[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
_______
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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]
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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.
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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.
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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:]
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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:]
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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:]
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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.]
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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.
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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.
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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.
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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.
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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.''
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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.
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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:]
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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.
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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.
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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.
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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.
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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.''
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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:]
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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.
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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.
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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.
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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.''
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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.''
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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:]
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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.
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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.]
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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.
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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.
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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.
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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.''
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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.
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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.
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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.
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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.
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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.
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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:]
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***************
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.]
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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.
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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.
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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.
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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:]
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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.]
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.''
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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.''
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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:]
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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.]
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