the circumstance is that faces the nation.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and thank you for 
the opportunity to serve on this very, very important committee 
and on issues that I have had a chance to wrestle with both at 
a State level and in the private sector.
    I want to focus my comments in two areas, one, around 
health care IT, and then to followup on Senator Alexander's 
comments, which I share his concern--a slightly different 
variation, but clearly share his concern as a former Governor.
    I spent 20 years as in the telecom and IT sector and 
managed to eke out a living. We still wouldn't be where we were 
in the wireless area if there had not been some level of 
standards. One of the things that is so frustrating to me about 
the health care sector, 16 percent of our GDP, is that it 
remains the only major sector of our society, or our business 
society, that has not been transformed by information 
technology. It is still around the edges. And while arguably 
hospitals and docs and others all have legacy systems, this is 
not a technology problem we are facing. This is a problem of 
political will to force upon the health care system some level 
of standardization.
    I saw in some of your study some questions about the 
efficacy of real cost savings from health care IT. Is that 
assuming that we are going to continue on this kind of nibbling 
process as opposed to having some level of across-the-board 
standards?
    Mr. Elmendorf. I think we are moving toward across-the-
board standards, greater interoperability of systems, easier 
sharing of medical information, with some privacy concerns that 
people are trying to address, and there is an office in the 
Department of Health and Human Services that is trying to 
coordinate our moves as a country.
    We think that the right sort of incentives can encourage 
faster adoption of health IT. I think the principal reason we 
don't score those as having very large reductions in 
utilization of health services is the lack of incentives to use 
the health IT in a way that reduces costs. It is a tool that 
combined with other--with the right incentives, I think could 
be more useful than just Senator Whitehouse's example, just 
having the toaster sitting there.
    Senator Warner. I guess one thing I would urge is that 
those incentives both include penalties and differential 
reimbursement levels based upon utilization rates.
    Mr. Elmendorf. Several options do precisely that. They 
explore different schedules for bonuses for early adoption and 
penalties for late adoption, and we think those sorts of 
incentives have an important effect on the rate of health IT 
adoption.
    Senator Warner. I would just make a comment that we would 
never have had a wireless system in this country without some 
governmental entity setting the standards. We would have never 
seen the transformation of business practices unless there had 
been, in effect, a Microsoft dominating product.
    The sense that the health care area is going to somehow 
reach some consensus on this--this is not a technology problem. 
Everybody has got a legacy system. Everybody has got a 
particular approach they want to take. I believe, Mr. Chairman, 
that long-term, we are going to have to weigh-in in a very 
major way in setting those standards and then be very, very 
aggressive on both incentives, but also penalties on making 
sure we move to that. You know, if a doctor doesn't want to 
change the way he or she practices, that is fine. Well, maybe 
our reimbursement rate ought to only be 95 cents on the dollar 
rather than $1.04 if you are going to actually move more 
quickly to the system.
    Following up on Senator Alexander's comments, the area that 
I want to hone in on, I lived through that exact example on 
Medicaid costs rising almost faster than any other component, 
but I can even take a greater step back on a piece of Medicaid, 
which is the aging of our population. In my State, two-thirds 
of our Virginia citizens who are in nursing homes are there on 
Medicaid dollars.
    I really question whether we continue to put long-term care 
and its financing in the health care bucket, and with the aging 
of our population, whether that is sustainable. Too often, we 
have never tried to separate out long-term care and how we 
finance it from a different area. Do you think with an aging 
population, keeping long-term care in the health care overall 
approach is sustainable?
    Mr. Elmendorf. I think the deeper question you are noting 
is how will we as a society pay for long-term care. Right now, 
in the Nation as a whole, about half of long-term care costs 
are paid by Medicaid, some by Medicare, some by private long-
term care insurance or out-of-pocket. I have two parents who 
spent time in long-term care. The costs are overwhelming and I 
don't think we have a plan.
    Senator Warner. I would argue that there needs to be some 
societal understanding that there is an individual 
responsibility to start planning for some level of long-term 
care when you turn 21 or turn 25. It is not going to be simply 
a government obligation long-term. I don't see how it is 
sustainable.
    And a followup on that, and I know we had an individual 
conversation about this and I hesitate to raise this kind of 
issue in this kind of setting, but this is not just a 
governmental responsibility, it is a morality responsibility, 
it is a faith responsibility, but at some point in this dialog 
around health care, somebody is going to have to start a 
discussion about end-of-life issues. We constantly hear--I have 
heard estimations as Governor that ranged from 30 percent to 60 
percent, based upon the last 3 months to last year of life, and 
how we sort through those issues in an appropriately 
compassionate way but recognizing we oftentimes put the 
decision on the family and the doctor at that most critical 
time when there is not really a qualitative assessment, there 
are not really any kind of norms and standards that we have set 
up.
    This goes beyond the realm of governmental action, but at 
some point, in my mind, at least, it needs to be part of the 
discussion. Have you done any analysis of what those end-of-
life costs amount to in terms of our overall health care 
spending and the expected rise in those costs, as modern 
medicine continues to find new techniques and advances to keep 
folks alive longer?
    Mr. Elmendorf. You are certainly right, Senator, that a 
large share of Medicare spending goes to people near the ends 
of their lives. I don't think CBO has done any particular 
further analysis on that topic, although I might--I mean, you 
have got it there and I might be mistaken and we will get back 
to you if we have, but----
    Senator Warner. I would love to see that, because I have 
seen estimates all across the board about how big a chunk of 
our health growth--
    Mr. Elmendorf. There is no doubt it is a tremendous amount 
of money. It is complicated by the fact that it is not always 
obvious it is the last of life until it is the case. But also, 
I think you are just right that we don't know how to make 
decisions very well about what sorts of care are appropriate 
and what sorts of care are not. And in some levels, you say 
that is ultimately a moral question, which is beyond my 
official capacity.
    Senator Warner. I understand. Thank you. Thank you, Mr. 
Chairman.
    Mr. Elmendorf. Thank you, Senator.
    Chairman Conrad. Thank you, Senator Warner.
    Now we have Senator Stabenow, who has also been very 
dedicated on this committee to health care issues and is a key 
reason we held this committee hearing this morning. Senator 
Stabenow, welcome.
    Senator Stabenow. Thank you, Mr. Chairman, as always, for 
your leadership on this issue and so many others. I would just 
add my voice on health information technology for a moment.
    I think Senator Warner was raising important issues as to 
carrots and sticks in the process. I would just remind us that 
in the Medicare bill we passed last year we did put in E-
prescribing incentives for the first time that does have in 
fact a carrot at the beginning, and a stick at the end of 5 
years. It did score as a savings for us as a start.
    We have in Southeastern Michigan a partnership with the 
automakers, United Auto Workers, Blue Cross and Blue Shield, 
which has now signed up 25 physicians doing E-prescribing, and 
it has not only addressed savings--and I would urge you to look 
at that, Dr. Elmendorf, if you have not already.
    But they have found from a quality standpoint that when 
they are using a system where they can look at allergic 
reactions to drugs, counter-indications, duplications and other 
things, that they are actually changing the prescription about 
30 percent of the time to more accurately reflect what should 
be done, so that there are huge quality issues that relate to 
our ability to have information and be operating in that way.
    There are, Mr. Chairman, some very exciting things 
happening in Michigan. We have some very exciting efforts going 
on locally through healthcare systems and so on that I hope, 
through the economic recovery plan and the dollars we're 
putting in, we can begin to connect all of that.
    But the providers, many of them are way ahead of us. 
They're out there doing what needs to be done. I would urge you 
to really look at what is being done in many places.
    I wanted to speak--I know there's been a lot of discussion 
this morning on the Medicare and Medicaid costs and in the last 
Congress I remember then GAO comptroller, General David Walker, 
noting that Medicare and Medicaid spending threatens to consume 
an untenable share of the budget and the economy in coming 
decades.
    But I also remember at the time that he went on to say that 
healthcare spending system wide continues to grow at an 
unsustainable pace, eroding the ability of employers to provide 
coverage to their workers and undercutting their ability to 
compete internationally.
    In other words, the challenge facing us is beyond the 
Federal Government. One of the things that I see is that when 
the private sector cuts on healthcare then it moves over to the 
public sector in some way, maybe children's health insurance or 
Medicaid, or it may be something else. When the government 
cuts, it moves someplace else.
    And so I guess my question and comments would be around the 
need for system wide health care reform so that we are not 
focusing on Medicare and then seeing the costs pop up someplace 
else. I wonder if you might speak a little bit more about that 
and the fact that it is important that we not shift the costs 
around from public to private sector?
    Mr. Elmendorf. I think most analysts would agree with you 
absolutely about the need for system wide reform. The Federal 
programs, Medicare, Medicaid, CHIP, are important; however, we 
should not forget their importance. They are a large share of 
spending to start with.
    Senator Stabenow. Right.
    Mr. Elmendorf. And also, they can set examples for other 
parts of the healthcare system. Providers who invest in health 
IT because Medicare makes them, will presumably use that health 
IT for all of their patients, and the effect of that on 
healthcare utilization is as part of CBO's estimate of the 
effects of health IT investment in Medicare because of those 
spillovers.
    Also I think that if Medicare can demonstrate the benefit 
of medical homes or accountable care organizations or other 
ways of restructuring care so people have an incentive to 
coordinate the care and to provide it cost effectively, those 
examples will then reverberate through the private system as 
well.
    As far as the private system itself, as Senator Whitehouse 
pointed out, the Federal Government does not directly control 
how healthcare is delivered throughout the country. But there 
are some levers the government does have right now. One, which 
we have discussed, is the tax exclusion for health expenses 
paid by employers.
    I think many analysts would agree that that exclusion could 
be restructured in a way that would make individuals more 
sensitive to the costs of the healthcare that can now be 
somewhat masked by the fact that the employer pays it and you 
never really see it.
    It turns up in lower wages for people and that is an 
important factor in the slow growth of wages, but it is not so 
visible. There are ways to change the health exclusion that 
would bring the cost to bear more directly on individuals and 
on their employers in a way that could propel the private 
sector to be more aggressive in modifying the way healthcare is 
delivered.
    So there are some levers that you do have.
    Senator Stabenow. When you talk about restructuring, what 
would be the kinds of things that you would suggest that we 
look at, when we talk about the tax treatment?
    Mr. Elmendorf. Right now, as I had mentioned earlier, the 
government loses about $250 billion a year through the income 
and payroll tax exclusion of health insurance expenses by 
employers. If we were to take away some of the benefit that I, 
for example, derive from that, and use that to provide more 
incentive for people in the lower tax brackets to get care, to 
buy insurance rather, I am unlikely to drop insurance and 
somebody in the lower income bracket is more likely to pick up 
insurance.
    So shifting some of the tax benefit from higher income 
people who work largely for firms that provide insurance in a 
subsidized way--toward people at lower income levels for whom 
health insurance is a larger burden, or who are more likely to 
work for employers that do not provide insurance now--that 
shift would likely raise insurance levels.
    Now to be fair, it raises my taxes, so it is not an 
approach that everybody will stand up and cheer for. But that 
is a sort of restructuring that gets more people into health 
insurance. Beyond that, if one reduces the amount right now--
however much--when I worked for the Federal Government--but 
when I was in the private sector--however much they paid for my 
health insurance, all of that was deductible or excludable from 
my compensation so it was not taxed.
    If instead we capped the amount that could be excluded, 
then that would still provide an important subsidy for a more 
basic health insurance, but any additional health insurance, 
more expensive policies, that extra money would come out of 
somebody's after-tax income. That would make them very 
sensitive to whether that extra more expensive policy was worth 
the extra amount relative to what else they could have bought 
with that money.
    So that kind of cap is a way of ensuring that people see 
the cost of buying more expensive insurance and see an 
estimation that would actually have a significant--that kind of 
cap would have a significant effect on how much a health 
insurance premium is worth down the road.
    Senator Stabenow. Thank you very much, and thank you, Mr. 
Chairman.
    I would hope that as we talk about Medicare and Medicaid 
that we will talk about it also in the larger context of 
healthcare reform since it is all connected. Having come from a 
state with a lot of employers providing health insurance, we 
see very directly what happens when they drop insurance or when 
they add insurance and how it moves from the public to the 
private sector. So I look forward to working with you as we 
look at this in totality.
    Chairman Conrad. Thank you very much, Senator Stabenow. I 
would like Dr. Elmendorf in the remaining minutes of the 
hearing--we have a series of votes at noon--I also should 
advise members and their staffs that tomorrow we will have the 
Secretary of Treasury, Mr. Geithner, here to talk about the 
financial sector and to talk about housing. So it is a 
critically important hearing the day after he announces his 
plan.
    With respect to healthcare, from a budget perspective, 
which of the options that you have analyzed with your 
colleagues at CBO show the greatest potential for bending the 
cost curve long term? So what I'm trying to get at is, what are 
the changes in policy that give us the biggest bang for the 
buck in terms of reducing healthcare costs while maintaining or 
improving healthcare quality?
    Mr. Elmendorf. So I have not done that comparison 
explicitly, Senator, but this is the right question and I will 
go through the book more carefully in search of the answer.
    I think in general though, I would caution against picking 
out just one or two items. I think as I have said in the answer 
to a number of questions, there is great uncertainty 
surrounding every one of these numbers that CBO has written 
down. We put down a number because we think you need that, but 
it's really a range of course, and a pretty broad range.
    There is a whole collection of these proposals that would 
restructure care in a way that might work, but might not, so we 
do not really know whether accountable care organizations are a 
better or worse idea than medical homes, so we have taken some 
stab at that, but we do not know for sure.
    I think the things that broadly speaking----
    Chairman Conrad. Can I just say to interrupt for a moment 
and say to you look, what we have got to have, we have got to 
have a prioritization of things that have the greatest prospect 
of working.
    I will tell you, I have been in a lot of discussions over 
the last several weeks publicly and privately about where this 
is all headed. The sweet bye and bye is upon us. Our colleagues 
who do not yet fully appreciate how acute the situation is and 
how urgent the need is to change course, are, I think, in for 
very rude surprises in the weeks ahead.
    We have got to be prepared to make changes. This course we 
are on cannot be sustained. I have had some of the most learned 
people in this country call me, some of them so concerned they 
have called me at home and said to me, don't people understand 
that we are headed for a collapse of this currency, not now, 
not next week, not next year, but off in the future if we do 
not deal with these long-term trends?
    I have had some of the most prominent economists. We have 
had them testify here. We had Allen Sinai sit at that desk and 
tell us we are headed for a country that will look like a 
Banana Republic if we do not deal with this long-term funding 
issue. And of course, health care is the 800-pound gorilla.
    If we look across the areas of concern, the place that just 
jumps out at you is health care. So we very much need you and 
your colleagues' best judgments as to what are the individual 
items and the collection of policies that have the greatest 
prospect of bending the cost curve.
    If I were to ask it that way, what would you say? Based on 
what you know now, and again, we know this is not a slam dunk. 
This is not an area where there is certainty. If there was 
certainty, we would have acted. But what do you see as the 
places where policy could be altered that would give us the 
best shot?
    Mr. Elmendorf. I think the cleanest and strongest lever 
that you have about private health care is the tax exclusion. 
As I said in my testimony, I think many analysts would agree 
that adjusting that exclusion can be very beneficial for health 
insurance coverage and for ensuring a more efficient health 
care system.
    In the public sector, you have, I think again, a comparably 
clean and strong lever would be increasing cost sharing by 
Medicare beneficiaries and we score some examples of that 
policy, those sorts of changes, a number of different ways in 
which there could be larger co-payments.
    We score a number of those in our document. But to be 
clear, the savings of the Federal Government are partly 
reduction in utilization, but more importantly, shifting of the 
costs to the beneficiaries. So it is not all--sometimes the 
Federal savings exceed the savings for the country. This is an 
example of the case where the government is saving a lot, but 
some of that is being shifted back to beneficiaries.
    So it saves Federal health costs but with consequences. I 
think the more subtle things, and this is where I am not sure 
what I would put higher or lower on the list, are the specific 
sorts of ways in which Medicare could reimburse physicians and 
hospitals more for value provided than for the number of 
services provided. That is a set of options.
    Chairman Conrad. Let's stop on that point and explore that 
a little more fully, because I have come to the conclusion--
this is critically important--that is that right now the 
reimbursement system is based on procedures and guess what, if 
you reimburse on procedures, you get a lot of procedures. 
Whether or not they are particularly efficacious or not, if you 
reimburse based on the number of procedures, you are going to 
get a lot of procedures.
    So what could be done to change the incentives with respect 
to that part of the system?
    Mr. Elmendorf. We cite a study in my written testimony that 
says cases where doctors are paid salaries--rather than being 
compensated as some share of the services that they induce--
that use of medical care is 30 percent less because they do 
not--apparently because they do not have this incentive to do 
more.
    Chairman Conrad. Thirty percent less? Thirty percent fewer 
procedures or 30 percent less cost?
    Mr. Elmendorf. Thirty percent less spending on health care 
I think is the fact. In an example where patients were assigned 
randomly either to a traditional fee-for-service setting or to 
a case where doctors were paid some salary that does not depend 
on the number of services.
    For doctors though who now practice independently, trying 
to figure out how to do reimbursement that way is difficult. 
One could force them all into managed care organizations of 
some sort, but I don't think that is really in the feasible set 
for you.
    So instead what happens is--people have experimented with 
this to some extent--are inducements to doctors to band 
together, so we talk of in this book about what we call bonus 
eligible organizations. That is a set of doctors who if they 
can maintain quality and reduce spending over a period of a 
couple years, get some share of that reduction in spending and 
the government gets some share of the reduction in spending.
    Chairman Conrad. I like that idea very much. I come from a 
long line of doctors in my family. My grandfather was a surgeon 
and the medical chief of staff of our local hospital. I have 
great respect for doctors, medical professionals and I have 
seen the incredible dedication that many bring to their jobs.
    So I think we have got to have a carrot approach here to 
make it attractive for them so they are in on the solution and 
they feel that they are being treated fairly. I am very 
intrigued by that notion of creating an incentive for them to 
participate in that kind of health care organization. What 
else----
    Senator Stabenow. Mr. Chairman, might I interject just on 
that one point?
    Chairman Conrad. Yes, absolutely.
    Senator Stabenow. There is a really excellent partnership 
between Johns Hopkins and the Michigan Hospital Association 
called Keystone Initiative, which I think I have mentioned 
before, that goes to this kind of approach of working with 
doctors on an evidence-based standard system to look at 
outcomes. They started out with an intensive care unit and they 
looked at very simple things they could do to stop the transfer 
of infections, and very simple things, washing hands, doing 
things that--but doing it in a very standardized way.
    Chairman Conrad. A checklist.
    Senator Stabenow. And measuring people. A checklist, 
exactly. They do the checklist and they have found that they 
have saved over a course of a few years now, about 1,500 lives 
and $165 million in health care costs by just stopping the 
infections that happen within the hospital setting.
    If we could institute more of an incentive base for those 
kinds of things where--because they are now also expanding. 
They are working with HHS to look at pilots around the country 
and there are other pieces they are looking at.
    But some of these are very simple really and 
straightforward, but they take some structure and some time and 
attention and I think if we were incentivizing and rewarding 
this, it could be an important part of increasing quality and 
decreasing costs.
    Chairman Conrad. You have mentioned to me this Keystone 
Initiative before and talked about the savings and improved 
health care outcomes. One of the things that jumps out at me in 
the data is Mayo Clinic and the hospitals associated with Mayo. 
My relative who is a nun used to be the administrator of the 
hospital at Mayo, the lead hospital there, and she was for many 
years the administrator. They get outstanding outcomes at a 
fraction of the costs of some of the other major medical 
centers.
    It really is very dramatic. Better outcomes, less cost. 
Have you analyzed that differential?
    Mr. Elmendorf. A leading health economist said to me this 
past week that we have proof of concept about effective 
hospitals and effective medical practices. There are cases, and 
the Mayo Clinic is a very important example, where care is 
delivered very--more effectively than most places and at less 
cost than most places.
    It is trying to spread that around, those examples around 
the country, that is important. So one incentive regarding 
hospitals that we talked about in this book would be when 
hospitals have readmissions of patients that they have treated 
and released but they have come back--some of those happen just 
because of the nature of the illness and some happen because 
hospitals have not done the right sorts of things in the 
hospital or the right things in terms of post-acute care.
    We can penalize hospitals. We could not reimburse them 
fully for the re-admitted stay and that sort of penalty would 
certainly induce them to be more careful about things. The way 
that we had mentioned is we could bundle the payment for the 
stay in the hospital and the care after the hospital, bundling 
those together with one payment rather than what we now do, 
which is pay for the in-hospital care but then pay extra for as 
much other care as you get.
    Chairman Conrad. That would be a huge incentive wouldn't 
it?
    Mr. Elmendorf. Right, and those are the things that we talk 
about in this book that save money in our estimation.
    Chairman Conrad. How do we encourage institutions to move 
toward a model like what we see at Mayo? There they have an 
integrated care system, right? You've got the clinics, the 
hospitals. You've got, as I understand it, a partnership that 
involves the doctors and you have a team approach to patient 
treatment and an integrated approach.
    What are the other things that we can learn from the Mayo 
approach?
    Mr. Elmendorf. I think the integration point is important. 
We have a tradition in this country in many places of medical 
care being practiced by solo practitioners, individuals, and 
that may have made sense at the time of a more rural country 
with much simpler medical technology and treatments.
    It seems to make much less sense to most analysts given our 
current concentration in many parts of the country and the 
complexity of medical treatments that can be administered, and 
I think we are in the process of a shift toward less solo work 
in medicine and more of these teams that you describe.
    It is a very strong cultural shift in many parts of the 
country. Some parts of the country have come naturally to that 
without being forced or induced by particular incentives. 
Economists usually answer, if you are trying to change other 
behavior is that sermonizing is OK, but financial incentives 
are very powerful. I think people, in our estimate, suggest 
that--we think people can be moved to explore new things they 
might in fact like, but maybe need some incentive to get going 
in that direction.
    I think incentives can be very effective over time.
    Chairman Conrad. Senator Stabenow, do you have additional--
--
    Senator Stabenow. Just on that point, Mr. Chairman, it made 
me think of a conversation I had with a very smart, creative 
hospital administrator who came from outside of health care to 
be involved in managing a hospital system in Michigan who told 
me the other day that he thought that payment incentives were 
the way to move the system, that when he looked at what caused 
change to happen or what he was able to do with change, that 
that was the way that we move the system.
    So when we provide a payment incentive for E-prescribing, 
people move to E-prescribing. If we were to provide--I also 
think that to get to the comparative analysis on quality that 
we need, that health IT is an integral part of that because I 
do not know how you get the information if you do not do that.
    But I do think that there is something to be said for 
structuring incentives in the direction we want to go and then 
my guess is the system will move there.
    Chairman Conrad. Well, I believe it.
    Mr. Elmendorf. I do too.
    Chairman Conrad. OK, now we got three. We are on a roll. 
You know, the clock is really ticking. You look at these 
numbers; they are so striking. Eighty-three hundred dollars per 
capita health care costs, $8,300.
    Mr. Elmendorf. It is stunning.
    Chairman Conrad. That is why--and I want to end this 
hearing as I began it. I want to send a message to those who 
believe the answer is putting a lot more money into this system 
that they got a very heavy burden to bear.
    I understand maybe to change the system is going to require 
some front-end costs, OK; I can accept that. But the notion 
that we are going to go from 16 percent of GDP to 18 to 20 
percent of GDP, we are on a track now by 2015 we are going to 
be at 20 percent of GDP, one in every $5 in this economy for 
health care. That will be double any other industrialized 
country in the world, on the current trend lines, double.
    Now we are not--if we are getting by far the best results, 
that would be one thing. But we are not. We are not even close. 
I do not think on the last analysis we are in the top 20 in 
health care outcomes.
    So being twice as expensive and not getting the very 
highest quality tells you we got a system failure and it is of 
enormous proportion and it makes our country less competitive. 
It makes our people less affluent and to the extent we have a 
health care system that does not deliver quality outcomes, it 
makes our people less healthy than they would otherwise be.
    My goodness, we have got to be able to do better than this 
and we very much need your help and the help of your associates 
to point the way in terms of what we try to do. And we have got 
to be very humble about this because the truth is, there is not 
certainty about changes that could be made here that would make 
a difference.
    So let's be humble about it, but let's not let humility 
prevent us from acting, because the course we are on is 
completely and utterly unsustainable. So that is our challenge. 
Thank you very much.
    Mr. Elmendorf. Thank you, Mr. Chairman.
    Chairman Conrad. We will conclude the hearing.
    [Whereupon, at 11:55 a.m., the committee was adjourned.]


    POLICIES TO ADDRESS THE CRISES IN FINANCIAL AND HOUSING MARKETS

                      WEDNESDAY, FEBRUARY 11, 2009

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

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to welcome everyone to the Senate Budget Committee 
today. Our witness today is the Secretary of the Treasury, Tim 
Geithner. We want to welcome Secretary Geithner to the Budget 
Committee in his first appearance here of what we anticipate 
will be many appearances, because we have obviously a need for 
a close working relationship with the Secretary of the 
Treasury. It is traditional that the Secretary come before the 
Budget Committee to talk about the outlook, and obviously, we 
are not the Budget Committee--or the Banking Committee. We are 
the Budget Committee. And so I will try to confine my inquiry 
to the things that really matter to this Committee, the Budget 
Committee. But we all recognize members are free here to ask 
whatever questions they deem appropriate. That is their 
judgment to make. But, again, I am going to try to pursue what 
the implications are for our overall budget circumstance 
because that is our first obligation.
    With that, I think we all know that we are in an extremely 
serious economic situation: 2.5 million private sector jobs 
lost in the last 5 months; consumer spending down for 6 
straight months. We have the largest 6-month drop in consumer 
spending on record. And it is interesting, reading press 
commentary of today and yesterday, this paradox between wanting 
people to save more--you know, many of us have talked about the 
need to save more for many years. On the other hand, in this 
circumstance, when consumers save more, that means they are 
spending less. That means aggregate demand is further reduced, 
and, of course, in economic terms, one of the problems that we 
face is a drop, a rather sharp drop in aggregate demand.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    So in the short term, we know that has to be addressed to 
prevent further economic damage, while at the same time we 
recognize over the longer term we do need to encourage more 
savings so that we can have pools of capital available for 
investment, so that we can have long-term economic growth. That 
is the paradox of the moment, and as is so often the case, what 
works in economic terms is counterintuitive.
    We also anticipate that this economy is going to contract 
further. In the fourth quarter of 2008, the economy contracted 
by almost 4 percent. The first quarter estimate for 2009 is a 
contraction of nearly 5 percent.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    And in the midst of all this, the housing crisis continues 
unabated. One out of five mortgages is underwater, with homes 
worth less than the remaining balance; in other words, people 
are upside down.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    They owe more money on the mortgage than the house is 
worth. We have had testimony before this Committee that one out 
of every four houses in the country is upside down. I am not 
certain which is the right measurement, whether it is one in 
four or one in five. Either one is a cause for real concern. 
And, of course, one in every ten mortgages in the country is 
delinquent or in foreclosure.
    The CBO Director came before us--Dr. Elmendorf--and talked 
about the need to address both the housing crisis and the 
financial crisis. Here is what he said: ``Policies focused 
directly at the housing and financial problems are a crucial 
complement to stimulus. Without such action, the end recovery 
will almost certainly be more halting and there would remain a 
larger risk of further economic decline.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    That is a message I have tried to deliver repeatedly and 
consistently over the last several weeks, that while we are 
doing an economic recovery package--which is absolutely 
necessary. We can debate its contents and its mix and whether 
it is as good as it could be. That is a separate subject. But I 
do not believe and I do not think most economists believe we 
are going to have the kind of economic recovery we all want 
unless we deal with the housing crisis and the crisis in the 
financial sector as well.
    We had testimony last week before this Committee, really 
riveting testimony, by three prominent economists, including 
Dr. Simon Johnson, the former Chief Economist at the 
International Monetary Fund, who said this on January 29th: ``I 
have been arguing that fiscal stimulus would not be sufficient. 
What worries me most of all is: What are we doing about banking 
exactly, and with what money? And what are we doing about 
housing and, again, with what money?''
    Let us think about the financial system now. Let us think 
about it comprehensively and on a complete scale rather than 
coming back in 4 or 5 months and saying, ``Oops, you know, we 
did not right-size the package last time and we regret it.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Mr. Secretary, that is really going to be the thrust of the 
questions that I have. What is it that we need to do to 
specifically address housing? What is it that we specifically 
need to do to address the financial sector? And what money are 
we going to use to do that? That is distinctly in the province 
of this Committee. That is our fundamental responsibility to 
our colleagues.
    I hope, to the degree that we can, we focus on those issues 
but, again, I want to make clear colleagues have the right in 
this Committee to ask questions of our witnesses on any subject 
they deem appropriate.
    With that, I will turn to Senator Sessions, who is here 
filling in for Senator Gregg, who we all know is going through 
the confirmation process. And if he is successful there, 
Senator Sessions will be the Ranking Member on this Committee. 
I welcomed him to that post yesterday, and I welcome him again 
today. Senator Sessions.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. Thank you, Mr. Chairman, and we do 
appreciate the leadership Senator Gregg has given to this 
Committee and that you have. In fact, you have had a great 
partnership, and it has been valuable to the country, and I 
hope, if my colleagues allow me, to participate in a positive 
way as well.
    Secretary Geithner, thank you for appearing before the 
Committee today. We want you to succeed. There are a lot of 
challenges out there. Over the last 6 months, the American 
people have watched with increasing concern as our economy has 
further stumbled and faltered. This is a confusion and anxious 
time for Americans. I travel my State a lot and talk to people. 
While the economic challenges are complex and the root causes 
of those challenges provide a lot of fodder for academic 
debate, I think the American people are far more focused on 
finding a responsible solution that will restore certainty to 
the market--uncertainty is not good--and growth to the economy.
    So those are my thoughts, basically, and I want to again 
reiterate that while I have opposed some of the solutions that 
have been promoted under President Bush and that appear to be 
continued, we are heading down a road that we want to be 
successful at, even if it may not have been my personal choice.
    This much is very clear: The average homeowner knows his 
property has lost value, but the Government has done little to 
explain why to the average American--perhaps it is understood 
within the Beltway, but not outside the Beltway. Experts cannot 
justify effectively to a middle-class worker why his job no 
longer exists, and analysts are hard pressed to demonstrate in 
clear and simple terms why it is more difficult for a small 
business owner with good credit to get a loan than it was 
before.
    To a large degree, I think--and I would make this 
criticism--our national leaders are promoting fear rather than 
more confidence that we will work our way through this 
eventually no matter how tough the challenges are, and that 
fear can actually sometimes make things worse.
    People do understand that markets are cyclical, that they 
go up and down. Most Americans are willing to accept the 
reality of tough times, adjust to the circumstances, and to 
persevere. But even so, they have looked to the Government for 
an explanation of what has happened and for leadership as we 
right the economic ship.
    The only thing murkier than the root causes of the economic 
problems we face, I think, is a muddled response from our 
Government.
    To my amazement, the Bush administration urged Congress to 
act so quickly last fall, at one point setting the opening of 
the Asian markets as a deadline that we had to pass the 
legislation by. Of course, that passed, and we eventually 
passed pretty much what they asked for, but not when they said 
it was so critical.
    So rather than closely study the challenges, understand 
their root causes, and formulate a targeted response, Congress 
basically washed its hands of the problem and gave the 
authority to the Secretary of Treasury, and along with $700 
billion. Secretary Paulson requested and received maximum 
flexibility to allocate the money however he saw fit, with 
little oversight. A week after he testified that the massive 
funds would be used to purchase toxic assets from banks--and in 
his testimony he specifically rejected buying stocks--he 
shifted gear to buy ownership stack in the Nation's financial 
institutions. I am confident that had the Secretary announced 
that he intended to buy equity stakes in banks, it would have 
received a good bit more hostile congressional response.
    Four months removed from the vote on that TARP plan, I 
believe most in Congress have heard from their constituents 
that they were not happy with it. The program, which was 
engineered with assistance from you--you were one of Mr. 
Paulson's advisers in that process--has not received good marks 
so far. Rarely has there been a Government program so large, so 
expensive, and so important that has met with so much public 
resistance and expense.
    In the real world, borrowers must present an application 
for a loan, demonstrate their ability to repay it, and sign a 
promissory note promising to pay back their debts. In a 
bankruptcy court, the petitioner must stand under oath and 
recount his debts and his assets. Even in the days of the RTC 
hearings, public transcripts were made, testimony was made 
available to the public. In the Paulson-Geithner world, 
decisions allocating huge sums of money, picking some private 
companies as winners and others as losers, seem to be made 
behind closed doors. There are no public hearings, no 
transcripts that I know of, and little justification for how 
those decisions are made. The procedures used are the 
procedures chosen by the Secretary of Treasury, and those 
procedures can be altered at his whim.
    This goes against the American heritage of law, individual 
responsibility, congressional oversight and accountability, 
limited Government, and free enterprise. Those principles are 
important, and each one of them is eroded by this process. The 
Obama administration has made it clear that a dramatic 
reformulation of this program is needed before the second 
tranche of the $350 billion is allocated. The market has made 
clear that certainty and stability are commodities of great 
demand, and I think many of us were looking forward to a plan 
that could be presented in a straightforward, clear, and 
detailed way. Unfortunately, that is not what we received 
yesterday. At least that is not what the markets and the 
country perceived they heard.
    The country's financial sector needs a better understanding 
of how the Treasury intends to move forward with this economic 
recovery. Congress as the people's representative must evaluate 
that plan, I think, and either approve it or disapprove it. So 
we look to you, Secretary Geithner, to lay out a detailed plan 
in clear terms about how you suggest we should proceed. I think 
the reviews of your performance from yesterday are in and they 
are not good. You were involved in this process from the 
beginning and you have had more than a month to work on the 
proposal. But what we have heard is more of an outline, short. 
. . on details about how we are going to fix this financial 
system, which is the core, I agree, Mr. Chairman, of the 
problems we face.
    So I hope you can use the hearing today to put some meat on 
the bones--as I heard a British analyst say on the Business 
Channel this morning, it needed more meat on the bones of your 
proposal, and I hope that we can work together and make some 
progress for our country. I believe this Nation will bounce 
back. If we use smart policies, we can help it be faster and 
less painful.
    Thank you.
    Chairman Conrad. Thank you, Senator Sessions.
    Again, Mr. Secretary, welcome to the Budget Committee, and 
please proceed with your testimony.

  STATEMENT OF HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Geithner. Thank you, Chairman Conrad, Senator 
Sessions, and members of the Committee. Thanks for inviting me 
here today. It is a great privilege for me to appear before you 
today as my first time as Secretary of the Treasury, and I look 
forward to doing it many more times. I believe deeply in the 
importance of a close working relationship between the Treasury 
Department and this Committee and your colleagues on both sides 
of the aisle, and I will work very hard to achieve that.
    I have laid out a somewhat longer prepared statement today, 
but I want to depart slightly from my text, and I want to go 
through and emphasize a few important elements of how we got 
here, the broad principles that guide our approach, and I will 
give you this framework of programs that we think are necessary 
to solve this crisis. But this is the beginning of a process of 
consultation, and I completely understand the desire for 
details and commitments. But we are going to do this carefully, 
consult carefully, so we do not put ourselves in the position 
again where we are laying out details ahead of the care and 
substance necessary to get it right, which requires quick 
departures and changes in strategy. I do not want to do that. I 
do not think that would be helpful for certainty. And I want to 
be careful and be responsive to the understandable desire in 
the Congress and elsewhere that we consult as we design and go 
forward and that we be careful to get it right.
    Now, I want to begin a little bit by how we got here. The 
causes of this crisis, enormously complicated, took a long time 
to buildup, and they will take a long time to resolve. 
Governments and central banks around the world--and now I say 
this with the benefit of hindsight, but governments and central 
banks around the world pursued policies that contributed to a 
huge global boom in credit. Investors and banks took risks they 
did not understand. Individuals, businesses, and governments 
borrowed beyond their means, and the rewards that went to 
financial executives departed from any realistic appreciation 
of risk.
    There were systemic failures in the checks and balances in 
our system--by boards of directors, by credit rating agencies, 
and by Government regulators. And these failures, not just here 
in this country but around the world, have helped lay the 
foundation for the worst economic crisis in generations. And 
when the crisis began, governments around the world were too 
slow to act. When action came, it was too often late and 
inadequate. Policy was behind the curve, always chasing the 
escalating crisis. The dramatic failure of some of the world's 
largest financial institutions caused investors to pull back 
from taking risk.
    Now, last fall, as the global crisis intensified, you and 
your colleagues acted quickly and courageously to provide 
emergency authority to contain the damage--authority that your 
Government did not have until you acted. And your Government 
used that authority to help pull the financial system back from 
the edge of catastrophic failure.
    Now, those actions were absolutely essential, but they were 
inadequate. The force of the Government response was not 
comprehensive or quick enough to withstand the deepening 
pressure brought on by a weakening economy. The spectacle of 
large amounts of taxpayer assistance going to institutions that 
were at the heart of the crisis with limited transparency and 
oversight added to a deep sense of public distrust, and that 
public distrust turned to anger across the country as boards of 
directors at some institutions--not all, but at some 
institutions--continued to award rich compensation packages and 
lavish perks to their senior executives.
    And our challenge and your challenge today is much greater 
because people have lost faith in the quality of judgments of 
the leaders of many of our major financial institutions, and 
they are skeptical that the Government to this point has used 
taxpayers wisely in ways that will benefit them.
    Now, my judgment is to get credit flowing again and to 
restore confidence in our markets to restore the faith of the 
American people, we are going to have to fundamentally reshape 
the Government's program to repair the financial system. And I 
want to be candid. This is going to cost substantial resources, 
it is going to involve risk to the Government, and it is going 
to take some time. But as costly as this response will be, I am 
also confident that a failure to act, a failure to act with 
force and speed, would be much more costly to the families and 
businesses across the country.
    If we are not acting with candor and honesty about the 
scale and difficulty of this problem today, ultimately it will 
cause more damage to the productive capacity of this economy, 
more damage to our capacity to fund the things the Government 
needs to do in the future, and more damage to families and 
businesses across the country.
    Now, we are going to have to adapt our program as 
conditions change. We are going to have to try things that have 
not been tried before. We are going to make mistakes as we go 
forward. And we are going to go through a period where things 
get worse and progress will be interrupted.
    This is a challenge more complicated and more complex than 
any that our system has faced, and it is going to require new 
programs and a sustained effort to solve it, and we are going 
to have to work together to do it.
    Now, our work is going to have to be guided by not just the 
lessons of the last 18 months, but by the lessons and the 
failures of financial crises over the course of history. And I 
just want to state quickly the basic principles and values 
based on those lessons that have to shape our strategy.
    We believe the policy response has to be comprehensive and 
forceful and that there is more risk and greater cost in being 
gradualist and tentative than there is in aggressive action. We 
believe that the action has to be sustained until recovery is 
firmly established. In this country in the 1930's, in Japan in 
the 1990's, and in other cases around the world, governments 
applied the brakes too early, and that made the crisis deeper, 
lasting longer, ultimately causing more damage and more costs 
to the taxpayer.
    We believe that access to public support is a privilege, 
not a right. And when our Government provides support to banks, 
it is not for the benefit of banks. It is for the people, the 
businesses, and the families who depend on banks, for the 
communities that depend on banks, and it is for the benefit of 
this critical public interest in getting our economy back on 
track.
    Government support, of course, has to come with strong 
conditions to protect the taxpayer and with the transparency 
that allows the American people to see the impact of those 
investments.
    We believe our policies must be designed to mobilize 
private capital. When Government investment is necessary, it 
should be replaced with private capital as soon as that is 
possible.
    And, finally, we believe that the United States has to send 
a clear and consistent signal that we will act to prevent the 
catastrophic failure of financial institutions that would cause 
broader damage to the economy.
    Now, guided by these principles, we are going to move to 
help stabilize and repair the financial system and support the 
flow of credit that is necessary for recovery.
    Last night, we laid out in a joint statement with Chairman 
Bernanke, with FDIC Chair Sheila Bair, with the head of the 
Comptroller of the Currency, and with the head of the OTS a 
statement of a program that brings all the financial agencies 
of our country together and a commitment to use the full force 
of the U.S. Government to help get our financial system back on 
track.
    Our work begins with a new framework of oversight and 
governance covering all aspects of our financial recovery plan. 
These new requirements will give the American people the 
transparency they deserve, and they will build on what we have 
already done by posting the details of these financial 
contracts on the Internet, by restricting the role of lobbyists 
and politics in access to Government resources, and by 
outlining strong conditions on executive compensation. This is 
the beginning.
    Now, under this framework we are going to establish three 
new programs to help clean up and strengthen the Nation's 
banks, to help bring in private capital to restart lending, and 
to go around the banking system directly to those markets that 
are critical to small business lending and consumer lending.
    We are going to require banking institutions to go through 
a carefully designed, comprehensive stress test to strengthen 
their balance sheets, and we are going to introduce new 
measures to improve public disclosure. We are going to provide 
capital to help facilitate that process. This capital will come 
with conditions to help ensure that every dollar of Government 
capital assistance is used to generate a level of lending that 
is greater than what would have been possible in the absence of 
Government support. And this assistance will come with 
conditions that should encourage these banks to replace public 
assistance with private capital as soon as possible.
    The second element of this program: Together with the Fed, 
the FDIC, and the private sector, we are going to establish a 
Public-Private Investment Fund to provide Government capital 
and financing, to leverage private capital, and to help get 
these private markets working again.
    Now, providing financing the private markets cannot now 
provide, we hope to help restart a market for the real estate-
related assets that are at the center of this crisis using a 
market mechanism to help value the assets.
    The third piece of this program: Working jointly with the 
Federal Reserve, we are prepared to commit up to $1 trillion to 
support a consumer and business lending initiative, building on 
a program outlined by the Federal Reserve and the Treasury last 
fall. This program is designed to restart the secondary lending 
markets, the securitization markets, to help bring down 
borrowing costs and to help get credit flowing again. This 
program, as I said at the beginning, goes around banks. We have 
to both strengthen banks because they are central to recovery, 
but we need to go around them to help get the credit markets 
that are critical flowing again. And, again, these are targeted 
to the markets that small businesses and consumers depend on 
most.
    In addition to these steps, and in the package now working 
its way through the Congress, we are prepared to take 
additional actions to make it easier for small business to get 
credit from community banks and large banks, with some 
improvements to and some additional authorities for the Small 
Business Administration.
    Now, finally, in the next few weeks, the President and his 
team will outline a comprehensive program to help address the 
housing crisis. Millions of Americans have lost their homes, 
and millions more live with the risk that they will be unable 
to meet their payments or refinance a mortgage. And our focus 
will begin on using the full resources of the Government to 
help bring down mortgage payments and help reduce mortgage 
interest rates, and we are going to do this with a substantial 
commitment of the resources already authorized by Congress 
under the Emergency Economic Stabilization Act.
    As I said, this program will require a substantial and 
sustained commitment of public resources. The Congress has 
already authorized substantial resources for this effort, and 
we are going to start by using those resources as carefully and 
as effectively as possible to get as much impact for those 
resources, at least cost and least risk to the American 
taxpayer.
    As we proceed with moving forward with this plan, I want to 
emphasize that we are going to invite input from the public and 
suggestions and ideas from Members of Congress, and having the 
benefit of your ideas and expertise and concerns will, I 
believe, help us craft better policies, and we look forward to 
making this a truly collaborative effort.
    Mr. Chairman, I want to just emphasize, as you did at the 
beginning, that for us to get the economy back on track, we 
need to move together on three fronts: we need to pass a 
powerful economic recovery program to help create jobs and 
encourage private investment; we have to move aggressively to 
try to get credit flowing again by helping to repair and 
strengthen the financial system; and we have to move to address 
this housing crisis. Very important that those things move 
together. The quotes you said at the beginning are absolutely 
right, that there is stimulus in financial repair and recovery. 
Without repair and recovery of the financial system, the 
financial system is going to continue to work against stimulus. 
We need to move on these three fronts together.
    Finally, I just want to say a few words about the deep 
challenges we face on the budget front going forward. I have 
always been a strong proponent of fiscal responsibility. When I 
last served in the Treasury Department in the 1990's, the 
adoption then of fiscally responsible policies for our country 
helped create a virtuous cycle of economic growth, deficit 
reduction, ultimately leading to a budget surplus. Today, of 
course, we are experiencing a terribly challenging fiscal 
environment and a terribly challenging economic and financial 
crisis. And as the President says, the Government has to act to 
help solve this crisis. Inaction is not an option. But as we 
move forward with the type of programs we think are necessary 
to fix this crisis, we are going to have to lay out for the 
American people and the Congress a set of commitments that 
bring our resources and our expenditures more into balance with 
a budget that achieves a sustainable position over the medium 
term, with a set of disciplines on budget process that will 
help achieve that, and with a commitment to work with you and 
your colleagues who have shown great leadership in this issue 
to address our longer-term fiscal challenges as well. That will 
be critical to the credibility of this program. But I also 
believe--and I think there is no escaping this--that if we are 
not forceful now, ultimately it will be harder for us to get 
our fiscal position back into a sustainable position because we 
will suffer from a greater loss of productive capacity, a 
greater erosion in our revenue base, and all those challenges 
will be more difficult to solve.
    We are starting, of course, from a deeply--just a huge 
deficit and a hugely damaged system. But the most fiscally 
responsible course now, I believe, is to try to move 
aggressively together to address those problems, because 
ultimately it will be less costly to the American people than 
the alternative path, which is to be tentative and limited and 
gradualist in our basic approach.
    Thank you, Mr. Chairman. I would be pleased to answer any 
of your questions.
    [The prepared statement of Secretary Geithner follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    

    Chairman Conrad. Thank you, Mr. Secretary, and I want to 
welcome David Vandeveer back to the Budget Committee hearing 
room. David served with distinction on the staff here for 6 
years before joining your staff as a top aide, and we welcome 
him back to this Committee hearing room.
    First of all, I got up this morning, read the Washington 
Post, and noticed that they had a column that they call ``It 
Adds Up,'' and they talk about the Federal Government having 
committed so far $7.8 trillion in guarantees, investments, and 
loans to dealing with this financial crisis--$7.8 trillion, and 
I think we should be swift to say that does not mean a full 
cost to taxpayers of $7.8 trillion, because much of that 
represents investments that will be, at least in part, 
recouped.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Part of it represents guarantees, and our history with 
guarantees is while they do cost money, they typically cost far 
less than the full amount of the guarantee.
    I also noted with interest yesterday the Washington Post 
said that the cost of what you are talking about with respect 
to the financial sector and housing, $1.5 trillion. This 
morning, the New York Times, with another day to mull it over, 
came up with a very different number--$2.5 trillion. It is 
going up a trillion a day. At least that is media estimates, 
and we all understand they are operating under deadline and 
with imperfect information.
    You know, the obligation of this Committee and the primary 
responsibility we have to our colleagues is to try to give them 
the best assessment of what the budget exposure is going to be 
in the next year and the next 5 years and the next 10 years. 
And that is the reason we have the Secretary of Treasury come 
before this Committee, to help us understand what is the budget 
exposure.
    I would understand if you are not prepared at this moment 
to give us a full picture of what that might be, but any 
indication that you can provide along those lines would be 
helpful to this Committee. As you know, we in just a few weeks 
need to present a budget outline to our colleagues.
    So what can you tell us about what you see is the potential 
budget exposure of what you outlined yesterday?
    Secretary Geithner. Thank you, Mr. Chairman. I want to 
begin by just emphasizing the point you made, which is that, 
you know, these numbers are very large. They are hard to 
understand. But the numbers you cited and are in this are 
predominantly, overwhelmingly loans against collateral and 
investments that come with a return to compensate the risk. 
Those broad numbers do not represent the costs in terms of 
budgetary resources, nor do they represent the additional 
borrowing into the country. And I think it is very important--
and we will do this--to try to explain more clearly to people 
what those numbers mean, what is already committed, and what 
these new programs mean in terms of numbers, and to be careful 
and realistic to people about, again, what the ultimate cost is 
to the taxpayers in these programs.
    A great strength of our country is we have a process with 
enormous integrity in CBO and the Congress and with OMB to try 
to assess the actual budgetary cost of these programs. I am 
deeply committed--we have been realistic--to integrity and 
candor to those estimates.
    But the broad numbers do not represent the ultimate cost to 
the taxpayer nor the direct claim on taxpayer resources, 
because these are largely programs of lending against assets 
that come with some return to help compensate for risk.
    Chairman Conrad. So let me interrupt, if I can, on that 
point. Let me say to my colleagues, we are going to restrict 
the first round to 5 minutes apiece, given the large attendance 
here, and I am going to impose that same restriction on myself. 
So I have got 30 seconds left.
    It is fair to say that the actual budget exposure is far 
less than the $1.5 trillion or $2.5 trillion that is in the 
newspaper headlines. Is that not the case?
    Secretary Geithner. Absolutely. And as I said at the 
beginning, we are not coming before you today to ask for 
additional resources and authority. You have already authorized 
substantial resources. I think it is our obligation to use 
those resources carefully and effectively, again, to minimize 
the ultimate cost to the taxpayer, maximize the benefit to get 
credit flowing again. And the programs I laid out yesterday we 
can move forward on, on a substantial scale, within the $350 
billion additional authorization Congress has already provided. 
And those resources are in the budget baseline with a careful 
estimate by CBO and OMB of the ultimate costs.
    Chairman Conrad. So, just in conclusion, you in your 
outline yesterday did not call for any additional budget 
authority.
    Secretary Geithner. That is correct, and I did that because 
I think not only have you already authorized substantial 
resources and it is our obligation to use those, as I said, as 
carefully and effectively as possible. But because we want to 
be careful before we come to you and ask for additional 
resources or authority that we have done so with as much care 
and consultation on design as possible. So before we get to 
that point, we will come with the level of detail and care in 
assessing ultimate costs and benefit that you need to do your 
job.
    Chairman Conrad. All right. Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman.
    Just to followup, I have the same Washington Post article. 
It uses the figure $7.8 trillion, and it says that amount of 
money is equivalent to all the homes west of the Mississippi 
River. So I guess my question--can you explain to the average 
voter what this $7.8 trillion consists of? Some of it is from 
Federal Reserve. Some of it, I suppose, is the $700 billion 
TARP money that we have got and other moneys. And we do not 
have a lot of time, but succinctly, if you could explain where 
that money will come from.
    Secretary Geithner. Well, Senator, as you said, this is a 
mix of different things. It includes the authority Congress has 
already provided under the Emergency Economic Stabilization 
Act, which has been used for capital investments, as well as 
smaller amounts of capital to help support broader lending 
programs. It includes a variety of guarantees and commitments 
made by the FDIC. It includes----
    Senator Sessions. Have you got numbers, round numbers for 
each one of these that you are mentioning?
    Secretary Geithner. Those are in the public domain, and I 
would be happy to provide as much detail as possible on the 
broad dimensions of that. The Chairman of the Fed yesterday 
committed to a greater process of transparency and disclosure 
on the Fed's piece of these programs. I think it is very 
important we lay that out, and I would be pleased to commit to 
laying that out in detail to this Committee. And I think the 
hard thing, of course, is not just to explain the composition 
of those numbers, but try to explain to people how we are 
protecting the risk to the taxpayer, what benefit they provide, 
because, again, our basic obligation--and I take this very 
seriously--is, again, to try to maximize the benefit we are 
achieving with limited resources, which as much care and 
protection for the taxpayer. And what is hard, of course, is, 
again, to try to provide a realistic appreciate of the risk in 
those programs. But it is important we do it, and I will 
provide as much comprehensive and candor and detail as we can.
    Senator Sessions. Well, we know the Congressional Budget 
Office--I think my recollection is correct--scored the $700 
billion TARP, the Wall Street bailout, as a $240 billion 
Treasury cost, and that Freddie and Fannie was about $200 
billion to date, they have scored that. So each one of these 
things you would admit, every new program where it would not be 
dollar per dollar, will have and should score by our 
independent Budget Office as a hit to the Treasury.
    Secretary Geithner. I think it is critically important we 
have candor, independence, and realism to those assessments. I 
completely agree. But, again, the overwhelming obligation we 
face--this is a complicated financial crisis. We have got an 
incredibly large economy, a very large financial system, and 
our basic obligation is to try to use these authorities as 
carefully as possible but as forcefully to try to get the 
system repaired and recovery going again, because if we do not 
do that, the stimulus will be less effective, and we are going 
to face a deeper----
    Senator Sessions. I understand that. I understand that, and 
you are saying we do not want to be timid and we do not want to 
be limited. But I do not want to be reckless, overspending, and 
unprincipled either. And so there is a tension here that we 
have to watch. And I know politically sometimes it might be 
better to say, well, we did everything possible and whatever 
goes wrong is not our fault because we acted boldly and nobody 
can blame me. But in the long run, those expenditures, those 
investments, those loans have to be consistent with our 
heritage of a free country, limited Government, and financial 
responsibility.
    You say you will consult. We have had consulting around 
here, but nobody ever consults with me. I am not sure--they 
probably consult with our Chairman. But, I mean, when you say 
``consult,'' are you going to ask for legislation? Or do you 
think you already have power to execute the list of things that 
you have been talking about today?
    Secretary Geithner. As I said, we have substantially 
authority and resources already authorized by the Congress to 
move forward on this front, and I think it is responsible, and 
it is our obligation to do that.
    If we judge, if we believe that we think there is a 
compelling case for additional resources and authority, we will 
come to you and lay that out as quickly as we can.
    Senator Sessions. I think I was in error. CBO scored the 
TARP at $189 billion, not $240 billion. But, at any rate, those 
are things that we do have to do, as the Chairman noted, figure 
out as best we can an estimate. Hopefully it will be less than 
that. It might be more.
    Is my time up? Yes. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Sessions.
    On our side, I just want to give Senators a heads up. It is 
Nelson, Cardin, Sanders. The first three on our side, Nelson, 
Cardin, Sanders. On the other side, it is Sessions, Enzi, 
Bunning, the first three.
    Senator Nelson.
    Senator Nelson. Mr. Secretary, I was surprised at the 
degree of criticism that you received from a number of the 
talking heads on TV this morning where they were saying there 
was a lack of specificity, and they were blaming the fact of 
the drop on the New York Stock Exchange and so forth. And I 
suppose that is a reflection that you came out with a balanced 
program, that it was not all going to Wall Street, that you 
look at this in a comprehensive way.
    We constantly get it directly from our constituents who 
have had their mortgages foreclosed and so forth. So a lot of 
your, and I quote, ``affordable housing support and foreclosure 
prevention plan is still yet to be developed.''
    Do you want to give us a few more specifics? And would you 
tie that into an issue that is before us right now? In the 
conference committee on the stimulus package, there is a 
$15,000 tax credit for the purchase of a home which is likely 
in the conference to be cut down to $7,500 tax credit. Tell us 
how that relates to what you ultimately will do on housing.
    Secretary Geithner. Senator, this is going to be 
frustrating, I know, because I do not want to get ahead of the 
President on the housing plan. And as I said, I want us to get 
the details right and be careful as we do it. But let me be 
responsive to your question.
    On where you ended, your colleagues are in the delicate 
process of consultations now on how to move this forward. My 
sense is they are making progress. There are some issues they 
have to work through. And we are very hopeful, though, that we 
are going to reach a broad balance that meets the President's 
objectives of a program with enough force to create 3 to 3.5 
million jobs and help get the economy back on track. As part of 
that, there is a whole range of things that will be important 
to that, but those discussions are going forward now, and we 
are very hopeful they are going to make progress.
    Now, on the housing strategy, I think the key elements of 
the strategy, as I said, are going to be to bring mortgage 
interest rates down, to help avoid the foreclosures that we can 
reasonably expect to avoid, to help bring mortgage interest 
rates down, and to try to bring more coherence, frankly, and 
consistency to the proliferation of initiatives to help support 
modifications across the financial system and across the 
agencies of the Government together. I think we have to do that 
together.
    Senator Nelson. What is the mechanism to do that?
    Secretary Geithner. We are going to do it, in part, by 
using Government resources to help incent and induce a level of 
modifications restructurings that will help, again, keep people 
in their homes and make mortgages more affordable.
    Senator Nelson. And how do you value those mortgages? This 
is the big fight. Is it what they were or is it what they are 
worth now?
    Secretary Geithner. Well, there is, you know, a deeply 
complicated set of valuation questions in any program like 
this, but in the housing plan, I think the core will be--and 
you have seen a lot of proposals out there in public by many 
people--to, again, try to induce economically sensible 
restructuring of mortgages, to help bring--using Government 
resources to help bring those payments down to a level that 
they are more affordable. That will allow the responsible 
borrower to stay in their homes. And you are going to have to 
do some complementary efforts to reinforce that by improving, 
strengthening Hope for Homeowners that Congress already passed 
last year. And there will be other things, too, that will be 
part of that.
    But I think you have to look across that front and move 
together on that, but I do not----
    Senator Nelson. How do you get the banks to go along with 
that?
    Secretary Geithner. Well, you have to use a mix of 
incentive and persuasion, and as a condition for Government 
assistance in our new capital programs, banks are going to have 
to commit to adopt foreclosure modification strategies to meet 
a set of standards we lay out. That will help with persuasion. 
But you also have to do things that are going to help make it 
more economically compelling for them to do that, and doing 
that, of course, we just have got to be very careful to use the 
taxpayers' money carefully and wisely so that we are not 
benefiting people who do not need it or institutions in a way 
that is excessively generous.
    Senator Nelson. On your first approach, financial stability 
trust going to the banks, you know that the community banks 
feel like they are being left out. What are you going to do 
about that?
    Secretary Geithner. I know they do. I have met with them, 
have spoken to them, and I am committed to making sure we have 
the resources available to process their applications quickly, 
and the basic principle that is deeply important to me is that 
institutions receive fair treatment, equal treatment, they have 
the same access any other institution does, regardless of where 
they are and the degree of broad support they have for their--
very important to do it because community banks largely were 
not part of this problem. They are going to be part of the 
solution. We need to make sure they have access on the same 
terms as anybody else, and that is going to require more 
resources so we can--you know, there are thousands of community 
banks, so we can move quickly to make sure that those who need 
it get it.
    Senator Nelson. Thank you.
    Chairman Conrad. Thank you, Senator.
    The order, Senator Enzi informs me, was not fair to Senator 
Alexander, that Senator Alexander is next. Senator Alexander?
    Senator Alexander. Well, I thank the Chairman, and I thank 
Senator Enzi. That is as rare in the Senate as an unexpressed 
thought, so I thank you for the----
    [Laughter.]
    Senator Alexander. I thank you for the courtesy, Mike.
    Mr. Secretary, welcome. We are glad you are here and look 
forward to working with you on this Committee as time goes on. 
I think Chairman Conrad was right on the money, so to speak, 
when he talked about housing, financial institutions, and with 
what money we'll use.
    Here is my concern. The testimony to which the Chairman 
referred the other day was from three distinguished economists 
that we asked what to do about the bank part of the credit 
problem. And the estimates they gave were that there may be $2 
trillion plus of bad assets in the banks. And then they 
recommended that whatever we did, we make it possible to get 
rid of those assets as quickly as we could to get lending 
moving again. We asked them how much capital a so-called bad 
bank--and I know that is maybe not a phrase that some like to 
use, but if we set up an entity to try to help get rid of those 
things, whether it is public-private, how much capital should 
it have? And the answer was, ``Well, as much as you can put in 
it.'' There are some limits even to the Federal Reserve Board's 
balance sheet, because either we are printing money, which 
means inflation down the road probably, or we are appropriating 
money, which comes from the taxpayers.
    So I have got in my mind this notion of $2 trillion to get 
rid of the bad assets in the banks and that we have heard for 
weeks and months, which I believe, that until we address, we 
are not going to get lending moving again. We cannot just tell 
banks to lend to people who cannot pay it back or lend money 
they do not have, as good as that might sound.
    So aren't you really underestimating the size of this when 
you say it is a trillion dollars and undercapitalizing the 
effort? And let me just go through the series of questions and 
give you the time to answer.
    Wouldn't it be wiser and bolder and better just to come out 
and say: We have got a big problem, maybe $2 trillion or more 
with bad assets. Experience all over the world in situations 
like this is we need to get the bad assets out as rapidly as we 
efficiently can.
    So we are going to need more money. We are going to need 
more money, and we are going to ask for it now. And I will have 
to say that, from my point of view--that is not the point of 
view on the other side of the aisle--I am still stunned that 
the President would ask us to spend $1 trillion, actually spend 
it on projects, on a so-called stimulus, most of which are not 
to create jobs in the first year. Why wouldn't it be better to 
cut that so-called stimulus bill in half, focus it on creating 
jobs in the first year, and set aside that $400 or $500 billion 
to help get lending moving, get housing moving, get the 
community banks moving? Wouldn't that even be a better stimulus 
if we said that? And wouldn't it be better to do it now rather 
than come back and ask for it? And I am one Republican Senator 
who has now voted twice for the TARP money because I thought 
President Bush needed it and I thought President Obama needed 
it.
    Secretary Geithner. Senator, let me just begin where you 
ended and say that, you know, the scale of lost output ahead in 
this recession is very large, and it is very important that 
this recovery package be large enough to help compensate for 
that lost output. And I do not think it would be efficient or 
responsible to underdo that even though I agree with you 
completely that getting the financial system repaired and 
getting credit flowing again is going to be crucial to 
recovery.
    So I think you are right, we need to do both, along with 
housing, but I do not think it would be sensible or ideal to 
underdo it on stimulus even though you are right that you need 
to use substantial resources for financial recovery.
    Now, I also agree with you that it is important to be 
candid about costs, and as I said in the beginning, it is 
better to try to do more sooner than to stretch it out. But I 
want to be very careful not to come to you and ask for 
resources and authority before we have as careful and 
compelling a case as possible.
    On the bad asset problem, it is critical in our country, as 
in any financial crisis, that we provide capital to 
institutions that need it. Now, our system is very diverse. 
There is a lot of strength in our system, and there are pockets 
of weakness where we have to be prepared to be helpful and 
supportive with capital, because that will be powerful in its 
impact on the economy as a whole. And to do that efficiently, 
we have to help get these markets for these real estate assets 
going again.
    Now, in a simple sense, there are two ways to do that. You 
can have the Government come in and buy the assets and manage 
them at a price the Government sets. That process carries 
enormous risk that we end up using the taxpayers' money 
inefficiently, take risks the Government does not understand, 
and my judgment is that ultimately will be costly, too costly.
    The alternative mechanism, which I think is a better 
mechanism, is to try to use our resources more carefully with 
financing from the Government to help leverage private capital 
with a mechanism that is going to provide a more realistic and 
careful measure of the ultimate value and cost of these assets. 
And I think using that market mechanism will be more helpful, 
more efficient for our objective over the longer term. It is 
complicated to do, though, and we are going to try to get it 
right before we move forward. And that is one reason why we 
started with the general outlines of the framework rather than 
the precise details of the proposal.
    But I very much agree with your basic instinct and 
judgments that better to be open about the costs, not 
underestimate them, move with as much force as possible, and 
just echo a comment that Senator Sessions made at the beginning 
about what the balance is between uncertainty and anxiety we 
create and between honesty and candor. And I believe deeply 
there is more reassurance in being candid than there is in its 
absence. And I will always try to come before you and be open 
with you about what the scale of resources are, ultimately what 
we are going to need, what the risks are, what the constraints 
are, what the alternatives may be, because I think it is 
important for our credibility and for yours that we are as open 
with those things as possible, and I will try to meet that 
test. But I cannot do that until we have had the chance to 
consult carefully on the broader design of the program and its 
ultimate cost.
    Senator Alexander. Thank you.
    Chairman Conrad. Senator Cardin.
    Senator Cardin. Thank you very much, Mr. Chairman, and, 
Secretary Geithner, thank you very much for your leadership and 
your appearance here today.
    You have said that Congress did the right thing in giving 
the President the tools to deal with the financial crisis, 
including the TARP funding. There has been a general 
acknowledgment that the first $350 billion should have been 
used more effectively than it was used.
    I want to hear from you briefly how you will do things 
differently. What lessons have we learned from the first $350 
billion, so that we have confidence that the second half of 
those funds will be used in a way that will be more effective 
in relieving the credit markets?
    Secretary Geithner. That is enormously important to me. We 
will not be effective unless we earn more confidence with you 
and your colleagues and with the American people that we are 
going to use these resources wisely. And so let me just give 
you my basic sense of what that is going to require.
    The first really important thing is, again, we bring much 
higher standards for transparency and accountability so the 
American people can see how we are using the money and what 
impact it is having.
    Senator Cardin. Can I just stop you on that point?
    Secretary Geithner. Absolutely.
    Senator Cardin. I believe I am quoting from your 
presentation, that you will guarantee a level of lending by 
those who are receiving the financial help. I am curious as to 
how you intend to enforce that. What enforcement is there to 
make sure that what the banks say they are going to lend is 
actually lent?
    Secretary Geithner. Right. A very important issue, and 
thank you for asking me to clarify that. What we are going to 
do is, as a condition for assistance, ask the banks to give us 
a concrete plan for how they are going to use that assistance 
to generate a level of lending that is greater than what would 
have been possible in the absence of that support. We are going 
to ask them to report monthly on what is actually happening to 
lending relative to that plan and that commitment. We are going 
to put those reports in the public domain. They will be subject 
to independent assessment, not just by the congressional 
oversight body but by the Treasury Inspector General, by the 
GAO, so you will have a series of independent evaluations 
about, again, how that money is being used.
    I think that is the right place to start----
    Senator Cardin. All that is positive. What happens if they 
do not reach the level of lending that is expected?
    Secretary Geithner. Well, they are going to have to explain 
why that was the case, and there will be reasons why it was not 
possible for them to meet that commitment, because, you know, 
we are facing an uncertain and very challenging economic 
environment, and it is hard to know ex ante exactly what the 
demand will be from creditworthy borrowers for loans going 
forward.
    You know, we had a huge credit boom. In recessions, demand 
for credit from everyone who is healthy and strong falls, and 
so the level of lending will naturally fall in this economy. 
What we want to do and what is critically important we do is it 
not fall more sharply, more acutely than that basic path. And 
that is why we have to make sure the assistance is directed at 
increasing the amount of lending that would have happened in 
the absence of that support.
    But it is not just enough to try to make sure we attach 
those conditions to our assistance to banks directly. We need 
to go around banks----
    Senator Cardin. But are there sanctions if they do not meet 
expectations and there is a belief that they should have done 
better?
    Secretary Geithner. Senator, some of the conditions that we 
are going to have to apply to this, we are going to--I mean, 
the conditions, we are going to have to make sure we enforce 
those conditions. But on the lending side, it is going to be a 
complicated process because, again, it is very hard to judge 
what the economically viable demand for lending is going to be 
in a recession.
    Senator Cardin. Let me just make a comment. When I was a 
lawyer in private practice, I negotiated on behalf of private 
companies to borrow money. If those companies did not meet 
certain expectations, there were sanctions that were imposed, 
including the pulling of credit, and other types of penalties.
    I would feel more comfortable if I knew that if through 
this open process banks do not meet resonable expectations 
government is prepared to exercise sanctions against them. Not 
only are they receiving money at a very low interest rate these 
are Federal funds that come with public expectation and require 
accountability.
    Secretary Geithner. I agree with you, and I want the 
conditions we establish to be enforced, and I want people to 
see how they are being met. But I just want to be candid that 
in this particular delicate area of lending, there will be 
things that will produce outcomes a little different from what 
their initial plans are, that we will not have the power 
responsibly to avert. But I completely agree with your 
sentiment that we establish conditions, and we want those 
conditions to be enforced.
    Senator Cardin. I thank you for that. Let me just say 
something positive in my last 10 seconds. Thanks for including 
small business. Thanks for being prepared to go into the 
secondary markets so that we can free up money for small 
business. I think it is desperately needed.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Enzi? And, Senator Enzi, thank you 
for being a gentleman previously, allowing Senator Alexander to 
go first.
    Senator Enzi. Mr. Chairman, I should have been more 
expansive on that than I was. Actually, Senator Bunning was the 
first person here, then Senator Alexander, then me. So I would 
defer to Senator Bunning.
    Senator Bunning. That is all right. I understand.
    Chairman Conrad. I apologize, Jim, if we got it wrong.
    Senator Bunning. Thank you very much, Mr. Chairman.
    Secretary welcome again. I am very interested in how you 
are going to value banks' assets in your stress test. This is 
the key to fixing the whole mess. What are you going to do with 
a bank that your stress test shows that they are insolvent? Are 
you going to close them, nationalize them, give them more 
capital, buy their toxic assets? What are you going to do with 
them?
    Secretary Geithner. Senator, the supervisors of your 
country are working together now to bring a more careful, 
consistent, realistic assessment of the exposures on banks and 
try to make careful judgments about what the losses ahead are 
likely to be in the kind of challenging environment we face. 
And on the basis of that, where there are needs for additional 
capital, we are going to be prepared to provide that capital.
    Now, Congress authorized in the wake of the S&L crisis a 
carefully designed process----
    Senator Bunning. Those savings and loans had already 
failed.
    Secretary Geithner. No, but I was going to say something--
--
    Senator Bunning. I was here when it happened.
    Secretary Geithner. I agree with that. I understand that. 
But I am just saying that the Congress does have and the FDIC 
does preside over a mechanism that allows for the orderly 
resolution of banks in our country. That process is being used 
today. It will be tested in the future. And I think it is very 
important that we be careful in moving forward that we are 
facilitating the necessary restructuring of the financial 
system that has to happen.
    Senator Bunning. OK. Some of my colleagues talked about 
spending and how much we were going to spend. If my figures are 
accurate and those that add them--and this is what the Budget 
Committee will tell us very quickly--our spending is right 
about 20 percent of GDP right now. It was down to 18. The Bush 
administration drove it up to 20. According to everything that 
I have read and seen, by the end of fiscal year 2010, it will 
be 38 percent of GDP. To me, that is exactly what the European 
Union countries are at. Most of those countries are 
socialistic.
    So what I am asking you is: What happens to our free market 
in comparison to running into socialism when and if we spend 
that kind of money?
    Secretary Geithner. Senator, that is a level of spending we 
cannot afford as a country and it would be irresponsible. In 
the President's budget, which you will see in the coming 
weeks--and I will have the chance to come speak to you about 
it--will lay out exactly what we think is a responsible path 
for expenditures and what the path of revenues are going to be 
to support that and how we are going to meet this vitally 
important obligation of committing to bring our resources and 
expenditures more into balance and our budget to a more 
sustainable position.
    That is hugely important, as I said. It is something that 
starts with the President's budget. It does not end with that. 
It is going to require we work together to make these hard 
choices, and the world will be watching to see whether we are 
prepared to make commitments now that will begin that process 
of bringing those resources and expenditures more into balance.
    Now, we are doing in the financial sector things that we 
have not done before that raise deep concerns about the 
appropriateness of the Government role in the financial sector 
over time. I am very sensitive to those concerns, but we have 
to be very careful that we not go too far and that we design 
things in a way that allows the Government to get out of this 
and walk it back as quickly as that is feasible. But crises 
like this cannot be solved by the markets. They will not burn 
themselves out. And I think it is necessary and responsible, 
done carefully, for the Government to be willing to come in and 
take some risks that the markets cannot take now.
    Senator Bunning. I understand that.
    Secretary Geithner. And in a very careful way that we can 
walk these back and unwind them as soon as we have got recovery 
firmly established.
    Senator Bunning. I have one last question. Yesterday I 
asked you if you believed that we have an independent Federal 
Reserve, and you said, ``Absolutely, and vitally important to 
our country that we preserve that.'' That is what you said. But 
your plan has the Fed printing nearly $1 trillion to stretch 
your TARP money to buy asset-backed securities, which could 
result in a loss to the Fed, much like the Bear Stearns assets 
are now about $3 billion in the hole.
    Do you think putting the Fed at risk to implement fiscal 
policy and save you from having to ask Congress for more money 
compromises the Fed's independence?
    Secretary Geithner. I do not, and I would not do it if I 
thought there was a risk of that. And the Federal Reserve has 
independent authority provided by the Congress, and they will 
not commit to do things jointly with us if they believe it 
compromises that independence and that authority.
    Senator Bunning. Well, we will ask the Fed Chairman when he 
gets before us. Thank you.
    Chairman Conrad. Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman, and, Mr. 
Secretary, thank you very much for being here. I know we all 
look forward to working with you to address this horrendous 
crisis.
    Mr. Secretary, as you well know, the American people are 
outraged that a small number of Wall Street executives, through 
their greed, their recklessness, and likely illegal behavior, 
have plunged us into the worst financial crisis since the Great 
Depression. We all know that millions of Americans have lost 
their jobs, their savings, their homes, their pensions, their 
health insurance, while the CEOs of the largest financial 
institutions in this country that caused this crisis are still 
holding on to their jobs. Millions of Americans lost their 
jobs. These guys who caused the crisis still have their jobs 
while over a period of years they made out like bandits.
    Now I do not have a lot of time, so I would like you to, if 
you could, just give me a yes or no answer to the following 
questions.
    In 2006 and 2007, Lloyd Blankfein, the CEO of Goldman 
Sachs, was the highest paid executive on Wall Street, making 
over $125 million in total compensation. Due to its risky 
investments, Goldman Sachs now has over $168 billion in total 
outstanding debt. It has laid off over 10 percent of its work 
force. Late last year, the financial situation at Goldman was 
so dire that the taxpayers of this country provided Goldman 
Sachs with a $10 billion bailout.
    A very simple question that the American people want to 
know: Yes or no, should Mr. Blankfein be fired from his job and 
new leadership be brought in?
    Secretary Geithner. Senator, that is a judgment his board 
of directors has to make. I want to say one thing which is very 
important. Everything we do going forward has to be judged 
against the impact we are going to have on the American people 
and the prospects for recovery. And every dollar we spend has 
to be measured against the benefits we bring in terms of----
    Senator Sanders. Mr. Secretary, you are not answering my 
question. You have a person who made hundreds of millions for 
himself as he led his institution and help caused a great 
financial crisis. We have put as taxpayers $10 billion to bail 
him out, and we have no say about whether or not he should stay 
on the job?
    Secretary Geithner. No, I did not say that. I think there 
will be circumstances, as there have been already, where the 
Government intervention will have to come with very tough 
conditions, including changes in management leadership of 
institutions, and where we believe that makes sense, we will do 
that.
    Senator Sanders. Well, I just asked you do you believe that 
is the case with Goldman Sachs?
    Secretary Geithner. In this case, I am not going to change 
my answer, but I want to just say one thing. I feel deeply 
offended by the judgments you have seen these boards of 
directors make. I think they have made our task much harder 
going forward----
    Senator Sanders. But we are not going to fire the 
leadership, and we are going to keep these same guys who caused 
this crisis in power and who have made huge sums of money.
    Secretary Geithner. Where we think that is the most 
effective strategy for our country, we will do that.
    Senator Sanders. All right. I have a strong disagreement. I 
think the American people, if they are going to pour hundreds 
of billions of dollars into these institutions, want a new 
slate of leadership so that we can work with them to move us in 
a new direction.
    Second question, and Mr. Bunning raised the issue of the 
Fed. I will take it in a different direction. We all talk about 
the $700 billion in TARP funding that the taxpayers have put 
up. We do not talk too much about the $2.3 trillion of Fed 
loans that went out.
    Now, every member of the Committee has engaged in huge 
debates on the floor of the Senate or the House, over $10 
million here, $50 million there, should it go here, should it 
go there. We put $2.3 trillion at risk from the Fed. I have no 
idea, nor do I believe does anybody else here know, where one 
nickel of that money went, who got it, what the terms are, what 
is being repaid.
    Will you make public or work with Mr. Bernanke to make 
public so that all of us will know who received this $2.3 
trillion?
    Secretary Geithner. Chairman Bernanke testified publicly 
yesterday that he is going to bring a new level of disclosure 
and transparency to the actions of the Fed. He believes in 
that. I think it is important to do. Happy to work with him on 
how best to do that. Happy to come testify with him together to 
try to make sure that on all these programs we are providing a 
level of transparency that----
    Senator Sanders. You did not answer the question. The $2.3 
trillion went out. Now, how do I get some of that? How do the 
people in Vermont get online to get some of that money? They 
are all very curious. Who got that money?
    Secretary Geithner. Senator, as I said, the Chairman of the 
Federal Reserve said yesterday that he is going to bring a new 
level of disclosure to those basic programs so that you will be 
able to see how they are being designed and used with a greater 
level of detail than is apparent today.
    Senator Sanders. Will we know who received the money?
    Secretary Geithner. You will know what loans were made with 
what programs against what type of assets with what rationale, 
with what ultimate risk. But that is a judgment he has to make.
    Senator Sanders. Last question. I have talked to some 
economists who believe that what happened on Wall Street was 
not just reckless and irresponsible, that perhaps--we do not 
know it--at the highest level there may have been fraud, that 
these guys understood that they were pushing worthless paper.
    I know you have been on the job all of 2 weeks, but what is 
your intention in terms of undertaking a detailed investigation 
of possible fraud and taking criminal actions against the 
people who caused this crisis?
    Secretary Geithner. My intention, Senator, is to work very 
closely with Mary Schapiro. This is her responsibility, the 
SEC's broader responsibility, and we need to make sure they 
have not just the resources but the quality of talent and 
people necessary to bring a much more forceful, credible 
enforcement mechanism. And I think it is very important to do 
so, and I know she is committed to it, too.
    Senator Sanders. Thank you.
    Chairman Conrad. Thank you, Senator.
    Senator Enzi? And before you start, let me just try to 
clear up the confusion about the rules of this Committee with a 
new year, and perhaps we all need to be reminded. The rules of 
this Committee are at the gavel we then have recognition of 
members based on seniority. So even if Senator Alexander and 
Senator Bunning were here before you, if you are here at the 
gavel, because you are senior you would command first 
recognition. After the gavel, it is based on time of 
appearance. So I think it is important to remind everybody. 
That is the rule, longstanding rule of this Committee. It is 
seniority at the tapping of the gavel. After that, it is time 
of appearance.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman, and I appreciate 
that clarification, and I also appreciate your incentive for 
punctuality. I think that makes a big difference in committees.
    I would ask that my full statement be a part of the record.
    Senator Enzi. I want to thank you for the answers that you 
have given, the very clear way that you have stated them. It is 
something that has been needed and will be needed.
    One of the things that has to happen around here is we have 
to restore confidence in the American people, and we have a 
tremendous task ahead of us because people do not have 
confidence in Congress. We have not done much to improve that 
confidence in Congress. Part of it has been the speed with 
which we have done things and the size of the things that we 
have done. Nobody understands the size of what we have done, 
and since they have not been given an understanding of it, they 
hold it against us. But they already held a bunch of things 
against us. And so we are trying to overcome that.
    We also keep talking about being bipartisan, but we do not 
act bipartisan. Bipartisanship is when people get together 
before a bill is drafted and talk about the principles that 
need to be in it, not wait until the end of the process and 
then try and buy enough votes to pass the bill. That is what we 
have been doing around here.
    Nobody in America, I think, believes that we can spend the 
$700 billion or the $820 billion efficiently. When you think 
about how much we have been spending, that gets very difficult. 
And until we can convince Americans that there is a mechanism 
there, we are going to have problems. And Treasury has a 
problem of confidence as well.
    Yesterday you made some presentations, and I read about how 
they were taken. No details. I hope we can give you a chance--
and I think you have done some of that today--to kind of undo 
yesterday. But you talked about demanding loans from the banks, 
liquidity. Isn't one of our problems that some banks have a lot 
of money to lend but they don't have any consumers that they 
would lend it to? That seems to be the way in Wyoming. They 
followed the rules. I think we only had one bank that had a 
problem, and it was not a problem due to the financial 
situation.
    So how do you get that money out there to people that can 
actually repay the money? How do we get the money circulating 
again?
    Secretary Geithner. Senator, I am glad you raised that 
question, and it points to the difficulty of working through 
these problems. As the economy slows, recession intensifies. 
There is an understandable realistic concern about what is 
going to happen to the borrowers on the other side of banks.
    Realistically, the credit quality of borrowers is 
deteriorating, and we have to be careful as we try to solve 
this crisis not to force lending to people who cannot use those 
resources well and not to force institutions that do not have 
enough capital to make the kind of mistakes that got us into 
this mess. And that is why it is such a difficult balance.
    But you are absolutely right that what is driving the 
contraction in the demand for lending is partly a sense of 
conservativism and care on the backs of borrowers, even 
creditworthy borrowers, and probably it is because you are 
seeing, you know, more failures across the country and more 
concern about possible failures across the country.
    Senator Enzi. Well, we were also told that with the first 
TARP that that money would go to buy toxic assets. I think you 
were part of formulating that plan. And then America saw that 
we did not buy any toxic assets. Now we are talking about 
solving housing again, but we have not plugged in the details. 
When will we be getting those details? And why did you decide 
to make a presentation yesterday if you did not have those 
details?
    Secretary Geithner. Senator, let me just go back to 
something several of you have said about my role over the last 
few years, including in TARP. I have been President of the New 
York Fed, not Secretary of the Treasury. As President of the 
New York Fed, I played a very, very active role in bringing a 
lot of creativity and action by the central bank to help limit 
the risk in this crisis at an early stage. I was also a very 
forceful advocate for the Government coming to Congress earlier 
to ask for the broader authority necessary to solve this 
crisis.
    Your Government came into this crisis without anything like 
the authority it needed to act to solve a crisis of this 
magnitude, and the fact that that action came late was very 
damaging. I was very supportive of the judgment not just to go 
to Congress and ask for broad authority, but very supportive of 
the judgment that at that time, when the system was at the 
point of maximum peril, that the most effective way to 
stabilize things was to put capital institutions and to provide 
broader guarantees.
    I think if we had not done that, if my predecessor had not 
done that, we would be living today with a much, much, much 
greater crisis today.
    Now, it did not have as much impact as necessary, in part 
because the scale of the challenge was getting much, much 
greater, and the resources provided were not adequate to that; 
and in part because, as many of you have said, there is a deep 
distrust and anger around how those judgments were made and how 
institutions have been responding to that. I understand that 
concern, and we are going to have to move together to fix that.
    Now, yesterday I laid out a broad framework of principles 
and programs to help solve this crisis. I understand the desire 
for details. I understand the disappointment about the lack of 
details today, but part of the disappointment, as I said at the 
beginning, is because people were hoping we were going to do 
things that, in my judgment, would have been too generous and 
not responsible with the taxpayers' money. I did not want to 
compound the mistakes of the last 12 months where things were 
rushed out before they were ready and strategy had to be 
adapted because of that. Very important to me we do that. And 
if that means there is going to be disappointment with the 
level of detail until we get it right, I will live with that 
disappointment because it is better than the alternative.
    Now, as I said, the President and his team are going to lay 
out the details of their strategy on the housing crisis very 
soon. A lot of that work is done with those details. There will 
be details in that program, and you will have a chance to 
evaluate the details of that program and see whether we have 
done enough in that context.
    But I understand the concern with details, but it is 
because of the need for care and consistency and clarity that I 
laid out a general framework rather than details yesterday.
    Senator Enzi. Thank you. That gives me more confidence.
    Chairman Conrad. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary.
    Let me followup where Senator Cardin left off. You know, if 
an American family takes out a loan with terms and conditions 
and they do not meet the terms and conditions, there is a 
consequence. And so the question for me, following up on 
Senator Cardin, is: Why would we treat the banks differently 
than we would treat average American families, especially when 
we have seen in the first tranche of these dollars that the 
lack of conditionality has led to some of the consequences we 
do not want to see?
    Secretary Geithner. Senator, the first obligation we have, 
I think, is to make sure that the conditions that came with 
those initial programs were actually enforced and met. That is 
very important to me. Again, there is an elaborate set of 
independent oversight of those conditions to try to make sure--
and where those conditions were not met, then we will take 
action to remedy that situation.
    Now, going forward, again, our judgment is we need to have 
tougher conditions with a much higher level of basic 
transparency and accountability so that people can see who is 
benefiting from the resources, people can see the terms and 
conditions, people can see how they come in to use those 
resources, they can see whether they are meeting that basic 
commitment----
    Senator Menendez. And I appreciate, Mr. Secretary, having 
the transparency and the accountability. I applauded you 
yesterday at the Banking hearing on that. The problem is that 
you need more than transparency. Accountability means nothing 
unless there are consequences.
    Secretary Geithner. Agreed, and we are not going to rely 
just on transparency. We are going to make sure these 
conditions are met and enforced. I believe in that deeply. But 
transparency itself is also important because it is important 
not just to public trust, but it itself----
    Senator Menendez. We are agreed.
    Secretary Geithner [continuing]. Can be very effective.
    Senator Menendez. We are agreed on that. But I think many 
of us are going to be looking for what is the mechanism of 
accountability at the end of the day.
    Second, today's New York Times has a story about the banks 
who already received TARP money wanting to get out and repay 
the TARP money. And so that drives two questions for me.
    No. 1, in fact, did they really not need the money that 
they are looking to repay it early? Is this a question--are 
they so committed to their culture that viability is second to 
reasonable conditions? And, third, are we in a set of 
circumstances that if they are healthy--and we hope for them to 
be--we will change--there is a condition that says that if they 
cannot repay for 3 years, as I understand it, are we willing 
to--out of their earnings, are we willing to review that if, in 
fact, we find them to be healthy and they want to repay and the 
taxpayer will get back their money and they will be on their 
way?
    Secretary Geithner. Senator, my basic sense is that it is 
important for us to design these programs so that we create 
incentives for them to pay the Government back, to replace our 
resources, the Department resources, as soon as that is 
feasible. I think that will be--that is a necessary thing not 
just to protect the taxpayer, but to make sure that the 
Government's role in the financial system is not sustained 
beyond a point that is necessary.
    So I view that it is largely a healthy thing, and I think 
going forward, again, we want to make sure we get these 
conditions right so that as markets stabilize and the economy 
gets back on track, they have very powerful incentives to help 
repay the Government. That will ultimately mean we have less 
risk and exposure, and we are solving this in a way that is 
ultimately going to be cheaper for the taxpayer.
    Senator Menendez. Do you think, though, that this desire to 
pay back--which is fine if they are healthy, but that some of 
what I read in the article was we do not like the conditions. 
So, therefore, if you do not like the conditions, either you 
needed the money to be healthy and stable and survive the 
present crisis, or you did not? And if you do, that reasonable 
conditionality--that the culture there is that viability is 
less important?
    Secretary Geithner. I do not think it is feasible for 
people to repay unless they have the means and the resources to 
repay, which is another way of saying that until they are 
viable, they will not be able to do that, whatever they think 
about the conditions.
    Senator Menendez. Finally----
    Secretary Geithner. But, you know, a good test of 
conditions is whether they are attractive or unattractive, and 
I think the sign that people want to replace that publicly held 
or private capital is a sign that the conditions are tough. 
They are going to have to get tougher. We have got to make sure 
that balance is right. But I think it is basically a healthy 
thing.
    Senator Menendez. Finally, I think insurance companies play 
a critical role in our economy, both in the form of products 
they offer as well as the economic growth resulting from their 
investments. Is that a view that you share?
    Secretary Geithner. I do believe that insurance companies 
play an important role in our financial system, absolutely.
    Senator Menendez. And, finally, I want to echo----
    Chairman Conrad. That was two ``finallys.''
    Senator Menendez. Yes, but my light did not go off until I 
said that ``finally,'' Mr. Chairman.
    [Laughter.]
    Senator Menendez. I just want to echo on the community 
banks what Senator Cardin said as well. We have several 
community banks that are at the heart of lending, and they have 
made requests, and they seem to be lost in the process.
    Thank you, Mr. Chairman.
    Secretary Geithner. And we will fix that, because community 
banks are a critically important part of our financial system. 
And, again, they will be an important part of the solution.
    Chairman Conrad. Senator Graham.
    Senator Graham. Thank you, Mr. Secretary. Let us try to 
make a budget here because I have got to go back to South 
Carolina and everyone here is going to go back to their 
respective States and give people some idea of what we are 
doing, how much all this is going to cost, and when it is going 
to get better.
    How much is left in the TARP fund?
    Secretary Geithner. Senator, I want to get these numbers 
right so just give me 1 second. I am going to look at the 
resources remaining relative to commitments.
    Senator Graham. This does not count against my time, does 
it?
    Chairman Conrad. Yes.
    [Laughter.]
    Senator Graham. Hurry up.
    Secretary Geithner. Can I be responsive, but can you--I 
want to protect myself from the----
    Senator Graham. Within $20 billion.
    Secretary Geithner. I need to amend this to be careful if I 
got the basic numbers wrong.
    Senator Graham. Sure.
    Secretary Geithner. But the Treasury Department staff 
inform me that the commitments made to date under the total 
authority Congress authorized totaled $387.5 billion. Now, 
again, that is not the cost to the taxpayer. That is the 
headline number using the----
    Senator Graham. That is the amount of money you have left 
to do something with?
    Secretary Geithner. No. That is the amount that has been 
spent so that----
    Senator Graham. OK. Well, how much is left?
    Secretary Geithner. Well, the balance is roughly in the 
$315 billion range. Now, we have already committed to you some 
of the resources----
    Senator Graham. Fifty billion is gone, right, because the 
stimulus package took $50 billion out to go to housing, right?
    Secretary Geithner. It will be when we start to move 
forward on that program. That is right.
    Senator Graham. OK. So you take $50 billion off $315 
billion, and whatever number that is, that is what you have got 
left to deal with, right?
    Secretary Geithner. That is right, and----
    Senator Graham. OK. Now, slow down. With that amount of 
money, you have got to do a bunch of things.
    Secretary Geithner. We do.
    Senator Graham. Like fix housing.
    Secretary Geithner. No, you just took the 50----
    Senator Graham. Well, that 50--well, will housing be fixed 
without any new money?
    Secretary Geithner. I do not know that 50----
    Senator Graham. On a scale of 1 to 10, 1, you will not need 
any money; 10, you are likely to need more money to fix 
housing----
    Secretary Geithner. For housing?
    Senator Graham. Yes.
    Secretary Geithner. I cannot tell you that at this point, 
but if we think there is a good case for doing it, we are going 
to come tell you how we are going to do it.
    Senator Graham. OK, good. So you have no clue.
    Secretary Geithner. No, that is not fair, Senator. What I 
will not do is--even if you are frustrated by the absence of 
details----
    Senator Graham. See, I just do not believe that is enough 
money to fix housing and banking, and I just wish you would say 
that, because you are going to come up here and ask us for more 
money. I know you will. Senator Conrad said on the floor let us 
just get on with this thing. Let us tell people some idea of 
what awaits them.
    Now, when it comes to banking, how much money will you need 
to fix the banking financial institution problem beyond what 
you have available to you today?
    Secretary Geithner. As I said at the beginning, I am not 
prepared to make that judgment today. I am not going to come up 
to you and ask you for money where we are not prepared to 
support the request for details.
    Senator Graham. Right. Well, see, you asked for--somebody 
asked for $838 billion, and whoever designed that package I 
hope is not going to design the banking and housing package, 
because I am convinced that of this $838 billion, a lot of it 
is going to go to things other than creating jobs in the first 
year or the next 18 months. And I am convinced you take 
hundreds of billions of dollars out of that package and apply 
it to housing and banking. But that is a debate that seems to 
be over with.
    You had two options about the toxic assets. You could buy 
them yourself, the Government could, and your main concern 
there would be the Government setting a price that is too risky 
for the taxpayer, right?
    Secretary Geithner. Yes.
    Senator Graham. OK. The second option is that you could get 
the private sector capital off the sidelines, give them some 
guarantees, put a floor or whatever you want to call it, and 
let them set a price, right? That is the second option?
    Secretary Geithner. Yes, it uses a market mechanism with 
Government financing to----
    Senator Graham. Right. The Government is involved. How much 
money would the Government save in the second option versus the 
first option in your opinion?
    Secretary Geithner. It depends how it comes out, but we 
believe a substantial amount of resources.
    Senator Graham. What would that be?
    Secretary Geithner. It will be dependent on the design of 
the program.
    Senator Graham. Hundreds of billions?
    Secretary Geithner. How much we will save?
    Senator Graham. Yes.
    Secretary Geithner. Hard to know if it is of that 
magnitude. But, again, we are going to be guided by how to 
reduce that risk to levels that are----
    Senator Graham. But you are confident that second option 
saves the taxpayer money?
    Secretary Geithner. Absolutely.
    Senator Graham. Very confident of it?
    Secretary Geithner. Absolutely.
    Senator Graham. Does it take longer to achieve the goal 
than the first option?
    Secretary Geithner. I do not think so.
    Senator Graham. OK. Now, when it comes to going around 
banks, setting up a system that will lend money to small 
businesses, does that create a problem for us down the road in 
the sense that you are creating a competition, a Government 
competition with private sector banks?
    Secretary Geithner. I do not think so. Again, these 
programs are designed, Senator, so that the economics of the 
lending will become unattractive as conditions stabilize. We 
have had a lot of experience in designing those programs. They 
are working quite well on that basis. So, again, as confidence 
improves and conditions stabilize, then demand for----
    Senator Graham. So you do not think--and I have 13 seconds 
left. You do not think that will hurt private sector ability to 
get back on----
    Secretary Geithner. No, no. I do not think there is risk in 
those designed that will be crowding out----
    Senator Graham. I have 5 seconds left.
    Secretary Geithner [continuing]. Other capital.
    Senator Graham. Now, last question. If I went home and told 
people you are probably going to have to spend $500 billion 
more to fix everything beyond what the TARP has, would I be in 
the ballpark or would that be ill advised on my part?
    Secretary Geithner. I do not think it would be well advised 
on your part to put numbers on anything yet until we have a 
stronger foundation for those estimates, and that depends on 
how we go forward.
    Chairman Conrad. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. I cannot spring 
like Senator Graham, but I am going to try.
    Nothing is more important, Mr. Secretary, to getting our 
economy back on track than gaining public confidence. Now, few 
developments have done more to harm public confidence in what 
is happening here in Washington than the news in the last few 
weeks of the financial institutions receiving Federal bailout 
funds paying out $18 billion in bonuses. That is money that was 
delivered in just the last few weeks.
    The Senate has passed as part of the stimulus legislation a 
bipartisan amendment that I authored with Senator Snowe and 
Senator Lincoln requiring that the companies pay back the cash 
portion of the excessive bonuses within 120 days.
    Now, the economic stimulus legislation is likely to be 
finalized today. My guess is it is going to be finalized in the 
next 5, 6, 7 hours. So my question is: Given the fact that the 
President, to his credit, called these bonuses ``shameful'' and 
time is short, where do you stand on getting a solution to the 
problem of these just paid excessive bonuses in the economic 
stimulus legislation?
    Secretary Geithner. Senator, the President laid out last 
week a comprehensive program of conditions on executive 
compensation. Now, you personally have demonstrated great 
leadership and creativity in coming up with a different 
complementary approach. We have talked about that privately. 
Our staffs are working together. We would like to work with you 
on how to achieve that objective.
    Of course, we want to be careful we get it right and we 
achieve what we were trying to achieve without, again, creating 
the risk that we end up in a situation where the taxpayer is at 
risk of losing substantial money going forward. But we would 
like to work with you on it and be as careful and as responsive 
as we can be to your objectives.
    Senator Wyden. I appreciate that. I think time is short. We 
are going to have to move very fast. Our doors are open. 
Senator Snowe and I want to make sure this is bipartisan, and 
we look forward to those discussions today.
    The second question deals with the valuation of bank assets 
acquired by Treasury under TARP. In December, Secretary Paulson 
promised that the value of the preferred stock that Treasury 
got for TARP money would be at or near par; that, in effect, 
for every $100 that was invested, the taxpayers would get stock 
and warrants valued at about $100 under current market 
conditions. The Congressional Oversight Panel that looked at 
this said that was not the case. They said Treasury got assets 
worth about $66 for each $100 spent.
    My second question is: What can you do now to revalue 
those? How would you go about revaluating them? And what is 
going to be done with respect to protecting taxpayers who 
deserve more for their money than they sure are getting in that 
first round?
    Secretary Geithner. Very important question. Let me just 
start by pointing out that when CBO scored the ultimate cost to 
the taxpayer of this program, they acknowledged, as they should 
have, that there is risk to the taxpayer and ultimate subsidy 
costs in these programs.
    The second point that is important to say is that a 
definition of a financial crisis is the market is not prepared 
to take risks that are otherwise economic. We are not going to 
be able to help solve that crisis unless we are prepared to 
take carefully designed risks the market is not prepared to 
take. That means that everything we do, if priced against 
current market conditions in some circumstances will look like 
today at that snapshot, then we are giving a significant 
subsidy to those institutions. That is why, again, CBO looks 
carefully at what the ultimate cost is.
    Now, what our obligation is is to set the terms and 
conditions on these programs going forward that we, again, 
minimize the risks to the taxpayer, ensure a fair return, and 
achieve the most benefit we can on our overall obligation, 
which is to try to repair the system and get recovery back on 
track. We will be very careful to do that, but everything we 
do, because this is a financial crisis, if you measure it 
through a snapshot today, there will be some programs that look 
like you are below the market as it currently exists.
    Senator Wyden. Let me see if I can get one other question 
in. I want to support you on your bad bank efforts. I think 
that you want to move in the right direction. But I am very 
troubled about the fact--and you certainly see this in terms of 
the business press, you know, right now where a lot of the 
experts say that there is not enough detail and enough 
transparency in terms of what is really out there in terms of 
these troubled assets. I have been looking at three or four 
articles just this morning in today's Wall Street Journal. Andy 
Kessler, somebody I respect, says your plan puts too great an 
emphasis on keeping existing banks in place even though they 
are just stuffed with these non-performing loans.
    So what is going to be done to give the public a clear read 
on the problem's scope here? Because unless that is done, I 
think it is going to be hard to make your bad bank strategy go 
forward.
    Secretary Geithner. I agree with you, and we are going to 
do our best. And we are going to get the supervisors together 
to try to, again, provide a more realistic, forward-looking 
assessment of these exposures with better disclosure. We are 
going to provide capital to help support that process. We are 
going to use, with as much care as possible, Government 
financing to help get those markets restarted again, which will 
help people come to a better judgment about the ultimate credit 
loss without the distortion introduced by the absence of 
financing today. And as I said, we have these lending programs 
carefully designed to go around the banking system to help 
provide the financing the market cannot do.
    I think that complement of things is the necessary, 
essential mix of things, and we are going to be careful to lay 
out the detailed design issues to the public before we initiate 
so they have a chance to look at those details and provide 
feedback and input to those so that we are coming out with the 
best program at least risk to the taxpayer.
    Senator Wyden. Thank you.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Ensign is next.
    Senator Ensign. Thank you, Mr. Chairman.
    I want to followup on the idea of bailing out the banks, 
going back to Japan's experience. Many people believed that it 
was a big mistake what Japan did in creating these zombie 
banks. We heard the other day an economist say that if an 
institution, if a bank, if a company is too big to fail, then 
they are just too big.
    Could you address the idea that we could be creating zombie 
banks in the United States, propping things up that should 
otherwise fail?
    Secretary Geithner. Senator, thank you. Obviously, we are 
going to be very careful not to do that. But this is an 
enormously severe, acute, broader crisis, and so what is 
possible in normal times is not possible in a situation like 
that.
    But you are absolutely right that our obligation is to make 
sure that we are not impeding the necessary restructuring of 
the financial system that has to happen because things got too 
far beyond gravity, and that is going to have to change.
    Now, countries classically make two types of mistakes in 
financial crises. One is, just to paint it starkly, to make the 
judgment that these things will burn themselves out, the market 
resolves them on their own. They other type of mistake they 
make is to underestimate the size of the problem to try to 
obscure the level of costs and resources, hope that it will 
work itself out over time, and that ultimately the system will 
grow its way out of it.
    Those are both important mistakes to avoid. We are going to 
do our best to avoid that, and we are going to try to bring the 
mix of more confidence and clarity to what these risks are with 
support in terms of capital and an aggressive program of 
financing options to help restart these markets. Our judgment 
is that is the best mix of programs. Doing it is enormously 
complicated. We are going to do it as carefully as possible. 
But we are very attentive to and sensitive to just the risks 
you pointed out.
    Senator Ensign. Do you have any fear at all when we are 
talking about how big the stimulus bill is, 800 billion plus?. 
We also have the TARP funds. We know we have an omnibus bill 
coming up. We know we will have a war supplemental bill coming 
up. We hear talk about the health care system with revusions to 
the health care system that could be incredibly expensive. We 
just added a lot of money to the Children's Health Insurance 
Program then you count the whatever trillions that the Fed has 
put into this, and whatever trillions that they will do in the 
future.
    Right now other countries are buying our Treasury bills. 
Their sovereign wealth funds are buying them up. Do you fear at 
all at some point that inflation will rise--that perhaps the 
rating agencies may even look at the U.S. Treasuries as maybe 
somewhat suspect because we have just taken on too much debt? 
As it was talked about before, before all this started, we were 
at 25 percent of GDP. And we are going to be at the 40 percent 
that was talked about before. Will that cause these countries 
to maybe not buy our Treasuries? If they do not buy our 
Treasuries, from what I understand it is over. Our economic 
system collapses at that point.
    Secretary Geithner. Senator, you are absolutely right, and 
we have to be very, very careful as we go forward that we 
improve confidence, not reduce confidence, not just here in the 
United States but around the world, that we are going to have 
the will as a country not just to solve this crisis but to 
bring our resources and expenditures back into balance over 
time.
    It is going to be enormously complicated because of how 
deep the hole is today. But I believe there will be more 
confidence around the world and more willingness to help to get 
through this if we are aggressive today.
    It sounds like a paradox, but I think it is true. I think 
if we look to the world like we are not going to move together 
with a carefully designed program of support for the financial 
system and economy, then I think we face more risk, that they 
are going to look at our country and say, Gee, growth will be 
lower in the future, they will have less ability to earn a 
return to pay back these investments, and I think there is more 
risk in that strategy than the strategy we are embarked on.
    Senator Ensign. Well, my last comment is that I look 
forward to the President's budget. I understand it is going to 
have some fairly significant cuts in it. I personally believe 
that we should have been offsetting some of the spending in 
this stimulus bill today. I think that would have been a better 
thing to do. There is a lot of wasteful spending, as we all 
understand, here in Washington, D.C. I look forward to working 
with the Administration, whether it is OMB or whoever else it 
is in the administration, to look at wasteful spending that we 
can cut. But one thing we should not be looking at right now is 
creating new programs for the future that might not work and 
which could lead us to question whether we can sustain this 
kind of growth in the future.
    Thank you.
    Secretary Geithner. I know the President shares that 
concern, as do I, and we have got to be very careful together 
that we are not doing things that add to expectations about 
increases in expenditures over time that will not be efficient 
and effective, and that will not be within our capacity to 
support responsible.
    Chairman Conrad. Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    Mr. Secretary we are clearly in a fine mess right now, and 
I wish you well trying to help guide us out of it. But I have a 
fairly specific question I want to ask you, and I want to tell 
you why I am asking it first, because I think we have this 
problem, but I think it is one of three major problems that we 
have as Congress to look at. And of those three, this is the 
smallest problem. This is looking at a $7, $8 trillion problem 
right now. Coming fairly shortly behind it is a $35 trillion 
problem of unfunded Medicare, and not far behind that is the 
problem of ocean acidification and climate warming and a 
complete global change that has never been seen in the history 
of the human species on this Earth.
    So we have three major significant problems to deal with. 
We have one supply of political capital to deal with them. And 
I am worried that that one supply of political capital is going 
to be burned up solving this problem and that by the time we 
are done with it a year or 2 or 3 from now, people will be so 
fed up with Government's response to this that we will not have 
the political capital to address those other things.
    The thing that I see as most damaging to this country's 
supply of political capital is the lack of comprehension on the 
part of Wall Street that the lives of luxury that they have 
been living that would make a pharaoh blush are completely 
inappropriate to a situation in which the Government is being 
asked to support that going on.
    Now, what President Obama did I think was very helpful, and 
it was a very good first start, but it hits strongly three 
companies and only a few people. There are two levels: The main 
level seems to hit only three companies. The other level 
reaches more broadly.
    I think that the support we are giving to these industries 
is very broad. People said the AIG support was really designed 
to protect Goldman Sachs and others. There is a network there, 
and I just worry that we have got to take this more seriously 
than we are right now. And the specific question has to do with 
the Wall Street Journal article a few weeks ago that pointed 
out that there is $40 billion in deferred executive 
compensation on the books of TARP recipients, and at the moment 
we have zero transparency into that, and there is zero chance 
of giving it any kind of a haircut going forward because we 
have created no mechanism that would allow us to even consider 
doing that.
    When you consider the war we had in this Senate over 
somewhere between $18 and $35 billion to support our entire 
auto industry, the notion that $40 billion needs to be blown 
out into deferred executive compensation with, again, zero 
transparency and zero haircut I think really puts at risk the 
public support that we need to address not only this but other 
problems.
    It is fine to look forward, but there is a lot of really, 
you know, heavy-duty stuff on these companies' books that 
executives have booked and salted away, either to dodge taxes, 
which deferred compensation does, or to provide specialized 
retirement packages that their employees do not enjoy. And I 
think that stuff is a lingering time bomb, and I really think 
we need to get at addressing it.
    As a lawyer, I think you need to have some due process for 
those folks. You cannot just move in and take it away. But we 
do not have any process for doing that right now, and so I 
think we are on a collision course with a real problem if we do 
not deal with that, and I would love to hear your thoughts.
    Secretary Geithner. Senator, I completely agree with you, 
and I share the deep sense of distrust and anger and outrage 
that has been created by the cumulative judgments of those 
firms and the boards of directors. And as I said in the 
beginning, I think that over a long period of time, 
compensation just got completely out of whack with no 
appreciate of risk, and we have seen judgments made as this 
crisis intensified that reflected, frankly, no judgment about 
the scale of the damage caused. And our obligation is to try to 
help protect the people who behaved responsibly through this 
crisis from being excessively damaged by the actions of those 
who were less responsible. And compensation is at the heart of 
that, and one of the most important things we have to do going 
forward is try to make sure we fix that system so the 
incentives are not so distorted again.
    Now, you are raising a very important and----
    Senator Whitehouse. Focus for a second on the looking-back 
part.
    Secretary Geithner. Yes, I am coming to that. You are 
raising a very important complicated thing. You are right, it 
is going to be hard to do. In the proposals the President laid 
out last week, we put some tough things in there that help 
mitigate that risk in circumstances where there was clearly 
misleading fraud in the institution. We are open to looking at 
ways we can do more.
    I know you know the sensitivity and complexity of doing 
that, but I appreciate the problem, and I agree with you that 
our overall credibility and our ability to help solve these 
problems and the others will depend on how we respond to this 
here. Happy to work with you on it, listen to ideas. I do not 
think it is going to be easy, though.
    Senator Whitehouse. Thank you.
    Chairman Conrad. Senator Murray.
    Senator Murray. Thank you very much, Mr. Secretary. We have 
heard the words ``credibility'' and ``confidence'' thrown 
around a lot here, and I do not think that is surprising. From 
my perspective, the efforts that have been made so far to 
strengthen our banks and unfreeze the credit markets and 
stabilize this housing market have really failed to generate 
any confidence with the American people or with the markets. 
And I agree with the statement that you made yesterday that the 
American people have sort of lost faith in the leaders of our 
financial institutions, and they are skeptical that the 
Government has used taxpayer money wisely so far that it will 
not really benefit them as taxpayers.
    Beginning way back with Bear Stearns, we saw that the 
strategy that was orchestrated and executed by the Treasury was 
just a patchwork of programs and seemed to a lot of people 
arbitrary and sort of reactive. And when Secretary Paulson 
initially proposed the TARP, his focus very clearly was to 
remove toxic assets from the balance sheets of the banks, and 
it was not 10 days later after we approved it that the strategy 
shifted to capital injections and pivoted away from specific 
proposals, back and forth, and I think that really has eroded, 
you know, the public confidence and our confidence and the 
market's confidence.
    I have to say I think the American people understand the 
magnitude of this problem. But I think what they do not 
understand is what the heck we are doing. And you have now put 
forward a new proposal, and I am trying to understand it, but I 
understand what all of us are saying to you today, and I would 
like you to explain to us why you think that this latest plan 
is prudent, fiscally responsible, and we are not going to 
change our mind in 10 days.
    Secretary Geithner. Because we have laid out a broad 
program of initiatives that get at the core weaknesses in our 
system, all of them, not just one of them; because we are 
clearly committed to help strengthening banks, because without 
banks that are prepared to lend, you are not going to have 
recovery strong enough. We are going to help that process by 
bringing not just more realism and disclosure to the exposures 
on bank balance sheets, but through a program of, again, not 
just capital but a program that provides Government capital to 
leverage private financing to help get those markets working 
again. And as I said, we are going to go around banks to help 
get at those markets that are critical to reviving markets for 
small business lending, for consumer lending, and other markets 
where we think the return is greater.
    Now, that has to come with action on the housing front, as 
I said, and by moving together on all those fronts and by 
trying to be as forceful as possible, I believe that offers the 
best prospect of trying to repair this system more quickly.
    Now, there are aspects of this that are going to have to 
adapt over time, but we are going to move on all those fronts, 
not individually, and that alongside stimulus gives us a much 
better prospect of arresting this and have the financial system 
in a position where it is supporting not working against 
recovery.
    Now, I understand how hard it is for people to grasp--I 
understand the desire for details on how exactly we are going 
to do that, and we are going to provide those details in a way 
people can assess as we refine these plans. But as I said, I am 
going to be very careful not to put you in the position and put 
us in the position where we are shifting strategy, looking over 
here at one point, ignoring what is over here. We want to do it 
all together.
    You know, it is not going to be easy. It is going to be 
messy. It is going to be uneven.
    Senator Murray. We sort of wanted you to do the miracle 
overnight thing here.
    Secretary Geithner. I would like nothing better than to 
offer to be able to do that, but I cannot do that. I think you 
are aware of that. But we are going to do it to the best of our 
ability, and we are going to keep at it until we fix it.
    The most important thing we can do together is make sure 
that the world understands and the American people understand 
that we are going to keep at it, and we are going to do what is 
necessary. We are going to be prudent and careful, but 
ultimately it will be more effective, it will be cheaper to the 
taxpayer, it will cause less damage to the American productive 
capacity if we move forcefully on all those fronts together.
    Senator Murray. What if we just were to do the stimulus and 
nothing else?
    Secretary Geithner. Then the stimulus itself would be much 
less powerful. You are going to have the system, again, you 
know, pushing against recovery. You are going to have a deeper, 
more protracted recession. Unemployment will be higher. 
Hundreds of thousands more businesses will fail because of 
that. So it is absolutely essential not just to do very 
forceful recovery act programs for jobs and investment, but to 
do things that fix housing and get the financial system better. 
And it is not going to take--you know, it is not going to 
happen in weeks and months. It is going to take a sustained 
commitment and effort to do it.
    Again, I want to just end on two points. I have tremendous 
respect for my predecessor. He did some very difficult, hard 
things. He did make judgments different than what I would have 
made and any of us might have made, but we did not stand in his 
shoes. And this country did not come into this crisis with an 
adequate set of resources and authorities to help respond, and 
that put us in the position as a country where we were chasing 
this crisis late to have the tools and ability to do it.
    Very important that we do not make that mistake again, and, 
again, I want to emphasize again that this is hard because of 
the scale of the weakness we are seeing across the economy. And 
as those pressures deepen, the pressure on the financial system 
intensifies and these two things reinforce each other, and 
arresting that spiral has to be the dominant objective of 
policy.
    Senator Murray. OK. Well, really quickly, Mr. Chairman, the 
taxpayers are holding the burden on this. Are any of your 
proposals going to require those banks or institutions to 
replace their current management?
    Secretary Geithner. Senator, where we have done that 
already, where we think that is necessary to protect the 
taxpayer and get better outcomes, we will do that. But we have 
got to make a careful judgment, again, what is going to end up 
with the best outcome for the taxpayer and the best outcome for 
the overall economy. And we will make that judgment where we 
see it.
    Senator Murray. OK. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator.
    Let me go back to a couple of things that, for the purposes 
of this Committee, are critically important for our 
functioning. In the TARP, there is, as I calculate it, $313 
billion remaining. You take out the $50 billion that is 
committed to housing; that leave $263 billion. By all accounts 
in terms of the testimony before this Committee by some of the 
most respected economic analysts in the country, that is not 
going to be sufficient to deal with the financial sector.
    You have been very careful here today not to provide more 
detail with respect to additional costs. I am not going to 
press you today, but I want to give you a fair heads up that 
this Committee, it is incumbent that you very soon help us 
understand if additional funds are going to be needed and in 
what amount. Can you give us any idea today when you might have 
greater clarity with respect to the costs of dealing with not 
only the financial sector but the housing sector?
    Secretary Geithner. Senator, we will do it as quickly as we 
can. Part of why we are being careful is we need to assess the 
overall needs, which is the process underway, the supervisory 
undertaking. Part of it depends on how we design these 
facilities to make sure we are leveraging every dollar of 
public capital to get the maximum benefit. And as we go through 
that process, we will be in a better position, and we will do 
it as soon as possible. I completely understand----
    Chairman Conrad. Can you give me some--here is the very 
practical problem we have got. The very practical problem we 
have got is we have got to produce a budget for our colleagues 
in the next several weeks. And, you know, we have been through 
a circumstance in which we had these magic asterisks for the 
war, and the previous administration would tell us, well, we 
cannot tell you how much that is going to be, and they would 
put in zero. That is not going to work. We cannot put in--we 
knew the right answer was not zero about the war, and I do not 
believe the right answer is zero with respect to the housing 
crisis and the financial sector.
    Can you give us any greater clarity on when you might have 
a better idea?
    Secretary Geithner. Well, we are going to move forward very 
quickly to come out with detailed design elements on these 
proposals I outlined yesterday. We expect to be able to do that 
over the next several weeks. And that will at least give you a 
sense of how we plan to use the existing authority we have, and 
that will give everyone a sense to look at what those ultimate 
risks will be, and that will give us something at the beginning 
of the process for looking at whether we need to go beyond that 
and when.
    I think it is important to point out that even those crises 
in history that were handled well and we look back with 
affection and admiration for how quickly and decisively they 
were, you know, they came in waves because--not because people 
were being too tentative, just because, you know, realistically 
you will not know with full clarity. So we face that basic 
tension of reality and will--but completely understand your 
imperative, and we share it, and we will move as quickly as we 
can.
    Chairman Conrad. Well, I appreciate that. Let me go to 
something else that is of great concern to this Committee, and 
that is the unsustainable course that we are on as a Nation. We 
saw a doubling of the debt in the previous administration. We 
now look ahead and see the potential for another doubling of 
the debt within a debt approaching 100 percent of gross 
domestic product, looking at the gross debt, 100 percent of 
gross domestic product by the end of this 8 years. And we have 
got the baby-boom generation, and that is not an estimate. They 
have been born. They are alive today. They are going to retire. 
They are eligible for Social Security and Medicare.
    The President has called for a fiscal responsibility 
summit, and he is talking about doing that sometime this month. 
My own belief is--Senator Gregg and I have come forward with a 
proposal of a task force, bipartisan in make-up, with 
everything on the table, with the assurance that the product of 
the deliberations of that task force would actually come to a 
vote.
    Now, I will be clear. There are members here, there are 
other committees, who strongly resist that approach. They want 
to go through what is called the ``regular order.'' We have had 
detailed testimony before this Committee, including former 
Chief of Staff of the President of the United States Leon 
Panetta and many others have said, ``You wait for regular 
order, you are going to be waiting a long time.''
    The problem with regular order is we are in silos. Frankly, 
I think that is part of the problem with the design of the 
economic recovery package. You have got appropriators working 
in their standard approach. You have got the Finance Committee, 
Ways and Means Committee. You know, unless you bring it all 
together, not only for the committees of Congress but for the 
American people, you lack the sense of urgency that is needed 
to actually reach conclusion on what to do.
    Can you tell me what your basic disposition is with respect 
to taking on these long-term imbalances that represent not only 
the entitlements but also the revenue system of the country, 
the need for tax reform?
    Secretary Geithner. Senator, the President shares and I 
personally share your judgment about the imperative, and it is 
going to require a different approach if we are going to solve 
that. And we are going to work with you in designing a process 
that offers the best prospect of bringing recommendations and 
judgments quickly, commensurate with the urgency of the problem 
and the scale of the challenges, so that we can, again, improve 
confidence that the American people are going to make these 
judgments going forward. And it is going to require a 
fundamental change in approach because I do not see 
realistically how we are going to get there through the 
existing mechanisms.
    Obviously, you have put out a creative proposal for how to 
do this in terms of process. I know the President has talked to 
you personally about this. A lot of people in the President's--
and I have been looking at this and other alternatives. He is 
going to try to bring people together and find a process that 
works. But I absolutely share your commitment to it, and it is 
going to require--you know, these things are not just driven by 
demographics. As you know, they are driven by what is happening 
to health care costs, and we are going to have to look at a 
comprehensive approach not just with discipline on the medium-
term budget and a set of rules and disciplines on budget 
process to enforce that, but we are going to have to start a 
process sooner that helps deal with the longer-term challenges 
you laid out. Completely agree with that, and I think it is 
going to be critical to the success of recovery, too, because, 
again, if people do not believe that we are going to have the 
will and the ability to walk this back and address these 
longer-term challenges, then our efforts will be less 
effective. They will become less confident. As you said at the 
beginning, people will save more because an expectation that 
there are commitments ahead that we have not been able to meet.
    Chairman Conrad. We had testimony before this Committee by 
Allen Sinai, whom I think you know well, one of the more 
respected economists in the country. He told this Committee 
very clearly, ``If you do not deal with the long-term 
imbalances, our country is going to look like a Banana 
Republic.'' Now, he said--this is a caricature of a response, 
but he said the harsh reality is if you look at the bow wave 
and the buildup of debt, the increasing need to finance that 
debt abroad--last year, of all the new debt issued by our 
country, 68 percent was financed by foreign entities. I mean, 
if this is not a warning signal to us that we are on an 
unsustainable course--and, by the way, we have had Mr. Orszag, 
who is now the Director of the Office of Management and Budget 
for this administration, he sat right where you are sitting and 
told us a year ago it is unsustainable. We have had every 
Secretary of the Treasury of the last three sit there and tell 
us we are on an unsustainable course. We have had the head of 
the General Accounting Office, Mr. Walker, tell us we are on an 
unsustainable course. We have had economists of every 
philosophical stripe sit at that table and tell us we are on an 
unsustainable course. And I believe it. And I personally do not 
want to be part of any papering over or slipping by or not 
facing up to--I have been here 22 years, and I do not want to 
be part of not facing up to what I believe is a fundamental 
threat to the economic security of the country.
    So I very much welcome your offer of working together. I 
think it is imperative that we do. I want to invite you back to 
the Committee when you have greater clarity with respect to any 
short-term additional costs we are going to face with respect 
to recovery, assistance to the financial sector and housing, 
and I very much will want you to come back and talk to us about 
these long-term processes.
    Senator Gregg, who is now, as you know, up for 
consideration for Commerce Secretary, and I concluded several 
years ago you have got to have a process. If you lead with 
policy, you are dead here. You are dead here. You have got to 
have a process that leads to a policy and a policy that can get 
voted on. If we do anything else, I think history shows us very 
clearly just forget it, because if you lead with policy in this 
town, every special interest group in this country will be 
knocking down the doors of our colleagues.
    So, with that bit of wisdom, I will turn it over to Senator 
Sessions.
    Secretary Geithner. Senator, could I just say that I agree 
completely with everything you said, but can I bring a tinge of 
optimism? We are----
    Senator Sessions. Good. I am looking forward to that. Our 
Budget Director for a while was named Mr. Sunshine.
    [Laughter.]
    Secretary Geithner. As I said, I think there is more 
reassurance and candor than there is in its absence. But, you 
know, we are a strong country. This is about will, not ability. 
And throughout our history, when we face challenges like this, 
we have acted together to lay out a path out of it. And that is 
why we are as strong as we are today, and we have a history 
of--because when faced with a crisis, we have acted to fix it. 
And people want to see us do that. And I think the world is 
watching, and they want to see us come together and do that. 
And cannot do it--Treasury cannot do it alone. The President 
cannot do it alone. It requires the Congress together, and I 
think your basic instinct, of course, is right that it is going 
to require a change in approach.
    Chairman Conrad. You know, this is exactly what I tell 
audiences back home because, look, the news is tough. It is 
tough. We know we are in a tough economic circumstance now. We 
know that we are on an unsustainable course. But if you look 
back at the history of this country, the challenges that the 
people of this country have overcome, whether it was World War 
II, the Great Depression, all the other conflicts that we have 
faced, over and over this country has risen to the challenge. 
And it will again. It will again. But it needs leadership. It 
does need an optimistic outlook and an understanding that we 
can do this. And we can.
    But to do it, we have got to be honest with people about 
the dimensions of the problem, and we have to act. And I 
especially welcome what you have said here today. This is not 
for some timid response. This requires strong action, 
determined action, and it is imperative we get it right.
    Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman. You have been at 
this for several years now, and I do not think that there is 
anyone who more deeply understands it. Your leadership in 
getting us through this difficult time is going to be critical, 
and you can be sure that on most matters you suggest, you will 
find a very enthusiastic supporter in me. And in the commission 
idea, I also believe we have got to do that, and hopefully we 
can make progress on it.
    I just want to say a couple of things that really trouble 
me. The budget deficit from 2004 to 2007 had fallen from about 
$400 billion to $161 billion. Then President Bush sent out $163 
billion in checks. That helped jump the budget deficit last 
year to $455 billion. Well, that is just 455. But that is the 
largest deficit we have had in the history of the Republic, the 
largest not in terms of GDP but in real dollars adjusted for 
inflation. So that is a huge, huge number.
    This year, Mr. Geithner, it will be $1.5 trillion, 
according to CBO. They are scoring without the stimulus plan 
the budget deficit to be $1.2 trillion. When you add in the 
amount of money that will be spent out of the stimulus they are 
estimating about $1.4 to $1.5 trillion--that is three times the 
largest amount in history. And President Obama said to us in 
conference and he said to the Democrats and publicly that he 
understands we have a systemic problem, and I agree, and that 
we need a long-term solution. And he is saying things that seem 
to support Senator Conrad's idea of thinking tough about the 
future.
    First of all, I want to say that he will never, ever save 
$800 billion we spent yesterday when we passed that bill. Not 
in his 8 years, if he stays in office 8 years, I do not believe 
you can cut entitlements, Medicare, Medicaid, $800 billion. 
That money is out the door. It is going to increase the deficit 
by $1.2 trillion scored over the 10-year budget window. So I 
just want to say that.
    One writer wrote a book in 2006 and predicted the financial 
housing collapse, used a word about economies and countries 
when they collapse, he said they ``invoke the old verities 
while doing just the opposite.'' We talk about balancing the 
budget. We talk about sound dollars. But the policy we have got 
in place here to fix it is not consistent with the ideal 
policies we want to have.
    Now, you are saying we have got to do it in the short run 
because the crisis is so severe. I understand that. But I 
know--and I think you know--we are spending more money, and in 
the long run we ought to be spending less. And that is a 
problem.
    You indicated earlier that we did not come to this crisis 
with the tools and resources to respond effectively. My belief 
is that the better thing to have done would be not to have 
allowed it to happen, to have prevented it. Senator Conrad and 
I believe Senator Isakson proposed in this stimulus bill that 
we have something like a 9/11 Commission so as the matter cools 
off and the American people are looking at it we can figure 
out, what mistakes did we make, how could they be avoided in 
the future. But, unfortunately, that proposal was not accepted. 
So maybe somehow we can get this done, but I really believe it 
is important for all of us to honestly know.
    Now, you said maybe last summer you saw real trouble ahead. 
Is that right?
    Secretary Geithner. Senator, this crisis began really in 
August of 2007. You could see the early signs of it happening 9 
months before that. And I was a very aggressive supporter of 
action back then to move to address this, and the things that I 
was responsible for help shaping them, if you look back at 
them, they did move very aggressively.
    Now, the central bank----
    Senator Sessions. We do not want to throw blame, but I 
think it is important for you to have your say about that. So 
you saw some things that could have been done sooner.
    Secretary Geithner. Absolutely. But I think you are exactly 
right that the critical challenge is to make sure that we have 
a system, we build a system that is less prone to future 
crises, and to do that you cannot just rely on having better 
authority to manage the crisis when it happens. You have to 
have much better disciplines and constraints in place ahead of 
time. And there were systemic failures in our process, 
including by supervisors and regulators, and although I did, 
with my colleagues in the Fed, a lot of effective things in the 
years leading up to this crisis to try to contain the damage, 
those efforts did not have enough traction. I will say that 
honestly to you today, and across the system more could have 
been done in advance.
    I completely agree with what you said about the importance 
of there being a brutally honest, careful, independent 
assessment of what those weaknesses are. I think just to use 
the word again about credibility, I think that one of the 
strengths of our country and a critical test of credible 
institutions is: Are people willing to allow there to be an 
independent assessment of what those failures are? And there 
have been already a number of independent efforts done to do 
that, but I think more will have to happen, including those 
focused on what happened in supervision. That is a necessary 
basis for trying to make sure that we come to you with a set of 
reforms that will prevent this from happening in the future.
    I just want to come back again to where you began, which is 
that we are starting with this deep fiscal hole, $1.2 trillion. 
And I know people are skeptical we have the will to gather this 
going forward. But we have to spend more now in order to 
improve the prospects we are going to be spending less later.
    There is no way this will solve itself on its own. These 
things can only be solved by governments acting to help 
stimulate jobs and stimulate private investment and help get 
the financial system working again. And so the best 
conservative, prudent way, fiscally responsible way to go 
forward will require necessarily additional spending and tax 
cuts now if we are going to solve this.
    I do not think there is any way through it, and I think 
that is the responsible path to proceed, because, again, if we 
do not do that, we are going to face more damage to our 
productive capacity. We will be growing more slowly in the 
future. Recovery will be delayed, the recession much deeper. 
Human cost damage will be much more profound, and we will be in 
a much poorer position to address those long-term challenges 
that are going to be so important.
    So it is hard to say it, but it is true. And I do not think 
there is a better path forward, again, than to try to be 
forceful now. I think that is the more prudent path.
    Senator Sessions. But the Congressional Budget Office, our 
Budget Office, has given us a grim but I think honest analysis. 
They say that the stimulus package we are passing right now, 
are in the process, would provide benefit to the economy for 2 
to 3 years, but over a 10-year period, because of crowding out 
of private borrowing and increased interest debt payments that 
we are going to have to make over that period of time, they 
score it as a net loss to GDP over 10 years. And we know the 
next 10 years, where we will be having probably a $400 billion 
interest payment on that debt, and the stimulus long since 
having been passed, so the question is: Is this a smart 
targeted bill? Nobel Prize Laureate Gary Becker wrote 
yesterday, he thought the stimulus was pretty low in the bill 
and was critical of it.
    So I just want to say there is no money to waste, and we 
are going to carry--our children will carry this debt. Every 
dollar needs to be wisely spent, and I appreciate the 
difficulty you are in. Keep the cost as low as possible and do 
us some good.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator. Thank you Mr. 
Secretary. Thank you for being here today. Thank you for your 
testimony. I think hopefully this will help the American people 
understand the course and the direction that we are on and that 
there is going to be not just one step--I think it is very 
important the American people know with great clarity that this 
is not going to be solved with one step. There are going to 
have to be many significant steps taken for us to be rebuilding 
for recovery, and we can do it, but it is going to take real 
effort. And all of us are going to have to pull together. That 
was your message here today. It is a good message.
    Senator Sessions. Mr. Chairman, could I correct one thing?
    Chairman Conrad. Yes, sir.
    Senator Sessions. I said there would be a negative GDP. 
What the report said was that GDP would be lower over the 10-
year period if the stimulus bill passes than if it would not 
have passed.
    Secretary Geithner. Senator, I just want to respond to 
that. I will look at the details of the report, but I do not 
think that is right, and ultimately what happens to the economy 
over time depends on what we do going forward to revenues and 
expenditures to bring our resources and commitments more into 
balance.
    Now, if we did nothing except pass stimulus, then you are 
right. We are going to be living with a deeper burden over 
time, which will put some broader weight in the economy. That 
is why it is going to be so important to follow the recovery 
act with a budget and a budget process that not just gets that 
medium-term deficit down over time to a level that is 
sustainable, but that we begin this process soon of working 
together on the design of a strategy to help address those 
long-term problems. But it really depends on what we do going 
forward, and so I do not think it is right to say that growth 
will be lower in the future if we did nothing--it will be 
higher in the future if we did nothing today. That cannot be 
the case. I am certain of the fact that if we do not act today, 
growth will be lower in the future, and dramatically lower in 
the future.
    Senator Sessions. Over 10 years is what they say, Mr. 
Geithner, and they crunched the numbers. I assume you have not 
personally crunched the numbers on that.
    Secretary Geithner. We will be----
    Senator Sessions. Well, let me just ask this. When you 
borrow $800 billion and interest over that 10-year period will 
make it $1.2 trillion, and you take that much money out of the 
sector, it crowds out other borrowing--would you not agree?--
which has a detrimental effect on the economy. And you have to 
pay an interest charge of $347 billion over that 10 years. So 
there are costs. Nothing free here.
    Secretary Geithner. Absolutely.
    Senator Sessions. The cost of stimulating the economy today 
has a long-term cost in the future.
    Secretary Geithner. Well, recovery today will produce more 
growth not just in the near term, but in the future. But 
addressing the challenge and the concern you just laid out, 
which is very important, requires that we follow the recovery 
act with a plan to bring our resources more in line with--so we 
are living within our means sustainably. And if we do not do 
that, you are absolutely right, we will be living with higher 
interest costs, greater burdens on Americans, and that will 
work against growth in the future. But that is just making the 
point which I completely agree with, and you have shown great 
leadership on these questions, too, that we move quickly to lay 
out what that path is with a credible process and commitments 
for achieving it. It will be critical to broader confidence in 
our programs.
    Chairman Conrad. Thank you again, and thanks to all 
members. We had very good participation today. I am glad 
everybody, virtually everybody had a chance to get their 
questions addressed. And, again, Mr. Secretary, thank you very 
much for your patience here today and for, I think, the 
important message you delivered.
    Secretary Geithner. It is a privilege to be here. I look 
forward to doing it again and again.
    Chairman Conrad. And again.
    Secretary Geithner. And again.
    [Laughter.]
    Chairman Conrad. OK. We will stand in adjournment.
    [Whereupon, at 12:19 p.m., the Committee was adjourned.]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




            THE PRESIDENT'S FISCAL YEAR 2010 BUDGET PROPOSAL

                        TUESDAY, MARCH 10, 2009

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:29 p.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
chairman of the committee, presiding.
    Present: Senators Conrad, Murray, Wyden, Feingold, 
Stabenow, Cardin, Sanders, Whitehouse, Warner, Merkley, Gregg, 
Sessions, Graham, and Alexander.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. First of all, I want to thank everybody 
for having this bit of a hiatus between when we had first 
scheduled the hearing and today and look forward to the 
opportunity to hear from the President's Budget Director.
    I think we should remember what President Obama is 
inheriting: Record deficits, a doubling of the national debt in 
the previous 8 years, the worst recession since the Great 
Depression, financial market and housing crises unparalleled 
since the 1930's, 3.3 million jobs lost in the last 6 months, 
and ongoing wars in Iraq and Afghanistan. I tried to put myself 
in the shoes of the President and think what he must feel day 
after day when confronting these various crises. It must truly 
be daunting.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    With that, the Obama budget has a number of, I think, key 
improvements, more transparency, accounting for war costs 
previously unaccounted for, some important priorities, 
especially in energy and education and health care, and cutting 
the deficit in half, albeit from these very high levels as a 
result of the economic downturn.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    This next chart shows the path of the deficit over the 
first 5 years of the President's budget, and you can see it 
more than cuts the deficit in half from its peak of this year.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The President has also committed to paying for health 
reform. He said this at the White House Health Summit on March 
5: ``We have also set aside in our budget a health care reserve 
fund to finance comprehensive reform. I know that more will be 
required, but this is a significant downpayment that's fully 
paid for and does not add one penny to the deficit.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Let me go to the next slide, if I can, with respect to the 
question of whether this budget is tax increases or tax cuts, 
because it depends very much what you have as the starting 
point. The Congressional Budget Office, which we follow, will 
use as its starting point the budget baseline based on current 
law. Looking at it from that perspective, they will say that 
this budget has more than a $2 trillion tax cut. They will get 
to that result by looking at the extension of the 2001 and 2003 
tax cuts for those earning under $250,000 a year and they will 
score that as a $2 trillion tax cut.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Other provisions in the President's budget, including 
Making Work Pay and other tax incentives for individuals and 
businesses will account for another $940 billion of tax 
reduction. The Alternative Minimum Tax relief contained in the 
President's proposal will score at roughly $576 billion of tax 
relief.
    On the other side of the ledger will be the cap and trade 
proposal, costing some $646 billion, various loophole closures 
and international reforms, raising $353 billion, and then the 
limitation on the itemized deduction, raising $318 billion. And 
you net it all out and CBO would say there is a tax reduction 
here of over $2 trillion.
    One of the issues that we are going to want to discuss 
today is the question of forecasts and the economics behind the 
forecast. Looking at OMB's forecasts of the unemployment rate, 
for example, comparing it to the blue chip for 2009 and 2010, 
for 2009 OMB is forecasting an unemployment rate of 8.1 
percent, the blue chip forecasters 8.6 percent, and for 2010, 
OMB is forecasting 7.9 percent rate of unemployment, the blue 
chip forecasters 9.1 percent. There is obviously a question of 
how much of the stimulus is included in the blue chip forecast. 
We know it is included in the OMB forecast. Because of the way 
the blue chip forecasts are made, I don't think we can know for 
certain because it is an aggregation of forecasts of individual 
forecasters. Some have no doubt included the stimulus, others 
perhaps not.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    With respect to real Gross Domestic Product growth, or GDP 
growth, OMB is forecasting a contracting economy of 1.2 percent 
in 2009, the blue chip somewhat more pessimistic at 2.6 
percent. And then in 2010, OMB is forecasting 3.2 percent and 
the blue chip 1.9 percent.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Next, looking at the gross debt as a percentage of GDP, we 
can see that gross debt is jumping very dramatically in this 
period, ending 2007, 2008, 2009, 2010, a very dramatic 
increase, which you would expect as a result of the steep 
economic decline. And then a flattening out through 2019 at 
about 101 percent of GDP. This is the area which is of 
significant concern to some of us. I would give the President 
pretty high marks on his budget the first 5 years, especially 
given these incredibly difficult times. My greatest concern is 
the second 5 years and what can we do to bend this debt curve, 
because I am concerned it is an unsustainable level of debt.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Finally, the President has said that same thing. At the 
Fiscal Responsibility Summit on February 23, he said, and I 
quote, ``I want to be very clear. While we are making important 
progress toward fiscal responsibility this year in this budget, 
this is just the beginning. In the coming years, we will be 
forced to make more tough choices and do much more to address 
our long-term challenges.'' I agree entirely with that 
sentiment and hopefully we will hear more from the Budget 
Director on what the President intends to do to address those 
longer-term aspirations.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    With that, I want to again welcome Dr. Orszag to the 
committee as the head of the President's Office of Management 
and Budget. We worked very well with him in his previous 
position as Director of the Congressional Budget Office. We are 
sorry to lose him from that position of responsibility, but we 
are delighted that the President is fortunate to have his good 
counsel.
    Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. I am glad to see 
you back. I hope you are feeling well, and it is good to see 
you have recovered, and it is nice to have Dr. Orszag here.
    Obviously, we have some different views on this budget, but 
we do have some things we agree on. I appreciate the Chairman 
saying that in the second 5 years of this budget, the debt 
levels are unsustainable, because they are, and the cost of 
this budget is unsustainable and the tax burden is 
unsustainable. The Chairman didn't say that. I added the second 
two categories. The budget, on balance, spends too much, taxes 
too much, and borrows too much. It is that simple.
    We do not argue--I do not argue, at least--with the fact 
that we are in a severe economic downturn. We all know that, 
and people's jobs are at risk and people are worried about 
tomorrow, paying the bills for tomorrow and there is great 
angst, and rightly so, and many people suffering hard times, 
and therefore the government has had to step up with a massive 
injection, historic injection of liquidity to try to move the 
markets and move the economy forward, and that has cost money 
in the short-run and we accept that.
    The problem is that that effort to try to stabilize the 
economy has been used as a straw dog for the purposes of 
expanding the size of the government in the out years 
exponentially, moving it to the left in a way that has never 
been projected or seen before, should it be successful.
    The budget proposes about $1.4 trillion in next taxes over 
the next 10 years, about $725 billion in new discretionary 
spending, about $1.2 trillion in new mandatory spending, and 
virtually no savings.
    The practical implications of that is that unlike during 
the years of President Clinton's first term in office, when he 
proposed a major tax increase, as this budget does, and I think 
it is a bit of Wizard-of-Oz politics to claim there isn't a 
major tax increase in this bill, because there is and the 
people who are going to pay the national sales tax on their 
energy bills are going to feel it, and the people who are going 
to pay a 42 percent effective rate on their income are going to 
feel it, small business people especially, but he used those 
revenues for the most part to reduce the deficit in conjunction 
with a Republican Congress at the time that pushed the 
government in that direction. This massive expansion in 
revenues, however, is going to be used to massively expand the 
size of the government.
    It doubles the national debt in 5 years, publicly held 
debt, this budget, and as the Chairman has said, some of that 
is understandable because of the fact that we have got this 
severe situation and a lot of debt is being run up as a result 
of that. But remember, much of the debt that is being run up in 
the short term, if it works, if the spending works, for 
example, the TARP works and some of the other initiatives work, 
is actually going to come back to us because it is invested 
funds. But the assumption is that it isn't going to come back 
to us to be used to reduce the debt. It is going to come back 
and be spent, all these funds coming back to us. So the debt 
triples in 10 years.
    The practical implications of that are staggering for our 
children. We have seen this chart before. All the Presidents, 
including George Bush, since the beginning of our republic will 
not have run up as much debt as this budget will run up in the 
first period of its term.
    The wall of debt, which has been a famous wall around here 
for a long time, jumps astronomically due to----
    Chairman Conrad. Do I get any kind of credit for these?
    [Laughter.]
    Senator Gregg. Credited to the Chairman. But the point here 
is this, that this debt, this increases the deficit as a 
percent. Do we have the next one, which shows the debt? I don't 
think we have it.
    But this debt in the year 2013 creates a ratio of debt-to-
GDP of about 67 percent. Historically, we have been around 40 
percent. When you get up around 67 percent, as many of our 
witnesses have said in this committee, you are creating a 
situation which is probably untenable for our children because 
of the size of that debt, and the deficit maintains itself at 
approximately 3 percent to 4 percent of GDP for as far as the 
eye can see under this budget. And there is no factoring in, 
really, of what is coming at us in a significant way, which is 
the retirement of the baby boom generation that costs 
entitlements on top of all that.
    So you essentially have set up a scenario here under this 
budget where we will pass on to our children in the very near 
future, at about the end of 4 years from now, a debt-to-GDP 
ratio which is unsustainable and a deficit ratio which is 
unsustainable. That means our kids are going to have a hard 
time digging themselves out of this hole.
    And I guess our debate with this budget goes to that point. 
Rather than doing something in the fourth, fifth, sixth year to 
bring those lines down and bend the debt down as a percent of 
Gross National Product and significantly bend down the deficits 
as a percent of Gross National Product, this idea that, well, 
they cut the deficit in half, well, if you quadruple the size 
of the deficit and then you cut it in half, what you have done 
is you have taken four steps back and two steps forward. You 
are still not going forward, and that is exactly what this 
does.
    Rather than bending these numbers down so that we don't end 
up passing on to our kids a government that is not only 
unsustainable and unaffordable but a debt burden which is going 
to basically limit their capacity to have a high-quality life, 
what we are really doing here is giving them a government that 
is not sustainable or affordable.
    And you look at the expansion of this government as 
proposed in the budget and it is really extraordinary. I mean, 
they are talking--the proposal here is to expand in health care 
and put in place $636 billion in new spending, and that is 
defined as a downpayment--a downpayment. That is not even 
considered to be the full payment. So let us say it is over $1 
trillion of new health care spending. That is in an economy 
that already uses 17 percent of its Gross National Product on 
health care, which is about 5 percent higher than the next 
closest industrialized nation. It isn't that we don't have 
enough money in health care in this country in the system, it 
is that we don't use it effectively. But what this budget 
proposes is to expand the amount of money into health care 
geometrically, probably in the anticipation of some sort of 
nationalization of the system.
    The same is done in education, where the entire education 
accounts in the student loan area is formally nationalized 
under the proposals.
    So you take this government and you basically explode it in 
size and proportions, both in the tax burden and on the 
spending side of the ledger, while not doing anything--there is 
no significant effort in this proposal to address what is the 
looming fear that I am concerned about, which is the explosion 
in entitlement costs. No entitlement restraint in here of any 
significance over the long run.
    And so we end up with a situation where what we are seeing 
here is a budget that is not sustainable for our nation, which 
fulfills maybe the desires and want of this administration in 
the area of spending, which it expands dramatically, and taxes, 
which it expands dramatically, but it doesn't address the issue 
of our kids' concerns because it expands the debt dramatically.
    And again, this is all done under fairly rosy scenarios. I 
would say this is on the Tinkerbell side of rosy scenarios, 
this budget. Look at these numbers here as reflected by the 
blue chip estimates. The budget is making some assumptions 
which are very much a reach--8.1 percent unemployment when we 
are already at potentially 8.2 percent unemployment, growth 
rates which are much higher than anticipated by the blue chips, 
and tax revenues which are much higher than anticipated by the 
blue chips.
    So the budget sets up some very significant problems for us 
as a nation, I believe, as we go forward, and it is appropriate 
that we address them.
    Now, there are places where we could cooperate to get some 
things done around here that would actually bend these numbers 
in the out years, and yet we are not doing that. In the 
entitlement accounts, the Republican Leader has said on 
numerous occasions that he is willing to move forward in an 
aggressive attempt to try to bring under control the cost of 
Social Security as we head into the out years, or at least its 
burden on our children. The same is true in health care. There 
are other places where there could be cooperation.
    I respect the administration putting forward, for example, 
ideas in the area of agriculture, limiting agricultural 
subsidies. But as a practical matter, the fundamental 
philosophy of this budget is an expansion of the size of 
government which isn't affordable by its own definition, 
because it maintains debt at a level which will essentially run 
our country into a position where our children cannot afford 
the cost of the government.
    Thank you, Mr. Chairman.
    Chairman Conrad. Director Orszag, welcome. It is your turn.

  STATEMENT OF HON. PETER R. ORSZAG, DIRECTOR, U.S. OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. Orszag. Thank you very much, Mr. Chairman----
    Chairman Conrad. Welcome back.
    Mr. Orszag. --Ranking Member Gregg, members of the 
committee. Thank you for having me.
    I am going to be brief, but let me try to address some of 
the things that were discussed in the opening statements.
    I think we face a key choice. We can continue a path in 
which the theory of the case is that the top marginal tax rate 
drives economic performance above and beyond any other variable 
and in which market competition is defined by how many--how 
much subsidies you can provide to private firms, or we can 
change course, be honest about the fiscal condition that we are 
facing, invest in education, energy, and health care, which, by 
the way, corporate leaders have long identified as being key to 
our long-term economic performance and bringing the budget 
deficit down.
    This budget includes $2.7 trillion in costs that have been 
excluded from previous budgets. For example, previous budgets 
have tended to assume that there would never again be a 
hurricane, that the Alternative Minimum Tax would take over the 
tax code, that physician payments would be reduced by 20 
percent and yet Medicare beneficiaries would still somehow have 
access to their doctors. This budget does not play those games. 
It presents an honest depiction of the fiscal course that we 
are on and what we can do about it.
    Now, there has been controversy about the economic 
assumptions. Let me speak to that directly. When the 
assumptions were locked down, they were fully in line with the 
Congressional Budget Office economic projections once the 
Recovery Act was included in the analysis. Since that time, 
incoming data have suggested a worse economic situation 
inherited by this administration than was thought even at the 
time when the projections were locked down. I don't think it is 
constructive to be constantly chasing our tail, revising 
assumptions with each new piece of information, especially when 
we have not yet let the Recovery Act--we haven't given it the 
opportunity to work. The money is just beginning to flow. Let 
us see what happens.
    But as an example, if you take those blue chip numbers that 
you put up, Mr. Chairman, and undertake the analysis of what 
that would do to the budget deficit relative to the projections 
that we use, the answer is that they would raise the budget 
deficit by under 5 percent for this year. So while there would 
be an impact, I think the argument that it dramatically changes 
the picture, given that we were already assuming substantial 
slowing of the economy and a substantial contraction this year, 
is exaggerated.
    Second----
    Chairman Conrad. Is that 5 percent on a $1.8 trillion 
deficit?
    Mr. Orszag. So roughly $50 billion or so, yes.
    Second, with regard to whether this is a big spending 
budget, let us look at the actual data. For non-defense 
discretionary spending in 2009 as a share of the economy, 
discretionary spending outside of defense will be 4.1 percent 
of the economy. Under this budget, it averages 3.6 percent, and 
by the end of the projection window, 3.1 percent, the lowest on 
record since 1962 and one percent of GDP lower than where we 
are starting.
    With regard to mandatory spending, there is some increase 
that occurs, but that is almost entirely because of the 
baseline, that is because of rising costs associated with an 
aging population. So, for example, under the baseline, between 
2012 and 2019, mandatory spending goes from 11.9 percent of the 
economy to 13.2. Under this budget, it goes to 13.4, and that 
reflects, in our opinion, needed investments in education and 
other areas that have been neglected. Point-two percent of GDP 
is not an explosion in government spending, especially when 
non-defense discretionary spending declines by much more than 
that.
    Third, with regard to entitlement spending, I think I have 
appeared before this committee over and over again and put up 
this chart, which actually comes from the Congressional Budget 
Office, and I think just looking at it makes the case that our 
entitlement problem is disproportionately focused in Medicare 
and Medicaid. Tackling health care reform is the key thing--you 
could think it is almost obvious from this graph--the key step 
in addressing our long-term fiscal problem. There are other 
issues that need to be addressed, Social Security and the rest 
of the budget. We do face a long-term deficit in Social 
Security and that will need to be addressed.
    But if you look at this chart, I think it is pretty clear 
that a disproportionate share of the long-term fiscal problem 
occurs in health care. That is why we want health care reform 
done this year in a way that will reduce costs and improve 
quality. The $634 billion that we put on the table is not a net 
expansion in overall health care spending. In fact, half of it 
comes from reductions in Medicare and Medicaid spending under 
current law, including $177 billion in payments that are made 
to Medicare Advantage Plans above and beyond what they would 
receive under a competitive process. Medicare Advantage Plans, 
which are private insurance plans that cover beneficiaries 
under Medicare, are paid $1,000 more per beneficiary than 
covering the same beneficiary under traditional Medicare. We 
propose changing the system so that they competitively bid for 
the business of Medicare beneficiaries. I think that is a very 
pro-market and pro-competition step. It saves $177 billion.
    Mr. Chairman, you had asked what the next steps were coming 
out of the Fiscal Responsibility Summit, and as the President 
mentioned at the end of that summit, we were--and, in fact, I 
believe this went out earlier this week or at the end of last 
week, but my understanding is that the comments that were made 
at the responsibility summit have now been circulated for 
revision and editing. We will get that back. We are going to 
then put that entire document out to the public within 30 days, 
as the President said, and we look forward to working with you 
on not only the process forward, but also the specific policy 
steps that could buildupon, I think what was a terrific summit 
where different perspectives were brought together, which is 
exactly what needs to happen.
    So in summary, I just want to come back and say I do think 
we face a key choice. We have neglected for too long 
investments in education, in energy, and in health care. We 
have played budget gimmicks where we have hidden massive 
amounts of spending that was likely to occur, reflected in the 
$2.7 trillion that we are including in this budget that would 
have been excluded from previous budgets. And in particular, we 
have neglected for too long reforming our health care system 
and putting it on a sounder track where there are substantial 
opportunities to improve its efficiency, which will also have 
major benefits not only for our long-term budget picture, but 
for State government and for workers, because take-home pay is 
already being reduced to a degree that is unnecessarily large 
and underappreciated.
    And with that, I will turn it back to you, Mr. Chairman, 
and again just look forward to working with you and the rest of 
the committee on these key issues. Thank you.
    [The prepared statement of Mr. Orszag follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    ***************
    Chairman Conrad. Thank you for your excellent testimony.
    Let us get right to it, because as I have said publicly and 
said here at the beginning of this hearing, I do believe there 
are important priorities here in energy, reducing our 
dependence on foreign energy. While oil prices are low now, I 
think all of us know that is not likely to go on forever and 
this is central to the economic and national security of 
America that we reduce our dependence on foreign energy. And 
that is one of the key components of the President's budget.
    No. 2, excellence in education. If we are not the best 
educated people in the world, we cannot long expect to be the 
most powerful country in the world.
    And finally, on health care, it is the 800-pound gorilla. 
Anybody that has spent 5 minutes studying the numbers know that 
your testimony is correct, that health care is where it is at.
    With that said, we are at about 17 percent of our Gross 
Domestic Product on health care and it appears to me that under 
almost any possibility, a proposal from the President will 
increase in the short term the share of the economy going to 
health care. And then we look at the revenue side of the 
equation. Under the President's proposals, we have spending 
that is about 22 percent of GDP in the out years, revenue 
roughly 19 percent of GDP, for that 3 percent gap.
    What do you see as a mechanism for addressing this long-
term imbalance?
    Before you answer, I want to make clear, people listening 
may have heard me talk about debt-to-GDP at over 100 percent. 
That is gross debt. You may have heard Senator Gregg, the 
Ranking Member, talk about debt-to-GDP of some 70 percent. That 
is publicly held debt. So there are two different measures of 
debt. I just want to make that clear to people listening. It is 
not that Senator Gregg and I have different numbers. In fact, 
our numbers are precisely the same. They are just two different 
measures of debt.
    So my first question to you would be, do you believe a 
gross debt-to-GDP of 100 percent is sustainable for this 
country given the baby boom generation? If not, what mechanism 
do you believe will be necessary to address it?
    Mr. Orszag. Well, I prefer to focus on the publicly held 
debt and the ratio there would be something like 60 percent. I 
think we have seen--while obviously it would be desirable to 
reduce it further, we have seen other countries and even the 
history of the United States bear a debt burden that high.
    And again, I want to just emphasize, even--if you pull up 
your chart up again on the gross Federal debt, what you see is 
a dramatic increase reflecting the condition that we are 
inheriting and the steps necessary to address it, and then a 
leveling off. What we are trying to accomplish over the next 
five to 10 years is a fiscal sustainability path where you are 
leveling that ratio and then investing in the key steps that 
will bend the curve on health care costs over the long term, 
since as this graph, or the graph had shown, that is the key to 
bringing that debt ratio down over the long term.
    And you had mentioned an expansion in national health 
expenditures. I think, if anything, there will only be a modest 
expansion in the near term. But the more important point is 
that the power of compound interest is so strong that if you 
can reduce the rate of health care cost growth by, say, 100 
basis points, 1 percent a year, the impact after 40 or 50 years 
is huge. So 1 percent a year compounded over 50 years saves you 
almost 20 percent of GDP in health care expenses.
    The entire ballgame is whether we can put in place the 
structural changes to our health care system to reduce that 
growth rate, and I believe we are doing everything that the 
Institute of Medicine, of which I am a member, Congressional 
Budget Office, which I used to run, and MedPAC--that anyone has 
put on the table in terms of bending the curve on long-term 
costs, and if we are not, I would welcome more suggestions, but 
I think we are as forward-leaning as you possibly can be in 
investing in health IT, comparative effectiveness, changing 
incentives for providers, investing in prevention, and I would 
welcome other suggestions because I think that is the whole 
ballgame.
    Chairman Conrad. Let me just say, I agree almost entirely 
with what you say with one exception and that is I never hear 
anybody talk about the revenue base of the country around here. 
And we have shown repeatedly that we are unwilling as a country 
to pay for what we want to spend. And so until we address not 
only health care but the revenue base of the country, I don't 
think we are going to get to where we need to go.
    Let me just say, I am going to end my questioning there on 
5-minute rounds. We are going to ask 5-minute rounds from 
everybody today because we have just been informed there will 
be votes starting at 4, and given the turnout, I think that is 
the only fair thing to do.
    Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman.
    I think you hit the nail on the head. The difference 
between the revenues and the spending is what creates the 
problem and drives the debt up, and unfortunately, under this 
budget, the administration is planning to take spending after 
the spike for the purposes of addressing the fiscal problems we 
have up to 22, 23 percent of GDP, as you can see from this 
chart, which is way above, way above where we have been 
historically, and it goes on forever and that is the problem, 
that the spending in this bill is huge and most of that 
spending is driven by what the Director has said very openly is 
the desire of the administration to spend more on education, 
health care, and a variety of other Federal areas other than 
defense in this bill. So it is a spending problem, in my 
opinion.
    But to move to a more specific issue in this bill which I 
am trying to get clarification on, and that is the cap and 
trade tax, which you estimate in this bill is going to 
generate, I think about $65, $67 billion annually, or something 
in that range--I have forgotten what the number was. But MIT, 
in scoring the same--the bill that was out there last year, 
which is the bill of record and which is, one presumes, the 
mechanism that will be used, an MIT study scored that at 
generating about $300 billion a year annually. That is a 
massive new tax. It is a tax on energy and it will flow 
directly through to the consumer in the form of a national 
sales tax on their electric bill, which I know the Director 
agrees with because he said that when he was Director of CBO, 
that that tax will flow to the consumer.
    And so I guess my question is, is that accurate, that you 
are putting in place, or proposing to put in place a massive 
new tax which will flow through to the consumer? Now, I 
understand you are going to take that and rebate it to some 
other consumers through one of your tax mechanisms here, your 
tax deduction mechanisms--I have forgotten the name of it, I am 
sure you will explain it to me--up to 80 percent, but there is 
still 20 percent that is floating around as slush money for 
whatever the spending that we want to put it on as a Congress.
    But more importantly, how do you explain to that electric 
utility user, most likely in the Midwest and the Northeast, 
that their energy bill, their electricity bill is going to 
spike a little bit--quite a bit--as a result of this new tax?
    Mr. Orszag. Let me comment on various aspects of that. 
First, the budget includes $15 billion a year in energy 
efficiency investments, for example, the kind of thing that we 
need to take wind energy from the Dakotas and connect it to 
population centers, because we have got lots of wind energy in 
parts of the country but we can't get it to where people----
    Senator Gregg. Are you going to get that money from this 
tax revenue? Is that where you are planning to get that $15 
billion? Is that where some of the money is going?
    Mr. Orszag. No, to finance those investments in a fiscally 
responsible way, we do have a market-friendly cap and trade 
program.
    Senator Gregg. Market-friendly. You keep----
    Mr. Orszag. Like in the sulfur dioxide program, firms will 
be able to trade permits and economists across the political 
spectrum agree that a cap and trade program is an efficient 
approach to reducing greenhouse gases because it allows firms 
to be flexible in terms of how they get efficiencies in 
reducing greenhouse gases.
    Senator Gregg. Independent of that, would you answer the 
specific question----
    Mr. Orszag. Yes.
    Senator Gregg [continuing]. Which is, is there a 
potentially $300 billion new tax, using MIT numbers, on energy 
consumers?
    Mr. Orszag. I haven't seen those estimates. I think that 
sounds remarkably high to me----
    Senator Gregg. That was the number that actually the Obama 
campaign used during the campaign.
    Mr. Orszag. I don't know what the Obama--as you know, I was 
at the Congressional Budget Office and didn't pay attention to 
campaign undertakings while I was there. But let me just note 
that what the President has said is that he supports reducing 
greenhouse gas carbon dioxide emissions by 14 percent relative 
to 2005 levels by 2020. There are many different paths to get 
there----
    Senator Gregg. How much will the tax be?
    Mr. Orszag. Again, I don't--I can't answer the question 
because there are lots of different ways----
    Senator Gregg. How much are you scoring in the budget as 
raising----
    Mr. Orszag. In the budget we----
    Senator Gregg [continuing]. Annually by this new energy tax 
on consumers?
    Mr. Orszag. OK. I also need to just address the semantics 
for a second, but I will do that in a moment. We have roughly 
$640 billion over 10 years, $646, coming from the sale of 
permits----
    Senator Gregg. So is that $64 billion a year annually, if 
you were to average it out every year?
    Mr. Orszag. Now are you going to allow me to address the 
semantic issue?
    Senator Gregg. Oh, of course----
    Mr. Orszag. OK.
    Senator Gregg [continuing]. You can address the semantic 
issue.
    Mr. Orszag. All right. So I think we have a common 
understanding of a tax is something that is collected through 
the tax code. On that basis, the budget delivers a tax cut for 
95 percent of Americans, and actually if you adopt the baseline 
that Mr. Conrad favors, it may be even more than that.
    There are lots of other effects of the budget--Pell Grants 
that help kids go to college, early education investments, 
early Head Start. You either have to do the analysis kind of 
all in on the financial impact on households or just look at 
the tax code. So unless we are going to start calling Pell 
Grants a tax cut, I think incorporating the secondary effects 
of policies that are not run through the tax code and calling 
that a tax, well, it is not the semantic approach that I would 
adopt.
    Senator Gregg. Well, you are going to raise $646 billion 
over 10 years. It is not going to come from Tinkerbell. It is 
going to come from consumers and that is--I mean, the consumer 
is going to see it as a price on their energy bill. You can 
call it a tax. You can call it an increased price for energy. 
But their bill is going up.
    Mr. Orszag. I agree there will be increased prices, yes.
    Chairman Conrad. Senator Cardin.
    Senator Cardin. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Cardin, if you would withhold just 
a moment, maybe I could just go down the list as we have it 
here so people know where they stand. Cardin, Sanders, Murray, 
Whitehouse, Stabenow, Warner, and Merkley on our side. On the 
other side, Sessions, Alexander, and Graham.
    Senator Cardin. Thank you, Mr. Chairman, and Director, it 
is nice to have you before us here.
    I do want to start off by congratulating the Obama 
administration for presenting an honest budget. It is good to 
see all of the expenditures that we are going to incur included 
in the budget so that we can really have, an intelligent 
discussion in the Budget Committee and try to be on the same 
page with the administration as we make policy decisions.
    I want to talk about health care, because I was interested 
in how you framed some of the budget scorekeeping here. We need 
to get to universal coverage for many reasons. Forty-seven 
million people without health insurance is extremely expensive 
to our economy and your charts point that out very clearly.
    Now, when we get to universal coverage, it will have a 
dramatic impact on the cost of health care. We currently spend 
twice as much as comparable countries spend on health care and 
we don't have the results to reflect that type of investment. 
So if we can reduce or eliminate the number of uninsured, we 
will reduce the number of people using emergency rooms and we 
will have much greater use of preventive health care, which 
will save lives and save tax dollars. If we have a more 
efficient system of health care delivery, that will clearly 
save money. We will have fewer people going into bankruptcy. 
That will also save money for our economy. All of that will 
have an impact on our future economy and on our deficit and on 
our budget.
    It is interesting that this committee, and Mr. Chairman, I 
am going to ask that a copy of this letter be made a part of 
our record----
    Chairman Conrad. Without objection.
    Senator Cardin [continuing]. Received a letter from a group 
of entities suggesting that CBO's current scoring conventions 
do not recognize many of the savings to be achieved by 
restructuring of our health care system. It reads, ``We 
believe, therefore, it would be reasonable to develop an 
approach for health care reform that reflects both the near-
term exigencies and long-term savings of such extraordinary 
legislation.''
    Senator Cardin. Now, the signatories of signed this letter 
include the U.S. Chamber of Commerce, the AFL-CIO, the American 
Hospital Association, the American Medical Association, and the 
National Federation of Independent Businesses. These aren't 
exactly radical groups when it comes to trying to spend more 
government funds. But what I think they are trying to do is get 
an honest assessment of how our budgets are going to address 
health reform.
    Now, you have a placeholder in the budget for what you 
think reform will cost, a little over $600 billion. I believe 
if you use current values for President Clinton's health care 
proposal, it would probably add up to about $1.1 trillion. I 
think some of us question whether there is enough room in the 
budget outline you have proposed--knowing how we do our budget 
scoring here--to be able to achieve universal coverage, because 
we want to see major health care reform in 2009.
    So my question to you is, what type of budget do you need 
coming out of this committee so that the committees working on 
health care reform can get the job done in 2009? I am concerned 
that we may not have enough direction from you now as to what 
is necessary so Congress can, in fact, take up this issue in 
2009.
    Mr. Orszag. Thank you for that question. As we noted in the 
budget document, the reserve fund was intended as a 
downpayment, and as you noted, there are lots of plans out 
there that would require more resources and there are lots of 
ideas that have been put forward to fill in any gap between how 
much we have already put on the table and how much would be 
required.
    In terms of what would be necessary in the budget 
resolution, we feel quite strongly that health reform should be 
deficit neutral over the next five to 10 years and also help to 
reduce costs over the long term. So in a sense, all that is 
required is a mechanism for ensuring deficit neutrality as part 
of the health reform effort. We have tried to kick-start that 
process by putting substantial resources on the table, 
including significant savings in Medicare and Medicaid, and we 
look forward to working with you to fill in any additional 
amounts that might be necessary.
    Senator Cardin. But do you agree that if we get this done 
right, if we can get a handle on the resources that our economy 
currently puts out for health care that the future benefits to 
our economy and to the budget we are considering, including the 
deficits, will be much easier for us to address
    Mr. Orszag. Without question. That is why we are trying to 
get--that is why we have put such an emphasis on getting health 
reform done this year, because without it, the path that we are 
on is unsustainable, and with it, there are other changes that 
are still necessary in terms of our long-term fiscal picture. 
But that is the single most important thing we can do, and I am 
just going to repeat, if other people have ideas about what 
might help bend the curve, I am all ears. But I believe we have 
been more forward-leaning than any budget I have ever seen in 
terms of putting in place health IT, comparative effectiveness, 
changes in incentives for providers, and prevention and 
wellness efforts to help bend the curve.
    Chairman Conrad. Thank you.
    Senator Alexander.
    Senator Alexander. Thank you, Dr. Orszag. Thank you very 
much for coming.
    Just an observation on Senator Gregg's comment about the 
national sales tax on energy or gasoline. I am one Senator who 
wants to deal with climate change and have introduced 
legislation that would put a cap and trade system only on power 
plants. But as we look at it from the TVA region, where 10 
percent of the customers in Nashville said they couldn't pay 
their electric bills in December because of TVA's rates, which 
are relatively low, we would be asking them to pay even more 
for, in effect, a carbon tax.
    Then under your proposals we have gone from about $5 
billion to about $20 or $25 billion a year in subsidies to 
banks and developers and big companies to build wind turbines 
in another part of the country. And you also now want to spend 
hundreds of billions of dollars, some of which we would have to 
pay, to build transmission lines from the other part of the 
country to Chicago and New York to carry that kind of energy. 
Typically, transmission lines have been paid for by the 
ratepayers who use the electricity and that is a separate 
discussion.
    But I would like to ask you about two education issues. I 
appreciated being invited to the Summit on Fiscal 
Responsibility and thought the President did an excellent job 
there and appreciate his focus there. The Republican Leader has 
said he is ready to go to work on that, starting with Social 
Security and then I believe we should do health care this year.
    But I was surprised to come back and then, the President in 
his budget would propose making Pell Grants mandatory, because 
if I am correct, that would take $117 billion and move it over 
to the automatic pilot spending side of the budget for the next 
10 years. Why shouldn't we be going in the other direction? We 
spent all afternoon down there being told by a whole number of 
people that our big problem was entitlement spending and you 
are proposing to add another $117 billion over 10 years.
    Mr. Orszag. Three comments. First, we propose significant 
savings by reducing and eliminating the subsidies for middlemen 
on education loans because the evidence suggests that there is 
a more efficient way.
    Senator Alexander. I will have a question about that next.
    Mr. Orszag. OK, great. The second is then let us examine 
the policy rationale for making Pell Grant funding more secure. 
I think the evidence is overwhelming that one of the reasons 
that current enrollment rates are not as high as they should 
be, especially for moderate-and low-income families, is that in 
ninth and tenth grade, too many kids don't aspire to go to 
college in the first place, in part because the existence of 
financial assistance is unclear, and if you look at the pattern 
of funding for Pell Grants in the past, it has been a zig-zaw, 
you know, up and down kind of thing. And second, that the 
process of applying for it is too complicated.
    So the vision, and the President is talking about this 
today, or already talked about it----
    Senator Alexander. I only have about a minute and a half 
and I have other questions.
    Mr. Orszag. OK, I am sorry. I will be really brief. You 
want to inspire kids to aspire to college, and that is what we 
are trying to do.
    Senator Alexander. But the fact of the matter is, you are 
moving $117 billion over to entitlement spending, which is 
where we already have the problem.
    Are you then going to spend the money twice by figuring you 
have left a $117 billion hole in discretionary spending and 
then spend that, too?
    Mr. Orszag. No. In fact, the reductions in non-defense 
discretionary spending that are discussed net out Pell Grants 
and the historical data----
    Senator Alexander. So you are only spending on the 
mandatory side, not on the discretionary side?
    Mr. Orszag. Well, there is a downward adjustment on the 
discretionary side, but I didn't want to conflate the analysis 
by making that look like a reduction in discretionary spending. 
So we took Pell Grants out of the----
    Senator Alexander. I want to make sure. Are you going to 
spend it both----
    Mr. Orszag. No.
    Senator Alexander [continuing]. On the mandatory side and 
then spend 117----
    Mr. Orszag. No.
    Senator Alexander [continuing]. And then say, I have got 
$117 billion----
    Mr. Orszag. No.
    Senator Alexander. OK, good. Now may I move to the other 
part of your vision and give you a moment to answer that?
    Mr. Orszag. Yes.
    Senator Alexander. I was Education Secretary when the 
direct loan program started. I didn't think it was a good idea 
then and I don't today. And the reason I didn't was partly 
because I didn't think it would save any money. There have been 
arguments about that on both sides for the last 10 years. I 
still don't.
    The second reason was a bigger reason. It was a management 
issue. We have got 6,000 higher education institutions across 
the country. We have got 15 million new loans to students every 
year. And you are going to turn that over to the United States 
Department of Education suddenly to manage? Arne Duncan, I 
think, may be the President's best appointee, with all courtesy 
to you----
    [Laughter.]
    Senator Alexander [continuing]. Among the most 
distinguished appointees.
    Mr. Orszag. OK.
    [Laughter.]
    Senator Alexander. But even he, I don't think, can take 
over the management of the millions of new loans that instead 
of being managed by lenders all across the country to 12 
million or 13 million students would now be managed by the 
United States Department of Education in Washington where I 
used to work.
    Mr. Orszag. Senator, first of all, I will make sure I pass 
along your warm regards to Secretary Duncan.
    Senator Alexander. I have already told him.
    Mr. Orszag. OK. A couple comments. First, I think the 
evidence is actually clear. I don't think there is ambiguity. 
The direct lending program does save money relative to an 
alternative in which the Federal Government guarantees private 
loans.
    Second, that private loan market itself has been 
experiencing significant difficulty, if you just look at what 
has been happening recently. So the argument that there would 
be problems in the direct lending program, I think doesn't take 
into account the difficulties that the private lending program 
is experiencing.
    Finally, before putting this forward, we did do significant 
work to make sure that the program could ramp up adequately so 
that there would be no disruptions and I believe that there 
would be a smooth ramp up if this proposal were adopted.
    Senator Alexander. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman, and welcome, Mr. 
Orszag.
    I want to go over three issues quickly: Income inequality, 
Social Security, and health care.
    No. 1, under President Bush, poverty increased, the middle-
class shrank, and the wealthiest people became much wealthier. 
But what we have seen is that despite the fact that the top 400 
Americans in this country saw a huge increase in their net 
worth, in fact, by $640 billion from 2001 to 2007, a huge 
amount of money for a few people, actually, today, these 
wealthiest 400 Americans now pay a lower tax rate, lower 
effective tax rate than most police officers, teachers, nurses, 
and people in the middle class. What do you think about that 
and what are we going to do about it? Do you think that is 
right, and should we change that?
    Mr. Orszag. One of the reasons that in 2011 and thereafter 
the President has asked for some rebalancing of the tax code 
and for more contribution from the very high-end of the income 
distribution is precisely the trends that you have identified. 
The top 1 percent of the population enjoyed ten--or accrued 10 
percent of national income in 1980. It is now up to almost 25 
percent.
    Senator Sanders. OK. Thank you. And I agree with you, I 
should tell you.
    Social Security--I happen to think there is not a Social 
Security crisis. Social Security will, in fact, be able to pay 
full benefits to every recipient for at least the next 32 years 
and after that it will be able to pay out 75 percent benefits. 
During the campaign, a candidate, you may recall his name, 
Barack Obama, this is what he said. Quote, ``What we need to do 
is raise the cap on the payroll tax so that wealthy individuals 
are paying a little bit more into the system,'' end of quote. 
It is a longer quote. Is that still the position of the Obama 
administration in terms of addressing the Social Security 
crisis?
    Mr. Orszag. I would just say there are lots of options for 
eliminating the actuarial imbalance in Social Security we face. 
I mean, benefits are higher than projected revenue and that 
needs to be closed.
    Senator Sanders. Let me go back again. Do you consider it a 
crisis when we can pay out every benefit owed to every eligible 
American for the next 32 years, and by lifting the cap, we 
could essentially solve the problem? And this is what the 
candidate Barack Obama was talking about. Has there been a 
change in policy?
    Mr. Orszag. I wouldn't say Social Security is in crisis. It 
does face a long-term deficit that needs to be addressed and it 
should be addressed.
    Senator Sanders. Are you still thinking about raising that 
cap?
    Mr. Orszag. Again, I am just going to say there are lots of 
options on the table.
    Senator Sanders. All right. The third question, I want to 
thank you and the President very much. In the stimulus package, 
there was $2 billion appropriated for Community Health Centers, 
$300 million for the National Health Service Corps so that we 
can begin to get doctors and dentists and nurses out into 
underserved areas. And all of the studies indicate that if we 
expand the Community Health Center program, if we get doctors 
into underserved areas, we end up saving money because people 
don't end up in an emergency room or the hospital.
    You guys did, I thought, a tremendous job in the stimulus 
package. Will you continue to support in a significant way 
Community Health Centers so that, in fact, we can have a center 
in every underserved area in our country?
    Mr. Orszag. Yes, and also the other piece of that, on the 
work force issues, there is also a few hundred million dollars 
in this budget----
    Senator Sanders. Exactly.
    Mr. Orszag [continuing]. To buildupon the effort that was 
in the Recovery Act.
    Senator Sanders. All right. So is that still a goal of 
yours?
    Mr. Orszag. Absolutely. Yes.
    Senator Sanders. OK. Thank you very much, Mr. Chairman.
    Chairman Conrad. Thank you.
    Senator Graham.
    Senator Graham. Thank you, Director Orszag. I think you 
were a good choice.
    Mr. Orszag. Thank you.
    Senator Graham. A suggestion. Climate change--if you are 
serious about climate change solutions, there is going to be 
some increased cost. That is just inevitable. But the problem I 
have with your approach is that you go to a 100 percent auction 
and I know hedge funds are going to jump into this and drive up 
the price of the credit and those industries that use a lot of 
energy, particularly in some out in the Midwest and other 
places are going to have a hard time in a 100 percent auction 
world of paying the cost until we get a solution. The fact that 
you use the revenues to go to your Make Work Pay program, which 
quite frankly is a tax policy that I don't agree with, is going 
to make it very difficult for you to pass climate change.
    So my recommendation would be that whatever revenue is 
generated from a cap and trade system, that it be less radical 
in terms of the 100 percent auction, that we understand that 
China and India are part of this problem, and if we do too much 
too quickly, we are going to drive people offshore and they are 
already leaving, and that when you take the revenue and put it 
into a tax program that there is division that you probably 
have thrown an issue into the climate change debate that has 
not existed and I think effectively destroyed the ability to 
solve the problem. That is just my opinion.
    Mr. Orszag. Could I comment on the 100 percent auction for 
a moment?
    Senator Graham. Yes, please.
    Mr. Orszag. I think this is important. If one did not 
auction the permits under a cap and trade program, the result 
would be, in a sense, the largest corporate welfare program 
that the government ever created because you would be 
transferring whatever the value of those permits were, whatever 
it turns out to be, you would be transferring it almost 
directly into a corporation's bottom line. And so the 
motivation for the----
    Senator Graham. I understand, but every other climate 
change solution in this building has had an allocation system 
because we don't see compliance. People are going to have to 
pay more. Industry is going to have to pay more. The people who 
are in manufacturing that use a lot of energy are going to be 
hit with this because they are emitting the most carbon. I 
understand that. But if you do too much too quickly, and if you 
don't recognize that hedge funds and other groups are going to 
jump into this auction system and drive up cost, well, then you 
have lost me. I will just be honest with you.
    There are a lot of folks who believe that climate change is 
real, that CO2 emissions are heating up the planet, and we need 
to find a solution. But your $646 billion revenue stream, I 
think assumes some things that are too far, too fast, and using 
the money to pay for a Make Work Pay program that is a 
different issue where there is more division, I will just leave 
it at that. I think you have done a lot to damage, quite 
frankly, the ability to find common ground on climate change.
    Now, when it comes to defense spending, right now, 4.1 
percent of Gross Domestic Product is spent on defense. In the 
budget, is it fair to say that 10 years from now, it will be 3 
percent of GDP?
    Mr. Orszag. It would be reduced, yes.
    Senator Graham. I just had a hearing with Admiral Blair, 
who I think is another good choice, and he gave us the threat 
assessment our nation faces, and I came away thinking that we 
are equally at risk, if not more at risk, over time. Do you 
think it is wise, given what this country faces in the next 10 
years in terms of military threats and international crisis, to 
reduce defense spending?
    Mr. Orszag. Well, again, wait. Reduce as a share of the 
economy. But let me actually speak directly to this.
    Senator Graham. OK.
    Mr. Orszag. Secretary Gates has stated that given the 
significant run-up in the defense budget, it is time to sort of 
change course and start applying more discipline--for example, 
in the procurement part of the budget, you have almost $300 
billion in cost overruns because there has been very little 
discipline applied----
    Senator Graham. Director Orszag, I agree that procurement 
and acquisition reform--no one should get a pass here. The 
Pentagon can do better. But we are going to increase the Marine 
Corps and the Army, as we should. But the biggest----
    Mr. Orszag. And the budget does that.
    Senator Graham. Exactly. The biggest cost of the military 
is personnel cost. So when you increase your personnel cost, 
something has got to give. And if you are going to reduce the 
overall pie, that means there is going to be less money for 
weapons systems that are efficient. And so I would just look 
long and hard about the glide path you have put us on when it 
comes to meeting the national defense threats that we face, and 
I think this is, quite frankly, a reckless move at a time when 
our nation is very much at threat.
    Finally, in 2009, the percentage of Federal spending that 
goes to interest payment on the national debt is 3.53 percent. 
In 2019, it is 12.06 percent. Where does that take us as a 
nation? If this continues where that percentage grows over 
time, what is the outer limits of the United States 
Government's ability to borrow money? When do we hit those 
outer limits and what does it mean?
    Mr. Orszag. Well, first, I don't believe that--actually, 
net interest is not anywhere close to that in 2019 as a share 
of the economy. But let me come back to the basic point. 
Because of the economic difficulties that we are inheriting, 
there is a significant increase in debt that has already 
occurred and that will occur this year, and then the whole goal 
of the budget is to stabilize that as a share of the economy 
while also dealing with health care, which is the key to our 
long-term future. Net interest will track that change in debt.
    And I also do, because I agree with you it is crucial----
    Senator Graham. I don't mean to interrupt, but I am talking 
about the amount of money spent to service the interest of the 
Federal spending. It is 3.5 percent now. Of the budget, 3.5 
percent goes to pay interest on the national debt. In 2019, it 
is 12.06. Am I wrong?
    Mr. Orszag. I believe so, yes.
    Senator Graham. OK. If I am, I stand corrected.
    Mr. Orszag. I think it is more like 2.7 percent, so reduced 
from current levels.
    Chairman Conrad. I think you are talking about share of the 
budget.
    Senator Graham. Yes, I am. I am talking----
    Chairman Conrad. Versus share of the economy.
    Senator Graham. Exactly. Twelve cents of every dollar the 
Federal Government will spend in 2019 is to pay the interest. 
Am I wrong?
    Mr. Orszag. That is approximately correct, yes, 622 over--
--
    Senator Graham. And if that continues unchecked, how does 
that affect this Nation's ability to borrow money to meet the 
obligations----
    Mr. Orszag. One of the reasons why we have to reduce the 
fiscal--you know, address the fiscal path that we are on is, if 
we do not, debt and deficit and that interest explode in cost 
over time. There is no question about that. This budget, 
relative to doing nothing, reduces the deficit by $2 trillion. 
And more important than what happens over the next 5 or 10 
years, I want to come back again--because I feel very strongly 
about this. If we do not address the excess cost growth rate--
that is, the rate at which health care costs are growing 
relative to income per capita--whatever happens over the next 5 
or 10 years is not going to matter.
    In order to address our long-term fiscal problem, that is 
the key thing we need to do, I think we are being as aggressive 
as--I mean, again, I would welcome thoughts. If anyone else has 
other things that, you know, the Institute of Medicine or 
others have not come up with, let me know, and we will work 
with you on them. I think we are as forward-leaning on that 
question as you could possibly be.
    I also just want to come back--and I do not know if 
Secretary Gates will be testifying before the Committee, but I 
defer to----
    Chairman Conrad. Well, we would like to have the Secretary 
come. He has not expressed a willingness to come. I think that 
is a significant mistake at a time like this for the Secretary 
or the Deputy Secretary not to come. But so far they have 
resisted the invitation of the Committee to come.
    Mr. Orszag. Well, I would, again, just defer to him on the 
appropriate level of funding for our defense effort, because, 
again, he thinks that what we are doing is in the Nation's best 
interest.
    Chairman Conrad. Senator Murray.
    Senator Murray. Thank you very much, Mr. Chairman. And I, 
too, wanted to say that I am pleased that we have a budget that 
addresses some of the realities that have been ignored for some 
time. We are going to have earthquakes or floods, and we need 
to budget for that. The cost of the war is a reality, and I 
appreciate a budget that comes to us that addresses that, and 
at the same time says we have got to get our arms around some 
very critical issues--energy, health care, education--in order 
to make sure that we have a strong economy in the future so 
that we can deal with the debt. So I thank you for that.
    Let me ask you some specifics. In reading through some of 
the budget highlights in the document, I was glad to see the 
Department of Energy's budget, and I quote, ``continues the 
Nation's efforts to reduce environmental risk and safely manage 
nuclear material.'' While that bullet is last on the list of 
highlights, I trust it is not the least, because I know the 
administration shares my dedication to pursuing both the moral 
and the legal obligation to clean up the environmental 
management complex.
    You and I have had the opportunity to talk about this many 
times. You know it is a high priority of mine. I have been very 
concerned about the previous administration's failure to comply 
with clean-up agreements with the States and 4 years of 
declining budget requests that have put us in jeopardy.
    Here in Congress, we have worked annually every year to 
backfill, and most recently in the fiscal year 2009 omnibus and 
the Economic Recovery Act. This is not a fight we should have 
every year. This is an obligation, and I am looking for at 
least $6.5 billion in the fiscal year 2010 request when the 
details are finally announced, and I wanted a chance to ask you 
today if that is what we are going to see.
    Mr. Orszag. Well, as you know, the Recovery Act provides 
substantial funding for environmental management. I think it 
would be premature for me to be committing to specifics for the 
detailed April budget at this point, but I know it is a 
priority of yours, and we----
    Senator Murray. The Economic Recovery Act put money in to 
reduce the size of the footprint overall complex around the 
country so that we would not continue to have to pay the high 
maintenance costs. But that does not take away our obligation 
every year in the annual budget. I assume you understand that.
    Mr. Orszag. I do understand that.
    Senator Murray. OK. Well, I will be looking forward to 
seeing what you put out.
    Mr. Orszag. I know you will be.
    Senator Murray. I also wanted to ask you about the VA, and 
we had a hearing this morning in the VA Committee with 
Secretary Shinseki, and we are hearing rumors that the 
administration is going to propose allowing the Department of 
Veterans Affairs to bill third-party insurers for the care of 
conditions that are related to a veteran's service-connected 
disability or injury. I am sure if you are not aware, you will 
be aware that our offices are hearing from veterans who are 
understandably very upset about a proposal such as that.
    Can you tell me if you are planning to include a third-
party billing proposal in the VA budget?
    Mr. Orszag. Well, there will be more details about the VA 
budget in April, but let me state very clearly that there will 
not be increases in out-of-pocket costs or premiums for 
veterans. And, in fact, the budget adds $25 billion over 5 
years for veterans and covers roughly a half a million more 
veterans under the VA system.
    Senator Murray. But is this specific proposal one that you 
are looking at?
    Mr. Orszag. There are lots of proposals that are being 
examined. I think it would be premature to be discussing 
specifics.
    Senator Murray. OK. Have you looked at the revenue impact 
of a proposal like that?
    Mr. Orszag. Again, I am going to just say it is premature 
to be discussing specifics. That will be part of the April 
budget.
    Senator Murray. OK. Well, in honesty in budgets, that is 
probably a proposal that is DOA when it gets here, so if we 
want to be honest, we better be careful what we are requesting.
    Mr. Orszag. OK.
    Senator Murray. Let me go back to education really quick in 
my last minute. Senator Conrad mentioned it as well. We have 
got to educate people today for the jobs that are going to be 
out there, whether they are health care or green energy or 
whatever it is. And if we do not do that, all is going to go to 
naught for all the money we are putting out there to try and 
get our economy back on track.
    I chair the Workforce Investment Subcommittee, and we have 
been trying to reauthorize the Workforce Investment Act, which 
is really the backbone of our national efforts, and I wanted to 
ask you if the administration was going to work with us to try 
and get that authorized so we can move forward and give people 
the skills they need to be able to compete in the jobs that we 
want them to be in.
    Mr. Orszag. Absolutely, and I believe the President touched 
upon that topic in his speech today, too.
    Senator Murray. OK. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    Welcome back. Peter, I applaud the more honest picture that 
this budget presents, and I applaud its focus on the long-term 
challenges we face, which are severe, in energy, education, 
and, most particularly, in health care. You know how I feel 
about the health care question, and I could not be happier that 
it is here.
    If you look at what I have long considered to be the 
guidepost for this reform, it is information technology 
infrastructure; it is improvements in quality and in prevention 
investments in areas that will save costs overall; and it is 
reform of the payment system so that we are sending a signal 
with our dollars that matches from a societal point of view 
what we want Americans to enjoy, which is better health care. 
And I think the budget touches on all those areas in important 
ways.
    My mental image of this is that our current system is like 
a cruddy old plant that runs and breaks half of the stuff as it 
makes it. It catches on fire every second or third day and 
wastes an enormous amount of oil and energy and is really bad 
design, bad systems design. We can move to a better, more 
efficient one that produces a better product with less 
casualties and less cost and less waste and less aggravation 
and all of that.
    If you were in a factory floor and you were making that 
transition, you would not only put investment up, which you do, 
but you would also have somebody responsible for managing that 
transition. And what I do not see yet is how this transition is 
going to be managed. I do not think CMS can do it. I do not 
know that you want to have this managed directly out of the 
White House on a day-to-day basis. I know that we in Congress 
cannot do it. We can do great big, simple, blunt moves. But the 
type of dynamic oversight of a multivariable, ongoing process 
on which, I think we believe in many respects, the fiscal 
future of the Nation depends is going to be quite a challenge. 
And that is what I do not see.
    How is that transition going to be managed? It is one thing 
to put this downpayment down, bravo for you, it is brilliant, 
and I will work with you as hard as I can to make sure you get 
all the support you need. But how do you manage it?
    Mr. Orszag. Well, there are different approaches. It will 
depend on what is done in the legislative process over the next 
few weeks and months. I will give you a couple examples.
    Senator Baucus has proposed a health institute or a health 
board that would manage a lot of those decisions.
    Senator Rockefeller has proposed something similar, 
basically MedPAC on steroids, where a technically competent 
body would help guide----
    Senator Whitehouse. Some type of authority.
    Mr. Orszag. Authority, would help guide those decisions. 
Under the Healthy Americans Act, the role of the exchanges is 
crucial, as it is in Massachusetts with the Connector. So there 
are lots of different models.
    Senator Whitehouse. I am relatively familiar with the 
legislative proposals. What I do not see is an administration 
proposal.
    Mr. Orszag. Oh, I am sorry. And from the administration 
perspective, Governor Sebelius will be making visits this week. 
We would like her to be confirmed as quickly as possible. The 
White House has named Nancy-Ann DeParle as the White House 
Coordinator on Health Reform, and she will be visiting up on 
the Hill, working with staff and with Senators and Members of 
Congress starting this week.
    So we are ready to roll up our sleeves, and it is going 
to--I mean, the fact of the matter is it will require a team 
effort from the administration along with a team effort from 
the Congress to get this done.
    Senator Whitehouse. So there is no fixed administration 
position at the moment on how this should be managed. You know 
that it should be, you are aware of the different options that 
are out there, and Governor Sebelius will be coming on board, 
and then you will sort through it. Is that----
    Mr. Orszag. Well, no, I would--OK. So there is how you 
actually manage the system itself versus how you manage the 
policy process. The policy process naturally will depend on not 
only hopefully soon-to-be Secretary Sebelius but also Nancy-Ann 
DeParle, and then clearly other members of both the economic 
and other teams will be involved--Secretary Geithner, Larry 
Summers, myself. Health care touches upon so many aspects not 
only of the economy, but of the Federal budget and State 
government. It is natural that a team effort will be required, 
and we will be presenting you with a team, and there will be 
clear points of----
    Senator Whitehouse. I am hearing you saying this is going 
to be actually managed at a very senior executive level----
    Mr. Orszag. Absolutely.
    Senator Whitehouse [continuing]. Rather than turfed off to 
an organization.
    Mr. Orszag. No. This is going to be managed at the highest 
levels, yes.
    Senator Whitehouse. I think my time has expired. Thank you.
    Chairman Conrad. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and let me add my 
voice to those who applaud the honesty in the budget and also 
some of the policy directions. We may have some differences on 
how we get there, but I think the policy directions are headed 
in the right way.
    One concern that I have is that while recognizing we are in 
this enormous economic challenge, which generated the 
requirement for the American Recovery and Reinvestment Act--and 
you have laid out a very bold agenda going forward--an area 
that may not be quite as sexy but one that I hope would get 
requisite attention is how those funds that are being spent are 
at least spent efficiently and effectively. I would like to 
hear some of your comments about both the role of the Chief 
Performance Officer, the Chief Technology Officer, and your 
Chief Information Officer, and how they are going to intersect. 
From personal experience, in Virginia when we had enormous 
budget shortfalls, it was a challenge, but it also allowed us 
to bring a great number of efficiencies to our system and 
resulted in us being named best managed state in the country.
    We found a lot of those efficiencies, I would add, not only 
through programmatic review--and I know OMB creates a hit list 
of programs that perhaps need to be reviewed, but I would just 
encourage you, as you develop these roles, to think about 
expanding oversight not just--across government, but 
particularly in the HR, technology and procurement areas, where 
I think we could see dramatic savings. I would love to see more 
emphasis on that.
    Mr. Orszag. Sure. Let me comment on two aspects of that.
    Last week, the President talked about reforms that we will 
be putting in place to procurement and contracting, so that the 
cost overruns that I talked about before will be much less 
likely to occur. The budget includes significant efforts at 
program integrity; that is, making sure that the right provider 
or the right person gets the right benefit at the right time, 
instead of having improper and erroneous payments. And, in 
fact, we dialed that up as substantially as possible based on 
hard evidence. There is $50 billion in savings from reducing 
erroneous payments based on credible evidence about what works 
and what does not in reducing them embodied in this budget: at 
HHS, in terms of improper payments to Medicare providers; at 
the Social Security Administration; in the Tax Code. And I 
think that is exactly what we need to be doing.
    In addition, the Recovery Act clearly raises a challenge in 
terms of spending the money not only quickly but wisely. We 
have already put up online Recovery.gov where there will be 
significant transparency provided; appointed a head of the 
Oversight Board, Earl Devaney, who is well known for being a 
very tough Inspector General; and are working actively not only 
with Cabinet Secretaries but with Governors and others to make 
sure this money is spent wisely and well in addition to 
quickly.
    Senator Warner. I would only add, though, that both in 
terms of ongoing, going forward, I have seen estimates in the 
past of tens of billions of dollars when we simply rationalize 
the different technology systems we have, not only across 
agencies but across secretariats. And if leveraging our 
purchasing power on the procurement side, not simply in terms 
of missed payment, but simple business practices, and at 
moments of crisis, from at least prior experience, you might 
find a Federal work force that might be more willing to make 
these kind of systemic changes during these challenging times, 
No. 1.
    No. 2, on the Recovery Act, I know you have appointed a 
very appropriate Inspector General. My hope would be that their 
role would not just be to look back, but it would also be a 
forward-looking process.
    Mr. Orszag. Absolutely.
    Senator Warner. As you are looking at certain areas like 
health care IT, which, Senator Whitehouse, is a terribly 
important area in health care reform, broadband, weatherization 
of some of the energy projects, projects that have been 
underfunded in the past, you are going to ask them to ramp up 
very, very rapidly, trying to bring in and put templates in 
place on the front end, as well as just common definitions. I 
know a lot of this is going to be driven around jobs, but if 
you have got 50 different States all defining job creation in a 
different way, it could prove to be a problem.
    These are areas that I would hope we can just continue a--
--
    Mr. Orszag. And let me just--I know we are running out of 
time. Let me just very briefly point out, the President 
appointed the person who used to be the Chief Information 
Officer for the D.C. Government. He now works at OMB as the 
Chief Information----
    Senator Warner. Prior Virginia Secretary--Assistant 
Secretary
    Mr. Orszag. Yes, and he is fabulous. We need to be moving--
we have underinvested in IT and IT efficiencies, and we need to 
be moving much more aggressively so that we are obtaining the 
benefits that many State governments and city governments have 
obtained from using information technology more intelligently. 
We need to do that at the Federal level, too.
    Senator Warner. Mr. Chairman, I simply would love to see 
this Committee at some future date spend more time on this 
effort. We may have policy differences. We may have, I think 
equally on both sides of the aisle, concerns about some of the 
deficits. But how we truly look at spending dollars more 
efficiently I think would be the subject of, I know from my 
standpoint, a great deal of interest, and probably some of the 
other members.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Warner.
    Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman.
    Governor Warner--now Senator Warner--like most Governors 
has to deal with efficiencies and productivities, and they work 
hard at it, I think generally because they have to have a 
balanced budget. We do not. But I was Attorney General, and we 
had a financial crisis, and I saved every dime I could save. I 
would just say, Senator Warner and Mr. Orszag, you are going to 
need to personally drive that if you are going to change, 
because this Congress and no administration since I have been 
here have the kind of commitment to efficiency and productivity 
that most Governors have. It is such a big Government, people 
just do not think that is important, but a few billion here and 
a few billion there can add up in the long run. And I can 
assure my colleagues, based on my experience in Government, 
that we could do a lot better, in my personal opinion.
    The example that we set by passing the stimulus package, 
$800 billion thrown together in a rush-rush manner with very 
few real amendments and that kind of thing was just stunning. 
And now we are moving forward with a package with 9,000 
earmarks. And you say, ``That is OK, we will worry about it 
next year.'' That is not a very good answer, I think as the 
Washington Post replied today, and the editorial yesterday.
    We have got to get serious about this spending. The amount 
of it is just breathtaking. In my opinion, Senator Gregg is 
just incontestably correct. This budget is more spending, more 
taxes, and more debt. That is what this budget is. It cannot be 
defined in any other way. And not just a little bit more 
spending, more taxes, and more debt. A lot of it in all three 
categories.
    And so I just want to tell you, I am prepared to do some 
things in this economic crisis and willing to work with the 
administration. But if, as Senator Gregg alluded, this 
represents a philosophical commitment by this administration to 
alter the historic vision of America as a Government of limited 
Government and lower taxes and free market capitalism, if it is 
a commitment that results in any significant change in that, 
count me out.
    So let me ask you, doesn't this budget reflect an 
alteration of a rather significant nature in the classical 
understanding of the size of the United States Government?
    Mr. Orszag. No. And, in fact, I mean, while it does 
represent a change in course, let us look at the revenue 
proposals. The revenue proposals after 2011 that are generating 
so much discussion would return the marginal tax rates for the 
top two marginal tax brackets to the levels that existed in 
1993. And at that time, just like now, catastrophe was 
predicted. If you look at the historical record, anything but 
is what occurred.
    I do not think returning marginal tax rates for the top 5 
percent of the population to what existed in 1993, which then 
kicked off a decade of strong economic performance and strong 
stock market performance, represents a dramatic----
    Senator Sessions. Do you think the tax increase kicked off 
that?
    Mr. Orszag. The policy changes that were put in place in 
1993 helped to encourage economic activity by reducing our out-
year deficits and encouraging activity, yes.
    Senator Sessions. Well, we will have a debate on it, but--
and I do not want to go into all at this point. But, of course, 
the cap-and-trade tax increase is a huge burden on the entire 
economy also. And some of that money will be given back, but if 
you look at the budget, I do not think it is expected that all 
of it will. And as Senator Gregg indicated, we are going to 
look at no paydown of the debt.
    I saw Reuters apparently today had an article that 
suggested that OMB had not directed or said to the Defense 
Department that they must delay the replacement of the 
refueling tanker, the Air Force's No. 1 priority, for quite a 
number of years, actually. What can you tell us about that?
    Mr. Orszag. What I can say is we are going to have a more 
detailed budget in April and that decisions about the tanker--
and not only the tanker, but other defense procurement 
decisions--will be left up to the Defense Department, and in 
this case the Air Force. And so the suggestion that somehow OMB 
dictated or directed this is incorrect.
    Senator Sessions. Well, what OMB has been known to do is 
they give you two or three--oh, my time is up--two or three 
alternatives, none of which are acceptable to the Defense 
Department, and they have to choose between bad choices and, in 
effect, it directs something. Is that the nature of this----
    Mr. Orszag. I think given cost overruns of almost $300 
billion in the defense budget, the Defense Department will have 
lots of options to put itself on a sounder course.
    Senator Sessions. Well, it is pretty clear to me that the 
stimulus package did a lot for a lot of different things. It 
did zero, virtually, for the Defense Department, and I am 
worried about that direction.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair. And 
welcome, it is good to have you before the Committee, Mr. 
Orszag. I must say it is a daunting challenge to lay out a road 
map to address the Bush legacy of economic disaster, but, 
nonetheless, you have undertaken that, and I think a superb 
proposal in which to chart the path out of that disaster, and 
your emphasis on education and energy and health care, I 
applaud, while you and the President taking that in your focus 
on honest accounting as well.
    I want to ask you a few detailed questions. One, in terms 
of the way you envision the option under cap-and-trade, do you 
envision it as an all-comers option or as an option possibly 
limited to those participants who need to buy credits in order 
for their carbon dioxide production? And I ask this question 
because there was a lot of discussion in the last couple years 
of how hedge funds, pension funds, and others affected the 
market in oil futures and drove up the price of oil. Is that 
something that we can avoid by how we structure this auction?
    Mr. Orszag. I think a lot of the details of how a cap-and-
trade auction system would work remain to be worked out. Is it 
upstream or downstream? Is it restricted or not?
    I would note, though, that to the extent that there are 
financial markets that exist, even if you do not auction the 
permits, financial markets can trade in the secondary market, 
and you would need an appropriate set of regulatory policies to 
govern the trading, because it is not really a question of 
whether--I know this came up before. It is not really a 
question of whether the permits are auctioned or not. It is 
whether there is secondary trading that occurs, and there will 
be secondary trading because that helps to provide liquidity to 
the permit market.
    Senator Merkley. Thank you. So it is a discussion yet to be 
had.
    Mr. Orszag. Yes.
    Senator Merkley. And details to be worked out.
    Also, I wanted to observe that I believe that you use some 
of the proceeds of the auction to sustain the tax credit for 
working Americans.
    Mr. Orszag. Yes, sir.
    Senator Merkley. And when one takes into account that tax 
credit as weighed against the higher energy costs, does an 
average family come out with higher costs or lower costs?
    Mr. Orszag. Well, it would depend on exactly how this was 
put in place, but all in all, if you look at the benefits in 
terms of Pell grants and other benefits provided through the 
budget, this budget makes the vast majority of Americans better 
off.
    Senator Merkley. Thank you. And, third, I wanted to address 
high-speed rail. I believe there was $8 billion in the stimulus 
package, then $1 billion a year for 5 years in this budget. 
That is not a lot of money when it comes to the cost of high-
speed rail in that I believe the estimate of building a rail 
line from San Diego to San Francisco is about $40 billion.
    What do you envision being accomplished with this seed 
money?
    Mr. Orszag. Well, I would say first the Recovery Act money 
was a historic investment relative to what has been done so 
far, and the budget builds upon that. The estimates of how much 
it will cost depend on what one does, so there are significant 
differences between the levitation and the very, very high-
speed rail, you know, more than 200 miles an hour, versus 
Acela-like speeds of 125 to, say, 150 miles an hour. The cost 
is very sensitive to what you mean by high-speed rail.
    Senator Merkley. Thank you.
    That is all my questions, Mr. Chair. Thank you.
    Chairman Conrad. Thank you.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Having heard the 
Director this morning in the Finance Committee on health care, 
I know he is in the middle now of a double header, and I think 
what I will do is get into a couple of other areas very 
briefly, starting with taxes.
    I think we all understand the Tax Code is going to melt 
down next year. There have been thousands and thousands of 
changes to the Code in recent years. It comes now to three for 
every working day, year in and year out.
    The administration has proposed still more changes, 
particularly in areas of charity and mortgages, and I think my 
question with respect to taxes is: How does what you are 
proposing this year on taxes fit into the prospect of tax 
reform next year when I think there is a real bipartisan 
possibility of a tax reform bill that broadens the base, cleans 
out a lot of these special interest perks, and uses that money 
to hold down rates and keep progressivity? Tell me, if you 
would, how does the set of tax changes that you are proposing 
this year fit into the prospects of tax reform next year?
    Mr. Orszag. Well, just as an example, one of the biggest 
sets of concerns or loopholes in the Tax Code involves 
international transactions for corporations. The budget 
includes $210 billion in that area. One of the biggest issues 
involves deferral of profits earned abroad. We specifically 
mention that. There are many other steps that the Treasury 
Department believes are warranted to clean out that base, as it 
were, and promote an overall tax reform, which, again, I think 
I agree with you would be desirable.
    Senator Wyden. I would like to start working with you now, 
Director Orszag, on that, because I think like health care, it 
goes right to the heart of how we are going to grow the 
economy. I think we understand that economic growth and fixing 
health care are two sides of the same coin. If you had three 
sides to a coin, you would probably put tax reform on it, too. 
So I want to start working with you on that.
    Senator Gregg has also done some very good work over the 
years on tax reform as well.
    Let me go now to something that is very important in the 
Pacific Northwest, and that is the question of funding these 
programs to fight fire.
    Mr. Orszag. Yes, sir.
    Senator Wyden. And what has happened there is the previous 
administration just pushed the Forest Service constantly, 
almost to the brink of bankruptcy, by refusing to fund the 
growing cost of wildfire fighting.
    Now, to pick up on the Chairman, I brought a couple of 
charts. The first shows how, since 1991, the fire spending by 
the agency has eaten up a larger and larger share of the 
agency's budget. By 2009, it came to 48 percent of the agency's 
budget. That is in the first chart.
    The second chart, which Ms. Miranda has, shows how the 
Forest Service, when fire spending is removed, has taken the 
biggest hit of all of the agencies. It comes to a little over 
35 percent.
    So I would like to pursue with you--and I think what you 
all did, as with much of the budget, moves in a constructive 
way because you set up what is, in effect, a contingent reserve 
account.
    Mr. Orszag. Correct.
    Senator Wyden. And I think that that is a step in the right 
direction. But we are still going to end up shorting a lot of 
these accounts, like Fish and Wildlife and Forest Management. 
And, frankly, that helps us care for the health of the forests. 
It helps us reduce the hazardous fuels. It is one of the 
reasons we will not have to spend so much on fighting fire.
    Can I continue to work with you on the question of shoring 
up these other accounts and what is, in effect, this contingent 
reserve account?
    Mr. Orszag. Absolutely, and I was scrambling to find the 
exact numbers, but the budget includes not only, if my memory 
is correct, something like $1.5 billion to reflect the average 
wildfire suppression costs, but also a $300 or $400 million 
contingent reserve precisely so that other accounts do not need 
to be robbed in order to address wildfires.
    Senator Wyden. A group of us in the House and the Senate 
have actually introduced legislation today that calls for a 
separate wildfire suppression account because of this sort of 
back-door process of robbing these funds. We want to continue 
to work with you on it.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Wyden.
    Senator Feingold.
    Senator Feingold. Thanks, Mr. Chairman. Director Orszag, 
thank you for being here, and in several ways this budget is a 
huge improvement over what we have seen over the previous 8 
years, including the fact that you include a number of 
important costs that the previous administration simply 
pretended did not exist.
    Having said that, let me ask you a few questions. The 
President includes some policies in his budget baseline as if 
they were already the law. I believe the annual hold-harmless 
patch for the alternative minimum tax is assumed, as is the 
permanent extension of the 2001 and 2003 tax cuts.
    Mr. Orszag. That is correct.
    Senator Feingold. Rather than including those policy 
assumptions in the baseline, why didn't the President just 
include those policies and their cost in his budget request, 
preferably with other policies that would offset those costs?
    Mr. Orszag. Well, I understand and respect the baseline 
that is traditionally--has been used by this Committee. The 
President feels that that does not conform to a popular 
understanding of what current policies are. And if you look, 
for example, at what the Congressional Budget Office did in its 
long-term projections, when it put forward an alternative 
fiscal scenario that was intended to capture the thrust of 
current policy, that is very similar to the baseline that is 
reflected in the President's budget.
    Senator Feingold. Let me switch to something else. The 
President insisted that the nearly $800 billion stimulus bill 
be free of earmarks, and I was pleased to see that Congress 
respected that request. Clearly, the President can have a real 
impact on this topic.
    With that in mind, what other bills will the President 
insist be free of earmarks?
    Mr. Orszag. The President feels very strongly that the 
earmarks need to be reduced even further, and that they need to 
be much more transparent. I think you are going to see we are 
actively working with the congressional leadership to come up 
with an agreement on what to do with regard to earmarks. And I 
think you will see that coming in the very near future.
    Senator Feingold. Well, I hope he goes back to what he did 
on some occasions with the stimulus bill as saying no earmarks. 
I would recommend that as a strategy in the future.
    If Congress passes legislation giving the President 
authority to rescind earmark spending along the lines of the 
line-item veto bill that I introduced recently, will the 
President sign that bill into law?
    Mr. Orszag. The President during his campaign spoke about a 
line-item veto that would need to be done in a constitutionally 
valid way. Enhanced rescission powers are also a possibility. I 
would note that even under current law, after passage of 
legislation, the President can propose a package of 
rescissions. And so any piece of legislation that is enacted, 
including the omnibus, can be reviewed by the administration 
and a package of rescissions can be proposed, which has 
happened in the past.
    Senator Feingold. But would he be inclined to sign a bill 
that provides for an enhanced rescission/line-item veto 
approach that he believes is constitutionally permissible?
    Mr. Orszag. Inclined, yes. Of course, we would have to look 
at the specifics.
    Senator Feingold. Fair enough. I commend the President for 
committing to use only emergency off-budget funding for the 
incremental costs of ongoing overseas operations and not for 
base or ongoing activities, such as security assistance and 
enhancements to intelligence surveillance and reconnaissance 
activities. I do not think we should be increasing the deficit 
to pay for such foreseeable operations or predictable recurring 
costs. Those items should be included in the regular budget.
    With that in mind, what definition of war costs will you be 
using as you prepare the supplemental for overseas operations? 
Explain to the Committee how you will draw the line between 
procurement that should be funded using emergency spending and 
that which should not?
    Mr. Orszag. The goal, again, is to--let me back up. Too 
much of the supplementals that have occurred over the past few 
years have actually reflected base funding, and we are trying 
to move that stream of funding into the base budget, as would 
be more appropriate.
    You will see a supplemental, we will be coming to you with 
a proposal over the next few weeks which is necessary to fund 
the war, and I think you will see at that point the definition 
that we are adopting. The budget includes a $75 billion 
supplemental for the remainder of this fiscal year for the war.
    Senator Feingold. Thank you, sir.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Feingold. Thank you, 
Director Orszag.
    A couple of quick things I would like to review with you. 
It is our understanding that we will have sufficient functional 
detail from the administration so that we could write a budget 
during this work period. Is that----
    Mr. Orszag. That is my understanding also, yes.
    Chairman Conrad [continuing]. Your understanding?
    Second, with respect to climate change legislation, this is 
going to be extraordinarily difficult to accomplish. Tip 
O'Neill once said, ``All politics is local.'' I represent a 
State that--most people do not think of North Dakota this way, 
but we are an energy State. We are a large oil and gas 
producer. We are a large coal producer. We generate electricity 
for nine States from the State of North Dakota. Climate change, 
frankly, in North Dakota would be quite welcome.
    I say that--you know, press, do not run out and say that 
Conrad said climate change would be welcome. That is a joke.
    But the reality is I find it unlikely that climate change 
legislation will pass that does not have some allocations 
reserved for especially hard-hit industries. You know, I think 
that is just a reality. And there is increasing talk--I 
certainly hear it--of the use of reconciliation for the purpose 
of climate change legislation. I think that has a series of 
challenges attached to it as well, especially given the Byrd 
rule. And I hope people are thinking very carefully about how 
all these things intersect:
    No. 1, the effect of the Byrd rule in writing substantive 
legislation here. We have been told by parliamentary experts 
that if one tried to write comprehensive legislation using 
reconciliation, the legislation, once the Byrd rule had been 
applied, would look like Swiss cheese.
    No. 2, if we were to move it in reconciliation, then only a 
simply majority vote would allow the prevailing side to advance 
legislation. I think there are an awful lot of Senators who are 
on the margins on this issue who would be very concerned to see 
their leverage reduced by that mechanism.
    And, third, the notion that there be no allocations for 
especially hard-hit industries tells me the prospect of 
succeeding in legislation would be an even more distant hope.
    So I hope people are open to understanding that, you know, 
everybody has their own view, but to accomplish big things 
takes compromise around here.
    That takes me to the question of this budget. What is the 
White House view with respect to the budget and the committees 
that have responsibility here? Is there a willingness to have a 
back-and-forth here to try to get a budget that can pass? Or is 
it the feeling that we ought to take the budget that has come 
here and pass it pretty much as is?
    I say this because I have colleagues coming to me now every 
day, every time I go to the floor, another colleague comes and 
sits down beside me and says, ``If this is it, don't count on 
my vote.'' I have had enough colleagues now tell me that about 
enough provisions in this budget to absolutely assure we cannot 
pass a budget. I gave a speech at noon to our caucus and told 
them, ``Please don't be drawing lines in the sand.'' I have 
tried not to draw lines in the sand. I hope the administration 
is not going to draw lines in the sand.
    What can you say with respect to that?
    Mr. Orszag. Well, let me say a couple things.
    First, we had a policy process, and we think that the set 
of proposals in here reflects our best judgment about the right 
way of moving forward. I understand that other folks have 
different ideas, and I hope you know I have a reputation for 
working with you, and I look forward to doing that.
    I would also note, though, the difficulty of wanting to do 
even more deficit reduction, concerns about some of the revenue 
proposals, concerns about some of the spending reductions, and 
how it will all fit together. So, absolutely, I want to work 
interactively and we want to work interactively with you. I 
would just come back and say we went through a policy process. 
This reflects our best judgment, and we look forward to working 
with you to get to a budget resolution.
    Chairman Conrad. Well, I found interesting reading in the 
New York Times about reactions to some of our reactions here to 
the budget. Let me just make very clear from my perspective, we 
have got an obligation to take what the administration has sent 
us. We have great respect for it. I have tried to say that 
publicly. But, you know, we have got a responsibility here, 
too, and if we do not get the votes, it is kind of an empty 
exercise. And getting the votes--anybody who thinks it is going 
to be easy to get the votes on a budget in the conditions that 
we face is smoking something.
    I would add two things. On the question of the limits on 
deductibility, I have heard from many members concerns about 
that--the effect on charities, the effect on housing when there 
is already a housing downturn. So that has clearly in the 
budget proposal come up. It is one hot spot area. No doubt you 
have heard it as well.
    Second was on agriculture, and, you know, I represent an 
agricultural State. I just spent the last year and a half 
getting a farm bill passed, and we paid for the farm bill. We 
paid for the farm bill. But precious little else is paid for 
around here, and I was a little taken aback to read that people 
are suggesting somehow the farm bill was not financially 
responsible or fiscally responsible, because of all the things 
that have occurred around here in the last 2 years, one of the 
very few that was actually paid for--and it was done at my 
insistence--the farm bill was paid for. So we made a lot of 
tough choices. We raised money. We made spending reductions.
    And so those who suggest it was not fiscally responsible, I 
do not think they are very aware of the history of how we got a 
farm bill passed here with 81 votes, overcoming two 
Presidential vetoes, and reopening that at this moment is 
probably not a real propitious way to advance this budget.
    With that, I would call on my colleague.
    Senator Gregg. Thank you, Mr. Chairman.
    You did not ask the question, so I will ask it: Does the 
administration support the use of reconciliation relative to 
the carbon tax, also known as a national sales tax on energy?
    Mr. Orszag. What we have said with regard to both health 
care and energy is that we would prefer not to start there. But 
we are not taking anything off the table at this point.
    Senator Gregg. Well, I would just make the point that 
reconciliation is a very unique vehicle. I do not recall in my 
experience--and I think that reconciliation has been used most 
aggressively during the period that I have had the chance to 
serve in the Congress, so I think I have been there for the big 
reconciliation events--that it has ever been used on an issue 
that is ab initio of the size of the national sales tax on 
energy, or on an issue that is as all-encompassing and as 
complex as health care.
    It has, obviously, been used aggressively--aggressively on 
a lot of authorization bills, a lot of authorizing areas, and 2 
years ago it was used very aggressively in the student loan 
area, which I would represent is one of the reasons why the 
private sector is not necessarily doing so well on student 
loans. And it has obviously been used on tax policy, but not on 
rewriting the entire tax laws. That was done in an open-field 
event in the 1986 act.
    So to initiate a reconciliation effort in the area where 
you are basically creating a brand-new, massive exercise in an 
attempt to address global warming, with a carbon tax and cap-
and-trade and all the different ramifications of that, would 
be, I believe, to depart from the purposes of reconciliation 
and create real consternation, if not outright--well, it would 
be an act of violence against the system here in the Senate, in 
my opinion, of open debate. And you probably are not going to 
get to where you want to go if you did that. I do not think you 
can do it on health care, anyway, because of all the Byrd rule 
issues. But I am not so sure about the carbon tax.
    So I think the fact that the administration has not taken 
that off the table probably undermines the ability to draw in 
people like Senator Alexander and myself, and Senator Graham, 
who have all been sponsors in the past of initiatives in the 
area of limiting emissions, because we will be concerned that 
if we step into this exercise, we will be blindsided with a 
reconciliation exercise. And there is no point in stepping into 
the exercise if we are going to be shut down in our ability to 
influence it. So I think that is a concern--not that you really 
care.
    On the issue of----
    Mr. Orszag. I do care, but OK.
    Senator Gregg. On the issue of the budget, I am entertained 
by the fact that we are not going to get the specifics of the 
budget until after we pass the budget. You parried a number of 
questions from my colleagues on the other side with the 
statement, ``Well, when we send up the real budget in April, we 
will have more specifics on that.'' By the time you send up the 
real budget in April, we will have passed the budget.
    Mr. Orszag. As you know, it is normal during a transition 
year to put forward an overview like we have done. You have 6 
weeks to put together something that normally takes 6 months, 
and then to followup with a more detailed budget thereafter, 
that is exactly what has happened during past transitions also.
    Senator Gregg. Do you then expect that your serious budget 
with the serious detail is going to come to the Congress after 
the Senate has voted on its budget and the House has voted on 
its----
    Mr. Orszag. Let us be clear about what you are filling in. 
You are filling in below the top lines for each agency the 
detailed appropriations that----
    Senator Gregg. Well, you are putting in enough so that you 
could not answer questions here today that were asked. There 
were three questions asked----
    Mr. Orszag. One was on tankers--what were the other 
questions that I could not answer?
    Senator Gregg. There were three of them--and I have 
forgotten the specifics--on the issues, and you said, well, 
when we get the budget----
    Mr. Orszag. I think they all were with regard to sub-total 
discretionary questions, which are decided as part of the 
appropriations process later in the year.
    Senator Gregg. So you expect your----
    Mr. Orszag. We have provided the top lines in the 
functional numbers that you need to write a budget resolution.
    Senator Gregg. But the detail is not going to come until 
after the budget resolutions are voted on.
    Mr. Orszag. But the budget resolutions do not govern that 
sub-detail. So, in other words, we are providing the level of 
detail----
    Senator Gregg. You do not think when a budget goes to the 
floor of the Senate that there is not a lot of discussion about 
what the detail of those gross numbers is?
    Mr. Orszag. I will defer to this Committee's judgment, but 
I believe this is exactly what always happens during a 
transition year, and we are providing the information you need 
to write a budget resolution.
    Senator Gregg. Well, that may be, but I would think that it 
would be incomplete if you are not going to put the meat on the 
bone before we have the votes on the issue.
    You said you support rescission, and you have the authority 
for rescission, so in the omnibus which we are about to vote on 
right now, what will you--will you be sending up rescissions 
relative to earmarks?
    Mr. Orszag. The normal process is to have legislation 
enacted. The administration then has the ability to propose a 
set of rescissions, and so at the appropriate time, we can come 
back to you, if it is appropriate, with a package of 
rescissions.
    Senator Gregg. Well, since the majority--and it has the 
right to do this--is not allowing any amendments to this 
package to pass--they are allowing us to offer them, and I 
greatly appreciate that courtesy, and I think it is 
appropriate. But they have got the votes to stop them. So we 
know what the form of the omnibus is, and you have known it for 
a while since you helped write it. And, therefore, my question 
would be----
    Mr. Orszag. Well, I did not--the administration has not 
been involved in writing the omnibus at all, period. And, in 
fact, I want to emphasize this. There have been Cabinet 
Secretaries who have wanted to come up to the Hill to ask for 
this or that as part of the omnibus. The administration has not 
been involved in writing this omnibus legislation. It was 
largely done last fall, and that is what it is.
    Senator Gregg. Well, it was not largely done last fall. The 
add-ons occurred between last fall and now. It occurred since 
you have taken office. But let us accept the fact that you were 
not involved in writing those add-ons, but you have had a 
chance to read it, because it has existed for a while. It 
passed the House. It is going to pass the Senate. Is there 
nothing in this bill that is going--as it has passed the House 
and is going to pass the Senate today, that you will send--that 
you can tell us today you are going to send a rescission up on?
    Mr. Orszag. Again, I want to allow the legislation to be 
enacted. We will then review it as enacted, and if it is 
appropriate, we will be proposing, as the President is allowed 
to do, a package of rescissions, which the Congress can then--
--
    Senator Gregg. The President has said he is opposed to 
earmarks. There are 9,000 earmarks in this bill. Could we 
presume that the President will send a rescission package up 
covering five of those?
    Mr. Orszag. I do not want to get in this game of 
presumption, but, again, you are correct that the level of 
earmarks in this legislation is higher than the President would 
have liked.
    Senator Gregg. Thank you. I appreciate your time.
    Mr. Orszag. Thank you, sir.
    Chairman Conrad. Thank you. Thank you, Director Orszag. 
Thanks for your service. Thanks for your extraordinary hard 
work coming into an incredibly challenging environment and 
doing a very professional job. We appreciate it.
    We will stand adjourned.
    [Whereupon, at 4:20 p.m., the Committee was adjourned.]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



THE PRESIDENT'S FISCAL YEAR 2010 BUDGET PROPOSAL FOR THE DEPARTMENT OF 
                                 ENERGY

                       WEDNESDAY, MARCH 11, 2009

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

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to welcome Secretary Chu here to the Senate Budget 
Committee. Welcome. Good to have you here.
    Secretary Chu is one of the Nation's leading scientists. In 
1997, he was a co-winner of the Nobel Prize for Physics. Prior 
to his nomination by President Obama, he was Director of the 
Department of Energy's Lawrence Berkeley National Lab. He was 
Director of the Department of Energy's Lawrence Berkeley 
National Lab and a professor of physics and molecular and cell 
biology at the University of California. As a proud graduate of 
Stanford, we still respect the University of California, I want 
to assure you of that.
    [Laughter.]
    Chairman Conrad. At Lawrence Berkeley, he steered the lab's 
effort in pursuit of new alternative and renewable energies, 
and so he is ideally suited to lead the Department of Energy at 
this time. We are pleased that Secretary Chu could join us, and 
we look forward to his testimony.
    I do not believe it has ever been more clear that our 
Nation's economic and national security are directly linked to 
our energy policy. We simply must address our Nation's 
addiction to foreign oil and confront the challenge of global 
climate change. And in the process, we can create new green 
jobs and an alternative energy and energy efficiency that will 
help our Nation's economy recover.
    The fact is we are still dangerously dependent on foreign 
oil. In 1985, we imported only 27 percent of our petroleum. We 
now import almost 60 percent of the petroleum that we use. As a 
result, we are becoming increasingly vulnerable to oil supply 
disruptions and instability in other parts of the world.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    This addiction to foreign oil is a direct threat to our 
national security. Many of the countries from which we import 
petroleum are in unstable or unfriendly regions. Here is a list 
of the top 15 countries exporting petroleum to the United 
States in 2008 and the number of barrels of oil we import in a 
single day. You can see that we import large quantities of oil 
from countries like Saudi Arabia, Venezuela, Nigeria, Angola, 
Iraq, Algeria, and Colombia.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    We must also address climate change. The scientific 
consensus is clear. Here are the conclusions of the 
Intergovermental Panel on Climate Change, and I quote: 
``Warming of the climate system is unequivocal, as is now 
evident from observations of increases in global average air 
and ocean temperatures, widespread melting of snow and ice, and 
rising global average sea level. Continued greenhouse gas 
emissions at or above current rates would cause further warming 
and induce many changes in the global climate system during the 
21st century. We have an obligation to current and future 
generations to take meaningful action to reduce greenhouse gas 
emissions.''
    The economic recovery package included some key energy 
investments to begin to address these issues. It included $11 
billion for a downpayment on modernizing the electrical grid; 
$6.3 billion for local government energy efficiency and 
conservation grants; $6 billion for renewable energy and 
transmission loan guarantees; $5 billion for weatherization 
assistance; $3.4 billion for carbon capture and sequestration 
technology; $2.5 billion for energy efficiency and renewable 
energy research and development; and $2 billion for advanced 
battery development.
    President Obama's budget takes further steps. The budget 
includes $26.3 billion in discretionary funding for the 
Department of Energy for 2010. The President's cap-and-trade 
proposal would reserve $15 billion of revenue beginning in 2012 
for clean energy technology. And the budget builds on 
investments in the economic recovery package by increasing 
support for solar, biomass, wind, and geothermal energy; 
advancing development of low carbon coal sequestration; 
investing in transmission infrastructure to improve energy 
efficiency and reliability; and providing significant increases 
for basic research and science. We look forward to hearing more 
details from Secretary Chu.
    Despite these advances in energy policy and new commitments 
of funding to energy, it is clear that this is going to require 
a sustained effort for years to come. Here was a headline in 
the Washington Post just last month: ``Alternative energy still 
facing head winds despite Obama's support. Projects tripped up 
by financing and logistics.'' So we know addressing our 
addiction to foreign oil and global climate change will not 
come easily, but it must be done.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    With that, I want to turn to my colleague Senator Gregg for 
his opening remarks, and then we will go to Secretary Chu for 
his opening statement, and then we will go to 7-minute 
questioning rounds. Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and it is a great 
honor to welcome Secretary Chu here, and to have him serving in 
the Government. We really appreciate that someone of your 
stature and ability has chosen to come into the Government.
    I am concerned, as the Chairman is, about our reliance on 
foreign oil. I think we as a Nation, if we are to address not 
only our national security needs but our economic concerns, 
have to do something about this. That is why I was a strong 
supporter of the initiatives on which we had some traction last 
year but, unfortunately, have been recently sidetracked by this 
administration, which is, to summarize, drill more domestic 
product and conserve more.
    I am also concerned about climate change, and I think we 
should try to move away from carbon-based production of energy. 
And that is why I have been a strong supporter of nuclear 
power. And I am genuinely concerned about this administration's 
approach to nuclear power.
    If you look at the recent stimulus bill that was passed, 
stripped from that bill was $50 billion of loan guarantees 
which would have helped us fund an expansion of nuclear power. 
If you look at the proposals of this administration relative to 
Yucca Mountain and the disposal of waste, it is basically a 
proposal which, as I understand it, says we have no options for 
disposing of waste. And we know that under the licensing 
procedure, you cannot really license unless you can adequately 
address the waste issue. So this is a back-door way of limiting 
licenses of new plants, in my opinion. Rather than formally 
saying the administration is not going to license new plants, 
it is being done in an indirect way but not making available 
adequate waste disposal initiatives; therefore, the 
administration will not be able to license new plants.
    It seems to me we are cutting off our nose to spite our 
face when we abandon nuclear or limit what is a genuine renewed 
interest in the use of nuclear, because nuclear is emission 
free and it is a hugely productive source of energy, already 
producing 20 percent of our electricity in this country. And 
compared to renewable electricty sources, nuclear dwarfs their 
capability of production. If you double the amount of energy 
that we produce in this country from wind and solar, which I 
would love to see us do, you still are only going to supply 4 
percent of the Nation's electricity for consumption. If you 
double the amount of energy we consume from nuclear, you would 
get 40 percent of the Nation's electricity. This is very, very 
doable. All we have to do is support it with the resources on 
the loan side and have a licensing process which is reasonable.
    So I want to hear specifically from the Secretary on the 
administration's position on nuclear. Are you for it or are you 
against it? If you are for it, how many plants do you plan to 
license in the next 4 years? And what is the timeframe for 
licensing? And what is the timeframe on coming up with a 
proposal on waste disposal?
    I think this is critical to our ability to lessen our 
dependence on oil and to address the climate change issues 
which are so essential. So I look forward to the Secretary's 
testimony, and thank you for being here.
    Chairman Conrad. Thank you, Senator Gregg. And, again, 
Secretary Chu, welcome to the Senate Budget Committee, and we 
hope we have many more appearances by you during your tenure. 
And we are delighted that you have accepted this position of 
responsibility. Please proceed.

 STATEMENT OF HONORABLE STEVEN CHU, SECRETARY, U.S. DEPARTMENT 
                           OF ENERGY

    Secretary Chu. Thank you, Chairman Conrad, Ranking Member 
Gregg, and members of the Committee. Thank you for giving me 
the opportunity to appear before you to discuss the President's 
fiscal year 2010 budget.
    Before I begin, I have to also note that I spent 17 years 
at Stanford, and----
    Chairman Conrad. You know, I thought you looked especially 
bright.
    [Laughter.]
    Secretary Chu. And my wife spent 30 years at Stanford. She 
was the chief of staff of two presidents of Stanford, Dean of 
Admissions, although trained with a Ph. in physics. But, 
anyway--so I have divided loyalties. I am also very loyal to 
University of California-Berkeley.
    The President's budget recognizes the enormous challenges 
and threats we face because of the ways we use energy. Today, 
as you indicated, we import roughly 60 percent of our oil, 
draining resources from our economy and leaving it vulnerable 
to supply disruptions. Much of that oil is controlled by 
regimes that do not share our values, further weakening our 
security. Additionally, if we continue our current rates of 
greenhouse gas emissions, the consequences for our climate 
could be disastrous.
    If we, our children, and our grandchildren are to prosper 
in the 21st century, we must decrease our dependence on oil, 
use energy in more efficient ways possible, and lower our 
carbon emissions. Meeting these challenges will require both 
swift action in the near term and a sustained commitment for 
the long term to build a new economy, powered by clean, 
reliable, affordable, and secure energy.
    The President took several strong steps toward that goal 
with the American Recovery and Reinvestment Act. As President 
Obama says, this act is putting Americans back to work doing 
the work America needs done. Let me highlight a few of its 
provisions on energy.
    First, the Recovery Act will create new jobs making our 
homes and offices more energy efficient. It includes $5 billion 
to weatherize the homes of low-income families; a $1,500 tax 
credit to help homeowners invest in efficiency upgrades; $4.5 
billion to ``green'' Federal buildings, including reducing 
their energy consumption; and $6.3 billion for State and local 
efficiency and renewable efforts.
    The Recovery Act also includes $6 billion for loan 
guarantees and more than $13 billion in estimated tax credits 
and financial assistance instruments that may leverage tens of 
billions in private sector investment in clean energy and job 
creation. This will help clean energy businesses and projects 
get off the ground, even in these difficult economic times. The 
bill also makes investments in key technologies, such as $2 
billion in advanced battery manufacturing, $3.4 billion for 
fossil energy research and development in support of clean coal 
efforts, and $4.5 billion for our efforts to modernize the 
electric grid.
    Getting this money into the economy quickly, carefully, and 
transparently is a top priority for me. I know that your 
constituent States, localities, businesses, and other entities 
are eager to move forward and are seeking more information 
about how to access this funding. I have met with many of them 
already, and we will have much more detail in the coming weeks.
    The President's fiscal year 2010 budget will continue this 
transformation to a clean energy economy, while returning to 
fiscal responsibility. The President has pledged to cut the 
deficit he inherited by at least half by the end of his first 
term. But even as we make the hard choices to begin to bring 
down the deficit, the President's budget will make strategic 
investments in America's economic future--investments that have 
been delayed for far too long. It lays the groundwork for our 
future prosperity by bringing down the high cost of health 
care, by giving all of our children a world-class education, 
and by reducing our dependence on foreign oil and creating 
millions of clean energy jobs.
    The President's fiscal year 2010 budget provides $26.3 
billion for the Department of Energy, with investments in basic 
science and in clean energy technologies, while securing and 
properly managing our Nation's nuclear materials. The 
development of this budget carefully considered the funding in 
the Recovery Act for the Department of Energy and complements 
those investments. The line-by-line details of the fiscal year 
2010 budget are not yet final, but I would like to share with 
you a few of our priorities.
    Investing in Science. The President has set a goal of 
doubling Federal investment in the basic sciences. As part of 
that plan, the 2010 budget provides substantially increased 
support for the Office of Science. It increases funding for 
climate science--a critical area of concern--and continues 
America's role in international science and energy experiments. 
The budget also invests in the next generation of America's 
scientists by expanding graduate fellowship programs in 
critical energy-related fields. The funding builds upon the 
$1.6 billion provided in the Recovery Act for basic science 
programs at the Department of Energy.
    To encourage the early commercial use of innovative clean 
energy technologies, the budget supports loan guarantees to 
help these projects get off the ground. These include renewable 
energy projects, transmission projects, and carbon 
sequestration projects that avoid, reduce, or sequester air 
pollutants and greenhouse gases. It also provides support for 
research, development, deployment, and commercialization of 
biofuels, renewable energy, and energy efficiency projects. It 
also allows us to exploit our huge domestic coal resources with 
reduced harmful greenhouse gas emissions. The budget supports 
carbon capture and storage technology. This is in addition to 
the $3.4 billion provided in the Recovery Act for low carbon 
emission coal power and industrial projects. Together, these 
investments will reduce our dependence on oil and create 
sustainable green industries that will power our economy long 
into the future.
    As part of the President's plan to modernize the Nation's 
electric grid, the budget provides support for the Office of 
Electricity Delivery and Energy Reliability. Goals of this 
program include improved energy storage, security, smart grid 
technology, and reliability. A new smart grid will be more 
reliable, more secure, and quicker to recover from disruptions.
    To enhance our security, the budget increases our efforts 
to secure and dispose of nuclear material and invests in 
innovative technology to detect and deter nuclear smuggling and 
weapons of mass destruction programs. Under this budget, 
development work on the Reliable Replacement Warhead will 
cease, while we will continue to make investments to ensure the 
nuclear stockpile's safety, security, and reliability. We will 
also improve performance and accountability for the 
environmental legacy of our Nation's nuclear weapons program.
    Meanwhile, the budget begins to eliminate funding for Yucca 
Mountain as a repository for our Nation's nuclear waste. Both 
the President and I have made clear that Yucca Mountain is not 
a workable option and that we will begin a thoughtful dialog on 
a better solution for our nuclear waste storage needs.
    For the longer term, the President has pledged to work with 
Congress to design a cap-and-trade system to reduce greenhouse 
gas emissions. Such legislation will place a market-based cap 
on carbon emissions and drive the production of more renewable 
energy in America. It will provide the framework for 
transforming our energy system to make our economy less carbon 
intensive and less dependent on oil.
    Our energy agenda is an ambitious one, but it is the right 
one. We simply cannot afford to put off these investments any 
longer. But with the leadership of the President, the actions 
of this Congress, and the support and participation of the 
American people, I am confident that we will succeed.
    Thank you, and I would be glad to answer your questions at 
this time.
    [The prepared statement of Secretary Chu follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you very much for that opening 
statement, Mr. Secretary. Let me begin talking about your basic 
philosophical construct as you approach the question of how we 
would reduce our dependence on foreign energy.
    I have been part of a group that was dubbed by the media 
``the Gang of 10``--later it became a group of 20, evenly 
divided between Democrats and Republicans--that advocated a 
comprehensive approach to reducing our dependence on foreign 
energy, including increasing domestic production; dramatically 
ramping up conservation; a very strong investment in 
renewables, wind, solar, plug-in hybrid; an overarching goal of 
getting our transportation sector moved off of carbon-based 
fuels over the next 20 years; nuclear power, support for 
nuclear power was part of this. So the basic vision guiding 
this group was doing some of a lot of different things in order 
to dramatically reduce our dependence on foreign energy.
    Could you give us how you see it, how you approach this 
problem? What is it that informed your decisions that you will 
be making?
    Secretary Chu. Well, I have to say I agree with just about 
everything you said. Many approaches have to be used 
simultaneously. In terms of conservation of energy, that is--in 
terms of decreasing our dependence on foreign oil, that is the 
quickest thing we can do, improve CAFE standards, things of 
that nature.
    The Department of Energy will be investing a great deal in 
battery technology to make plug-in hybrids a reality. Roughly 
60, maybe 65 percent of the transportation energy we use is in 
personal transportation. Most of that personal transportation 
is 40, 50 miles or less per day. So if you can offload that 
demand and have access to other forms of generating energy via 
electricity, that would decrease our dependence.
    I think biofuels has great potential; that is to say, 
biofuels, what I would call ``fourth-generation biofuels,'' 
where we can take bio wastes--wheat straw, half the corn 
stover, lumber wastes, as well as very rapidly growing grasses 
that do not require that much energy input. There are 
estimates--for example, an Oak Ridge study that says there 
could be a billion tons of this material and converting a 
billion tons to 100 gallons of ethanol per ton will actually 
add a tremendous amount of roughly more than half of our 
current transportation needs.
    So I think there is a real possibility for all of those 
things. So just go down the route, I think nuclear has to play 
a very important role in this century for our energy needs. The 
nuclear energy that can be generated, at night you can recharge 
your plug-in hybrid cars.
    Chairman Conrad. Let me ask you this, if I could. Another 
part of the effort was to support carefully thought through 
offshore drilling. Our group concluded, while that is no silver 
bullet, it is not going to solve the problem, nonetheless it is 
an important part of the mix.
    Do you have views on offshore drilling?
    Secretary Chu. Well, yes, I think if it is part of the mix, 
and realizing that it can play a role, but it really has to be 
part of a much more comprehensive plan. As you stated and as I 
said, we have to break our dependence on foreign oil, but we 
will be finding oil substitutes and decreasing our unnecessary 
use of oil. But there is part of the transportation sector--in 
airplanes, in long-distance trains, long-distance trucks--that 
for the near-term future we need liquid transportation fuels.
    Chairman Conrad. I have less than 3 minutes left. Let me 
just say we are asking everybody to have 7-minute rounds on the 
first round here today, a little more time than we had 
yesterday, because we are not backed up against a vote. So I 
want to get as quickly as I can to the questions that I have.
    Coal. I come from the State of North Dakota. Most people 
think of that as an agricultural State, and indeed we are, and 
proud of it. But we are also a major energy State. Very few 
people think of us that way, but we are one of the major oil 
and gas producers, have major coal deposits. And I see this 
battle every night on television about coal, and some 
advocating clean coal technology, carbon sequestration, 
recognizing that 50 percent of our electricity currently comes 
from coal. I see these other ads running that say there is no 
such thing as clean coal and it is all a ruse and a farce.
    What would you say to the American people, what would you 
say to this Committee and to the Senate of the United States 
with respect to coal?
    Secretary Chu. Well, I think that coal again in this 
century will have to play a part of our energy mix. It is 
abundant. There are four countries that hold two-thirds of the 
known coal reserves. The U.S. is in No. 1. It has the largest 
reserves of coalalong with China, India, and Russia.
    To my associates and friends who say that Americans should 
stop using coal, I would say we have to--I would counter that 
by saying we have to develop clean coal technologies because 
India and China will not turn their back on coal. And I do not 
think the United States will. And I think it is very possible 
that we can begin to develop these technologies aggressively so 
that we can trap a large fraction of the carbon emitted from 
these coal plants. It is a necessity given the fact that the 
world has incredible coal reserves.
    Chairman Conrad. I have just 30 seconds left. If I could 
just pursue that issue, what are the realistic prospects for 
carbon sequestration? Can you give us your insight there?
    Secretary Chu. We need to pilot existing technologies 
simultaneously, existing technologies that can capture some 
reasonably large fraction, at least to get in parity with 
natural gas as a minimum.
    Chairman Conrad. And what would that be as a percentage, 
realistically?
    Secretary Chu. A percentage of how much carbon? I would 
hope that we could capture 60, 70 percent at the start, and 
then do the research that brings into economic viability to go 
to 80, 90-plus percent. But I do not want to start by saying we 
have to begin with 90, 95 percent. So we want to get it going. 
We have to test technologies.
    In the meantime, I plan to put a lot of money into research 
to test new ideas that could revolutionize, but the existing 
technologies we need to start piloting today.
    Chairman Conrad. Thank you.
    Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman.
    Mr. Secretary, first off, I appreciate your allusions 
alluding to the fact that you do support nuclear as an option 
here. But I look at the constituencies who have been active in 
the Democratic Party, and many of them actively oppose nuclear 
power. My own experience in New Hampshire as Governor was that 
we were trying to bring online the last nuclear power plant 
licensed in this country, which was called Seabrook, and it 
took us an extra 15 years, cost the ratepayers in New Hampshire 
an extra $1 billion because of the extremely aggressive 
opposition to the use of nuclear power, which was mostly 
affiliated with members of the Democratic Party in our State. 
And so I think there is at the core of the party that you 
represent a real resistance to using nuclear power, and we 
ought to be honest about that.
    So my question to you: Is this administration going to 
support the licensing of new nuclear power plants? The Nuclear 
Regulatoroy Commission expect 22 applications for 33 units 
through 2011. Will any of those plants be limited in their 
ability to be licensed because the administration is no longer 
going to pursue Yucca--which I can accept if you had another 
option? Of the 33 units that are expected, how many will be 
licensed in the next 4 years?
    Secretary Chu. OK. So I think I have been very clear since 
joining the Administration, and actually previous to that, that 
I believe that nuclear power is an essential part of our energy 
mix. It provides clean baseload generation of electricity.
    In terms of the Yucca Mountain issues and nuclear waste, I 
think looking back at how that started----
    Senator Gregg. I do not want to debate Yucca.
    Secretary Chu. OK.
    Senator Gregg. Because I accept the fact that Yucca may not 
be viable.
    Secretary Chu. So what I intend going forward to do is 
begin to discuss with various people a blue-ribbon panel to 
say, OK, let us develop a long-term strategy that must include 
the waste disposal plant in order to go forward.
    Senator Gregg. But are you going to limit the licensing of 
these 32 units until you complete this, as you called it, 
``thoughtful dialog''?
    Secretary Chu. No, I do not--first, the NRC does the 
licensing, and----
    Senator Gregg. Right. What will be the policy of the 
administration?
    Secretary Chu. Well, I do not think the NRC should be 
limiting that or putting the licensing on hold, quite frankly, 
because the NRC has also said that we can put in the waste 
currently we now have and distribute it into dry cask storage. 
That dry cask storage could be safe for decades while we 
develop this energy. Within this year, we hope to develop a 
plan to move forward. So I do not see that as preventing going 
forward with aggressive licensing, quite frankly, but, again, 
that is the NRC's domain.
    Senator Gregg. Will you be promoting additional lending 
authority--for example, $50 billion was taken out of the 
stimulus package--to assist in the construction of nuclear 
power plants?
    Secretary Chu. I would actually be in favor of increasing--
we have $18.5 billion. We are moving very aggressively toward 
getting that money out the door.
    Senator Gregg. But that only will do three to five plants, 
so there was $50 billion in the pipeline that was taken out. 
Would you support putting that guarentee back in?
    Secretary Chu. Well, let us just say I would support 
encouraging the nuclear industry to grow, at least. We are 
right now focused on starting the next generation of power 
plants, getting a generic licensing of the Westinghouse and GE 
designs, and so you can accelerate that. You get, for example, 
the AP1000 license, and then a much shorter licensing period 
for a particular site. So we are working hard and helping get 
those initial generic licensing through the door with the NRC.
    So I know you are a little bit suspicious, but believe me, 
I want to encourage this thing to go forward.
    Senator Gregg. Well, I appreciate that, and I think your 
voice would be extraordinarily helpful because you are so 
highly regarded for your expertise.
    Another question. You outlined a series of different 
sources where you could produce ethanol without having to put 
more in than you got out, to put it simply.
    Secretary Chu. Right.
    Senator Gregg. Switchgrass and other types of biomass. 
Doesn't the present subsidy structure of ethanol, which 
perversely promotes corn, undermine the ability to aggressively 
pursue those other forms of biomass?
    Secretary Chu. No, I don't really think so, but let me also 
say that currently, with present technology, we don't have a 
cost-competitive technology of getting cellulose waste and 
grasses. But I actually have great hope that that will come 
about.
    I have personally invested a lot of my time over the last 
four-and-a-half years at Lawrence Berkeley Lab. As you may 
know, Lawrence Berkeley Lab with UC-Berkeley and Illinois 
haveten a BP contract for converting cellulosic sources into 
not only ethanol, but more advanced fuels, and the Department 
of Energy has invested in three research laboratories, one 
centered in Wisconsin, one centered in Lawrence Berkeley Lab, 
and one centered at Oak Ridge, to create advanced biofuels.
    The progress in those labs has been remarkable, even though 
they have only been in operation about 1 year. Berkeley Lab has 
already generated yeast and bacteria that can create out of 
simple sugars not ethanol, but gasoline and diesel-like fuel. 
And so they are now concentrating on getting that productivity 
up so it becomes commercially viable.
    The reason BP has invested half-a-billion dollars in the 
University of California Berkeley Lab and Illinois is because 
they think it is actually a real possibility of a new business. 
So I am pretty optimistic.
    Senator Gregg. That is good to hear. Natural gas--shouldn't 
we be drilling for a lot more natural gas in the United States? 
Our nation has the potential to tap into our huge natural gas 
reserves and we are always hearing about new ones being 
discovered across the country. Shouldn't we be more 
aggressively using natural gas and drilling for it, and 
drilling for it in the Outer Continental Shelf?
    Secretary Chu. Well, I think natural gas is a very clean 
source of energy. Of all the fossil fuel energies, natural gas 
is the cleanest. It does have carbon emissions, but one of the 
concerns about natural gas is, partially like oil, is its 
extremly volatility. Yes, developing more natural gas in the 
United States should be part of a comprehensive energy plan.
    Chairman Conrad. Thank you, Senator Gregg.
    Senator Murray? Let me just say the order on our side is 
Murray, Cardin, Warner, and Merkley. On the other side, Crapo, 
Alexander, Graham, Bunning, and Sessions.
    Senator Murray.
    Senator Murray. Thank you very much, Mr. Chairman, for 
holding this hearing.
    Secretary Chu, good to see you again. Thank you for being 
here to testify and thank you for your willingness to take on 
this incredibly important agency. With everything you have had 
on your plate, I am not sure you had time to plan a trip out to 
my home State of Washington yet, but I wanted to reiterate my 
invitation to you to come and visit. Between Hanford and PNNL, 
we have a lot of facilities, I think, that you would benefit 
from seeing in person to understand their importance, and 
thanks to the Economic Recovery Act and the omnibus bill that 
we passed last night, the face and footprint of those 
facilities are going to be changing dramatically, so I again 
invite you to come out and see firsthand those facilities.
    The Presidential priorities for clean energy really are 
exciting and I am delighted that we are looking at the future 
and how we need to plan for that. But as you and I have talked 
about previously, we can't forget our past as we look at our 
future, and clean-up is obviously not as flashy as some of the 
great new energy proposals out there and the other missions, 
but it has to be a priority of your agency and I want to make 
sure that we agree that the Federal Government has a moral and 
legal obligation to clean up those sites across the country and 
I need to know that you are with me when it comes to buckling 
down and focusing on the hard work of clean-up at the EM sites 
like Hanford, which is in my home State.
    The funds that were provided in the Economic Recovery Act 
and in the omnibus bill that the President is going to be 
getting shortly were really designed to help us get back on 
track toward stable annual budgets, because we have seen 4 
years of decline in these budgets and it has been an annual 
battle here that we should not be into. And I wanted to ask you 
this morning while you are here how you plan to buildupon the 
gains that we made for the EM budgets in fiscal year 2010.
    Secretary Chu. Well, first, I think the Department of 
Energy has legal and moral obligation to clean up the cold war 
legacy. As you know, I argued within the Administration for 
substantial funds requested in the Economic Recovery Act, and 
so I was very pleased that we were given those funds and we are 
working apace at trying to deploy those funds as quickly as 
possible to really add a big kick to the clean-up obligations 
we have. I also am anticipating going to future stable budgets 
for that, and we are planning to come visit the State of 
Washington.
    Senator Murray. Oh, you are? Great. Well, I am delighted. 
You are going to be at Hanford and CRPN while you are there?
    Secretary Chu. I--well----
    Senator Murray. You haven't made all those plans yet?
    Secretary Chu. Well, certainly I will----
    Senator Murray. We will help you plan.
    Secretary Chu. You can help me plan.
    [Laughter.]
    Senator Murray. Good. I appreciate that.
    Secretary Chu. That would be great if you could help us.
    Senator Murray. OK. Fantastic.
    Secretary Chu. You will be hearing from us very shortly, 
actually.
    Senator Murray. OK. Great. Let me just say that the 
Economic Recovery Plan, whose focus is on the EM sites, needs 
nationwide to reduce their footprint so that we aren't paying 
the continual costs every year. It is very important.
    But it is also important that we have stable budgets every 
year and we are working with the administration to get a 
funding level of $6.5 billion for fiscal year 2010 so we can 
continue the important work of doing the clean-up at those 
sites. So I hope that you will work with us as we move toward 
that.
    Secretary Chu. I agree with you. Those are my goals. I 
should also say that I am spending a lot of attention on this 
money, to use it as wisely as possible. There have been in the 
past some cost overruns and we are taking steps in order to 
make sure--ensure that the projects are better managed both in 
the Department of Energy, and by the project managers on the 
sites. And so we are looking very hard at that. So it is not 
only the amount of money, but we want to raise the level--the 
effectiveness in which we use that money.
    Senator Murray. OK. Well, we look forward to working with 
you on that.
    Let me ask you about the national labs. I know, given your 
background, that those are very important to you. Washington 
State is the home to the Pacific Northwest National Laboratory. 
That is a very unique lab. I hope you have time to see it while 
you are there. It has a lot of diverse capabilities, from 
chemistry, energy, homeland security. It is actually home to 
EMSL, which is an Office of Science National User Facility, and 
PNNL is actually not only in Central Washington at the Hanford 
site, but we also have a site up on the Olympic Peninsula where 
we have the DOE's only marine science lab in the Nation and it 
is located in Sequim.
    I know that you must be as pleased as I was that Congress 
funded the Department of Water Power Program at $40 million in 
the 2009 omnibus bill. That is a huge increase for that program 
and it covers many areas of water power research, from emerging 
water power technologies, like marine and hydrokinetics, to 
conventional hydropower.
    The Pacific Northwest is a premier region for hydropower 
and continued innovation in that arena is critical, I believe. 
Can you talk to us about your vision of hydropower as we talk 
about the future energy use of the nation?
    Secretary Chu. Well, I think hydropower is one of the 
cleanest sources of renewable energy that we have. I don't know 
to what extent--many people tell me that it is largely 
developed. I would actually like to see hydropower being used 
as pump storage so that we--this is using the electricity 
generated from wind turbines, from solar, to actually pump 
water back up into the dams and then to release it back into a 
holding pond below so that you can actually store the renewable 
energy. This is a technology that the world is currently using 
and I see hydro, particularly in the Pacific Northwest, we have 
already begun discussions in the Bonneville Power 
Administration on how we can incorporate in an environmentally 
responsible way pump storage, because we will need storage 
mechanisms as renewable energy grows. So I think I am a big fan 
of hydro.
    Senator Murray. OK. Great. And just quickly, in my last 30 
seconds, I mentioned the Marine Sciences Laboratory at Sequim. 
They can be a real asset to your agency when you look at R&D. 
They are looking at a lot of really new technologies in our 
marine areas and I know when you come out to Washington State, 
it is a big State, you won't be able to get to everything, but 
I do hope the Marine Sciences Laboratory is a part of looking 
at some of this future energy. We have a lot of ocean out there 
that we can use if we have the technology to be able to use it.
    Secretary Chu. Very quickly, I am not sure--the time is 
running out, but very quickly, I just want to say I do have a 
soft spot for the National Lab System. Actually, when I was at 
Berkeley as a graduate student post-doc, I was also an employee 
of Lawrence Berkeley National Laboratory during those 6 years 
and the National Lab System is an incredible asset to the 
country. I know the statistics better for Berkeley Lab, so at 
the chance of sounding more provincial, I would have to say 
that Berkeley Lab has trained over 30 young scientists--
students, post-docs, young career scientists--who later went on 
to get a Nobel Prize.
    Senator Murray. Wow.
    Secretary Chu. I don't know what the number is of all the 
National Labs, but they are an incredible asset to our 
intellectual strength. Anything that will not only protect but 
enhance their capabilities, I am all for.
    Senator Murray. OK. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Conrad. Thank you.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman, and Dr. 
Chu, I also welcome you here.
    Before I get started on my questions, I just wanted to 
mention my disappointment, and I am sure you share it, over the 
incident that we were notified about last week concerning the 
loss of personal information of about 59,000 current and former 
employees at the Idaho National Laboratory. I know and I hope 
that your Department will continue to followup on efforts to 
protect the credit histories of those individuals and encourage 
you to do everything you can to make certain that we protect 
against this type of incident in the future.
    I want to come back to nuclear, as you may have suspected. 
I strongly support the comments that have been made by my 
colleague, Senator Gregg, and by my colleague, Senator Murray, 
with regard to both the environmental management side of the 
issue as well as the advanced movement forward on nuclear 
power.
    I know you have already indicated your support for nuclear 
power. I wanted to point out that, as you are very well aware, 
in August of 2008, when you were the Director of the Lawrence 
Berkeley National Laboratory, you, along with the other 
directors of our National Labs, signed a report called ``A 
Sustainable Energy Future: The Essential Role of Nuclear 
Energy,'' and Mr. Chairman, I would like to submit a copy of 
that report for the record.
    Chairman Conrad. Without objection.
    Senator Crapo. Thank you. And the reason I wanted to do 
that is simply to make sure that the record shows the strong 
support that exists for nuclear power as a key part of our 
national energy policy.
    Senator Gregg has talked about the need to focus on making 
sure that nuclear power is treated properly in the budget and 
that we focus on the loan guarantees and the licensing. That 
report also laid out a very aggressive nuclear R&D agenda that 
covers both sustaining the current reactor fleet, closing the 
nuclear fuel cycle, and expanding our nuclear power's reach 
beyond electricity.
    My question to you is, these R&D activities require much 
significant funding and I think they will have a tremendous 
return on investment. But are you and the administration 
committed to properly funding these R&D activities?
    Secretary Chu. The simple answer is yes. I stand by what I 
signed several years ago. As I said, I have a record of saying 
that nuclear has to be part of our energy mix in this century. 
I think closing the fuel cycle is something we do want to do. 
We do not know how to do it in its present form. I am worried 
about its proliferation potential and we should work hard at 
closing the fuel cycle to make it more proliferation-resistant.
    But in the long term, I think ideally it would be a good 
step for several reasons. It has the potential for greatly 
reducing the amount of nuclear waste, with a small percentage 
of reactors having high-energy neutron flux that you can burn 
down the long-lived--actonize the waste material. That would 
mean that you would have to store stuff for a million years, 
you can reduce it to hundreds of years, so there is that 
potential. So both the advanced nuclear reactors that can do 
this, and that is why we have to take a fresh look at the 
nuclear waste repository strategy, as well. It is all 
incorporated in the strategy, which include research into 
making fuel cycling, recycling, a reality.
    Senator Crapo. Well, thank you. I appreciate that. There 
has been--as Senator Gregg indicated, there have been sort of 
some subtle signals, maybe just in the sense of lack of 
attention to the role that nuclear power can play in what we 
have seen already that have raised concerns, and so I hope that 
as we move forward and get specifics on the budget proposals, 
we can have a much more full explanation of the support for 
this kind of R&D.
    I would like to also go to the Yucca Mountain decision. I 
am very discouraged by the decision that has been made by the 
administration with regard to Yucca Mountain, and you indicated 
in your response to Senator Gregg that one of the things that 
could be done while we were trying to figure out where to go 
now is dry cast storage.
    As you are probably aware, that is not going to help Idaho. 
Idaho is the location of a significant amount of spent nuclear 
fuel that was not generated in Idaho, and the Federal 
Government has a binding agreement with our State to remove 
that nuclear fuel by 2035. It takes a long time. If you are 
going to shift from Yucca Mountain now, I suspect that just 
simply putting the material into dry cast storage is--I know 
that that is not a solution for the agreement that the Federal 
Government has with Idaho and that we are going to probably 
look at a very long timeframe of whatever the next option you 
may come up with is.
    And so I guess the question I have to you is how will you 
resolve the issues in terms of managing the spent nuclear fuel 
at Idaho and the Federal Government's obligation to take 
possession of that fuel?
    Secretary Chu. Well, we do have an obligation. My 
understanding is by 2035, it should be ready to ship out. I am 
hoping after--I don't want to prejudge what this blue ribbon 
panel might determine, but again let me reiterate this will be 
done this year, that we can move in a way that would not take 
as long as the previous experience.
    Senator Crapo. Well, I hope you are correct about that, and 
frankly, a lot of research that is being done at the Idaho 
National Lab, as you have just indicated, could help to be a 
part of that solution.
    Secretary Chu. Right.
    Senator Crapo. And although I am very discouraged in the 
decision that we have seen, I think we need to get very 
aggressive at finding a path forward.
    I have a couple of other questions. I have about a minute 
left. One question I had is as we were doing the--pursuing the 
stimulus package, one of the provisions that was in it was a 
manufacturing tax credit, which again talked about a lot of 
different forms of energy but it did not specifically mention 
nuclear energy. As we revised the bill on the floor of the 
Senate, we were able to change the language there, not to 
mention nuclear specifically but to give the authority to the 
Department of Energy to include nuclear power in that 
manufacturing tax credit. I just wanted to make sure you were 
aware of that and also to receive your assurances that nuclear 
power will be able to receive that manufacturing tax credit as 
we move forward.
    Secretary Chu. I am not actually aware of the exact 
details, but I will certainly look into it, and if it is 
allowed, they will certainly be eligible.
    Senator Crapo. All right. Well, thank you very much.
    One last question. In President Obama's fiscal year 2010 
budget request, he assumes 100 percent auctionable allowances 
under a cap and trade legislation proposal. Twenty percent or 
$150 billion over 10 years is directed to clean energy 
technologies, including biofuels, renewable energy, and so 
forth. Can you expand a little bit on what clean energy 
technologies will receive funding from this proposal and 
whether nuclear energy will be included there?
    Secretary Chu. Again, I am not sure of the exact statutes, 
but let me tell you what I understand it is going to be. 
Biofuels is an example. Clean energy biofuels is what I call 
fourth generation biofuels, where you put in far less fossil 
fuel inputs into the lifecycle generation costs. Advanced 
batteries--we do not have batteries that can last 15 years of 
deep discharges, that we need probably a factor of two or three 
higher energy densities before I could see a massive deployment 
of plug-in hybrids, and then even a better battery for all-
electric vehicles. Those are examples of clean energy 
technologies.
    Senator Crapo. Would nuclear be included, in your opinion?
    Secretary Chu. I would have to look again at the statute, 
quite frankly. Nuclear is--we have still a nuclear waste issue 
we have to overcome and we have--but, you know, if you look at 
the palette of our basic electricity now, it is gas, it is 
coal, it is nuclear.
    Senator Crapo. Well, thank you. I see my time has run out.
    Chairman Conrad. You kind of snuck an extra one in on me 
there.
    Senator Cardin.
    Senator Cardin. Well, Mr. Chairman, first, thank you for 
holding this hearing, and Secretary Chu, it is a pleasure to 
have you before our committee. I also add my thanks for your 
willingness to serve our nation in this critical role.
    Our energy policy needs to achieve two objectives: One, 
energy independence, so we are not as dependent upon foreign 
sources of energy; and two, we need to deal with the global 
climate change and greenhouse gas emission issues. So let me 
first deal with the environmental issues. I want to 
congratulate the administration for including the cap and trade 
proposal in your budget.
    Our energy policy can make us more secure, it can help our 
economy, and it can also improve our environment and make 
America a leader internationally. A cap and trade system 
establishes a specific goal on carbon reductions and I think 
that is perhaps its greatest strength, that we know on a 
particular day we will hit particular goals.
    It also, with the trade system, allows market forces to 
work. We would have the capability of looking at vulnerable 
consumers and making sure that they are held harmless or that 
we deal with the adverse impact of a carbon cap on their logs. 
So it gives us that capacity. But we have to get it right. We 
want to make sure the market forces work and that with whatever 
rebates we provide or however we use the revenues, we don't 
injure the concept of allowing the market to determine energy 
sources in the future.
    I want to underscore one point. Cap and trade is going to 
be friendly toward nuclear power because the carbon footprint 
on nuclear energy is rather modest. And to my friends who seem 
to think this is a partisan party issue, in Maryland, we are 
moving forward with a new reactor because we need it in our 
State. We have a Governor who is a Democrat who supports this 
and our delegation supports this. We definitely believe that 
nuclear is part of America's goal to become energy independent 
and to be friendlier toward our environment.
    But we also need the revenues to invest, and I have heard 
my friends talk about certain investments that we need. We do 
need to invest in the next generation of nuclear. We need to 
figure out how we are going to deal with clean-burning coal as 
part of our energy solution in this nation. And we need to 
invest in new technology. So we need to get it right, and the 
revenues from the cap and trade would allow us to do that.
    Last week, we had the opportunity to meet with your 
counterpart from Great Britain and he made a very interesting 
observation. He said the fact that Europe and England moved 
forward unilaterally on climate change legislation was good for 
their economy. They weren't so concerned about what other 
nations were doing other than the international impact, that we 
all have to be together on it, but that this was good for the 
economy of Great Britain.
    Yesterday this Committee talked about getting health care 
costs under control, because the long-term impact on our 
economy if we don't would be devastating. We can talk about 
deficits all we want. If we can't control health care costs, it 
is going to be very difficult for us to deal with budget 
deficits in the future. If we don't deal with energy issues, 
the impact on our economy could be severe. So I would ask you 
to comment as to how, if we get this energy policy right, it is 
going to create jobs for our economy and help us grow.
    Secretary Chu. Well, I agree with you and I agree with the 
British minister. I liken it to really identifying something 
that is a common challenge not only in the United States, but 
across the world, regarding decreasing our emissions on carbon, 
that this is a cause that all the world should be investing 
heavily in.
    And so what do we invest in? Well, we invest in, in the 
near term, weatherization of homes, but we invest in how to 
develop buildings, commercial and residential buildings that 
are much more energy efficient. Those investments go into the 
country where those buildings will occur. When we do that, what 
we are really doing when we spend roughly 40 percent of our 
energy in buildings, we will off-load that expense. I mean, a 
lot of that purchase of dollars in paying for utility bills 
just goes up the smokestack.
    And so what we are doing is we are rebuilding 
infrastructure that in the new world, where energy costs will 
be seen on the long term to increase and we recognize the new 
800-pound gorilla in the room is climate change, and so while 
we are investing to try to mitigate the more severe predictions 
that might occur, you are building an infrastructure that is 
much more efficient so you don't spend as much----
    Senator Cardin. I hope that our investment includes public 
transportation, because if we can get people to work quicker 
and friendlier, I can tell you particularly in this region, it 
will be good for our economy and result in less stress for the 
people who have to confront traffic problems here in the 
Washington region and around the country.
    I want to move on to energy independence for a moment, 
because you are specific about your goals on the environment. 
You are not quite as specific on energy independence. I 
encourage you to establish reasonable goals as to how we can 
wean ourselves off of imported energy sources, particularly 
oil. We should also have a way of judging whether we have 
reached those goals, and using, as the President announced last 
week, the best science we have available to achieve those 
goals. Third, we need to know what policies Congress should 
advance to assist in that regard. I urge you to have some 
mechanism to achieve that.
    Some of us in Congress have offered suggestions. We look 
forward to working with you. We need to be able to judge how we 
are achieving energy independence. We have been through this 
many times before and we didn't achieve great results. Let us 
make sure we get it done this time.
    Secretary Chu. I think there are very specific goals. It is 
a double-barreled thing. You use less and you create more 
transportation fuel on shore. But biofuels is a large part of 
that----
    Senator Cardin. But what I am saying is that we need 
specific goals as to how much oil we will have to import next 
year, 5 years from now, 10 years from now, and hopefully at 
some point, zero, and we must have in place mechanisms to 
ensure that we achieve those goals.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Cardin.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. First, I want to thank you for your 
work on the America Competes recommendations to Congress, which 
I hope you find as a very useful blueprint over the next few 
years and I hope we can properly fund it.
    Second, I want to invite you, as I know you will, to come 
to the Oak Ridge Laboratory, particularly because of the 
renewable energy work there in which you have been very 
interested the last few years and its alliance with the 
University of Tennessee on science matters. I think you will 
find that especially interesting.
    Without being presumptuous, I would like to suggest a way 
that you could win another Nobel Prize or someone could, and 
that would be to find a way to capture and deal with most of 
the carbon after it has been burned in existing coal plants. 
You made some reference to this the other day in your Energy 
Committee testimony. You talked about post-combustion 
technologies needed to meet the climate challenge.
    I think you could understand some of the skepticism around 
the table about the administration's goals when it comes to 
nuclear and coal. My friend and fellow Tennessean Al Gore can 
write a whole article about reaching low-carbon goals in the 
next 10 years without even mentioning nuclear power. And in his 
article in the New York Times in November, which sounded like a 
blueprint for the Obama administration, he said that the idea 
of recapturing carbon from coal was so unrealistic as to be 
imaginary. Do you agree with that?
    Secretary Chu. Well, golly, you are going to put me on the 
spot to disagree with my friend, Al Gore----
    Senator Alexander. Well, he is my friend, too, but that 
doesn't mean he is always right.
    Secretary Chu. Let me just say that I think there is a lot 
of ingenuity out there that we are going to have to try, and I 
think there is a reasonable chance of success, quite frankly, 
in capturing a large fraction of the carbon emitted from coal-
burning plants. I want to say that we have to try to do this 
because no matter what the United States does, India and China 
will not turn their back on coal. They are building pulverized 
coal plants, conventional coal plants----
    Senator Alexander. Yes.
    Secretary Chu [continuing]. One a week are the numbers I am 
hearing. So if we don't develop this technology, who will?
    Senator Alexander. Well, there are strong environmental 
groups who agree with that point. I mean, the Natural Resources 
Defense Council makes that point. And let us forget carbon for 
the moment, but we have sulfur and nitrogen to think about, as 
well, and it goes up in the air in India and we breathe it in 
Los Angeles and Tennessee. So a gift to the world, it seems to 
me, would be during your time as Energy Secretary to find a way 
to get rid of carbon, which is the only remaining pollutant in 
coal that we don't know how to control.
    Let me press that a little further. All the talk is about 
carbon sequestration and sticking it under the ground. I am not 
a scientist. That seems unlikely to me for such a large amount 
of carbon. Isn't there more likely to be some biological or 
chemical process, such as the algae experiments we have heard 
about, that might produce a way to burn coal from existing 
plants and get rid of it?
    Secretary Chu. First, there have been experiments going on 
now in geological sequestration of carbon, a couple million 
tons a year in a few locations. I am not skeptical, quite 
frankly. I think it has to be done right. It has to be 
monitored for safty in order to gain the confidence of the 
American public.
    But we are looking at all sorts of ways. Algae is one of 
them. The downside of algae, quite frankly, is that you need a 
tremendous amount of surface area in order to capture a large 
fraction of the carbon dioxide, where, you know, you pass it 
over algae----
    Senator Alexander. But you also do for solar thermal power 
plants, if I am not mistaken. You have acres of mirrors.
    Secretary Chu. That is true, so the issue here then is you 
would have to port that carbon--the coal plants are more 
centralized in higher populated areas, and so you would have to 
imaging porting that carbon dioxide out of the cities where the 
coal plants are to some distant location.
    But we will be looking at all of these avenues. We will 
further be looking at avenues in which you can grab carbon 
dioxide out of the air. Plants do this, and we will be looking 
at ways in which we can apply that. A plant grabs carbon 
dioxide out of the air and it grows into some biomass type of 
thing. Now, when it is used, either it is burned or when it 
just falls and decays, the microbes recycle virtually all of 
that carbon back into the atmosphere. A small fraction--
    Senator Alexander. Well, I am very encouraged that you are 
in the position that you are and to hear your testimony. It 
seems to me that so much of our discussion about climate change 
and clean air comes down to a carbon tax and renewable energy. 
And even if you are for both those things, given the size of 
our economy and India and China and what they are doing, it 
seems to me that sometimes we overlook the easiest ways to 
solve the problem. You have mentioned one, which is 
conservation and efficiency. To give Gore a little credit, he 
says that 40 percent of carbon comes from buildings. Well, we 
can probably agree on what to do about that. But right after 
that comes nuclear. No one has mentioned this figure today, but 
it is 70 percent of our carbon-free electricty, so how could we 
even think about dealing with climate change without involving 
nuclear power? And if coal is half of our electricity and it is 
American and it is low cost and we have more of it than anybody 
and we are helping the world, it would seem to me that a mini-
Manhattan Project on carbon capture, as the National Institute 
of Engineering has recommended, would be a terrific goal for 
the new Secretary of Education.
    Secretary Chu. How about Energy?
    [Laughter.]
    Secretary Chu. I agree----
    Senator Alexander. I mean Secretary of Energy. I am sorry.
    Secretary Chu. I agree. I agree with all the things you 
have said. I would love to invest more in carbon capture and 
sequestration of all kinds and taking the carbon from coal 
plants and turning it into cement and using the cement. It is 
going to be----
    Senator Alexander. Do you plan to use the new ARPA-E, the 
Energy Department form of DARPA, for such things as making 
solar power costs competitive, finding ways for carbon capture, 
advanced biofuels, nuclear waste reprocessing? It seems if you 
had four little mini-Manhattan Projects to deal with those four 
things at ARPA-E in the next 5 years, that would transform the 
world's energy picture.
    Secretary Chu. I would love ARPA-E to invest in all of 
those things. And as you know, we are planning to stand it up.
    Senator Alexander. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. I would also like 
to add my congratulations to Dr. Chu, and thank you for taking 
on this terribly important challenge.
    Let me first of all associate, before I get to my 
questions, with the comments of both Senator Cardin and Senator 
Alexander. I share, like Senator Cardin, the belief that 
nuclear power has to be part of the mix. We in Virginia, like 
Maryland, are one of the States that is further along in terms 
of adding new reactor capability, and clearly we have disposal 
issues, but I do hope it is part of the mix.
    Echoing what Senator Alexander said, I also believe, as I 
think you appropriately pointed out, should America move away 
from coal, India and China are not. So the Holy Grail is 
getting a cleaner way to grapple with coal, and I would simply 
point out, perhaps for your staff's review at some point, if we 
could do it post-burning, great; but if the sequestration 
option is still out there, we have a brand-new, next-generation 
coal plant being built in southwest Virginia where there are 
wonderful geological formations in terms of the ability to 
sequester. And I cannot think of anything better than eastern 
Tennessee, southwest Virginia, West Virginia, places in 
Appalachia, along with Pennsylvania, that started the 
industrial age in America that developed the coal to actually 
have the solution set come from that region as well. So I would 
urge you and your staff to take a look at that facility as a 
potential beta site for a sequestration project.
    Let me come back to one of my favorite topics, and that is, 
how we are going to make sure that all that is on your plate is 
going to be done efficiently and effectively. I am very excited 
about all the options that came out of the recovery plan: your 
weatherization activities, the smart grid, the green buildings, 
the loan program.
    The challenge, though, that I think you have is: As you use 
these assets, how do you get them out quickly, create jobs, and 
at the same time scale up these programs effectively? One of 
the things that I was happy to see that you did that I would 
love to see other secretariats do is I understand you hired a 
former McKenzie guy--I believe his name is Matt Rogers--to look 
at this. And I would like for you to describe what Mr. Rogers' 
portfolio will be on how we set up, not just from an Inspector 
General looking back standpoint, but how do we make sure on the 
front end of these programs and projects we get it right in 
terms of protocols, procedures, and make sure that there is 
going to be appropriate financial oversight.
    Secretary Chu. Well, yes, thank you for giving me this 
opportunity. Matt Rogers is wonderful. We have streamlined our 
processes, completely overhauled how we try to evaluate and get 
loans out the door. He is directly reporting to me on all the 
economic recovery work that is----
    Senator Warner. So he will not just be doing the loan 
portfolio? He will also have----
    Secretary Chu. He is part of----
    Senator Warner [continuing]. Oversight of all of the 
Recovery Act?
    Secretary Chu. Auto, everything. And what is happening is 
that he meets every day at 9 a.m. with the people in the 
Department of Energy: What has been done today? And they have 
to report, and it has actually transformed the way the 
Department of Energy is moving forward. And so we are hoping to 
announce within weeks the first tranche of these loans.
    We are also looking very much to your question about how do 
you do this effectively, that you prevent fraud, abuse, 
inefficiency. And so we are working with the internal DOE IG, 
also with the administration IG, not to--you know, they viewed 
themselves perhaps in the past as an audit function to look 
into things where there might be a suspicion of waste or abuse, 
but to actually anticipate what might go wrong and start to 
plan as we get these things out and how to monitor. So now they 
are becoming an integral part of the planning process. As we 
release the money, we will be releasing it in stages and will 
be looking very closely, because whenever there is a new flood 
of money, there is always a potential for it not being spent in 
the wisest way possible.
    So, again, this is a daily thing. I realized very quickly--
in fact, in my first week--within starting that I needed 
someone who is very, very good, who could help the Department 
of Energy respond in a way, because we cannot fail on this.
    Senator Warner. I commend you for doing this, but I do not 
think some of your other colleagues who have equal challenge, 
particularly with the Recovery Act funds, have put in place 
this same kind of oversight. And I would love to see if you 
could perhaps share with this Committee what kind of protocols 
across sectors have been developed, because I think we need to 
make sure that it is not just kind of ``look back, gotcha,'' 
but we actually spend this money efficiently going out.
    Secretary Chu. Right.
    Senator Warner. That brings me to the second part of my 
question, which is, when we think about literally training up 
thousands of folks around weatherization, or as we look at how 
we are going to develop the smart grid initiatives, a lot of 
these resources are going to still be passing through the 
States. And I hope that one of the things we have to do is 
start with common definitions. And my concern, as I raised with 
Dr. Orszag yesterday, is that we have a goal of job creation, 
but if Tennessee counts job creation differently than Virginia 
and differently than Alabama, we are not going to have common 
standards.
    Have you or Mr. Rogers looked at, as you drive these 
programs down into the States, making sure that we have common 
standards across the various States?
    Secretary Chu. Yes. In fact, there are two parts of the 
question: first, common standards; but, also, there is going to 
be a huge need in the weatherization program for competent, 
trained, certified energy auditors. So you establish a 
baseline. You have to actually go in a home and tell the 
homeowner what is the best way to invest money. It is one thing 
to create jobs, but we also simultaneously have to make sure 
that that actually decreases energy bills in a substantial way.
    And so we have already engaged in associations around the 
country, groups of mayors, and are pointedly asking them, as 
part of how we get out there, get the money out there, to, you 
know, let us know what your training programs are for these 
auditors, how you are actually going to ensure that this money 
is well spent.
    Our job does not stop by just releasing the money to 
States, and the President has made that very clear to all the 
Cabinet members.
    Senator Warner. Well, I think you are going to find a lot 
of these programs you are going to want to continue, and even 
my colleagues that might not have supported the Recovery Act, 
they are going to want to make sure, as I, that we have real 
accountability methods. Doing this on the front end is terribly 
important.
    My last point--and I know my time has expired--Senator 
Alexander also raised the issue of algae. Algae has wonderful 
opportunities in terms of as a biofuel, and I would commend 
your staff, again, to look at some of the research that is 
going on at Old Dominion University in Virginia on that issue. 
Thank you, sir.
    Thank you, Mr. Chairman.
    Chairman Conrad. You bet.
    Let me just say to my colleagues, we kind of have an issue 
now because we have a little less than 50 minutes left, and we 
have nine Senators. I propose we go to 6-minute rounds unless 
anybody has a big problem with that.
    All right. Let us do that. Senator Alexander--Senator 
Graham. I am sorry. Senator Graham is next.
    Senator Graham. Thank you, Mr. Chairman.
    Mr. Secretary, your testimony, quite frankly, has been more 
reassuring than the budget and, quite frankly, it has been more 
reassuring to me than the President's speech to the Congress a 
couple of weeks ago in the area of nuclear power.
    But one thing I have learned from being from a State that 
has a national lab and Savannah River site, where we have a big 
DOE footprint, is that the politics around energy are sort of 
like agriculture politics. They do not break along party lines 
many times. You have two Senators on the other side who have 
talked about nuclear power as being part of the mix in their 
State. And I have had my problems with the last administration 
with environmental management funds, sort of stopping programs 
in the middle. And so, one, I want to applaud you for beefing 
up the environmental management budget so that people like 
South Carolina's Savannah River site, who have done some pretty 
aggressive things to reduce their waste footprint, will not be 
left hanging. And so the more certainty, the better.
    But, quite frankly, what has been disturbing is that in the 
nuclear power arena, the $50 billion to support a more 
aggressive loan guarantee program was taken out of the stimulus 
package. Do you know why?
    Secretary Chu. No, I do not.
    Senator Graham. OK. Now, when the President spoke to the 
Congress a couple of weeks ago, he mentioned energy 
independence and climate change as two big issues for the 
administration, and he gave a list of solutions. He did not 
mention nuclear power. Do you know why?
    Secretary Chu. No.
    Senator Graham. OK. When it comes to the fuel cycle, are 
you familiar with what the French and the Japanese are doing in 
terms of recycling spent fuel?
    Secretary Chu. Yes, I am. They are using a technique the 
United States invented.
    Senator Graham. OK. Why aren't we using it?
    Secretary Chu. Because of the concerns of proliferation, 
and they are becoming increasingly concerned as well.
    Senator Graham. Well, as I understand it, the Japanese just 
developed an $18 billion recycling--do you think their programs 
are reckless?
    Secretary Chu. Well, quite frankly, I would have preferred 
if they--they are talking to us now about a second recycling 
where they want to develop a more proliferation-resistant one.
    Senator Graham. Of all the European nations, what nation 
has met its carbon emissions targets?
    Secretary Chu. Well----
    Senator Graham. What is the only one?
    Secretary Chu. I think Great Britain has, but I may be 
wrong.
    Senator Graham. I think it is the French.
    Secretary Chu. OK.
    Senator Graham. Eighty percent of their power comes from 
the nuclear power industry. And what I am concerned about is 
that if you are serious about climate change, there are a 
couple things you have to realize. It is never going to happen 
unless it is bipartisan. It is never going to happen unless 
there are some costs associated with going from carbon to 
something else. And the number in the budget is $646 billion. 
That is the revenue to be generated from the proposed cap-and-
trade system the President has announced.
    How did we arrive at that number?
    Secretary Chu. Pardon? How did we arrive at what?
    Senator Graham. The $646 billion in the budget set-aside as 
a revenue stream from the cap-and-trade system.
    Secretary Chu. The details of that I do not know.
    Senator Graham. OK. A hundred percent auction of the 
credits.
    Secretary Chu. Right.
    Senator Graham. My concern----
    Secretary Chu. Oh, sorry. I misunderstood your question.
    Senator Graham. I am sorry.
    Secretary Chu. The money was, yes, going to come from the 
credits. The exact amount or the estimate, I did not know.
    Senator Graham. Well, somebody has to assume that a credit 
will trade at a certain amount to generate $646 billion. I 
would like to know the formula they used. If you could get that 
to me, I would appreciate it.
    Senator Graham. The one thing that disturbs me about the 
climate change proposal in this budget and the President is 
pushing is that 100-percent auction of the credits will, I 
think, make it very difficult for a heavy-energy-user 
manufacturers all over the country--Michigan, Ohio, South 
Carolina, and other places--to basically stay competitive in a 
global world, because their competitors in China and India are 
not going to have to deal with this issue, and I believe hedge 
funds are going to jump into this arena and affect the auction 
system to make it very difficult on manufacturers who employ a 
lot of Americans to stay in business.
    Is that a concern of yours?
    Secretary Chu. It would be a concern of mine if hedge funds 
jumped into anything at this point in time.
    [Laughter.]
    Senator Graham. OK. No, I understand, and I do not mean to 
put you on the spot, because I have a lot of hope that you will 
really be good for the country here. But the 100-percent 
auction is a departure from other legislation that has been 
proposed that I think is going to make it very difficult for 
American businesses who are hanging by a thread in a global 
economy to comply. And when you take the revenue stream and you 
put 15 or 20 percent of it into clean energy and you cannot 
tell me nuclear power is part of it, that is disturbing. And 
when the rest of the revenue stream I going to pay for a ``Make 
Work Pay'' tax program that I think is divisive, I think what 
we have done is destroyed the ability of the Congress to come 
together, because 100-percent auction is a radical departure 
from the way we have set up other cap-and-trade systems that 
Democrats and Republicans have bought into. And dedicating the 
revenue stream to pay for a tax plan that is divisive is going 
to make it more difficult to find consensus on climate change. 
And the money going back into the energy sector that you cannot 
tell me includes nuclear power is even going to undercut more 
the ability to solve the climate change problem, because I do 
not believe, quite frankly, Mr. Secretary--and I think you 
probably agree--that you can be serious about climate change 
solutions unless you aggressively pursue nuclear power as part 
of the mix.
    So that is more of a statement than it is a question, but 
at the end of the day, I have a lot of hope that we can find 
consensus on this issue, and I would urge you to talk with the 
Chairman about his Gang of 10 proposal. I think it is very 
creative and it is very bipartisan.
    Thank you.
    Chairman Conrad. I thank the Senator.
    Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and I thank you for 
your testimony, Mr. Secretary.
    The administration has set out a long-term carbon dioxide 
goal of 83-percent reduction by 2050, and I believe the number 
on the shorter term is 14 percent by 2020. There are a number 
of folks in the scientific community who have said we need to 
be more aggressive as a community of nations in the short term.
    Is the administration locked into this goal of 14 percent? 
Are they looking at strategies that might hit--I think the 
common number is 25 percent globally by 2020. Is that a piece 
of the conversation about how aggressive we are in taking on 
global warming?
    Secretary Chu. I think the Administration so far is just 
repeating what the campaign promises were. There are two 
numbers: 20 percent by 2020 and 25 percent by 2025. I would 
personally be delighted if we can reach, you know, 20 percent 
by 2020. But we also need to get there, and so, you know, I 
mean, my heart is trying to get as much as we can out of it as 
quickly as possible.
    Senator Merkley. Well, as we look at the variety of 
technologies--and people have spoken to various components of 
non-carbon technologies or capturing carbon or taking and 
preserving--using energy more efficiently, which is another 
strategy for reducing carbon. As one ranks these, what is the 
most cost-effective strategy, or how do these lay along the 
curve under current technology?
    Secretary Chu. There is no question that energy efficiency 
and conservation is the most cost-effective strategy. As I am 
sure you know, in the McKenzie report a lot of the carbon 
decrease, the carbon abatement will come in the form of saving 
money if done right. And so there is no question in my mind in 
the coming decades most of the decrease in the carbon dioxide 
will actually--should and must come from energy efficiency and 
conservation. That is the lowest-hanging fruit on the ground by 
far.
    Senator Merkley. How do the other technologies rank?
    Secretary Chu. Well, let us say that it--I am thinking now 
down the list of things. You know, better management, the 
development of renewable resources is kind of in the middle. 
The efficiency is definitely the highest ranking. Better land 
use management is part of that mix.
    Senator Merkley. Let me be a little more precise. We had a 
discussion of solar and wind and nuclear. Is there a fair sense 
of how those rank in terms of the cost?
    Secretary Chu. Again, it is based on today's technology, 
and what we have----
    Senator Merkley. Based on today's technology.
    Secretary Chu. Right, based on today's technology, I think 
that wind is more cost-effective than solar photovoltaic or 
solar thermal, which is more cost-effective than photovoltaic. 
So is that sort of--and nuclear is a very--well, the full costs 
of nuclear, you know, are complex, especially in this waste 
management issue. But nuclear is in there as being more cost-
effective than photovoltaic at the present time.
    Senator Merkley. When you take into account the entire life 
cycle of nuclear?
    Secretary Chu. Yes, but it is----
    Senator Merkley. I am surprised, because I think the 
reports I have seen have said that solar is almost half the 
cost of nuclear when you look at life cycle costs of 
generation.
    Secretary Chu. There is a little bit of an uncertain in my 
mind about what the life cycle costs of nuclear are, especially 
since we do not have in place a long-term plan for how we 
handle the waste.
    Senator Merkley. All right. You mentioned the issue of the 
impact of reprocessing technologies upon nuclear proliferation. 
Of course, we are dealing with North Korea. We have a situation 
in Pakistan with an unstable government that has at least 30 
nuclear weapons. Can you expand on the point you are making 
about how reprocessing ties into nuclear proliferation?
    Secretary Chu. Yes. The current reprocessing technology, 
the so-called EUREX technology that France is using, Japan is 
beginning to use, actually separates out the plutonium, and 
once you separate out the plutonium and you have this material 
around, it offers the possibility that terrorists, for example, 
can get their hands on this stuff. That is the proliferation 
problem.
    Senator Merkley. We are asking a number of countries around 
the world to forego reprocessing for that very reason. Does it 
create a challenge for us diplomatically if this is the 
strategy that we are pursuing here in the United States?
    Secretary Chu. Well, it is not the strategy we are pursuing 
in the United States. We are pursuing a strategy where we----
    Senator Merkley. But if were pursuing that strategy. You 
had mentioned the possibility that you were considering the----
    Secretary Chu. We are considering recycling, but 
considering recycling in a way that makes it proliferation 
resistant. So you do not create the pure plutonium. You 
actually put in other stuff, for example, that makes it less 
likely that you can make a nuclear weapon, quite frankly, much 
more radioactive so that it protects itself.
    Senator Merkley. So it is too dangerous to steal.
    Secretary Chu. That is right, that it would kill the 
terrorist within a very short time.
    Senator Merkley. Plug-in hybrids--I am out of time, but in 
the future, I would like to pursue that issue with you. Thank 
you.
    Chairman Conrad. I thank the Senator.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman. Welcome, 
Secretary Chu. I would like to get to cap and trade because 
Senator Crapo asked some of the questions I was going to ask 
about nuclear. I have a son who has been working in nuclear 
power for 25 years, first with the United States' Navy and now 
for a power company. The Navy has been very successfully and 
very efficiently in the way that they operate their nuclear 
facilities, and they store onsite their spent uranium and 
things like that, which is required right now since we do not 
have very many depositories to send it to.
    Do you think that large-scale carbon capture and storage 
will be in use at any coal-fired plants by the year 2012? Do 
you expect any new nuclear to be online by 2012?
    Secretary Chu. Commercially, I think the answer is no to 
the first. There will be, I hope, pilot plants and tests, near-
commercial-scale tests of carbon capture and storage by 2012. 
Nuclear power plants, this is up to the NRC. People tell me 
starting today, 2012, to actually have a plant licensed and 
operating, unlikely.
    Senator Bunning. OK. If that is the case, then why is your 
administration proposing that we dedicate less than 20 percent 
of the auctioned revenues from this assumed cap-and-trade 
program to emerging technologies in clean coal and renewables 
and over 80 percent of its tax credit that not every citizen 
and certainly not every small business will qualify for?
    Secretary Chu. Well, when you have a cap-and-trade system, 
it will have impacts, and there is a sensitivity with the 
poorer people in our country, and so there was a decision made 
that a certain fraction of it would try to offset the impacts. 
But a significant amount of that would be for investing in the 
development of new technologies so we can get it out there 
faster.
    Senator Bunning. Thank you for bringing that up, because in 
my home State of Kentucky, 93 percent of our electric comes 
from coal, with 20 percent of my State's residents falling 
below the national median income. Can you tell me what the 
estimated increase in the cost of electricity would be in my 
State if the renewable portfolio standard in its current draft 
form went into law?
    Secretary Chu. No, I cannot precisely tell you. I have 
heard estimates, for example, that there is a DOE study that 
showed if we get to 20 percent wind, it would increase the cost 
of electricity around the United States by less than one-tenth 
of one cent per kilowatt hour. I just do not----
    Senator Bunning. Well, first of all, we have to have the 
technology to store the wind. Then if you produce the wind in 
South Dakota, how do we get it to Kentucky? Or else will the 
residents of my State have to pay a tax that would not be very 
favorable and would be not offset by the fact that you are 
going to charge me for producing electricity from coal and I am 
going to have to worry about how you transmit your wind energy 
and your solar energy because the technology does not exist 
presently, to store it.
    Secretary Chu. The technology--aside from pump hydro 
storage, I would agree with you, Senator. This is something we 
have to be investing in. But 20 percent will not really, in my 
opinion, require massive energy storage. That can be solved by 
a distribution system, which we need to develop concurrently.
    Senator Bunning. Yes. How many years down the road would 
that be?
    Secretary Chu. It would take a couple of decades to really 
flesh out, but we have to begin today.
    Senator Bunning. I do not disagree with you. I think that 
is absolutely essential. But to get from Point A to Point B, 
you cannot eliminate coal and you cannot do anything but clean 
it up. If we are going to have a global cap and trade, and we 
are going to exclude China and India from the global cap, we 
could clean up to zero in the United States, and we still would 
not get to the point where you and I both want to get to.
    Secretary Chu. I agree with you. I think given where we are 
today, that is why I want to invest a lot in developing clean 
coal methods. It is going to take awhile to grow a transmission 
line system, to grow the renewable energy that we need. In the 
meantime, our baseload generation for this decade will be coal, 
gas, and nuclear. And so as we aggressively push the other 
issues, we have to--and, quite frankly, as I have said many 
times today, coal is going to be part of America's future in 
this century. There is no doubt about it.
    Senator Bunning. I hope that your boss and your 
administration remembers that in the policies that they push in 
the Department of Energy and in any energy bill that we are 
going to address, like the renewable portfolio bill that is 
coming before our Energy Committee very shortly. It excludes 
any kind of clean coal technology, or doesn't exclude it but 
doesn't emphasize it, and coal-to-liquids is completely left 
out. So I would hope that there would be some--I have gone over 
my time. I am sorry, Mr. Chairman. I will question later on.
    Chairman Conrad. I thank the Senator.
    Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman.
    Dr. Chu, welcome. First of all, let me begin by 
congratulating you and the President on your budget. For many 
years now, we have been talking about global warming, we have 
been talking about energy independence, but I think for the 
first time in history, you guys have walked the walk. You are 
beginning to put the tens of billions of dollars that we need 
into weatherization, energy efficiency, sustainable energy, so 
congratulations for taking a significant step forward.
    In this panel and on this committee this morning as well as 
in many previous hearings, there is always a lot of discussion 
about coal and so-called clean coal. There is a lot of 
discussion about nuclear. There is not a whole lot of 
discussion about solar. Not a lot of discussion about solar. 
Solar shines in Kentucky and in Vermont occasionally and the 
Southwest of this country a whole lot. And in fact, I have 
heard people talking about the Southwestern part of this 
country being the Saudi Arabia of solar energy, if you would 
like.
    And I have talked to people who know a whole lot about this 
who suggest that the technology is there now, today, that in a 
couple of years, we can be building numerous solar thermal 
plants which emit virtually no greenhouse gas emissions, stable 
long-term price. For the life of me, I just don't understand 
why we are not moving forward.
    So my first question to you is, do you, A, agree that solar 
thermal has potential? I don't know if you have visited the 
Solar One, I think it is called, in Nevada. They are producing 
electricity for some 20,000 homes. Very quiet, there it goes. 
There are plants online right--not online, but on the drawing 
boards that can produce electricity for four or five hundred 
thousand households. So do you agree with the potential for 
solar thermal, and B, what are you going to do so that 
President Obama will be able to cut the ribbon for the first 
significant solar thermal plant in his first administration?
    Secretary Chu. I agree that solar thermal and photovoltaic 
have great potential. If you look at how much sunlight hits the 
United States and how much sunlight--a very small fraction of 
our deserts could be generating at 20 percent efficiency all 
our electricity needs if we could have a distribution and 
storage system that can handle that. So there is incredible 
potential. In fact, I did a quick calculation. We are talking 
about a few percent of the world's deserts that satisfies all 
the world's electricity needs. So ultimately, solar will be the 
answer, but the question is how do we get there.
    I think solar thermal right now for utility generation 
makes more sense than photovoltaic. The last time I looked, it 
is about a factor of two less per installed kilowatt 
generation. There are some projects being discussed very 
actively. I think we are looking at loan guarantees on some of 
them. And I would dearly love to----
    Senator Sanders. I would like to continue this--I just 
yesterday, as a matter of fact, talked to a couple of private 
sector guys who are prepared to put substantial sums of money 
into these projects. My understanding is that you can construct 
these things in several years at not an outrageously high 
price. Do you have optimism that within the first 4 years of 
the first Obama administration that we are going to be cutting 
a ribbon for a major solar thermal plant?
    Secretary Chu. Yes.
    Senator Sanders. Can we do it?
    Secretary Chu. Actually, well, I know there is one in 
California being discussed very actively----
    Senator Sanders. There are several. There are a number on 
the drawing boards.
    Secretary Chu. And I would hope so, yes.
    Senator Sanders. But here is the point. They are on the 
drawing boards. I have been talking to people for several years 
and I am just getting impatient. I mean, will you make it a 
high priority so that we are beginning to build these plants, 
which have, as I think you have indicated, so much potential?
    Secretary Chu. Yes.
    [Laughter.]
    Secretary Chu. How is that?
    Senator Sanders. We need a ``Yes,'' not a--a little bit too 
much wavering in that yes. I mean, do you think we will have 
a----
    [Laughter.]
    Secretary Chu. Yes.
    Senator Sanders. I want to see the President cut the 
ribbon. I want to be there. Do you think I am going to?
    Secretary Chu. In the next 4 years----
    Senator Sanders. Within the next 4 years.
    Secretary Chu [continuing]. A very high likelihood that we 
will----
    Senator Sanders. You think there is a high likelihood that 
we can do that. OK.
    Secretary Chu. But again, the details of this, there are--
you know, there are environmentalists who are resisting, as you 
may know----
    Senator Sanders. I know, as well, and I think a lot of the 
problem is more financing than, in fact, technological and 
engineering. How do you get the money to these guys? You 
indicated that in the budget, I think we have $6 billion for 
low-interest loans--in the stimulus package, which presumably 
can be used for this, is that correct?
    Secretary Chu. Correct.
    Senator Sanders. Second question, the potential of 
photovoltaics. My understanding is that it is a question of 
scale. The more we produce, the more we use, the less expensive 
they become. Do you have any guess, if we expand photovoltaics 
and start getting them out, and I think the stimulus package 
will help us do that, when do you see photovoltaics becoming 
competitive with more conventional forms of energy?
    Secretary Chu. You are right that the so-called learning 
curves, if you plot it on the Y-axis, cost per installed 
kilowatt hour, and the X-axis is the amount deployed, that as 
you deploy more, that naturally drives the cost down and 
virtually all technologies follow a Morozov curve with regard 
to that. But there are times when you can fall off that Morozov 
curve. The way you fall off of it is--because there is 
progressive improvements in driving the cost down, improvements 
in the technology that keep you on the Morozov curve. But you 
can fall off of it when you run out of improvements and you can 
fall off of it if you actually too aggressively push it because 
it takes time for those incremental improvements.
    So this is one of the issues. Again, I am referring now to 
a Department of Energy report on when it would take, given the 
Morozov curve in investments in photovoltaic technology, when 
will it be competitive with fossil fuel. But the competition of 
fossil fuel is wholesale production----
    Senator Sanders. Right.
    Secretary Chu [continuing]. And that is a pretty high bar. 
And so, quite frankly, I think, and this is where the 
universities and National Lab System can plan an incredible 
role, I would love to invent dramatically better technologies 
than just driving down the cost of photovoltaics.
    Senator Sanders. OK. Thanks very much.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Sessions.
    Senator Sessions. Thank you, Mr. Chairman.
    Dr. Chu, it is good to see you. I have great confidence in 
your abilities, and if you will just sift through all these 
difficult issues and give us your honest evaluation of what 
makes sense, then I think that can be a big help to us.
    I would just say my philosophy is I am willing to support 
any technology that works. I think we need to be more focused 
on actually getting the technology identified and into the 
system and actually producing rather than sustaining it with 
subsidies forever and ever because those are so expensive. But 
I really believe in the goals that we have here. It will be 
good for our economy and I appreciate the abilities you bring 
to this issue.
    With regard to the nuclear question that so many have asked 
about, I would just say I did notice in your written statement 
you didn't mention nuclear in any significant way, and I am 
glad your answers to the questions were more positive, because 
we were all a little uneasy. That is why you are getting a lot 
of questions. I know that is not the only answer, but it is a 
factor, I believe, in the answer to it.
    With regard to the loan program, a number of us are 
critical of the Bush administration for not getting that loan 
program up. I think there is $40-plus billion available. Can 
you tell us to date how many loans have been made in that 
program?
    Secretary Chu. To date? Exactly zero, but as I said, 
beginning the first week since I assumed my responsibilities, 
we have been looking very hard at this and I hope in the coming 
weeks you will look upon the Department of Energy differently 
in how we can expeditiously assess these loans and get them 
out.
    Senator Sessions. I just wanted you to say that ``zero,'' 
because it is not your fault yet. It soon may be if they don't 
get made. But it is unfortunate. It does provide some 
opportunities for loans for nuclear power, does it not?
    Secretary Chu. Yes.
    Senator Sessions. And you are not adverse to allowing them 
to have the share that they are entitled to----
    Secretary Chu. No.
    Senator Sessions [continuing]. Under this program?
    This nuclear waste fund, the ratepayers are paying about 
$750 million a year. That was about $26 billion has been paid 
into this fund, basically from ratepayers in their electric 
rates, and they were expecting and the utilities were expecting 
there to be a site that they could store this waste. So you 
recognize, do you not, that if we don't do the Yucca that you 
have decided not to do, if we don't do that, we have a very 
real obligation to come forward with a positive plan--maybe it 
is recycling, which I have favored and have offered legislation 
to that effect--but some sort of plan that would break the 
logjam here of how to handle the waste.
    Secretary Chu. I absolutely agree with that. We have to 
come up with a viable plan that is going to be acceptable to 
our country, absolutely, and it has to be done in a timely 
manner.
    Senator Sessions. With regard to the renewable energy 
proposals and the mandates that are out being discussed and 
have been offered before, to me, it only makes sense that if a 
utility, maybe they are approved by the Public Service 
Commission, and they invest billions of dollars to build a 
nuclear plant and it takes five, 6 years, 7 years to get the 
plant up and actually operating, and they are spending billions 
of dollars on that which would produce a plant that would for 
60-plus years produce pollution-free, CO2-free electricity, 
that they ought to get some credit for that, particularly in 
areas like my area of the country where the wind is not 
available. It is too cloudy. Solar does not work. And we just 
don't have the options.
    Can we figure out a way that in the portfolio standards 
that we give some credit for a company that is investing 
billions of dollars in a clean energy source?
    Secretary Chu. I think you are raising very important 
points, and one of the things, in fact, as I understand it, the 
Energy Act of 2005 addressed is the very long approval process 
where you are investing these billions of dollars and not 
getting a return on investment for years. You have dug yourself 
a financial hole. And so one of the very first things that one 
has to do is to figure out how to streamline the process to 
make it much faster. Even a few years off means a whole lot for 
economic viability.
    And so that is the strategy, the strategy of licensing. We 
have, in the past, every nuclear power plant was a one-off and 
there had to be a separate detailed safety evaluation by the 
NRC. One of the reasons why France has been so successful in 
building up its nuclear potential is because they had very 
similar reactors. You know, the old joke is, when asked why 
France has nearly 80 percent nuclear power, we have 20 percent, 
and the answer was in France, we have hundreds of cheeses, one 
reactor. In the United States, you have one cheese, many 
reactors.
    So we are trying to license a very limited set of new 
reactors. I mentioned the Westinghouse and the GE one as those. 
Once you license a generic reactor, then there is a much 
shorter time to license that particular site. And so that is 
one of the things we are working on. I think in the Energy Act, 
there was a--if the license time went over a certain amount----
    Senator Sessions. You are analyzing that very clearly and I 
appreciate it. I was just saying that the renewable portfolio 
standards could cost companies in the whole Southeast region a 
lot of money because we don't have the options that other areas 
have. But they would have to meet that at great cost while they 
are still trying to invest billions in a nuclear power plant, 
which is odd to me. Thank you.
    Chairman Conrad. Thank you, Senator.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Secretary Chu, I want to ask first about the question of 
the higher cost of fuel that you would see associated at least 
with some versions of the cap and trade system. It hasten to 
the point now, given the speed at which this issue is moving 
along, I actually moved to adjust my tax reform proposal, it is 
called the Fair Flat Tax Act, just to start trying to deal with 
this question.
    So let me ask it this way. The administration proposes to 
use the Make Work Pay credit to compensate people for the 
higher cost of fuel that comes about through cap and trade, and 
the more I look at this, I am concerned about how this would 
affect various Americans in different income brackets and I 
want to ask you a couple of examples about it.
    The Make Work Pay credit has a refundable section that is 
designed to reach low-income taxpayers, but based on my 
reading, it wouldn't reach the very poor, the poorest among us 
who don't file a tax form and also are most vulnerable to 
higher fuel costs. So it looks, at least if you just look at 
the budget documents, the way cap and trade is set up now and 
tying it to the Make Work Pay credit, that the very poorest in 
our country, the people who can least afford it, are sort of 
left out. How would you deal with those people who don't file a 
tax return?
    Secretary Chu. Well, I mean, in all honesty, I have not 
devoted a lot of my time up until now on that aspect of what 
you do with the revenues. I think this is something that the 
administration should be in deep discussions with Congress to 
be working out. And so you raise a very important point.
    Senator Wyden. But you haven't gotten into it yet?
    Secretary Chu. I personally have not gotten into how you 
deal with the revenue stream that you want in order to relieve 
some of the strains and the consequences of a cap and trade 
bill.
    Senator Wyden. I don't want to be harsh, but I think the 
administration has to get into this issue. I mean, these are 
the very poorest among us at a time when a lot of them feel 
like they are getting hit with a wrecking ball. I have one of 
the highest unemployment rates in the country. I see my friend, 
Senator Stabenow from Michigan, same situation. If we are 
talking about a major environmental initiative, a cap and trade 
is being discussed in climate change, and people haven't 
thought through what this is going to mean for the poorest 
among us, we have to put some changes in place and get out this 
issue.
    Secretary Chu. No, I was speaking about me. I am just a 
lowly scientist.
    Senator Wyden. Well, who is? You are the Secretary of 
Energy----
    Secretary Chu. That is true.
    Senator Wyden [continuing]. And you are going to be one of 
the key players in this debate about climate change. I sure 
hope you all will get at it.
    Let me ask one other kind of substantive question on this. 
The cost of oil has fallen from about $150 a barrel to about 
$40 a barrel in the last 9 months. I think we all know it goes 
up and it goes down. How would the administration adjust the 
value of the Make Work Pay credit in line with the rise and 
fall of fuel costs?
    Secretary Chu. Again, at this point in my time, for me 
personally, I haven't given that much--these are things that 
other people in the administration, I am sure, have had a great 
deal of thinking about this, but----
    Senator Wyden. Who are those people?
    Secretary Chu. Well, I mean, it would be the people more on 
the economic side of what it is. But I certainly--and you are 
right, I am part of the administration and I have to get into 
those things, as well. But again, my background is as a 
scientist, not as an economist, and----
    Senator Wyden. Could you get back to me with answers to 
those particular questions?
    Secretary Chu. Yes.
    Senator Wyden. Because I don't think those are the only 
income groups. I have some questions--I am for the Make Work 
Pay credit. I mean, I think the President of the United States 
is trying to send the right message. But we have to think 
through the economic consequences here or a lot of people are 
going to get hurt. Can you have some answers to my questions, 
say, within 2 weeks?
    Secretary Chu. I will certainly try, Senator.
    Senator Wyden. And if you would send those through the 
Chairman and the Ranking Minority Member so that all members of 
the committee could have it, that would be helpful.
    Thank you, Mr. Chairman.
    Chairman Conrad. I thank the Senator.
    Senator Enzi, please.
    Senator Enzi. Thank you, Mr. Chairman.
    Mr. Secretary, I am very impressed with your answers and 
your range of knowledge and all the things that you said here 
today, in particular your emphasis on energy research. I 
realize from your background that that would be an emphasis, 
but Wyoming is particularly interested in the research and have 
made some huge funding commitments to research. One of their 
commitments is based on abandoned mine land money.
    There was a tax that was going to expire about 3 years ago 
and of that tax, half of it would go to resolve abandoned mine 
land problems in the East and half would be returned to the 
State where the coal was dug to take care of the abandoned mine 
land projects. Wyoming was one of the States that went ahead 
and resolved a lot of those projects even before the government 
released the money, which they didn't do for about 30 years. 
Since the coal tax was going to run out, we got together an 
interesting coalition of people and extended that tax, with the 
promise that that money would be coming back to Wyoming. The 
legislature has committed this money to energy research for our 
State.
    Now, your budget calls for eliminating the return to the 
States that in good faith made that operation, and one of the 
things I am worried about is in the future, if we are putting 
together unique coalitions like that, can we trust the 
government? I was hoping that you might take a role in seeing 
that our research money continues. It is money that was stolen 
from Wyoming for 30 years before we were able to get a release 
on it, so it is a fairly big chunk of money now. But if it 
doesn't come through, we won't be able to continue the research 
that the State has already obligated to do through 2011. So I 
hope--my question is, will you help us play a role in that?
    Secretary Chu. Well, I will certainly look into this and 
get back to you on that.
    Senator Enzi. OK. I appreciate it and understand that that 
would be the best you would be able to do at the moment, but I 
will look forward to visiting with you some more about it.
    I am a huge believer that incentives work better than 
penalties, although recognizing that sometimes penalties need 
to be in place because there are bad actors. One of the 
incentives that I hope we can do in energy is--for cleaning up 
energy is to put some provisions into Federal law so that 
companies can be assured that if they do research and find 
things that work and add it to their plants, that it can go 
into the rate base right away. I suspect that there are some 
other incentives that could be placed on that.
    One of the biggest questions they have now is will we be 
able to get a return on the cost? It is my hope that you would 
help promote that sort of thing and that would be my question, 
that and maybe you might know some other ways that we can 
provide incentives that will get people on board with cleaning 
things up.
    Secretary Chu. Well, Senator, I actually agree with you. I 
believe more in incentives than regulatory pushes. The rate 
base is determined by, as you know, the regulatory agencies. 
Historically, the regulatory commissions felt that there was a 
single criterion. They were advocates for the consumer. Now as 
we enter into this new era of the specter of some consequences 
of climate change we don't want to see happen, there is another 
issue on the plate, as well, and so I would like to see the 
regulatory agencies--these are local, within States and 
sections, and within States--begin to fold in these other 
concerns.
    Senator Enzi. Except that we are about to make it a Federal 
issue and a Federal tax, because we are talking about cap and 
trade, which is a tax, and that tax will be passed on to the 
consumer. In the budget, I noticed that, yes, some of that is 
going to go to energy research, and I think that is tremendous 
and provides maybe an incentive. It is kind of a back-end sort 
of an incentive. But a portion of that is going to cover the 
increased taxes that people will have on energy consumption, 
which does give some recognition that it is the consumer that 
is going to pay the taxes.
    I thought that the purpose of cap and trade was to have all 
of the money that was coming in from whatever was being taxed 
would go toward the solution of that tax. Does your Department 
have any role in how that is divided up?
    Secretary Chu. I think the recognition that a significant 
part of the money goes to offset the economic consequences of 
the poorest parts of our population is important. But I also 
simultaneously believe that the money going into research and 
development so we can get much better solutions than we have 
today is actually essential. So it is really what is the proper 
balance.
    Senator Enzi. My time has expired. Thank you, Mr. Chairman.
    Chairman Conrad. I thank the Senator.
    Senator Stabenow.
    Senator Stabenow. Thank you very much, Mr. Chairman, and 
Secretary, welcome. I appreciate all of your efforts to date. I 
know you have come in with many different challenges to face, 
so we appreciate that and look forward to working with you as 
we implement the recovery package and move forward, obviously, 
on the energy bill and cap and trade and so on.
    One of the things that I am very pleased about is that the 
energy bill invested in batteries, which is such critival 
technology to develop, but also the 30 percent manufacturing 
credit, the extension of the investment tax credit, the 
production tax credit, and the connections to a grant program 
for those not currently making a profit. I think these are all 
important steps in the right direction on financing and showing 
that there are jobs in the new green economy, which I think is 
critical in order for people to feel good about moving ahead on 
what we need to do as it relates to carbon.
    My question goes to the broad issue of financing, because 
in the budget, the President has placed $15 billion per year 
for new clean technologies, which I commend, but it is tied to 
the cap and trade program and it is tied to a policy of 100 
percent allocations or auctions, I should say, which I think it 
is unlikely, actually, to actually happen, and certainly will 
not happen until down the road.
    Right now, we need financing. We have Section 136, which I 
was pleased to be the architect of, and we need to certainly 
get those dollars out as quickly as possible, loan guarantees 
and so on. But I wondered if you might speak to a willingness 
to work with us on a financing mechanism. We talked about it in 
the Energy Committee at your hearing. The Chairman of the 
Energy Committee is talking about an effort to put together a 
clean energy fund financing mechanism. It is so critical that 
we not wait if we are going to take advantage of the 
opportunities that we have right now, and frankly, 
opportunities that I believe are moving quickly away from us 
overseas and that we have to grab onto.
    When we look at our competitors around the world and their 
capacities, like Korea, to have financing mechanisms that draw 
people there, or Germany with major manufacturing tax 
incentives and so on, which we are beginning to address, I 
think it is absolutely critical that within the confines of 
this budget we are focusing on clean energy financing not tied 
to something down the road but something that we can begin to 
do right now. I wondered if you might speak to that.
    Secretary Chu. Well, Senator, I do agree with you that the 
nurturing of American industry into developing clean energies 
is very important. I personally have witnessed, as I began to 
get more and more into this energy problem, how when you look 
around, which country has the lead technologies, it is 
surprisingly fewer and fewer of them are in the United States 
and this is very troubling. I think we have to develop 
mechanisms to encourage the United States to regain the lead in 
many of these advanced technologies. I think over the last 
period of time, we invented many of them.
    And so in terms of the long-term investment in the 
research, the development, the innovation, it is something that 
is very important and I will certainly hope to work with you 
and the rest of the members in Congress in making sure that 
that continues. We have incredible intellectual talent in this 
country and we need to adjust the conditions to really nurture 
that intellectual capacity and to the point where industry, the 
private sector is actually investing in these technologies, and 
I will be working with you on that.
    Senator Stabenow. Thank you. As a followup: we certainly 
know the capital markets right now have done nothing but make 
the current situation worse. There is no question about that. 
We have a number of very important projects that have applied 
through Section 136, some on battery technology where literally 
we have a window of opportunity of months before those go 
overseas. And, in fact, I know of situations where dependent 
upon our financing, decisions will be made to bring proposed 
plants back from Korea or other countries. But we are in a very 
small window of time before those investment decisions will be 
made. So I am wondering if you can update us on Section 136 and 
how quickly we can see the loans being given.
    Secretary Chu. I share your sense of urgency on this, and I 
do know of those issues. And as I said before, you know, since 
assuming these duties, I have taken this as my highest 
priority, is how do you actually streamline the process. And 
this is being done, has been done, and so hopefully in the next 
few weeks you will hear some very good news.
    Senator Stabenow. Well, I appreciate that. I know it is 
your priority, and I would just support it and emphasize I 
think it is absolutely critical to achieving the broader goals 
of showing that turning to a new green economy actually creates 
jobs.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Stabenow, very much.
    Senator Whitehouse is next, and then Senator Nelson.
    Senator Whitehouse. Thank you very much, Mr. Chairman. And 
welcome, Secretary Chu. The last time we met was February 4th 
when you were at the caucus, and I handed you a letter 
concerning increasing the contract ceilings under the DOE's 
Super Energy Savings Performance Contract Program, which has 
hit a contract ceiling, but there is a lot of work ready to go 
on Federal buildings. It has been estimated that it is $2.2 
billion worth of what everybody would call shovel-ready stuff.
    In the past, for the technology-specific photovoltaic solar 
contract, the ceiling has been lifted. Is this something that 
you can lift? We have not had a response to that letter to find 
out where we----
    Secretary Chu. I am sorry. Are you talking about the ESPCA, 
the Energy Savings----
    Senator Whitehouse. Yes.
    Secretary Chu. OK. Actually, I looked into it, and I signed 
a waiver, I think 3 or 4 weeks ago, that said because of the--
that there was a very good response to those, and we had gone 
over the previous limit. We looked into it. There is a 30--I 
believe there is a 30-day waiting period. If you did not get 
the information, I apologize. But I actually signed the waiver 
maybe 2 or 3 weeks ago on that.
    Senator Whitehouse. Wonderful. So we succeeded.
    Secretary Chu. Yes.
    Senator Whitehouse. Thank you.
    I was delighted to hear you mention over and over again 
your observation that so often this is U.S. technology. And the 
development of it into marketable products has moved overseas. 
I was in Spain at a solar array that is generating electricity 
right now, and the technology was developed in the United 
States. It was developed pursuant to a U.S. DOE grant. Because 
they had feed-in tariffs, that is where they developed, and 
that is where the technology solutions were put together to 
make it a marketable product. And now they are lined up to 
build the product in Arizona. So U.S. technology, U.S.-funded, 
and a U.S.-built project had to be essentially laundered 
through a foreign country in order to bring it to market here.
    I think what that suggests to me among a lot of other 
examples is that your job at the Department of Energy is 
obviously to a certain degree a technological job, but it is 
also very much an economics job. If we can, as you said, adjust 
the conditions for technology development, we do not have any 
shortage of ideas or talent. We just have economic signals that 
discourage this.
    The area that worries me the most is conservation, which, 
as you said, is the most effective bang for the buck on energy. 
However, it is very hard to find--to make it sexy for an 
investor the way a new technology might make somebody a million 
dollars, conservation, caulking, you know, it is not all that 
new tech. And the people most likely to be involved in this are 
the electric utilities for whom it is a real challenge to their 
business model, which is to sell kilowatt hours of electricity. 
And I am wondering what your thoughts are on how you adjust the 
conditions so that conservation becomes not only cost-effective 
for us as a Nation, but cost-effective and economically 
productive as an activity for individuals who participate in 
it, because we are way, way, way behind the curve. And I would 
like you to touch a little bit on what you feel about whether 
you might have something to do with the Federal Energy 
Regulatory Commission. We used to have utilities, and now they 
have been busted up into distribution companies, transmission 
companies, generating companies. No reason we could not also 
have conservation companies, it would take some regulatory 
activity to force that.
    So if you could talk a little bit about conservation, 
changing the economics, and the regulatory role in that, and 
your coordination with FERC on that.
    Secretary Chu. Sure. OK, so let me start with efficiency 
and conservation. I think there are a number of mechanisms that 
should be piloted. A lot of times, if you consider the building 
of a commercial building, there is an architect; there is an 
structural engineer; there is the person who builds the 
building. It is rare that the design, the operation and 
maintenance of the building, the whole life cycle of the 
building is under one roof the way it would be, for example, in 
a government building or a university building, and it changes 
hands. Because of that, there are very split incentives. If you 
want to invest 5 or 10 percent more to make a much more 
efficient building, it does not really serve it. So we have to 
figure out a way in order to distribute the incentives.
    One of them might be in the first 5 or 10 years of the 
operation of the building based on performance of that 
building, that if it exceeds a certain amount, a sharing of 
both--it could be a local slight decrease in the property taxes 
of the building. It could be--when you see a decrease in the 
operation of the--decreased utility, that you provide incentive 
to make sure the contractor, when they do the value 
engineering, when they are actually building the building, that 
the first thing that traditionally has dropped off the plate 
are the things that give you more energy efficiency. So there 
are things of that nature.
    In residential homes, I would like to see the banks ask 
that the last year's gas and utility bills are--you know, a 
counterfeit-resistance copy of that is presented. Why is that 
relevant? Well, it is relevant because if the utility bills are 
$400 or $500 a month, that actually has a significant impact on 
one's ability to pay a mortgage, just as termites in the home 
would have a significant impact.
    So you can have--this is the bill, and for this size house 
in this region of the U.S., which it all could be on record, a 
mixture of the utility bills plus what we know about the size 
of the homes from the property records, that there is a 
distribution--just like in a refrigerator, when you buy a 
refrigerator, here is the distribution of energy and here is an 
arrow where this house is. So it creates a more informed buyer 
and encourages the current homeowner to make investments in 
energy efficiency because it increases the resale value of that 
home.
    So those cost the taxpayer very little--nothing, 
essentially, but these little tools can be used. And so a 
number of them--and I can go on about this because I have given 
a great----
    Senator Whitehouse. I am running into Senator Nelson's time 
at this point, so let me cut you off and just say I look 
forward to continuing to have discussions with you about your 
role as Secretary of Energy Economics.
    Secretary Chu. OK.
    Chairman Conrad. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. Good morning, Dr. 
Chu.
    Last evening, Congressman Bart Gordon, the Chairman of the 
Science and Technology Committee in the House, released a GAO 
report that says that a carbon capture coal project called 
FutureGen, which was killed by the previous administration, 
was, in fact, done on a miscalculation, and this is chronicled 
this morning in the New York Times, and let me just read a 
couple of paragraphs here.
    ``The error led the Department of Energy to say mistakenly 
that the project, known as FutureGen, had nearly doubled in 
cost--an increase the Bush administration deemed too expensive. 
At the time, FutureGen was the leading effort to capture and 
sequester carbon dioxide, the main heat-trapping gas linked to 
global warming. If the project were resumed and proved 
successful, it could prove a model for curbing the carbon 
dioxide that coal adds to the atmosphere.''
    What do you know about this mistake that the GAO has come 
out with in the report? And who is responsible for it? And what 
are your future plans with FutureGen?
    Secretary Chu. My understanding is the following: When the 
price was first put on that project, it was a price of this is 
what it would cost in--you know, whatever time it was--2004 or 
2005 dollars, and it did not include the fact that, as you go 
forward in time over the construction time of the project, let 
us say it is 3 or 4 years, that you fold in inflation costs, 
the increase in cost of the commodities that would be put in 
the plant. So it was in dollars times zero, and the real cost 
of any project has to fold in those increases.
    Senator Nelson. As a matter of fact, the New York Times 
says that--they said in canceling the project that it had 
increased from $950 million, almost doubling to $1.8 billion. 
But, in truth, the auditors in GAO said it had gone up 39 
percent, to $1.3 billion.
    Secretary Chu. Yes, and that is precisely this--the proper 
costing of any project has to include what you see as trends in 
the costs of the materials and during the time. And so that was 
part of it. Now----
    Senator Nelson. Well, that is a pretty big mistake. Who 
made that mistake?
    Secretary Chu. Well, I am not responsible for that mistake.
    Senator Nelson. No, but do you have some ideas?
    Secretary Chu. No, actually, I don't, quite frankly.
    Senator Nelson. It is the previous administration, so you 
are going to just plead the Fifth, then. OK.
    Secretary Chu. Well, I don't think----
    [Laughter.]
    Secretary Chu. Let me just say that on my watch, I hope we 
don't make a similar mistake. There has been, in addition to 
the 1.8, there have been estimates that it has gone higher.
    Now, having said all this, I am beginning to look very 
closely at this project and I think there is a lot of merit in 
really testing the gassification, the capture and the 
sequestration all in one unit. The current price, as I 
understand it, is still very high, as I have said in previous 
comments. We have to--I think it does make a lot of sense to 
test this idea, but we also have to spend a lot of time and 
attention on post-combustion capture.
    And so I am actually personally looking into how do you 
bring down the cost so we can go ahead. So at this time, that 
is--there are many things, as you have probably noticed, that 
haveten a lot of my attention and there are only 36 hours in a 
day and so I will do my best.
    Senator Nelson. In your opinion, does this technology--is 
this promising to get a complete capture of carbon?
    Secretary Chu. Actually, it is a technology that is 
certainly worth testing, in my opinion. The complete capture of 
carbon is a different story. There are price needs on what one 
can do, and so you have to look at cost-benefit analysis, as 
alluding to the Senator's comment about the Secretary of Energy 
and economics. Once you do a cost-benefit analysis, I think 
future technologies going forward will help us capture more and 
more of the carbon. But if we lay out a plan that says we have 
to capture 95 or 90 percent and makes it prohibitively high, 
that will begin to delay--that will delay the first experiments 
and deployment and I would rather see it getting started.
    Senator Nelson. Well, good luck, because we do have a lot 
of coal----
    Secretary Chu. Yes.
    Senator Nelson. And if we can stop carbon going in the 
atmosphere, it is certainly to our advantage because of that 
energy source there.
    I know you all talked earlier, and I have just got a little 
bit of time left. I just want to put my marker down that I have 
no objection to offshore drilling if it is done responsibly and 
if it is done where the oil companies already have leases. 
There are some close to 80 million acres under lease. I know 
that there are 33 million acres under lease in the Gulf of 
Mexico that have not been drilled. I am talking about 80 
million acres that haven't been drilled. There are 33 million 
acres under lease in the Gulf of Mexico that haven't been 
drilled. And, of course, I have been the point on this, trying 
to protect the U.S. military's interest in the Eastern Gulf of 
Mexico, of which the operative policy in the Department of 
Defense is that you can't have oil rigs out there where we are 
testing and training and testing some of our most sophisticated 
weapons. So as you approach this, you and Secretary Salazar, I 
want you all to be mindful of the balance of issues.
    And also, I don't think nuclear has been brought up here at 
this hearing. Clearly, after Three Mile Island, we now are a 
lot safer with nuclear and should be able to tap that source in 
a safe and responsible way to meet our energy needs in the 
future.
    I know my time is up, but any comments, I would love them.
    Secretary Chu. Nuclear is going to be part of our energy 
future and it has to be. And the issues you raise are very 
important ones and that is correct. There are a lot of oil 
leases out there that are not being used.
    Senator Nelson. Thank you. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you. Thank you, Senator Nelson.
    A couple of quick things. One, you have been in the 
academic world and in that world you grade people on their 
performance. You get an A-plus. You couldn't have done better 
here today. I just wanted to say that.
    Second, in terms of climate change, I think it is very 
important for the administration to understand what I am 
hearing. I reported yesterday some of what I have been hearing, 
and I know it discomforts some in the administration to hear 
that the budget as is, in my judgment, just as it has been 
written, probably can't pass here. Now, I say that because I 
have colleagues coming to me every day, saying to me, if this 
is in, don't count on my vote.
    One of the things that a group of colleagues has come to me 
about is with respect to the auctions and a concern that there 
are insufficient resources to offset effects on consumers and 
companies that are very adversely affected. And I know we had--
yesterday, the head of the Office of Management and Budget told 
us that he has grave concerns about using--to having some 
allocations.
    I just say to you, in terms of getting something passed 
here, not an academic exercise but a real world practical 
politics exercise, in terms of getting something passed, there 
is going to have to be flexibility on how the funds are used. 
The notion that very adversely affected companies are not going 
to be given any help, I don't think--I am just making a--this 
is not my position, just my observation based on colleagues 
coming to me. And so it is very, very important that we have 
flexibility and that we work together to try to resolve things 
to get a result, because it would be an utterly empty exercise 
around here not to get the votes to actually pass things and 
pass things that will make a difference for our country.
    On the point that Senator Nelson made with respect to the 
Gulf, and he has--quite properly, he is defending his State as 
he sees in the best interest to defend his State. Others of us 
have a somewhat different view. You know, the way leasing works 
in the oil industry is you go out and lease vast tracts with no 
intention ever of drilling on all of it. That isn't the way it 
works. First of all, you go out and lease vast tracts and then 
you do exploration to determine where are the best prospects. 
And parts of the Gulf have been very picked over. The Western 
Gulf has been very picked over. The Eastern Gulf has not.
    And with respect to the military's restriction, they have 
made clear to us and the Group of 10, the Gang of 10 that 
became a Group of 20, and by the way, Secretary Salazar when he 
was a Senator was part of our group--the military has made very 
clear to us they are open to working with us and technology has 
changed and you can have a much reduced footprint than was 
previously the case and, therefore, much less impact on 
military operations.
    So I think all of this has to be kept in mind. Again, 
anybody that suggests drilling offshore is the silver bullet 
answer, that is just not serious, and I think virtually 
everyone up here knows that. But it is part of the mix. It is 
part of the mix, and there are other things that will be much 
more significant contributors. You have made clear the list 
here. Conservation and energy efficiency has to be at the top 
of the list. Anybody that has studied this for 5 minutes knows 
that what you said here today is true. And so let us be 
aggressive about doing those things, and I am sure you will be.
    With that, if there is any final comment that you wanted to 
make, we would be happy to hear it.
    Secretary Chu. Well, I thank you for your comments and 
especially the last ones. One final comment. I forgot to say 
that I consider energy efficiency to be terribly sexy.
    [Laughter.]
    Chairman Conrad. OK. Well, you know----
    Secretary Chu. But it is all in the eye of the beholder.
    Chairman Conrad. Yes, sir.
    [Laughter.]
    Chairman Conrad. Look, these things are so very important 
for our country's future. We are blessed to have somebody of 
your capability and your character in this position of 
responsibility. And again, this was almost--if we were putting 
on a seminar, how to present yourself before a committee of 
Congress, your performance here today would be a pretty good 
place to start.
    Thank you very much. The committee stands in adjournment.
    Secretary Chu. Thank you.
    [Whereupon, at 12:22 p.m., the committee was adjourned.]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




     THE PRESIDENT'S FISCAL YEAR 2010 BUDGET AND REVENUE PROPOSALS

                        THURSDAY, MARCH 12, 2009

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Wyden, Feingold, Nelson, 
Stabenow, Cardin, Sanders, Whitehouse, Warner, Merkley, Gregg, 
Sessions, Bunning, Crapo, Graham, and Alexander.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Denzel McGuire, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The Committee will come to order.
    I would like to welcome the Secretary of the Treasury, Tim 
Geithner, here this morning. Good to have him back before the 
Budget Committee. Today's hearing will focus on the President's 
budget and revenue proposals. I have described the President's 
budget as a ``good beginning.'' The key priorities of the 
budget focusing on reforming health care, excellence in 
education, and reducing our dependence on foreign energy I 
believe are the right priorities. I also think it is critically 
important to be cutting this deficit dramatically over the 
first 5 years. We all understand we have inherited a very 
serious economic situation that requires an extraordinary 
response, and that means increased deficits and debt in the 
short term. But I think it is also critically important that we 
recognize over the longer term we are on an unsustainable 
course, and it is absolutely essential that we return to a more 
fiscally prudent path in the future.
    I want to say what I have said before, that while I think 
the President's budget is a good beginning, especially over the 
first 5 years, I am very concerned about the second 5 years. I 
have said this directly to the President. I have said it to 
every representative of the President that has come to see me. 
I am very concerned about the second 5 years.
    We know that the President has been handed an extraordinary 
set of crises.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I have thought often what it must be like to be President 
of the United States at this time to face a housing crisis, a 
fiscal crisis, a banking crisis, on top of that an overall 
economic crisis, with the explosion of joblessness in this 
country, the worst conditions since the Great Depression, and 
in the midst of it all, two wars.
    The President's budget includes, I believe, a number of key 
improvements.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I certainly salute his transparency, putting on the table 
things we know are going to be expenditures but in the past 
have been left out. I also very much agree with the fundamental 
priorities on education, energy, and health care, and cutting 
the deficit in half over the first 5 years.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    On the issue of taxes, some critics of the President's plan 
argue it represents a tax increase, and for some clearly it 
does. That is accurate. On an overall basis, I see something 
quite different, and I think CBO--and they will score this 
budget--will also conclude something quite different, because 
under the traditional scoring rules that we use around here, 
this budget represents over a $2 trillion tax reduction.
    How do I get there? Well, this budget extends the 2001 and 
2003 tax cuts for everybody earning below $250,000 a year. That 
is a very significant tax reduction from what current law 
provides.
    No. 2, this budget extends the alternative minimum tax so 
that it does not affect 20 or 25 million taxpayers that would 
otherwise be affected. And that, too, is not contemplated under 
current law. That represents a very dramatic tax reduction.
    In the estate tax, the extension of the provisions at $3.5 
million exemption, current law would take it back to $1 
million. That represents significant tax reduction.
    And I could go on and on, but I will not. My colleagues 
know what is in this budget. The President's budget also 
contains the Making Work Pay tax cuts and other provisions for 
individuals and businesses.
    When you net it all out--and I include the provisions on 
climate change, because while that is not strictly considered a 
tax, nonetheless it has the same effect economically. And so if 
you wrap that up as a tax increase and you net it all out, this 
budget has $2.2 trillion of tax reduction, and I believe that 
will be the CBO scoring.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I would like to particularly commend the President for 
committing to pay for the cost of health care reform. This is 
an area that gives many of us great pause, because we are 
already spending one in every $6 in this economy in health 
care. We have had testimony before this Committee that as much 
as 30 percent of that is being wasted. When we have got a 
circumstance in which the UCLA Medical Center's costs are 100 
percent more than the costs of the Mayo Clinic health care 
system, we know there is room for dramatic savings and still 
have quality health care outcomes, because the Mayo results are 
actually better than the UCLA results, even though they cost 
half as much.
    Now, we see that across the country. So some of us have 
real pause about the notion of putting substantially more money 
into the health care system when we have already got a bloated 
system.
    What I am most concerned about, as I said at the beginning, 
is the debt outlook for the Nation.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In the previous administration, we saw the debt more than 
double from $5.8 trillion to $12.7 trillion this year. I have 
never held the President, the previous President or this one, 
responsible for their first year; they are inheriting a 
situation. But when I look at this budget, I see the debt 
doubling again, and that gives me great concern. Again, based 
on testimony before this Committee, Democratic witnesses, 
Republican witnesses, some of the finest economic minds in this 
country and, indeed, the world, coming before this Committee 
day after day after day warning us of the danger of a buildup 
of debt. And I believe it. I want to make very clear I believe 
that build-up of debt fundamentally threatens the economic 
security of this country. I believe it in my bones.
    Now, maybe part of that is I am Danish. I find that Steny 
Hoyer over in the House--he is Danish, too--seems to have the 
same views. I looked at the Danish debt-to-GDP ratio and see it 
is the lowest, so maybe I come by this honestly. Maybe it is 
genetic. But I must say I am concerned about it. Excuse me?
    Senator Gregg. Can you skate?
    Chairman Conrad. Oh, yes, I can skate. I'm a North Dakota 
boy.
    So I want to emphasize I feel it is critically important we 
do better in the second 5 years. We need to keep in mind what 
is at stake here. We are on, as a Nation, an unsustainable 
fiscal course. That is not the fault of this administration. It 
is not the fault of this administration. But we are inheriting 
a situation that we have to grapple with and we have to 
address. And as I say, I think the President has done a very 
commendable job in laying out the first 5 years. I am much more 
concerned about the second 5 years.
    Now I will turn to Senator Gregg. One other thing I should 
mention, and that is, I also believe that the first TARP, as 
imperfect as it was--and I believe it was very imperfect. I 
believe had we not done the first TARP that we would have faced 
an economic collapse. Senator Gregg and I were in the room as 
the reports were delivered to us that night. We were there all 
night. We heard the reports of financial institutions going 
down all across Europe. We heard the reports very directly of 
major enterprises in America that were on the brink of going 
down. There is no question in my mind that if we had not done 
the first TARP, we would have faced an outright economic 
collapse.
    With that said, was it done as best as it could have been 
done? No. And, unfortunately, we are living with the results of 
that now, deep anger in our constituencies. And let me just say 
anybody that does not understand the anger of the American 
people is not paying very close attention.
    Every day I get the letters that come to me from my 
constituents, and the anger level is extraordinary. I have 
never--in the 22 years I have been here, I have never seen such 
anger with the sense of betrayal that people in positions of 
responsibility took advantage of them, and they, no fault of 
their own, now are getting stuck paying part of the bill. The 
outrage of people cannot be dismissed.
    Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and let me pick up 
there, because I want to praise the Secretary. I recognize he 
has come in for a fair amount of constructive thought since he 
had become Secretary. But I want to praise his efforts and the 
commitment of this administration under the Secretary, as well 
as Larry Summers and Chairman Volcker, to try and stabilize the 
financial institutions of this country. It is very obvious that 
unless we stabilize the financial institutions of this country, 
we cannot recover. And as we recover, if we do not have a 
robust and functioning financial system, the recovery will be 
stunted.
    We all recognize that not everything you have tried has 
worked. Not everything that Secretary Paulson tried worked. But 
you are trying, and you are pulling the levers, along with 
Chairman Bernanke, to try to settle out the financial structure 
of this country. And I have my specific disagreements with some 
of your initiatives, and I have my specific agreements.
    I agree with many who feel that we should have more 
aggressively and more actively focused on the underlying 
problem, which was real estate. And I still do not think we 
have done it adequately. But the fact is that the initiatives, 
such as TARP, TALF, and the mortgage initiatives, are putting 
some meat on the bone right now relative to how you are going 
to orchestrate getting the private sector to come in and take 
bad debt off the books of some of these institutions. I think 
on balance those initiatives have been more than constructive. 
I hope it is true that our most problematic financial 
institution has actually made money in the first 2 monthsof 
calendar 2009--I have not looked at the books, and I do not 
know how they have accounted for that. But if that is true, 
that is good news, and maybe we have begun to turn a corner, 
although there is still a tremendous way to go. So I want to 
thank the Secretary for his energy in this area. I do hope 
there are more specifics to come, however.
    Now, on the budget I cannot praise you, and, in fact, I 
pick up again where the Chairman left off, which is that this 
budget, as it is presently constructed, passes on to our 
children a Nation which they will not be able to afford and 
which will potentially drive this country into bankruptcy.
    I recognize the fact, because it is obvious, that in the 
short term there is a need for the Government to step in with 
huge amounts of money because the Government is the last source 
of liquidity and, therefore, the spending that is occurring in 
the short run is necessary. We do not want to do it, but we are 
going to have to. But some of it has been very unfocused and 
not all that constructive, such as the stimulus bill.
    But after 2 or 3 years, this budget should propose to get 
spending under control, and it does not. It is proposing a 
public debt-to-GDP ratio of 67 percent for the next 10 years 
starting in 2013. Before that, it is higher. It is proposing 
deficits of 3 to 4 percent post-2013 to the end of the budget 
period. It proposes expanding the size of the Government as a 
percentage of gross national product up to 23 percent from its 
historical average of about 20 percent.
    The practical implications of this are that we are 
essentially putting on our children's backs a debt which they 
can never get out from underneath and a debt which involves a 
radical expansion of the size of the Federal Government as a 
percentage of our economy. And as a result, I think we are 
putting at risk not only our children's future; we are clearly 
putting at risk the value of the dollar and our ability to sell 
debt. Because if I am in the international marketplace and I am 
looking at this budget, I am saying to myself, ``Where is the 
discipline? Where is the containment?'' There isn't any.
    Why would I invest in the debt of this country? I know that 
in the out-years they have got a budget which has no fiscal 
discipline. And there are only two ways out of that. One is 
inflation, which is not acceptable. And the other is massive 
increases in the tax burden, which will significantly reduce 
the productivity of the economy and as a result undermine the 
quality of life of everyone in this country.
    And so this is a budget which has fundamental flaws. The 
argument that it cuts the deficit in half in 4 years is truly 
spurious, because when you take the deficit and quadruple it 
and then you cut it in half, that is like taking four steps 
back and two steps forward. You are not making any progress. 
You are still going backward.
    The argument that this budget does not have tax increases 
is, I think, an Alice in Wonderland view of the budget because 
of the baseline they use. The budget proposes raising the 
effective tax rate from 35 percent to 41, 42 percent. You are 
severely scaling back itemized deductions on things like 
mortgage interest and on charitable contributions. The small 
businesses of this country that are going to be hit with this 
tax increase. Those are the people who go out there and take 
the risk, create the jobs. Those are the people that that tax 
burden is going to fall on mostly. Sure, it will fall on the 
wealthy, but the large percentage of it is going to fall on 
people who run sole proprietorships, that little grocery store, 
the little restaurant, the small software company. They are not 
going to be able to expand because their tax burden is going to 
eat up their expansion dollars. They are not going to be able 
to create jobs.
    And then you have got this carbon tax, which is represented 
as being $646 billion of new revenue. That is a huge amount of 
revenue, but it is a gross understatement. Every independent 
group that has looked at this--beginning with MIT, which is the 
most objective, and CBO--has said that this carbon tax in its 
form as proposed represents a $300-billion-a-year increase in 
revenues. That is a massive sales tax, a national sales tax, on 
everybody's electric bill, especially people from the Midwest 
and the Northeast.
    And what do you do with that revenue? You do not use it to 
reduce the deficit. You use it to expand the size of 
Government.
    There is a representation that a part, 80 percent, of the 
first $64 billion is going to go pay for the Make Work Pay tax 
credit, but the remaining 20 percent goes to raise the size of 
the Government. And then on top of that, you are going to get 
another $200 billion, potentially, and there is no 
representation that that is coming back to taxpayers. In fact, 
there is specific language which makes it pretty clear that 
that is going to be used as walking-around money for various 
constituencies who are interested in spending it. They may be 
worthwhile constituencies, but it is a heck of a tax burden to 
put on the American people, and it represents a massive 
expansion in the size of Government.
    I guess that is my big problem here. I join with the 
Chairman in being concerned about the effects of this budget on 
our children, because what this budget is passing on to our 
children is a debt that is not sustainable, a deficit that is 
not sustainable, and a Government which has grown too fast, too 
far, and which is not sustainable.
    So I am going to be interested to hear your thoughts on 
that, Mr. Secretary. Thank you very much.
    Chairman Conrad. Welcome. You know, there is nothing quite 
like it, is there? But this is a debate that we owe the 
American people.
    Secretary Geithner. We do.
    Chairman Conrad. And you said it very clearly as you came 
in. This is a debate we need to have. So we are delighted that 
you are here, Mr. Secretary. We very much appreciate the 
extraordinary responsibilities that are on your shoulders and 
the effort that you have extended to address the multiple 
crises facing the country. Please proceed.

  STATEMENT OF HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Geithner. Thank you, Mr. Chairman--and Happy 
Birthday--Ranking Member Gregg, and members of the Committee. 
It is a privilege to be here today. As I said coming in, this 
is an important debate to have. We need to do this openly and 
honestly for the American people, and I look forward to our 
conversation.
    I just want to briefly summarize my written statement, and 
I look forward to having a chance to respond to the concerns 
you both raised in your opening statements. But let me just 
start with where we are today.
    We start, the administration just 7 weeks old, with an 
economy that has been in a recession for over a year, an 
intensifying housing crisis, and a financial system under 
stress. Now, since the recession began 4.4 million Americans 
have lost their jobs; millions have lost or at risk of losing 
their homes, or are struggling to obtain loans to finance the 
purchase of a care, a house, or their kids' education; 
businesses are finding it harder to get credit; the fourth 
quarter GDP numbers show our economy declining at the annual 
rate of 6.2 percent. What you are seeing here you are now 
seeing around the world, and that is being reflected in greater 
pressure on our financial system, again, both here and around 
the world.
    Now, the obligation we share is to make sure that our 
Government does as much as we can to get Americans back to 
work, to help stimulate private investment, and to help get 
credit flowing again. We have to move together to try to do 
this as rapidly and effectively as possible.
    Now, as this Committee knows, this crisis has helped cause 
a dramatic deterioration in our fiscal position. Again, we 
start this Congress and this administration with a $1.3 
trillion budget deficit, the largest deficit as a share of GDP 
the Nation has faced since the end of the Second World War. 
These are extraordinary challenges, and these challenges 
require extraordinary actions.
    Now, in passing the Recovery and Reinvestment Act, the 
administration and the Congress have put in place a very 
powerful mix of programs to help get Americans back to work and 
to support private investment. The combined effect of these 
investments and tax measures will be to save or create save or 
create between 3 and 4 million jobs and to increase real GDP 
growth by 3.2 percentage points by the end of 2010 relative to 
what would have occurred in the absence of this package.
    Now, alongside the Recovery Act, the administration is 
moving to repair our financial system so that it can provide 
the credit necessary for businesses across the country to 
expand and for families to finance critical needs.
    The deepening recession is putting greater pressure on 
banks, and in response, many banks are pulling back on credit. 
And right now, as a result, critical parts of our financial 
system are damaged and are working against recover. This is a 
very dangerous dynamic, and to arrest it, we need to make sure 
our financial system has the resources necessary to get credit 
to the economy, and we need to act to get the broader credit 
markets working again.
    Now, to address this financial crisis, we have launched a 
very powerful program to help jump-start lending to small 
businesses, student loan markets, consumer credit markets, auto 
finance markets. This joint Treasury-Federal Reserve program 
goes around the banking system to try and get the securities 
markets working again.
    We have initiated a forward-looking assessment of the 
potential capital needs of our major financial institutions, 
and we have outlined the very detailed terms of a capital 
assistance program that will provide a backstop for these 
institutions so that they can raise the capital necessary to 
support economic recovery.
    Now, alongside these initiatives, we will outline an 
innovative program that uses market mechanisms to help clean 
the legacy assets on bank balance sheets. This program will be 
designed to bring in private capital alongside Government 
financing to help restart markets for these assets.
    Now, as we go through this process, as the President has 
said, we will bring the full force of the Federal Government to 
ensure that the major banks which Americans depend on have 
enough confidence and enough resources to lend even in more 
difficult times. And when these institutions require 
exceptional assistance, we will hold accountable those 
responsible, force the necessary adjustments, provide the 
support to clean up their balance sheets, and assure the 
continuity of a strong, viable institution that can serve our 
people and our economy.
    All of these actions are necessary to lay the foundation 
for recovery, and the President's budget builds on this 
foundation to set us on a path toward long-term growth and a 
path where we are again as a country living within our means.
    The first step in addressing these problems is to be honest 
about them, and the President's budget honestly and 
transparently presents the fiscal challenges facing the 
American people. We include, as you know, the cost of fixing 
the AMT each year; reimbursements for Medicare physicians; the 
likely future costs of foreign wars and natural disasters; and 
in an abundance of caution and realism, the potential need for 
additional financial crisis funding.
    We offer a 10-year rather than a 5-year budget 
presentation. The budget proposes to carefully but 
substantially address the most critical challenges facing our 
economy in health care, in energy, and in education--again, 
within a framework that puts us on a path to fiscal 
responsibility and fiscal sustainability.
    On the tax side, the budget rewards work, encourages 
savings, and promotes growth. Important provisions include the 
Making Work Pay tax credit for 95 percent of working Americans, 
the expansion of the earned income tax credit, a zero capital 
gains tax provision for small businesses, and a permanent 
extension of the R&E tax credit.
    Now, receipts in the President's budget average about 18.7 
percent of GDP over the 10-year budget window, just slightly 
above the 40-year historic average, returning us to the same 
taxation rates that applied during the economic prosperity of 
the late 1990's.
    The budget addresses the tax gap by tackling tax shelters 
and other efforts that permit abuse of our tax laws. Over the 
next several months, the President will propose a very 
substantial package of legislative and enforcement measures to 
reduce tax avoidance.
    I want to emphasize again that we propose no new revenue 
increases in our budget--none--until we are safely into 
recovery in 2011. And at that point, when the consensus of 
private forecasts projects significantly positive growth for 
the overall economy, the budget restores tax rates to the pre-
2001 tax levels for families making more than a quarter of a 
million dollars.
    The soaring cost of health care is hurting families, 
businesses, and our long-term budget prospects. There is no 
path--there is no path to addressing our long-term entitlement 
challenges that does not require major health care reform. And 
our budget begins this process by reducing cost and 
inefficiencies, increasing quality and prevention, and moving 
toward affordable coverage for all.
    Just to cite one example--and there are many--the Hospital 
Quality Improvement Program proposes to pay for performance and 
reimburse hospitals for the quality of their care rather than 
merely for the quantity of the services they provide. Health 
care reform is a moral imperative, an economic imperative, and 
a fiscal imperative for our Nation.
    The budget makes a significant commitment to our energy 
security that will strengthen our economy, our environment, and 
our national security. Investments in renewable energy and 
energy efficiency will create new American jobs and industries 
and lead the way to a new green economy.
    And if we are truly committed to making our Nation both 
more prosperous and more just, we must recognize that it defies 
both our basic values and economic common sense to deny any 
child in America the quality education they need to compete in 
the global economy. And this budget calls for more resources 
for early childhood education, new incentives for teacher 
performance, and a significant increase in the Pell grant, 
together with President Obama's American Opportunity tax 
credit, which provides up to $10,000 of tax relief for a single 
student going to 4 years of college.
    Now, I want to emphasize this. Even with these critical 
long-term investments, the President's budget keeps overall 
non-defense discretionary spending well below its long-term 
average as a share of the economy. I want to emphasize this 
point. Under the President's budget, non-defense discretionary 
spending would average 3.6 percent of GDP over the next decade, 
and by the end of the budget window, we propose to bring it 
down to 3.1 percent of GDP, the lowest level since the 1960's. 
Overall outlays return to historical norms once you account for 
the interest costs associated with higher deficits and the 
impact of the baby-boom retirement on entitlement costs.
    So just let me say this again. Once you take out the 
interest costs associated with the inherited deficits and the 
cost of fixing this crisis, and you account for the costs of 
demographic change, aging of the baby-boom generation on 
entitlement costs, overall outlays return to historical norms. 
A critically important point.
    The President and I share a commitment to working with the 
Budget Committee to put our Nation back on a path to fiscal 
sustainability once recovery has been firmly established, and 
we do this by making the tough choices to cut the deficit in 
half in 4 years and reduce the deficit to a level where the 
overall debt is no longer growing as a share of the economy. If 
we do not do this, then you are absolutely right: Then we face 
the risk that Government borrowing will crowd out private 
borrowing in the future and weaken growth.
    Now, when I last served at the Treasury Department in the 
1990's, fiscal responsibility helped create a virtuous circle 
of greater confidence, strong private investment, very strong 
productivity growth, higher overall gains in income for all 
Americans, more broadly shared across the American economy. We 
are a strong and productive country. This is about our will, 
not about our ability. The great strength of America is that 
when confronted with extreme challenges, we come together and 
confront them and lay out a path forward. The American people 
want to see us do that together. The world is watching us. They 
want to see us come together and work to solve these problems 
and get the economy back on track. And I look forward to 
working with you in this endeavor, and I very much look forward 
to answering your questions.
    [The prepared statement of Secretary Geithner follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Thank you, Mr. Secretary, and thank you 
for that excellent opening statement. And, again, I want to 
recognize the extraordinary responsibility that is on your 
shoulders and what I am sure is an extraordinary workload, and 
we appreciate very much your coming before this Committee for 
what is a very important conversation about the document that 
is going to be the blueprint for our country going forward and 
what should that blueprint reflect.
    One thing I wanted to put up is, looking at credit markets, 
the most encouraging thing that I have seen--this is something 
we monitor very closely in our office--is the TED spread, the 
difference between the London Interbank Offered Rate and the 
Treasury borrowing rate. And what we saw last fall was truly 
stunning and of deep concern, because the TED spread spiked 
very dramatically at nine times its typical difference. Nine 
times its typical difference. That told us that banks' 
perception of borrowing from one another had gone off the 
charts. And we have now seen a very dramatic improvement in the 
TED spread.
    By the way, this difference in the TED spread had led me to 
believe a year ago in December that we might be headed for 
trouble, because we saw a spike then in this critical rate.
    If we look at commercial paper spreads, we see the same 
thing, a very dramatic improvement--very dramatic improvement 
in the commercial spreads. In fact, if I had a chart showing 
that, it would very closely mirror this chart. Commercial 
spreads have come way down.
    With that said, we still have this issue of the toxic 
assets ricocheting around the global financial system, 
continuing to put at risk institutions and continuing to lock 
up credit markets. I had a very distinguished businessman call 
me, had a $12 million credit line, never late on a payment, 
never missed a payment, and his credit line was pulled--not 
because of anything wrong with his business, but because the 
bank's own balance sheets were so impaired that the regulator 
insisted they start to pull back on some of their lending.
    So what can you tell us, first of all, with respect to this 
measure that I have closely watched for a long period of time? 
And I find very encouraging that it has almost returned to 
normal. It is still not normal, but dramatically improved from 
where it was. How important do you take that to be, as well as 
the commercial market spread's improvement? And what can you 
tell us about the toxic assets and the plan to deal with that?
    Secretary Geithner. Thank you. Let me just start by saying 
you are both absolutely right that recovery depends on getting 
credit flowing again, and without very forceful action to make 
sure banks have the ability to lend, even in a deeper 
recession, and without continued action to get these credit 
markets working again, then recovery will be undermined and the 
effect of the very powerful Recovery and Reinvestment Act will 
be not as powerful as it needs to be in this context.
    Now, you are right that those measures of risk in some 
sense have come down dramatically. The one other thing I would 
cite in this context is that if you look at what has happened 
to mortgage interest rates, they have also come down 
dramatically. And that is, of course, critically important to 
families across the country.
    Now, it is going to take more, though. We have not seen 
enough progress. And you have heard from your constituents 
across the country that businesses, good businesses, viable 
businesses, are seeing lines cut and withdrawn, and it is for 
exactly the reason you said.
    One qualifying point, though, before I come to the toxic 
asset thing. It is important to recognize that our financial 
system--you know, we have 9,000 banks in the country. We have 
thousands of community banks. The vast majority of these 
institutions were not part of the problem, and they are going 
to be an important part of the solution. And you are seeing the 
strong, well-managed institutions expand, as they should in 
this context. And it is important that we not tar the system 
with the basic broad brush we are seeing expressed in much of 
the commentary in this context.
    Now, you are absolutely right that the basic dynamic at 
work here is that many institutions made a lot of bad loans. 
Those loans are still on their books. They cannot sell those 
loans because the markets are not working, there is no 
financing available.
    One example that is helpful to use is if you had to sell 
your home tomorrow in a market where nobody could get a 
mortgage, the price you would get for your home would be far, 
far below what you would normally expect to get in a growing 
economy where financing is available. And that is part of what 
is causing this system to be so defensive and pull back.
    Now, markets look forward, and part of the uncertainty you 
are seeing in markets is the markets are looking ahead to the 
scale of potential losses on those bad loans that might occur 
in a deeper recession. And that is in some sense forcing 
behavior by some banks that is making them defensive and 
pulling back. And to arrest this, we have to do two things:
    We have to make sure that we provide a more careful, 
transparent, realistic assessment of the potential losses banks 
may face if we go into a deeper recession. When you look under 
the hood a little more carefully, which we are doing, we need 
to make sure there is capital available to them for those that 
need it, and some will need more capital. The Government has to 
provide a backstop in that context. And we need to provide a 
mechanism to help them sell these bad assets, get them off 
their books, clean up their institutions. That will put them in 
a position where it is going to be easier for them to raise 
private capital and replace the Government's investments with 
private capital as soon as possible.
    So the mechanism we are going to use is to provide 
Government financing alongside private capital that will make 
is easy for banks to get rid of and unload these assets. And, 
again, that will make it easier for them to present a cleaner, 
stronger institution and bring private capital into their 
institutions going forward. And this is something--because this 
crisis is so different from past crises, it requires different 
approaches, and to solve it we are going to have to work with 
the market, because we do not want the taxpayer and the 
Government taking all those risks on the Government's balance 
sheet and leaving the Government with huge, incalculable 
losses, risks we cannot manage effectively, so we need to find 
a way to work with the market to help solve that problem. That 
is what our plan is designed to do.
    Chairman Conrad. All right. We are going to have 6-minute 
rounds, given the level of interest here today. I think that is 
the only fair way to do it, and I will impose that limit on 
myself.
    Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman.
    Let me just respond quickly to your opening statement. I 
want to just make a statement relative to what you said about 
your budget, because I really have fundamental disagreements 
with the way you characterized it. You said essentially that 
you are controlling spending. Well, you are not.
    Can you put up the spending chart?
    When we get into your budget in the out-years, spending as 
a percentage of gross domestic product is at 23 percent. Now, 
you argue that you control discretionary spending. You say you 
maintain it at 3.1 percent or 3.2 percent of the total budget, 
or whatever your calculation was, which is less than the 
historical number.
    Well, maybe you do, but if you do it, it is primarily 
because you are moving things from discretionary spending over 
to entitlement spending. You are taking the Pell grants and 
moving $100 billion off the discretionary accounts into the 
entitlement accounts.
    And then you said, well, and we really do manage the 
spending except for the fact that we do not address the issue 
of entitlements being impacted by the retirement of the baby-
boom generation. Well if you do not address that issue, you are 
not addressing the spending of the United States. I mean, that 
is at the core of our spending problems. And so--I will give 
you a chance in a second. I want to make this point. You cannot 
claim that you are being disciplined if you leave off the table 
the most significant item that has to be addressed.
    Now, maybe your argument is, well, we are going to address 
health care and, therefore, we are going to address the 
entitlement issues. Well, how do you address health care? 
Health care today takes 17 percent of the gross domestic 
product. You are suggesting that it be increased as a 
percentage of gross domestic product. You are adding another 
$664 billion in your budget, which you say is a downpayment on 
the entitlement accounts relative to health care, which is 
probably a downpayment that is only about half of what you 
think you really need. It is probably closer to $1 trillion, 
$1.2 trillion.
    So you are exploding the size of health care spending on 
top of health care spending which already exceeds any other 
industrialized country in the world by about 5 percent of GDP. 
So there is no discipline there. In fact, there is a massive 
expansion of the Government.
    And in the area of revenues, you are claiming, well, we are 
going to go back to the 1990 revenue levels. We are going to 
get to 18.2 percent of gross domestic product. Well, that gives 
you a structural deficit of 5 percent of GDP. If you are at 23 
percent of GDP for spending, and you only get your revenues up 
to 18.2 percentof GDP, you have got a structural deficit of 5 
percent of GDP.
    Why are you going to back to the 1990's? Why don't you go 
back to the Bush years when revenues were up to 18.9 percent of 
GDP? Why were they at 18.9 percent of GDP? Because we had a tax 
policy structure in this country which encouraged productivity 
and allowed people to take risk capital and make money on it 
and thus create jobs and thus create revenues for the Federal 
Government. What are you doing? You are clubbing--clubbing--
risk capital. You are taking and creating a 30-percent tax 
increase on capital gains. You are saying to the people who are 
small business people, we are going to increase your taxes from 
a 35-percent to a 42-percent effective rate. And then you are 
claiming, oh, we are going to have to be more productive. Of 
course, we are not going to be more productive. That is why you 
cannot get your tax revenues up because you are basically 
saying to the productive side of the ledger we are not going to 
allow you to be productive.
    Secretary Geithner. Senator, could we go through these----
    Senator Gregg. Just as second. I have got one more point 
here before we go through them. I am going to run out of my 
time.
    You say the markets look forward. The markets are looking 
forward. They are looking forward and saying, Why would we 
invest in the United States when we are going to see a massive 
expansion of the Government that will burden this country in a 
way that it cannot afford? It creates a doubling of the 
national debt in 5 years and a tripling of the national debt in 
10 years. Why would we invest in a country where the debt is 
going to be unsustainable, where the deficits are 
unsustainable, and where they are basically saying if you are a 
productive individual, a small businessman who wants to take a 
risk, we are going to penalize you, we are going to go out and 
club you with a massive new income tax. And then when you try 
to sell your little small business, you know, the little 
restaurant that you wanted to sell to the big restaurant chain, 
we are going to hit you with a 30-percent increase on your 
capital gains rate. Hit you twice, you know?
    I do not see how your budget does anything other than put 
us in a position where we get a Nation that our children cannot 
afford and that is not productive.
    Secretary Geithner. Senator, can I respond now?
    Senator Gregg. Of course.
    Secretary Geithner. Could we go back to that first chart?
    Senator Gregg. Yes. Go back to the spending chart.
    Secretary Geithner. This is a very important thing to go 
through. A significant part of the resulting level of spending 
to GDP I just want to say is interest cost based on the 
essential result of the inherited deficits and the cost of 
fixing this crisis.
    Now, you are right that part of that increase is the effect 
of the aging population and rising health care costs on 
entitlement spending.
    Now, as you know, the President brought the leadership of 
the Congress together----
    Senator Gregg. May I just----
    Secretary Geithner. Part of it----
    Senator Gregg. Doesn't that require you to take action 
which reduces interest costs in the out-years?
    Secretary Geithner. Absolutely. And what the budget does--
--
    Senator Gregg. But you are creating a deficit----
    Secretary Geithner. And, again--no, what the budget does is 
propose to bring the deficit down to 3 percentage points of GDP 
5 years out, and to keep it in that range over the next 5 
years. And what that means is the debt-to-GDP ratio will 
stabilize, and that ultimately is a test of sustainability.
    Now, you are right if we----
    Senator Gregg. No, a debt level of 67 percent of GDP is not 
sustainable.
    Secretary Geithner. No----
    Senator Gregg. And if you look at the last 20 years, 
deficits ran at about 2 percent of GDP.
    Secretary Geithner. No, but the judgment of sustainability 
of all economists across the spectrum is what level of deficit 
stabilizes the debt-to-GDP ratio at reasonable levels. And 3 
percent is roughly the band which achieves that, and that is 
the test of what the economy can bear.
    Now, you are absolutely right. This is a proposal for his 
this Nation could be fiscally responsible and live within our 
means. It is a proposal. It requires Congress to come together 
and agree to make these tough choices.
    Now, you are absolutely right that we then need to bring 
down entitlement costs, but as you acknowledge and your 
colleagues have acknowledged, the only way to do that and the 
necessary condition for doing that is to reduce the growth of 
health care spending.
    Now, you have said several times this is a dramatic 
expansion in the size of the Government relative to the 
economy. Now, again, if you take out interest costs and you 
take out the modest increase forced by the aging of the baby 
boomers, this is a change in priorities for the country, but it 
is not a significant growth in the overall size of the 
Government to GDP. And, again, the critical test for long-term 
growth is: Is that deficit going to be brought down and held at 
a level where the debt burden is manageable and stable?
    Now, that is something that we cannot do alone as an 
administration. It requires Congress, both sides of the aisle 
coming together and saying, yes, we are willing to commit to 
that path of responsibility. So we have to start with that 
path, and it has to come with meaningful reductions in non-
defense discretionary spending.
    Now, you are right that that is not going to be sufficient, 
but it is the necessary of it, and this is a very ambitious, 
fiscally responsible deficit.
    One last very quick point. You said several times in your 
opening statement that the tax increases that this budget 
proposes on the most affluent Americans, it will come only 
after recovery is established--not this year, not next year, 
only beginning in 2001, when private economists all believe 
recovery will be in place. Those increases in taxes, again, 
restore us to the level that prevailed in 2001, and they will 
affect only 2 to 3 percent of small business owners across the 
country. Only 2 to 3 percent.
    Now, you can look at independent assessments of that, and 
we can debate that impact. Those are not our estimates. Those 
are estimates of independent economists.
    Now, to say that this budget proposes to substantially 
increase the tax burden on any meaningful fraction of small 
business in the country is just not a fair representation.
    Now, we will have different priorities, different judgments 
about what is going to get the economy growing again, but there 
are very few economists who would not agree that addressing the 
growth in health care costs, improving educational outcomes, 
improving our infrastructure, and moving us to a cleaner energy 
economy are not absolutely necessary conditions for improving 
the long-term growth potential of this economy.
    Senator Gregg. And reducing debt and deficit to a 
sustainability level is at the core of accomplishing that.
    Secretary Geithner. Absolutely at the core. I completely 
agree.
    Senator Gregg. Which is not accomplished under this budget.
    Secretary Geithner. But, Senator, if your proposal is we 
should try to go lower in terms of deficits to GDP in the out-
years, lower than 3 percent of GDP, then we would be happy to 
work with the Congress on how to achieve that. And that is the 
reason----
    Senator Gregg. Start with entitlements.
    Secretary Geithner. But that is the reasonable proposition. 
But 3 percent of GDP is a fiscally sustainable deficit path. 
The hard thing is to achieve it, not to propose it. The hard 
thing is to achieve it, and, again, what this budget does is it 
outlines very concrete, very specific ways for doing that, and 
that is why you are seeing so much concern raised about some of 
the specific provisions. A test of credibility is are we 
proposing things that are going to be hard, and these will be 
hard things to do, and they require the Congress to come 
together to act.
    Chairman Conrad. Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    Mr. Secretary, the Chairman gave an example that has 
happened to a lot of us. He gave an example of a constituent 
that had a $12 million loan, never missed a payment, had 
perfect credit throughout his life, and suddenly the bank is 
calling the loan. Now, this is happening to every one of us.
    You made a statement that it was the regulators that are 
coming in there and requiring----
    Secretary Geithner. That was the Chairman's statement, but 
I would like to address that.
    Senator Nelson. OK. Then my question to you, and, please, 
we are all interested in this: What do you do to control the 
regulators so that they are not working at cross purposes with 
what we are trying to do to restore the economy? And the 
regulators, I assume, work for the Treasury Department.
    Secretary Geithner. Well, as you know, we have a rather 
complicated supervisory structure. We have something like 64 
bank regulators across the country. But your point is 
absolutely right. We need to make sure that strong banks are 
lending to strong, viable companies.
    Now, it is very important to step back and recognize that, 
you know, we had a huge, unsustainable growth in borrowing 
across our country, and we are living with the consequences of 
gravity being restored. And that means that demand for credit 
will fall, necessarily. But what we have to make sure of is 
that you do not have the supply of credit constricted and, 
therefore, pushing businesses to the point where they cannot 
meet payroll, cannot make the investments, are at greater risk 
of failure. And everyone we are doing in the financial system 
is designed to arrest that dynamic and, again, make sure that 
you have enough credit for viable businesses to do what they 
need to do.
    Now, the regulators face a very difficult balance, and it 
is very important that the supervisors across the country are 
not making it harder, again, for strong banks to lend to viable 
businesses. And I know that my colleagues and counterparts at 
the national level responsible for bank supervision are trying 
to be as careful as they can in sending out that guidance. They 
issued a statement together back in the fall. We have been 
encouraging them to stay on it, to be very careful that they 
are sending a balanced message, and I agree with you completely 
that is an important part of a way to get small business 
lending to the point where it is supporting recovery.
    Senator Nelson. So does that mean that the regulators are 
going to start being more realistic about the poor guy who has 
never missed a payment and they are not going to require the 
bank to call the loan on him?
    Secretary Geithner. Again, you are absolutely right. you 
want to make that the supervisors are not making this thing 
harder than it already is.
    Senator Nelson. Well, they have been in my State, and I 
assume in the Chairman's State.
    Secretary Geithner. Well, I know there is as lot of concern 
about this, and, again, I think that we have tried to make it 
clear to the supervisors that they need to send a more careful, 
clear, consistent message across the country so that we are not 
amplifying those challenges.
    Senator Nelson. Well, I do not know how you do what you do, 
and you do not have a lot of your subordinates in place. But I 
would think that that would be a very important message for you 
to get out to all of these supervisors, that we ought to all be 
in the harness pulling in the same direction. And they are 
pulling in the opposite direction right now.
    Now, let me tell you one thing that is a problem in your 
proposed mortgage relief for my State. You only allow mortgage 
relief for a mortgagee if their mortgage is only up to 105 
percent of value. That is not the case in Florida. The real 
estate market has dropped like a rock, and, therefore, a 
person's home is worth a lot less than a mortgage being 
underwater that much.
    So what can we do for places like Florida and Nevada and 
California--and, of course, I have in one part of my State the 
highest mortgage foreclosure rate in the country, and we want 
to help them. But your regulations are not going to help them.
    Secretary Geithner. Senator, thank you for raising that. It 
is very important to start by recognizing that what is 
happening in housing requires recovery. To arrest it, it really 
does require that we reduce the risk that unemployment rises 
more than it has already likely to rise, and that we get the 
credit markets and mortgage markets working again. Those are 
necessary conditions. They are not sufficient, but the 
President's plan does three very important things.
    One, it is designed to help get mortgage interest rates 
lower, and even since the announcement, those rates have come 
down significantly further. That benefits all Americans who own 
a home, would like to own home, or need to borrow to refinance.
    The second thing is to make it easier for Americans to 
refinance to take advantage of lower interest rates, even if 
the loan-to-value ratio of their house has gone up beyond the 
normal 80-percent threshold that the GSEs can finance. And what 
you are referring to specifically is this refinancing program, 
and you are right that that program is only open to people who 
have loan-to-value ratios between 80 and 105.
    But the third piece of the President's program would 
provide strong incentives to reduce mortgage payments through 
principal and interest reductions for a set of Americans that 
could potentially have much higher loan-to-value ratios in 
their house. And that third part of the program is the first 
time we brought the entire arms of the Government together--the 
GSEs, the FHA, the FDIC, the bank regulators--and we issued 
just last week, I think last week, a set of standard 
modification provisions that will help provide substantial 
payments relief to millions of Americans, even with Americans 
whose loan-to-value ratios are above 105.
    Of course, you want to make sure that is going to produce a 
viable, economically affordable mortgage payment, and it will 
not benefit many Americans who really borrowed way, way beyond 
their means.
    And just let me end with this. Of course, you know, the 
tragic thing about financial crises is they cause damage not 
just to those who were irresponsible, but to those who were 
very careful and prudent in their financial decisions, and 
through no fault of their own are left facing the prospect of 
diminished access to credit, lower home values. And that is why 
in a case like this, there is such a powerful imperative for 
the Government to act forcefully.
    I hope that was responsive, but the core part of this more 
affordable payment scheme will reach a broader class of 
Americans--not all Americans but a broader class of Americans--
than the refinancing program.
    Chairman Conrad. I thank the Senator.
    Senator Sessions?
    Senator Sessions. Thank you, Mr. Chairman. And, Mr. 
Secretary, I appreciate your work. You have got a lot of 
challenges and a lot of difficult problems to deal with.
    I would just say to you, in my opinion, your statement 
today is a disappointment. I do not think it is an honest and 
responsible appraisal of the condition that we are facing 
today. And I do believe that as Secretary of the Treasury, with 
the kind of power that you have, you need to get out of the 
campaign mode. I know you have responsibilities to the 
administration, but this sounds a lot like David Axelrod to me 
rather than a fundamental appraisal. So we need to work 
together to come up with a better assessment.
    I think you should listen to Senator Gregg. What he is 
saying is that we are not going to accept numbers that we do 
not think are responsible. We are going to have to deal with 
the reality. I think Wall Street is expecting that, and they 
are not confident that they have got it yet.
    This budget at its base is more taxes, more spending, and 
more debt. I do not think anybody can debate that. And you 
cannot have, as Senator Gregg suggested, an 18-percent GDP 
revenue base while we are looking at a 23-percent spending 
rate. That is the problem that faces us.
    Could I ask you one thing? But first I want to say to my 
distinguished Chairman and Ranking Member, I know that you were 
in meetings, and you were told that this TARP had to pass so we 
could buy toxic assets. My question is: Who told you that? And 
was the economy in total collapse, facing total collapse? You 
were not, I do not think--you may have been in that room. You 
were certainly with Mr. Paulson. But Mr. Paulson told us he was 
going to buy toxic assets with it. A week later, he was buying 
stock in banks. So from the beginning, they don't have any 
credibility with me. I have doubts about it.
    With regard to that particular item, Mr. Secretary, I am 
hearing that some Main Street banks that are participating in 
the TARP program--I am talking about Main Street banks, not the 
Wall Street crowd, where you are from--that they were forced to 
the table, strongly encouraged to participate in the first 
phase of this Capital Purchase Program. It was sold to them as 
one thing, and then the rules changed. But many of these Main 
Street banks would like to pay back their TARP money to the 
Government and terminate their relationship with the 
Government. This would seem to me to be a good goal for the 
country and the taxpayers and would be a signal of some 
progress.
    However, I understand you are proposing a second injection 
of capital from the Federal Government into these banks, and I 
think many of them do not want it.
    My question is: What is the Government's objective in 
conducting the stress test that the Government is currently 
conducting on the banks? What is the ultimate goal? And what if 
some of these more well-managed Main Street banks want to pay 
back their Phase I capital and get out from under the Federal 
Government? What is the position there?
    Secretary Geithner. Senator.
    Secretary Geithner. Senator, thank you. Can I just start 
with one point? I have been in public service my entire 
professional life, never worked on Wall Street, never worked 
for a financial institution. I worked----
    Senator Sessions. Well, you supervised Wall Street, sort 
of, at the Federal Reserve.
    Secretary Geithner. You are absolutely right, as part of my 
responsibilities, I have worked in----
    Senator Sessions. That is the culture that you were part 
of, but I accept your response.
    Secretary Geithner. My obligation to the American people is 
to protect the financial security of this country and to 
protect our financial system, not because we are here to do 
anything for banks. I would not give a penny to help a bank. 
The only thing we are doing is we are trying to make sure that 
credit is available on a scale and terms necessary for recovery 
to come back. And there is no way we are going to get recovery 
in the speed and force we need unless we do a better job of 
achieving that outcome.
    Now, you are absolutely right, and nothing would make me 
happier to see strong banks repay the Government the capital 
they took, and we would love to see banks go out there and 
replace that capital with capital from the private sector, 
repay us, and allow us to use that for where it can be targeted 
next.
    One thing I really want to say, you know----
    Senator Sessions. Is there hesitation, is there any 
reluctance whatsoever----
    Secretary Geithner. No reluctance----
    Senator Sessions [continuing]. On the part of Treasury to 
have that happen?
    Secretary Geithner. Again, as long as they replace that 
with private capital so that they are, again, able to provide 
lending to the economy, then that would----
    Senator Sessions. What do you mean as long as they replace 
it with private capital? What if their stress test report 
indicates they do not need more private capital?
    Secretary Geithner. Well, then they are in a good 
position----
    Senator Sessions. And they are willing to pay you back.
    Secretary Geithner. Then they are going to be in a good 
position to repay the Government and replace that capital. So 
to the extent that happens, that will be a good thing. Now----
    Senator Sessions. Wait a minute. If they do not replace 
that capital, are you then going to tell them no, they cannot 
give back the money to the Government and get out from under 
your boot?
    Secretary Geithner. Well, Senator, I just want to say one 
thing. I was not Secretary of the Treasury until about 6 weeks 
ago.
    Senator Sessions. I understand that. You are right.
    Secretary Geithner. And although I support many of the 
actions that were taken by the Congress over that period of 
time. And you are absolutely right, Mr. Chairman and the 
Ranking Member, that what was done back then was a necessary 
thing to stabilize our system. But I was not Secretary of the 
Treasury then.
    Now, my job now is to make sure that, where it is necessary 
for banks to have additional assistance so they can do what 
they need for recovery, we do so on conditions that are going 
to make sure there is more credit available and that they 
emerge from this stronger. That is my basic responsibility.
    And I want to say, just to--can I come back on the stress 
test thing, or do you want me to come back later, Mr. Chairman?
    Chairman Conrad. Well, the Senator's time has expired. If 
you have just some----
    Senator Sessions. But the question was ongoing. I do not 
think----
    Chairman Conrad. Wait a minute, Senator. Senator, your time 
has expired.
    If you have some final point that you wanted to make in 
response, we can do that.
    Secretary Geithner. Just very quickly. We are doing what I 
think any American would understand, which is that we want to 
make sure that we understand and the world can see how strong 
these institutions are and where some may need an additional 
buffer of capital to get through this challenging economic 
environment. To do that, you have to look carefully under the 
hood and bring a more consistent, realistic, forward-looking 
assessment of what potential losses may occur across the 
system. That is a necessary, completely sensible, reasonable 
thing for the Government to try to do, and it is in the 
interest of these institutions, because right now they are 
living with a cloud of uncertainty which is causing them to be 
more defensive and withhold lending. And we need to arrest that 
basic dynamic.
    But I hope and expect--and I believe it will be possible--
that many banks will be able to repay the Government the 
capital they initially took.
    Chairman Conrad. Let me just stay this to my colleagues. We 
are not going to make it at this rate because people are going 
over their times, and I mean not just a little bit over.
    Senator Sessions. I was just 1 minute.
    Chairman Conrad. Yes, I know, it is 1 minute here and 2 
minutes there, and pretty soon we are not going to make----
    Senator Gregg. Is that like trillions?
    Chairman Conrad. Yes, it is sort of like that. I just ask 
all of our colleagues, and I would ask the Secretary--you have 
a full right to respond. I want to absolutely give you every 
chance to respond here. And to colleagues, please respect our 
other colleagues.
    We have next in order on our side Stabenow, Cardin, 
Sanders, Murray, Warner, and Whitehouse. On the other side, 
Senator Bunning will be next, Senator Crapo, Senator Graham, 
Senator Alexander.
    Senator Stabenow?
    Senator Stabenow. Thank you, Mr. Chairman, and welcome, Mr. 
Secretary. This discussion or debate going on reminds me very 
much of the debate we have had for the last 8 years, the ninth 
year of my being in the Senate and on the Committee. And with 
all due respect, say I welcome an administration and a 
Secretary of the Treasury that is putting forward an honest 
budget that shows all of our debt, does not pretend that the 
war does not cost anything, and is including all of the 
challenges that we have.
    I remember when our previous Vice President said that 
deficits don't matter, and, in fact, we all know that they do. 
But to me this is very much about the old solutions that were 
in place, that were tried with a different administration, a 
different majority, and trying to do something new, having a 
different view, a different set of values and priorities.
    And so I want to just start out by commending you for 
having a budget that is a net tax cut for the middle class of 
this country, for putting together the true costs and issues 
that deal with economic competitiveness for businesses and 
families. When someone sits around a kitchen table, they do not 
compartmentalize their health care bill, the cost of sending 
the kids to college, and what is happening when they are trying 
to pay for gas or their energy costs. It is all part of their 
budget. It is all part of the challenges. And, unfortunately, 
you find yourself where you have inherited a terrific mess, 
economic mess, and inaction on all of these issues. And so I 
commend you for pulling this all together, which is very, very 
tough to do.
    I also want to indicate that we have said for years that we 
have to invest on the front end to get savings, and it is 
always hard. It is hard to do prevention even though it saves 
money. It is hard to do up-front costs like health information 
technology even though you know it saves, creates quality, 
saves on costs. It is hard to deal with issues around energy on 
the front end. But I want to thank you for that as well, 
because this budget really does reflect being responsible about 
how we get where we want to go to save dollars.
    I want to ask you a question, though, related to up-front 
costs. You have in here in the overall budget a National 
Infrastructure Bank, which I commend you for, to deal with 
long-term infrastructure investments. And also there are 
dollars in the budget that deal with alternative energy 
investments, new technologies, which I also commend you for, as 
a State where we can make those technologies, and I see that 
very much a part of our future.
    My question to you is--the clean energy piece is tied to 
the cap-and-trade program, $15 billion tied to cap-and-trade. 
And I very much want to see that separate, not because I am not 
supporting doing something on cap-and-trade, because I am and 
have very specific ways that I believe that we can work 
together to get there. But I also believe that we can't wait, 
that the alternative energy, clean energy investments on the 
front end are critical for us to be able to meet cap-and-trade.
    And so my question is: If we put forward--and I would like 
to work with you on this budget, putting forward a clean energy 
fund that would be within the context of this budget, but would 
not be tied to the cap-and-trade regime specifically in case 
this takes a little bit longer to get done, and I am wondering 
your thoughts about that.
    Secretary Geithner. Senator, thank you. I think I should 
start by saying in the Recovery Act which you passed, there are 
very, very substantial investments already----
    Senator Stabenow. Absolutely.
    Secretary Geithner [continuing]. In clean energy 
technologies, and, in fact, they are much larger, I believe, if 
you account for them correctly, than the proposed $15 billion 
piece of use of resources potentially raised by cap-and-trade. 
And so we are not waiting, and I think you are right that it is 
very important not to wait. This is too important to wait, and 
we need to move now.
    The Energy Department and other arms of the administration 
working with Treasury are trying to move very, very quickly to 
put those programs in place because it is important to do.
    Senator Stabenow. Well, what I would ask that you look at 
again is that in the recovery plan--and I was pleased on the 
Finance Committee to be a part of putting together the 
manufacturing credit and extending the investment tax credit 
and production tax credit, there is a cap, particularly on the 
manufacturing credit, in terms of the value of the credit that 
will be allowed overall. And we will exceed that on the 
manufacturing credit.
    There is an explosion there in jobs, in green energy, and 
interest that is going to exceed that cap very quickly. And so 
I would just ask that you work with us in order to expand that.
    Thank you, Mr. Chairman.
    Secretary Geithner. Thank you.
    Chairman Conrad. Senator Bunning is next.
    Senator Bunning. Thank you, Mr. Chairman.
    Secretary Geithner, I see in the press that you have a plan 
to save the world's financial system. Where is your plan to 
rescue the United States system? We have been waiting for that.
    Secretary Geithner. Senator, thank you for raising that. We 
have moved--again, we have been in office 6 weeks. In that 
period of time----
    Senator Bunning. No, but you--excuse me.
    Secretary Geithner. I just want to say this. Let me explain 
what we have done----
    Senator Bunning. But do not--no, I am not going to let you 
do that, because you were part of the problem. You were the 
head of the Federal Bank of New York. You sat in on the 
meetings on TARP when it was decided. In fact, they give you 
credit for it being your plan, the former Secretary of the 
Treasury does.
    Secretary Geithner. Senator, lots of people----
    Senator Bunning. And Ben Bernanke has not denied that 
before our committees.
    Secretary Geithner. Senator, lots of people are giving me 
credit, and lots of people are going to be blamed for lots of 
different things. But let me----
    Senator Bunning. I did not blame you for it. I said you are 
credited for it.
    Secretary Geithner. But let me just respond to your initial 
question. We have got to move and we are moving very quickly. 
You have not seen a Government move this quickly to address a 
crisis of this magnitude ever before. Remember, it has been 
roughly 6 weeks since I took office, and in that period of 
time, we have launched this very powerful housing program to 
get to the heart of this crisis. We have started this very 
powerful program with the Fed to get lending going into small 
businesses and consumers. We have laid out a program for 
strengthening our Nation's banks with detailed terms on the 
capital they have the potential ability to get from the 
Government--all in this short period of time.
    We have proposed very substantial reforms to the conditions 
that come with our assistance, not just on dividends, on 
compensation, but on lending and transparency and 
accountability----
    Senator Bunning. Mr. Secretary, I have got 6 minutes, and I 
want to ask some questions.
    Secretary Geithner. And this is a global crisis. It is in 
the interests of the United States that we have a global 
response, and export prospects for American businesses across 
the country will depend in part on how effective we are getting 
other countries to move with us----
    Senator Bunning. Thank you. Last week, AIG's bailout brings 
the total to about $180 billion. I do not understand how one 
company is worth propping up with $180 billion worth of 
taxpayers' money, and I do not think the American people 
understand it either. So tell us, why do you keep bailing out 
AIG? What is the risk? And who are the counterparties that we 
are really trying to save?
    Secretary Geithner. I agree, it is an outrageous thing for 
our Government to be in the position where a company was 
allowed to get to the point with no constraints that their 
future is critical to the future of the financial system. Now--
--
    Senator Bunning. Have you seen this report?
    Secretary Geithner. I do not see what it----
    Senator Bunning. Well, it is a strictly confidential 
report: ``AIG: Is the Risk Systemic?'' It was supposed to be 
the document they presented to you all or the Treasury for the 
fourth tranche of money that they got.
    Secretary Geithner. Senator----
    Senator Bunning. I got it from the New York examiner of 
insurance.
    Secretary Geithner. I am happy to look at it, but I will 
tell you my judgment. AIG is systemic. I wish it were not the 
case. But AIG is systemic, and the least cost way to the 
American taxpayer and the American people for dealing with that 
risk is to help this company restructure and get to the point 
where----
    Senator Bunning. Where is the bottom line, Mr. Secretary?
    Secretary Geithner. The bottom line is that our job and my 
responsibility is to protect the security of the American 
financial system----
    Senator Bunning. Where is the bottom line for the American 
taxpayer dollar-wise?
    Secretary Geithner. The bottom line is that we have to make 
sure, given the severity of this crisis and the fragility of 
this system, that we do everything necessary to protect against 
the risk that we have a disorderly failure of a major financial 
institution. I mean, just look back to what happened in the 
fall----
    Senator Bunning. I did.
    Secretary Geithner [continuing]. And look how that----
    Senator Bunning. I disagreed completely with what you did.
    Secretary Geithner. No, but remember, I was--if you look at 
the consequences for the American economy----
    Senator Bunning. I have looked at the consequences.
    Secretary Geithner. But if you look----
    Senator Bunning. I looked at Bear Stearns. I looked at 
Lehman Brothers. I looked at all the things that were going on 
at the time and disagreed completely with what was happening.
    Secretary Geithner. And, Senator, I do respect your views 
on this, and I understand your concerns about it. But this is a 
basic judgment about what is necessary to protect the stability 
of the American financial----
    Senator Bunning. Thank you.
    Secretary Geithner. And that is my job and responsibility--
--
    Senator Bunning. Thank you.
    Secretary Geithner. And AIG is systemic.
    Senator Bunning. The first thing that France did when they 
went socialistic was nationalize the banks. We have skirted 
nationalization of the banks under you and the amount of money 
that we have been putting in banks all over the country.
    Now, we will not call it ``nationalization'' because that 
is a bad word, but if you tell me how many banks have accepted 
money from the Federal Government, I will give you a little 
better idea on what nationalization is.
    Secretary Geithner. Senator, are you speaking in favor of 
nationalization or against it?
    Senator Bunning. No, no. I am----
    Secretary Geithner. Against it.
    Senator Bunning. That is really funny.
    Secretary Geithner. No, I was not trying to be funny. I 
just want to make sure I understand.
    [Laughter.]
    Secretary Geithner. You said we skirted it, but you were 
not praising me, I thought.
    Senator Bunning. No, I am not.
    Secretary Geithner. OK. So the information on who has taken 
money from the Government in terms of capital and the amount of 
capital----
    Senator Bunning. How many banks?
    Secretary Geithner. It is publicly available on the 
website. It is in the hundreds. But what matters is the amount 
and terms of that capital.
    Senator Bunning. Well, OK. I understand all those things. I 
have a community banker who attacked me out in Paducah, 
Kentucky, on FDIC assessment. Their assessment went up 1,000 
percent. They are getting charged, and did not have any 
failures, for those who failed. Explain that to me.
    Secretary Geithner. You are absolutely right. I think this 
is a deeply unfair thing, and it causes concern across 
community banks across the country. You are absolutely right. 
The way our system is designed is the FDIC is obligated under 
law to assess a tax over a period of time--to raise the premium 
over a period of time across the entire financial--and that 
does create this problem that people, again, who were 
responsible and ran well-managed banks are bearing the costs of 
the decisions made by others. And that is a deeply unfair 
thing. But that is the way the system as designed by the 
Congress is applied. And I think it is very important that we 
work together to make sure----
    Senator Bunning. We will work together to change it. Thank 
you.
    Chairman Conrad. Thank you, Senator.
    Senator Cardin.
    Senator Cardin. Thank you, Mr. Chairman.
    Secretary Geithner, first let me tell you what I like about 
the Obama budget. I think it is an honest budget. You have 
included in the budget the real cost of Government, and that is 
refreshing. It is aggressive in dealing with the short-term 
problems that you inherited, including large deficits and an 
economic crisis. And it invests in America's future so that our 
long-term prognosis will be much better, by including health 
care reform, and energy and education policies.
    But let me share with you the concerns that the Chairman 
has raised about long-term financial viability of the economic 
plan that you have presented. I say that because, first, the 
Administration's success depends upon Congress responding to 
your requests on health care, energy, and education. I 
certainly hope the budget resolution that passes Congress and 
the actions of our committees will accomplish that. And I will 
do everything I can to give the best possible chance for that 
to be achieved. But it is a heavy lift, and if we do not 
achieve those objectives, then the long-term prognosis is not 
going to be as good as you have presented.
    Second, it depends upon an effective strategy to deal with 
this economic crisis, and let me talk about that, for a moment.
    We have heard over and over again that the economic engine 
of America in creating new jobs is small business. That is 
where most jobs are located, and where most of the job growth 
will take place. That is where we find the best prospects for 
innovation in America.
    Now, before President Obama was inaugurated as President of 
the United States, Larry Summers made a commitment that we 
would have a strong program to help small businesses. I have 
asked questions at hearings before as to when are we going to 
start to see small businesses get the help that they need. 
There was a commitment to use the Federal Government in the 
secondary markets to ease up SBA loans. You have said that you 
are going to become out with a program to help small 
businesses.
    I was concerned by Assistant Secretary Neel Kashkari's 
comments yesterday where he said that government is not going 
to interfere with the banks' lending policies; it is going to 
be up to their independent judgment.
    Can you tell me specifically when small businesses in 
Maryland and around the Nation can get some help from these 
programs? They do not see it today.
    Secretary Geithner. Very important. Very important 
objective, and I completely share your commitment for us moving 
aggressively to fix this.
    Now, let us just start with in the stimulus package there 
is a range of very important provisions for small businesses, 
including a substantial increase in the SBA guarantee program. 
To make that work fully effectively, we need to make sure that 
these lending programs we announced 2 weeks ago are also up and 
running operationally, and they are coming onstream very, very 
quickly. That will help make sure there is liquidity available 
to help support those issuance. But that is not enough.
    We also need to make sure that community banks are getting 
access to capital where they need so as quickly as possible, 
and we are committed to doing that. And as I said, as one of 
your colleagues said earlier, it is very important that 
supervisors are working in support of this objective, not 
against it. And we are looking at other ways and are open to 
suggestions on other things we can do quickly to help reinforce 
these big objectives.
    But you are absolutely right that getting credit available 
to small businesses who are viable, can support strong 
businesses, is an absolutely critically important priority. And 
you have seen a lot in stimulus and recovery. You see 
additional things in the budget which we hope will pass 
quickly. And you will see--we have already started these 
lending programs that are necessary for the SBA program to 
work.
    Senator Cardin. I know the tools are there. We just have 
not seen the results.
    Secretary Geithner. Right.
    Senator Cardin. I can tell you, I meet with the small 
business people in my State frequently, and the credit sitution 
for them is just as tough as it was 4 months ago.
    Secretary Geithner. I agree with that.
    Senator Cardin. I would urge you, first of all, to keep us 
informed as to what is happening, what the facts are.
    Secretary Geithner. Yes.
    Senator Cardin. And, second, do some visible things to show 
that you are concerned about small businesses. We need their 
help, and they really do believe government aid is primarly 
directed at large corporations, and that if you are smaller, 
there is no help available.
    Secretary Geithner. I understand that concern, and we are 
very committed to fix this, we are moving very aggressively, 
and we will give as much prominence and profile to these 
initiatives as we can.
    Senator Cardin. I appreciate that.
    Let me just talk for a moment about these toxic assets, 
because I am not exactly sure I understand the mechanism that 
you have in place. Are you trying to get them sold and off the 
books of these banks that are not as healthy as they should 
be----
    Secretary Geithner. Yes.
    Senator Cardin [continuing]. Or are you trying to get just 
a better valuation, you are trying to get them off the books? 
So you are going to have a private-public partnership to have 
investors purchase these assets?
    Secretary Geithner. To provide an opportunity for them to 
sell these assets.
    Senator Cardin. And then a private entity would own the 
toxic asset, and the bank would get the----
    Secretary Geithner. Sharing the upside with the Government, 
managed by people who are good at managing these assets.
    Senator Cardin. And are the specifics of this proposal now 
well----
    Secretary Geithner. No. We are outlining within the next 
couple of weeks the details of these proposals so everybody can 
see them and see how they are going to operate.
    Senator Cardin. As you know, predictability is important--
--
    Secretary Geithner. Very important.
    Senator Cardin [continuing]. In all of our businesses, and 
there is a lot of speculation out there as to how much risk the 
private investors are going to have to take and whether this 
plan is viable or not. I urge you to have transparency as this 
is developed, because there are some good ideas out there, and 
there is a lot of money sitting on the sidelines. Investors are 
prepared to make investments if they believe that this is going 
to be a fair process. And I could not agree with you more, we 
have got to get these toxic assets off of those banks' balance 
sheets; they are recluding banks from making loans today.
    Secretary Geithner. Yes, and you are absolutely right that 
it has to come with absolutely clear, full transparency for 
people to have confidence in the program.
    Senator Cardin. Finaly, I want to underscore the urgency of 
the real estate situation. February's foreclosure numbers were 
shocking. We have got to stop the hemorrhaging of people losing 
their homes, and I would just underscore that point.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you. And Senator, you get a prize. 
You were right on time. What a good example.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman. And, 
Secretary Geithner, thank you for coming today. I want to try 
to make three or four points during my 6 minutes, so I will try 
to talk fast.
    First, could we put the chart up on the deficits?
    I want to return to one of the issues that Senator Gregg 
raised with you, and that is just the question of where we are 
headed with our deficits in the country. With the chart that we 
have up there, I want to focus on the blue line first. The blue 
line is, as I understand it, what CBO's assessment is of the 
baseline; in other words, what would happen with our deficits 
if we simply follow current law and do not do anything 
different for the next 5 years or so.
    What that line shows is that if we just followed the 
current law, our deficits by 2012 would be down in the $200 
billion range and declining over time. And it shows with regard 
to the President's budget that although there are some spikes--
and I understand those spikes as a result of, I assume, the 
stimulus act and some of the other things that we have been 
doing--it also declines rapidly basically as a result, as I 
understand, the way that we will be phasing out the excessive 
spending and the stimulative actions and the TARP funding and 
so forth that we are engaged with right now.
    My point is, first at least, to make the comparison between 
the two lines, but to make this point: When the President says 
he wants to reduce the deficit by half by 2012, isn't he 
basically saying that--I mean, that is going to happen anyway 
as a result of current law. That is not correct?
    Secretary Geithner. Well, Senator, this is very important 
to point out. That blue line, for that to happen, you would 
have to have no extension of the AMT; you would have to have--
taxes on 95 percent of Americans would rise substantially. 
There would have to be, I think, no foreign wars. It would be 
peace and prosperity across the world tomorrow. And so it is 
not actually anything like a realistic expectation about what 
is a sensible economic path for the country.
    Senator Crapo. I understand that, and leaving out the 
potential for another war, I am one of those who, I am sure you 
know, does not believe we should let the tax cuts expire and 
that we should maintain our current tax policy. And my 
understanding is that if we did maintain tax policy and did not 
have tax increases on the American public, that line would be 
somewhere between these two lines.
    But my point still is, shouldn't we--and, again, I am not 
trying to make the comparison between the two lines. Others can 
make that point. I think it is maybe a valid point to argue 
about. But my point is this: As we talk about trying to reduce 
the deficit, admitting that we need to do something on tax 
policy--and we may disagree on that; we do agree on the AMT--
shouldn't we try to do much more than simply allow our current 
trends to take us back to a much smaller deficit? In other 
words, shouldn't we be much more aggressive on deficit 
reduction than simply allowing the trend lines to bring us back 
to a normal reduction in about half of what we have?
    Secretary Geithner. I want to just underscore this. It is 
absolutely imperative that we lay out a path that brings us 
back to sustainability, and that requires more than just 
letting the temporary increases in spending in the Recovery Act 
expire and fall--it requires more action by the Government and 
the Congress to do that. And the President's budget proposes a 
number of specific measures necessary to bring that deficit 
down to 3 percent of GDP over time. It is not enough just to 
sit back and let those temporary things expire. You have to do 
more things.
    But it is very important to recognize the tax increases 
that are proposed in this budget, again, only come when 
recovery is in place, and they only go into effect on a small 
fraction of the most affluent Americans, very limited number of 
small businesses, and only restore those rates, again, to a 
level that prevailed during a period where you had remarkably 
strong----
    Senator Crapo. You just got to my second point that I 
wanted to make, and that is, you say that the tax increases 
will only happen when the economy has recovered. I understand 
that a lot of economists are saying we are going to be 
recovered by 2011. Frankly, I think there are economists who 
are saying that maybe our recovery will not be so strong by 
then.
    My question to you is: Are these tax increases contingent 
on a recovery? Or are they going to happen regardless of what 
happens in 2011?
    Secretary Geithner. Senator, I think it is a very important 
question. I think that, again, we need to lay out an ambitious 
path for bringing those deficits down; commit to achieving 
that, with a mix of measures on the resource side and the 
spending side that do the best possible job of leaving our 
economy stronger. And that is what the President's budget tries 
to do.
    Now, of course, we are going to have to watch how the 
economy evolves, and I want to underscore that one of mistakes 
governments have made over time in dealing with economic crises 
is putting the brakes on too quickly or in ways that, you know, 
hurt growth just as it is starting to take----
    Senator Crapo. So are you saying----
    Secretary Geithner. We want to be careful not to do that.
    Senator Crapo. So are you saying that if we do not see the 
more rosy picture in 2011 that we may not see the 
administration suggest that we----
    Secretary Geithner. No, I am just saying----
    Senator Crapo [continuing]. Tax increases?
    Secretary Geithner. I am just saying that recovery requires 
that we keep stimulus sustained until growth is in place, but 
we have to do it in a fiscally responsible way.
    Senator Crapo. But what about the tax policy? Are you 
including tax policy in that?
    Secretary Geithner. Again, I would say generally. Of 
course, we have got to keep watching things as they develop, 
but what we need to do together is lay out a path that brings 
those deficits down, and we have to agree on what the right mix 
of measures on the resource side and the expenditure side are 
to do that.
    Now, we are going to have slightly different priorities in 
that context, but I believe that this is the best package of 
policies to leave our economy stronger in the future, and I 
think, again, if you look at the record, just going back to the 
second half of the 1990's, there is a pretty strong empirical--
very strong empirical case that that produced a level of 
private investment and productivity growth that is the envy of 
the world.
    Senator Crapo. Well, I ran out of time, and I only got to 
two points, so I will----
    Secretary Geithner. I apologize, Senator.
    Chairman Conrad. I thank the Senator. He gets a prize as 
well.
    Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman. Welcome, Mr. 
Secretary.
    Mr. Secretary, as you well know there is a huge sense of 
outrage in our country with what Wall Street has done through 
their greed, through their recklessness, and perhaps their 
illegal behavior, in plunging us into this deep recession and 
bringing us to the cusp of a depression, all of which has 
impacted tens and tens and millions of people, hurt so many 
people.
    I want to express my view that I am concerned that the same 
people on Wall Street who were part of the problem are still in 
office, and they still have all of the power and all of the 
money that they used to. I am concerned there has not been a 
serious investigation explaining to the American people who 
caused this crisis. I have not seen the kind of prosecutions 
that I think should be done.
    So I would hope from the Treasury Department we will begin 
to give confidence to the American people--you know, they talk 
about Wall Street wanting confidence from you. The question is 
the American people have no confidence in Wall Street. So I 
would hope that we would see a more aggressive posture on the 
part of the Treasury Department and express it, the outrage 
that the American people feel about the greed on Wall Street.
    Now, of the many issues that all of us hear about, one of 
them that I hear a whole lot about is that at a time when the 
taxpayers of this country are providing hundreds of billions of 
dollars to bail out Wall Street, Wall Street is saying: Thank 
you. We are going to charge you 15, 20, 25, 30 percent interest 
rates on the credit cards that we are issuing to you.
    That is very nice of those guys. We are bailing them out. 
They are getting zero-interest loans from the Fed, and then 
they charge our people 25 or 30 percent interest.
    I am introducing today legislation that would cap interest 
rates in this country at 15 percent, cosponsored by Senator 
Durbin. It emulates actually what the Federal Credit Union Act 
does for credit unions. Many people do not know this, but 
credit unions cannot charge more than 15-percent interest 
rates, with certain exceptions, then go up to 18 percent. 
Credit unions are not coming in here to be bailed out.
    So my question is: Do you think it is time in this country 
for legislation to cap interest rates--to go back maybe to 
where the Bible took us, that says it is immoral for financial 
institutions to charge middle-class people 25, 30 percent? 
Would you support a cap on interest rates?
    Secretary Geithner. Senator, I want to begin by saying I 
completely share your sense of basic outrage and anger. I 
understand how powerful it is across the country. You are 
absolutely right that the judgments made by the leaders of our 
financial institutions have caused a catastrophic loss of basic 
confidence. It is making everything worse--everything we need 
to do to get recovery back on track is made worse by those 
basic judgments. I could not feel more strongly about this 
issue, and that is why the things we do have to be directed at 
making sure that we are getting more credit to the American 
people, not less.
    Now, on your specific--I would like to look at your 
proposal in detail and give you a more thoughtful response. The 
basic test that we would have to apply to any proposal like 
that is, again: Is it going to make it more likely that credit 
is available on reasonable terms or less likely? That is the 
basic balance we have to strike. But I would be happy to take a 
careful look at your----
    Senator Sanders. Mr. Secretary, all I would say is that 
this concept has been in existence under the National Credit 
Union Administration. Our credit unions are doing pretty well. 
They are lending out money to people who need it. They are not 
asking for bailouts of hundreds of billions. I think we should 
emulate what they are doing.
    Second point. You have raised with AIG, all of us know, 
this absurd concept of ``too big to fail.'' What I have said 
from the very beginning of this crisis is that if an 
institution is too big to fail, it is too big to exist.
    What are we doing now to break down and break up these 
organizations so that we are never again placed in a position 
to have to bail them out because of the systemic damage that 
would occur if they failed? Are we starting right now an 
investigation to say, Sorry, Bank of America, sorry, Citigroup, 
sorry, AIGs of the world, we no longer can sustain institutions 
that are just so large that it could cause so much damage if 
they failed?
    Secretary Geithner. Senator, you are absolutely right that 
we have to create a system that is less vulnerable to the kind 
of risk we see in this crisis, and part of that is going to 
require that we have much stronger oversight with much greater 
constraints on institutions that pose some potential damage to 
the system. And a critical priority of the President, working 
with the Congress, will be to put in place legislation which 
will achieve that objective.
    Now, right now, as you know, the Government's assistance in 
AIG is conditioned under there being a very dramatic, 
substantial restructuring of that entity. And where we have 
to--if we have to take additional actions to help stabilize the 
system, we will make sure that those actions come with 
conditions that achieve----
    Senator Sanders. OK. Very briefly. We do not have much time 
here. You know, I voted against the repeal of Glass-Steagall. I 
argued with Greenspan every time he came before the House 
Financial Institutions Committee. I do not believe in 
unregulated financial institutions, et cetera. But on this key 
issue of ``too big to fail,'' I think we have got to go back to 
where Teddy Roosevelt was--do you agree?--and start saying, 
Sorry, we are going to break them up.
    Secretary Geithner. I completely agree that we do not want 
to put this country in the position in the future where we are 
vulnerable again, where the weakness in one institution causes 
the risk of great damage to the fabric of the American 
financial system. That basic objective has to underpin 
everything we do in the reform agenda, and we have to get it 
right.
    Senator Sanders. OK. Thank you, Mr. Chairman.
    Chairman Conrad. I thank the Senator.
    Senator Sanders. And I am giving you back 17 seconds. Do I 
get some credit for that?
    Chairman Conrad. You are rising to a whole new position.
    [Laughter.]
    Chairman Conrad. Senator Graham.
    Senator Graham. Thank you, Mr. Chairman.
    Do you support a biblically based 10-percent flat tax?
    [Laughter.]
    Secretary Geithner. I do not like to----
    Senator Graham. You do not have to answer that.
    Chairman Conrad. You do not have to answer.
    Senator Graham. Well, do you support a temporary suspension 
of the mark-to-market rule?
    Secretary Geithner. Senator, that is the prerogative of the 
SEC. I want to say one basic thing, which is that we are at a 
period where investors do not have a lot of confidence in their 
capacity to judge the risks----
    Senator Graham. From your personal point of view, is it a 
good idea or a bad idea?
    Secretary Geithner. My personal point of view is that we 
have to be very careful not to do things that would erode 
confidence in the people's ability to assess the risks and 
exposure to a bank.
    Senator Graham. OK. Well, let us look at--and you think 
that might do that.
    Secretary Geithner. There are some versions of those 
proposals that would have that risk, and like many things, 
these are complicated, careful judgments. But I know that my 
colleague Chairman Schapiro is looking carefully, as she should 
be, at all reasonable proposals.
    Senator Graham. OK. Let us look at some assumptions that 
are being made in this budget process and about the economy in 
general. Under President Obama's budget, he assumes a 3.2-
percent GDP growth in 2010. Do you think that is accurate?
    Secretary Geithner. I think that is a reasonable judgment 
based on the evidence available when the budget was put 
together.
    Senator Graham. Do you think that is a reasonable judgment 
now?
    Secretary Geithner. I do think it is a reasonable judgment, 
but as you know, that is the kind of judgment we have to assess 
carefully. There is an established rhythm----
    Senator Graham. Would you like to change that judgment?
    Secretary Geithner. Not today I would not.
    Senator Graham. OK. The assumption also is made that 
unemployment would peak at 8.1 percent in 2009. Do you stand by 
that assumption?
    Secretary Geithner. Senator, I will just say again--I mean 
I know what you are asking, and----
    Senator Graham. It is a simple question.
    Secretary Geithner. Again, as I said, that forecast, done 
with independence and integrity, always underpins----
    Senator Graham. Given what you know today, do you think 
that is a reasonable assumption to make?
    Secretary Geithner. Senator, I still believe, if you look 
at the consensus of private forecasts, they project recovery 
starting to take hold the latter part of this year into next 
year.
    Senator Graham. Let us try this again. Do you believe that 
the assumption that unemployment will peak in this Nation at 
8.1 percent in 2009 is still reasonable?
    Secretary Geithner. Senator, I am going to say it exactly 
the same----
    Senator Graham. Fair enough. We will move on.
    Secretary Geithner. OK.
    Senator Graham. Do you believe that if we put limitations 
on charitable giving where the maximum deduction would be 28 
percent versus what it would be today, 35 percent--the 
Independent Tax Policy Council has estimated that $9 billion 
would be lost in terms of charitable giving. Do you agree with 
their assumption or ont?
    Secretary Geithner. You know, I will have to look more 
carefully at it, but as we have said before--and I think this 
is true in independent estimates--those proposals, again, which 
would only take place if we agree on comprehensive health care 
reform in years out there, would affect a very small fraction 
of----
    Senator Graham. It is just the concept that I am trying to 
drive at, that if we begin to limit the charitable deduction 
write-off, does it have an adverse impact on charities?
    Secretary Geithner. You know, Senator, it depends, as you 
know, on what else is happening, and the most important thing 
you can do to affect charitable giving is to get this economy 
back on track and a stronger basic position.
    Senator Graham. I think the most important thing you can do 
is to reward it when it is done. That is just my assumption.
    Let us move on now to the stress test. And, No. 1, thank 
you for taking the job. I know it is tough, and you are doing a 
lot of things, and I agree with Chairman Gregg that this is not 
easy and you do not have your team in place. And if you are 
looking for a way to serve the country, join the marines or go 
to Treasury. I think they are both very difficult.
    Secretary Geithner. I am very glad you said that, and I 
completely agree.
    Senator Graham. Very difficult assignments.
    Secretary Geithner. No more important, no more noble 
opportunity.
    Senator Graham. The few, the proud, the brave--the Treasury 
people, yes.
    [Laughter.]
    Senator Graham. But--where was I at? Oh, OK.
    Secretary Geithner. I just do not want to say ``the few.'' 
We want to say ``the many and the proud and the brave.''
    Senator Graham. That is right. The bottom line about the 
stress test is that we are going to put some of these banks 
under stress and see if they are adequately capitalized. That 
is the goal, right.
    Secretary Geithner. Yes. I am not sure the word ``stress'' 
is the best used in this context. Again----
    Senator Graham. Well, that is what you all call it.
    Secretary Geithner. Well, that is the sort of standard term 
of art. Remember, every institution----
    Senator Graham. Well, whatever you are doing, you are 
trying to find out if in some reasonable scenarios banks are 
adequately capitalized. To me, that is a good thing. You are 
doing that, right.
    Secretary Geithner. That is the objective, yes.
    Senator Graham. You are testing these banks.
    Secretary Geithner. Yes.
    Senator Graham. To determine adequate capitalization, is it 
the Tier 1 regulatory standard you will be using?
    Secretary Geithner. We are leaving the regulatory standards 
in place, but as you know, what matters is not just the amount 
of capital you have, but the quality of that capital.
    Senator Graham. Sure, that is the risk, but what will you 
be using to judge adequate capitalization?
    Secretary Geithner. We are going to look at the existing 
regulatory requirements both in terms of the overall amount and 
the quality of capital, meaning how much of----
    Senator Graham. Will it be the Tier 1 system?
    Secretary Geithner. Yes, the existing framework will remain 
place.
    Senator Graham. OK.
    Secretary Geithner. What matters is to look forward at what 
might happen in a more adverse recession.
    Senator Graham. OK. If the Government owns 36 percent of 
common stock of a company, a bank called Citibank, and 
virtually makes every decision or has every decision of that 
bank run by the Government, what would you call that?
    Secretary Geithner. Senator, that is not the case today, 
although under the proposal that they presented to their 
private investors and the Treasury, that would happen. But I 
want to underscore this----
    Senator Graham. Is that free market?
    Secretary Geithner. I would say that we are going to do 
what is necessary in the interest of the American financial 
system to make sure----
    Senator Graham. OK. I have got 18 seconds left. Are you 
assuming a TARP III would pass this Congress to put new capital 
into banks?
    Secretary Geithner. You know, my operating assumption, 
Senator, is that there is widespread recognition across the 
country that getting the financial system back to the point 
where it recovers and provides credit is a critical----
    Senator Graham. Do you think TARP III will pass this 
Congress if you made a request?
    Secretary Geithner. Our hope is that the Congress will come 
together and do what is necessary to make sure the financial 
system is strong enough.
    Chairman Conrad. Thank you, Senator.
    Senator Murray.
    Senator Murray. Thank you, Mr. Chairman, and Happy Birthday 
to you. I cannot think of anybody else who would rather spend 
their birthday chairing a Budget Committee hearing.
    [Laughter.]
    Senator Murray. Welcome, Mr. Secretary. I have a couple of 
questions relating to Bank of America and Merrill Lynch. Both 
of those firms have received TARP money, correct?
    Secretary Geithner. Yes.
    Senator Murray. All right. And do you know how much it is?
    Secretary Geithner. Senator, I would be happy to get back 
to you with the specific numbers, but it is a lot of money.
    Senator Murray. In the hundreds of billions.
    Secretary Geithner. No.
    Senator Murray. More than $150 billion.
    Secretary Geithner. For Bank of America and----
    Senator Murray. And Merrill Lynch.
    Secretary Geithner. No.
    Senator Murray. Including guarantees, debt guarantees?
    Secretary Geithner. But the right--I mean, again, people 
have different assessments. What we want to look at is the risk 
and exposure to the Government in that context. And I do not 
think that is quite the right way to measure. But I would happy 
to provide a detailed assessment of----
    Senator Murray. OK, if you could. But it is a substantial 
amount of money.
    Secretary Geithner. It is a very substantial amount of 
money.
    Senator Murray. And that was necessary because we needed to 
make sure we were stabilizing the industry. I understand that.
    Secretary Geithner. That is right.
    Senator Murray. OK. And Bank of America recently formalized 
the acquisition of Merrill Lynch in January, correct?
    Secretary Geithner. That is correct. Now, Senator, I just 
want to say one thing. I am the Secretary of the Treasury.
    Senator Murray. Yes.
    Secretary Geithner. I am not in and nor would my 
predecessors have been in the position of responding to 
detailed questions about individual institutions given the 
basic constraints in which we all operate. But I would be happy 
to be as responsive as I could. But I want to just give you 
that one caution----
    Senator Murray. I appreciate it. Where I am going with this 
is they have received a large amount of money from the Federal 
Government at this point.
    Secretary Geithner. A very substantial amount.
    Senator Murray. Correct. And have they been profitable 
since they received that money?
    Secretary Geithner. Again, that is not a judgment I can 
make or share with you today, although I think you will see in 
the public domain, in the context of the normal reporting 
period, a full answer to that question, like you will for 
institutions across the country.
    Senator Murray. Well, OK. Let me just ask you, do you think 
it is appropriate given the financial condition of these 
firms--and I assume that there are losses--that bonuses were 
paid to their executives?
    Secretary Geithner. Senator, I find it deeply offensive 
what happened in compensation practices across this country, 
and then the role that played in contributing to this crisis. 
And I think it has made it much worse, that even as the crisis 
intensified and the Government was forced to do extraordinary 
things, that you saw some institutions making really terrible 
judgments about how to reward their executives, even as their 
institutions were facing extraordinary losses.
    And as you know, the President proposed some very far-
reaching, substantial reforms and some conditions that could 
come with assistance. In the stimulus bill, an additional set 
of restrictions or conditions were passed, and we are in the 
process and have the obligation now to try to translate those 
requirements and proposals into detailed guidelines, and we are 
working on it.
    Senator Murray. OK. I appreciate that, because my 
constituents are hurting. Families and businesses are really 
struggling, and they do not understand at all the fact that 
some of these companies are having lavish weekends and paying 
out bonuses and all of that. So we know they are going to need 
additional capital, and I heard what you just said, that we are 
going to make sure that that is accountable. And we do not see 
this, but money is fungible. So how are we going to assure that 
taxpayer dollars are used not for lavish weekends or bonuses or 
these things that seem so out of line to ordinary citizens who 
are trying to pay their bills?
    Secretary Geithner. Assistance comes with conditions. It is 
not a right. It is a privilege. Those conditions will require 
that banks use the resources we provide them to increase the 
amount of lending that would otherwise have been possible; that 
they report on what is happening in lending in a way that is 
transparent and accessible to the American people; that our 
assistance comes with appropriately tough conditions on 
compensation to senior executives that is going to, you know, 
incent what we need to happen and make sure that taxpayer 
dollars are not going to benefit those senior executives in 
ways that do not make sense.
    Those are our basic objectives, and I completely share your 
concern about it, understanding how strong these opinions are 
across the country.
    Senator Murray. OK. I appreciate that, and I think it is 
really important that we continue to send that message and hold 
them accountable.
    Let me quickly flip to another question, and that is the 
impact of declining trade and exports. The Department of 
Commerce issued a revised GDP number for the fourth quarter of 
last year that showed that overall economic contraction was a 
lot more severe than originally projected. I have seen the 
minutes from the Federal Open Market Committee, their January 
meeting. It showed a consensus view among the participants that 
the declining global consumption abroad was a key contributing 
factor to declining exports and GDP.
    Can you tell us with this interdependent global economy 
what the impact is of this, what we need other countries to be 
doing, not just ourselves, and how we are going to achieve 
that?
    Secretary Geithner. Thank you very much for raising that. 
It is very important to understand that our fortunes are 
closely tied, much more so than at any other time in our 
history, with those of the rest of the world. And it is very 
important that all the major countries are moving together to 
strengthen demand, lay the foundation for recovery, that they 
are moving aggressively to fix their financial systems. And we 
need to make sure that the international financial institutions 
that provide great leverage on American assistance are using 
those resources to help those emerging market economies that 
are critical markets for U.S. exports get back on track more 
quickly. And we are going to work very aggressively. The 
President is going to take a very active leadership role with 
the G20 to try to make sure that we are all making a sustained 
commitment to recovery. And we are providing assistance to make 
sure that those critical markets have a stronger foundation.
    Senator Murray. I think that is so important. We have to 
understand that this is having a huge impact, so I am----
    Secretary Geithner. You are absolutely right.
    Senator Murray. And I am extremely concerned about some of 
our countries in Central and Eastern Europe who are seeing 
increasing financial instability. Can you talk a little bit 
about that region of the world and the impact on us as----
    Secretary Geithner. You are absolutely right. They are 
facing a set of challenges far more acute than is true in many 
other parts of the world, and it is just a symptom of how 
complicated and severe this crisis is.
    You know, a lot of people understand what happened in the 
United States, and it did start earlier in the United States. 
But many of the challenges in financial systems and their 
economies are much greater outside the United States, and it is 
going to require a lot of cooperative efforts to help them get 
through that process.
    Senator Murray. Particularly since our U.S. banks have 
invested in many of those countries, so a longer conversation, 
but I hope that we can address that in the future.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here, for your good 
humor and your resilience in all of this. I would like to shift 
gears a little bit in terms of a conversation with you, which I 
hope provides a constructive suggestion. I wonder if you are 
familiar with a book that Professor Ernest May at the Kennedy 
School at Harvard wrote called ``Thinking in Time: The Uses of 
History for Decision Makers.''
    Secretary Geithner. I am not familiar with that book, but 
it sounds like I should be.
    Senator Alexander. Well, it is an interesting book. It 
tries to compare, as you face decisions to make, if there are 
analogous decisions in the past that would illuminate anything. 
For example, if you are dealing with the Cuban missile crisis, 
is it analogous to look at Hitler coming into the Rhineland, or 
is it not? And I wanted to suggest a couple of examples in our 
history and ask you whether they suggest anything to us about 
how we might deal with what you have talked about today, which 
is fixing the banks and getting credit flowing again as our 
major challenge.
    One is the bank holiday that FDR had when he was elected to 
office in March 1933. Two days after taking office, he declared 
a bank holiday that lasted 4 days. He closed the banks. He let 
certain ones open. There was a bigger crisis then with banks--
5,000 banks went out of business. There were different rules at 
the time. He had a fireside chat. By the beginning of April, 
Americans were confidently returning a billion dollars to the 
banking system. According to this report, the bank crisis was 
over. That would be one example.
    What I think might be a little more analogous is President 
Eisenhower in October 1952 and his view on Korea. I am going to 
read just a paragraph from his speech, because it sounds like 
today a little bit to me. He says, ``The first task of a new 
administration will be to review and re-examine every course of 
action open to us with one goal and view: To bring``--in this 
case--``the Korean war to an early and honorable end....The 
reason for this is simple. The old administration cannot be 
expected to repair what it failed to prevent.''
    It sounds familiar to me.
    ``Where will a new administration begin? It will begin with 
its President taking a simple, firm resolution. The resolution 
will be: To forego the diversions of politics and to 
concentrate on the job of ending the Korean war--until that job 
is honorably done....I shall make that trip....I shall go to 
Korea.''
    One of the most memorable lines in American history.
    Now, here is my suggestion: I believe that the American 
people--I know that I am--are persuaded that our new President 
is impressive, intelligent, and having watched his campaign and 
watched his first few days in office, I am absolutely convinced 
he can do many things at once and do many things well.
    I am also convinced he does not need to scare the American 
people anymore. They are scared enough in Tennessee about what 
is going on and the President does not need to explain the 
problem with banking and credit anymore. Most people understand 
the problem.
    I wonder whether President Obama needs to borrow a lesson 
from President Eisenhower in 1952 and simply say, as you 
announce your new plan for banking and credit next week, ``I 
will fix the banks, and I will get credit flowing again, and I 
will make everything else second and subordinate until that job 
is honorably done. I will put the Health Summit aside, the 
Fiscal Responsibility Summit aside, the education challenge, 
the energy challenge``--all those other challenges are 
important, but in an Eisenhower sort of way, should he not say, 
``I will fix the banks, I will get the credit flowing again, 
and I will concentrate on that job until it is honorably 
done''? Otherwise, how will he regain the confidence of the 
American people for that one solution?
    Secretary Geithner. Senator, very important to say in the 
beginning--and the President has said this, and he will keep 
saying it--that our central obligation to the American people 
is to do what is necessary to get this economy on track, back 
on track, and to keep at it until we achieve that. And a 
necessary condition for that is to fix this financial system 
and get credit flowing again, and we will do what is necessary 
to achieve that outcome.
    Now, you cannot do it just by focusing on the financial 
system. You have to make sure the Government is providing very, 
very substantial support for demand. That is a necessary way of 
doing it. And there will be other things like you are seeing us 
do in housing that are part of that solution.
    Now, you are absolutely right, that is the central, most 
critical priority for our country, and the important message 
that he has said--and we are committed to do it--is that we 
will keep at it until we fix it. But we have a lot of 
challenges as a country, and just like it is so important, as 
many of your colleagues have said, that as we try to get 
recovery back on track, we are making it clear we are going to 
get us back to fiscal sustainability, we need to give American 
people the confidence that we are going to start to fix--start 
today to fix these long-term problems that have been neglected, 
frankly, and are going to be really important to making sure 
our economy can grow, too.
    Senator Alexander. I have just a few seconds left, and I 
respect what you are saying, and I am not unimpressed with our 
President or with you and your abilities. I am simply saying 
from my vantage point and looking at the example of FDR in the 
banking crisis in 1933--he had that fixed in 3 weeks. And he 
did not do the TVA and the CCC and the WPA and the PWA and all 
the other things until after he had the banking part of that 
crisis fixed. And Eisenhower focused on one job, ``I shall go 
to Korea.'' And he went to Korea on November 29th of 1952, 
within a few days of his being elected.
    I guess what I am saying is that part of the President's 
job is to see the strategy and let the country know about it, 
but he needs to persuade at least half the people he is right 
about it. And if you do have a plan, you have not persuaded us 
yet. And until you persuade us, confidence will not come back.
    Secretary Geithner. Senator, maybe I could just end by 
making one very important point. If you look at the lessons of 
history and the lessons of financial crises, the most important 
thing is how quickly it is--to move together quickly, 
comprehensively, and not to wait and not to be too tentative. 
And that basic lesson, which is in the American experience, the 
experience of Japan, and many other countries, shapes 
everything we do. And you are right to invoke history in that 
context, and I completely share that basic comparative.
    Senator Alexander. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Mr. Chairman, and thank you, 
Mr. Secretary. I know it has been a long morning, and I 
appreciate that you are here and have worked so hard to help 
solve these problems.
    The first thing I want to compliment you on is the 
directional changes in this budget. We spend an awful lot of 
time fighting around here about budget issues that are the 
equivalent of who gets to use the lighter first in the car and 
what belongs in the glove box. And you focused on where we are 
going and what have we have in front of us, particularly with 
our energy policies, which have been self-defeating and largely 
dictated by big oil companies. Now we have the prospect of a 
new energy policy that serves the American people; education, 
equally self-defeating policies that have led us to decline in 
our status in international competition, which is really 
shameful for a country like ours that has the best educational 
institutions in the world; and most particularly, health care, 
which, as a former Comptroller General has said, ``threatens to 
swamp the ship of state.'' We have to address these things, and 
for the first time, at least in my time here, this budget 
responsibly tries to do that. That I think is the key, 
overarching point that we should all think of.
    Some of the fine aspects of it, I also compliment you on 
the change to the outrageous tax loophole that allowed hedge 
fund barons to pay a lower tax rate than the guy loading the 
luggage into their private jets would pay. It was just, 
frankly, a disgrace to the country, and this cleans that up and 
I appreciate it.
    A couple of specific questions, though. You talked about 
your outrage about the compensation practices that pre-existed 
this crisis and, in an exercise in very bad taste and bad 
judgment, actually continued into the crisis.
    As you know, I have a concern about mummified compensation 
practices that took place during the Gold Dust era when people 
were laying it on thick, and I think it was even pretty 
disgraceful then. But they got locked in because people created 
tax dodges and did deferred compensation, or they got special, 
you know--like the old James Bond movies where the bad guy gets 
to get away and everybody else in the boat goes into the hole, 
and he has got his escape pod. They had their escape pod--
health care packages, retirement packages that were different 
than their employees.
    A lot of that stuff is now embedded, and under our legal 
system, which I fully support, it requires a hearing of some 
kind before you can even address that question. Because these 
institutions cannot go into bankruptcy because of the systemic 
problem, that eliminates the only present way to get that 
hearing to do anything about the mummified costs. And, you 
know, the mummy is going to walk at some point, and it is going 
to be really embarrassing, I think, to have $40 billion, as the 
Wall Street Journal reported, of taxpayer money go to pay 
deferred executive compensation that has been mummified on the 
books of these companies when people are suffering as badly as 
they are.
    I would urge you to take a look at working on a way to try 
to solve that problem. I think it will emerge as a serious one, 
and I have a proposal, as you know. Now may not be the moment 
for it, but I really do think that this is a problem that has 
to emerged.
    The second thing I would like to direct your attention to, 
we had a real nightmare in Rhode Island, a banking crisis, 
about 15 years ago. It was a small but very intense situation, 
and people were very, very angry. One of the things that helped 
a great deal was an investigative commission that Governor 
Sundlun then put together to take a look at what had gone 
wrong, to bring people before the public. One of the members is 
now a district judge, a United States district judge. Others 
have gone on to--it was a very distinguished group of people. 
They did a very credible job, and it really helped people 
understand what was going on.
    There is no present mechanism for anybody to understand 
what took place, and particularly when so much of the money is 
going back to the people who seem to cause it, I think it is 
important that we work on a strategy to really draw out and 
explain to the American public what went wrong and why this 
will not be repeated.
    I know that as you are going through the fixes, that is an 
incidental, and an important incidental, but I think somewhere 
it should be somebody's first order of business to bring people 
in, take some testimony, and sort that out.
    Those are just two points I leave with you. The question is 
this: Back to what Senator Sanders was asking about, credit 
card rates, many years ago the Supreme Court decided the 
Marquette decision, which was a technical decision about who 
had jurisdiction when you had a bank in one State and a 
consumer in the other. And the Supreme Court resolved it in 
favor of the bank's State.
    Well, then economic development folks came along and they 
figured out, wait a minute, if we can trash our banking laws, 
then we can attract banks who then are operating without any 
real restriction on them. And that has been the status quo 
since then.
    It does not seem to have been a very deliberate policy 
choice. Is that status quo presently important to our economic 
recovery in any respect?
    Secretary Geithner. Senator, I want to say something that I 
believe--I think is responsive to your question, but let me say 
it this way: One of the problems in our financial system is 
that we let many financial institutions choose their regulator.
    Senator Whitehouse. Yes.
    Secretary Geithner. We let people structure a product to 
take advantage of the optimal mix of tax accounting, regulatory 
capital treatment. We provided huge opportunities for 
arbitrage, and that lowered the overall quality of regulation, 
undermining the basic public policy objectives regulations are 
designed to address. And one of the most important things we 
need to do as we reform our system is to address and end and 
change the basic judgment that that kind of competition 
produces acceptable outcomes for public policy.
    So I agree with your concern, and we share an obligation 
with you to fix that as we reform the system. And I just want 
to underscore what you said, because I think you are right 
that, you know, sort of a test of credibility is the ability to 
look back honestly, independent judgment about what exactly 
caused this crisis, and that will provide the necessary 
foundation for us in figuring out how to fix it going forward, 
and the process that the Banking Committees and other 
committees are working through in the Senate and the House will 
begin the process of bringing in a whole range of outside 
experts to contribute testimony and analysis to that 
assessment. But it is a critically important thing to do and a 
test of the credibility of any country, and we are generally 
good at that, at doing that as a country.
    Chairman Conrad. Thank you, Senator.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and I 
certainly applaud the administration on putting forward a 
budget that seeks to address the incredible mess created over 
the last 8 years and to reposition America in terms of energy 
and education and health care to be much more successful down 
the road.
    I wanted to ask a couple questions as we go about that 
task, and one is--and I am referring to an article--David Smick 
wrote an op-ed a couple days ago in the Washington Post, and he 
noted one of the challenges we face--and it certainly would 
seem relevant to the public-private partnership goal of 
removing toxic assets from the banking system--is that the 
assets are worth, if you will, in a market sense 5 to 30 cents, 
but that to make the banks stable and successful, one would 
need to pay 50 to 60 cents. That is quite a gap, and how does 
one attract a private partnership into that kind of scenario 
where they might need to pay far more than the assets are 
worth? And how does one go about tackling that? I recognize 
this is an inherent dilemma you are working night and day to 
figure out.
    Secretary Geithner. Well, you are right about the problem, 
and the challenge is to try to make sure that with Government 
financing--which financing is not available in these markets 
now--to provide a market clearing mechanism for these assets. 
And our judgment is that, again, we can provide some Government 
capital and some Government financing, that you are going to 
provide something that does not now exist, which is a way for 
this to start get clearing.
    Now, again, what is sort of burdening the system now is the 
fact that there is really no financing available, no market for 
these assets, and, therefore, no real ability for banks that 
need to get rid of these things and do so in a way that is sort 
of sensible and effectively. But then this plan will address 
that.
    I would not agree, though, with the precise example that 
you used in terms of about what the price is of this and what 
is necessary to achieve this. But what we need to do is to get 
those market prices up again by making financing available. You 
want to make sure banks have a greater incentive to get rid of 
those assets.
    Senator Merkley. If I understand your point, to some degree 
the lower market valuation now is the result of the lack of 
demand, which is driven by the lack of credit to drive or clear 
the market. Is that a fair way to put it?
    Secretary Geithner. Again, that is a key thing. Just to 
take the mortgage example as a simple example, if you had to 
sell your house tomorrow--not in 3 years, not after your kids 
go to college, but tomorrow, and nobody could get a mortgage, 
the price you would get would bear no realistic resemblance to 
what you might get in a normal condition. That is a simple 
explanation of what you are seeing across markets.
    And so providing the financing is a necessary--not a fully 
sufficient condition to do that. You know, the things that are 
driving uncertainty about the valuations is partly just concern 
about how deep the recession is and uncertainty about what the 
losses might be in that context. But a big part of this is the 
absence of financing.
    Senator Merkley. A second issue that has been raised is 
whether bank bond holders, should participate in the pain, and 
on the positive side, that that participation is appropriate 
given the risk associated with their investment and the current 
status of the banks; and the opposite side, as I understand it, 
is that if the bond holders take a haircut, that it might 
decrease investment in other commercial or corporate bonds, 
damaging our effort to restore liquidity.
    How do you see that balance in how we approach this?
    Secretary Geithner. It is not a close call, Senator. It is 
necessary to protect the financial system and get recovery back 
on track for the markets to understand that we will do what is 
necessary to make sure that these major institutions can meet 
their commitments. And everything we are doing in terms of 
making capital available where it is necessary, providing 
support in terms of liquidity, funding, and guarantees, is to 
underscore that commitment to make sure these institutions can 
meet their commitments. That is necessary for them to be in a 
position to help provide the credit necessary for recovery, and 
that objective has to guide everything we do.
    Senator Merkley. I appreciate your analysis. It is a little 
difficult to explain this to taxpayers about why their 
investment to rescue the banks should not necessarily be in the 
front of the line, if you will, before the bond holders.
    Secretary Geithner. That is right, but, you know, our basic 
obligation again is to help protect the overall economy, the 
overall financial system, at least cost to the taxpayer. And I 
am very confident that that commitment I just described that 
the President said in public and we have all said publicly is 
the most effective, least cost way to the taxpayer for us to 
get out of this.
    Senator Merkley. To restore--to sustain and improve 
liquidity.
    Secretary Geithner. Exactly. The President said it best. 
Economies recover, a well-functioning financial system, credit 
is the lifeblood of any economy.
    Senator Merkley. Absolutely.
    Secretary Geithner. There is no path to recovery that does 
not start with a better foundation for the provision of credit.
    Senator Merkley. One of the things that is very frustrating 
to me is I think many of the circumstances we are in right now 
could be avoided had we had reasonable rules of the road at 
both the retail mortgage market and in terms of Wall Street 
supervision. And at the retail level, something that was 
troubling is that folks going to their real estate brokers had 
a lot of protection against conflicts of interest. But when 
they went to their mortgage broker, their mortgage broker was 
often paid significant sums if they could steer their client, 
if you will, and our homeowner into a more expensive loan.
    Is it time to end and outlaw steering payments?
    Secretary Geithner. You are absolutely right that this 
crisis in part was caused by basic failures of consumer 
protection. And for some of the reasons we just discussed, we 
allowed people in this country to evade basic protections. And 
it is very important that we put in place a stronger set of 
basic rules of the road applied more evenly and enforced more 
carefully so that this thing does not happen again. I 
completely agree with you. Of course, you want to do that in a 
way that is sort of careful and is going to be effective, but 
the basic principle is right.
    Senator Merkley. When you say you completely agree with me, 
does that include the detail that we should end steering 
payments? I like the word ``completely,'' by the way.
    Secretary Geithner. I meant to say I completely agree with 
the broad objective. I will look at that carefully. I do 
believe that the--I have to go back and look, but the Federal 
Reserve, in cooperation with the other supervisors, put out 
some very important provisions in terms of new regulations in 
the fourth quarter of last year that go some distance to 
addressing that problem. If they do not go far enough, we will 
take a careful look at how to fix that.
    Senator Merkley. Thank you. I would love to work with your 
team in terms of that rule of the road--I see I am over time 
now--and some other pieces of that consumer rule of the road. 
Thank you very much for your testimony.
    Chairman Conrad. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Secretary Geithner, 
it is good to have you here, and I know you have been logging 
some serious hours, and I think that was what Senator Graham 
was talking about, and he has got my sentiments exactly.
    Let me get into something that I think is positive news 
first. Yesterday I got into the question of the Make Work Pay 
credit, helping low-income people pay for the higher costs of 
fuel that result under a cap-and-trade approach. And I was not 
completely satisfied by the answers, but after the meeting, I 
got some encouraging news, and I want to kind of review it with 
you. This involves essentially what is going to happen to the 
very poor who, in effect, do not file a tax form, and what kind 
of relief would be available to them.
    Now, my understanding, based on some discussions last 
night, is that the administration would be open to modifying 
the President's Make Work Pay tax credit and would be willing 
to consider adding a low-income component that could provide 
some additional help through States human services agencies to 
address these kinds of concerns. I found those kinds of reports 
encouraging last night, and I want to give you a chance to 
convey some good news.
    Are you open to that kind of idea?
    Secretary Geithner. I am certainly open. I was not part of 
those conversations, but I will catch up to where you are and 
confirm your understanding.
    Senator Wyden. That would be very helpful. I would 
especially appreciate your listening to the good folks at the 
Center for Budget and Policy Priorities. They have got some 
very sensible ideas that I think are consistent with the 
administration's approach in terms of the Make Work Pay credit. 
It is your desire to compensate people for the higher fuel 
costs. I am with you on that. But I think Bob Greenstein and 
the people at the Center for Budget and Policy Priorities have 
some very good ideas to complement what you are doing, will 
resolve the matter that became controversial yesterday, and 
that will be very constructive.
    Let me ask you now a couple of questions with respect to 
AIG. In your view, does the Government have adequate legal 
authority to prevent future AIGs?
    Secretary Geithner. No.
    Senator Wyden. Given that, what steps are needed so that 
the Government does not face yet another all-time record 
bailout? In an area that to me is especially incomprehensible, 
when I think about the insurance function, I think about people 
selling insurance in my home State. It is all about managing 
risk. And they are stable operations, they are not investment 
houses, and nothing resembling what happened with AIG. So you 
have said the Government does not have adequate legal authority 
to prevent future AIGs. In your view, what is needed 
specifically to prevent a future debacle like this?
    Secretary Geithner. Many things. You have to start by 
making sure that institutions that pose potential risk to the 
stability of the system in the context of a shock like this 
have a strong oversight over them with sufficiently 
conservative constraints on risk taking so that they can 
withstand very severe stress. AIG was allowed to buildup 
without any effective supervision, to choose their supervisor, 
to attach a very risky business to a set of underlying very 
profitable healthy insurance companies, and that put us in the 
position where we should never have been as a country.
    So you have to have a much stronger form of regulation over 
those institutions going forward, and you need to make sure 
that in the event, despite that they get themselves in the 
position where they are vulnerable, that we have the capacity 
to deal with those situations in a way that has a more 
effective balance for the taxpayers as a whole.
    So as Chairman Bernanke said 2 days ago or 3 days ago--and 
I have said publicly this many times in the past--we need a 
more effective resolution regime as well to deal with 
situations like this that could cause potential risk to the 
stability of the system. Those two things are necessary. The 
challenge is in getting it right, and we are going to work very 
closely with the Congress on making sure there are adequate 
tools in place, both to prevent it and to manage it more 
effectively if it happens.
    Senator Wyden. Will you propose a legislative and 
regulatory remedy to prevent future AIGs?
    Secretary Geithner. Yes.
    Senator Wyden. If so, when?
    Secretary Geithner. We have begun a process of consultation 
with the relevant committees. I am testifying in the House on 
the 26th of March. Before that, we plan to lay out a set of 
relatively detailed concrete proposals to address just this 
issue.
    Senator Wyden. One question that is immediate, and I 
started getting into this with Chairman Bernanke. For the live 
of me, I cannot understand why the American people should not 
know who the counterparties are that have gotten these billions 
and billions of dollars through AIG. It has been pointed out in 
several places that it sure looks like some of this money is 
going outside the United States. Taxpayers are seeing billions 
sucked out this way, and for the life of me, I cannot 
understand why the American people do not have a right to know 
who the counterparties are.
    Secretary Geithner. I know--I understand that view and I 
know that my colleague Chairman Bernanke and his colleagues are 
looking at how to be responsive to that concern. I know they 
are on it; they are looking at it. There is a delicate set of 
legal provisions around confidentiality which we have to figure 
out how to manage through. But I understand your concern. He is 
working on it.
    Senator Wyden. All right. I am going to be following up 
with you on that, because to keep the public in the dark on 
these counterparties does not pass the smell test, Mr. 
Secretary. And I am going to followup with you and, again, I 
appreciate the enormous time commitment that you have given, 
and we need it now. Thank you.
    Thank you, Mr. Chairman.
    Secretary Geithner. Senator, could I--Mr. Chairman, could I 
just say one last thing on this point?
    Chairman Conrad. Yes.
    Secretary Geithner. It is very important to clarify this. 
You know, when the Government has to act to preserve the 
stability of the system, we are not doing it for and did not in 
this context do it for those individual counterparties or 
because of concern about the direct effects on those 
counterparties if you were to see a disorderly unwinding of a 
firm that complicated and systemic. We are doing it because of 
the much harder to measure indirect effects on confidence and 
the confidence of all Americans and investors around the world 
in the basic stability of institutions in the types of 
insurance savings protections they bought. And it is those 
effects that are much more important in making the judgment 
about the stability of the system, but I understand your 
concern, and I know that my colleagues are working on how to 
make sure there is a level of transparency responsive to the 
public concern.
    Senator Wyden. The Chairman has just given me 2 seconds on 
that point. I think that is a legitimate argument, but to keep 
people completely in the dark as to who is being rescued and 
why, in my view, Mr. Secretary, is going to undermine the 
credibility that you are going to need in order to make 
additional reforms in the financial sector. So we are going to 
keep working with you on it.
    Thank you, Mr. Chairman.
    Secretary Geithner. I feel as strongly as you do.
    Chairman Conrad. Let me just say that the commitment we 
made to the Secretary's people was we would get him out of here 
at 12:15, and we are close to that. I have one question that I 
would like to ask.
    You have talked about the out-years of the budget achieving 
deficits 3 percent of GDP. It is about that range that it is 
necessary to stabilize the debt. What would your recommendation 
be to us if the Congressional Budget Office comes back and says 
to us the deficits are not 3 percent of GDP in the out-years, 
but more like 4 percent of GDP?
    Secretary Geithner. Of course, that would concern all of 
us, but you have to look at the sources of the difference in 
estimates before you figured out how we try to narrow that gap. 
It depends a little bit on the sources of the differences, and 
we would have to work through whether those differences are 
bridgeable. But I think that, you know, what matters is the 
policies we commit to, together with the Congress, credible 
achieve sustainability, and sustainability has to be defined in 
that envelope around 3.
    Chairman Conrad. I would just say to you that my 
expectation is CBO is going to come back, and we will know in 
the days ahead what their prediction is. But my own view is it 
will probably be in that 4 percent of GDP range as they do 
their own rescoring of all of this. And so I think we have to 
be prepared for that.
    Senator Gregg had a final question as well.
    Senator Gregg. I have a series of quick questions.
    When you set up this effort, which is the public-private 
partnership to get toxic assets off the bank books, I presume 
what you are saying is that the Government will come in and 
essentially guarantee that the private sector will not lose 
money on these assets and that the Government will also benefit 
in some way. And my question is twofold:
    How big a number do you expect to take off the books? And 
how do you plan to value those assets when you take them off 
the books and guarantee them?
    Secretary Geithner. We have said that we think that to be 
effective in this context, we need to commit to do something in 
the range of financing available on the order of up to a 
trillion. We have to examine that over time. You will see us 
explain the details of that----
    Senator Gregg. Will that be done by guarantees?
    Secretary Geithner. No, that would be the amount of 
financing----
    Senator Gregg. Or insurance?
    Secretary Geithner. That is the amount of financing that we 
have to mobilize in this context. Now, on the valuation thing, 
this is very important. The virtue of this mechanism is that we 
are going to use a market-based mechanism to determine value of 
the assets, and that is important because we do not want to put 
the Government in the position where we are setting an 
artificially high price that will leave us with more risk than 
we think the taxpayer will bear. And so the virtue in this--
again, just to step back, if you only act after institutions 
fail, if you only act after your are in a much deeper crisis, 
you do not have to worry about the valuation problem because, 
as you saw in the S&L crisis, at that point it is not a 
complicated question because at that point the Government just 
has to resolve the institution.
    What we are trying to do is much harder, is to act much 
more preemptively, way before we get to that point, for 
institutions that we believe are going to be viable, open, and 
a necessary part of our system going forward. But to do that 
effectively, we have to solve this valuation problem, and we 
think this market-based mechanism is going to be the best way 
to solve that problem at least cost to the taxpayer.
    Senator Gregg. Well, that is good. You have given us a 
number that you are working with, a trillion dollars. What is 
the risk to the taxpayer in that trillion dollars? Are we going 
to guarantee the trillion dollars that comes in?
    Secretary Geithner. No, no. That is----
    Senator Gregg. Are we going to insure it or are we going to 
put a floor underneath?
    Secretary Geithner. You know, it depends on the precise 
structure and the amount of capital that we put in alongside 
the private capital. But the basic principle is we want to 
limit the downside exposure of the Government, and we want to 
make sure that we are sharing in any potential return on these 
assets. And that is a sort of simple, basic proposition because 
we are doing something that is beneficial for the system in 
these institutions. We want the Government to be able to share 
in the potential return on that, you know, as we do when we 
provide assistance to institutions generally.
    Senator Gregg. Maybe I do not understand, but I presume the 
way you are going to get the private sector to participate is 
you are basically going to make it profitable to them, or at 
least potentially profitable to them, by removing their 
downside risk with taxpayer insurance.
    Secretary Geithner. They are going to have to take some 
risk, too. The precise mix of risk and return depends on the 
precise structure that we design and we lay out, and we are 
going to begin--as I say, we are going to begin that process 
relatively quickly by laying out publicly what we think is an 
appropriate structure for mobilizing as much private capital as 
we can with an appropriate sharing of the risk and reward. But 
you are right, it is going to be a complicated balance to 
strike. But they will have to take risk, too, for it to work, 
and they are prepared to take some----
    Senator Gregg. Well, when you announce this, do you expect 
that the public, the market, will immediately see that there 
will be participation of a trillion dollars' worth of effort to 
try to clear up the toxic balance sheets?
    Secretary Geithner. I would say you will be able to see 
immediately the basics of the structure, and you will see a 
commitment to a level of financing which we think is very 
substantial. And our expectation is you are going to see--
again, because we are providing something the market cannot 
provide now, which is access to financing, we are going to see 
private capital come in.
    Senator Gregg. Up to a trillion dollar----
    Secretary Geithner. No, the amount of capital from the 
private sector will not be in the range of the trillion. The 
trillion is the amount of financing that we are going to make 
available generally. The amount of private capital depends a 
little bit on how we design the precise----
    Senator Gregg. Will this be done by the Fed, or will it be 
done by the Treasury?
    Secretary Geithner. This will require, given the basic 
authorities we have together, that we are working together with 
the Fed and the FDIC, and you will see us lay out the precise 
mix.
    Senator Gregg. And will this require any TARP III money? Or 
will you be able to do this within the resources you have?
    Secretary Geithner. We certainly can start it within the 
resources we have.
    Senator Gregg. Thank you.
    Chairman Conrad. Mr. Secretary, you know, you can see what 
this is like. You know? It is pretty intense at times, but I 
think very productive. And this represents the best of our 
democracy, having a serious debate about serious things. And 
you have done a superb job. Markets are up over a hundred. I do 
not know if we can actually attribute that to----
    Secretary Geithner. That is because of our shared 
commitment to fiscal responsibility over the medium term.
    Chairman Conrad. Yes, sir. And you know how I believe in 
this very, very deeply, as I know you do, and we have got an 
extraordinary responsibility, all of us collectively. And at 
some point in the future, we will be judged. We will be judged 
whether we were responsible or not. And I know you want to be 
judged favorably, so do I, and I think every member of this 
Committee. We had very, very productive meetings yesterday at 
the White House with the President, the Vice President, and I 
think this was a very constructive meeting this morning.
    We are getting you out of here a little bit late. I 
apologize for that. We told your people we could get you out by 
12:15, but it is 12:20.
    Thank you again for your excellent work, and we very much 
look forward to the unveiling of the additional plans and hope 
to have you back to help us better understand them.
    Secretary Geithner. I look forward to that, and thank you 
for what you both said. And, Senator Gregg, we share more in 
common than you believe on----
    Senator Gregg. Is that because you went to school at 
Dartmouth?
    [Laughter.]
    Secretary Geithner. You know, we are going to disagree on 
some things, but on this basic imperative of getting us back to 
the path of a sustainable fiscal position, we are absolutely 
committed to that. Absolutely committed. We may disagree on how 
best to get there, but we share that commitment. And I 
completely welcome your personal commitment to that basic 
objective as well as the Chairman's.
    Senator Gregg. There is fertile ground here in this Senate, 
especially between myself and the Chairman, for accomplishing 
that goal.
    Chairman Conrad. I thank the Secretary very much.
    The Committee will stand in adjournment.
    [Whereupon, at 12:22 p.m., the Committee was adjourned.]


                      THE LONG-TERM BUDGET OUTLOOK

                        THURSDAY, JULY 16, 2009

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9 a.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Murray, Feingold, Nelson, Cardin, 
Whitehouse, Warner, and Gregg.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Cheri Reidy, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to welcome CBO Director Elmendorf back to the Budget 
Committee. I also want to thank him and his very capable staff 
at CBO for shouldering one of the most crushing workloads that 
has ever been put on CBO as we consider so many different 
consequential measures that have enormous fiscal effects, 
including health care, climate change, and the normal 
appropriations process.
    Dr. Elmendorf and his team should be commended for the 
extraordinary public service they are rendering. Whether we 
agree with every one of their scoring issues or not is not the 
point. There is always room for disagreement on scoring 
matters. What is critical is that we have an objective 
scorekeeper here that is respected, and Dr. Elmendorf--and the 
team at CBO--is that independent scorekeeper, and they 
certainly have my respect.
    This hearing will focus on CBO's long-term budget outlook, 
which was released last month. We have deferred this hearing so 
that the committees of jurisdiction working on health care 
would have the full attention of CBO, but we did not believe 
that this hearing could be further delayed given the importance 
of the message and the information that is contained in it.
    This first chart, updated with data from CBO's new report, 
shows the outlook for Federal debt under CBO's alternative 
fiscal scenario. It shows that we are on a completely 
unsustainable course. Over the next 50 years, with rising 
health care costs, the retirement of the baby-boom generation, 
and the permanent extension of the 2001 and 2003 tax cuts, 
Federal debt will climb to more than 400 percent of the gross 
domestic product of the United States.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    While the long-term debt trajectory is generally unchanged 
from CBO's report in 2007, we can see that the debt explosion 
has been moved up in the intermediate term. This is primarily 
due to the financial crisis and recession and the Federal 
response to them. Debt held by the public is now projected to 
reach 100 percent of gross domestic product by 2023, 7 years 
earlier than previously projected.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Rising health care costs remain the biggest threat to the 
Federal budget. These rising health costs are exploding the 
cost of Federal health programs, and private sector health 
spending is also exploding. According to CBO's report, taken 
together, public and private health care spending will reach 38 
percent of GDP by 2050. That is more than one in every three 
dollars in this economy just going for health care, and that is 
a completely unsustainable trajectory.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    We can reform our health care system without harming the 
quality of care. The Dartmouth study found that as much as 30 
percent of health spending may not contribute to better health 
care outcomes. Here is what they found.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Americans believe that more medical care is better care, 
but the evidence indicates otherwise. Evidence suggests that 
States with higher Medicare spending levels actually provide 
lower-quality care. We may be wasting perhaps 30 percent of 
health care spending on medical care that does not appear to 
improve our health.
    Senator Gregg and I asked the Congressional Budget Office 
to provide its best analysis of reform options that get at this 
long-term cost issue. Here are the key findings.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    One, without fundamental changes in the organization and 
delivery of care, expanding health insurance coverage will 
worsen the Nation's long-term budget outlook.
    Two, paying for reform over 10 years does not guarantee 
long-term savings. CBO noted the planned expansion of coverage 
would be phased in over 10 years, so the full cost would not be 
apparent until later.
    Three, the focus should be on savings within the health 
care system that will grow over time. CBO emphasized that any 
offsetting savings enacted outside the health system will 
likely fail to keep up with the rising costs of health care.
    Four, the Government has two powerful levers for 
controlling costs: changing Medicare payment rules and limiting 
the tax exclusion for employer-sponsored health insurance.
    And, finally, fifth, identifying savings game changers will 
take time and experimentation.
    I hope my colleagues are paying attention to these 
important findings as we move forward with health care reform.
    In addition to health care costs, we also face a 
demographic challenge that is undeniable. According to this 
year's Social Security Trustees report, the number of 
beneficiaries is projected to rise from roughly 40 million 
people this year to roughly 82 million in 2050. That is a 
doubling over the next 40 years. And we also face a revenue 
challenge. The fact is our revenue system is outdated and 
inefficient. We are suffering from tremendous leakage from the 
tax gap, offshore tax havens, and abusive of tax shelters. I 
believe we are now collecting less than 80 percent of what is 
owed. We need comprehensive tax reform to bring clarity, 
efficiency, and fairness to the Tax Code and to improve our 
competitive position in the world. We have a tax system that 
was designed at a time when we did not have to worry about our 
competitive position. We now do.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The former head of the GAO, former Comptroller General 
Walker, said about the need for more revenue, ``You are going 
to need additional revenue; 18 percent of GDP won't get the job 
done, even if you end up making entitlement restructuring and 
spending constraint effective. The gap is just too great.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Putting the Nation back on a sound fiscal footing is not 
going to be easy. If it were easy, it would have already been 
done. But we have to act, and the CBO report summed it up well. 
It stated, and I quote, ``The difficulty of the choices 
notwithstanding, CBO's long-term budget projections make clear 
that doing nothing is not an option. Legislation must 
ultimately be adopted that raises revenue or reduces spending, 
or some of both. Moreover, delaying action simply exacerbates 
the challenge.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    I am going to end on that point and simply say that Senator 
Gregg and I have made a proposal about how to tackle these 
long-term issues. I am also announcing today that we are 
calling back the Deficit Reduction Caucus to action. We had a 
first meeting yesterday. I am inviting members of both parties 
to join the Deficit Reduction Caucus. We are going to 
reinvigorate that effort, which was effective over a very long 
period of time in getting us back to balance in the 1990's. I 
think it is timely that we restore a focus to deficit and debt 
reduction, and that will be the work of that caucus.
    So I invite members on both sides to join. Our intention 
will be to meet monthly and to develop a plan to address these 
long-term issues. The time for doing nothing has passed.
    With that, I turn to the very able Ranking Member, Senator 
Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. Let me join with 
you and, I think, all Members of the Senate in thanking the 
Director and the staff of CBO for the extraordinarily effective 
and professional way you have handled the immense workload that 
has been put on you as a result of the health care--primarily, 
the health care bills being brought forward. And we certainly 
thank you on our side of the aisle for being fair and objective 
and being an honest umpire of the numbers, and that has been 
very important as we have proceeded here.
    I want to echo much of what the Chairman said. I think the 
key to what the Chairman said is that this issue of the deficit 
and the debt is spiraling our Nation downward to a point where 
we may not have fiscal sustainability. We are looking at 
basically a debt which will exceed anything in our history 
other than during the period of World War II and a debt which 
has no end in sight. And as a result, we are basically headed 
on a path of financial bankruptcy for our children, and it is 
not right. And it is mostly being driven--although there is 
definitely a revenue component to this, it is mostly being 
driven on the spending side of the ledger. Spending is growing 
from about 20 percent of the gross national product up to 24 or 
25 or 26 percent of the gross national product.
    A large amount of that is driven, of course, by the health 
care and the demographic situation which we confront as a 
Nation, which is going to cause greater utilization of health 
care. And I think the key here is that as we look at all these 
health care bills, we have to put in place systems within these 
bills if we are going to pass health care reform which are 
going to lead to a long-term reduction in the rate of growth of 
health care spending in this country. And so far we have not 
seen that. At least we have not seen it, in my opinion, in the 
House bill, and we definitely did not see it in the bill 
reported out of the Committee which I serve on--Health, 
Education, Labor, and Pensions. In fact, just the opposite. 
That bill increases spending by $2.2 trillion over the first 10 
years if you were to fully phase it in. And it increases 
spending in the second 10 years by more than $2 trillion. That 
is spending. Some of that is offset but not much.
    And as a very practical matter, you cannot grow the 
Government at that rate and catch your tail. You cannot keep up 
with the debt that will have to be added because the cost is 
just too high. And so we have got to come at this from a 
different direction, in my opinion.
    Now, you have outlined to us the two themes which we should 
be pursuing if we are going to effectively bend the out-year 
cost curve in a letter to myself and Senator Conrad, and those 
two themes were:
    One, that we need to change our tax policy relative to 
deductibility of health insurance, which makes obvious sense. 
If you are incentivizing people to overutilize the system 
through the tax laws, you are driving up health care costs. And 
if you are looking for revenues to basically address the issue 
of the uninsured, you should look within the health community. 
And why should you be funding gold-plated health insurance 
policies? And so I greatly regret that there is a movement to 
take off the table one of the two items that you in your letter 
pointed out to us was most important for the purposes of 
controlling your health care costs, which is to basically make 
the deductibility of health insurance--high-end policies, 
especially--bring those into the debate. And we should not take 
that off the table because I think your counsel there is 
excellent.
    The second, of course, was that the reimbursement system 
has to change, and there are a lot of different proposals out 
there to do that, but I tend to think the best way to 
accomplish that is by incentivizing both the user to pursue 
healthy lifestyles and the provider to deliver quality at lower 
costs. And the way you incentivize people is with cash and 
creating systems which accomplish that.
    So I thank you for your counsel in this area, but I do not 
sense that your counsel is being taken. At least neither the 
House bill nor the bill reported by the HELP Committee 
addressed effectively--in fact, did not address at all, the 
first point--it took that off the table--address effectively 
the two points which you have made for addressing--for bending 
the out-year cost curve of health care.
    And so I will be interested to hear what your thoughts are 
in that area, and we certainly appreciate your continued 
presentation to us of the information which is critical for us 
to make public policy decisions.
    Thank you.
    Chairman Conrad. Thank you, Senator Gregg. And, again, Dr. 
Elmendorf, welcome back to the Budget Committee, and please 
proceed with your testimony.

  STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Elmendorf. Thank you, Mr. Chairman, Senator Gregg, and 
members of the Committee. It is good to be back. I also want to 
thank you on behalf of my terrific colleagues for your 
appreciation and support for the work that we are doing. And I 
appreciate the opportunity to testify today about CBO's most 
recent analysis of the long-term budget outlook.
    Under current law, the Federal budget is on an 
unsustainable path. Federal debt will continue to grow much 
faster than the economy over the long run. Although great 
uncertainty surrounds long-term fiscal projections, rising 
costs for health care and the aging of the population will 
cause Federal spending to increase rapidly under any plausible 
scenario for current law. Unless revenues increase just as 
rapidly, the rise in spending will produce growing budget 
deficits and accumulating debt that would cause substantial 
harm to the economy.
    This slide shows our projection of Federal debt relative to 
GDP under the two scenarios we model. Keeping deficits and debt 
from reaching these levels will require increasing revenues 
significantly as a share of GDP, decreasing projected spending 
sharply, or some combination of the two.
    Measured relative to GDP, almost all of the projected 
growth in Federal spending, other than interest payments on the 
debt, stems from the three largest entitlement programs; 
Medicare, Medicaid, and Social Security. For decades, spending 
on Medicaid and Medicare have outpaced the economy. CBO 
projects that if current laws do not change, Federal spending 
on those two programs combined will grow from about 5 percent 
of GDP today to almost 10 percent by 2035. By 2080, the 
Government would be spending as much as a share of the economy 
on just these two major programs as it has spent on all of its 
programs and services in recent years.
    In our estimates, the increase in the spending for Medicare 
and Medicaid will account for 80 percent of the total spending 
increases of these three entitlement programs between now and 
2035 and 90 percent of spending growth between now and 2080. 
Thus, reducing overall Government spending relative to what 
would occur under current law would require fundamental changes 
in the trajectory of Federal health spending. Slowing the 
growth rate of outlays for Medicare and Medicaid is the central 
fiscal challenge.
    Under current law, spending on Social Security is also 
projected to rise over time as a share of GDP, but much less 
sharply. CBO projects that Social Security spending will 
increase from less than 5 percent of GDP today to about 6 
percent in 2035 and then roughly stabilize at that level.
    Meanwhile, as shown in this slide--actually, I don't think 
I have--sorry. As shown in this slide, Government spending on 
all activities other than Medicare, Medicaid, Social Security, 
and interest on the Federal debt is projected to decline or 
stay roughly stable as a share of GDP in future decades. This 
is the collection of everything outside of these three large 
programs and interest that includes national defense and a wide 
variety of domestic programs. And under our projections that 
lead to those unsustainable debt paths, this spending actually 
is at or below the levels that we have experienced throughout 
the last several decades.
    Federal spending on Medicare and Medicaid and Social 
Security will grow relative to the economy both because health 
care spending per beneficiary is projected to increase and 
because the population is aging. As shown in this slide, 
between now and 2035, aging is projected to make the larger 
contribution to the growth of spending for those three programs 
as a share of GDP. After 2035, continued increases in health 
care spending per beneficiary is projected to dominate the 
growth in the spending for the three programs.
    I should note that the current recession and policy 
responses have little effect on long-term projections of non-
interest spending and of revenues, but they do matter for 
future interest spending. We estimate that in fiscal years 2009 
and 2010 the Federal Government will record its largest budget 
deficits as a share of GDP since shortly after World War II. As 
a result of those deficits, Federal debt held by the public 
will soar from 41 percent of GDP at the end of fiscal year 2008 
to more than 60 percent at the end of fiscal year 2010. This 
higher debt results in permanently higher spending to pay 
interest on that debt. Federal interest payments already amount 
to more than 1 percent of GDP. Unless current law changes, that 
share would rise to 2.5 percent by 2020.
    CBO's long-term budget projections raise fundamental 
questions about economic sustainability. I return to the 
initial slide. If outlays grew as projected and revenues did 
not rise at a corresponding rate, annual deficits would climb 
and Federal debt would grow well beyond our historical 
experience. Larger budget deficits would reduce national 
savings, leading to more borrowing from abroad and less 
domestic investment, which in turn would depress incomes in the 
United States. Over time, the accumulation of debt would 
seriously harm the economy.
    Alternatively, if spending grew as projected and taxes were 
raised in tandem, tax rates would have to reach levels never 
seen in the United States. High tax rates would slow the growth 
of the economy, making the spending burden harder to bear.
    Policymakers could mitigate the economic damage from 
rapidly rising debt by putting the Nation on a sustainable 
fiscal course, which would require some combination of lower 
spending and higher revenues than the amounts now projected. 
Making such changes sooner rather than later would lessen the 
risks that current fiscal policy poses to the economy.
    Thank you. I am happy to take any questions.
    [The prepared statement of Mr. Elmendorf follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman Conrad. Dr. Elmendorf, I am going to really put 
you on the spot because we are in the middle of this health 
care debate, but it is critically important we get this right.
    Everyone has said--virtually every one--that bending the 
cost curve over time is critically important and one of the key 
goals of this entire effort. From what you have seen, from the 
product of the committees that have reported, do you see a 
successful effort being mounted to bend the long-term cost 
curve?
    Mr. Elmendorf. No, Mr. Chairman. In the legislation that 
has been reported, we do not see the sort of fundamental 
changes that would be necessary to reduce the trajectory of 
Federal health spending by a significant amount. And, on the 
contrary, the legislation significantly expands the Federal 
responsibility for health care costs.
    Chairman Conrad. So the cost curve, in your judgment, is 
being bent, but it is being bent the wrong way. Is that 
correct?
    Mr. Elmendorf. The way I would put it is that the curve is 
being raised, so there is a justifiable focus on growth rates, 
because, of course, it is the compounding of growth rates 
faster than the economy that leads to these unsustainable 
paths.
    It is very hard to look out over the very long term and say 
very accurate things about growth rates. So most health experts 
that we talk with focus particularly on what is happening over 
the next 10 or 20 years, still a pretty long time period for 
projections. They focus on the next 10 or 20 years and look at 
whether efforts are being made that are bringing costs down or 
pushing costs up over that period.
    As we wrote in our letter to you and Senator Gregg, the 
creation of new subsidies for health insurance, which is a 
critical part of expanding health insurance coverage, in our 
judgment, would by itself increase the Federal responsibility 
for health care. That raises Federal spending on health care, 
which raises the amount of activity that is growing at this 
unsustainable rate. And to offset that, there would have to be 
very substantial reductions in other parts of the Federal 
commitment to health care, either on the tax revenue side 
through changes in the tax exclusion, or on the spending side, 
through reforms in Medicare and Medicaid. Certainly reforms of 
that sort are included in some of the packages, and we are 
still analyzing the reforms in the House package, which was 
only released, as you know, about 2 days ago.
    But the changes that we have looked at so far do not 
represent the sort of fundamental change on the order of 
magnitude that would be necessary to offset the direct increase 
in Federal health costs from the insurance coverage proposals.
    Chairman Conrad. And what about the Finance Committee 
package as it stands?
    Mr. Elmendorf. I cannot speak to that, Mr. Chairman. We 
have been working with the Finance Committee and the staff for 
a number of months on proposals that they have been addressing, 
but our consultations with them have been confidential because 
they have not yet released legislation. And I do not want to 
speak publicly about that.
    Chairman Conrad. All right. And in terms of those things 
that are public from the other plans, what are the things that 
are missing that, in your judgment, prevent a bending of the 
cost curve in the right way?
    Mr. Elmendorf. Bending the cost curve is difficult. As we 
said in our letter to you, there is a widespread consensus--and 
you quoted some of this--that a significant share of health 
spending is not contributing to health. But rooting out that 
spending without taking away spending that is beneficial to 
health is not straightforward. Again, the way I think experts 
would put it, the money is out there, but it is not going to 
walk in the Government's door by itself. And devising the 
legislative strategies and the regulatory changes that would 
generate these changes is not straightforward. But the 
directions that have widespread support among health analysts 
include changing the preferential tax treatment of health 
insurance. We have a subsidy for larger health insurance 
policies in our Tax Code, and that, like other subsidies, 
encourages more of that activity. Reducing that subsidy would 
reduce that.
    And on the other side, changing the way that Medicare pays 
providers in an effort to encourage a focus on cost-
effectiveness in health care and not encourage, as the fee-for-
service system tends to, the delivery of additional services 
because bills for that will be paid.
    Chairman Conrad. I thank you. Senator Gregg.
    Senator Gregg. Picking up there, Director, because I think 
you have stated rather precisely the fact that what we have 
done so far has not gotten to the problem, or what has been 
proposed so far is not getting to the problem, and you have 
made a very good case for the need to look at the deductibility 
of health insurance and the perverse incentives that creates 
for very high end plans that create overutilization, to say 
nothing of the fact that it is low-income people subsidizing 
high-income people's insurance.
    Mr. Elmendorf. Yes, sir.
    Senator Gregg. But I want to get to the issue which you 
essentially stated. The problem is, going forward, the cost of 
Medicare and Medicaid to the Government. And if we create this 
new subsidy for basically the uninsured, I presume that will 
also get folded in as one of the problems relative to driving 
costs.
    The question becomes: What procedures can be put in place 
that are going to affect the Medicare reimbursement system and 
the Medicaid reimbursement system in a way that will cause us 
to continue to get quality health care, but get it at a more 
affordable price?
    Now, there have been a number of proposals put forward. I 
don't know how many of them you have had a chance to look at in 
specific, but let me list a few and get your thoughts on them. 
I will list them and then you can go through them.
    The first, of course, is to reduce defensive medicine, 
which means tort reform.
    The second is the issue of encouraging people to pursue 
healthy lifestyles through incentivizing them with 
reimbursements, cash basically, by expanding HIPAA, the 20 
percent to 50 percent or something.
    Third is changing the incentives for providers relative to 
delivering services so that you reward economically providers 
who are scored as delivering quality services at lower costs.
    Fourth is addressing the issue of the last 6 months of life 
through a shared responsibility approach, which has been 
introduced by myself and discussed at length by others.
    And fifth is an idea that has been just recently put on the 
table--and I don't know if you are familiar with it--by the 
folks up at Dartmouth where they are taking their numbers and 
converting them to clinical trials, so to say, as ways to 
control health care costs by picking--I think their proposal is 
to pick three major delivery systems in this country, try to 
systematize what they do that delivers good quality at lower 
cost, and then grow out from there by bringing other systems 
into that and start picking up systems that aren't quite as 
effective and bring them into the realm of what these systems 
do. They tend to think that that proposal, which is a huge 
demonstration program growing into a national program, but 
doing it in a way that is orderly as versus just pushing 
everybody into the program, is the best way to proceed.
    Can you give me your evaluation of those ideas and any 
other specific ideas that we should do in the area of Medicare 
reform relative to the way we encourage people to buy insurance 
and to deliver insurance that you think would actually 
specifically affect the out-year cost curve?
    Mr. Elmendorf. OK. I will try to address those questions in 
turn.
    First, on defensive medicine, CBO's evaluation of the 
evidence of the effect of tort reform in different States is 
that it has reduced costs directly through less payment in 
malpractice cases, but that it has not had the spillover 
effects one would have expected in terms of medical practice 
more widely.
    Now, Senator Hatch gave me a good talking-to before the 
HELP Committee about what he viewed as the ridiculousness of 
that evaluation, and he speaks with some experience in this 
area, and I assured him that we would look at the issue 
carefully.
    I think our interpretation of the evidence we have seen is 
not that defensive medicine is such a problem, but that even 
the sorts of tort reforms that have been undertaken turned out 
not to be very effective at stopping defensive medicine.
    Senator Gregg. Is there another way to get at defensive 
medicine?
    Mr. Elmendorf. I do not know of one. I think it is probably 
related to the general litigiousness of our society and 
attitudes about that. But I don't know, and I am not an expert 
in that area.
    On your second point about healthy lifestyles, a leading 
health economist, a member of CBO's panel of health advisers, 
said to me a few months ago that the thing that truly scares 
him most about future health costs in this country is obesity. 
And if you look at the chart--and we have shown this--of the 
incidence of tobacco use in this country, it has gone like this 
over the last several decades. The incidence of obesity is 
essentially a mirror image of that.
    The challenge is developing the policies that can address 
that. Tobacco is a single substance, already controlled and 
regulated by the Government, and it has taken several decades 
to have this effect.
    Now, in the end, I think social changes and policy changes 
have had a very pronounced effect, but it took some time.
    Obesity is more complicated because there are many factors 
that contribute to it: lifestyle in terms of exercise, but also 
lifestyle in terms of diet and lots of different types of 
foods, of course. It is a harder problem to get at.
    But certainly incentives are undoubtedly an important part 
of that solution, and I think that direction is a useful one to 
go in, and I think it would be a view that experts would widely 
share. It will take some time, but it is very important, again, 
in the view of all the experts we have talked with, to get 
started on that process.
    Incentives for providers are, again, key here. Incentives 
matter in the world, and when we pay doctors per service 
performed, undoubtedly that leads to more services performed 
than if they were paid in different ways.
    But changing behavior is still complicated. If one pays 
doctors too little for a procedure, then they may do too few of 
them. So there is a balance. And we know from the performance 
of certain health systems around the country it is possible to 
deliver very high quality care at much lower cost than average. 
So exporting those systems to other parts of the country whose 
medical systems operate in different ways is challenging.
    So I think changing incentives for providers is certainly 
the right direction to go in as well, and we have analyzed in 
our budget options volume some ways to do that. But there will 
have to be some experimentation, and I will come back to that 
at the end.
    Your fourth point was about the last 6 months of life. I 
think this is the question I have been asked most often about 
health care since I have been the Director at CBO, to which we 
really don't have any answer. We have not done work in this 
area, and we should and we will, because as everyone knows, the 
distribution of medical spending is very skewed toward 
particular people, and an awful lot of medical spending happens 
in what turns out to be the last year of people's lives--or the 
last 6 months of people's lives.
    Again, finding a balance, nobody wants to be told to stop 
getting certain kinds of treatment. I think it is a matter of 
informing patients. My father is somebody who was in that 
position a few years ago, and he was able to make decisions 
based on information from his doctor, and I am very grateful 
for that. And I think that can be very important. But we have 
not done much work on that area.
    The experimentation you describe with different delivery 
systems, is absolutely central. As we wrote in our letter to 
you and Senator Conrad, many of the specific changes that might 
ultimately prove most important cannot be foreseen today, and 
can be developed only over time through experimentation and 
learning. And that is a way, I think, of discovering what is it 
that makes certain health care systems work much better than 
others.
    In terms of what else there is on the agenda, I think 
something you may have alluded to but has not gotten a lot of 
attention in the discussion of the last few months is greater 
cost-sharing responsibility for individual patients. And, 
again, CBO has analyzed in its budget options volume last 
December a number of ways of changing the cost-sharing 
structure in Medicare.
    It is a challenge because, of course, the point of 
insurance is to insulate people from unbearable costs. But it 
is possible to design cost-sharing systems in which individuals 
bear some of the costs at a reasonable level, enough to make 
them sensitive to the costs of alternative strategies for 
addressing medical problems, and without leaving them open to 
the catastrophic costs of treatment that might ensue. And I 
think with care, movement in that direction can be a very 
important complement to providing different incentives to 
providers.
    Senator Gregg. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman, and, Dr. Elmendorf, 
my thanks to you as well for your professionalism and your 
responsiveness to all of us.
    I want to go at this set of tax rule questions a little bit 
differently. It is pretty obvious if you go out to a group of 
working-class people and say, ``How would you feel about having 
your health care taxed?'' about 107 percent say, ``No way,'' 
usually accompanied by some pretty choice curse words before 
the words ``No way.''
    If, however, you say to them, ``You know, these tax rules 
look like they go mostly to the well-off and we are interested 
in trying to come up with a way that will give you working-
class people a tax break and help us to hold down costs,'' 
people say, ``You know, I am interested in looking at that.''
    Now, 14 United States Senators, a big bipartisan group, 
have essentially proposed that, and I just want to go over with 
you what the findings I believe are between you all and also 
Joint Tax.
    What you all and Joint Tax have essentially said is if you 
convert these tax rules into something that provides a 
generous, fixed, above-the-line credit or deduction, three good 
things happen:
    One, you provide a tax cut, a significant one--and Joint 
Tax says this--to more than 35 million working-class people.
    Second, what you all have said is that that kind of 
approach--and I am looking at page 35 of the budget materials--
excuse me, at one of your charts on the budget. You all say 
that it would also provide an incentive to contain costs.
    And, third, that we would have a substantial amount of 
money left over to try to boost the transition to covering the 
uninsured.
    Do you share that kind of analysis that I have just made 
this morning?
    Mr. Elmendorf. Yes, I do, Senator.
    Senator Wyden. OK. On the second point, following up on 
what Chairman Conrad has said--and I know Senator Gregg is 
concerned about this as well--people around the country are 
being told that these bills that are coming out of the Senate 
and coming out of the House are going to lower their premiums. 
And I am trying to figure out what is in these bills that will 
lower their premiums, and I cannot find very much.
    Can you tell me what we would say to our constituents on 
this central point of lowering premiums if these bills pass in 
their current form?
    Mr. Elmendorf. So these bills differ in a variety of ways 
that can be important, as you know. Let me mention a few 
general features of some of the reform proposals we have seen 
that can affect premiums, affect private insurance premiums.
    The first is that for people who are currently buying 
insurance in the individual or non-group market, where there 
are very large administrative loads and adverse selection 
problems, the creation of exchanges with a mandate to buy 
insurance which draws people in and insurance reforms around 
guaranteed issue of policies and elimination of pre-existing 
condition restrictions and so on, those sorts of reforms can 
reduce premiums for those people, partly by avoiding the 
adverse selection problems, partly because in some of these 
proposals that try to adjust for the risk in different 
insurance plans, money is moved around in a way that reduces 
the incentive for insurance plans to cherrypick and to figure 
out what costs they can avoid paying.
    So there are administrative savings through these 
exchanges, and there is some greater competition through these 
exchanges. And that we think we would have some effect on 
reducing premiums for those people.
    Additionally, these reforms can have effects on private 
insurance premiums through shifting of costs from public plans, 
but there are forces cutting in different directions there. I 
don't think there is a clear sign of that effect in the end, 
and, actually, CBO's reading of the evidence is that cost 
shifting is a much less quantitatively important phenomenon 
than most observers think. And there are some other features as 
well, but I think it is fair to describe these as fairly small 
effects relative to the level and trajectory of private health 
insurance premiums.
    Senator Wyden. Mr. Chairman, my time is about up but there 
was a very important article printed yesterday by Kaiser that 
said, and I will just quote the title: ``For many workers, 
insurance choices may be limited.'' And so what Dr. Elmendorf 
has said--and I share his view--is that down the road there is 
going to be some real cost containment potential in the 
exchanges, if workers can get to them. But what Kaiser has just 
pointed out--and I would just ask unanimous consent that this 
be put into the record, Mr. Chairman.
    Chairman Conrad. Without objection.
    [The article follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Wyden. A lot of the workers in this country who are 
being told they are going to get expanded choices, according to 
my analysis and Kaiser, are going to wake up and find they 
don't have that expanded array of choices.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Wyden.
    Senator Whitehouse.
    Senator Whitehouse. Thank you. Just to followup for a 
moment on health care before I turn to another subject, George 
Bush's Treasury Secretary Paul O'Neill has written recently 
that there is $1 trillion a year of excess cost in our health 
care system, and he is no fool, is he?
    Mr. Elmendorf. No, I do not think he is. I only met him 
once, but I don't think so.
    Senator Whitehouse. And the President's Council of Economic 
Advisers has recently put out a report that suggests that there 
is $700 billion in excess or waste cost in our health insurance 
system. And they are credible, aren't they?
    Mr. Elmendorf. Yes, I think they are.
    Senator Whitehouse. So it appears that we have a very big 
savings target to shoot for in the health care system. You 
yourself have said in your letter to Chairman Conrad and 
Ranking Member Gregg that there are ``large reductions'' that 
are possible.
    It strikes me that the problem here is that in order to 
achieve those large reductions, a considerable amount of 
executive management, of experimentation, of flexible and 
dynamic regulatory activity going forward is going to be 
necessary. There is not a light switch that you flip and this 
happens.
    Mr. Elmendorf. Yes, absolutely.
    Senator Whitehouse. Which means two things. One, it is very 
hard for you to score that because of that. I see a head 
actively nodding.
    Mr. Elmendorf. Yes, absolutely.
    Senator Whitehouse. And, two, it means that it is difficult 
for Congress to decree that it happens. We are in a better 
position to try to establish the parameters for that happening 
and then whip the executive branch as hard as we can to 
perform. But it actually will take executive administration and 
constant ongoing regulatory oversight to make the pursuit of 
those savings successful.
    Am I correct in that?
    Mr. Elmendorf. Yes, I agree entirely.
    Senator Whitehouse. OK. Let me switch topics to cap-and-
trade. A mental gear shift for you. You have estimated that the 
allowance purchases by corporations subject to now having to 
pay something for polluting the environment with carbon, that 
25 percent of whatever they have to pay for is lost revenue to 
the Federal Government. And I understand that the 25 percent 
comes from an approximation that is a historic tradition within 
CBO based on your report on that.
    What I am having trouble understanding is why--the money 
doesn't just go up into the Federal Government and disappear. 
As the legislation that we are looking at goes, it sprinkles 
back to utilities, it sprinkles back to green energy, it 
sprinkles back to conservation programs, it sprinkles back to 
investment in new industry.
    Why is it that the expenditure on the allowance is subject 
to a 25-percent reduction, but there is a presumption that as 
it comes back into the economy, there is a zero tax consequence 
of all of that expenditure and investment? And, hypothetically, 
let us just assume that it is the same amount, that is $1 out 
and $1 back; it is just reorganizing the economy so that there 
is a cost for carbon pollution, but that the Government pushes 
all that money back into the private sector. Hypothetically, 
wouldn't that wash?
    Mr. Elmendorf. People love talking about this 25-percent 
offset. It really is one of the more bedeviling topics.
    Senator Whitehouse. And we do not have time to get into the 
gory details. I am trying to focus in on the reverse. Why the 
zero----
    Mr. Elmendorf. The standard issue here is that if the 
Federal Government levies an excise tax of sorts on firms or 
individuals, the amount that they pay for that they can deduct 
from their income, and their taxable income or taxable profits 
are reduced as a result. And 25 percent is essentially the 
average marginal tax rate on income in----
    Senator Whitehouse. That is the part I understand. Why is 
it on the way back a zero?
    Mr. Elmendorf. It depends on how the money is given back to 
the private sector. There are ways to give it back that go back 
into the income stream that do not generate this offset or 
generate the phenomenon you are describing in which it all nets 
out. And there are other ways in which it does not, and it 
depends whether--I think the short answer is it depends on 
whether the money is given to taxable entities in a way that 
enters their income.
    So if the allowance--if the money received by the 
Government were given to me in a way that I would then have to 
declare it on my 1040 Form, then I would end up having a higher 
income and paying tax on that. That would essentially offset 
the reduction in tax paid by whoever it was who was having to 
pay for the allowance.
    So it matters who it goes to, but it has to go into the 
income stream----
    Senator Whitehouse. My time has run out, but just one very 
quick technical question. If it didn't appear on your 1040 but 
if in turn you spent it on wages for people, same difference, 
right?
    Mr. Elmendorf. Well, no. The challenge with the spending is 
that we also----
    Senator Whitehouse. Well, two other questions. I do not 
want to burden other people's time. If----
    Mr. Elmendorf. Can I have just 30 seconds with the 
Chairman's allowance? The other part of the constraint here is 
that we do our estimates of the effects of legislation, 
assuming that overall GDP is fixed. We do not do dynamic 
scoring in the sense of allowing the overall macroeconomic 
aggregates to change. So this money has to go back into the 
income stream. If it just is spent, then because GDP is fixed, 
that spending is essentially driving out some other aspect of 
spending in the economy.
    That may not be sufficiently clear, and I am happy to 
continue the conversation.
    Chairman Conrad. Senator Nelson.
    Senator Nelson. I want to followup the excellent line of 
questioning by the Chairman and Senator Wyden. Basically you 
said in response to the Chairman that in order to reduce the 
cost of Medicare over time so that the Federal Government can 
afford it, we are basically going to have to do significant 
improvements, No. 1, in the efficiency of the delivery system; 
and, No. 2, you said we are going to have to stop the 
oversubsidization that we do now through the employee being 
exempt from taxation on his insurance premiums paid by his 
employer. Is that in essence what you said?
    Mr. Elmendorf. Yes. I just want to be careful about the 
word ``should.'' The choices are yours, but we have outlined 
those as the key levers that you have.
    Senator Nelson. OK. Now, this has gotten all balled up 
politically, but if we address that head on, now I want to go 
to Senator Wyden's question, and I want to understand this. If 
you stop the tax subsidy which is in current law of the 
employee's part of what they receive from their employer of 
health insurance premiums, and instead change that to where 
everybody has a tax deduction, that helps the employee. But how 
does that help stop the subsidy and, therefore, the financial 
problem over time to the U.S. Government?
    Mr. Elmendorf. I think it depends crucially on the 
structure of this deduction, and it depends crucially on what 
you are doing about payroll tax treatment as well. So under 
current law, the benefits employees receive from their 
employers for health care are not subject to either payroll tax 
or income tax. So there are different ways one could proceed. 
One could take away or limit the income tax exemption subject 
to an amount above some threshold, for example, to income 
taxes. One could also subject that amount to payroll taxes, 
although that issue has not been discussed as much of late. One 
could also structure this as a deduction of a fixed amount so 
that essentially any purchase of insurance above that amount 
would not get any additional deduction.
    The crucial point here is the incentive on the margin for 
spending an extra dollar on health insurance. What changes 
behavior is making people pay essentially full price for an 
extra dollar of health insurance as they pay full price for an 
extra dollar of any other good they would consume rather than 
paying this tax-subsidized price.
    Senator Nelson. Well, what would be the difference between-
let's say that we took a certain amount of the exemption, let's 
say everything under $20,000 of equivalent income as applied to 
a health insurance premium, everyone under that for the 
employee was exempt, but above that, the employee was going to 
pay income tax on it. In other words, a Cadillac or a Mercedes 
policy that was very rich, they were going to have to pay 
income tax on it. What is the difference between that and doing 
it as a tax deduction saying that we are going to give a tax 
deduction worth $20,000 to every employee?
    Mr. Elmendorf. So if I understand the question right, those 
effects are the same for employees who are at the level of the 
deduction or higher, the level of capping the exemption or 
higher, but could affect employees below that differently. If 
there is a standard amount that everybody can deduct, that is 
going to have a different effect--then the question is: What if 
you buy the Kia insurance policy? What happens to the gap 
between that and the cap or the standard amount? And I think 
that is the part that people can treat differently, depending 
on how you structure--whether you have an exemption or 
deduction, whether the deduction is specifically around how 
much you paid for insurance or some standard amount that 
everybody can deduct.
    Senator Nelson. Mr. Chairman, one more question, if I may. 
If we said that everybody with a policy worth $20,000 per year 
is going to be exempt if they are an employee in an employee 
plan, and above $20,000 of premium per year they are going to 
pay income tax on, and if we try to get the escalating cost of 
medical cost in line with the annual cost of living, is that 
going to make a substantial difference in what the Federal 
Government is going to pay over the next 10, 20, 30 years?
    Mr. Elmendorf. Yes. I mean, certainly the first part by 
itself, if there is a cap on the amount that can be excluded 
from taxable income, that itself saves money. It saves more 
money over time if the cap rises more slowly than health costs. 
So it depends a lot on what the exemption is indexed to. If it 
is fixed in amount or indexed to overall inflation rather than 
health costs, then it will have increasing savings over time.
    And I think in the second part, that will by itself create 
pressure that will reduce private health spending. On top of 
that, if there are other actions that are taken by the 
Government to bring its support for health through Medicare or 
Medicaid down, then that would have complementary effects in 
improving the Federal budget outlook.
    Senator Nelson. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Nelson.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and I apologize on 
the front end that these questions may have been addressed, and 
as a new member, I am still trying to understand some of your 
methodology.
    Mr. Elmendorf. I am a new Director, Senator, so if I cannot 
help you, then my colleagues behind me will.
    Senator Warner. Well, having seen, at least secondhand, 
some of the scoring that has been done on some of the proposals 
around health care reform, particularly as regards prevention, 
wellness, system benefit design, that seem to be scored 
relatively low, yet seem--and I wonder whether how much kind of 
real-life examples are brought into that scoring process. 
Because one of the things, I think, that has been--as I have 
re-delved into this issue, that is a dynamic real change 
processes that corporate America, at least the more progressive 
companies, large employers, self-insured that have their own 
benefit design plans, there has really been a fairly radical 
change in the last just 3 to 5 years in companies that have 
really aggressively gone on cost containment.
    Many of us here have talked to Steve Burd in terms of 
Safeway, but there is a host of other companies that have had 
similar actions, much of that based upon issues regarding--
around prevention and wellness. Is that kind of real-life 
examples factored into your analysis in terms of scoring costs?
    Mr. Elmendorf. Yes, it is, Senator. We take the real-life 
examples very seriously, but I understand that our analysis of 
the effects of prevention and wellness initiatives is one thing 
that has made, I think, more Members of Congress more 
frustrated with us than almost anything else. Let me spend just 
a few minutes explaining how we think about this and what the 
evidence shows.
    Senator Warner. Please.
    Mr. Elmendorf. Think of a simple medical test to start 
with, and then I will broaden the scope. That test will 
discover that some people have some condition that can then be 
treated in the early stage rather than waiting until it becomes 
more apparent later. For that person, doing this test early is 
good for their health and reduces their health spending, 
perhaps substantially.
    The challenge is that there are a lot of other people given 
the same test who will come back negative, thankfully. Giving 
them the test has raised their health spending relative to what 
would otherwise have occurred, but not very much, presumably, 
per person relative to the savings for the people who end up 
having the disease caught early.
    On the other hand, for most diseases there are many more 
people who don't have than do have it. So analyzing the effect 
on overall health pending of an extra test involves weighing 
the extra cost, the small extra cost for a large number of 
people who come back negative against the large savings for the 
smaller number of people who come back positive.
    There are actually hundreds of studies that have done this 
for specific preventive measures, and as you would expect from 
this logic, preventive measures that are more targeted than 
others are more likely to be cost-saving. So all sorts of 
screenings that are cost-saving if done on a periodic basis for 
older people are moderately costly if done on a periodic basis 
for younger people, are very costly if done on a very high-
frequency for younger people.
    Senator Warner. But can I--I mean, I think I understand 
this, and I do not mean to be rude, but I have got one other 
question I want to ask, and my time is running out. But I guess 
that is based upon procedural screenings. What I think has 
driven a lot of the actions that have come out of the private 
sector corporate plans have been incentives toward behavior 
modification, not in terms of identification of a disease.
    Mr. Elmendorf. So there are a few issues--and Safeway is a 
good example of this, and we have talked, in fact, with Steve 
Burd, and we have talked with actuaries and financial people at 
his company as one example of this.
    Safeway has done a number of things. One is they 
renegotiated contracts with their health care providers. They 
bargained harder.
    A second thing was that they gave the employees financial 
incentives to economize, first, on the use of health services, 
just the sort of cost sharing that I discussed with Senator 
Gregg a few minutes ago.
    Third, they provided real financial incentives for more 
healthy behaviors.
    Those are much more forceful policies and go well beyond 
wellness itself, and that collection of policies, if presented 
to us----
    Senator Warner. Would be----
    Mr. Elmendorf [continuing]. Would save money. But that is 
much more aggressive on the behavior side than many of the 
things that we see that are just more generally encouraging of 
good behavior. And then we need to try to assess how much any 
individual program is actually going to alter behavior and what 
effects it will have.
    Of course, some of these things will have larger effects 
outside the 10-year budget window, but we just do not do 
numbers too far out because it is too uncertain.
    Senator Warner. Mr. Chairman, could I ask one more 
question? I know my time has expired.
    Chairman Conrad. Yes, sir.
    Senator Warner. It is an issue that I think we have--that I 
had before you, and it is--let me preface it again by saying it 
is a challenging issue that has not only health care, 
political, financial, but also moral implications as well; that 
is, I have legislation pending about raising end-of-life 
issues, recognizing that 70 percent of Americans have no 
advance directives, have no living wills, other types of 
issues. And all the data as I have seen is that if we encourage 
the utilization of more palliative care, if we train people in 
the medical field to have these kinds of conversations with 
families earlier on, if we engage religious leaders as well to 
be willing to talk about these issues, and that there are real 
living examples that actually enhancing hospice-type services 
outside of the last 6 months when folks are still in the 
curative stage, to encourage these conversations, and by no 
means--let me make very clear here--no indication here of any 
effort to limit people's choices, limit people's care, limit 
all their options, but just make sure families have these 
options, that companies like United and Aetna and others who 
have enhanced, increased these services, that more people 
choose perhaps not to spend their waning days in the hospital, 
but choose other options.
    We think and they have shown that increased patient 
satisfaction, increased family satisfaction, and, on average, 
cost savings north of $5,000 per person, you know, we are 
trying to work with your staff now on trying to get approaches 
like this scored and--because it seems to me that this is an 
area that, again, because it goes beyond the realm of politics. 
It is a deeply moral and religious issue as well. But 
encouraging these conversations, we found from the faith 
community a real willingness to engage on this issue, again, 
just laying out people's choices and encouraging them to have 
these conversations.
    I would hope we could work with your staff on trying to--
you know, this is a sensitive area, trying to have this area 
looked at, and, again, recognizing that there are real-life 
examples, models being used that demonstrate, as I mentioned, 
both increased patient and family satisfaction and cost 
savings. Have you all looked at this issue at all?
    Mr. Elmendorf. Senator, we have not looked sufficiently at 
this issue, and we recognize that that is a gap in our health 
care work and a gap that we are eager to fill when we have a 
chance to do that. And we are looking forward to working with 
you and your staff.
    Senator Warner. I have legislation--and it is before you--
that we have been urging you to get some kind of scoring back, 
and I know you have got other things on your plate. But I will 
take that as a commitment that you will work with me directly 
on trying to get this----
    Mr. Elmendorf. Yes, we certainly will, Senator, and I will 
check on this when I get back to the office.
    Senator Warner. Thank you, Dr. Elmendorf.
    Thank you, Mr. Chairman.
    Senator Wyden [presiding]. Dr. Elmendorf, thank you. Thanks 
for your patience. I understand you have got to be out the door 
at 10:30. I have some additional questions. I am sure my friend 
does as well.
    When I asked earlier about premiums, we talked about the 
broken individual insurance market in terms of your answer, and 
certainly there is some benefit there.
    But most of the people are in the employer market or in 
group health plans, and the reason I asked the question is my 
understanding, the way the House and HELP Committee bills are 
structured now, that if there is a judgment that these workers 
have affordable employer coverage, they wouldn't get access to 
the exchange in most cases. That is why I said I am struggling 
to try to find what most workers in this country who are in 
these group health plans are going to get in the next few years 
in terms of ways to hold down their premiums. And let's talk 
about those workers for a minute. Are they going to get 
anything in terms of premium reductions in the next few years?
    Mr. Elmendorf. We do not think those workers would see a 
noticeable change in their premiums. There are a variety of 
forces at work that can have small effects. There are Medicare 
reforms that can spill over to the private sector. There is the 
potential for more or less cost shifting from public plans to 
the private sector.
    Our sense at the moment, based on our understanding of the 
specifications of the House proposal, is that those would not 
be significant effects, no.
    Senator Wyden. I appreciate your clearing that up, and I 
know my colleague from New Hampshire is concerned about this as 
well. These are people who in many instances are seeing double-
digit premium hikes, and they are hearing across Washington 
that their premiums are going to go down. And you have just 
told us that in many, many cases that is not going to happen. 
So we have got a lot of heavy lifting left to do.
    Let me ask you about the implications of not reforming the 
tax exclusion, certainly a way a number of us on this panel, a 
number of Senators on both sides of the aisle have cosponsored 
the approach that we talked about earlier. But let's say you 
don't go that route, and, in effect, Dr. Elmendorf has said 
there are two cost containment tools. One of them is changes in 
Medicare. The other is changes in the tax rules. So those are 
the two big sets of changes.
    If you, in effect, only go with one of the policy levers, 
is it fair to say that there will be significantly less cost 
containment as a result of, in effect, putting aside one of the 
major tools?
    Mr. Elmendorf. Yes, Senator. One could do much more 
dramatic things, I suppose, on the Medicare side to offset 
that. But it is certainly a difficult challenge, and tying one 
of the two hands behind one's back makes the job much, much 
harder.
    Senator Wyden. Just a couple other questions. Most of the 
money in the legislation goes to expanding Medicaid, and I am 
very much committed to expanding coverage. I think Medicaid is 
a broken program. What I would like to see is poor people 
sitting next to their Congressperson in their doctor's waiting 
room, you know, so that there would be new dignity and fairness 
for poor people. We will see how that plays out.
    But I am trying to think about how small business owners, 
in effect, from, you know, Coos Bay, Oregon, to Oyster Bay, New 
York, are going to benefit from the big chunk of spending in 
this legislation. What are the implications of setting up, you 
know, a significant new entitlement program? What are the 
implications for small businesses?
    Mr. Elmendorf. For businesses that are quite small, there 
are special subsidies in the House proposal to purchase health 
insurance that would benefit them. Small businesses that are 
small but above those thresholds could still benefit because if 
they are currently buying health insurance, they are doing it 
in this largely broken small-group market. If they are not 
currently buying insurance, then one problem they may have 
competing with larger employers for employees is that they 
don't offer health insurance, and those employees would have 
the opportunity to go into a health insurance exchange.
    Senator Wyden. I am talking about the implications of the 
additional entitlement spending. There is no question that 
there are some benefits for the small businesses in the 
exchanges. But in terms of setting up a new entitlement 
program, you know, what are the implications for small 
businesses? Because it seems to me absent the kind of cost 
containment reforms I would like to see, you set up a new 
entitlement program, small businesses get more taxes?
    Mr. Elmendorf. Well, I think the issue here is that setting 
up these insurance exchanges and providing subsidies for low-
income people would disproportionately benefit small firms 
because they tend not to offer health insurance today or to pay 
larger amounts for it, and because they often employ a lot of 
low-wage workers. But you are absolutely right that there is 
this broader issue which is that money to provide subsidies for 
somebody comes from somewhere, somebody else, and to that 
extent, expanding entitlement creates an actual or potential 
future burden on somebody else who will have to foot the bill.
    Senator Wyden. One last question and just on this point, 
and I appreciate your answer. I am a passionate supporter of 
making sure that those who are uninsured get good-quality, 
affordable coverage. Senator Gregg and I are supporters of 
legislation that would ensure that justice is finally done for 
those folks.
    What I am concerned about is, absent cost containment, if 
all you do is expand an entitlement program, as sure as the 
night follows the day, you are going to see taxes shifted onto 
these small business folks.
    One other question with respect to the implications of the 
Medicare changes over the next few years. The theory behind the 
Medicare reforms that has the support of I think virtually 
every Senator I have talked to is that you can make 
transformative changes for the long term. You have suggested 
that in the budget documents, and I certainly agree with them.
    The problem is, as you all have stated, that most of them 
are untested, and as a result, they are relatively modest 
savings in the short term.
    So in the next budget window, the next 10 years, what are 
the implications of trying to find these significant savings in 
Medicare, the cuts and other savings, in order to pay for 
program expansions? What are the implications for Medicare?
    Mr. Elmendorf. Well, so, I agree with the premise of your 
question, of course, about the difficulty of choosing 
particular transformative changes that we can have confidence 
will work. There are other ways, of course, to save money in 
Medicare. MedPAC provides a regular list of suggestions--they 
work for you; unlike us, they make suggestions, recommend 
policies--a variety of ways they think are out there to adjust 
the payments that are made to providers that they think would 
be more in line with those providers' true costs.
    There are also broader changes that one could make, for 
example, to increase provider payments over time in a way that 
takes the costs but also adjusts for presumption for rising 
productivity in the health area. And, again, some of the 
members of my panel of health advisers are very optimistic 
about the ability of the health care system with IT and with a 
renewed focus on cost efficiency to reap productivity gains; 
and if that is true, then one can raise the payment rates by 
smaller amounts to account for that, and they would still be 
whole.
    As you know, it is a very large program, and there are a 
variety of ways one can make changes. But they are not costless 
in important ways. I mean, ultimately for the Federal 
Government to save money, it has to pay somebody else less. And 
if the people who are getting paid less can find a way to do 
what they have to do at lower cost, then that works out. If 
they can't, then there is a squeeze, and that is the problem 
that one encounters if one is simply sitting on provider 
payments without there being a sort of opportunity or a path by 
which providers can really reduce their costs.
    Senator Wyden. I am very hopeful about those productivity 
gains down the road. I just have been reading your reports, and 
I have not seen the likelihood that that is going to be 
generated in the next few years. And, again, the challenge will 
be for a Senator to explain to those on Medicare why these 
programs are going to have, you know, fewer dollars, and 
particularly why we are not going to see the productivity 
changes until much further down the road.
    Senator Gregg.
    Senator Gregg. Mr. Director, your testimony has been 
sobering today, because essentially what you have said is that 
an item which the administration appears to be taking off the 
table is essential to getting health care costs under control, 
which is the deductibility of insurance.
    The present plans as they have been produced have no 
significant cost-bending events in them relative to 
reimbursement and relative to the way that they structure 
health care; most Americans' premiums are not going to go down, 
and they will continue to go up; and that the debt of this 
country is unsustainable on our present course, and there is 
not a whole lot in this health care debate to date relative to 
the bills that have been produced that is going to do anything 
but continue to aggravate that and actually expand that 
problem.
    That is my summary of what you have said. Is that a 
reasonable summary?
    Mr. Elmendorf. The only point I would be careful about 
myself is I don't know what the administration is or is not 
taking off the table.
    Senator Gregg. I understand. I hope they haven't taken it 
off the table.
    Mr. Elmendorf. But on the summary of a sobering 
perspective, yes, I agree with that, Senator. I am sobered by 
having to give it.
    Senator Gregg. So shouldn't we step back, because we are 
clearly not pursuing the path we desire to be on, which is to 
get all Americans covered by insurance, but do it in a way that 
actually makes our--doesn't aggravate our potential insolvency 
as a Nation? Shouldn't we step back and take another look at 
how we are going to approach this thing and address the issues 
which you have given us a very clear outline today we need to 
address--which have been highlighted by Senator Wyden and 
Senator Conrad and Senator Warner and Senator Nelson. Because 
we seem to be hell-bent for leather on passing something that 
is not going to get where we need to go relative to either 
making insurance available or containing its costs relative to 
the effects it is going to have on future generations and the 
solvency of our Nation. That is a rhetorical point.
    Thank you very much for your time.
    Mr. Elmendorf. Thank you, Senator.
    Senator Wyden. Dr. Elmendorf, thank you for being so 
responsive to this Committee, and also because I serve on the 
Finance Committee, I know that you have been putting many, many 
hours and sometimes I suspect that you and your staff are being 
fed intravenously because we have you at your desk incredible 
hours, and we thank you for your help.
    Mr. Elmendorf. Thank you, Senator.
    Senator Wyden. The Committee is adjourned.
    [Whereupon, at 10:16 a.m., the Committee was adjourned.]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                                 
