[Senate Hearing 111-733]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 111-733
 
          CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2011

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              


  January 28, 2010-THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2011-
                                  2020

   February 2, 2010-THE PRESIDENT'S FISCAL YEAR 2011 BUDGET PROPOSAL

 February 4, 2010-THE PRESIDENT'S FISCAL YEAR 2011 BUDGET AND REVENUE 
                               PROPOSALS
 February 9, 2010-CRISIS AND AFTERMATH: THE ECONOMIC OUTLOOK AND RISKS 
                    FOR THE FEDERAL BUDGET AND DEBT
February 11, 2010-SETTING AND MEETING AN APPROPRIATE TARGET FOR FISCAL 
                             SUSTAINABILITY
  February 23, 2010-DEFENSE BUDGET AND WAR COSTS: AN INDEPENDENT LOOK
   February 24, 2010-THE PRESIDENT'S FISCAL YEAR 2011 BUDGET FOR THE 
                      DEPARTMENT OF TRANSPORTATION
 March 4, 2010-DEPARTMENT OF DEFENSE FISCAL YEAR 2011 BUDGET REQUEST

                                     
                                     

             Printed for use of the Committee on the Budget

          CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2011


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                                                        S. Hrg. 111-733

          CONCURRENT RESOLUTION ON THE BUDGET FISCAL YEAR 2011

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________


  January 28, 2010-THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2011-
                                  2020

   February 2, 2010-THE PRESIDENT'S FISCAL YEAR 2011 BUDGET PROPOSAL

 February 4, 2010-THE PRESIDENT'S FISCAL YEAR 2011 BUDGET AND REVENUE 
                               PROPOSALS
 February 9, 2010-CRISIS AND AFTERMATH: THE ECONOMIC OUTLOOK AND RISKS 
                    FOR THE FEDERAL BUDGET AND DEBT
February 11, 2010-SETTING AND MEETING AN APPROPRIATE TARGET FOR FISCAL 
                             SUSTAINABILITY
  February 23, 2010-DEFENSE BUDGET AND WAR COSTS: AN INDEPENDENT LOOK
   February 24, 2010-THE PRESIDENT'S FISCAL YEAR 2011 BUDGET FOR THE 
                      DEPARTMENT OF TRANSPORTATION
  March 4, 2010-DEPARTMENT OF DEFENSE FISCAL YEAR 2011 BUDGET REQUEST

                                     
                                     

?

                        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 28, 2010--The Budget and Economic Outlook: Fiscal Years 
  2011-2020......................................................     1
February 2, 2010--The President's Fiscal Year 2011 Budget 
  Proposals......................................................    77
February 4, 2010--The President's Fiscal Year 2011 Budget and 
  Revenue Proposal...............................................   151
February 9, 2010--Crisis and Aftermath: The Economic Outlook and 
  Risks for the Federal Budget and Debt..........................   229
February 11, 2010--Setting and Meeting an Appropriate Target for 
  Fiscal Sustainability..........................................   301
February 23, 2010--Defense Budget and War Costs: An Independent 
  Look...........................................................   371
February 24, 2010-The President's Fiscal Year 2011 Budget for the 
  Department of Transportation...................................   445
March 4, 2010--Department of Defense Fiscal Year 2011 Budget 
  Request........................................................   487

                    STATEMENTS BY COMMITTEE MEMBERS

Chairman Conrad.....................1, 77, 151, 229, 301, 371, 445, 487
Ranking Member Gregg....................................7, 84, 158, 378
Senator Bunning..................................................    40
Senator Merkley..................................................   399
Senator Session................................................236, 352

                               WITNESSES

Gordon Adams, PhD, Professor of International Relations, School 
  of International Service, American University................394, 397
Douglas W. Elmendorf, Director, Congressional Budget Office......10, 13
Honorable Timothy F. Geithner, Secretary, US Department of the 
  Treasury.....................................................160, 164
Simon Johnson, PhD, Ronald A. Kurtz (1954) Professor of 
  Entrepreneurship, Massachusetts Institute of Technology, Sloan 
  School of Management, and Senior Fellow, Peterson Institute for 
  International Economics......................................242, 246
Honorable Raymond H. LaHood, Secretary, US Department of 
  Transportation (Accompanied by Chris Bertram, Chief Financial 
  Officer, US Department of Transportation)....................454, 456
William H. Lynn, III, Deputy Secretary of Defense, US Department 
  of Defense; Accompanied by Robert F. Hale, Under Secretary of 
  Defense (Comptroller) and Chief Financial Officer, US 
  Department of Defense........................................487, 489
Maya MacGuineas, President, Committee for a Responsible Federal 
  Budget, and Director, Fiscal Policy Program, New America 
  Foundation...................................................320, 325
Donald Marron, PhD, Visiting Professor, Georgetown Public Policy 
  Institute....................................................253, 255
Honorable Peter R. Orszag, Director, Office of Management and 
  Budget.........................................................87, 90
Rudolph Penner, PhD, Institute Fellow, Urban Institute Co-Chair, 
  Committee on the Fiscal Future of the United States..........337, 341
Carmen M. Reinhart, PhD, Professor of Economics, and Director, 
  Center for International Economics University of Maryland....238, 240
Honorable Alice M. Rivlin, PhD, Director, Greater Washington 
  Research, The Brookings Institute............................311, 313
Paul K. Van Riper, Lieutenant General, United States Marine Corps 
  (Retired)....................................................410, 412
Cindy WIlliams, PhD, Principal Research Scientist, Security 
  Studies Program, Massachusetts Institute of Technology.......378, 381

                        QUESTIONS FOR THE RECORD

Senator Byrd...................................................128, 214
Senator Cardin...................................................   481
Senator Cornyn...................................................   521
Senator Crapo....................................................   211
Senator Enzi.....................................................   138
Senator Feingold...............................................226, 522
Ranking Member Gregg.............................41, 142, 205, 472, 509
Senator Merkley..................................................   149
Senator Murray.................................................145, 218
Senator Nelson..................................................42, 481
Senator Sessions..........................................123, 294, 512
Senator Stabenow.................................................   517
Senator Warner...................................................   131
Senator Whitehouse..............................269, 298, 438, 442, 518
Senator Wyden..................................................477, 514


        THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS 2011-2020

                              ----------                              


                       THURSDAY, JANUARY 28, 2010

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:01 a.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Feingold, Nelson, Stabenow, 
Cardin, Whitehouse, Merkley, Gregg, Grassley, Enzi, Sessions, 
Bunning, and Alexander.
    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.
    First, we want to welcome the CBO Director here to the 
Budget Committee to report on the latest CBO estimates. And 
before we begin that, I want to publicly thank Director 
Elmendorf for the really extraordinary effort he and the people 
at CBO have made over the last year with an unprecedented 
workload, and I mean truly unprecedented. I know firsthand that 
he and his people have worked nights, weekends, repeatedly, 
repeatedly, repeatedly, under extraordinary time pressures and 
with real complexity. And I must say, even though there have 
been times I disagreed with Director Elmendorf's views, 
sometimes strenuously, I absolutely respect his independence 
and his integrity. And I think he has won the respect of people 
on both sides of the aisle who have seen that he has tried to 
call them straight. And that is the best that we can ask for, 
and it really is, I think, high professionalism from Director 
Elmendorf and from the people at CBO. And, again, I have had my 
disagreements on some of their findings on things that mattered 
a lot to me, but what is important is that we do have an 
independent scorekeeper that has integrity. And certainly 
Director Elmendorf has proved that, and I appreciate it.
    Let me just turn briefly to my remarks about the subject at 
hand. The jobs situation across the country is very much in the 
front of everyone's mind, and if we look at the changes in 
payrolls going back to July of 2008, we can see we reached a 
peak of job loss in January of 2009. Virtually every month we 
have seen some improvement, and in November, we actually had no 
jobs lost, no net jobs lost; in December, 64,000. So a dramatic 
improvement from the 700,000 that were being lost a month in 
January of 2009.

[GRAPHIC] [TIFF OMITTED] T8153.014


    The same pattern can be seen in terms of the economic 
growth in the economy, the first quarter a negative 6.4 
percent, improving each quarter; so fourth quarter, according 
to the Blue Chips, we can anticipate growth in the fourth 
quarter of last year of 4 percent. Some are now saying it may 
be even stronger than that.

[GRAPHIC] [TIFF OMITTED] T8153.015


    So things have moved from the edge of the precipice. I 
believe very strongly we were on the brink of a global 
financial collapse before actions that were taken by the 
Congress, the President, and I would include the previous 
President, because the actions of his administration at the end 
I think were part of the response from the Government, both the 
administration, the Congress, and, of course, the Federal 
Reserve, taking actions to provide liquidity to prevent a 
collapse. Those actions did forestall, I believe, what would 
have been the worst recession since the Depression.
    But it leaves us with a long-term budget outlook that is 
truly daunting, and we cannot flinch from that. We cannot deny 
it. We have to face up to it. The 10-year budget outlook worst-
case scenario is as this chart depicts. We see improvement for 
the next 5 years, but then it starts to turn and move the other 
way if we do not act, and act we must.

[GRAPHIC] [TIFF OMITTED] T8153.016


    The gross debt now is approaching World War II levels, and 
let me just indicate that I know the economists like to focus 
on debt held by the public. I like to focus on the gross debt 
because, for budget purposes, all the debt has to be repaid, 
and debt can only be repaid out of current revenues. And so the 
fact is if we are looking at what is going to have to be dealt 
with from a budget standpoint, we have to consider gross debt. 
Those borrowings from the trust funds are real. They must be 
repaid. They are backed by the full faith and credit of the 
United States. And when I look at the gross Federal debt, I see 
it exceeding 100 percent by 2020--and, in fact, before that.

[GRAPHIC] [TIFF OMITTED] T8153.017


    The World War II high was 121.7 percent. Now, to put this 
all in perspective, other countries, industrialized countries, 
do have higher debt-to-GDP. Japan I believe at this point is in 
the 189-percent-of-GDP range. But there are real consequences 
for that. I believe Japan is about to have their debt 
downgraded because people see the risk of debt of that 
magnitude.
    More alarming and more concerning to me is the long-term 
trajectory, and if we look at the long-term budget outlook from 
CBO, we see debt, with all policies extended, all current 
policies extended, reaching 400 percent of GDP by 2059. There 
is no one that thinks that is a sustainable course. So anybody 
that tells us, well, you do not have to do anything, you do not 
have to worry about these things, we can just continue as we 
are, they are not telling us the truth. And this is not just my 
judgment. It is the judgment of Senator Gregg, the Ranking 
Member here. This has been the testimony before this Committee 
of this head of the CBO, of the previous head of the 
Congressional Budget Office, of the head of the Office of 
Management Budget, of the former head of the General Accounting 
Office, of the Chairman of the Federal Reserve, of the current 
Secretary of the Treasury, of the previous Secretary of the 
Treasury.

[GRAPHIC] [TIFF OMITTED] T8153.018


    So it is critically important that we honestly describe our 
circumstance. Our circumstance requires action on the debt.
    Colleagues, let me quote from CBO on the budget outlook: 
``The Federal fiscal outlook beyond this year is daunting. 
Accumulating deficits will push Federal debt held by the public 
to significantly higher levels. With such a large increase in 
debt plus an expected increase in interest rates, as the 
economic recovery strengthens, interest payments on the debt 
are poised to skyrocket. Without changes to Federal fiscal 
policy involving some combination of lower spending and higher 
revenues, rising costs in health care and from the aging 
population will rapidly drive the size of the Federal debt.''

[GRAPHIC] [TIFF OMITTED] T8153.019


    Now, I do not know what could be more clear. I do not know 
what could be more clear.
    Yesterday, or perhaps the day before, I used a chart on the 
floor that showed the historical context of our spending and 
revenue. That chart showed that current revenue is the lowest 
it has been in 60 years. If we look at last year and this year, 
revenue as a share of the gross domestic product, the lowest it 
has been in 60 years; spending, the highest it has been in 60 
years as a share of the gross domestic product. The difference 
between a revenue level of about 15 percent of GDP and an 
expenditure level of 26 percent of GDP, that is an 11-percent 
gap. We would not qualify for membership in the European Union 
with deficits of that magnitude. They do not permit it. They do 
not permit entry for countries that have deficits of that 
level.
    Senator Gregg. Over 3 percent.
    Chairman Conrad. Yes, I think their limit is 3 percent.
    So, look, this is the reality that we confront. The 
President was right to focus on this last night, and it is our 
responsibility to focus on it as we put together a budget for 
this year and the years beyond.
    With that, I call on the distinguished Ranking Member, 
Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman. Obviously, I second 
everything you have said about the problems we have as a Nation 
and that we are confronting relative especially to the debt. As 
you have said, the debt is the threat. And it is more than a 
threat now. It is a cataclysmic event facing us which is going 
to basically give our children a Nation they cannot afford and 
a lower standard of living than we have had in our generation.
    I want to put one chart up because I think it is the most 
telling chart that I have seen in recent years.

[GRAPHIC] [TIFF OMITTED] T8153.006


    This chart takes the CBO numbers and projects them out. 
What the Chairman was talking about is the line that is through 
the middle, the axis line, which shows the red line at its 
height--the red line being spending--and shows the blue line at 
its nadir, which is the taxes line. And that is where we are 
today, this massive gap, which is generated in large part by 
the recession, but also because much of the spending is 
recessionary driven, and obviously the drop in tax revenues is 
recessionary driven.
    But what is also shows in stark terms is that when we 
return to some level of ``normalcy,'' to use I guess it was 
Herbert Hoover's term--no, it was Harding's term--when revenues 
return to their historic levels, we still have a massive gap 
because spending is not returning to its historic levels, which 
makes the obvious point that the problem is primarily a 
spending problem. Even if you get your revenues back to where 
they have been on average for the last 40 years, you do not 
solve our problem, and we continue to pile on this debt, and we 
get to a position, regrettably, in the very near future where 
our debt is so large that, like a dog, we cannot catch our 
tail. In other words, we will not be able to afford the 
interest payments on that debt. The world community and our own 
Nation will begin to be suspicious of our capacity to pay our 
debt down, which will lead to an inevitable crisis of 
significant proportions relative to the value of the dollar, 
relative to our ability to sell debt, and relative to the 
productivity of the Nation as we have to probably dramatically 
raise the cost of Government on the productive side of the 
ledger.
    So this is a problem of inordinate proportions, and it is 
in large degree a spending issue. And, thus, we have to start 
addressing it on the spending side, obviously. There are others 
who want to address it on the revenue side. But I believe that 
we have got to address the issue where it lies, and this chart 
unequivocally points out that it lies in the fact that we are 
taking the size of the Government from its historic level of 
about 20 percent of GDP up to 25, 26, 27, potentially up to 30 
percent of GDP.
    Well, how do we address that? Last night, the President 
said, related again that he wanted to freeze non-defense 
discretionary. Well, that is good language, but not a lot of 
money. I mean, it is a lot of money for us individually. It 
would actually be a lot of money for the State of New 
Hampshire. But in the context of what we are facing in 
deficits, it is not a lot of money. The ``lot of money'' comes 
on the entitlement side, not on the non-defense discretionary 
side, and that is where we have got to set our course and try 
to do something.
    Unfortunately, I did not hear anything about controlling 
the entitlement accounts, and, in fact, on balance, if you take 
all the new programmatic ideas that were put on the table last 
night--and there were a whole series of them that were put out. 
I have not added them up yet, but I am sure that they far 
exceeded by a factor of, I suspect, 4 or 5 what was represented 
as would be saved under a discretionary freeze, a non-defense 
discretionary freeze. So actually spending under the proposals 
from last night goes up again.
    We need to face up to this. You know, it is like that old 
TV ad, Fram oil filter ad, ``You can pay me now or pay me 
later.'' But the ``later'' is coming fast. This is no longer an 
over-the-horizon event. It is on the horizon and closing fast. 
And I will be interested to hear from the Director what he 
thinks the closing date is. When does the Nation hit the wall? 
We know that Japan is hitting it right now. Their debt is about 
to be downgraded, it appears. And when are we going to get to 
that point? And is it not a predictable event right now that 
that will occur in our Nation? And when that occurs, that is 
when you have basically stepped off the insolvency cliff, and 
it is very hard to catch yourself as you fall off an insolvency 
cliff. So I will be interested in hearing what the Director 
says.
    I also want to join with the Chairman in thanking him for 
his extraordinary work and his team's extraordinary work over 
the last few months, an incredibly intense period with the 
scoring of the health care bill. And the integrity and fairness 
of CBO really gave the whole exercise a lot more--well, it made 
me feel comfortable that we were at least getting good numbers 
on a bad bill and we were getting honest and fair numbers on a 
bad bill. And that is what CBO should do. It should be the fair 
umpire around here, and you have really done an extraordinary 
job of being the fair umpire, and we thank you for that.
    Chairman Conrad. Director Elmendorf, just before you begin, 
I want to amplify something Senator Gregg said. I have had 
people suggest to me that any commission that would consider 
our long-term debt would make adjustments to Social Security 
and Medicare. I think we have got to look people in the eye and 
say yes. There is really no alternative.
    Medicare is cash-negative today. The trustees tell us it 
will be insolvent in 8 years. Social Security is cash-negative 
today, and your report of the day before yesterday says that it 
will be cash-negative every year except two for the future.
    You say in your report it will go cash-negative on a 
permanent basis in 2016. So anybody that says you do not have 
to make any changes to those programs, programs I strongly 
support--I lost my parents when I was young. I got Social 
Security; it helped me go to college. So I understand its 
importance in people's lives. I understand the importance of 
Medicare in people's lives. I have seen it in my own family. 
But the suggestion we do not have to do anything is just not 
being straight with people.
    And so I hope as this debate goes forward we just do not 
fall back into the same old divide of you cannot cut this, you 
cannot add any revenue here. I personally believe given the 
nature of the baby-boom generation that has doubled the number 
of people who are eligible for these programs, you are going to 
have to do something on the revenue side as well.
    So I again welcome you to the Committee and again thank you 
for your and your team's extraordinary work during these last 
many months.

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

    Mr. Elmendorf. Thank you, Mr. Chairman and Senator Gregg, 
for your very kind words about our work at CBO.
    Exactly 1 year ago today, I testified before this Committee 
for the first time as the newly minted Director of the 
Congressional Budget Office, and on behalf of all of us at CBO 
I want to express our appreciation for the support that both 
Senator Conrad and Senator Gregg have shown for our work over 
the past year, which means a great deal to us.
    To you and to all the members of the Committee, I 
appreciate the invitation to testify today about CBO's annual 
outlook for the budget and the economy.
    Under current law, CBO projects that the budget deficit 
this year, fiscal year 2010, will be about $1.35 trillion, or 
more than 9 percent of the country's total output. That deficit 
would be only slightly smaller than last year's deficit, which 
was the largest as a share of GDP since World War II.
    We expect that revenues will grow modestly this year, 
primarily because we expect a slow pace of economic recovery.
    We expect that outlays will be about even with last year's 
level as a decline in Federal aid to the financial sector is 
offset by rising outlays from the stimulus packages and for 
other purposes.
    Debt held by the public will reach $8.8 trillion by the end 
of this fiscal year, or 60 percent of GDP--the largest burden 
since the early 1950's.
    Looking beyond this fiscal year, the budget outlook is 
daunting. Again, under current law, CBO projects that the 
deficit will drop to about 3 percent of GDP by 2013 but remain 
in that neighborhood through 2020. By that point, interest 
payments alone would cost more than $700 billion per year.
    Moreover, maintaining the policies embodied in current law 
that underlie those projections will not be easy. It would 
mean, for example, allowing all the tax cuts enacted in 2001 
and 2003 to expire next year as scheduled, and not extending 
the temporary changes that have kept the alternative minimum 
tax, or AMT, from affecting more taxpayers.
    But as you know, many policymakers have expressed their 
intention not to let current law unfold as scheduled. If 
instead they extended all of the 2001 and 2003 tax cuts, 
indexed the AMT for inflation, and made no other changes to 
revenues or spending, the deficit in 2020 would be twice the 
size of the deficit that we project under current law. Debt 
held by the public would equal 87 percent of GDP and be rising 
rapidly.
    The baseline projections also assume that annual 
appropriations will rise only with inflation. If instead 
policymakers increased such spending in line with GDP, which is 
about what actually happened over the past 20 years, the 
deficit in 2020 would be two-thirds again as large as we 
project under current law.
    In sum, the outlook for the Federal budget is bleak.
    To be sure, forecasts of budget and economic outcomes are 
highly uncertain. Actual deficits could be significantly 
smaller than we project or significant larger. We believe that 
our projection balances those risks.
    One set of factors contributing to the bleak budget outlook 
are the financial crisis and severe recession along with the 
policies implemented in response. Analysts define the end of a 
recession as ``the point at which output begins to expand 
again.'' By that definition, the recession appears to have 
ended in mid-2009. However, payroll employment, which has 
fallen by more than 7 million since the beginning of the 
recession, has not yet begun to rise again, and the 
unemployment rate, as you know, finished last year at 10 
percent--twice its level of 2 years ago.
    Unfortunately, CBO expects that the pace of economic 
recovery in the next few years will be slow. Household spending 
is likely to be dampened by weak income growth, lost wealth, 
and constraints on their ability to borrow. Investment spending 
will be slowed by the large number of vacant homes and offices.
    In addition, although aggressive action by the Federal 
Reserve and the fiscal stimulus package helped moderate the 
severity of the recession and shorten its duration, the support 
to the economy from those sources is expected to wane.
    Employment will almost certainly increase this year, but it 
will take considerable time for everyone looking for work to 
find jobs, and we project that the unemployment rate will not 
return to its long-run sustainable level of 5 percent until 
2014. Thus, more of the pain of unemployment from this downturn 
lies in front of us than behind us.
    A deep recession and protracted recovery mean under current 
law lower tax revenues and higher outlays for certain benefit 
programs. CBO estimates that those automatic stabilizers will 
increase the budget deficit by more than 2 percent of GDP in 
both 2010 and 2011. In addition, CBO projects that last year's 
fiscal stimulus package will increase the deficit by roughly 2 
percent of GDP this year and by a smaller amount next year.
    As the economy recovers and the effects of the automatic 
stabilizers and legislated policies fade away, the budget 
deficit will shrink relative to GDP. However, as I have noted, 
the projected deficit remains large throughout the decade even 
under current law. And if current law is changed in some way 
that more closely matches current policy, as many people 
perceive it, the amount of Government borrowing relative to GDP 
would be unprecedented in the post-war period.
    A large and persistent imbalance between Federal spending 
and revenues is apparent in CBO's projections for the next 10 
years and will be exacerbated in coming decades by the aging of 
the population and the rising costs of health care. That 
imbalance stems from policy choices made over many years.
    As a result of those choices, U.S. Fiscal policy is on an 
unsustainable path to an extent that cannot be solved by minor 
tinkering. The country faces a fundamental disconnect between 
the services that people expect the Government to provide, 
especially in the form of benefit payments to older Americans, 
and the tax revenue they are prepared to send to the Government 
to finance those services. This fundamental disconnect will 
have to be addressed in some way if the Nation is to avoid 
serious long-term damage to the economy and to the well-being 
of the population.
    Thank you. I would be happy to take your questions.
    [The prepared statement of Mr. Elmendorf follows:]

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    Chairman Conrad. Well, first of all, thank you for that. 
Sobering but truthful.
    I wrote you some time ago and asked you to analyze and have 
your people help analyze various measures to help strengthen 
the economy and help create jobs at this time of continuing 
economic weakness. And you and your people came back with an 
analysis, and I would like to talk for a few minutes about your 
views with respect to what measures to help the private sector 
employ more people would be most effective and would be most 
effective in a way that is timely.
    As I read your analysis, your top three most impactful 
policy changes for increasing jobs in 2010 were, No. 1, tax 
assistance for businesses that would hire additional people; 
additional tax assistance for small business through small 
business expensing; and as I read the report, the extension of 
unemployment insurance--that those three would have the biggest 
bang for the buck and the most immediate impact. Is that 
correct?
    Mr. Elmendorf. I would just distinguish among those three, 
Mr. Chairman. In our review, the incentive for greater business 
investment would be less effective than tax credits for firms 
that increase their payroll or additional benefits for people 
who are unemployed. For many years, economists have believed 
that temporary tax incentives can have a powerful stimulative 
effect, particularly because of their temporariness and, thus, 
the need to take the action now. I think, unfortunately, the 
experience of the last decade, when these sorts of incentives 
have been tried on several occasions, has somewhat dampened 
economists' enthusiasm for those approaches because they appear 
to have been less successful in stimulating investment.
    I think one piece of intuition for that is that when firms 
have a lot of unused capacity, as they do today, and a lot of 
uncertainty about the course of the future demand and the use 
of that capacity, they may be less responsive even to cut-rate 
opportunities to do more investment.
    So that would be the least effective of the three you 
mentioned, according to our analysis.
    Chairman Conrad. Which would be the least effective?
    Mr. Elmendorf. The business incentives. The incentives for 
business investment, which I think was one of the ones that you 
mentioned. The ones that would be more effective, in our 
judgment, would be increasing payments to people who are 
unemployed, particularly because they are very short of income 
and likely to spend a large share of the money they receive 
very quickly; and, second, incentives for businesses that 
increase payrolls because that puts money into the economy, but 
also provides this particular incentive to do more hiring. And 
the effectiveness depends a good deal, in our judgment, on just 
how that incentive is structured.
    Chairman Conrad. I see. I was perhaps not hearing you 
right. I thought in your original response you were putting the 
jobs credit in the same camp as the small business expensing. 
What you are saying, what I hear you saying is the two things 
with the biggest pop would be, in essence, a tax break for 
businesses that hire people, No. 1, on the business incentive 
side. And the other thing that you see in your analysis that 
would help is the unemployment insurance extension.
    Why would that be of assistance in terms of jobs?
    Mr. Elmendorf. The chain of reasoning is basically that if 
people receive money and then they spend it, that demand for 
goods and services then means that those businesses that are 
selling products have the revenue to hire more people and see a 
need to hire more people because they need to step up their 
production to meet this increased demand, the normal process 
through which extra demand increases jobs.
    Chairman Conrad. I am running out of time here, so I want 
to go to the third element that we talked about, the small 
business expensing. As I read the report, that was seen as 
positive in terms of helping with the job situation in the 
country today.
    Mr. Elmendorf. Well, I think that is right. I did not mean 
to say it would have no effect. It just, in our judgment, would 
be less effective than the other two items that you mentioned.
    Chairman Conrad. Yes.
    Mr. Elmendorf. Yes, we do think there is some effect of 
reducing the price of buying investment goods, particularly for 
a time-limited period, which then would encourage businesses, 
if they were thinking of doing investment in the future, to do 
it right now.
    Chairman Conrad. Are there any other things that would be 
as effective as those three, or more effective, for 2010?
    Mr. Elmendorf. Those are the ones that we think of as being 
most effective. The one thing, I would just broaden a bit this 
increased aid to the unemployed. One can just give money to 
other people in the form of tax cuts or increased benefits. The 
effectiveness depends--in our judgment, the effectiveness in 
spurring overall economic activity and job creation depends on 
how much of that money is spent; and, thus, giving it to people 
who are unemployed is particularly effective because they are 
likely to spend a large share of it. But one could achieve 
effects that would be somewhat smaller by giving benefits to 
other people as well.
    Chairman Conrad. And with respect to infrastructure, as I 
read your report, that would be more effective in 2011 than 
2010? Is that a correct reading of your report?
    Mr. Elmendorf. Yes, that is correct. Our judgment, and I 
think it has--it was our judgment a year ago, and it has been 
confirmed by the experience of the past year, is that most 
infrastructure dollars move into the economy somewhat slowly. 
There are projects--resurfacing of roads, and I drive on some, 
and I appreciate that they are resurfaced. That can happen 
pretty quickly when money is made available. But many other 
infrastructure projects, the more substantial projects, have 
fairly long lags, and it takes some time to get that money out 
the door.
    That is not a judgment, of course, about whether those 
projects are worth doing or not worth doing from any other 
perspective. But as a question of pure macroeconomic impact, 
they tend to take some time to take effect.
    Chairman Conrad. I thank you for that.
    Senator Gregg?
    Senator Gregg. You have highlighted the fact that one of 
the primary drivers of the growth in the government and the 
spending which is going to create this structural deficit is 
health care costs, especially as it relates to the aging 
population, is that correct?
    Mr. Elmendorf. Yes, that is right.
    Senator Gregg. Now, you sent us a letter, myself and the 
Chairman a letter, that said that if you wanted to control 
health care costs, there were two primary things that could 
occur that you suggested. One of them was that the amount of 
deductibility for health insurance should be reduced so that 
people were actually paying more of a share of their health 
insurance rather than having it tax deductible, isn't that 
correct?
    Mr. Elmendorf. Yes, and the ``should'' is your term. We 
don't make recommendations. But what we did write to you was 
that there are a few levers the government controls and that 
was----
    Senator Gregg. That is a primary lever.
    Mr. Elmendorf. Yes.
    Senator Gregg. So when we hear the House talking about--the 
House leadership talking about changing health care so that 
insurance is fully deductible and so that the Cadillac plans 
are given advantageous tax treatment, that is actually going in 
the wrong direction?
    Mr. Elmendorf. I think from the perspective of cost 
control, it is a very widespread view among experts that 
reducing the tax subsidy for more generous insurance is one of 
the very important levers the government has, and that taking--
and that not employing that lever then reduces the extent of 
cost control, all else equal.
    Senator Gregg. Also in the health bill that passed, there 
was a massive savings expected in Medicare. I believe you 
estimated $500 billion over the first 10 years. A trillion 
dollars was our estimate over the first 10 years of full 
implementation, $3 trillion over the first 20 years of full 
implementation. The Medicare savings were used to expand other 
activities of the government, specifically the expansion of 
Medicaid and the new entitlement that was in the bill.
    If those dollars were used, which were saved from Medicare, 
to shore up Medicare in some manner, a Medicare reserve fund or 
something that would basically be paying down debt, could you 
give us a thumbnail estimate as to how much that might help 
correct the out year structural problems we have?
    Mr. Elmendorf. I can't do a quantitative calculation in my 
head, but your logic is certainly correct, Senator, that we 
estimated almost $500 billion in Medicare savings over the 10-
year projection period and increasing amounts over time in an 
amount that we have not separately quantified----
    Senator Gregg. Let me try to confine the question, then. If 
you didn't use it to expand the government but you used it 
instead to try to shore up the Medicare system by reducing the 
debt, wouldn't that have a significant positive effect for 
Medicare but also--because it would make it more solvent, 
theoretically--but also for the debt situation?
    Mr. Elmendorf. Yes, Senator. If we used those same savings 
to pay down debt, that would be a significant improvement in 
the budget outlook.
    Senator Gregg. There has been a lot of talk about the fact 
that TARP money is available to spend somewhere else. First, 
the law doesn't allow that. It is supposed to be used to reduce 
the debt. But I just want to clarify the fact that there is no 
TARP money, that all this money has to be borrowed, right? I 
mean, every cent of TARP money is borrowed from China or from 
somebody, right?
    Mr. Elmendorf. There is just one pool of government money 
and everything else is a sort of accounting treatments to keep 
track of it for various purposes. But yes, if more is spent 
through the TARP, that is just more that is spent.
    Senator Gregg. And more that is borrowed?
    Mr. Elmendorf. And more that is borrowed.
    Senator Gregg. And more that goes on the Federal debt?
    Mr. Elmendorf. And more that goes on the Federal debt.
    Senator Gregg. So there is no piggy bank over here that 
somebody has as a reserve fund somewhere in some desk drawer 
down at Treasury that they can use to create a new small 
business program or a new housing program or whatever they want 
to do. It has to be borrowed from somebody, right?
    Mr. Elmendorf. That is right.
    Senator Gregg. The freeze that the President has suggested, 
and I give him credit for using the term ``freeze'' and for 
stepping forward on that turf and I thank them for doing that, 
but I am trying to quantify it, because the deficit this year 
you projected at $1.34 trillion, was that your number?
    Mr. Elmendorf. For this fiscal--yes, 1.35 I said, but yes, 
that is correct.
    Senator Gregg. So $1.35 trillion. If we were to do a non-
defense discretionary freeze, give me the number that that 
would be adjusted for inflation and not adjusted for inflation.
    Mr. Elmendorf. So if we did a full--our report shows what 
would happen with a full discretionary freeze. So if one froze 
discretionary appropriations for defense and non-defense for a 
full 10 years----
    Senator Gregg. Just non-defense, the proposal that the 
President----
    Mr. Elmendorf. So, unfortunately, we don't have enough 
details about the President's proposal to do that calculation. 
I know only what I have seen in the newspapers. When we receive 
the President's budget next week, we can do that calculation. 
But until we know exactly which categories are included, 
excluded----
    Senator Gregg. Well, how about a range? It would range, 
wouldn't it, between $15 billion and, say, $25 billion, 
somewhere in that range, right?
    Mr. Elmendorf. Well, so in the--again, it depends crucially 
what happens after the freeze. So if you freeze for 3 years, if 
you then go back up to the level you would have been at 
otherwise, then the savings are just in those 3 years and they 
are small. If you maintain the--if you freeze and then grow 
from the end of the freeze but don't jump back up, then you can 
achieve significant savings over the remaining years, and that 
is obviously a policy choice that the Congress will have to 
make.
    Senator Gregg. What I am trying to get at here, obviously, 
is compared to the deficit this year, which is going to be 
$1.35 trillion, we are talking about this year saving, if you 
did a non-defense discretionary freeze of maybe 1 percent or 10 
percent--what----
    Mr. Elmendorf. Yes, it is even less than that. So we think 
a freeze on all discretionary appropriations would only save 
$10 billion in fiscal year 2011.
    Senator Gregg. So it is a step in the right direction, but 
it has--that is a lot of money, but it still has a marginal 
impact on what we----
    Mr. Elmendorf. As a share of the total deficit problem, it 
is a small step.
    Senator Gregg. Thank you.
    Chairman Conrad. Senator Feingold?
    Senator Feingold. Mr. Chairman, let me begin by thanking 
you and the Ranking Member for your bipartisan efforts to get 
our long-term fiscal house in order, and in particular for your 
Fiscal Commission amendment to the debt limit measure. As you 
know, I had some concerns with the concept of a Special Fiscal 
Commission. I don't think we should be outsourcing the job that 
we should be doing. But I share your frustration at the 
consistent failure of Congress to confront our long-term budget 
problems.
    And as is the case for many issues that we consider, there 
comes a moment when you have to decide, and in the Senate, you 
can't vote maybe. So even though I am not entirely comfortable 
with this approach, I decided to support the amendment. And 
while it didn't get the 60 votes it required under the 
unanimous consent agreement, I was encouraged that it was 
supported by the majority of the Senate.
    Of course, as is obvious from the Director's testimony, it 
will only get tougher, in particular, when we finally have to 
consider specific spending and revenue policies to correct the 
problem. There will be enormous pressure to resist such a 
correction, and that is appropriate. It is the way of a 
democracy. When that day comes, and I hope it comes soon, our 
country will be best served if that date concentrates all of 
our minds.
    I thank Director Elmendorf for all his work and the work of 
the CBO. Please know that some of us truly appreciate the work 
of the CBO and I acknowledge, as the Chair and the Ranking 
Member did, the pressures you face, perhaps because we are 
responsible for a whole lot of that pressure. I also want to 
acknowledge the limitations of any economic forecasts and 
especially those under which the CBO operates. Keynes said, 
never predict. If you do predict, predict frequently. Congress 
won't allow you to obey either of these admonitions, though. 
However, you are wise enough to recognize the spot in which we 
place you and to include language in your report regarding the 
uncertainty of your projections.
    In that regard, I have a place on my bookshelves for the 
Budget and Economic Outlook Report CBO issued in January of 
2001. It was the first report that included a rather stunning 
summary figure about the uncertainty of CBO projections. It 
showed a shaded fan of possible budget outcomes, with the 
darker central areas of the fan being more likely and lighter 
outer areas being less likely. Even under the worst scenario in 
that figure, at the faintly shaded low end of the fan, the 
budget was still projected to be in rough balance. Of course, 
the fan was based on what the current policies were at that 
time, and that is important, because as it turned out, that 
report was also the last Budget and Economic Outlook prepared 
by CBO before Congress enacted what would be a stunning set of 
policies that led to the biggest fiscal turnaround in our 
history.
    In less than 3 years after that report, Congress enacted 
two massive tax cut bills, it authorized two wars, and it 
enacted a massive entitlement program under Medicare, and none 
of those enormously expensive measures were paid for. Each and 
every one of them was added to the bill we are leaving our 
children and grandchildren. And sadly, each and every one of 
them remains with us today.
    As I read the report, CBO projects that extending the Bush-
era tax cuts and just indexing the alternative minimum tax for 
inflation would add over $4.5 trillion to our deficits over the 
next 10 years. And while it is difficult to project the cost 
over the next 10 years of the legislation which created the 
Medicare prescription drug benefit, Medicare's chief actuary 
estimates the legislation will end up costing $534 billion, 
more than half-a-trillion dollars, over its first 10 years.
    One of the policies with the biggest potential impact in 
future budgets, of course, is the cost of the ongoing wars in 
Iraq and Afghanistan. As I read CBO's report, the outlays 
projected in the baseline for the wars in Iraq and Afghanistan 
and related activities for the next 10 years are $1.4 trillion. 
Of course, that is the baseline, and CBO is constrained in the 
assumption it makes for that baseline. Our actual policy is not 
likely to be the one which is reflected in the baseline.
    CBO anticipates by providing two alternative budget 
scenarios, but even under the alternative which CBO estimates 
will produce the greatest savings relative to the baseline, 
reducing the number of troops deployed in Iraq and Afghanistan 
to 30,000 by 2013, over the next 10 years will cost about $400 
billion. And under CBO's middle-ground alternative, reducing 
the number of troops deployed by 60,000 by 2015, over the next 
10 years, the cost is nearly three-quarters of a trillion 
dollars.
    Mr. Chairman, every penny of those costs is added right to 
our deficits. That has been our policy for the past 10 years 
and it continues to be our policy. We aren't paying for those 
wars. We are just running up the enormous tab we are already 
leaving our children and grandchildren.
    Director Elmendorf, there is a telling statement in the 
Budget and Economic Outlook Report which notes that if CBO 
assumed that all the expiring tax cuts were extended beyond 
2010 and they weren't paid for, the long-term effect would be 
to lower future GDP because of the greater accumulation of 
debt. Is it not also the case that the greater accumulation of 
debt that results from failing to fully pay for the wars in 
Iraq and Afghanistan will also mean future GDP will be lower 
than it otherwise would be?
    Mr. Elmendorf. Yes, Senator.
    Senator Feingold. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator.
    Senator Bunning?
    Senator Bunning. Dr. Elmendorf, welcome.
    Mr. Elmendorf. Thank you, Senator.
    Senator Bunning. When you appeared before this committee 
last year, I asked some questions about CBO's practices. Now 
that you have had a year of experience as Director, I would 
like to ask you about these policies again.
    Current CBO practice assumes that any law that increases 
spending will be permanent. On the other hand, current CBO 
practice assumes that any tax decrease will not be permanent. 
Do you have any plans to address this inconsistency?
    Mr. Elmendorf. No, Senator, we don't. As I understand our 
policies, they are consistent across spending and taxes in the 
sense that when a proposal is put forward, if it is enacted to 
be a permanent policy, then it is scored at that time as the 
effects it would have over the 10-year budget window. If it is 
enacted to be temporary, then it is scored as having those 
effects, and----
    Senator Bunning. That was not my question.
    Mr. Elmendorf [continuing]. Into the baseline.
    Senator Bunning. That was not my question. My question was 
current policy of CBO----
    Mr. Elmendorf. Right----
    Senator Bunning [continuing]. On spending, that any 
increase in spending would be permanent. On the other hand, 
CBO's practice assumes that any tax decrease will not be 
permanent. Is that the current policy of CBO?
    Mr. Elmendorf. I think not every spending policy is viewed 
as being permanent, but many of them are. Yes, that is right, 
Senator.
    Senator Bunning. OK. I think it is common sense that tax 
relief helps business grow. When the business grows, it will 
pay more taxes. As I am sure everybody here knows, factoring 
this effect into budget estimates is known as dynamic scoring. 
Do you have any plans to use dynamic scoring at CBO?
    Mr. Elmendorf. We do not intend to incorporate the effects 
of policies on macroeconomic conditions in our estimates. Of 
course, the tax estimates themselves are done by the staff of 
the Joint Tax Committee, so that particular branch, the 
question really needs to be directed to them. But for our part, 
we do not intend to incorporate those effects. We do try, when 
we can, to provide analysis for you and other members of the 
macroeconomic effects, as we do every year for the President's 
budget and have for some years now. But we don't incorporate 
those and don't intend to incorporate those in our estimates of 
particular legislation.
    Senator Bunning. Then your answer is no?
    Mr. Elmendorf. That is right.
    Senator Bunning. OK. Do you believe that extending the so-
called Bush tax cuts will have a positive or a negative effect 
on the economy?
    Mr. Elmendorf. We think that extending those tax cuts would 
have a positive effect on the economy in the year or two at the 
beginning because they would encourage spending and thus 
encourage job creation of the sort that I was discussing 
earlier. Over a longer period of time, if those tax cuts are 
extended permanently and no other changes are made to spending 
or revenues, then we think that the larger debt that would 
arise would lower the level of economic impact.
    Senator Bunning. In other words, if they were extended on 
not a permanent basis but a temporary basis of two or 3 years, 
you think that would help the economy?
    Mr. Elmendorf. That would certainly, again, help the 
economy in the period when they were--in those first few years. 
Again, there would be--even for those few years, of course, 
there would be a good deal of additional debt accumulated and 
that would have some drag in later years if it were not offset 
in some other policy change.
    Senator Bunning. OK. During my time in Congress, which has 
been unbelievably long----
    [Laughter.]
    Chairman Conrad. Not so long.
    Senator Bunning. Twenty-four years. I have worked to 
advance the creation of a strong domestic fuel industry that 
would provide our government agencies with a safe, secure 
supply of fuel regardless of policies, global policies of oil. 
To this end, I have authored legislation that would provide 
incentives for this through a mix of loan guarantees and tax 
credits, as well as providing multi-year procurement 
contracting authority for our government agencies. Aside from 
providing marketplace stability through price certainty, I 
believe this allows for more consistency in the budgeting 
process. As the energy demands within our government agencies 
continue to grow, do you believe it is important to provide our 
government with the authority to enter into these multi-year 
procurement contracts?
    Mr. Elmendorf. As you know, Senator, we don't make policy 
recommendations, but I understand and agree with your point 
that uncertainty in future costs, all else equal, complicates 
the budget process. But I can't judge the specific ways in 
which you would make those costs more certain and costs that 
might be----
    Senator Bunning. I understand what you are saying. Thank 
you.
    Thank you, Mr. Chairman. Thank you.
    Chairman Conrad. Thank you, Senator Bunning.
    Senator Stabenow?
    Senator Stabenow. Thank you, Mr. Chairman, and first, I 
want to thank you for your ongoing leadership, you and the 
Ranking Member, in focusing us on long-term deficits while at 
the same time talking about what we need to do in the short run 
to create jobs. I appreciate your balance on both of those, 
which are so critical.
    I wanted to take a moment and just ask that we re-look at 
two charts, Mr. Chairman, that you had put up. One of those--
because I think it is important. Let me just start by saying, 
it is important to look, not for the purpose of blame but for 
the purpose of understanding what works and what doesn't work, 
to look at the last 8 years and to look at before then and sort 
of what has worked, what has not worked.
    When I came into the Budget Committee in 2001, we were 
debating what to do with the largest surpluses in the history 
of the country--the largest surpluses in the history of the 
country. That period in the 1990's was focused on innovation, 
education, also balancing the budget, but very much focused on 
investing in people and in innovation and in growing jobs, 20 
million new jobs plus.
    Eight years coming in, different economic policies were put 
into place, ones that focused on tax cuts at the top, hoping 
they would trickle down to middle-class families, two wars not 
paid for, a prescription drug bill not paid for, we go from 
huge surpluses, the largest in the history of the country, to 
largest deficits.
    So I don't think it is insignificant as we now look at 
different policies and that we are looking at how do we go back 
to, in some ways, what worked in the 1990's that created jobs 
and created surpluses, to look at what has happened in the last 
year.
    The first thing is the fact that this is not insignificant, 
Mr. Chairman, that we are, in fact, moving in a direction of 
less people losing their jobs, and hopefully we are going to 
see people beginning to have a net plus in terms of creating 
jobs. That is not insignificant.
    I also don't think it is insignificant, Mr. Chairman, that 
the economy is improving. I mean, we have, in fact, put in 
place different policies than the last 8 years. And at least 
part of that, when we look at the Recovery Act, I was very 
pleased that the effort I championed on Cash for Clunkers had 
such an immediate impact in a small amount of time, and some 
economists certainly have credited that with some of the boost 
in--short-term boost in GDP. But it is not insignificant.
    So I think it is important to stress that different 
policies are beginning to swing this in a different direction, 
and I think that is important. Now, we are focused on, again, 
as we were in the 1990's, middle-class tax cuts. We are focused 
on investments in innovation, in education, and in jobs, and I 
think that is very significant.
    I wanted to ask, Mr. Elmendorf, and again, I want to join 
my colleagues in thanking you for the incredible job that your 
staff have done, particularly around health care, which was an 
incredibly stressful 24-hour-a-day effort and thank each of you 
for doing that.
    Mr. Elmendorf. Thank you, Senator.
    Senator Stabenow. But you talked about how infrastructure 
spending has a delay, and so what I assume, that the dollars 
that we passed last February in the Recovery Act would have 
more impact this year than last year?
    Mr. Elmendorf. So the infrastructure dollars, yes, that is 
correct.
    Senator Stabenow. And----
    Mr. Elmendorf. It is also true more generally for the 
program, but infrastructure, it is definitely the case. There 
is much more impact this year than last year.
    Senator Stabenow. So you would expect in 2010 that we would 
see more impact and more jobs created as a result of that?
    Mr. Elmendorf. Yes, that is correct.
    Senator Stabenow. OK. Could you talk about how growing the 
economy, just a little bit more in terms of creating jobs in 
the economy, will help us reduce the deficit? It is different 
than sort of a top-down approach, about how putting money in 
the pockets of Americans, middle-class people, and creating 
jobs grows the economy.
    Mr. Elmendorf. So as you are saying, Senator, increase in 
economic growth, declining unemployment would increase the 
revenues the government collects under current law and it would 
decrease the benefit payments that go out to unemployment 
insurance and formerly the Food Stamp program, now Supplemental 
Nutrition Assistance, and so on.
    In rough terms, we and the staff of the Joint Committee on 
Taxation think about a dollar of extra GDP or total income 
raising government revenue by about 25 cents. So there is a 
substantial feedback effect. We show in our outlook that if the 
economic growth is stronger than we project over the next year 
or two or three or more, that would lead to smaller deficits. 
If it is weaker than we project, that would lead to larger 
deficits, and I keep emphasizing the uncertainty, but we think 
risk on both sides.
    Senator Stabenow. Right. And so it would be fair to say 
that--and I appreciate your critique in terms of what would be 
most effective for us, but focusing on some kind of jobs-
specific credit for business as well as unemployment extension 
as well as some other investments that we can make, that that 
not only creates jobs, but that also helps us tackle the 
deficit, is that correct?
    Mr. Elmendorf. That is right. It does. Again, you do 
understand that scale of deficit now, this year and next year 
and so on, is very large. We would have to be unbelievably far 
off, even by the standards of the fan chart that was shown, in 
terms of economic growth to take that problem away, but it is a 
step in the right direction.
    Senator Stabenow. And I am certainly not minimizing what is 
a huge issue for us.
    And then finally, I just wanted to reemphasize, in all the 
work that we did last year and we continue to do to tackle 
health care costs, which I believe also creates jobs--it 
certainly does in my State of Michigan and I think across the 
country--if you might just reiterate again your feeling in 
terms of tackling health care costs as an important part of 
addressing the deficit and, in fact, the work of your great 
staff indicated that the bill, as passed in the Senate, would 
reduce the deficit, I believe, by $132 billion in the first 10 
years, and then a much larger amount--I have heard different 
numbers now, but certainly a much larger amount in the second 
10 years. Do you still believe that tackling health care costs 
is a critical part of bringing down the deficit?
    Mr. Elmendorf. Certainly, reducing Federal spending for 
health care is almost a necessary part of pulling the budget 
into a sustainable trajectory over time because a significant 
part of the growth of the budget gap, the deficit, comes from 
rising health costs. Whether particular sorts of health reform 
are effective in reducing the government's spending on health 
depends, of course, on the specific reforms. As you say, our 
estimate is that the bill that passed the Senate and also the 
bill that passed the House would have a small effect of deficit 
reduction in the first 10 years.
    Again, as Senator Gregg indicated, $130-some-billion is 
large by many, many standards, but not by the standard of the 
size of the deficit we project. So by our estimation, if those 
bills were allowed to unfold as written, they would be a step 
in the direction of reducing the deficit, but only a small 
step.
    Senator Stabenow. But the second 10 years and the Senate 
bill?
    Mr. Elmendorf. The second 10 years, again, we think in both 
bills that they would slightly reduce budget deficits in the 
second 10 years. We have not given dollar values ourselves, as 
you know, but just expressed this as really ranges of GDP, and 
that is because we want to emphasize the vast uncertainty that 
surrounds that. But our view, again, is that if both bills were 
allowed to unfold as written, they would represent slight 
reductions in the budget deficit over the second 10 years, as 
well.
    Senator Stabenow. Thank you. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Grassley?
    Senator Grassley. Thank you, Dr. Elmendorf. I want to ask 
you--and I got here late, I hope it hasn't been asked by other 
people--about the bank tax, widespread agreement with the 
President among taxpayers and Members of Congress that 
financial institutions should repay every dime that they have 
received from the government for financial stability. The 
President recently proposed what he calls a Financial Crisis 
Responsibility Fee to help facilitate the repayment.
    Obviously, a lot of us agree with the goals that the 
President articulated. Before Congress is asked to vote on 
legislation imposing such a fee, it will be very important to 
understand the potential impact on consumers, the criteria for 
applying the fee to some entities and not others, and the 
implication for securing the stability of these institutions.
    So does the CBO know if the fee will get passed on to 
consumers in any manner? If so, how will it be passed on to 
consumers? And second, will the fee reduce the amount of 
bonuses paid by financial institutions subject to the fee?
    Mr. Elmendorf. So Senator, we and the staff of the Joint 
Tax Committee are hard at work trying to answer the many 
questions that you have sent us regarding this fee and we hope 
to get back to you shortly on at least some of them. Other 
questions will have to wait until we get more details ourselves 
about the proposal in order to answer.
    I don't think I have a good short answer to your questions. 
The incidence of the fee, who it is who will bear the burden--
and somebody will, right. We understand there is no other pool 
of money in the sky for it to come out of. It will be borne by 
somebody. How much will end up being passed into loan costs or 
into lowering interest rates paid on deposits versus how much 
would get passed to the shareholders or to the managers is a 
very hard question and we just don't have an answer to that 
now, and I doubt even at the end we will have an answer that we 
will have great conviction about because it is an uncertain 
business. But we are working on that analysis, but I am afraid 
we just don't have any useful answer to that question at this 
point.
    Senator Grassley. OK. Well, then I will be glad to wait, 
and thank you for your consideration. More importantly, thank 
you for studying it in depth, and hopefully, you will have some 
real concrete answers for us.
    I want to go to interest rates and the publicly held debt. 
Your baseline projects that debt held by the public will exceed 
60 percent of GDP in 2010, begin approaching 70 percent of GDP 
by 2020, and those are your figures. I happen to have read 
other places where some people expect at the 10-year window 
they might even get up into the high 80's or 90 percent of GDP. 
Anyway, net interest costs on this debt are estimated to rise 
from over $200 billion this year to over $700 billion in 2020, 
a threefold increase. What are the implications for our economy 
on such large interest payments?
    Mr. Elmendorf. So, Senator, just to say quickly, I think 
the difference that you are seeing between what we projected 
and some other projections really rests on different 
assumptions about the path that fiscal policy takes. As you 
know, our baseline assumptions assume current law, but we have 
discussed in our outlook and I did say in my comments that you 
weren't able to be here for that if, in fact, some laws were 
changed in a way that more closely match what most people think 
of as current policy on the tax or spending side, that the 
deficits would be substantially larger, and I actually used a 
figure of 87 percent of GDP at the end of the 10-year window 
under some alternatives.
    The borrowing by the government has different sorts of 
costs for the economy. One is that that debt crowds out 
investment in real capital, in business, plant, and equipment 
of the sort that makes people more productive and raises 
incomes over time. And that happens incrementally year by year 
every time more debt is accumulated. Debt also poses a risk of 
some more cataclysmic event in which investors might decide 
that they were not willing to hold Treasury debt at anything 
like the current interest rates or became unwilling to hold 
U.S. dollar assets in the way they have at this point.
    That is a risk, and economists are very bad at trying to 
analyze how big the risk is or what a triggering event might 
be. All that we can really say as analysts is that that risk 
increases as the debt rises relative to GDP, because that means 
that debt would have to become an increasing share of the 
portfolios of investors and that raises the risk of their 
reassessing their decisions. But whether there is a tipping 
point, and if so, at what level of debt relative to GDP it 
would occur, we just don't know.
    All we know, again, is that the risk is rising, and as we 
move our debt from the 60 percent of GDP it will be the end of 
this year higher over the next decade, we are moving 
increasingly into territory that we have not seen in this 
country in more than 60 years and that we don't see in very 
many other developed countries, and I think there is a warning 
in that, but it is not a warning that I am able to quantify in 
any way.
    Senator Grassley. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Grassley.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman. It certainly is a 
sobering analysis, and we all need to focus on this issue. I 
want to make one observation first about the Ranking Member's 
comments and your response, that there is just one pool of 
money, that whenever we change your baseline assumptions, 
whether on spending or on revenues, if it increases spending or 
reduces revenues, it means more borrowing. That is the point 
that you made, and that is true whether we change your 
assumptions on TARP funds or we extend tax cuts that are not in 
the baseline. It means more borrowing. In addition, if we enact 
new tax cuts or increase troop levels beyond what is in the 
baseline, all that means more borrowing and makes forecasts 
even worse in the future. I thank you for reminding us of that 
constantly.
    I want to follow on the Chairman's point about how we can 
stimulate the economy, which would then improve the forecast 
and help us deal with the long-term fiscal dilemma we face.
    I was interested in the response to the Chairman's question 
about the most effective ways. If we can help businesses hire 
more employees, that obviously is going to help us on the 
forecast. Last night, the President brought up help for small 
businesses. I was pleased to hear him say that because 
historically most job growth has occurred with small 
businesses. Coming out of this recession, the more we can 
inspire confidence with small business to put on more 
employees, the faster we will see the job growth that is going 
to be necessary for our economy. So targeting the tax credit 
for new hires to small businesses will have a very positive 
effect.
    I want to make one additional point. You mentioned that the 
expensing, although positive, is not quite as strong as the job 
credits for new employment. I want discuss the availabiity of 
credit. I can just tell you, in Maryland small businesses that 
want to expand do not have the same access to credit as larger 
companies. That is a fact. Much of that is because they do not 
have the same type of relationships that larger companies have 
with alternative financial institutions that can get them 
through this period.
    One of the proposals that is being made is to try to ease 
the manner in which small businesses can access credit, not by 
changing the ground rules that would allow them to get credit, 
but just making it easier for them to obtain that in hopes that 
that would help expand our economy.
    So I would just like to get your assessment as to the 
availability of credit as one factor. If we can make it easier 
for small businesses to access credit so that they can carry 
out a business plan that is also reinforced by a jobs credit 
for new hires, how could that have a positive impact on our 
future outlays?
    Mr. Elmendorf. I have a couple of observations. You are 
certainly right that small businesses have been--their access 
to credit has been particularly hurt by the financial crisis of 
the past few years, and we can see that in the reports of small 
business owners themselves.
    We did not as part of this project about stimulating 
employment growth focus on ways to improve access to credit. It 
just was not an area that we considered, so I do not have much 
to say specifically about how one might help that and what 
particular means might be effective at addressing that problem.
    I would say on the more general question of encouraging 
employment, a lot of jobs are made in small businesses. A lot 
of jobs, unfortunately, are lost in small businesses as well. 
They are very volatile. Some succeed and some, unfortunately, 
do not. There is not really anything in the economic analysis 
that suggests that one should focus employment incentives on 
small businesses.
    If you can encourage large businesses to hire more, those 
count as jobs, too, of course. Those can bring down the 
unemployment rate. Those can create incomes that will create 
demand for other goods. Those would create additional tax 
revenue and so on.
    So there is nothing that says that the--regardless of how 
many jobs are created in which sector under normal times, there 
is no reason to think that focusing job credits on small 
businesses would be more effective dollar for dollar in raising 
employment than allowing the same credits for big businesses as 
well as small businesses.
    Senator Cardin. Well, I would clearly agree that we need to 
focus on our entire economy. I just tell you anecdotally that 
for a small company that extra dollar is so important today in 
making their decisions. In some cases, it determines whether 
they will decide to go after a contract or not. The incentive 
difference between a small company and a large company is much 
greater and historically we have seen more job growth from 
smaller companies. But you are correct. I agree with you. We 
have got to concentrate on the entire economy. I was just 
pleased to see the President recognize the need that we have 
not yet reached small businesses through our economic programs 
as effectively as we need to for stimulating our economy.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator.
    Senator Enzi?
    Senator Enzi. Thank you, Mr. Chairman. First I want to 
thank Director Elmendorf for all the good work that he did on 
health care and I appreciate all the time that your staff had 
to put into analysis day after day and night after night and 
weekend after weekend. And now that we're in budget season, I 
am concerned that the Federal Government has not been a good 
partner in the economic recovery. Businesses need a stable 
environment to make plans for the future, purchasing plans, 
production decisions, hiring plans, strategies to manage cash-
flow. They cannot be made in a vacuum.
    But how can the business community plot a path toward 
growth and recovery when the future is clouded by the uncertain 
fate of major initiatives like health care reform, forced paid 
sick leave, expiring income taxes, the estate tax, and the 
business tax extenders? My question is: Is it logical to assume 
that Congress' failure to act on these initiatives has had a 
negative impact on the job creation and the economic growth? 
And if so, is it possible to quantify the magnitude of that 
impact? Should Government be a better partner in this recovery 
and move quickly to address some of the low-hanging fruit such 
as the business tax extenders? Would that have an effect?
    Mr. Elmendorf. I think you are correct, Senator, that 
uncertainty about future Government policy is weighing on 
business decisions. I cannot quantify it, and I think it is not 
as important an uncertainty, of course, as uncertainty about 
the future demand for products, future sales, which is the 
predominant uncertainty weighing on businesses. For example, on 
the small business front, although they do report problems 
getting credit, they also report that their biggest uncertainty 
is whether they will be able to sell their goods. So I think 
that is the biggest uncertainty which is weighing on business 
decisions to invest and hire. But I think uncertainty about 
Government policy is also playing some role.
    Senator Enzi. Continuing the theme of taxes and 
uncertainty, there is some question in the business community 
about the fate of the income tax cuts that Congress passed in 
2001 and 2003. As you know, small business is the engine of our 
economy. And many of those small businesses file their taxes as 
partnerships or limited liability corporations and subchapter S 
corporations, and they pay income taxes according to the rate 
schedule for individuals, which puts a lot of them in that over 
$250,000 category. Consequently, the fate of the marginal rate 
cuts in 2001 are very important to them, and you do talk about 
some of the impact of that on page 45, and I appreciate that.
    CBO's current policy forecast for real GDP growth in 2011 
is 2.4 percent. The Blue Chip forecast is 3.1 percent. The 
Federal Reserve is 3.4 percent.
    Is it correct to say that the CBO predicts that our failure 
to extend all of the 2001 and 2003 tax cuts will reduce 
economic growth by seven-tenths to a full percent of GDP next 
year? And is it wise to sacrifice the opportunity for growth in 
this economic environment? If the Government wanted to be a 
good partner in recovery and reduce uncertainty in the business 
climate, it seems logical that Congress should act quickly to 
permanently extend all the tax cuts, especially those rates 
that affect small business. What would be your take on that?
    Mr. Elmendorf. Senator, we do think that if you and your 
colleagues were to extend those tax cuts on a temporary basis, 
that would provide a stimulus to economic growth next year. We 
think if you were to extend the tax cuts on a permanent basis, 
that would actually supply an even larger stimulative effect 
next year because people would tend to spend a larger share of 
taxes they thought would be cut for some period of time.
    The problem is, of course, that if you do that and take no 
other steps, then the deficit outlook is quite a bit bleaker, 
and over time, unless other steps are taken, that extra debt 
would hold down economic activity.
    So just as our estimate for the stimulus package last year 
had an increase in economic activity in the short run but some 
dampening effect toward the back half of the 10-year window, an 
extension of the tax cuts--again, with no other changes in 
policy--would have an important stimulative effect up front but 
would depress economic activity later on in the 10-year 
projection window.
    We do think that a large share of the gap between our 
economic projection of the next couple of years' growth and 
that of outside forecasters probably stems from this difference 
in fiscal policy assumptions. Of course, we stick with current 
law, and they are making some guess of what you will do, which 
we do not and should not do ourselves. And we do not quite know 
their assumptions, but if we changed ours to include a 
permanent extension of the tax cuts, that would raise economic 
growth over the next couple of years in our forecast by more 
than a percentage point. But, again, I will come back to 
baseline projections that would show deficits twice the size 
that we are showing now at the end of the 10-year window, and 
that is the other part of the problem that you and your 
colleagues are confronting.
    Senator Enzi. Let me switch quickly to education for a 
short question. Using the 2009 baseline, CBO scored the savings 
in the Student Aid and Fiscal Responsibility--SAFR--bill at $87 
billion. But a subsequent estimate provided to Senator Gregg 
estimated only $47 billion in savings when the market risk was 
factored in. Given your advised baseline estimates and the fact 
that a number of schools have switched to direct loan programs, 
how much do you approximate that the previous score will change 
given the new baseline and assumptions?
    Mr. Elmendorf. We do not think that that score would change 
very much because there are some offsetting factors at work. So 
it is true that the switch, because more people in schools have 
already switched to the direct lending, that has an effect in 
one direction. On the other hand, we have lowered our forecast 
for interest rates a little bit over the next decade in 
response to the weak economic conditions, and that has an 
effect in the other direction. I do not think we have completed 
an estimate yet, but the work in progress suggests not much net 
difference from what we reported last year.
    As you say, there is a significant difference between the 
official score, which is based, of course, on the Federal 
Credit Reform Act of 1990, and an alternative that tries to 
incorporate market risk in the way that Senator Gregg asked us 
to produce for him.
    Senator Enzi. Thank you. I will submit some followup 
questions on that in writing.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Enzi.
    Senator Nelson?
    Senator Nelson. Thank you, Mr. Chairman----
    Chairman Conrad. Senator Nelson, if you would just withhold 
for a minute, I just want to thank you for your strong support 
of the initiative that Senator Gregg and I advanced. Nobody was 
a stronger advocate for that or pushed harder for it, and I 
just want to publicly acknowledge the work that you did on the 
debt control commission.
    Senator Nelson. Mr. Chairman, the fact that we only got 53 
votes for setting up a commission in the statutes that you and 
Senator Gregg proposed I think is a shame. We had to reach the 
60-vote threshold under the Senate rules to get it, and we only 
got 53 votes. And there were how many against, forty----
    Chairman Conrad. Forty-six.
    Senator Nelson. Forty-six against having a statutory 
commission to get the national debt problem under control. That 
says a lot about the willingness of folks to get our fiscal 
house in order.
    I wanted to thank you, Dr. Elmendorf. You have done 
yeoman's work in all of the requests that we have had to you 
for scoring as we considered this health care bill.
    Let me go back to one of the Chairman's charts. Is it true 
that if we took the Senate health insurance reform bill--call 
it broader, the Senate health reform bill, that debt, the long-
term Federal debt, would come down?
    Mr. Elmendorf. It would come down by a little bit, Senator. 
I----
    Senator Nelson. Well, I want to ask you about that because 
you said in the second 10 years--if I recall, your projection 
was if the Senate health bill passed, the second 10-year period 
it would come down in the range of $650 billion to $1.3 
trillion.
    Mr. Elmendorf. So the way we put that was as a share of 
GDP, Senator, and some people have taken to doing their own 
calculations of GDP in that second decade and doing the 
multiplication. But we deliberately stuck with percentages of 
GDP, but that chart is still relevant. Actually, you can bring 
the chart back up. We said that the bill would reduce the 
deficit between a quarter and half a percent of GDP. So over a 
decade, that amounts to 10 times that, so that would be 2.5 to 
5 percent, 2.5 percent to 5 percent of GDP.
    You can see on that chart--take the end of that second 
decade at 2029. Debt is going from 100 percent of GDP to 200 
percent of GDP over the space of--I cannot be sure, but a 
decade or two. So we are taking 5 percentage points off the 
level for that second decade. It is lower, but I think if we 
were to hold up a chart next to that chart, to be honest, you 
would have trouble detecting the difference.
    Senator Nelson. Well, now, is it not true that one of the 
things that you cannot score when you do a score for the Senate 
health bill is the insurance reforms, things like that 
insurance companies cannot suddenly cancel you for pre-existing 
conditions, and we are going to set up accountable care 
organizations that are going to follow the patients through 
Medicare, the emphasis on primary care doctors so that they 
have to get a doctor that will go and say you need to go to 
this specialist, electronic records so that one physician to 
the next knows what the other has done and, therefore, you do 
not have to repeat all of these tests that we find in the 
Medicare system right now where the Medicare recipient goes to 
this specialist, this specialist, this specialist, all not 
knowing what the other specialists are doing, and they are 
duplicating tests? That is something you cannot score. Isn't 
that right?
    Mr. Elmendorf. Well, we try. Estimating the effects of 
those kinds of changes on the budget is very difficult, and 
certainly there are other analysts who think that we have 
produced estimates of the budgetary effects that are too 
pessimistic and other analysts who think we have produced 
estimates that are too optimistic. And either group could be 
right. The uncertainty is great. But we do think we have 
balanced the risks in the projections that we have provided.
    Senator Nelson. Well, you certainly agree that health care 
is a big part of our Federal spending and it is going to affect 
that huge debt in the future.
    Mr. Elmendorf. Yes, absolutely.
    Senator Nelson. And so maybe there are things like on the 
private sector, these insurance market reforms that we have got 
to get into, some of which I just mentioned will affect the 
Federal budget that it are difficult for you to score.
    Mr. Elmendorf. Yes, it is certainly difficult for us to 
score. The uncertainty--everything we do is uncertain. The 
uncertainty here is particularly large. And, of course, as you 
are suggesting also, the effect on the budget deficit is not a 
summary measure of everything that might matter in legislation. 
It is just one aspect. But it is the aspect on the table at the 
moment.
    Senator Nelson. Today--and I will conclude with this--we 
are going to be voting on a so-called pay-as-you-go amendment, 
and that sounds awfully good. But there are going to be certain 
exceptions for it. There is going to be an exception for the 
AMT. We are not going to pay for that for 2 years. All of 
bringing doctors up to what they should have been getting under 
Medicare that has this acronym called SGR, that is not going to 
be paid for for 5 years. I wonder if it is a pay-as-you-go 
amendment. And the whole thing, we are going to forgive about 
$1.6 trillion that we are not going to pay, and the consequence 
of that when you add the debt service to it is going to be 
about $1.9 trillion.
    Mr. Elmendorf. We have not done those estimates precisely, 
but that does sound like the ballpark that we expect the 
numbers to be in, yes. And those provisions, those exceptions--
adjustments, as they are called in the legislation--do suggest 
the deficit will be larger than if you and your colleagues 
passed a similar bill that did not have those adjustments.
    Senator Nelson. Thank you, Mr. Chairman.
    Senator Gregg [presiding]. I understand Senator Whitehouse 
is headed in this direction. Do we know how far away?
    Does anybody else wish to ask any followup questions of the 
Director?
    [No response.]
    Senator Gregg. We have got a vote starting at 10:30. Does 
the Director mind waiting for a couple of minutes for Senator 
Whitehouse?
    Mr. Elmendorf. No. As long as you would like me to wait, 
Senator.
    Senator Gregg. Well, I can ask you something while we are 
waiting. Following up on this PAYGO issue, do you have an 
estimate of how many times the Congress has waived PAYGO in the 
last 2 years?
    Mr. Elmendorf. No. I certainly wish I did now, but I am 
afraid that I do not.
    Senator Gregg. Would the number, the total gross amount in 
waivers that has occurred under--of items that should have been 
subject to PAYGO be, in our estimate, approximately $400 
billion?
    Mr. Elmendorf. I am sorry, Senator. We cannot do that in 
our heads.
    Senator Gregg. Well, I will hypothesize that it is a fairly 
big number and that PAYGO has become a fairly meaningless 
exercise around here because it either gets gamed, waived, or 
avoided with regularity. Is that not true?
    Mr. Elmendorf. I think our judgment and the judgment of 
other analysts is that in the 1990's, when there was a 
bipartisan----
    Senator Gregg. 1990's.
    Mr. Elmendorf. Yes, when there was a bipartisan concern 
about rising Federal debt, that the PAYGO rules and the 
discretionary spending caps helped to restrain actions that 
might otherwise have increased the budget deficits. But by the 
end of the 1990's, as you know, when the deficits were turning 
into surpluses, then those rules were widely ignored. So they 
are not by themselves binding, but they can be helpful, again, 
in our judgment, when people are already----
    Senator Gregg. If the will is there, they are useful. If 
the will is not there, they are not useful.
    Mr. Elmendorf. I think that is right, Senator.
    Senator Gregg. Senator Whitehouse?
    Senator Whitehouse. Thank you, Chairman Gregg.
    Senator Gregg. Thank you.
    [Laughter.]
    Senator Whitehouse. Dr. Elmendorf, thank you for coming 
back to us again. Just a couple of quick questions.
    First, the President's Council on Economic Advisers has 
calculated that the excess cost and waste in the health care 
system is in excess of $700 billion a year. The New England 
Health Care Institute has calculated that it is around $850 
billion a year. The Lewin Group--and I think it is probably 
their number that former Treasury Secretary Paul O'Neill used, 
because they are coincident--puts the number for excess cost 
and waste in the health care system annually at $1 trillion a 
year.
    Do you believe that those studies are in the general right 
order of magnitude?
    Mr. Elmendorf. I think that seems the right ballpark. I 
mean, as we noted in our letter to Senator Gregg and Senator 
Conrad in June, there is a widespread view among analysts that 
a lot of money is not being used effectively, judging 
principally by comparing different parts of the country which 
spend a lot and those that do not.
    It is impossible to quantify precisely. I would not use the 
word ``calculate.''
    Senator Whitehouse. I did not say that----
    Mr. Elmendorf. I would make an educated guess.
    Senator Whitehouse. But your educated guess is that that is 
the right ballpark.
    Mr. Elmendorf. Certainly hundreds of billions of dollars, I 
think that is right.
    Senator Whitehouse. In your written testimony, you state 
that the recovery will be dampened by a number of factors, 
including, and I quote, declining support from fiscal policy as 
the effects of ARRA, the American Recovery and Reinvestment 
Act, wane. That states a proposition in the negative. Would you 
be prepared to state the proposition in the positive?
    Mr. Elmendorf. As we wrote in our report on policies to 
stimulate employment growth, we think that appropriate fiscal 
measures can spur economic activity and job creation in the 
next few years. Or an alternative positive version--I am not 
sure what you want--is that we believe--and we have written 
this many times, and I said this in my remarks--that the 
seamless package has spurred economic activity and has 
increased the level of employment relative to what would have 
occurred without the legislation.
    Senator Whitehouse. So it has been good in terms of getting 
us out of the economic ditch we were in?
    Mr. Elmendorf. We think that it has shortened the duration 
and reduced the depth of the recession relative to what would 
otherwise have occurred.
    Senator Whitehouse. And that, I would suggest, works under 
the general category of good.
    Mr. Elmendorf. Yes, I think that is right, Senator.
    Senator Whitehouse. Not to be too fussy about it, but I 
think that is right.
    One other question. What are your observations about the 
extent to which the foreclosure crisis continues to operate as 
a drag on the economy? And to what extent, if at all, do you 
believe that a sort of clear market solution like resort to 
bankruptcy court for families who are in trouble on their home, 
first mortgages on their primary residence, might help provide 
clarity in the market so that banks and everybody else can 
respond? And would that move the foreclosure crisis behind us 
more rapidly if we had that kind of a clear market signal 
coming out of bankruptcy courts as people have the chance to 
get their cases called and heard rather than sit on the phone 
for many hours with banks finding ever new corners of their 
telephone answering system to be thrust into?
    Mr. Elmendorf. So we do think that the foreclosure crisis 
continues to be a very serious problem, obviously for the 
families that are involved, but also in macroeconomic terms. 
And there are analysts who worry a good deal that house prices 
will take another turn down as more foreclosed properties 
appear on the market. So that is a drag. And I think that 
greater clarity reaching the end of that process would indeed 
help to stimulate economic growth.
    We have not analyzed, however, particular ways of achieving 
that clarity, and I think in general the experience of the last 
few years suggests that the greatest clarity can be achieved 
with a large injection of funds and that achieving clarity with 
a smaller injection of funds is pretty challenging. So I think 
those are the issues one would have to weigh, but we have not 
done a study of that at this point.
    We are in the process of working more on that topic, and we 
may be able to report to you about that shortly.
    Senator Whitehouse. OK. As an observer of markets and 
economic behavior, if you give banks the opportunity 
unilaterally to decide how much they are going to lose on a 
mortgage that is underwater rather than allow a market-neutral 
process to make that determination, what effect does that have 
on getting quickly and accurately to the real number and 
enabling the economy to move on?
    Mr. Elmendorf. I think whether the other process is faster 
than the current process depends on just what structure you set 
up and how it is run and what the incentives are of the people 
who are running it. I do not think I can answer that question 
in general terms.
    I also think that there is an issue--we have a process 
under which contracts were negotiated and signed, and I think 
there are legitimate concerns about changing those contracts 
and the process through which problems are resolved. It does 
not mean we should not. I am just saying that there are other 
complexities about the effects over time as well, and that is 
why it really requires an analysis. We just have not done it 
yet.
    Senator Whitehouse. Although the efficiency of the American 
bankruptcy system has been one of the great assets of our 
economy. There was a very good piece on this in the Economist 
magazine just a few weeks ago. It is one of the sort of prides 
of the American economy. The bankruptcy system is nothing new. 
It has existed for I think as long as the Republic has. And it 
applies to every single type of debt, including debts that the 
banks hold, except for one kind, and that is the poor 
residential mortgage holder who years ago for political reasons 
was carved out of that and denied access to the same quick 
established resource that every other debtor has access to.
    And so I just want to push back a little bit against what I 
thought was your implied theory that this would be something 
novel or peculiar if we allowed this to happen. It actually 
lifts a novelty and a peculiarity out of the system and 
restores it to its traditional general basis.
    Mr. Elmendorf. I think that is right, but it would be a 
novelty in the mortgage market, and there are studies that 
suggest that that particular novelty or peculiarity of 
mortgages has helped to keep mortgage interest rates down. So 
there may be a tradeoff between what one is doing for people 
who end up in trouble versus what one is doing to people who do 
not end up in trouble. And I am just suggesting why I do not 
feel like I can off the cuff analyze your particular proposal. 
But I understand your concerns.
    Senator Whitehouse. Well, very good. Thank you for your 
testimony. I am sorry I went a little bit over, and I 
appreciate very much Senator Gregg's patience in allowing me to 
have this time.
    Senator Gregg. Does anybody else have any questions?
    [No response.]
    Senator Gregg. Well, again, I want to thank on behalf of 
the Chairman and myself you and your staff for the 
extraordinary job you do. We were just sitting here saying to 
each other the amount of work that you folks have done in the 
last few months has just been exceptional, and the quality of 
it has also been exceptional, and the integrity of it has been 
exceptional, and we thank you for it.
    Mr. Elmendorf. Can I just say, Senator, that I feel very, 
very fortunate to work with such a talented and dedicated group 
of people at CBO, and I am very grateful to you and to Senator 
Conrad and to Chairman Spratt and Congressman Ryan for giving 
me the opportunity to do that. Thank you.
    Senator Gregg. Thanks.
    [Whereupon, at 10:36 a.m., the Committee was adjourned.]

    STATEMENT SUBMITTED FOR THE RECORD

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    QUESTIONS FOR THE RECORD

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            THE PRESIDENT'S FISCAL YEAR 2011 BUDGET PROPOSAL

                              ----------                              


                       TUESDAY, FEBRUARY 2, 2010

                                       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, Nelson, Sanders, 
Whitehouse, Warner, Merkley, Gregg, Sessions, Ensign, and 
Alexander.
    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 thank Director Orszag for being here this 
morning. I want to thank all members of the Committee who are 
here and who are on their way. We know there are many other 
hearings underway on the budget in other venues today, and we 
appreciate and respect that. It is important for us on the 
Budget Committee to hear directly from the Budget Director.
    Let me just go through a couple of slides to begin and then 
go to Senator Gregg for his opening remarks and then give the 
Director a chance to make his presentation, and then we will go 
to questions. I think we will stick to 5-minute rounds this 
morning and go to a second round if members are desirous of 
doing that.
    I think it is important to put in context what we confront. 
This President inherited the most dire situation any President 
has faced since Franklin Roosevelt: record deficits; a doubling 
of the debt had occurred before he came to office; the worst 
recession since the Great Depression; crises in the financial 
markets and the housing markets and the energy markets; ongoing 
wars in Iraq and Afghanistan; and an unsustainable long-term 
budget outlook with dramatically rising health care costs, and 
we know the story.

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    The previous administration, to their credit, and this 
administration took a series of steps when the economic 
downturn became apparent, and the result has been an 
improvement in the jobs picture. If we recall in January of 
last year, the economy was losing over 700,000 jobs a month. 
Now, that has been reduced in December of last year to 64,000 
jobs. And while that is of cold comfort to those who have lost 
their jobs or who are worried about losing their jobs, it is a 
dramatic improvement from where we started.

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    The same is true on economic performance. In the first 
quarter of last year, economic growth was a negative 6.4 
percent. In the most recent quarter, that improved to 5.7 
percent.

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    If we look at some of the specifics in the President's 
budget, we see on the revenue side major proposals to further 
reduce revenue. Extending the 2001 and 2003 tax cuts for those 
with incomes below $250,000, the estate tax at the 2009 level, 
the alternative minimum tax relief--that combination is over $3 
trillion of tax relief. In addition, there is other tax relief 
for families and businesses of almost $300 billion as well as 
temporary recovery measures of about $80 billion.
    On the other side of the ledger, there are health care 
reform revenues that represent an average of what the Senate 
and House has done, $743 billion; limiting the itemized 
deductions to a 28-percent rate raises $291 billion; the 
international tax reforms previously proposed and again 
included in this budget, $122 billion; a financial crisis 
responsibility fee on the largest banks of $90 billion; other 
loophole closures and reforms of $309 billion. If you net it 
all out, it is an additional package of tax reduction of $1.9 
trillion.

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    If we look at the deficit path for the first 5 years--and I 
look at the first 5 years because Congress, when we do budgets, 
virtually all of the time do 5-year budgets--the deficit is 
coming down as a percentage of GDP from 10.6 percent in 2010 to 
3.9 percent in 2015. That is the good news.

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    On the other side of the ledger is the long-term outlook. 
In the long-term outlook, the Federal debt continues to rise in 
an unacceptable and unsustainable way, according to CBO's long-
term outlook, to a projected debt in 2059 of 400 percent of 
GDP. Let me indicate that is a worst-case scenario because it 
includes extending all of the spending, and it includes 
extending all of the tax cuts that are already in place. 
Nonetheless, we are on an unsustainable course by any measure.

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    And let me just say that when I look at this budget, I 
strongly agree with the President's budget in the short term. 
It is absolutely imperative that we not allow the economy to 
slip back into recession. I have strong disagreement with the 
long term, and I must say that. I do not know any other way to 
say this than to be brutally honest with everyone. Short term, 
I believe it is absolutely essential that we provide additional 
liquidity to prevent a double dip. Our friends in Japan have 
warned us repeatedly: Do not try to cut your deficit 
prematurely at a time of economic weakness; you will only push 
the economy back into recession. I believe that. And so I 
believe the President is taking us in the right direction over 
the next several years.
    But I must say I am very concerned about the long term 
because I believe we are on an unsustainable course. I have 
said it many times. I believe it deeply. And it has to be 
addressed, and the President's 10-year outlook I do not think 
is the path that we can take as a Nation.
    Senator Gregg and I proposed a commission, and I know in 
fairness to the administration that they are relying on that 
approach to deal with the long-term circumstance we face. I 
hope very much that that works. The President said, on 
establishing a bipartisan fiscal commission, that, ``A decade 
of irresponsible choices has created a fiscal hole that will 
not be solved by a typical Washington budget process that puts 
partisanship and parochial interests above our shared national 
interest. That is why, working with Congress, we will establish 
a bipartisan fiscal commission charged with identifying 
additional policies to put our country on a fiscally 
sustainable path.'' I believe in that approach.

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    I have spoken to the Vice President's office on Friday and 
asked them to reach out to Republican leaders because, while we 
had negotiated with the White House a way of proceeding, it is 
important now that Republican leadership be consulted to see 
their ideas for the make-up of the commission, the rules under 
which it would operate, to see if agreement can be found with 
them. I very much hope that that will be the case.
    I believe that it is absolutely essential that we have a 
look this year from a group who has the responsibility to come 
up with a long-term plan, one that would get us to 3 percent of 
GDP as a deficit by 2015, but much more challenging and what I 
believe is absolutely imperative is a longer-term plan that 
brings us to balance and that deals with the long-term debt 
threat.
    With that, I will turn to my colleague Senator Gregg for 
his opening comments. Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and thank you again 
for reminding us of the seriousness of the problem and the 
issue and the failure of this budget, honestly, to address that 
issue in the out-years--and in the short term, for that matter, 
as far as I am concerned.
    You know, it is really not what this administration 
inherited that is quite as important as what our children are 
going to inherit. And in both this budget and the budget that 
came last year, they are going to inherit a country whose debts 
are rising at such a rate and have risen to such a level as a 
result of deficit spending that the Nation will be unaffordable 
for them.
    I actually think it is malfeasance to present a budget 
which, by its own terms and numbers, leads us down a path which 
ends in insolvency for this Nation. And that is not my 
assessment of this budget. That is the assessment of the 
administration's view of this budget in the long run. We go 
into insolvency. It is unsustainable. Unsustainable under any 
form what is proposed in this budget if we intend to continue 
to have a vibrant Nation to pass on to our children.
    The blame falls in a lot of different places, and you can 
blame it on the past administrations. You can blame it on the 
generation that is huge and is about to retire. You can blame 
it on this administration that is exploding the size of 
Government in a variety of different areas. But blaming is not 
going to do us any good. Let us talk about solutions. Let us 
talk about resolving this.
    Unfortunately, this budget, as it is presented, is filled 
with small ideas and smaller actions in the areas of how you 
get this long-term issue under control, and what we do not need 
are a lot of bunts and singles and hit-and-runs. We need 
somebody to step up to the plate with some ideas that are going 
to lead to doubles and triples and home runs. We can no longer 
afford to play small ball on this issue.
    I want to put in some context how I see this problem. Could 
you put that one chart up there?
    The revenue side is a big issue for us right now because in 
a recession revenues drop, and they have dropped more 
precipitously in this recession than probably in any recent 
recession. But CBO projects--and I would note that CBO's 
baseline projections are for lower deficits than the deficits 
under the Administration's policies--CBO projects that revenues 
will jump back to their normal historic level of 18.2 percent 
fairly quickly because of additional revenue that comes in when 
the tax cuts expire at the end of this year, and that they will 
exceed that level, getting up to 20 percent of GDP essentially, 
which would be well above their historic levels.
    The problem, of course, is that spending has not only 
spiked as a result of the desire to float the economy through 
using the liquidity of the Government, but it is also spiking 
because there is being put in place programmatic activity which 
radically expands the size of the Government. And so spending 
goes up astronomically as a percent of GDP to levels not seen 
really in any time except for when we have been at war. And it 
does not come down. That is the real horror of this budget. And 
the proposal is that when you get out 10 years--and you cannot 
blame George Bush 10 years from now--when you get out 10 years, 
the deficits are going up, and the debt has crossed into a 
place where recovery is virtually impossible from it because 
you are like a dog chasing your tail. You cannot catch it.Debt 
service will amoutn to $800 billion by CBO's estimate, 
potentially $1 trillion. And as a result, there is no light at 
the end of the tunnel. It is pretty black. And there may be a 
stone wall out there that we are headed toward.
    So what should we do? Well, I would have liked us to use a 
statutory commission, as the Chairman and I proposed, because I 
think that that is the only way you can pull together a group 
of people and have it be bipartisan. You need that initial vote 
where a bipartisan vote actually occurs that creates the 
commission because that gives it the imprimatur of 
bipartisanship that is so critical. An Executive order by 
definition is an Executive order, and, therefore, it is 
partisan and it is not part of the Congress, and so it has got 
fundamental flaws there.
    And then, second, you need a statutory structure because 
you have to have an up-or-down vote, you have to have fast-
track, and you cannot have an amendable vehicle or else too 
many games are played around here.
    And would a task force have solved all the problems? No. 
But would it have addressed a big chunk of the solution? Yes. 
And should everything be on the table? Absolutely. Some people 
on my side did not vote for it because they did not think that 
there should be any tax policy on the table. That is foolish. 
You have to have everything on the table. The people on your 
side did not vote for it because they did not want Social 
Security or something else on the table. That is foolish. You 
have to have everything on the table.
    So that was, in my opinion, the best approach, but it 
failed. I hope we will bring it back. We were seven votes 
short. We ought to be able to bring it back and pass it.
    I saw this Congress, members of the other party, cast 60 
votes for a couple of items around here, so they ought to be 
able to get 43 if we can get 17. Maybe we can get a few more on 
our side.
    Independent of that, we have got to think of bigger 
approaches to this. That is the bottom line. You cannot do this 
a freeze on discretionary non-defense items post-2010. What is 
that? Ten billion dollars on a $1.6 trillion deficit? I mean, 
sure, it is the right sentiment, but it does not get you 
anywhere. That is small ball. That is not even a bunt.
    An Executive order commission probably gets you a nice 
report, but it does not get you action. There are a number of 
programs which the administration has suggested eliminating. I 
will vote to eliminate them. Unfortunately, most of them have 
been proposed before, and they have not been accomplished. I 
think we have got to think in a little bigger context here. Let 
me suggest four things that we could do.
    First, we could freeze all discretionary spending today, 
really make a statement that we are going to freeze annual 
appropriations. In fact, if you want to make it a real freeze, 
make it a freeze less earmarks. That is a number that will get 
you a little bit of money.
    Second, it is inexcusable that the TARP (Troubled Assets 
Relief Program) is being used as a piggy bank. Inexcusable. The 
language of the TARP was very specific. Monies paid back were 
supposed to go to debt reduction. Once we got past the crisis, 
which we have by all accounts, including the Secretary of the 
Treasury and the Chairman of the Fed, we should not be drawing 
down more TARP money. Those dollars should be lapsed, and the 
moneys that are repaid should go to debt reduction. You are 
talking hundreds of billions of dollars there.
    Third, there is no excuse for spending stimulus money after 
2010. And that is a lot of money. There is money being spent 
under that stimulus package that occurs in 2014, 2015, 2016, 
2017, and 2018. How can you justify that? Clearly, those 
dollars should be lapsed.
    And, last, let me take an idea that was put forward by the 
other side of the aisle, a very courageous idea, in my opinion. 
The other side of the aisle in their health care bill suggested 
adjusting Medicare spending by $500 billion. Actually, it was 
$1 trillion when fully implemented over a 10-year period. 
Regrettably, rather than using that money to stabilize 
Medicare, they took that money and then created major new 
entitlements with it. They took Medicare funds that should be 
used for Medicare and funded a brand new series of 
entitlements.
    Well, if you were willing to vote to make those types of 
tough decisions on Medicare, do it again, but use the money to 
stabilize Medicare. Put it in a Medicare stabilization fund, 
and you will get some very significant out-year savings, and 
they will be really positive.
    Those are some ideas. I am sure there are some ideas from 
the other side of the aisle on tax policy that could also be 
considered. But as a very practical matter, let us stop talking 
about these little ideas, and let us stop putting forward 
budgets like this which represent a death certificate to the 
American dream for our kids, because that is what this is if we 
continue on this path. Our kids are not going to be able to 
participate in the American dream because their lives will be 
mortgaged, and their capacity to be prosperous will have been 
fundamentally undermined by the debt we will have put on their 
backs.
    Thank you, Mr. Chairman.
    Chairman Conrad. I thank the Ranking Member and thank him 
for his strong statement. I would say, you know, this is a time 
I think unlike any other as I look at our national history 
since the Great Depression, and it really does require us--it 
requires the very best from all of us. We have got to go 
beyond--I like your description ``small ball.'' I really do 
think it is a time that requires us to come up with a 
comprehensive, long-term plan that demonstrates to the American 
people, that demonstrates to our colleagues, that demonstrates 
to our creditors that we are equal to, as a great Nation, 
facing up to this long-term challenge. And we simply have to do 
it.
    With that, we turn to Director Orszag. Thank you for your 
service. I know you are somebody who in your history has 
certainly had an eye on fiscal responsibility and a commitment 
to it, and we are fortunate to have you in this position. The 
country is fortunate to have somebody of your ability and your 
vision in that job. Welcome and please proceed.

STATEMENT OF THE HONORABLE PETER R. ORSZAG, DIRECTOR, OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. Orszag. Thank you very much, Mr. Chairman, Senator 
Gregg, members of the Committee. This year's budget focuses on 
three main things: first, job creation in the near term; 
second, middle-class security; and, third, beginning the task 
of putting the Nation back on a path to fiscal sustainability. 
Let me just pause and give a little bit of background before 
turning to what we should be doing on those topics.
    We just came through a year in which a second Great 
Depression was averted. At the end of 2008, the economy was 
declining by more than 5 percent on an annualized basis. At the 
end of 2009, it was increasing by more than 5 percent on an 
annualized basis. Although the economy is now expanding, the 
employment market remains too weak. The unemployment rate is 10 
percent, and there are 7 million fewer jobs today than in 
December 2007, which is why the administration has put forward 
items like a jobs and wages tax credit and why this budget 
invests in education, innovation, and clean energy.
    Second, let us look at the pre-existing condition with 
regard to our fiscal situation when the administration took 
office, and, actually, if I could have Senator Gregg's chart 
put back up, that would be terrific.
    In January 2009, the Congressional Budget Office issued its 
Economic and Budget Outlook, which at that time showed an 
increase in Federal spending from 20.9 percent of the economy 
in fiscal year 2008 to 24.9 percent in 2009. This was, again, 
before the Obama administration took office, so presumably was 
not a reflection of our policies. And, similarly, if you look 
at where that green line is, that increase in spending and that 
decline in revenue was already apparent in January 2009. So it 
cannot be attributed to the policies that have been put in 
place since then.
    Similarly, with regard to the projected deficits, if you 
look out over the decade from January 2009 forward, the 
projected deficit was $8 trillion at that point. That reflects 
two main factors. One was the fact that the 2001 and 2003 tax 
cuts and the Medicare prescription drug benefit were not paid 
for; they were deficit financed. That added more than $5 
trillion to the projected deficit. And, second, the economic 
downturn, precisely what you see here, a decline in revenue as 
the economy weakens and an expansion in spending on things like 
unemployment insurance and food stamps and other automatic 
stabilizers built into the Federal budget that help to mitigate 
the economic downturn, but that do temporarily expand the 
deficit, added more than $2 trillion to the projected deficit.
    So that is the situation that we face. We do face a very 
substantial medium-term deficit, and we also face a jobs 
deficit. So what are we doing?
    First, the budget includes a $100 billion jobs package, 
including the new wage and jobs tax credit that I already 
mentioned to try to spur hiring among small businesses in 
particular, and it is worth pausing to examine the logic there. 
As I already mentioned, real GDP has started to increase, but 
employment growth typically lags behind economic growth. And 
one of the things that we are hoping to accomplish through a 
jobs package is to shorten that lag between when you have a 
statistical recovery and when you have a jobs recovery, and 
shorten the time between when income picks up or aggregate 
demand picks up and when employment picks up.
    Second, with regard to our fiscal deficits, what are we 
doing? The first step in the face of this kind of problem is to 
make sure you do not make the problem worse, and the 
administration is particularly pleased that the Senate has now 
joined the House in embracing a concept that the administration 
has also embraced, statutory pay-as-you-go legislation, which 
embeds in law that basic principle. Do not dig the hole any 
deeper when you already have a hole. If this policy and this 
principle had been in place in the past, our out-year deficits 
would be only 2 percent of GDP, and debt as a share of the 
economy would be declining.
    Second, economic recovery will help to reduce the deficit 
over time, moving the deficit from roughly 10 percent of the 
economy today to about 5 percent of the economy by 2015. That 5 
percent of the economy is too high. It is above our fiscal 
target of roughly 3 percent of GDP, which is also consistent 
with balancing the budget, excluding interest payments on the 
debt. So how do we get from 5 to 3?
    The first thing that we do is we put forward a set of 
specific proposals that would reduce the projected deficit over 
the next decade by $1.2 trillion--I would note the largest 
deficit reduction both in dollar terms and as a share of GDP in 
over a decade embodied in any administration's budget proposal. 
This includes steps like the financial services fee, which 
raises $90 billion and also helps to repay taxpayers in full 
for the costs of TARP. It includes allowing the 2001 and 2003 
tax cuts for those making more than $250,000 a year to expire 
as scheduled in 2011, which reduces the deficit by roughly $700 
billion. And I would note, Senator Gregg, I appreciate the 
suggestions you made. I did a rough calculation. I think they 
come in total roughly to the same amount as simply extending 
those high-income tax cuts which I know many in your party 
would support, so perhaps we could go through that in more 
detail.
    It includes eliminating fossil fuel subsidies which amount 
to $40 billion over the next decade. And it also includes the 
3-year freeze on non-security discretionary funding which would 
reduce the deficit by $250 billion over the next decade. And I 
would note this is not an across-the-board freeze on non-
security discretionary spending. We are increasing investments 
in education, where we are putting an additional $3 billion 
into elementary and secondary education. We are increasing 
investments in research and development, which is up 6 percent 
in this budget. And in clean energy, in addition to eliminating 
fossil fuel subsidies, there is more than $6 billion in clean 
energy R&D and related activities embodied in the budget.
    All of that put together, again, $1.2 trillion, but it does 
not get us to where we need to be. I think it has been long 
recognized, including through the leadership of Senator Gregg 
and Senator Conrad, that a bipartisan process is necessary to 
get us the rest of the way there. We supported a statutory 
commission. In the absence of a statutory commission, we 
support an Executive order commission. This has to be done on a 
bipartisan basis, and we are calling for a commission and with 
the goal of not only addressing our long-term fiscal imbalance, 
but also balancing the budget, excluding interest payments on 
the debt, by 2015 which would get us the rest of the way there 
to our fiscal target.
    Finally, let me just note that over the very long term--
this was all with regard to the next decade. Over the very long 
term, the key driver of our deficits is the rate at which 
health care costs grow. The legislation that both the House and 
Senate passed would not only reduce the deficit over the next 
decade, but also put in place the key infrastructure that would 
help to reduce costs and improve quality over time thereafter, 
which is one reason why the administration is so focused on 
getting that legislation done.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Orszag follows:]

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    Chairman Conrad. Thank you, and thank you for your 
testimony.
    Let me, first of all, go to this notion of excluding 
interest payments from the calculation of deficits and debt, or 
at least of deficits. I guess I understand the concept, but it 
strikes me, when I look at where we are headed, interest 
payments in this budget, net interest is expected to rise from 
$188 billion this year to $840 billion by 2020--$840 billion in 
interest.
    Now, the interest has to be paid, so I do not understand 
how it makes any sense to be excluding interest from the 
calculations. What is the thinking there?
    Mr. Orszag. Senator, it is not that we would exclude it 
from the calculations, but as you know, economists have often 
focused on the so-called primary budget, which is the budget 
excluding such interest payments on the debt. The reason to do 
so is you are then isolating the sort of programmatic side of 
the budget as opposed to, as you correctly point out, net 
interest must be paid, and isolating the programmatic part of 
both expenditures and revenue. And so a concept that economists 
have often focused on is what is happening to the primary 
balance, that is, the budget excluding interest payments.
    It turns out that balancing the budget excluding interest 
payments in 2015 is consistent with an overall budget deficit 
of 3 percent of GDP in that year. So the fiscal target of 3 
percent and balancing the primary budget or the budget 
excluding interest payments turn out to be the same goal.
    Chairman Conrad. All right. Put me down as a skeptic.
    Mr. Orszag. OK.
    Chairman Conrad. I understand, to me, you know, when we 
start excluding things, for whatever purpose, I think we tend 
to just mislead ourselves about really the gravity of the 
situation. And as I look at the trend that we are on as a 
country, I see a very grave situation, a dire situation. And, 
again, I give the administration high marks for what you have 
done thus far to avert what I believe would have been a global 
financial collapse.
    I was in the room with the previous Secretary of the 
Treasury, with the head of the Federal Reserve, and that long 
weekend in which hour after hour we were advised of the 
impending collapse of major financial institutions, not only 
here but around the world. Anybody who was there had to be 
sobered by how close we came to a financial collapse.
    So I give the administration and, frankly, I give the 
previous administration at the end of that administration high 
marks for responding to what could have been a depression as 
severe as the previous depression.
    But now we are looking ahead, going forward, and again, in 
the short term, I believe we have to be very careful not to 
move too quickly to deficit reduction, and I am a deficit hawk. 
I have felt this way my entire life. I think we have to be very 
careful not to prematurely reduce the deficit because, in many 
ways, we are facing what the Japanese did. The Japanese call it 
a balance sheet recession because their businesses, their 
financial institutions are unable to generate the type of 
economic activity necessary to sustain growth because their 
balance sheets have been impaired. And in that circumstance, 
the only one big enough to come to the table to fill the demand 
gap is the Federal Government, and if it doesn't, economies 
crater. That is reality. That is a fact.
    With that said, we then look to our long-term circumstance. 
So I believe, and believe strongly, it is critically important 
that we run deficits and add the debt in the short term. But I 
also believe just as passionately that as the recovery takes 
hold, we then must pivot and deal with the long-term debt. And 
the place where I would fault this budget is I don't see the 
pivot. I don't see the pivot. I don't see the focus on bringing 
down that long-term debt.
    I don't see us getting below, as I look at the numbers, 5 
percent of GDP in the next 10 years. And I know there are other 
estimates, but looking at the way CBO will judge this, my own 
sense is we are probably not going to get below 4.5 percent of 
GDP. That is too high, especially given what is happening with 
the retirement of the Baby Boom generation and the debt we have 
already by that time accumulated.
    So help me understand, what is the administration's 
thinking with this long term? I am certain you don't see this 
as a sustainable circumstance. So how is it going to be 
addressed?
    Mr. Orszag. No, we don't view the long term as on a 
sustainable course. I would note three things. First, that is 
precisely why we are calling for a commission along the lines 
that you have already tried to embody in a statutory version.
    Second, it is another reason why we do believe 
comprehensive health legislation is crucially important.
    And finally, I would just note, there are alternatives that 
have been put forward. For example, Senator Gregg's colleague 
on the House side, Mr. Ryan, has put forward a plan that would 
eliminate the long-term deficit, and that is a significant 
accomplishment. But it is worth examining how that is done.
    The way it is done is taking the Medicare program and 
turning it into a voucher program for those 55 and below, which 
would shift risk onto individuals and beneficiaries, and then 
have that voucher not keep pace with health care costs over 
time, which would shift expected costs onto individuals. And 
then there are a variety of other changes, but that is the big 
driver. It is possible to address our long-term fiscal problem 
that way, and that would be worthy of debate.
    So again, I am going to come back and say we strongly favor 
a Fiscal Commission, in part because we agree. The fiscal 
course that we are on out in 2020 and 2030 and 2040 is 
unsustainable and it needs to be addressed.
    Second, if we don't address rising health care costs, there 
is nothing else that we are going to be able to do that will 
alter that basic fact, and there are lots of parts of the 
legislation that both the Senate and the House have passed 
which would help with that problem.
    And finally, it is worthy of further discussion, some of 
the other proposals that are out there, and that is partly what 
we would hope the commission would do.
    Chairman Conrad. Senator Gregg?
    Senator Gregg. I must just take a bit of difference with 
your comments. It is not 2020 and 2030 that we need to worry 
about. It is 2017, 2015, when our bonds are no longer salable 
or become very expensive and we are not able to defend our 
currency because we have got so much debt. And the signs are 
pretty clear that that is where we are headed. I mean, the 
Japanese already face the problem. Their debt is being 
downgraded. The Chinese have made it clear they are not going 
to purchase debt at the rate that they were. So we have got 
this problem. It is no longer on the horizon. It is closing 
fast.
    I want to talk about one specific here. The President today 
is going to announce he is going to take--and I am quoting from 
a statement, which I assume is his quote from his speech, and 
it is going to be in New Hampshire, ironically--``that is why 
today I am announcing a proposal to take $30 billion of money 
that was repaid by the Wall Street banks and use it to create a 
new small business lending fund.''
    Then I want to read to you from the law, the TARP law. That 
is money from TARP. The TARP law says ``revenues of and 
proceeds from''--that are recovered from the banks--``shall be 
paid into the general fund of the Treasury for reduction of the 
public debt.'' That is ``shall.''
    This proposal violates the law. Are you intending to amend 
the TARP law?
    Mr. Orszag. Senator, my understanding is that the proposal 
would require new legislation to implement, so it would only be 
done with Congressional approval and a change in the law, sir.
    Senator Gregg. So you are proposing to add $30 billion to 
the debt?
    Mr. Orszag. We are proposing to put $30 billion into a new 
program that would help promote small business activity because 
small businesses are suffering from a lack of access to credit 
currently.
    Senator Gregg. It comes from deficit financing.
    Mr. Orszag. Relative to simply repaying the debt, yes.
    Senator Gregg. Well, you know, I mean, how are we going to 
get this under control if on the day that you are up here 
telling us that you are going to be fiscally responsible, you 
are proposing language which is going to spend $30 billion of 
repaid TARP money which specifically was supposed to be used to 
pay down the debt? The whole concept of the TARP was--and I was 
in the room, also, with Senator Conrad, and this was debated at 
some length--the whole concept of the TARP was that as we 
recoup the money, we would use it to pay down the debt because 
we were borrowing it from Americans and from the Chinese. Now 
with this proposal, that is not going to happen. It has become 
a piggy bank----
    Mr. Orszag. Well, Senator----
    Senator Gregg [continuing]. A piggy bank which adds to our 
deficit, adds to our debt, and gets put on our kids' backs.
    Mr. Orszag. The degree to which shifting funds would add to 
our debt or deficits depends on what the net subsidy rate would 
be on that new activity. Remember, the purpose of TARP was to 
address problems in our financial markets, and it has been 
remarkably successful in bringing credit spreads back down to 
normal levels.
    One of the lingering problems in our financial markets, 
however, is access to credit for small businesses. That is why 
in this budget we are----
    Senator Gregg. No, no, no. You can't make that type of 
statement with any legitimacy.
    Mr. Orszag. OK.
    Senator Gregg. You cannot make that statement. This is the 
law.
    Mr. Orszag. Small businesses are suffering from----
    Senator Gregg. Let me tell you what the law says.
    Mr. Orszag [continuing]. Lack of credit----
    Senator Gregg. Let me read it to you again, because you 
don't appear to understand the law. The law is very clear. The 
moneys recouped from the TARP ``shall be paid into the general 
fund of the Treasury for reduction of the public debt.'' It is 
not for a piggy bank because you are concerned about lending to 
small businesses----
    Mr. Orszag. And this would require new legislation----
    Senator Gregg [continuing]. And you want to get a political 
event when you go out and make a speech in Nashua, New 
Hampshire. That is not what this money is for. This money is to 
reduce the debt of our children, that we are passing on to our 
children. And you ought to at least have the integrity to be 
forthright about it and say that is what you are doing. You are 
adding to the debt that our kids are going to have to pay back, 
when you are claiming at the same time----
    Mr. Orszag. Senator, with respect----
    Senator Gregg [continuing]. That you are being fiscally 
responsible.
    Mr. Orszag. Senator----
    Senator Gregg. Let me ask you another question, because 
clearly, we are not going to agree on this and you are not 
going to follow the law. Second----
    Mr. Orszag. Sorry, I do--excuse me. We will be following 
the law. This would involve legislation----
    Senator Gregg. Well, then you are not going to be able to 
do it unless Congress----
    Mr. Orszag. Yes, exactly----
    Senator Gregg [continuing]. Gives you the authority to do 
it.
    Senator Sanders. Yes. That is how laws are made usually. 
Congress passes them.
    Senator Gregg. Did the Senator from Vermont make a 
statement? Well, the Senator is wrong. This is the law as it 
stands today. There is no law on the books which allows-----
    Senator Sanders. And Congress can amend the law----
    Senator Gregg. There is no law on the books, Senator, that 
allows you to take that money and spend it.
    Senator Sanders. And he is indicating he is going to go to 
Congress to amend the law.
    Senator Gregg [continuing]. To do it.
    Chairman Conrad. Please. No. We don't operate that way in 
this committee. People seek recognition through the Chair. We 
don't have ad hominem debates here. That is not the way this 
committee is going to function, period.
    Senator Gregg. On another----
    Chairman Conrad. The witness gets a chance to respond. The 
Senator asked the question and I will extend his time so the 
witness has a chance to respond----
    Mr. Orszag. Very briefly----
    Chairman Conrad [continuing]. Then the Senator will have an 
additional chance.
    Mr. Orszag. Very briefly, the proposal would involve--would 
require new legislation, so it would be fully consistent with 
existing legislation, and the net impact on the deficit would 
depend on the net subsidy rate for the new activity. It would 
not be a net cost in terms of the budget deficit of $30 
billion.
    Senator Gregg. That is an extraordinary answer. What you 
are essentially saying is that when this TARP money comes back 
in, you are going to change the rules so that you can spend it, 
not put it toward debt reduction.
    Mr. Orszag. If Congress agrees, sir.
    Senator Gregg. Right, but, I mean, the purpose was to 
reduce the debt, and you are not going to use it to reduce the 
debt at the same time that you are alleging that you are trying 
to pursue a course of small steps, small ideas, of fiscal 
responsibility. So you have got a law on the books which says 
specifically, reduce the debt. You are going to change it so 
you can spend the money, add to the deficit.
    Mr. Orszag. I would just say again, one of the lingering 
problems in the economy today, one of the reasons why we are 
not getting the job creation that we need is that small 
businesses lack access to credit. There are a variety of steps 
the administration favors taking, including expanded activity 
at the Small Business Administration, including this new 
proposal which would require Congressional approval to try to 
address that problem.
    Senator Gregg. Thank you.
    Chairman Conrad. Senator Murray?
    Senator Murray. Thank you, Mr. Chairman, and I look forward 
to that discussion. We have a lot of small businesses in my 
State that are really struggling with capital today, so I look 
forward to that debate as we get into it in Congress, as well.
    Dr. Orszag, I do want to talk a minute about a subject that 
I know you understand is of importance to me and that is the 
DOE's EM, environmental management, budget. We are in a 
different place from last year when the EM budget had a 
proposed cut, and I do want to thank you for the proposed 
increase, which is an acknowledgement that the Federal 
Government does have an obligation to clean up those sites 
across the nation. I think it is important that the people in 
the country see that the administration is going to put their 
money where their mouth is when it comes to meeting those very 
important moral and legal obligations of clean-up.
    Having said that, I am sure you expected that I would have 
some specific questions about Hanford, which is in my home 
State of Washington, and I am worried that it appears that DOE 
is once again offsetting base program work with ARRA dollars. 
That was never the intention of those funds and it sets up a 
huge hurdle to overcome when the money is gone. From what I 
have seen throughout the budget, ARRA is not being used as an 
offset in very many other places. I am also very concerned that 
there is some significant reduction to groundwater work.
    Now, my time is limited and I have some specific questions. 
I would just like to ask you if we can sit down with some of 
the folks on your team to understand how you made those 
decisions and work our way through it.
    Mr. Orszag. Absolutely. I would be delighted to do that.
    Senator Murray. OK, great. I also wanted to talk to you 
about the Corps of Engineers budget, because as you may be 
aware, in my home State of Washington, we have a dam--it is 
called the Howard Hanson Dam--that has significant seepage 
problems that is prohibiting the Corps from operating it at a 
fully authorized level of flood protection to a lot of our 
downstream communities.
    There is currently a study underway to determine the 
permanent fix for that dam in the Corps' Dam Safety Seepage 
Stability Correction Program, and I understand the Corps is 
also conducting studies on about 70 other projects, as well. 
All of those studies are proposed to be funded for $49 million 
in the fiscal year 2011 budget, and I am concerned that that 
level of funding won't be sufficient to undertake that many 
studies. Do you believe that the $49 million will give the 
Corps their full capability to follow through on all those 
studies that are being required?
    Mr. Orszag. We do believe that it would give the Corps 
adequate capability, but we can again, in the discussion that 
we are going to have with you, sit down and walk you through 
that.
    Senator Murray. OK, because it is really important that we 
get those studies done so that we can begin the construction in 
2012 because it will be significant damage if that doesn't get 
fixed.
    Also, I wanted to just say that I am really pleased to see 
the policy changes in the VA budget providing greater access 
for non-disabled veterans with modest incomes. That is 
something we have been pushing for a long time. It recognizes 
those veterans and I want to thank you for that.
    I do want to ask you about the Veterans' construction 
budget for both major and minor construction dollars. We know 
that the number of beneficiaries is going to increase by about 
550,000 non-disabled veterans by 2013. That is especially 
concerning to me because of the increasing demands of both 
disabled veterans that we are seeing coming home and from 
previous wars, and also the unique needs of female veterans, 
which we are seeing a huge increase of and we need to meet, as 
well. And, by the way, increasing the construction budget for 
the VA would provide construction jobs, and that is, I know, an 
important goal for the budget, as well.
    So I just wanted to ask you this morning what your 
rationale for reducing the overall construction budget by 15 
percent in VA is.
    Mr. Orszag. Well, again, although there is a reduction from 
2010, we are still at historically high levels for the 
construction account and we believe it will allow VA to focus 
on its highest priorities in terms of its construction. And 
this is in a context, also, in which the VA budget has gone up 
between 2009 and 2011 by 20 percent.
    Senator Murray. And that is mostly for beneficiaries that--
--
    Mr. Orszag. It is mostly for beneficiaries.
    Senator Murray [continuing]. We have a huge increasing need 
for, so we can't ignore that.
    Mr. Orszag. Yes.
    Senator Murray. But I am also specifically worried about 
the construction dollars. These are projects out across the 
country that we have been working on trying to get built to 
meet the demands of the VA. So reducing the construction budget 
in particular by 15 percent is a real concern to many of us, 
and----
    Mr. Orszag. I understand that, and again, I would just 
again emphasize, even with that, it is still at an historically 
high level, and I know that Secretary Shinseki and others would 
be delighted to walk you through in more detail.
    Senator Murray. And we will definitely be asking them that.
    Mr. Orszag. OK.
    Senator Murray. OK. Thank you.
    Chairman Conrad. Senator Alexander?
    Senator Alexander. Thanks, Mr. Chairman.
    Dr. Orszag, thank you for being here. I have three 
suggestions and a question.
    Mr. Orszag. OK.
    Senator Alexander. So my first suggestion is to suggest 
that whoever came up with the idea of leaving the interest 
payments out of the budget, you might gently tell them you ran 
it up the flag pole and it didn't do very well.
    Mr. Orszag. Can I intervene very quickly? No one is talking 
about leaving interest payments out of the budget, and I know 
the Chairman had asked about this before. They are absolutely 
in the budget. The only question is are there intermediate 
steps to balancing the overall budget where you have other 
targets that are----
    Senator Alexander. Well, if----
    Mr. Orszag. No one is talking about excluding interest 
payments from the budget.
    Senator Alexander. Well, whatever. In my own view, it ought 
to be first. If I went in to borrow money to buy a house and I 
told the----
    Mr. Orszag. Absolutely.
    Senator Alexander [continuing]. I told the banker, look, in 
10 years, my interest payment is going to be 15 percent of my 
income, but I am going to put that on another account, I don't 
think he would make the loan. That is one suggestion.
    Suggestion two, Senator Gregg's suggestion of four pretty 
big steps, I hope you will take those seriously. I do. We have 
had a difficult time here in the Senate with comprehensive 
bills. You know, comprehensive health care has been very hard. 
Comprehensive economy-wide cap-and-trade has been very hard. 
Comprehensive immigration, even though we had Senators from 
both parties who were working on it, was very hard. We may do 
better step by step to go in the right direction.
    Those were four pretty good steps. Start the freeze right 
away. Stop using TARP as a piggy bank. Don't spend the stimulus 
money after 2010. Find some money in Medicare to use to 
strengthen Medicare. I can think of others. You probably can, 
too. So I think you would find bipartisan support for steps in 
that direction and I hope that will be taken seriously.
    Third----
    Mr. Orszag. Senator, can I clarify on that----
    Senator Alexander. Yes.
    Mr. Orszag [continuing]. Because, again, on the Medicare 
reductions, there was some opposition from members of your 
party. So if----
    Senator Alexander. Because you spent it for a new program.
    Mr. Orszag. OK. I just wanted to clarify.
    Senator Alexander. That was the problem.
    Mr. Orszag. OK.
    Senator Alexander. That is the problem, and I think that is 
what Senator Gregg said. There was a lot of opposition for 
that.
    On the Fiscal Commission, you might want to consider 
following a suggestion about bringing that up again, amending 
it, and finding out what the problems are. I mean, it has 17 
Republican votes. If the President with 59 or 60 votes can't 
pass something that is important to him, it is going to be a 
long 4 years. So that is a good start, and maybe there are some 
adjustments that could be made in the statutory commission.
    My own view is that working on that is much more likely to 
get a result than an Executive Order, no matter how well 
intended that might be. President Bush had a very good 
Executive Order creating a panel on tax reform. It never saw 
the light of day.
    So those are three suggestions.
    Mr. Orszag. Thank you.
    Senator Alexander. Now, here is my question. There is a lot 
of talk about inheritance, and members of the administration 
say, rightly, that they inherited a debt, inherited a 
recession. That is exactly right. But the question is what you 
do with your inheritance. That is what we are talking about 
here.
    And it seems like that what we are saying here is that, 
aha, I see the problem. The boat is sinking and it has a hole 
in it, and your solution is to put some more holes in it with 
big increases in spending. There is the stimulus bill, the auto 
bailout, the appropriations bills, the spending for health 
care, and the spending for the jobs bill. And I have a specific 
one to ask you about, which is what you propose to do with Pell 
Grants.
    We all like Pell Grants. I am a former university president 
and was Education Secretary. I am a big backer of Pell Grants. 
But in your budget, as I read it, we would increase spending 
for these college scholarships by $14 billion, nearly $15 
billion. We are up around $34 or $35 billion a year. We would 
then spend $118 billion over 10 years to fund the existing 
maximum grant award, and then we would spend $69 billion over 
10 years to increase it according to the cost of living plus 1 
percent, and then we would take all of that money, which is 
about a half-trillion dollars over 10 years, and make it 
mandatory spending.
    Now, I was invited to a summit with the President at the 
White House last year, which I appreciated very much, where all 
of the concern was about entitlement spending. How can you 
justify adding a half-trillion new dollars over 10 years in 
Pell Grant spending from the discretionary side to the 
mandatory automatic pilot side?
    Mr. Orszag. Well, Senator, I think the objective there is 
that, as you know, education is one of the underpinnings of not 
only the middle class--living the middle class dream, but also 
of economic growth. And so in addition to our elementary and 
secondary education reforms, we also want to be promoting 
college attendance, because one of the things that has happened 
over the past decade or so is that increase in average 
educational attainment among the U.S. population, which was a 
tail--I am sorry, a wind at our backs in terms of economic 
growth, has now tailed off and it is no longer rising. So we 
need to go additional steps and again promote not only college 
attendance, but college completion. That is what this proposal 
is aimed at getting at.
    Senator Alexander. Thank you, Mr. Chairman. My time is up.
    Chairman Conrad. I thank Senator Alexander.
    Senator Nelson?
    Senator Nelson. Dr. Orszag, thank you for your public 
service and for trying to get your hands around this budget 
deficit and the problems facing the country.
    I want to ask you a friendly question and I want to ask you 
an unfriendly question.
    Mr. Orszag. OK. Which one first?
    Senator Nelson. The friendly question, but you are going to 
think it is unfriendly.
    Mr. Orszag. OK.
    [Laughter.]
    Mr. Orszag. Great.
    [Laughter.]
    Senator Nelson. I am going to zero into a specific part of 
the budget. The President, with regard to the future of manned 
space flight, appointed a Blue Ribbon Panel. Basically, in your 
budget that you have announced, you have accepted the 
recommendations of the Blue Ribbon Panel, which is called the 
Norman Augustine Panel, with the exception of what they said 
for meaningful human space flight for the future of what you 
had to spend.
    Here is what the Augustine Commission said. Human 
exploration beyond low-earth orbit is not viable under the 
fiscal year 2010 budget guideline. We agree with that. And they 
went on to say, meaningful human exploration is possible by 
increasing annual expenditures by approximately $3 billion in 
real purchasing power above the 2010 guidance. And, of course, 
you haven't done that.
    Do you want to explain? And that is my friendly question.
    Mr. Orszag. OK. I can't wait for the unfriendly one.
    [Laughter.]
    Mr. Orszag. Senator, as you know, we increase NASA funding 
by $6 billion over the next 5 years, including an increase 
between 2010 and 2011, despite an overall non-security 
discretionary freeze. So NASA is one of the agencies 
experiencing an increase.
    I would also note, and I will leave the science to my 
colleagues, Dr. Holdren and others, but that Mr. Augustine has 
issued a statement strongly in support of the direction that is 
reflected in this budget for the future of NASA.
    Senator Nelson. I choose to disagree with that 
characterization. It was a namby-pamby watered-down statement 
that was oblique, at best.
    Alright. So, in essence, you are saying that in the 
totality of spending and so forth that you all couldn't afford 
the Augustine's recommendations of $3 billion a year for human 
space flight.
    Mr. Orszag. No, I don't know that that is the way I would 
describe it. I think that, again, under the leadership of our 
scientific and NASA leaders, there is a new course being 
charted for the future of human space flight that involves more 
advanced technologies, longer-range R&D, investments in 
technologies that will help us leapfrog existing technologies 
and allow us to have human space flight to different parts of 
the solar system.
    Senator Nelson. All of which are necessary, all of which 
were in the Augustine Commission report and of which you have 
embraced, but you can't do it on the cheap and that is the big 
difference. OK.
    Now for my final question. You accepted the Augustine 
Commission's report saying that we are going to develop a 
commercial rocket that will be a space taxi that will basically 
get us to and from the International Space Station. You 
extended the Space Station to 2020. I mean, we have spent $100 
billion and are still constructing it. We now need to make it 
pay off like a national laboratory. All of that is good.
    The problem is that you have put all the eggs in the basket 
of assuming that those commercial rockets are going to work and 
that NASA is not going to have to spend a lot more in making 
those commercial rockets manned, safe for humans. And you have 
cutoff the testing and development of an alternative rocket. 
There is no fail-safe position. If those commercial rockets 
don't work, then for the foreseeable future of the next decade 
or so, we are going to be relying on the Russians just to get 
to and from our Space Station.
    Now, that is what I wanted to talk to you privately out 
there about and we were interrupted. I want you to take that 
for consideration, and that has got to be changed, Dr. Orszag.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Nelson, and since I am 
the one who interrupted you, I apologize. I know that you were 
in the middle of a discussion with Director Orszag and I needed 
to have a discussion about some other issues, but----
    Senator Nelson. No, you didn't interrupt. It was Senator 
Gregg.
    [Laughter.]
    Chairman Conrad. We were together.
    Senator Gregg. Well, I apologize.
    Chairman Conrad. Senator Ensign?
    Senator Ensign. Thank you, Mr. Chairman.
    Dr. Orszag, I appreciate all of the work. I know anybody 
who works for the administration puts in incredible hours and I 
know you want to do the right thing for the country, just like 
the rest of us. We may have disagreements on how we go about 
doing that, but certainly I think we all have the same goals in 
mind.
    One of the things that was said earlier was about the 
Japanese budget during the 1990's, the lost decade, and I have 
heard some talk about this and it seems to me to be 
mischaracterized, because it was a lost decade. Everybody 
agrees on that. The question is, did they put the brakes on 
government spending or was it too much government spending?
    Well, in 1991, 32 percent of their GDP was government 
spending. By 2000, it was up to 38 percent of GDP. They had six 
different stimulus bills during the 1990's on government 
spending, infrastructure-type projects. It did not take them 
out of that lost decade. It wasn't government spending that did 
it.
    The reason I think that is an important point to make is 
simply because it is just like the whole debate about the Great 
Depression. Was it government spending that was taking us out 
of the Great Depression? Well, we lasted a long time during the 
Depression with all of the various things that FDR tried to do, 
and with good intentions. But it wasn't until World War II that 
we came out of the Great Depression.
    I guess the point is that the debt, the long-term debt, is 
a threat to the actual viability of the United States economy, 
just like it is for a country, or a company, just like it is 
for a State, just like it is for a city or a family. Too much 
debt makes it impossible to meet your obligations. That is what 
bankruptcy is about. Well, we are heading in that direction. I 
think Senator Gregg and Senator Conrad have talked a lot about 
this. This is not something theoretical. This is becoming real.
    The question that I have for you is, do you have a best 
guess at what point that our debt would be downgraded? How much 
debt? As a percentage of GDP or a total number, do your 
economists have a guess at what point we will be downgraded, or 
where the Chinese will say, yes, we are maybe not going to buy 
any more of that debt or we are at least, if we are going to, 
we want higher rates on that debt? Have you guys kind of 
projected that out?
    Mr. Orszag. Senator, I do not think we are close right now. 
I think it is worth pointing out we are in an exceptional 
period where private borrowing has collapsed. Total borrowing, 
as a share of the economy, which was roughly 30 percent of GDP 
in 2006, plummeted to single digits, if not roughly zero. And, 
in that context, it is not surprising, if you look at interest 
rates, the 10-year treasury bond is yielding less than 4 
percent.
    The issue really is as private borrowing picks up, and you 
go out over time, interest rates will rise, and at that point 
we have to get ahead of the problem, which is why again we are 
putting forward a trillion dollars in deficit reduction, we 
think a bipartisan process is necessary, and so on and so 
forth.
    So it is not an immediate issue, but it is an issue that 
needs to be addressed before it becomes a crisis. And I agree 
with the Chairman and, frankly, with Senator Gregg and others 
that we need to get ahead of the problem.
    Senator Ensign. In getting ahead of the problem, though, 
and the reason I brought up about the Japanese, is that these 
Congresses and the Presidents always seem to wait. They seem to 
say, you know we are not going to make the tough decisions 
today. It is easier to put it in a budget that we are going to 
do deficit reduction in the future, instead of now.
    OK, you had a stimulus bill last year. Argue the merits of 
the stimulus bill back last year. But then during the 
appropriations bills, those were plussed tremendously on top of 
the stimulus bills, and this year as well. Why do we not start 
last year, go at least year's level and start this spending 
freeze?
    I am glad that at least you put this spending freeze 
forward. That is at least something.
    By the way, I think you are going to have a lot of trouble 
with your side of the aisle with that spending freeze. I think 
you are going to have a lot of political trouble. I will 
support you in it, but I think that you will have a lot of 
trouble with folks on your side to get that done.
    But, having said that, it would seem to me that we cannot 
keep kicking this ball down the road. We need to address it and 
address it now.
    Mr. Orszag. Well, the challenge really is, Senator, from my 
perspective, that we face those large fiscal deficits, but we 
also do have this massive jobs deficit.
    And I guess I do have a different reading of both history 
and my view of how economies operate, that in a downturn 
temporary measures, including measures like the Recovery Act, 
help to reduce unemployment, help to spur economic activity. In 
that context, it is counterproductive to start reducing the 
deficit too quickly. I think that is the history of 1937, where 
that was attempted, and we threw the economy back into 
recession.
    Senator Ensign. Well, just to finish up here, Mr. Chairman, 
1937, think about how long the recession had gone on. Think 
about how much money had been spent. Right?
    And remember, it was Republicans that also increased, 
dramatically increased government spending at that point. There 
were also trade laws.
    I hope that the Administration actually will push free 
trade, so we do not go into a protectionist type of a mode and 
repeat some of the mistakes. But also, I think the government 
spending, every time you take a dollar to the government, that 
is a dollar out of the private sector, and we should be putting 
those dollars and creating private sector jobs instead of 
government jobs. It is just a difference in philosophy.
    Thank you.
    Chairman Conrad. Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman.
    Let me begin by saying something to my friend, Senator 
Gregg, through the Chairman--through the Chairman--and that is 
I really do not like being lectured on deficits when you and 
many members of your party helped cause the situation we are in 
right now.
    People voted--Senator Gregg, I believe you were one of 
them--for a war in Iraq which some people will think will cost 
two or three trillion dollars, but you forgot to pay for that 
war.
    You and other people voted for tax breaks for the 
wealthiest 1 percent, cost $600 billion. Forgot to pay for 
that.
    You voted for a prescription drug Medicare bill, which will 
cost $400 billion, that does not negotiate prices with the 
pharmaceutical industry. Forgot to ask how that was going to be 
paid for.
    You voted for a bailout, and I believe you want to repeal 
the inheritance tax, which will cost a trillion dollars over a 
10-year period, benefiting the top three-tenths of 1 percent.
    I voted against all of those things. So, please, please 
spare the lectures on deficit reduction.
    Now----
    Senator Gregg. May I say through the Chair that this 
Senator's factual position is inaccurate?
    Senator Sanders. You did not vote for every one of those 
things?
    Senator Gregg. I did not vote for the drug benefit, and I 
have not proposed eliminating the inheritance tax.
    Senator Sanders. All right, we have you on Google. All 
right. But you did vote for the wars.
    Senator Gregg. Yes, I believe we should protect ourselves 
as a Nation first----
    Senator Sanders. But without worrying about how you were 
going to pay for those.
    Senator Gregg [continuing]. To defend the Country.
    Senator Sanders. All right.
    Dr. Orszag, now I am going to be rough on you. I did not 
want to be nonpartisan about this.
    [Laughter.]
    Senator Sanders. I applaud the President for keeping in his 
budget a proposal to let all of the Bush tax breaks for the 
wealthiest 2 percent expire at the end of this year. My 
question is why have you not moved to do that this year?
    We have a situation where the top 1 percent earns more 
income than the bottom 50 percent. According to the Citizens 
for Tax Justice, if we repealed all of the 2001 and 2003 tax 
breaks that went to the wealthiest 1 percent alone, we would 
save over $100 billion this year. Why not?
    Mr. Orszag. Senator, it was our view that they were 
scheduled to expire at the end of the year and that that was 
just the best way forward.
    Senator Sanders. Really? We know that they were set to 
expire. But I am asking you, when we have the most unequal 
distribution of income in the entire industrialized world, why 
did you not ask the top 1 percent to start paying their fair 
share this year?
    Mr. Orszag. There are a variety of ways of answering that 
question. I think one of them is that we were shifting to 
deficit reduction gradually over time, including in 2011 and 
2012, and that 2010 was not seen as the year to be reducing the 
deficit, given the depth of the economic downturn.
    Senator Sanders. Well, I surely do not agree with that.
    And, by the way, let me say I think you did a lot of good 
things in this budget, which I applaud, and I think absolutely 
that in the midst of the worst economic recession since the 
Great Depression we have got to do everything that we can to 
put people to work and to make taxpayers out of them and to 
fight our way out of this horrendous economic situation.
    But let me ask you this in terms of the budget. You chose 
to exempt the Pentagon from the budget. I could quote----
    Mr. Orszag. Well, from the freeze, yes.
    Senator Sanders. From the freeze, right. Right. I am sorry.
    There is a lot of belief that a huge Pentagon budget which 
has significantly increased in recent years, that a lot of that 
money is not necessarily directed toward fighting the fights we 
are in right now against international terrorism. But, among 
other things, there are weapons systems designed to fight the 
cold war, that there is an enormous amount of waste.
    I mean people like Don Rumsfeld talked about trillions of 
dollars not being able to be accounted for.
    Why was the Pentagon exempted from the freeze?
    Mr. Orszag. Well, first let me say that there were 
constraints placed on the Pentagon budget. It was exempted from 
the freeze because we are at war and we think during a time of 
war our first priority is to protect our soldiers.
    But let me just talk for a second about the steps that 
Secretary Gates is taking. At this time last year, we proposed 
canceling the F-22 fighter jet. Most people thought we would 
not succeed. We did. Cancelled the Presidential helicopter.
    He has come back this year and made it very clear, no more 
C-17s----
    Senator Sanders. I apologize. I just have a little bit more 
time, and so I want to ask you a third question. And I do 
understand that, but I think that is a whole area where there 
is potential savings that we can and should be looking.
    Mr. Orszag. We agree.
    Senator Sanders. The last thing is the President, I think 
appropriately, understands that many senior citizens in this 
Country are hurting. There is not going to be a Social Security 
COLA this year. He supported the concept of doing what we did 
in the stimulus package, providing $250 per senior and disabled 
veteran, which I think make a lot of sense. It is in your 
budget.
    Mr. Orszag. It is.
    Senator Sanders. But is that something you are going to 
fight for?
    Mr. Orszag. It is in our budget, and we are going to fight 
for everything in our budget.
    Senator Sanders. OK. Thank you.
    Chairman Conrad. Thank you.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    Let me first associate myself with both the comments that 
you and the Ranking Member made about the need to break the 
logjam on the deficit reduction. I was a strong supporter of 
the statutory approach on deficit reduction. I wish the 
Administration had actually come onboard earlier for that 
approach. I was appreciative of their support at the end.
    I am a new Senator, but it seemed to me that when folks 
sign up to be co-sponsors of a piece of legislation, the 
expectations are they are going to go ahead and vote in favor 
of that legislation, particularly when they have been on record 
time and again supporting that we have to break out of the 
normal process and do this in a bipartisan way.
    I had a family emergency on the day of that vote and flew 
back. It sure did seem like the process was a little bit cooked 
when a lot of my colleagues on the other side who had been 
longtime supporters of this, had the chance to get that 
critically important piece of legislation passed through the 
Senate, that when the time to put their names down as yeas, 
that they were not there.
    I would echo what the Ranking Member said, we ought to 
bring it back up, and we ought to. I will continue to work with 
my colleagues on this side of the aisle.
    A lot of new members were very supportive of that effort. I 
would love to hear again from my friends on the other side of 
the aisle, those who had been on record as supportive of that 
proposal, over time, why, when we were this close to getting it 
done, they chose that suddenly now is not the right time when 
clearly all of the data support that the current approach is 
unsustainable. The current process has not proven the ability 
to move beyond small ball.
    And I again would urge the sponsors of the legislation to 
continue to bring it back up, and we ought to try to get more 
folks on this side. But, gosh, it sure would be great to have 
folks who had been long-term supporters, who put their name on 
as co-sponsors, to step up and actually adhere to that and be 
part of the solution.
    I also want to make one other comment. I do not fully agree 
with my colleague, the Senator from Vermont, on the defense 
budget. I do think from the freeze, because the Nation is at 
war, we need to have more flexibility there.
    But I would agree that without putting some pressure on the 
Pentagon budget you end up not having any notion of constraint. 
For example, an issue that I know Senator Nelson would greatly 
disagree with me on this, but there is a debate about home-
porting of aircraft carriers. Norfolk does an incredibly good 
job of that at this point. Your budget puts forward spending. 
You estimate $600 million. I think more realistic estimates are 
north of a billion dollars on adding this additional facility 
in Florida when the Navy has a $36 billion backlog in terms of 
already identified needs.
    I am hoping that as we see more of this budget laid out, 
that the Navy or the Administration will outline what is being 
bumped from that list of existing priorities to add a billion 
dollars of additional spending that I do not think, in terms of 
need or defense policy, clearly had not been identified as a 
need until the waning days of the last administration--how 
suddenly this is going to trump the $36 billion of unmet needs 
the Navy has already identified.
    Let me get to my question. I appreciate very much the task 
force that the Chairman and the Ranking Member have given me, 
and Senator Whitehouse and others on the other side, to look at 
performance goals. Jess Zients, your chief performance officer, 
has said performance goals need to be part of this budget. I am 
not sure they have been fully laid out and there was supposed 
to be input from the Congress and the public. I would like to 
hear whether there was that input from the Congress and the 
public.
    But one of the things that is terribly important, and 
actually quoting President Reagan, one of the things hardest to 
kill is a government program. You have indicated, and the 
President has indicated in the past that he was going to go 
through line by line and find those programs that could be 
eliminated. You suggested 121 programs last year that would 
have saved $17 billion. We actually ended up only approving 
$6.8 billion of those.
    With this year and the out-year deficit being as bad as it 
is, I was a little disappointed that in this year's budget you 
have only, in aggregate, indicated program eliminate that would 
account for $23 billion in savings in 2011, which is about a 
half a percent of our overall budget. Why not identify more 
programs and would you be willing to work with us in seeing if 
we could identify more where we could actually eliminate some 
of these programs going forward?
    Mr. Orszag. Absolutely. We are open for ideas.
    And I note with regard to the high priority performance 
goals, they actually are embodied in the documents that we sent 
out. So, in the Analytical Perspectives chapter volume, 
starting on Page 75, we go through it.
    Senator Warner. Did the individual agencies go out and 
solicit from the Congress and the public the way they were 
supposed to?
    Mr. Orszag. They varied, and the one of the reasons that we 
were so interested in publishing them is to solicit that kind 
of feedback and commentary now, to the extent that additional 
commentary is always welcome.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Conrad. Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    And welcome back, Director Orszag. It is good to be with 
you. I think that in this Committee you are likely to run into 
disagreement on a whole variety of subjects from various sides, 
but I do not think it is appropriate to question your 
integrity, and I just want you to know that I at least have 
full confidence in that, even in areas where we may disagree.
    An observation, a recommendation and a question. The 
observation is that, as Senator Alexander was kind and accurate 
enough to admit, the problems of the deficit that you inherited 
were considerable. He said that is exactly right, and it sure 
is exactly right.
    I just wanted to add as an observation that at the time the 
Bush Administration came into power the trajectory that CBO had 
anticipated for the Federal Government was into absolute 
surplus. And when the Bush Administration is criticized for the 
deficits that it ran up, what is usually left out because it 
starts at a zero baseline is the surpluses that they were in 
line for, had they really kept the Clinton policies going.
    Our calculation, for what it is worth, is that the net 
effect of the difference between the Bush policies and where 
CBO, at the day that Bush took office, projected the economy 
and the deficit to go is nearly $9 trillion, which is an 
absolutly astonishing amount of fair weather debt at a time 
when none of the Keynesian steps for supporting an economy in 
steep contraction through Federal spending made any sense. That 
is my observation.
    My recommendation is this: Back, I guess quite a while ago, 
James Carville observed that it is the economy, stupid.
    When it comes to the deficit, it strikes me that it is 
health care. To the extent that it is location, location and 
location in real estate, it is health care, health care and 
health care on the deficit. I see you nodding, and I know that 
you agree with that.
    The reason that I did not support the statutory fiscal 
commission is that it looked like it came at the health care 
question too much with fiscal knives and not enough with 
comprehensive delivery system reform. As you know, I am a very 
keen advocate of delivery system reform.
    I think the goals and the extent of the target are very 
enormous. I mean really astonishing. If there is a trillion 
dollars worth of waste every year in our health care system, or 
$850 billion--or, as the President's Council of Economic 
Advisors guesstimated, north of $700 billion--whatever it is, 
it is a very big number, and there is a great deal of very good 
stuff in the health care reform legislation that targets that.
    CBO was not able to score it because it takes a lot of 
management and a lot of experimentation and a lot of executive 
effort to deploy those tools, but they are there.
    In the event that the Republican blockade of significant 
health care reform persists, and now at 41 votes they have the 
ability to make it absolute, I would urge that you 
investigate--and I am happy to participate in any way you think 
I would be useful--how much of that stuff you can get done 
through executive order. Really push it because the clock is 
ticking on this stuff. If we do not get started now with these 
programs, in the out-years we will have lost critical time, and 
that critical time turns into critical dollars.
    I think anybody who is serious about the deficit has to be 
serious about moving the delivery system reform part of the 
health care agenda, and you simply cannot be serious about the 
deficit with the one hand and continue to blockade that section 
of the legislation on the other.
    The question is this: Looking out long term at the economy, 
if we continue to subsidize carbon pollution and continue to 
lag behind the emerging clean energy technologies in 
international competition, particularly with the Chinese but 
also with many of the European Union companies, what long-term 
effects do you anticipate on our economy if we are slow to make 
that transition from subsidizing carbon pollution to adequately 
and competitively supporting clean energy emerging 
technologies?
    Mr. Orszag. There are two effects. One is the effects of 
failing to address climate change and the effects that has on 
the economy, and the second effect is as the rest of the world 
moves to a clean energy future we would be losing opportunities 
to be the world leader in a crucially important market. That is 
why we, in this budget, propose eliminating fossil fuel 
subsidies, and it is why we have more than $6 billion in 
funding for clean energy research and development related 
activities, so that we can leapfrog and become the world leader 
in a green energy future.
    Senator Whitehouse. I appreciate that.
    Thank you, Chairman.
    Chairman Conrad. Thank you, Senator Whitehouse.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    And thank you for your presentation, in particular, the 
emphasis on creating jobs and helping the middle class. I want 
to see us be as bold and aggressive in assisting working 
American families as we have been in assisting major financial 
institutions, and in that regard I did want to ask you about 
housing because housing is a key component of the success of 
our economy and the success of our families.
    Just a quick review here, in the budget: Discretionary 
spending would be down $2 billion. Mandatory spending would be 
down $11 billion. Guaranteed loan commitments would be down 
$170 billion. Direct loan disbursements would be down $145 
billion. USDA's program for multi-family activity in rural 
areas would be zeroed out. And then we have the HAMP program 
that very little money has actually been disbursed on because 
of the great difficulty in families getting through the trial 
period and into permanent programs.
    Taken as a whole, I am very concerned that this is not the 
bold, aggressive outreach, in a very important part of our 
economy that would be equivalent to the bold, aggressive 
outreach there was to save our major financial institutions. So 
I just would like you to spend a couple minutes on that if you 
could.
    Mr. Orszag. Sure. There actually is a significant amount of 
housing-related activity in this budget, including an important 
measure to address homelessness through the HEARTH Act, 
significant expansions in the Department of Housing and Urban 
Development's activities surrounding assistance for people 
including tenet-based assistance, project-based assistance and 
related activities, some increase in programs that are 
dedicated to assisting the elderly with their housing.
    And then more broadly, and this returns to some of the 
earlier discussion, but as you know the Administration's 
efforts, working with the Congress and others, to stabilize 
financial markets has helped to stabilize mortgage rates and 
generated more than a thousand dollars savings for the average 
borrower in terms of their mortgages. That is a crucial step.
    Now with regard to the HAMP program which you mentioned, 
there are in excess of 800,000 families that have experienced a 
modification through that program. The problem really is in 
taking, expanding that number and then taking the temporary 
modifications and making them permanent. Under Secretary 
Geithner's leadership and working with Secretary Donovan and 
others, there is very active effort to try to streamline that 
program, so we can get the temporary modifications not only 
expanded but also make them permanent.
    Senator Merkley. OK. Let me just say I am not satisfied 
with your response. The housing for the elderly is being 
dropped from $825 billion in 2010 to $274 billion. While some 
of the other increases you mentioned are here, as a total, we 
still have a $2 billion drop in the discretionary spending. So 
I think picking out just a few that are plussed up presents a 
misleading picture of our overall housing effort.
    Also, the monetary policies you referred to that decrease 
the cost of the home mortgage for families, this is very true, 
but it is also being phased out of the next 3 months. So that 
change would also contribute to a change in the picture as we 
approach this.
    So I will not spend more time on that, but I just wanted to 
raise it because I think it is an important component, and it 
looks like it falls short.
    I wanted to turn from that to interest, and on Page 149 of 
the budget there is a presentation of the interest, net 
interest in 2009, looking at $187 billion. By 2020, it rises to 
912.
    So I thank you for having interest in here, but I also 
wonder since many of us are very concerned. It has been 
mentioned by some of my colleagues that our assumptions about 
interest rates are critical because not only is our debt 
increasing, but interest rates are at a historic low, and there 
is certainly the possibility of those interest rates increasing 
dramatically which would further amplify what is now about a 
fourfold increase in the cost of interest that is in this 
budget over a 10-year period.
    So maybe you could just mention the interest assumptions--
--
    Mr. Orszag. Sure.
    Senator Merkley [continuing]. And what higher assumptions, 
the impact higher assumptions might have and the risk that 
poses to us.
    Mr. Orszag. Sure. First on interest rates, if you turn to 
Table S13 which is on Page 177 of that same document, you can 
see the path of interest rates on, for example, the 10-year 
note which might be the most illuminating, rising gradually 
over time. And that is mostly because again, as I had mentioned 
earlier, as private borrowing picks up and there are 
alternative investment opportunities, one should expect 
investors to diversify their portfolios to some degree, and 
that puts upward pressure on treasury yields.
    Senator Merkley. Thank you for pointing me to those 
assumptions. I appreciate that, and I hope that the 5.3 percent 
assumption holds because otherwise we are in a much worse 
condition.
    I am out of time, so a last sentence, and that is I am 
wholeheartedly behind taking funds and moving them to support 
our community banks. That is a proposal that I have been 
advocating for. But I would recommend that we take that $30 
billion out of the $200 billion currently unspent rather than 
the funds that are being returned. It seems to me that that 
would address some of the issues that are being raised right 
now.
    But I think we could all--we ought to all be able to get 
behind the notion that if our community banks are not 
recapitalized and they cannot lend to small businesses, our 
small businesses are not going to thrive, our communities are 
not going to thrive. It is going to be a very long recession.
    Thank you.
    Mr. Orszag. If the Chairman would allow me just 30 seconds, 
just to clarify one thing because I did not have a chance to 
fill in the detail, with regard to housing and the Department 
of Housing and Urban Development's budget, the decline that you 
see is mostly because there is an offsetting receipt. You can 
see it in the Federal Housing Administration line in 2011, and 
that is the primary explanation for the apparent decline in the 
HUD budget. But we could followup in more detail.
    Senator Merkley. That would be terrific. Thank you.
    Chairman Conrad. I thank the Senator. I thank all Senators 
who have participated today. I especially thank the Director 
for being here.
    Just before you leave, I want to kind of recap. Again, as I 
look at what happened, my own belief is that the United States 
had a series of policies on both the monetary side and the 
fiscal side that led us to the brink of collapse.
    I believe there was an overly loose monetary policy by the 
Federal Reserve after 9/11. It was understandable for some 
period of time after 9/11, but it continued too long.
    Simultaneously, there was an overly loose fiscal policy 
under the control of Congress and the Administration, and this 
goes to the previous administration. That was on their watch--
massive deficits, a doubling of the debt, a dramatic increase 
in foreign borrowing.
    And it is the combination of an overly loose monetary 
policy and overly loose fiscal policy, all within a context of 
deregulation, that created the seed bed for bubbles to form. 
And bubbles did form. And it was not just a housing bubble, 
although we certainly saw that. There was also an energy 
bubble, a commodity bubble. I distinguish an energy bubble from 
a commodity bubble because, for example, wheat went up tp 
almost $20 a bushel.
    Bubbles ultimately burst, and when they do there is 
enormous economic wreckage. It was critically important for the 
administration, the previous administration at its end and this 
administration at its beginning, coupled with the Federal 
Reserve, to provide liquidity because there was not economic 
activity on the private sector side. Had government not stepped 
forward, there would have been an absolute collapse.
    On the question of what history teaches us, with Japan, I 
can only cite top Japanese economists who have advised us: Do 
not try to cut your deficit too quickly.
    Now this is coming from me. I am a deficit hawk. I am very 
concerned about long-term debt. But I also recognize if 
government does not step into the breach when the private 
sector, because their balance sheets are impaired and because 
they do not have demand, pulls back--if the government does not 
step forward, there is no one to keep the economy from going 
right off the cliff. So, yes, these policies added to deficits 
and debt in the short term. They were exactly the right thing 
to do.
    The argument that I have is the longer term--the longer 
term--because my concern is when I look beyond 5 years I see 
deficits of a trillion dollars a year as far as the eye can 
see, and I see debt continuing to grow as a share of the gross 
domestic product in a way that is clearly unsustainable. Part 
of it fueled by demographic changes. Part of it fueled by 
economic changes. Part of it fueled by structural changes in 
the economy.
    If we do not face up to it, I believe that will 
fundamentally threaten the economic security of the United 
States. I believe that will create another seed bed, a seed bed 
that could lead to a run on the dollar, which would then 
require very precipitous action.
    The former Secretary of the Treasury, Robert Rubin, who I 
think has, from all observers, gotten very high grades for the 
economic policy that he pursued as Secretary of the Treasury 
under the Clinton years, has called me several times in the 
last years, warning about his concern about the long-term 
growth of debt and what it could mean for interest rates.
    Senator Merkley, I am very pleased that you raised that 
issue because these forecasts tend to flow from what is 
happening now, and typically forecasters miss it at the turn. 
We saw that when things were going down. We have seen it 
repeatedly when things were going up. The forecasters miss it 
on the low side, they miss it on the high side because they are 
forecasting from what is.
    Unfortunately, none of us can predict with clarity what 
will be. What we do know is that we are running outsized risks. 
That is the point former Secretary Rubin has made to me 
repeatedly. It is what I personally believe.
    I believe we are running on the long term, outsized risks, 
and we have got to right-size this budget.
    And again, I give the Administration high marks on what 
they have done to respond to this crisis. I think history will 
show they helped avert a global financial collapse.
    Anybody that was in that room, and this was with the 
previous Secretary of the Treasury under the previous 
administration, as the news came in on the weekend we were 
negotiating the first TARP, it was truly perilous times. I do 
not think the Country has ever really been made aware to how 
close we came to not just a financial collapse here, but a 
global financial collapse.
    I see that Senator Wyden has arrived.
    Senator Wyden. Thank you very much, Mr. Chairman. I want to 
welcome the Director as well, and I want to express my 
appreciation, first of all, to the Director for the support in 
the budget for management and also restoration of forestry. 
This is going to be particularly important because in eastern 
Oregon, as the Director knows since we have talked about this, 
we have been able to achieve a real breakthrough in the timber 
wars. We have been able to get the timber industry and the 
environmental community together on a proposal that we believe 
will get saw logs to the mills, help us generate biomass, a 
clean source of energy, and also protect old growth. So I am 
very appreciative of the Director and the folks in your office 
for working closely with us on this because I think that 
particular account for management and restoration work will be 
a huge plus.
    Just a couple of questions, if I might. In the Build 
America bonds area, which, as the Director knows, I authored 
and I have championed now for a number of years, we have been 
able to achieve a remarkable success. What we thought might 
generate about $5 billion worth of bonds, since the program 
really did not start until late in the spring, ended up at the 
end of the year with just under $64 billion worth of bonds 
being issued, and it is projected to rise to about $130 billion 
this year.
    I am very pleased that the administration looks to make 
this program permanent. I think that is a real plus. I have 
just one question. There appears to be a proposal to modify it 
to allow for operating expenses to be included and also 
refinance, and, Mr. Director, I would like to continue to work 
with you in that area because what we envisioned when I and 
Senator Thune and Senator Talent and others worked on this is 
that you got the most on the job creation side with new 
efforts. Would it be possible to continue this dialog with you?
    Mr. Orszag. Absolutely. Yes.
    Senator Wyden. That would be great. One last question, and 
I gather a couple of my colleagues touched on the issue of 
military spending. I just want to read you a quote that was in 
an important article by George Wilson, who I think consistently 
is one of the most knowledgeable people who writes on this 
subject. He said a couple of days ago, ``Two-thirds of our 
casualties in the Iraq war were inflicted by hidden bombs that 
the bad guys set off by cell phones or other simple devices 
available at Radio Shack.''
    So what has become clear to me is that to best protect the 
country in a dangerous time when we deal with terrorist threats 
is to try to address a lot of those kinds of concerns rather 
than some of these big projects of dubious value that seem to 
always manage to make it through the Congress because they have 
got support in a variety of congressional districts.
    Tell me, if you would, particularly since the President 
said that the overall budget would not be cut, how can you, as 
you all go forward with budget decisions, advance the kind of 
thinking that I think George Wilson lays out correctly in this 
article and help us to steer clear of these projects that to 
me, when you hold them up to the light, get you a lot more 
spending and not the value we need to protect our troops in a 
dangerous time?
    Mr. Orszag. Well, Secretary Gates in particular is very 
focused on reforming the procurement part of the budget, the 
defense budget, which is where those big projects or big 
weapons systems are. You will hear more from him about this 
year canceling or terminating things like additional purchases 
of C-17 cargo aircraft, which are not seen as being militarily 
necessary; canceling the alternative engine for the F-35; 
eliminating the CGX ship for the Navy, and so on and so forth. 
There is a whole series of terminations and reductions that the 
Defense Department has put forward, and what he is trying to do 
is reform the procurement budget, in particular, to avoid those 
overbudget and militarily unnecessary projects that seem to 
get--or weapons systems that seem to get funded even though the 
military does not ask for them.
    Senator Wyden. Mr. Director, I will only say I am anxious 
to work with you and Secretary Gates in that area, because that 
image of the bad guys in effect, whether it is Radio Shack or 
somewhere else, going on out there. I sit on the Intelligence 
Committee, obviously cannot get into anything classified, but I 
think what that article that I quoted lays out is one of our 
biggest challenges, and it is not going to be achieved with 
these huge weapons systems that end up costing us billions but 
a much more focused kind of attack on the kind of example that 
I cite, and I am anxious to work with you and the Secretary on 
it, and I appreciate the chance to continue this discussion in 
the days ahead.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Wyden, and thank you 
for your leadership on this Committee.
    Very few Senators dig into as many topics and as in-depth a 
way as Senator Wyden. Whether it is tax reform or health care 
reform, Senator Wyden listens to his colleagues and then really 
does his homework. And it is very important to this Committee, 
and I appreciate it very much.
    Dr. Orszag, thank you again for your willingness to serve. 
It is not always easy. There are a lot of strong emotions, as 
we could see here today, a deep concern about the direction 
that we are headed long term, and I know you share that 
concern, and your record is very clear on that subject.
    I just want to make clear that this Committee fully 
appreciates not only your professionalism but your integrity, 
and we are very fortunate to have people of your character and 
your quality in public service. Thank you, and we look forward 
to working with you in the days ahead.
    Mr. Orszag. Thank you, Mr. Chairman.
    Chairman Conrad. The Committee will stand in adjournment.
    [Whereupon, at 11:42 a.m., the Committee was adjourned.]
    QUESTIONS FOR THE RECORD

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     THE PRESIDENT'S FISCAL YEAR 2011 BUDGET AND REVENUE PROPOSALS

                              ----------                              


                       THURSDAY, FEBRUARY 4, 2010

                                       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, Cardin, Sanders, 
Whitehouse, Gregg, Sessions, Bunning, Crapo, and Alexander.
    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 Secretary Geithner back to the Budget 
Committee. We are here today to review the administration's 
budget and revenue proposals.
    When President Obama took office last year, we were in the 
midst of the worst recession since the Great Depression. The 
President and the administration, moved quickly to avert an 
even sharper economic decline, and his policies, I believe, are 
working.
    I also credit the previous administration for the steps 
that they took at the end of their administration to begin 
dealing with what I believe could have been a global financial 
collapse.

[GRAPHIC] [TIFF OMITTED] T8153.114


    The actions taken by the Federal Government over the last 
year I believe have clearly helped us back from the brink. We 
have seen steady improvement in the jobs picture. In January of 
last year, the economy was losing more than 700,000 private 
sector jobs a month. By the end of the year, the economy was 
losing 64,000 jobs a month--a dramatic improvement. Now, 
clearly, that is cold comfort to those who are still struggling 
to find work, and we need to focus on assisting the private 
sector create jobs like a laser. I think most of us understand 
that job creation is primarily a function of the private 
sector, but we can do things to provide incentives to them to 
help them in that effort.
    I want to take a moment to outline some of the job creation 
proposals that are in the President's budget. These are 
temporary recovery measures that he proposes.

[GRAPHIC] [TIFF OMITTED] T8153.115


    No. 1, $100 billion to be devoted to new jobs initiatives, 
including $33 billion for a new tax cut for small businesses to 
encourage hiring and better wages. And, by the way, late last 
year I asked the Congressional Budget Office to evaluate 
options and alternatives. This option, a tax credit for hiring 
by business, was one of the two top contenders in terms of the 
Congressional Budget Office's assessment of what would be most 
effective. So I am pleased that the President has included it 
in his package.
    Two, $67 billion for investments in infrastructure and 
clean energy, as well as other tax relief.
    He proposes extending Making Work Pay, costing $61 billion.
    He proposes extending bonus depreciation, small business 
expensing, and tax credits for clean manufacturing, clean 
energy manufacturing, costing $6 billion. By the way, again, 
CBO, in rating what would be most effective, said for 2010 the 
jobs credit would be the most effective, biggest bang for the 
buck. They also gave a very solid, positive rating to small 
business expensing, Section 179.
    The President also proposes extending unemployment 
insurance, COBRA assistance, assistance to States in aid for 
needy children and families, costing $87 billion. Most of that, 
of course, is the unemployment insurance extension. Again, the 
Congressional Budget Office in their assessment said that would 
be one of the two most effective measures to be taken in terms 
of assisting with jobs in the short term.
    And he proposes providing $250 payments to retired and 
disabled Americans costing $12 billion. That is in light of the 
formula not providing any increase to those who are Social 
Security beneficiaries.
    In total, those measures cost $266 billion over 10 years, 
with 92 percent to be spent in 2010 and 2011.

[GRAPHIC] [TIFF OMITTED] T8153.116


    The President's budget also includes a number of other 
measures to assist small businesses, and they include assisting 
in increasing small business lending by community banks; 
providing for additional small business loan guarantees; 
eliminating capital gains taxes on long-term investments for 
many small businesses; and providing funding to promote small 
business exports.
    Let me just say in terms of my own reading of things from 
my constituency, credit to small business is critical. If there 
is one place that there is a hole in what has been done, it is 
in getting credit flowing to small businesses. I hear it 
repeatedly. I have had two of the most successful entrepreneurs 
in my State who are both close personal friends call me, and 
they are very well-to-do. They can finance their own deals. But 
they said, ``If there is one thing that is clear, it is that 
the flow of credit to small business is a very serious 
problem.'' And one of them is a banker; one of them is involved 
not only in banking but a series of other enterprises who has 
said to me that at his own bank, because of regulators saying 
to them, ``You have got to rebuild your balance sheet,'' even 
though their balance sheet was never very impaired because they 
never got into the risky loan business, they are still finding 
it difficult to extend credit even to worthy borrowers. So I 
think this is an issue we do need to focus on.

[GRAPHIC] [TIFF OMITTED] T8153.117


    I also want to highlight that the President's budget 
includes a net tax cut of $1.9 trillion over 10 years. Here are 
some of the key revenue provisions: in terms of a tax cut, the 
budget includes $3.1 trillion to extend the 2001 and 2003 tax 
cuts for those making under $250,000; continue the estate tax 
exemptions at the 2009 level; and provide alternative minimum 
tax relief to prevent a tax increase for those folks who would 
otherwise face increases this year; $293 billion for other tax 
relief for families and businesses; and $83 billion for the 
revenue portion of the temporary recovery measures that I 
noted, including the new job creation tax credit and extending 
Make Work Pay and bonus depreciation.

[GRAPHIC] [TIFF OMITTED] T8153.118


    In terms of revenue raisers, it includes $743 billion as a 
place holder for health care reform revenue provisions, $291 
billion from the President's proposal to limit itemized 
deductions, $122 billion from international tax reforms, $90 
billion from a financial crisis responsibility fee, and $309 
billion in other loophole closures and reforms. Again, the net 
is a tax cut of $1.9 trillion.
    Let me put up another slide. This chart depicts the 
projected deficit under the President's budget over 10 years. 
It shows the deficit coming down from a high of $1.56 trillion, 
reaching a low of $706 billion in 2014, and then slowly 
climbing back up to $1 trillion in 2020. It is that second 
period that I raised the day before yesterday in a hearing with 
Dr. Orszag and indicated personally that while I strongly 
support the President's proposals in the short term, I am very 
concerned about them for the longer term.
[GRAPHIC] [TIFF OMITTED] T8153.119


    The next chart that I want to show depicts gross Federal 
debt. It shows the debt more than doubled under the previous 
administration to $11.9 trillion. Under the President's budget, 
gross debt would continue climbing to $25.8 trillion by 2020 
absent our taking additional action.

[GRAPHIC] [TIFF OMITTED] T8153.120


    The long-term debt outlook is even more dire. According to 
CBO's long-term budget outlook, over the next 50 years with 
rising health care costs, the retirement of the baby-boom 
generation, and the permanent extension of all the 2001 and 
2003 tax cuts, the Federal debt could climb to more than 400 
percent of the gross domestic product.
    I believe we need a two-pronged strategy. We need one in 
the short term to prevent going back into recession. We also 
need a longer-term pivot to deal with our long-term debt. That 
is why Senator Gregg and I proposed a statutory commission. I 
was delighted that we received 53 votes, but it required 60 
votes. Fifty-three is not 60. And so now we are left with the 
alternative of perhaps offering our colleagues another chance 
at a statutory commission, which I would fully support. The 
President has said if there is not a statutory commission that 
he is prepared to create one by Executive order. That is what 
the Greenspan Commission was that dealt successfully with 
Social Security in the 1980's. That was an Executive order 
commission. And the Vice President has provided a letter to me 
outlining the commitments from the Majority Leader and the 
Speaker of the House assuring us that there would be a vote on 
the recommendations of the commission if it had to be 
established by Executive order.
    With that, I want to close by again welcoming Secretary 
Geithner to this panel, back to this Budget Committee, and we 
will turn to Senator Gregg for his statement, and then we will 
go to Secretary Geithner and then open it up for 5-minute 
rounds. And if we need a second round, we will do that.
    Senator Gregg.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and thank you, 
Secretary Geithner, for being here today.
    Let me identify myself with the Chairman's remarks relative 
to the two-pronged approach. I agree 100 percent. The only 
problem is that the second prong does not exist in this budget.
    The budget as it comes to us, as I have said on numerous 
occasions, and which is obvious, I think, to anybody who takes 
even a cursory look at it, does nothing about the long-term 
fiscal insolvency of our Nation; the fact that we are on an 
unsustainable course; and the fact that $11 trillion of new 
debt will be put into the system over the 10 years of this 
budget; and that the deficits never fall to a level that is 
sustainable and, in fact, expand rather dramatically, and 
continue to expand even at the end of 10 years, so they are 
growing.
    Ironically, also, the unemployment levels under this budget 
are--the presumption is that they never, during the President's 
term, get back to the unemployment level that existed in 2008. 
They never get back to below 7 percent. They are at the end of 
4 years still around 8 percent, and I do not think that is a 
good unemployment level. And I think a lot of that is a 
function of the fact that the economy cannot be expected to 
recover robustly if we are putting on the economy a debt 
service and a debt burden which basically soaks up the capital 
of the Nation and uses it for the Government as versus for the 
productive side of the ledger. I would argue that that is 
exactly what we are doing with this budget, because we are not 
putting in place the difficult decisions that need to be done 
in order to accomplish fiscal responsibility and to pass to our 
kids a better Nation, a more prosperous Nation.
    Since we have the Secretary of the Treasury here, I think 
we should focus a little bit on the revenue side in this bill. 
There is $2 trillion of additional revenue in this bill, and 
just to list a few of them--obviously these are philosophical 
decisions that the administration has made, which I tend to 
disagree with, but they raise the marginal rate from 35 to 39.6 
percent; they limit tax deductions for itemized deductions to 
28 percent; they reinstate the ``Pease limitation'', a phase-
out, which is basically another hit on people who itemize; they 
raise the capital gains rate; they raise the dividend rate; 
they assume significant tax increases as a result, or fee 
increases, however you want to describe them, as a result of 
health care reform; there are new taxes on financial 
institutions which, of course, have been in the public domain 
for a while and discussed; and they change a number of tax 
events, including LIFO and IRS programs and reductions in tax 
gap, fossil fuel taxes--all of which add up to $2 trillion of 
new revenue.
    So it is not as if there is not a fairly significant push 
toward generating revenues. The problem is that at the same 
time that they are generating revenues--can you put that chart 
up?

[GRAPHIC] [TIFF OMITTED] T8153.113


    The problem is that at the same time that this bill is 
generating significant revenues as a result of tax increases 
and taking revenues well above their historic norm--revenues 
have historically been about 18.2 percent of GDP since 1940, 
and under this budget it is presumed that they will get up 
around 20 percent of GDP. At the same time, the explosion in 
spending is allowed to continue, and basically the size of the 
Government grows exponentially, and that is where the problem 
is, as these lines show--the red line being the rate of growth 
of the Government, the blue line being the rate of growth of 
taxes.
    Obviously, in the short term, tax revenues have dropped 
precipitously. Spending has gone up precipitously because of 
the recession. But it is the out-years, the second step, which 
the Chairman was talking about, where there is no serious 
effort to try to get those lines to converge, because if you do 
not get them to converge, you end up with all this deficit and 
debt, which is going to drive our Nation into a point of 
insolvency.
    And so I guess I go back to my basic theme, which is that 
this budget plays small ball--bunts, singles, you know. The 
Senator from Kentucky could explain to me better what another 
term might be, but, you know, hit and run--of course, he never 
allowed anybody to hit a single. But, in any event, small ball 
is being played here. We are not taking on the big issue, and 
the gorilla room, which is very significant, is the fact that 
we are raising the level of debt of this country to an 
unsustainable level--``unsustainable'' being the term that I 
believe the Secretary has even used. And so we need another 
approach, and that is why we have supported this commission, 
and I believe it has to be statutory in order to be effective. 
So I look forward to hearing from the Secretary.
    I also hope the Secretary will address where he sees the 
banking system today. This is important for us to know, because 
obviously there is a fair amount of money available to the 
Secretary--I hope it does not have to be spent--to continue to 
shore up the banking system. My hope is that instead it can go 
to reduce the debt, which is what it was supposed to do. And I 
hope that we are sort of--as a result of the Secretary's 
efforts and the prior administration's efforts, Secretary 
Paulson, and the overlapping effort of Chairman Bernanke, I 
hope that we have stabilized the system to a point where there 
does not appear to be any significant disruption headed in our 
way in the financial system. I hope the Secretary will address 
that issue, how he sees the health of the basic financial 
system vis-a-vis where we were in 2008 and early 2009.
    So I thank the Secretary for being here today.
    Chairman Conrad. Thank you, Senator Gregg.
    Again, welcome, Secretary Geithner. Please proceed with 
your testimony, and then we will go to questions.

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

    Secretary Geithner. Chairman Conrad, Ranking Member Gregg, 
and members of the Committee, it is a pleasure to be back here 
today. This Committee is the guardians of fiscal 
responsibility, and in some ways you hold here in your hands 
this critical challenge of how we balance the critical 
priorities of supporting growth, fixing what was broken, doing 
so in a fiscally responsible way, addressing our long- term 
fiscal problems, and trying to do that in a way that is fair--
fair to the American people.
    A year ago, as you both said, when the President took 
office, our Nation was in a deep recession, and we faced a 
deficit of $1.3 trillion and projected deficits--and this is 
very important. Before the new Congress took any steps, 
projected deficits, according to CBO, would more than double 
the Nation's debt over the succeeding decade. And this 
recession, of course, has cost tremendous damage, and I think 
we all know that the road to jobs and to greater economic 
security and to fiscal sustainability does have to start with 
economic growth. And today I think it is important to recognize 
due in large part to the actions of the Congress, the executive 
branch, and the Federal Reserve, the economy is growing again.
    One just brief comment on this morning's productivity 
numbers. You are seeing extraordinarily high rates of 
productivity growth in the second half of last year. In many 
ways, those are a testament to the dynamism and strength of the 
American business community. It is important for people to 
understand that. But there was, I think, an encouraging shift 
if you saw the composition of that. Instead of that coming 
significantly from reducing payroll and hours and employees, it 
is now coming in the former of higher output. And I think there 
is encouragement in that. We should take encouragement from 
that. But we have got a ways to go still.
    So this is progress. It is not enough, and our priority 
remains, our priority has to remain job creation, investment, 
and innovation.
    Now, we are proposing to extend Recovery Act tax relief for 
small businesses, and we are proposing, as the Chairman said, a 
new credit for small business job creation, which combined a 
$5,000 credit for every new employee hired in 2010 with payroll 
tax relief for firms that add hours and increase wages.
    We are proposing to extend small business tax relief that 
goes to encourage new capital investments, investments in 
research and development. We are proposing again to eliminate 
taxes on capital gains for investors in small businesses.
    Just one brief note. That specific proposal would reach, 
our view is, 2 million small businesses, and we think it is a 
good, powerful type of step to help encourage investment and 
innovation.
    Now, of course, we understand that Government needs to be 
smarter, and in the President's budget we have laid out a 
comprehensive agenda to invest in innovation. The 
responsibility of Government is to create the conditions for 
the private sector to grow, to invest, and to create new jobs. 
This requires financial reform. It requires more support for 
American innovation. We need to increase exports, and we need 
to invest in education, and we need health care reform so we 
can help provide greater economic security for tens of millions 
of Americans and to help businesses reduce the growth in the 
health care costs.
    Now, alongside these steps, we need to work to continue to 
improve access to credit for American families and businesses. 
Over the past year, the broad strategy we embraced to stabilize 
the financial system has been remarkably effective in helping 
repair what was broken, bringing a measure of stability to the 
system, and we have done that largely by encouraging private 
capital solutions to come in and replace the investments the 
Government of the United States had to make. And we have 
achieved those results in terms of stability, lower borrowing 
costs, better access to credit, at much, much lower cost to the 
American taxpayer than many had anticipated.
    We have already recovered two-thirds of TARP investments in 
banks which are being used, as Senator Gregg said, to bring 
down our deficit. The expected cost of stabilizing the 
financial system has fallen by more than $400 billion. We 
expect it to fall further, and if we can work with Congress to 
adopt a fee on the financial system, then we can say to the 
American people that American taxpayers will not face a penny 
of loss on the actions the Government had to take under the 
TARP.
    The financial system today is much more stable. As I said, 
credit conditions are significantly better. You can see that in 
terms of the price and access to credit for municipal 
governments, for companies, for homeowners, and for families.
    But critical parts of the financial system are still 
damaged. No surprise. The crisis caused a lot of damage. And I 
think it is very important that we continue to use the 
authority the Congress provided us under the TARP to continue 
to help small banks expand credit to small businesses and to 
help continue to work to stabilize the housing market.
    Now, when you talk to small business owners across the 
country, as I know you do, they tell a similar story, that 
their ability to expand and to hire depends on better access to 
credit. And I think we all know that to get loans for small 
business to rely on, you have to make sure that small banks, 
community banks, are in a better position to provide that 
credit.
    Now, on Tuesday, the President announced that we will 
support new legislation to create a small business lending 
fund, and we will support legislation that would take existing 
authority that we have reserved under the TARP and use that 
authority to help make sure we can provide assistance and 
support and capital to small community banks that are prepared 
to work to expand lending to small businesses.
    These banks, these small banks, have been at the center of 
small business lending in the past. They still account or they 
typically account for more than half of credit to small 
businesses, and I do not believe it is possible to try to work 
to address the credit problem small businesses face in this 
country without helping small business community banks do a 
better job of helping their customers grow and expand.
    Now, we want to complement that with stronger authority for 
the Small Business Administration, with higher loan limits, 
lower guarantee fees temporarily. That can be very effective, 
too. And, again, I think it is important for people to 
recognize that even as we grow and recover, you need credit to 
make sure recovery is going to be as strong as possible.
    Now, as we repair the damage caused by the crisis and we 
work to reallocate resources to investments in innovations--
and, of course, we operate with scarce resources, we need to 
commit to work together to reduce our long-term fiscal 
deficits. Future deficits are too high, and the American 
people, along with investors around the world, need to have 
confidence in our ability as a country, as a Government, to 
work together to bring them down over time. I think failure to 
do so would weaken recovery. It would mean higher interest 
rates for families and businesses. It would limit the 
Government's capacity to deal with the many challenges we face. 
This is a critical economic imperative for the country.
    Now, the President's budget proposes some important steps 
toward that objective. We do not claim to have solved this 
problem, but we need to work together to identify ways that are 
going to put us on a path to fiscal responsibility. We, as a 
country, need to go back to living within our means again.
    The President has proposed a cap on non-security 
discretionary spending for 3 years. We have proposed to restore 
the basic disciplines of budgeting that all families live with 
today that we call pay-as-you-go. We propose ways to make our 
tax system fairer and begin the process of cutting those long-
term deficits. You are both correct to say that the 
Adminstration has proposed to allow the tax cuts for the most 
fortunate 2 to 3 percent of Americans expire. But we are also 
proposing to extend not just the Make Work Pay tax credit for 1 
year that goes to 95 percent of working Americans, not just to 
extend permanently the middle-class tax cuts, but to extend a 
number of very important provisions for business investment and 
for small businesses which we think are important not just for 
the near term but for our long-term economic strength and 
innovation.
    Now, the budget proposes to bring down our deficits as a 
share of GDP dramatically. We propose ways, specific ways, to 
bring them down to below 4 percent of GDP, I believe 4 years 
out. And while I think we all recognize that Government support 
for the economy is still very important, we cannot let our 
future deficits and debt continue to grow faster than our 
economy without making our country weaker in the future.
    This is going to be enormously challenging, and that is why 
we have proposed building on the model, as you said, Mr. 
Chairman, of both the bipartisan Greenspan Commission 
established by President Reagan and the proposals both of you 
have worked so hard to create, defend and explain, and that 
many of your colleagues support. We proposed a bipartisan 
commission charged with trying to build consensus on a set of 
policies that can address not just our deficits over the next 
10 years, but the long-term deficits which everybody recognizes 
are fundamentally unsustainable.
    Now, I just want to close with encouragement, with some 
measure of optimism and confidence. I think if you listen today 
to how people talk about our economic challenges, you hear a 
lot of common ground on a set of core things. People recognize 
that deficits matter. They recognize they are too high. I think 
people recognize that tax cuts are not free. I think people 
recognize that we have to pay for programs we propose. And I 
think everyone recognizes that our priority right now, as you 
both said very well, is to make sure we are repairing the 
damage caused by this recession and getting this economy back 
on its feet, getting people back to work, and restoring their 
confidence, the confidence of businesses and families in our 
capacity as a country to work together to solve these long-term 
problems.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Secretary Geithner follows:]

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    Chairman Conrad. Thank you, Secretary Geithner.
    I would like to go back and just share with colleagues and 
those who might be listening experiences I had at the end of 
the previous administration. I remember vividly being called to 
a meeting in the Leader's office with leaders of Congress, 
Republicans and Democrats, with the then-Secretary of the 
Treasury, and with the Chairman of the Federal Reserve. And in 
that meeting, we were informed--we were not being consulted; we 
were being told--that the administration intended to take over 
AIG the next morning, and they told us they believed, if they 
did not do that, that a financial collapse would be inevitable 
and would come soon.
    And I remember my own reactions listening to the then-
Secretary of the Treasury and the Chairman of the Federal 
Reserve. Again, they were not there to consult us. They told us 
they were taking over AIG, and they told us they believed they 
had the legal authority to do it, and they told us they 
believed if they did not do it that there would be a financial 
collapse that would not be limited to the United States. They 
made very clear they thought there would be a global financial 
collapse.
    That then followed, Senator Gregg will remember well, the 
discussions on rescue legislation. I remember, too, that long 
weekend, again, with Secretary Paulson, who told us if we did 
not come up with a plan by 6 o'clock Sunday evening, the Asian 
markets would open and they would pancake, and we would then 
see our own markets crumble the next day.
    And however imperfect those solutions were--no question 
they were imperfect; they were devised under extraordinary time 
pressures--I believe history will record that they were largely 
successful. I believe the evidence is really quite clear.
    The economy of this country contracted in the first quarter 
of last year by over 6 percent. We were losing 700,000 jobs a 
month. That is the reality. In the last quarter, economic 
growth increased by 5.7 percent. That is a dramatic turnaround. 
If one reads economic history, it would be hard to find a 
circumstance in which there was a more dramatic turnaround in 
the positive direction during this last year. And job loss went 
from 700,000 a month to 65,000 in the most recent month. Now, 
we do not have January's numbers yet. Hopefully that will have 
improved. I do not know. But I believe the record is really 
quite compelling that the actions that were taken by the 
previous administration at the end, by the new administration 
in their beginning days, and by the Federal Reserve were 
absolutely essential to preventing a collapse. And it has 
worked. I think the evidence is undeniable.
    Is it imperfect? Absolutely. Were there enormous mistakes 
made that led to this crisis? Absolutely. And I believe 
fundamentally it was an overly loose monetary policy by the 
Federal Reserve and overly loose fiscal policy by Congress and 
the President that created the seed beds for bubbles to form. 
And when bubbles form, they burst. And when they burst, there 
is enormous economic wreckage. And on top of it all, we had 
deregulation that left no one watching derivatives markets that 
had trillions of dollars flowing around the world unregulated, 
unchecked, even unrecorded.
    Let us not repeat the policies that led to that collapse--
an overly loose monetary policy, an overly loose fiscal policy, 
and deregulation that left us without any kind of oversight of 
extraordinarily risky measures.
    My question is simply this: Looking ahead, this is where I 
have a bone to pick with this budget, and I certainly support 
what is being done in the short term, but the longer term, what 
if the commission, for whatever reason, is not formed? If the 
Republicans refuse to participate, for example. Some have said 
they would not. Then what?
    Secretary Geithner. Mr. Chairman, the idea of the 
commission, as you both have said so well, is to get people 
together, removed from politics, to try to take a fresh look at 
how to dig our way out of this unsustainable hole. And for it 
to work, it is going to require Democrats and Republicans 
coming together, and people are going to have to come fresh and 
open because it is too hard.
    So we are going to do as much as we can to try to design it 
in ways that will command that broad support, and I think it is 
important to underscore, again, how important it is that people 
recognize now that we have to start to build that broader 
consensus. It is not something we can put off indefinitely. I 
know many of you would like us to be more ambitious in this 
budget in terms of identifying ways to bring down those long-
term deficits. That is a fair point. I think it is important to 
underscore that we are recognizing in a very clear, direct way 
that we have to get the deficits down over the medium term to a 
level where our debt burden as a share of the economy is no 
longer growing and stabilizes at a rate we can afford and bear. 
And we are a long way from that point.
    Next year is not too soon to begin that process, and in 
some ways our capacity to be helpful now, to continue to work 
to help encourage job creation and investment, our ability to 
do that now depends directly on how much confidence we create 
that we are going to find the political will as a country to 
bring those deficits down over the medium term.
    Now, of course, we could do that successfully and still 
face unsustainable long-term fiscal deficits. And as you know, 
our view is that the only way and the necessary way to begin to 
deal with those things starts with reducing the rate of growth 
in health care costs. So that is not something that we can 
responsiby defer.
    Chairman Conrad. My final question to you: Will Republican 
leadership be consulted on the make-up of any commission?
    Secretary Geithner. Yes.
    Chairman Conrad. I think that is absolutely essential. And 
will there be the assurances that the Vice President has 
provided in his letter of the Majority Leader and the Speaker 
bringing the recommendations of the commission to a vote in the 
Congress?
    Secretary Geithner. Yes. The basic design of this, as you 
know and have worked so closely on, is you bring Democrats and 
Republicans together, ask them to step back from politics, make 
recommendations that help solve these problems, and the 
Majority Leader and the Speaker of the House have committed to 
the President that they will bring those recommendations to a 
vote.
    Chairman Conrad. Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman. And you have said a 
lot of things, Mr. Secretary, which I do not have time to 
discuss them all, so I will just pick a couple of the 
highlights.
    I do want to congratulate the Chairman for his history 
lesson. It was accurate and correct, in my opinion, but with 
one caveat, one footnote. It was actually the Chairman of the 
New York Fed who took over the AIG, and it was the right 
decision, and it remains, in my opinion, the right decision.
    But you said, Mr. Secretary, something that I think you 
said it in a way that I am not sure people focused on it, but I 
think it is at the core of the issue, and that is, until the 
world community and our own markets believe that we are putting 
in place actions which will fundamentally change the out-year 
instability of our fiscal situation and the unsustainable path 
that we are on, we probably will not get robust recovery 
because people will not be willing to invest and people will 
not be willing to buy American bonds at a rate that is 
reasonable. Our costs are going to go up here dramatically, I 
think, within 4 or 5 years if we do not do something. We may 
find ourselves--Moody's just yesterday said they may downgrade 
us. But we may find ourselves in the same situation as Japan is 
in today, and we will be in trouble. The path we are on is 
unsustainable and I believe leads to insolvency. And, 
regrettably, the budget that was sent up--you know, you 
mentioned the freeze. I am for the freeze. But it is $10 
billion on a $1.6 trillion deficit. It just does not get us 
there.
    You mentioned the tax increases, $2 trillion. I do not 
happen to support them, but as a practical matter, you still 
have $11 trillion of deficit on top of that after your tax 
increases.
    And as I said earlier, the taxes are getting well above our 
historic norm, but spending continues to be unsustainable at 
these levels. So it is really a Never-Never-Land budget when it 
comes to the out-year problem that we confront. It is almost as 
if it does not admit that it exists in many ways.
    We can debate later the commission and how you structure 
it, but I believe the best way to approach it is another vote 
so that it is statutory.
    I guess I want to go, however, to this issue of your new 
proposals on small business because I do not really understand 
them. On the one side, you are raising the top marginal rates 
from 35 to 39.6 percent. Those rates are primarily paid by 
small businesses. Those are mostly subchapter S corporations. 
They represent the majority of people who fall into that rate 
category. So you are raising significantly the tax rate on 
small business subchapter S. At the same time you are claiming 
you are going to energize small business activity by a $30 
billion capital infusion into banks with assets under $10 
billion.
    The two do not--the two are going in opposite directions, 
No. 1, but more importantly--equally important, I cannot 
understand why any bank in America that is not in serious 
trouble would ever want another capital infusion from the 
Federal Government after what they have been through during the 
experience with TARP. And, therefore, how are you going to get 
healthy banks to take the money, No. 1? I mean, I can 
understand where weak banks will take it, but that is not going 
to cause lending because they are weak. And, No. 2, why do you 
think a capital infusion into banks under $30 billion with 
under $10 billion of assets, even if they take it--and I would 
like you to explain to us why you think they will take it 
unless you are going to force it on them through regulatory 
oversight, which I hope you are not--why you think that offsets 
these very significant increases in taxes on small business 
that you are proposing, which I think weakens the energy out 
there to invest and create new jobs and capital because people 
have to use the money to pay their new tax bill?
    Secretary Geithner. Those are excellent questions, and let 
me try to respond.
    The proposal we have made to allow the tax cuts on 
Americans earning more than $250,000 a year to expire will only 
affect 2 to 3 percent of small businesses across the country. 
Now, it is 2 to 3 percent. These are independent estimates. 
They are not our estimates.
    Now, you can----
    Senator Gregg. But isn't it true, though, that 60 percent 
of the revenues, approximately, from people paying more than 35 
percent--a 356-percent tax rate comes from subchapter S 
corporations?
    Secretary Geithner. Well, I guess, again, the way I would 
say it is----
    Senator Gregg. Which is small business.
    Secretary Geithner. It is only 2 to 3 percent of small 
businesses. That is the best measures of the overall effect. 
You need to look at those alongside what we are proposing, 
which is we are proposing to make permanent tax cuts that will 
affect 97 to 98 percent of small businesses to give them 
additional tax relief for business expensing, for accelerated 
bonus depreciation----
    Senator Gregg. I support all those.
    Secretary Geithner [continuing]. Zero capital gains rate 
on----
    Senator Gregg. Great idea.
    Secretary Geithner. Those are things we think make a lot of 
sense, that are good policy, and they are important. But I want 
to come to this point about credit because it is very 
important, and so I want to try and respond to your questions 
about credit.
    One of the most effective things we can do to help credit 
markets is to make sure that small and community banks have the 
basic resources to expand to meet what will be growing demand 
for credit as the economy recovers.
    One of the most cost-effective ways to do that is to give 
them a dollar of investment capital with a dividend for the 
taxpayer. Every dollar we give them should expand lending 
capacity, their ability to lend, by a factor of 8 to 10. I am 
not aware of any public policy investment that offers that kind 
of a return.
    Now, you are right. We cannot force them to come and take 
these investments. In fact, what we saw across the country over 
the last 10 months or so that is quite damaging is we had 650 
small and community banks withdraw their applications from the 
Treasury to capital for a lot of reasons. I would say the two 
principal reasons they cite is concern about the perception 
that they would be stigmatized for doing that--some of their 
competitors ran ads against the people that took capital--but 
also because they were very concerned about actual and 
prospective conditions that might apply that might make it 
impossible to run their institutions.
    So we are not going to be effective in trying to open up 
those credit pipes unless we can design a program that makes it 
more likely that they will come and use that capital to expand 
small business lending.
    Now, we have been able to--because we helped recapitalize 
the financial system with private capital, stabilize the system 
as a whole with using much less authority than Congress gave us 
at much, much lower cost. And so what we propose to do is we 
have reserved some of that authority--and it is a very modest 
share of our remaining resources--so we can design something 
together that would meet that basic test.
    But you are absolutely right. We have learned something. 
They need to be willing to come take advantage of that. If we 
can it right, and I do not think it is that complicated to do. 
It is a very high return. And I do not believe it is possible, 
since--small banks are 50 percent of the credit to small 
businesses,to be responsive to that credit problem without 
working alongside the SBA to help small banks and small 
businesses.
    And, I am sorry, one more comment, Senator. I think 
people--it is important to get the balance right. Even though 
we have put out the financial fire, and even though the actions 
of my predecessor, the Chairman of the Fed, the Congress in the 
fall of 2008, and the first 6 months of the year were 
incredibly effective in putting out that fire, I do not think 
anybody can look at this system today--and say that the 
challenge is really over for small community banks, for our 
housing markets. There are parts of our system that still 
reflect the basic scars of this crisis, and we want to work 
with you and figure out how to address that. And the architects 
of the authority--and I know they are in this room--were very 
careful and pragmatic in trying to make sure that we had the 
ability to work through those basic credit pipes of the system. 
You cannot work around them completely. You can do some things 
around them, but if you do not work through them, I do not 
think anything is possible.
    Senator Gregg. Well, my time is up, but I just do not see 
how any board of directors sitting around in a small bank in 
North Dakota or New Hampshire, unless they are in financial 
trouble with their capital structure, is going to want to get 
the Government into their bank after what happened relative to 
compensation, relative to loan quality, relative to all the 
chaos that was created as a result of the Government stepping 
into--I just do not see how this program probably is taken 
advantage of, but maybe I am wrong.
    Secretary Geithner. That is probably why we proposed the 
legislation. And, Mr. Chairman, could I say just one more thing 
on this?
    Chairman Conrad. Yes.
    Secretary Geithner. When I hear from small community banks, 
what they say is something like the following: They are very 
worried that financial reform is going to come out in a way 
that is going to put huge new burdens on them. They say, we 
were not the cause of the problem in subprime lending or the 
huge predatory abusive practices in consumer credit, and we do 
not want you to solve those problems on our backs. They say 
they are facing enormous pressure from their supervisors, and 
there is always a risk in recessions that people overcorrect 
after a period where credit was too easy. And they say they 
cannot raise capital from the private markets, even though the 
capital markets are much more healthy and open to many large 
companies and major banks.
    So those are things we have got to work on all fronts, and, 
the tests of how governments deal with financial crises are 
really three: Do you limit the damage effectively? And, Mr. 
Chairman, you were right that we have brought it back from the 
brink of collapse very, very quickly. The question is can you 
do so at low cost to the taxpayer, and our judgment is we have 
a very good shot at having solved this in ways that, in 
financial terms, are a fraction of the S&L crisis, at a much, 
much lower cost, in a fiscally responsible way. And the third 
test, which is still before us: Are we going to deal with the 
moral hazard risk created by our response to the crisis? Are we 
going to reform the system in ways that will prevent these 
abuses in the future? And I think it would be important for the 
banking system as a whole and for businesses to try to bring 
the financial reform legislation to earth as quickly as 
possible so people know what the rules of the game are, and I 
hope we can work with you and your colleagues on how best to do 
that.
    Chairman Conrad. Senator Murray.
    Senator Murray. Thank you very much, Mr. Secretary. I met 
with you last year when you were seeking Senate confirmation, 
and I told you that people all across my State were hurting, 
and small businesses were coming to me and saying they could 
not meet their payroll and could not get loans, and families 
who had always had good credit could not get college loans or 
loans to buy a home or car, and they were pretty angry that 
their tax dollars were being used to cover the consequences of 
years of recklessness on Wall Street and failures of a 
regulatory system. At that time, you talked to me about the 
need to have transparency and accountability and said that you 
would focus on Main Street as well as Wall Street.
    Well, we are sitting here today, we are here a year later. 
As Senator Conrad said, we took steps to prevent a major 
economic collapse. But Americans are still really struggling, 
and, frankly, I have not seen enough accountability to Main 
Street.
    My constituents tell me all the time that they are not 
feeling the benefits of the bailout programs that are paid for 
by TARP, and I really understand that frustration. We provided 
assistance immediately to Wall Street, but a year later, we do 
not see it on Main Street. Frankly, I am pretty angry, too, 
because I see these Wall Street banks that have returned to 
their bonus-as-usual mentality, and that creates a lot of 
tension in America.
    In my State in the past 6 years, over six community banks 
have failed, and a lot more are struggling. We just woke up 
this morning to another headline from Cowlitz County, and a 
small town, Longview, where Cowlitz Bank is being ordered by 
FDIC to reduce lending and cut dividends and raise capital. 
Those are all stemming from bad assets on their books. This is 
a community with over 13 percent unemployment, and their 
lending has now dropped by 20 percent, which means those little 
businesses and those families in that community are really 
feeling the pinch.
    So, you know, I am glad that the President is announcing a 
plan to jump-start small business lending. I do have some 
concerns with the approach.
    Now, back in the fall of 2008, Treasury began providing 
billions under the Capital Purchase Program to small and 
medium-sized banks, and the goal was to expand lending. Now, we 
know that did not work. Instead of expanding lending, banks 
that received those capital injections put it in to strengthen 
or buffer against losses. In fact, I want to quote from the 
Congressional Oversight Panel that said, ``Uncertainty about 
risks to balance sheets caused banks to protect themselves by 
building up capital, including devoting TARP assistance to that 
end. One consequence was a reduction in funds for lending and a 
hesitation to lend even to borrowers who were formerly regarded 
as creditworthy.''
    Now, I know you understand that reality, and I know that 
you have stated many times, including in your testimony to the 
Banking Committee last summer, and you said, ``Troubled legacy 
assets are congesting the U.S. financial system,'' and that 
``simply hoping banks work off these assets would prolong the 
economic crisis and increase the costs to the taxpayer.'' I 
assume you are still there and you agree with that.
    So you can see now my concern with the administration's 
approach. You have made some adjustments, and the new small 
business lending proposal is very similar to a tactic that did 
not work in the past as it was intended. I think, if we are 
serious about expanding credit availability to small 
businesses, that we have got to do it in a more permanent way.
    Last year--we talked about this yesterday--you rolled out 
the Public-Private Investment Program, and some progress was 
made on the securities side, but we need a renewed focus on 
getting the legacy loan programs working.
    Now, I have introduced legislation and I have made some 
proposals that I think can help achieve that. I think there are 
two things that are pretty clear that we need to make: 
adjustments to the pricing mechanisms to make it economical for 
banks to sell impaired loans, and adjustments to the 
requirements for participation, including dividend rates, 
executive compensation limits, and other factors. Those are 
improvements that can be made quickly, and, frankly, they do 
not require legislation.
    So I wanted to ask you if you agree with that and hear your 
comments.
    Secretary Geithner. I think I agree with everything you 
said, but I want to make one point before I respond directly to 
that question.
    I believe that the capital investments that were placed in 
the U.S. banking system were exceptionally effective in 
improving overall credit conditions, and the best measure of 
that is what has happened to the cost of credit for all 
businesses, homeowners, and municipal governments.
    Now, as I said--and I completely agree with you--there are 
still a lot of challenges ahead for the banking system and for 
small businesses, but the capital programs were exceptionally 
effective in trying to make sure you did not have a crisis 
accelerate and to make sure that the recovery was not going to 
be choked off because of access to credit.
    Now, I completely agree with you that there are things we 
have the authority to modify under the TARP that affect the 
economic terms that banks get on investments from the Treasury. 
I think those are necessary, but I do not think they are 
sufficient.
    As Senator Gregg said, there is enormous fear and 
uncertainty about the broader stigma and conditions that come 
with the program of the TARP.
    Senator Murray. Right.
    Secretary Geithner. I know you have thoughtful legislation 
in this area designed to try to get directly at the legacy 
assets that are still in the banks, in the banking system. I 
would be happy to work with you on that. As you know, we did 
design--and I think it is a very effective program on the 
securities side. We have made less progress on the bank side, 
and partly because we have to work in partnership with the 
FDIC, and I respect their reservations. They have some 
understandable concerns about this stuff. But I would be happy 
to work with you on how best to solve it.
    Senator Murray. Well, I would really like to work with you 
on this because of what I see. Just like the Cowlitz Bank that 
we are reading about today, these banks have troubled assets on 
their books, and as a result, they are not lending. Then they 
get in trouble, and then they get closed down, and before you 
know it, we are not going to have any community banks left. And 
I am deeply concerned about that.
    We helped the Wall Street banks, and there is a real anger 
at home right now that now we are ignoring what is happening in 
everybody's neighborhood, and it is affecting their little 
barbershop and their restaurant and their grocery store and 
everything else that they count on for employment in those 
small communities.
    Secretary Geithner. I completely agree with you about that 
concern, and we share the basic objectives. And I just want to 
point out just one clarifying remark. You know, I think a lot 
of the American people have been left with the impression that 
this administration came in and put hundreds of billions of 
additional dollars into our Nation's largest banks. And that is 
not what we did. In fact, what we did is very quickly make sure 
that the taxpayers' investments in those banks were repaid, 
replaced with private capital, so that they were going to be in 
a stronger position to support recovery.
    The only checks this administration, this President has 
written in terms of investments in our Nation's banking system 
were not to the large banks but to small community banks and 
regional banks. It is important to note everything we did to 
try to make sure that we were pulling the economy away from the 
abyss and stabilizing people's confidence in their savings in 
banks across the country, were designed to meet exactly the 
challenge you said, which is that the only thing that was 
guiding what we did. We were trying to make sure we were fixing 
what was broken in our broader system, so that businesses and 
families across the country would benefit from more credit on 
fair terms. And, again, the best test of that--and there are 
enormous challenges ahead--is to just look at what has happened 
to credit terms and the price of borrowing for a mortgage.
    Senator Murray. All right, Mr. Secretary. My time is up, 
but I would like to work with you, because unless we get to the 
root of this problem, we are not going to see those banks 
lending.
    Secretary Geithner. I agree with you.
    Senator Murray. OK. Thank you.
    Chairman Conrad. Thank you.
    Let me just indicate to my colleagues, we have gone really 
effectively from 5-minute rounds to 8-minute rounds or even 
something beyond that. So let me just say to our colleagues, I 
will extend their time as well so they do not have to feel as 
though they are going over, since all of us have. So, Senator 
Bunning, I would recognize you for an 8-minute round.
    Senator Bunning. Thank you very much.
    Welcome, Secretary Geithner. The Federal Reserve has been 
out in the press talking about how they are going to make money 
on their AIG loans. What a joke, making it sound like a good 
idea for the taxpayers. However, that is not the whole truth 
because Treasury has committed some $70 billion to the AIG 
bailout. So the taxpayers are still exposed to AIG and, in 
fact, are likely to take losses.
    What is your current estimate on the taxpayers' losses from 
AIG?
    Secretary Geithner. Senator, you are exactly right, and I 
have made that point as clear as I can. The Government is still 
exposed to substantial risk of loss in AIG.
    Now, the CBO put out an estimate just a few weeks ago. It 
says that those losses may amount to $9 billion. Our estimates 
are somewhat higher than that. We do not actually know at this 
point. And you----
    Senator Bunning. Well, isn't it true--and I do not want to 
interrupt you, but isn't it true in the budget submission that 
you made you anticipate $30 billion in losses?
    Secretary Geithner. Exactly. As I said, our estimates of 
losses are significantly higher than in the CBO's. They may be 
right. We are trying to be conservative about it. But I want to 
just underscore two things. They are a fraction of what those 
estimates were 6, 9, 12 months ago. They are much lower cost 
than any of the alternatives we could have considered at that 
time. And, again, to make sure we can tell the American people 
they will not pay a penny of the costs of what we had to do in 
AIG. That requires----
    Senator Bunning. Well, that is if the Congress acts----
    Secretary Geithner. If the Congress acts, that is right.
    Senator Bunning [continuing]. As you want us to.
    Secretary Geithner. Well, as the law requires us to, 
proposed ways to recoup those losses, which we have done. Now, 
there are different ways to do it----
    Senator Bunning. Mr. Secretary, the law requires you to 
take all AIG-or not AIG, but TARP money and use it for deficit 
reduction. All returned money, that is what the law says.
    Secretary Geithner. That is exactly right. The earnings on 
this--and they have actually been substantial in most of these 
programs--go directly to the budget----
    Senator Bunning. What about the cost as far as interest?
    Secretary Geithner. Repayments, interest, too, also, 
dividends, interest, warrants. But repayments also, as the law 
is designed, go to reduce our deficit. And, again, it is very 
important for people to understand that when I took office, 
independent estimates of total costs of solving this thing were 
$400 billion above where they are today. Now, that is good for 
our long-term fiscal challenges. That means there are resources 
available today that were not foreseeable at that time to try 
to deal with our----
    Senator Bunning. You spoke earlier about the cost of money 
and the cost for the taxpayer, homeowners, borrowers, 
businesses, schools, municipalities. Would that have something 
to do with the zero monetary policy of the Federal Reserve?
    Secretary Geithner. It is very important--and you are 
exactly right--that what has helped bring stability, improve 
access to credit, and reduce borrowing costs is the combined 
effect of three very important instruments: one is what the Fed 
did and is still doing; the second is what Congress did in 
passing a Recovery Act and putting a floor under a collapsing 
economy; and the third is what we did to help make sure there 
was capital back in the financial system and people were not 
living with the acute fear that we were going to let things 
fall apart.
    All those things mattered. They were all reinforcing. 
Again, just one example. I believe even in March of this year, 
people expected house prices across the country to fall another 
30 percent. What happened in fact was you have now had 6 months 
of initial signs of basic stability in housing prices, and 
those go directly to how people think about their basic 
economic and financial security. The value of their pension 
savings today in an average 401(k) is 35, maybe even more, 
higher today than it was at the law. You are right that----
    Senator Bunning. Don't speak too soon because it depends on 
the recovery continuing.
    Secretary Geithner. It does. Exactly right. You are exactly 
right about that.
    Senator Bunning. Well, if you look at today's market, you 
would not be as optimistic maybe as you were yesterday.
    Secretary Geithner. Oh, I am a very careful person, 
Senator, and I would always----
    Senator Bunning. It is up 200 points today.
    Secretary Geithner. I always underscore the fact that we 
are still living with a lot of damage caused by this recession. 
And these problems took a long time to buildup; they are going 
to take a long time to repair and dig our way out of. And it is 
a responsibility I think we all share to make sure we are doing 
things that are going to help repair that damage. And we have 
made a lot of progress, but there are a lot of challenges 
ahead.
    Senator Bunning. I just want to read from Moody's Investors 
Services as of this morning. ``Unless further measures are 
taken to reduce the budget deficit further or the economy 
rebounds more vigorously than expected, the Federal financial 
picture as presented in the projections for the next decade 
will at some point put pressure on the triple A government bond 
rating.''
    ```Freezing part of discretionary spending for a three-year 
period beginning in the next fiscal year is a positive step 
from a rating perspective,' says Moody's Senior Credit Officer 
Steven Hess. However, the deficits projected in the budget do 
not stabilize debt levels in relation to GDP, and the portion 
of government expenditures going to pay interest on the debt 
shows a steady increase.''
    So that brings out exactly what our Ranking Member and our 
Chairman have said. Short term, OK. Long term, really not OK.
    Secretary Geithner. I agree with that. But let me just 
underscore one important thing again. We are proposing clear, 
specific ways--things that are going to be very unpopular--to 
cut our deficits dramatically as a share of our economy. We 
bring them below 4 percent of GDP, but as I said, that is not 
far enough. And that is why we want to have a commission that 
is bipartisan try to work together to figure out how to deal--
to get us that further distance so we do not have a debt burden 
that is going to make us weaker in the future.
    Senator Bunning. Somebody brought up the Commission that 
Chairman Greenspan headed up on Social Security. In my opinion, 
it was a failure in the long run. It was a very successful 
Commission for the short term. In the long run, Social Security 
goes negative in 2017, and it pays only 73 percent of our 
benefits if you project out to 2042.
    Just in very little changes in the recommendations of that 
Commission, extending the retirement age from 67 to 70 would 
have put that out to 2075, 2080 rather than 2042.
    So creating commissions is not always the answer to our 
problems, especially one that is mandated by the Executive. I 
agree with both my Chairman and my Ranking Member that if it is 
going to be done, it has to be done in the Congress of the 
United States to get everybody cooperating, both Rs and Ds. If 
we get that, then there will be a coming together on that 
fiscal problem.
    Secretary Geithner. Senator, I think you said it right, and 
I think that 53 votes was not enough. On the other hand, 53 
votes signals pretty broad bipartisan support for the basic 
recognition. You said it very well, which is that you are going 
to need Democrats and Republicans to come together and propose 
ways to deal with this. But ultimately Congress has to act. 
And, you know, commissions do not themselves create consensus. 
You have got to build consensus across the aisle.
    Senator Bunning. I have gone a minute over, so go right 
ahead.
    Chairman Conrad. I appreciate the Senator. We went from 5-
minute rounds to 8 minutes, and this was 9, and that is really 
what it is running, so I will allocate 9 minutes to Senator 
Whitehouse, and I hope he will not go a minute over.
    [Laughter.]
    Chairman Conrad. It was completely fair of Senator Bunning 
to do so because, really, we were at 9 minutes with others. So 
9 minutes, Senator Whitehouse, Senator Sanders, Senator 
Alexander.
    Senator Whitehouse. Thank you, Chairman.
    Just to followup on the discussion that Senator Bunning was 
having, I would be an achievable vote on the Conrad-Gregg bill 
if it were clear to me that the most important part of this, 
which is health care reform, was going to be handled in a 
health care-specific way that put reform first and did not 
bring in a lot of bloody minded fiscal hawks with their knives 
to just cut away at benefits because they frankly do not 
understand the technique and the issues of delivery system 
reform, and if it were clear that there would be a very solid 
process going into it where people like me could have their 
voices heard. I could not have made that clearer. I have made 
that clear in letters to everybody in sight. Those do not seem 
to be unreasonable requests. We have never been approached on 
that subject. So I think there are more votes to be had on 
that.
    But if enough Republicans who are actual cosponsors of the 
legislation, who have put their names behind it, can be 
directed by their leadership to vote against it when it comes 
up as soon as it is clear that President Obama supports it, 
that is a pretty strong sign that there is mischief afoot, and 
it is very hard to work around that mischief.
    Two different points. One is on carried interest. As you 
well know, there is a loophole that has allowed the wealthiest 
and best compensated people in America, the big hedge fund 
managers, to pay income tax rates by pretending that it is 
capital gains at a rate that is lower than their secretary 
pays, at a rate that is lower than their driver pays, at a rate 
that is lower than their gardener pays. And the image to me of 
some person earning tens, hundreds of millions of dollars a 
year sitting in their private jet and looking out the window at 
the father of four who is busy loading their luggage in the 
rain into that private jet and the guy inside the private jet 
with the champagne glass is paying a lower income tax rate than 
the fellow out working hard, showing up every day and loading 
luggage in the rain, to me that is just something that is very, 
very wrong with America. And it is in the Obama 
administration's budget to fix this. I applaud him for that.
    What I would like to ask you, Mr. Secretary, is: What will 
the Treasury's position be on this? Are you just going to run 
up a flag saying we nominally support this? Or when it comes to 
the real crunch on this politically, are you going to be there 
with us? Are you going to be in there fighting in the political 
scrum that it is going to take to get this change made?
    Secretary Geithner. Absolutely. Absolutely. And I 
personally am very supportive of this. In fact, it is just a 
basic thing of fairness.
    Senator Whitehouse. It is sickening, frankly, not to have 
it straightened out.
    Secretary Geithner. Why should somebody running a private 
equity firm or a hedge fund face lower taxes on income than a 
teacher and firefighter. It is a simple thing. And, you know, I 
think this is a very compelling thing to do. We had decades 
where we had an alarming, damaging, corrosive rise in income 
inequality across this country. Changes to the tax system made 
that worse.
    It is a very important thing to public confidence in our 
system that we restore a sense of balance and fairness to this. 
And even though that measure does not produce a lot of revenue, 
it is good economic policy, and I think it is fairer. And I 
frankly hope that we can work with our colleagues in London as 
well to try to make sure they are making comparable changes, 
too.
    So I think it is good policy, and I personally am very 
supportive of it, and we will fight for it.
    Senator Whitehouse. Good. Well, it is very important to me 
to hear you say that. Like Ronald Reagan, I intend to trust but 
verify. And I very much hope that you and the administration 
can be as powerful in the fight as in the starting efforts.
    The other point that is very important to me is the 
continuing problem of foreclosures. I have had several hearings 
on foreclosures in my Judiciary Subcommittee. The stories are 
just appalling. When somebody has to go and tell their daughter 
that she is going to lose her bedroom and that all the stuffed 
animals have to be packed and that they are going off, it is a 
terrible family catastrophe when that happens.
    When they then have to deal with a servicing company that 
is not the bank, that cannot answer their questions--Joe 
Burlingame, a firefighter from Woonsocket, told me at one of 
the hearings about the absolute nightmare that his family was 
put through just trying to deal with the bank. Another guy, Joe 
Verdelotti, who is an electrician in West Warwick, told me 
about his wife and he having to basically pass the phone when 
he came home from work and she went off to work because they 
were stuck on the phone going from voice-mail to voice-mail to 
push button 2 to push button 3 for so many hours, 6, 7, 8 
hours. Over and over again, the personal cost of these 
foreclosures really comes home to roost on people in ways that 
are agonizing, in ways that are frustrating, in ways that are 
painful. And it strikes me that we have a clear and simple way, 
a market way to find the floor, the actual market floor on the 
prices of these houses, and to move on and to cut through all 
of the clutter, all of the delay.
    And, by the way, this is not non-HAMP banks. This is people 
in the so-called HAMP program still getting just crushed by it. 
And that is to enable somebody when they are frustrated enough 
to say, ``You know what? To hell with it. I am going to go to 
bankruptcy court, and we are going to get this straightened out 
once and for all.''
    I think the instant that that can happen, the entire 
industry will adapt. You now have a solid, fair, neutral 
marketplace to decide exactly what that real value is and 
everybody else has to adapt. Instead, the procedure that you 
have followed has been to put it on the banks to make the 
decision about how much money they are going to lose. That is a 
very hard call to ask a bank employee to make. It is very easy 
to kick that down the road. And as they kick it down the road, 
that family continues to be tormented because they are on the 
other end in a lot of misery.
    Will you please support the change in the law that would 
allow a residential primary mortgage to be reset in bankruptcy 
the way every other debt can be and not just give it lip 
service but get in there and fight with us for this? I think in 
the long run it will actually be better for the banks because 
of the long agony that they are going through, frankly, it does 
not help anybody to have this artificial circumstance. There is 
a price for that house. The bankruptcy court will set it. It is 
a market and you move on, and that is the discipline that we 
should be pursuing.
    Secretary Geithner. Senator, I completely agree with you 
that housing still seeing enormous devastation, and it is a 
basic symbol of all what was wrong in this crisis, what is 
unfair in it, because you saw people that were completely 
responsible that are the victims of the fact that other people 
were taken advantage of, lived beyond their means, and you are 
seeing it directly affect the value of their house, the 
prospect of keeping their house. It is deeply unfair, 
fundamentally unfair, and I completely agree that we have an 
obligation to do as much as we can to make sure that people who 
can afford to stay in their house do so as well. And it is not 
something that you can solve with a single instrument, and you 
know the President has been supportive of carefully designed 
bankruptcy reform to reinforce this objective.
    Now, we are trying very hard----
    Senator Whitehouse. The President has been supportive, and 
he actually supported the legislation when he was a Senator.
    Secretary Geithner. He did.
    Senator Whitehouse. But when we actually tried to bring it 
up last year, I would describe the support that his 
administration officials provided that effort as nominal at 
best.
    Secretary Geithner. Senator, I just want to say that we are 
committed to continue to work to do everything we can to be 
helpful in trying to not just put stability on things, but try 
to make sure that we are reducing, to the extent we can, the 
amount of foreclosures out there still ahead of us. And I 
completely agree with you that we need to get--that banks and 
servicers need to do a much better job of trying to make sure 
they are converting these modifications to permanent 
modifications, and they are very substantial benefits----
    Senator Whitehouse. They would not need to do a better job 
or they would immediately do a better job if the consumer could 
go to the bankruptcy court and force that process, at least for 
those that are service mortgages and not held by a bank.
    I apologize. I am 20 seconds over. Thank you, Chairman. I 
appreciate the indulgence.
    Chairman Conrad. Senator Alexander for 9 minutes.
    Senator Alexander. And 20 seconds.
    [Laughter.]
    Senator Alexander. I will give back 20 seconds.
    Mr. Secretary, welcome to the Budget Committee, and thank 
you very much for your service to our country. You mentioned in 
your testimony how entitlement spending and the contribution 
that has made to our deficit, and particularly those in the 
last administration. I remember going to an entitlement summit 
that the President had last year.
    How much of the debt problem, getting it under control in 
the long term, will have to do with getting control of 
entitlement spending?
    Secretary Geithner. The long-term problem, once you look 
beyond the next 10 years, is really overwhelmingly a 
combination of two factors. One is the fact that our economy is 
aging, more people are retired relative to how many people are 
working. But that is much less important than what has happened 
to health care costs and what is still projected to happen to 
health care costs. And that is why I think many people believe 
that the best path and the only path to fiscal responsibility 
over the longer term has to go through health care reform that 
reduces the rate of growth in costs.
    Now, in the near term, the next 10 years are not the near 
term, but the near-term factors are overwhelmingly the 
consequences of a bunch of policies that were adopted over the 
last decade and just the huge damage to our revenue base and 
the interest costs associated with this recession.
    Senator Alexander. But, Mr. Secretary, I happen to think 
entitlement spending is the big gorilla that we need to work 
on. But if that is true, then why would the administration's 
budget propose moving a half trillion dollars over the next 10 
years into new entitlement spending in the Pell Grant program? 
We all like college scholarships, but isn't this an example of 
just saying I see the problem, the boat has a hole in it, and 
so what I propose to do is just put some more holes in the 
boat? Wow could we possibly be thinking about adding a half 
trillion dollars in 10 years to new entitlement spending, no 
matter how worthy the goal?
    Secretary Geithner. Senator, the President's view, is that 
a dollar of help to make higher education more affordable, 
again, has very high returns to the overall American economy, 
and that is the judgment we are making. Again, the test we all 
face is to do things that have a high return for every dollar 
we are proposing to ask the taxpayers to put up. And I think 
making higher education more affordable absolutely meets that 
test and is one of the most effective things we can do.
    Senator Alexander. The President mentioned free trade in 
his State of the Union address as one part of job growth, and 
he mentioned Colombia. Does that mean we are likely to see the 
Colombia Free Trade Agreement resubmitted to Congress?
    Secretary Geithner. Senator, we believe that the three 
agreements pending can be strengthened and, if enacted with the 
right set of protections, would be good for expanding exports. 
But as the President also said in the State of the Union, we 
want to work with countries around the world on a new 
multilateral agreement that offers those same basic 
protections, expands markets, and we want to make sure we are 
in the game in Asia, too, as other countries move to work on 
that. But, of course, for these to work, they have to provide 
strong protections for American workers, and they have to 
provide a level playing field for American companies.
    But one of the best things we can do for future growth is 
try to make sure that we are part of this, economies that are 
growing most rapidly, and American companies and workers are 
able to share in those gains.
    Senator Alexander. In looking for ways that Democrats and 
Republicans can work together, I was especially pleased to see 
the President's comments about a new generation of nuclear 
power plants, about his recommendation for $54 billion of loan 
guarantees for nuclear plants, and his appointment of a 
commission for dealing with used nuclear fuel. I have been 
afraid that we are going to have an energy policy that amounted 
to the energy equivalent of going to war in sailboats by using 
windmills for this big economy. And I am very encourage by 
this.
    I am wondering if as this policy evolves and matures we 
will ever get to the point where we can support--as Senator 
Webb and I do in our legislation on alternative energy and 
doubling nuclear power--technology-neutral policies rather than 
this subsidy for wind and this subsidy for solar and this 
subsidy for geothermal and this subsidy for nuclear, where we 
have loan guarantees and production tax credits and other 
appropriate things that led us toward carbon-free electricity, 
if that is the goal, rather than picking and choosing winners 
and losers.
    Secretary Geithner. Senator, I cannot speak to the 
specifics of that proposal, but I agree with the general 
principle that our job should be to get the incentives right to 
encourage people to use energy more efficiently and make sure 
that we are encouraging cleaner sources of energy use. But we 
want the technology--we want there to be innovation in 
technology, and we want to make sure that technologies that 
offer the best return on those two objectives are the ones that 
end up dominating the field.
    Senator Alexander. What is the plan for getting rid of the 
Government's investment in General Motors? I had suggested that 
we just declare a stock dividend and give the stock back to 
everybody who paid taxes last April 15th. Senator Warner and 
Senator Corker have a different proposal. It seems to me the 
sooner the taxpayers get out of the auto business, the better. 
What is your----
    Secretary Geithner. I could not agree with you more.
    Senator Alexander. So when are we going to do that?
    Secretary Geithner. We are going to do it as quickly as we 
can, and I think that there is a lot of merit in what Senators 
Warner and Corker have described, have proposed, which is to 
try to make sure that we are managing down those investments as 
quickly as possible. And, of course, our obligation is to try 
to make sure we are getting the Government out of that as 
quickly as possible, but doing so in ways that offer really the 
best return for the taxpayer. A lot of merit in those 
suggestions, though, and we are working very closely with them.
    Senator Alexander. I still like the idea of the stock 
dividend. That would get rid of it quickly, and it would make 
everybody a fan of General Motors who happened to own a few 
shares of GM stock, and maybe they would go buy a GM car.
    Secretary Geithner. Senator, just again as a test of our 
basic theory and approach, if you look at what we have done in 
the major banks, we have been very successful in making sure 
private capital came in to take us out, leaving them in a 
better position than if the Government was in there. And the 
return to the American taxpayer, in terms of dividends, 
warrants, on those investments was very high. It does not do 
anything close to capturing the full cost of the crisis to the 
economy as a whole, but it shows a basic principle that has 
guided our approach, and we are going to bring that to 
everything we have done.
    Senator Alexander. My last question is as much an 
observation as a question. Senator Gregg has suggested that the 
President might consider encouraging another vote on the 
Conrad-Gregg commission. I hope you will take that seriously. 
The fact of the matter is that the President's support came 
over the weekend before the vote. I understand it was difficult 
because there are 23 Democratic Senators who were opposed to 
it, some of them very senior, and many senior Members of the 
House. It is a big decision to make. And it was sort of a 
general endorsement.
    A President of the United States who is a Democrat, who has 
59 or 60 votes in the Senate, who has 17 or 18 Republican votes 
for something that is important to him, ought to be able to 
pass it. And perhaps a way to do that is to say we did pretty 
well there, a Democratic Senator is leaving and a new 
Republican Senator is replacing him; you are gaining one vote 
in support there. The Democrat voted no, the Republican said he 
will vote yes, so you are up to 18 Republicans who have said 
yes, they will vote for it.
    So it might be that with an amendment or two and some 
consultation that it would pass, and my own judgment is, 
looking at what happened to President Bush's tax reform 
commission, for example--which was a pretty good report by some 
pretty good people, but it just never went anywhere. It just 
went up on the shelf like a lot of commission reports. I think 
we are much more likely to get down the road toward deficit 
reduction with a statutory commission modeled along the lines 
of the Conrad-Gregg commission than we are with any 
Presidential commission, no matter how well intended.
    Secretary Geithner. I agree with much of what you have 
said, Senator, and, again, we are trying to take the best of 
Conrad-Gregg, Gregg-Conrad, and the Reagan-Greenspan 
Commission, which, I think is the only really successful 
example we have. And in its structure, it is fundamentally 
different from all the other commissions in between, and I 
think because of that we think it has a pretty good chance.
    Now, before the President made that statement that 
Saturday, he and the Vice President had been working very hard 
to try to build consensus on an approach. And, again, I would 
take some encouragement from the fact that you see people on 
both sides of the aisle now say again that deficits matter, 
that our deficits are unsustainable, that our recovery today 
and our long-term economic health depends on dealing with these 
kinds of things, and the world is watching us and they want to 
know whether we are going to have the capacity to build 
consensus on these things.
    Chairman Conrad. Senator Sanders is recognized for 9 
minutes, and with a little slop over on the last one, so we 
will allow that here as well. Senator Sanders.
    Senator Sanders. Thanks very much, Mr. Chairman, and, Mr. 
Secretary, thanks for being here.
    Mr. Secretary, the name of this Committee is called the 
Budget Committee, and obviously every member of this Committee 
is concerned about record-breaking deficits and a $12 trillion 
national debt. I have to say--and I say this to my friend 
Senator Gregg, as I suggested through the Chairman last week--
that I get a little--I understand that we have got to look 
forward and not backward. That is clear. We are all in 
agreement on that. But I do get a little bit tired of being 
lectured about how serious the deficit crisis is today by, in 
many instances, the exact same people who caused the deficit 
crisis. And I want to make this clear so I do not have to 
repeat it at every meeting that we are in. I--and many of us--
did not vote for the Bush tax breaks which cost $600 billion 
over a 10-year period without any payment for them. I believe 
Senator Gregg and many others on the other side did vote for 
those.
    I did not vote for the war in Iraq for a number of reasons, 
not least of which there was no mechanism to pay for that war. 
I believe my Republican friend Senator Gregg did vote for that 
war.
    I did not, when I was in the House, vote for the insurance 
company and drug company prescription drug Medicare bill, which 
could have been paid for by negotiating pharmaceutical prices 
with the drug industry. Many of my Republican friends voted for 
that. Senator Gregg, you voted against it. But you voted to 
waive the budget rule so that it, in fact, did not have to be 
paid for.
    I did not vote for the Wall Street bailout of $700 billion, 
and, in fact, I brought forth an amendment which said that if 
you were right, if the Bush administration was right, let us 
pay for it. Let us do a surtax on the very wealthiest people in 
this country so that if it was needed, it could be paid for.
    I do not support, as Senator Gregg does, the repeal of the 
estate tax which would provide $1 trillion in tax breaks to the 
wealthiest three-tenths of 1 percent over a 10-year period.
    So all that I say--and Senator Gregg is a good friend of 
mine. We are neighbors. He is a serious guy. But please do not 
lecture us when many of us voted exactly in opposition to 
running up the huge deficit that we have.
    My question is: Do you agree?
    [Laughter.]
    Secretary Geithner. I agree that Senator Gregg is a 
careful, thoughtful person with a great record on fiscal 
responsibility. And I agree with you--
    Senator Sanders. Ohhh.
    Secretary Geithner. And I agree with you----
    Senator Sanders. You agree with Senator Gregg and myself. 
Now, that is a tough one, right?
    Secretary Geithner. We are all trying to find common 
ground. And I agree with you that it is important for people to 
recognize that we are living today with the choices made over a 
long period of time to not pay for new things that are very 
expensive.
    Senator Sanders. Well, that is true, but I think you are 
being too gentle in saying there were people who voted to run 
up a huge national debt and some people of us did not.
    The past is the past. I acknowledge that. We have got to 
look to the future. But it is not fair to say all of us did 
this. Some of us did not. All right. Now let me get to areas 
where you do not agree with me.
    I applaud the President for keeping in his budget a 
proposal to let all of the Bush tax breaks for the wealthiest 2 
percent expire at the end of this year. My question is: Why 
didn't the President propose repealing these tax breaks for the 
wealthy right now, which I understand would have brought in 
another $100 billion in that 1-year period?
    We have, as you know, Mr. Secretary, the most unequal 
distribution of income and wealth. I think Senator Whitehouse 
made some very appropriate references to the outrage that the 
American people are feeling as the middle class collapses and 
the people on top get, you know, tens of millions of dollars in 
bonuses.
    What is the problem with beginning to address that problem 
now?
    Secretary Geithner. Well, Senator, I just want to say--and 
I completely agree with you, our tax system today is not fair 
and the burdens are not shared equally.
    Senator Sanders. So why aren't we moving aggressively to 
address the----
    Secretary Geithner. Well, they are scheduled to expire at 
the end of this year, and we think that is the right time for 
them to expire.
    Senator Sanders. Why?
    Secretary Geithner. But it is not----
    Senator Sanders. Why? I mean, in other words, you are 
right. They are schedule, but you could have----
    Secretary Geithner. I do not think it was necessary to pull 
them forward, and as you know, we are trying to balance the 
basic imperative of trying to make sure that we are all focused 
on doing everything we can to fix what was damaged in this 
recession. We are going to keep our priority on that, but we 
think the country can afford to let those tax cuts expire, and 
we think it is time to do some modest things to make the system 
more fair, and that is part of it.
    Senator Sanders. Well, I do not know that I agree with you. 
I do not----
    Secretary Geithner. I did not expect you would on this, but 
I think that is the best way to state the rationale.
    Senator Sanders. OK. I think underlying, everybody here 
knows that there is a tremendous amount of anger out there, and 
it is manifested in many ways. I think the Wall Street bailout 
and the bonuses given to the people who helped cause the worst 
recession in the modern history of America is certainly an 
integral part of that appropriate outrage. And I think that the 
faster the Obama administration says that we are going to 
address the reality--all right? You say we cannot move faster. 
We have 19 percent of our children living in poverty. That is 
the highest rate of childhood poverty in the industrialized 
world. Right? That is an international disgrace. And yet we 
have a totally inadequate child care system, totally inadequate 
education system, as the President understands.
    So I do not think it is a good enough response to say, 
well, you know, we are moving along a timeline. People are 
increasingly frustrated about income and wealth inequality in 
America. You are doing some steps that are right. But I would 
hope that you would be more aggressive on that.
    Now, let me ask you a next question. We bailed out our 
friends on Wall Street whose dishonesty and greed has resulted 
in some 17 percent of our people being unemployed or 
underemployed, a total economic disaster. One of the outrages, 
when we talk about why people are angry, one of the reasons is 
we bail out these banks--Citigroup, Bank of America, et 
cetera--and then they charge people 25, 30 percent interest 
rates on their credit cards.
    Will the administration come forward and say that is usury, 
that is immoral, that is wrong, we should do with the private 
banking system what credit unions do, have a cap of 15 percent, 
except under exceptional circumstances go to 18 percent? Can 
the administration come forward and say, thanks, no more than 
15-plus-3 on your interest rates on credit cards?
    Secretary Geithner. Senator, I support what Congress took 
last year in putting in place sweeping reforms of consumer 
credit practices to try to end the abuse and predation that we 
saw across the system. That was a tragic failure of Government. 
I am very supportive of those changes. We would be happy to 
work with the Congress on additional reforms like we are doing 
in financial reform.
    I personally do not support the imposition of a cap on 
interest rates because I do not think it is the best way to try 
to make sure we are preventing abuse and predation. But I 
understand why you support that. I respect your views on it.
    Senator Sanders. Well, it is not hard to understand. Talk 
to anybody, talk to any of the hundreds of people who have 
called my office, and you will understand it. Tell me why we 
should not address a situation where a working person--do you 
agree that 25- or 30-percent interest rates is usury?
    Secretary Geithner. What I believe very strongly--and I 
think this is a deep failure of Government--is that we allowed 
a level of abuse and predation to happen across the system with 
appalling, terrible consequences. And I think it is very good 
that Congress moved last year, even in the depths of the 
crisis, to start to address that. But that is why we are 
working so hard to try to make sure that we are putting in 
place a broader set of reforms----
    Senator Sanders. You are not answering--well, I guess you 
are answering. You do not agree. I mean, you could do all the 
kind of talking you want, but people will still be paying 25 or 
30 percent----
    Secretary Geithner. We have to act. We cannot talk about 
it. I agree with that.
    Senator Sanders. But you do not agree with me. You do not 
support a cap on interest rates.
    Last question. We are running out of time. There is 
widespread support for more transparency at the Fed. Above and 
beyond the TARP, we lent out trillions of dollars at zero-
interest loans. Secretary of the Fed Bernanke refuses to tell 
us who received those loans. Do you believe that the American 
people have a right to know who received trillions of dollars, 
which financial institutions received trillions of dollars of 
zero-interest loans?
    Secretary Geithner. I personally am very supportive and 
will work to help support broader improvements in transparency 
by the Federal Reserve System. But I think it is very important 
we not take steps that would undermine--and you are not 
proposing this, I do not believe--the independence of the Fed 
or put us in a position where the Fed's ability to do what was 
absolutely essential in this crisis----
    Senator Sanders. Do you support letting the American people 
know who received trillions of dollars of zero-interest loans?
    Secretary Geithner. Well, again, as I said, there is a very 
good, constructive set of reform proposals now working its way 
through the Senate that would bring substantially greater 
transparency, and I will support those. But the two 
qualifications I would put on that, just to be direct--and I am 
disagreeing with you respectfully--is not to threaten the 
independence of it and not to limit the Fed's capacity to do 
the essential thing in future crises.
    Senator Sanders. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Conrad. Senator Cardin, for 9 minutes and some.
    Senator Cardin. I thought it keeps on accumulating, so I 
thought I would get more. That is why I came in a little late. 
Secretary Geithner, I was here during your testimony, and let 
me thank you for your service to our country and thank you for 
your presence today and your testimony.
    Your opening statement is very clear about the need to 
create more jobs in America, and everything seems to be 
centered around how we can get job creation in America and get 
our economy back on track.
    You also talked about international trade. The President 
talked about international trade in the State of the Union 
address. He wants to double our exports, and I think each one 
of us would agree with that. I appreciate the comments you made 
in response to one of my colleague's questions about 
strengthening international understandings, particularly on a 
multinational basis. And I strongly support that as it relates 
to labor and environment, but I would also add as it relates to 
dumping and other enforcement issues that we should be equally 
aggressive about.
    Let me raise what I think is the largest single issue. 
China is the largest growing market. Currency manipulation is 
well known. If we are going to have a level playing field, why 
won't the administration be more aggressive on the currency 
issue so that we truly have economics dealing with the market 
penetrations, allowing us greater access to the Chinese market?
    Secretary Geithner. It is a very important issue, and I 
agree with you about the importance of China moving. And I 
think it is actually quite likely China will move. I think they 
recognize this is important to them in their interest as well, 
and it is an important part of what we are trying to do 
generally, trying to make sure that the world is growing, not 
on the basis of an investment-led, export-heavy model again, 
but growing with stronger consumption, stronger domestic 
demand, and that requires a level playing field for American 
exporters generally. We are going to work very hard to 
encourage those changes. And I share your view about the 
importance of seeing more progress across the board in this 
area.
    Senator Cardin. I would make one final observation. You are 
an economist in that you understand----
    Secretary Geithner. I wish--I do not think I wish I was, 
but I am not an economist.
    Senator Cardin. You have a strong background in economics 
and finance.
    Secretary Geithner. Fortunately, I am not an economist.
    Senator Cardin. You certainly support allowing currency to 
reach its true level. I cannot believe that you would feel 
otherwise. So the only issue is transition. How do we get 
there? It seems to me that we have just been dragging our feet 
on this and have not made it the priority it should.
    I am certainly sympathetic to allow transition time so 
there is no major disruption of markets. But if we are not more 
aggressive on this and we solely depend upon the Chinese to 
decide when they are going to allow their market to fluctuate, 
we do a disservice to U.S. manufacturers and producers, and it 
is going to be extremely difficult to double our exports, as 
the President wants.
    I want to address a second point here, which is health 
care, which has come up several times during this hearing. 
Businesses in my community have a tough dilemma. Small business 
owners are really deciding whether to hire another employee or 
pay their insurance premiums. Consumers thinking about buying 
an automobile have to look at the medical bills they have on 
the counter that have to be paid. And I can tell you about 
people who are locked in their jobs because they cannot get 
insurance anyplace else, and they could well have more 
productive employment, but they cannot change jobs because of 
our health care system. I could also talk about the burden of 
health care costs on businesses in America trying to compete 
internationally, or about how health care expenditures are 
affecting our budget deficits in large measure.
    We need to be clear with the American people about what 
will happen if we do not get health care costs under control. 
We have an opportunity in this Congress to get it done. But we 
cannot continue this current trend--in my State, we are 
expecting in the next 8 years the cost of a family's health 
care plan to double from $12,000 to $24,000 a year. That is 
going to be a huge drain on our economy in creating jobs.
    We could all do a better job of articulating the importance 
of health care reform in getting our economy moving.
    Secretary Geithner. I could not agree with you more. I 
thought you said it perfectly. The current system is enormously 
unfair and puts huge, vivid costs, conspicuous costs, and 
hidden costs on small businesses, not just on people that do 
not have health care, but on the businesses we depend on to 
grow as an economy as a whole. You said it exactly right, and 
if people said it the way you did, then you might see broader 
support for this.
    But it is good long-term fiscal policy, it is good policy 
for the American economy and American business, and it is fair 
and just for people who are denied coverage, do not have access 
to health care now, and this is something that should be very 
important.
    Again, if you just go back a few months ago, you would see 
health care costs by businesses cited as their principal 
concern about their ability to grow and compete.
    Senator Cardin. I want to get to the deficit, because 
everybody here has talked about the deficit. The deficit is way 
too large. We have got to get it under control. And Senator 
Sanders made a strong point about opposing the policies that 
led us into this deficit. I can cite my opposition to many of 
the policies that led to these deficits, including the unfunded 
tax cuts.
    But the point is that entitlement reform starts with health 
care. It is very tough to say we are going to reform Medicare 
and Medicaid without dealing with the underlying cost of health 
care. All you are doing is cost shifting in that case. Maybe 
seniors will pay more for their health care. They are already 
paying too much. But if we are going to get entitlement reform 
that is going to help the Federal Government with health care, 
I do not know how you it can be done without getting health 
care costs under control.
    Secretary Geithner. You are exactly right. If you care 
about fiscal responsibility, if you are worried about our long-
term deficits, as everybody has to be, there is no path to 
address that does not go through health care reform that 
reduces the rate of growth in costs. That is very hard to do, 
but there are some very sensible, powerful approaches that have 
moved through this body that would make a huge contribution to 
that goal, and you said it exactly right.
    Senator Cardin. I want to talk about small business. You 
talked about small business. I very much appreciate that. You 
talked about community banks, and I strongly support what you 
are doing in trying to help our community banks.
    I would make one observation. If you look at the banks that 
received the funds from the bailout, and you look at the amount 
of moneys that they have received in assistance and the amount 
of loans they made to small business in 2008, is less than 1 
percent. The total number I have is $238 billion in bailouts, 
and the number I have for small business loans is $1.26 billion 
in small business loans in 2008. I know they got the money in 
2009, but I am just trying to say they do not have a good 
history of loaning moneys to small businesses.
    Secretary Geithner. Actually, they got the money in 2008. 
We took it back and replaced it with private capital in 2009.
    Senator Cardin. They do not have a good record. We are all 
going to keep the pressure on the larger banks to make small 
business loans, but it is going to be a struggle.
    Secretary Geithner. Right. You are exactly right. Again, 
about half of small business lending comes from small community 
banks. The other half comes from larger institutions, and we 
are working very hard to make sure that we are improving those 
credit channels that are opening up again. And I believe we are 
making some progress.
    Again, the most important thing for a business is: Is there 
going to be demand for my products? What all small businesses 
cite today, their first concern is: Are we going to be growing? 
Are we going to face growing demand for our products? But 
credit is part of that, and that is why we should work on this 
front, and I agree with what you said.
    Senator Cardin. You are focused on it now, and we thank 
you. It is going to require a continued focus.
    Secretary Geithner. I completely agree.
    Senator Cardin. It is not going to be solved in the next 
couple months.
    Secretary Geithner. I agree. The costs of these things go 
on for years, and you cannot stop early.
    Senator Cardin. And the last thing I would say--and you 
pointed this out--helping community banks makes sense. I 
believe we have got to strengthen the SBA even more. I agree 
with the reforms that you are asking of SBA. I would give them 
more resources in addition to this.
    But if you do not deal with the regulators and the pressure 
that the regulators put on the community banks, on the loans 
that they are making, even though these loans are guaranteed by 
the Government, it is going to put a lot of pressure on them 
not to make the loans to the small businesses. So it has to be 
done in conjunction with an overall strategy that will release 
money to allow small businesses, which are the economic engine 
of America, to be able to create the jobs we need.
    Secretary Geithner. I agree with you. It requires capital, 
SBA, clarity in the rules of the game, and reform, and we want 
to make sure there is a balanced approach taken by supervisors 
across the country so that they are not getting in the way of 
banks meeting demand of viable businesses to expand.
    Senator Cardin. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Cardin. And you 
actually came in under the overage. So you get a special 
commendation.
    [Laughter.]
    Senator Cardin. I will take it another time.
    Chairman Conrad. Let me go back to the question of credit, 
if I could, and Senator Gregg has got a few more questions as 
well.
    You know, if we look at what happened to the TED spread, 
the difference between the Fed can borrow for and what the 
London Interbank Overnight Rate is, during the height of the 
crisis that was 9 times normal. That has come back to normal. 
That is a remarkable change, critically important.
    I cited earlier the turnaround in economic growth from a 
negative 6 percent the first quarter of this year to positive 
5.7 percent the last quarter. That is a remarkable turnaround.
    The job losses from 700,000 a month at the beginning of 
last year to 60,000 a month in the last month.
    So those who assert none of this is working are to me 
detached from reality. Clearly, this is moving in the right 
direction. But we have got two issues.
    One is the credit front because small business continues to 
report to us, and you heard it all around the table here today. 
I had a case brought to my attention. The guy had a $10 million 
line of credit. He never missed a payment, never late in a 
payment, and he has his credit line pulled. He goes to his 
lender and he says, you know, ``Hey, I am making all my 
payments, always have, will continue, continue to be 
profitable.'' And the bank says to him, his primary lender, 
``This had nothing to do with you. It is a circumstance in 
which our balance sheet has been impaired by other bad loans, 
and we have to``--``we have made the judgment, you and others 
are having their credit lines pulled because we have got to 
rebuild our balance sheet.''
    That continues out there, and I think you have heard it 
loud and clear here today, and obviously you have a plan to 
respond.
    You know, the question in my mind is: With the $30 billion 
from TARP to help small business, if those small lenders, for 
whatever reason, are not willing to take that money, what is 
the back-up plan? What is the alternative? Is there a way--I 
had a bank in my State that took money and then had ads run 
against it by their competitors that they had taken these 
funds.
    So if that is an overhang in the market, how do we make 
certain that this is effective in terms of getting credit out?
    Secretary Geithner. I think you said it exactly right. I 
think we have just got to keep working on it, and we need to 
help make sure that people up here understand that this is good 
policy, it is good for business, it is fair. And if you scare 
them to death, they are not going to come. Banks will not come. 
Strong banks will not come. So it will take work. It just takes 
some work, but I do not think this is beyond our capacity to 
solve.
    Again, I was in Minneapolis last week, and there was a 
small bank there that could stand up and say, as many, many 
banks can say, ``I got some capital from the Government. I 
substantially expanded lending because of that. It was very 
helpful, very effective.'' And they can point to their business 
customers that have loans today, can expand today because of 
that. We cannot solve these problems if we stigmatize or scare 
the people we have got to work with to make credit more 
available.
    Chairman Conrad. Senator Gregg.
    Senator Gregg. Thank you, Mr. Chairman.
    I suppose I should respond to Senator Sanders, even though 
he is not here, and I appreciate that the Chairman does not 
want exchanges, so I did not participate in that. But, you 
know, in court proceedings, there is something called judicial 
notice, you know, such as that water runs down hill. I think we 
can take judicial notice of the fact that a socialist Senator 
from Vermont and a conservative Senator from New Hampshire are 
not going to agree, and I am going to accept that.
    This issue of recruitment, as you know, under the TARP 
language this tax on banks, which you are proposing to recoup 
the cost of the underlying event, was not supposed to occur 
until 5 years. Now, we picked that date because we had presumed 
we would have a better sense of exactly what we needed to 
recoup.
    It appears from your numbers that you have testified to 
here that for the most part you are going to get the bank 
lending--to the extent you capitalize banks, you are going to 
get that money back with interest. And you have gotten from the 
big banks almost all of it back with interest. From your 
middle-sized banks, you have still got some out there, and you 
are talking about putting a little more out.
    The real place where we have not recouped yet is the 
automobile companies. Now, I saw where GM said they may pay 
back at least some portion, maybe their preferred but not their 
equity positions. So isn't this premature to initiate this 
recoupment exercise in a context--in fact, AIG is another 
example. You said it is going to be 30. CBO says it is going to 
be 9. Chairman Bernanke said it was going to be zero.
    Secretary Geithner. I agree with what you said, and we do 
not really know fully the ultimate cost of this thing. It is 
unclear. And the costs will come overwhelmingly from the 
combination of what we had to do in AIG, what the previous 
administration initiated in autos, and what we are doing in the 
housing side. And you are right. We will not ultimately know 
the full costs for some years to come.
    But there is a basic----
    Senator Gregg. Doesn't the law also say the recoupment 
exercise is supposed to start 5----
    Secretary Geithner. No, it said I did not have an 
obligation to propose how to recoup until, I believe, 3 years 
out. But you may be right about the law thing. Let me just say 
why I think this is fair and important. A basic principle we 
are trying to underscore in financial reform is to say that we 
are going to create a system in the future where taxpayers are 
not exposed to the risk of loss if the Government has to act to 
put out a financial fire, and we want to make sure that the 
industry that benefits from those actions is bearing the costs 
of solving the crisis.
    We have proposed that in financial reform. We want to make 
sure that you are going to have a system that can put these 
large institutions through something like bankruptcy, and to 
make sure as that happens taxpayers are not exposed to any risk 
of loss.
    So we thought it was very important consistent with that 
principle, building on the model the FDIC uses now, to try to 
make sure that the large institutions that benefited the most 
are bearing the costs of the crisis and that we do so in a way 
that can help address this broad ``too big to fail'' problem by 
putting a fee on leverage and on risk. And we think we can 
begin that process now without putting at risk the broad 
progress we have achieved in trying to stabilize the system and 
bring down borrowing costs.
    Senator Gregg. Yes, but first off, the law is pretty 
specific, and I understand you are not familiar with it, but it 
is Section 134. It says the recoupment exercise, the President 
shall submit a legislative proposal that recoups from the 
financial industry an amount equal to the shortfalls in order 
to ensure that the relief program does not add to the deficit 
or to national debt. That is supposed to be submitted 5 years 
from now.
    Secretary Geithner. Right. I apologize about the 5-year 
thing, but I think it is important to remind people of that 
obligation. We are trying to meet that obligation. We are doing 
this a little sooner than we needed to.
    Senator Gregg. Yes, but there may not 5 years from now be 
anything to recoup. In fact, we may actually have a positive 
cash-flow. So that is why we put it out 5 years.
    Secretary Geithner. That would be great, but----
    Senator Gregg. So are we going to return this tax if we 
have a positive cash-flow?
    Secretary Geithner. Again, we think that there is still 
significant risk of loss, and we need people to understand that 
taxpayers are not going to bear a penny of that.
    Senator Gregg. Well, I appreciate that, but right now the 
people that you are asking to pay for it have for the most part 
paid their money back with interest. If you really are 
assessing this against significant potential for loss, it 
should be assessed against the auto industry, right?
    Secretary Geithner. Well, I do not think there is a fair 
way to do this. It is important for people to recognize--and I 
know you do--that the large institutions got enormous benefits 
from this not captured by the return to the taxpayer in 
dividends and warrants. And the costs of this crisis go well 
beyond the financial accounting costs that you see reflected in 
CBO estimates of losses. And so there is just a basic principle 
of fairness and fiscal responsibility to underpin what you 
helped write into law to say taxpayers should not be exposed to 
loss. We proposed what we think is a fair way to do that.
    Senator Gregg. Well, are you setting a precedent now that 
every time we have a recession of significant proportions that 
basically there will be a special tax assessed against entities 
which may have had a major part in playing the--in creating the 
recession after those entities have already repaid the debts 
that were used to stabilize the system with interest?
    Secretary Geithner. I think we are creating a different 
precedent. Again, this is modeled on what has existed for a 
long time for banks across the country under the FDIC----
    Senator Gregg. Yes, but they have an insurance fund. This 
is not going into some sort of insurance----
    Secretary Geithner. No, but even beyond that, the way that 
law works is if the FDIC has to take action to protect the 
stability of the system--or it has to recoup those costs in the 
form of a fee on institutions, so the precedent we are 
establishing I think is a good precedent, and it is a good 
precedent for incentives and behavior to make sure that people 
understand that the big institutions that benefit the most will 
bear the costs of future crises in some ways proportional to 
their benefits and their size.
    Senator Gregg. Well if that is true, then the automobile 
companies should be included in your tax.
    Secretary Geithner. I understand that perspective and we 
are going to work very hard to make sure that we recoup as much 
of that loss as possible from what we had to do in the auto 
industry, again building on the actions that President Bush 
took in that context.
    There are different ways to cut this. You know, you could 
have done it much, much more broadly. You could have done it 
narrowly. And we would like to work with the Congress on the 
best design. We have made what I think is a very acceptable 
proposal but we know there is going to be different views on 
that.
    Senator Gregg. Thank you. I see Senator Sessions just 
arrived.
    Chairman Conrad. Senator Sessions.
    Senator Sessions. Did I disappoint you?
    Chairman Conrad. Yes.
    [Laughter.]
    Chairman Conrad. You ask an honest question. But that is 
fine. We are always glad to have----
    Senator Sessions. I was in the Judiciary Committee.
    I am sorry, Mr. Secretary, I could not be here. We just 
have a lot of big issues. I would just ask a few things.
    We are on track, according to CBO, and I do not think you 
would argue with it, to triple the public debt in 10 years. And 
their score is to show that interest on the debt would go from 
$187billion in 1 year--I think last year--to $800 billion year 
in 1 year in 2019. I believe you have been quoted, so many 
have, as saying that is an unsustainable path. Would you 
maintain that? Is that your view?
    Secretary Geithner. I agree completely. I just would make 
one point of fact, which is that in January 2009, CBO also 
projected on reasonable assumptions about policy that we were 
on a path to double and triple the national debt.
    Now we are not consigned to that future. It is our 
responsibility to prevent that from happening. And that 
requires us to work together to try to make sure we are doing 
things that will bring those down. And that is within our 
capacity to present.
    But the largest part of that projected increase was baked 
into our fiscal future because of the choices made over the 
previous 10 years, 8 years, because of the damage of the 
recession.
    Senator Sessions. Well, at some point you cannot just 
borrow your way out of a recession. If it is such a great idea, 
why didn't we borrow three times as much?
    But let me ask you, a man told me at a town hall meeting in 
Evergreen, as my daddy says, you cannot borrow your way out of 
debt.
    Secretary Geithner. I think that is well said and I agree 
with that.
    Senator Sessions. Now the President's budget projects that 
the debt held by the public is growing, as I understand it. And 
would you explain to us what it is that the Europeans have on 
their rule that debt should not exceed 60 percent of GDP? And 
how do they enforce that? And what is their view about that?
    Secretary Geithner. You are right about that, and it is a 
little uncertain how good their enforcement mechanisms are 
because I think we'd recognize like they do, they'd recognize 
like we do, which is ultimately it is about political will and 
we need to find that will together to try to figure out how we 
prevent that.
    But I am glad you cited that because we have said very 
clearly in this budget, and we said in the last budget, that 
our economic strength as a country depends on showing a path to 
get those deficits down to the level where our debt burden is 
no longer growing and it stabilizes at an effective level.
    Now we have proposed policies that take us a long way to 
that goal, not far enough in part because we inherited a very 
large structural deficit. But you are right to underscore the 
fact that the basic test of policy and obligation of government 
is to make sure we are showing a path that the deficits are low 
enough so that our debt burden is no longer growing and 
stabilizes at an acceptable level.
    Again, this is something we can do. We have enormous 
benefit strengths they do not have.
    Senator Sessions. I just had--I do not want to keep our 
colleagues a lot longer. But the fact is your budget does not 
do anything about it. This is the course your budget has put us 
on. And it seems to me, according to our calculations--well, I 
guess CBO's numbers--that the debt held by the public will 
exceed 60 percent of GDP this year and begin approaching 90 
percent of GDP by 2020. That is 10 years from now.
    Secretary Geithner. I think we can avoid that and I think 
we need to work to avoid that outcome. And I think that is 
within our capacity to do.
    Senator Sessions. Well, my view is that we all have spent 
too much. But I do believe the President has got to seriously 
talk about it. He made reference to it in the State of the 
Union. But to me it should have been a core part of his entire 
address, to alert the American people that changes are going to 
have to occur and they are not going to be pleasant for 
everybody who is used to getting so much money.
    I have to be critical of it. I think it was not 
sufficiently realistic--and I think if they are told that we 
are here, we have got to change this trajectory, and it is 
going to require us to do these things, and if we do them we 
can leave our country a healthy place for our children and 
grandchildren, there would be political support for it. I have 
not seen that talk yet.
    Secretary Geithner. I think that is well said and I agree 
with that, and I know the President does, too. But it is 
important to recognize also that to get there we need an 
economy that is growing. We need a sustainable recovery. We 
need to make sure Americans are more confident they are going 
to have a job and earnings are going to grow in the future.
    That is critical to everything we need to do to restore the 
damage caused to our long-term fiscal health. So I would just 
say, as you recognized, and you said it very well, about the 
importance of dealing with those long-term fiscal perils, there 
is no path to that without starting with making sure this 
economy is growing again and we have repaired the damage----
    SenatorSessions. I just would challenge one thing. There 
seems to be an assumption here, and the President has said it--
perhaps you have--that we know we have got a debt problem. We 
will worry about that next year. Right now we have got a 
recession.
    I was with a German official recently and they have not 
gone into this much debt and they are worried about other 
European nations such as the Brits, even, as I have heard them 
explain.
    Secretary Geithner. Actually, the Germans are actually 
doing a lot of very substantial government support for their 
economy now. So in many ways, they are doing what you would 
expect. Now they are going to do it differently.
    But I think you are exactly right. You are not going to 
make recovery sustainable, people confident in recovery, unless 
they are confident we are going to be able to move to bring 
them down. But you cannot solve the wreckage problem and the 
growth problem today by trying to focus right now on those 
long-term things.
    Again, we have proposed bringing down that deficit from 
over 10 percent of GDP to below 4 percent of GDP in a 
relatively short period of time. And the measures we have 
proposed just for next year would reduce it by 2 percentage 
points of GDP. And we have been very honest in our budget to 
say that we get it below four, but that is not far enough.
    So I agree with much of what you said. I would just 
underscore again----
    Senator Sessions. Well, the Europeans believe it ought to 
be below three, don't they?
    Secretary Geithner. Oh no, we say in the budget also for an 
economy--we have different economies.
    Senator Sessions. I mean, that is their rule.
    Secretary Geithner. Yes, for an economy like ours, we are 
very similar--we are saying to be sustainable over time, the 
deficits need to be in the range of three. We get them, again, 
below four.
    Senator Sessions. It is not very comforting in 10 years 
when we are--well, we could talk about this more, but I will 
not belabor it.
    Mr. Chairman, thank you and I look forward to working with 
you as we strive to figure a way to do better.
    Chairman Conrad. I thank the Senator. I thank him for his 
courtesy, as well.
    And I want to thank the Secretary for being here and, once 
again, at our invitation appearing before the Committee. I 
think you could hear around the table concerns about--
especially concerns about the long term, concerns that I shared 
again this morning, as did the ranking member, as did members 
around this table. And certainly about the credit issues, which 
again when I think the history of this period is written, you 
will fare very well for what you have done in this first year, 
responding to a crisis that threatened a global financial 
collapse.
    I will never forget, as long as I live, being with the 
former Secretary and we were in a conference room over in the 
Capitol, being asked to come up with a recovery plan. And this 
was all night, I think it was all night on a Friday night, 
perhaps it was all night Saturday. I know I was here virtually 
all night both of those nights.
    And I will never forget, as long as I live, the stream of 
information that was coming in to us through the Secretary, 
your predecessor, with respect to what was happening to 
financial institutions around the world, major institutions on 
the brink of failure in Germany and the German government 
moving to rescue them. Major institutions in Ireland, in 
England, in other European countries on the brink and their 
governments rushing to rescue them with an understanding that 
we all had to act. And we had to act together to prevent a 
collapse which could have taken us down a road far more severe 
than anything we have ever seen before, matching the Great 
Depression of the 1930's.
    I believe we were perilously close to that. I believe the 
turnaround is really quite remarkable. That the credit spreads 
have now gone back to normal, that is amazing in 1 year. That 
we have gone from a negative 6 percent growth to a positive 5.7 
percent in 1 year. The job losses have gone from 700,000 a 
month to 60,000 a month. That is a remarkable improvement.
    But it is also true, we have got more to do. In the short 
term, we have got to strengthen this recovery. In the longer 
term, we have got to pivot and we have got to deal with this 
debt threat.
    And I am very hopeful that this commission approach will 
work. After all, Senator Gregg and I worked 2 years to try to 
convince our colleagues. We are delighted 53 of them, a 
majority, voted with us on that matter. But 53 is not 60, and 
it requires 60.
    So now perhaps we will have another vote on that. But the 
President has indicated if a statutory commission is not put in 
place, he is prepared to put in place a commission by his 
executive order. And you have indicated that he will consult 
and you will consult with Republican leaders on how that is 
formulated.
    I appreciate that. I think it is critically important 
because if the Republicans are unwilling to participate, then 
we have got to find another way.
    And I must say, I was disappointed that seven of our 
colleagues on that side of the aisle, who were original 
cosponsors of the Conrad-Gregg proposal, when the roll was 
called, voted against the proposal that they themselves 
cosponsored. You know, let us be frank about everybody's 
responsibility here. Let us be frank about everybody's 
responsibility here.
    And the responsibility to get out of this ditch is not the 
administration's alone. It is on both sides of this aisle. It 
is on both sides of this aisle.
    Again, I thank the Secretary for his leadership, for 
dealing with the extraordinary pressures that are on him and on 
this staff and on this administration and on this Congress and 
on this country. And we have got to work together to dig out.
    Senator Gregg and I, I think, have demonstrated that we are 
prepared to do that. Mr. Secretary, I think you have 
demonstrated that you are, as well.
    We thank you. The hearing will stand in adjournment.
    Secretary Geithner. Thank you, Mr. Chairman.
    [Whereupon, at 12:09 p.m., the committee was adjourned.]
    QUESTIONS FOR THE RECORD

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 CRISIS AND AFTERMATH: THE ECONOMIC OUTLOOK AND RISKS FOR THE FEDERAL 
                            BUDGET AND DEBT

                              ----------                              


                       TUESDAY, FEBRUARY 9, 2010

                                       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, Cardin, Whitehouse, Merkley, 
Grassley, Sessions, and Graham.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Cheri Reidy, Minority Staff Director.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. Welcome. The hearing will come to order.
    First of all, I appreciate very much our witnesses being 
here with conditions as they are, and I appreciate colleagues 
who are here and who are on their way. I especially want to 
thank Senator Sessions for being here to represent the 
Republican side of the aisle. Senator Gregg informed us that he 
has not been able to get back to Washington at this moment and 
hopes to be with us soon. But airports, as you know, have been 
closed, so anybody that was out of town has had a difficult 
time getting back.
    I do not know whether the votes scheduled this afternoon 
for the Senate are actually going to come off for not. For 
those who are thinking about tomorrow, we have a hearing 
scheduled for tomorrow. We are going to make a decision about 
that very soon because we have witnesses lined up. One thing we 
are considering is moving tomorrow's hearing to the next day in 
light of the threat of additional snow this afternoon and 
through the evening and into tomorrow. If we do get another 10 
or 12 inches, it would probably be very difficult for witnesses 
to get here. I am fortunate. I live about ten blocks away, so I 
can always get here.
    I want to again thank the witnesses very much. This is an 
important hearing on the economic outlook and risks for the 
Federal budget and debt. We are joined by an extremely 
distinguished panel of witnesses:
    Dr. Carmen Reinhart, Professor of Economics and Director of 
the Center for International Economics at the University of 
Maryland. Welcome. Good to have you here.
    Dr. Simon Johnson, the Ronald A. Kurt (1954) Professor of 
Entrepreneurship at MIT's Sloan School of Management, and 
Senior Fellow at the Peterson Institute for International 
Economics. Simon has appeared before this Committee in the 
past. We have always enjoyed his commentary and his testimony.
    And Dr. Donald Marron, a Visiting Professor at Georgetown's 
Public Policy Institute and the former Acting Director of the 
Congressional Budget Office. Always good to have you back 
before the Committee as well. Dr. Marron is somebody who has 
served in a very distinguished way at the Congressional Budget 
Office, and we have always been indebted to him for his service 
there.
    This is Dr. Reinhart's first appearance before the Budget 
Committee, so we especially want to make her feel at home. We 
look forward to her testimony, and Dr. Johnson and Dr. Marron 
are, as I have said, both well known here before the Committee.
    As the title of our hearing suggests, we are going to focus 
today on the Nation's economic outlook and the risks we are 
facing that could affect the outlook, the Federal budget, and 
the Nation's debt.
    I would like to begin with just a brief review of our 
economic situation. I think we all know that, when President 
Obama took office, we were in the midst of the worst recession 
since the Great Depression. The President moved quickly to 
followup on the steps that had been taken by the previous 
administration to avert an even sharper economic decline, and 
those policies, I think, are clearly working.
    The actions taken by the Federal Government over the last 
year have clearly helped pull us back from the brink. We have 
seen a dramatic turnaround in economic growth. Economic growth 
in the first quarter of last year was a negative 6.4 percent. 
By the last quarter of last year, it had improved to a positive 
5.7-percent growth.

[GRAPHIC] [TIFF OMITTED] T8153.121


    Now, I think it is very important to say none of us 
anticipates that that level of economic growth will continue. 
Many of us see a more tepid level going forward.
    We have also seen a steady improvement in the jobs picture. 
According to the revised estimates we received last Friday, in 
January of last year, the economy was losing more than 800,000 
private-sector jobs in 1 month. Now, that is up from a previous 
estimate of about 700,000 jobs lost. So looking back, we can 
see in January of last year the job loss was running about 
800,000 a month. By January of this year, the economy was 
losing about 12,000 jobs in a month--a dramatic improvement, 
but still short of where we need to go in terms of dramatically 
reducing unemployment.

[GRAPHIC] [TIFF OMITTED] T8153.122


    And I must say all of these numbers, to those who are 
suffering the consequences of a weakened economy, are just 
numbers on a page. If you are someone who is unemployed or 
cannot find sufficient work or are underemployed, these numbers 
are cold comfort to you. It is important to recognize that 
things are improving. At least the free fall that we were in 
has been stabilized, and we are starting to move back in the 
right direction.
    According to estimates we received last Friday, the 
unemployment rate did fall to 9.7 percent, but that is still 
far too high. Last year's recovery package is still providing 
stimulus. We know that its impact on economic growth likely 
peaked during the third quarter of 2009. According to an 
estimate from Goldman Sachs, the recovery package provided 
about 3.3 percent of increase in real GDP at its peak during 
the third quarter. Following the third quarter, the 
contributions to growth of last year's recovery package began 
to diminish.

[GRAPHIC] [TIFF OMITTED] T8153.123


[GRAPHIC] [TIFF OMITTED] T8153.124


    Given the high unemployment rate, the continuing concerns 
about the economy, and the fact that the impact of the recovery 
package has started to wane, I think it is appropriate for us 
to be considering additional job creation measures at this 
time. So I would like to hear from our witnesses their views on 
the benefits of enacting such measures at this time.
    The economic downturn and the Federal response to it has 
contributed significantly to the worsening of our budget 
outlook. Now, this is the other side of the picture. In the 
short term, measures that were taken to stabilize the economy 
and stop a precipitous collapse have been effective. But we 
know there is a price to be paid, and the price to be paid is 
increases to our deficits and debt.
    This chart depicts the projected deficit under President 
Obama's proposed budget over the next 10 years. It shows the 
deficit coming down from a high of $1.56 trillion in 2010 to 
$706 billion in 2014, and then slowly resuming its climb back 
to $1 trillion in 2020.

[GRAPHIC] [TIFF OMITTED] T8153.125


    I have said before that I can understand increases in 
deficits and debt in the short term to deal with an economic 
weakness and to prevent an economic collapse. But I am 
increasingly concerned about the out-years because we are 
already on an unsustainable path, and I am concerned the 
President's budget does not focus sufficiently on our long-term 
need to deal with the debt threat.
    The Nation's debt outlook is even worse, particularly over 
the long term. The fact is we are on a completely unsustainable 
course long term. I personally believe we need a two-pronged 
strategy going forward--one for the near term, one for the long 
term. In the near term, I believe we must emphasize policies 
that encourage job creation in the private sector. But for the 
long term, we must pivot to controlling our debt. The economic 
security of our Nation depends on it.
    With that, I will turn to Senator Sessions for any opening 
remarks he might want to make, and then we will go to our 
witnesses, and then we will have a chance for questions of the 
panel. Again, Senator Sessions, thank you so much for being 
here. It speaks very well of a man from Alabama to be here with 
the weather conditions we are currently experiencing in this 
city. In North Dakota, this is no big deal, but I am sure in 
Alabama this would be an all-out emergency.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. It was fun for me to be out a little bit 
Sunday, to walk around and see the beauty of the snow. It is 
really a stunning sight. But it does cause difficulties for 
travel.
    Chairman Conrad. Well, if you like the beauty of this snow, 
I would like to invite you to North Dakota.
    [Laughter.]
    Chairman Conrad. Anytime in January or February of next 
year. In fact, maybe spend all of January and February.
    Senator Sessions. Maybe we can invite you south. That would 
be a better idea.
    I thank all of you for coming, and I look forward to your 
discussion. I frankly do not know how well our actions worked 
after the collapse in the financial markets. Those who 
supported it, promoted it, funded it, ran it, all tell us if we 
had not done it, we would be so much worse than we are today. 
But forgive me if I am not sold. I just believe that a lot of 
things had to be done, and I have supported a number of things, 
but the fundamental actions that we took were troubling to me.
    The Fed had to act. We know that. And the Congress has some 
things that we needed to do. But I am troubled by it all. The 
TARP, $700 billion, had to pass before the Asian markets opened 
the next morning, they originally told us. And then when 
President Bush had left office, he had not spent his $350 
billion half of it yet. And one man was allocating $700 
billion. So forgive me if I am uneasy about that.
    That $700 billion was distributed in ways directly contrary 
to what Congress was told. We were told it was to buy toxic 
assets, and within a week they were buying stock in companies, 
insurance companies, then buying automobile companies. So 
forgive me if I am not happy and the American people are not 
happy.
    Second, the stimulus package, the $787 billion, it is now 
840 because we are spending more under the commitments made 
than we intended when we passed it. I think it has produced 
little. In fact, I think it is one of the great tragedies in 
the history of the country that we have gotten so little out of 
such an incredibly large expenditure, the largest single 
expenditure in American history. I do not think it has gone 
very well. I do not think it has created the jobs they 
projected it would create, even.
    The bill that some of us supported that Senator Thune and 
Senator McCain offered for half the cost, according to 
Christina Romer's own analysis, would have created twice as 
many jobs and half the debt impact on our country.
    So we have got some serious problems. One of the things 
that happens with budgets that, Mr. Marron, as Director CBO at 
the time you were over there--you might be aware of this; most 
Americans are not--that the only year that really counts is the 
year you are in. And the year we are in, for example, has a 
gimmick if the President's job stimulus package were passed, 
like the one similar to the House version that he praised in 
the State of the Union, it has $100 billion more in ten. He is 
counting $170 billion in the next 10 years, but he is not 
counting the 100 in this year. It is a violation of last year's 
budget. But we will have to have a vote sufficient to raise the 
spending level through emergency designation, I guess, to spend 
that money this year.
    So I guess what I am saying is what I am hearing from the 
incumbent administration that concerns me is that , it is 
always next year. Next year. We have got to do all this this 
year. We are not going to worry about how much debt is being 
run up this year. We will worry about it next year. And the 
chart you put up, Mr. Chairman, is, however, the budget that 
they are citing. So we have got to reduce the budget.
    Now, I offered legislation and have 16 or 17 Democrats who 
support it which says let us take that budget we passed last 
year and let us follow those numbers, which were basically 1- 
and 2-percent increases over the next 5 years. But we did not 
get the 60 votes necessary to pass it. But that would have been 
a real step, I think, that would help us send a message to the 
whole world and to our own American people that we are going to 
contain discretionary spending, at least for a while, and then 
we absolutely, as, Mr. Chairman, you have led on this, have to 
discuss how we can reduce our entitlement spendings, and all 
spending, really. But we have got to act. That is all I am 
saying.
    I look forward to hearing from you. The American people are 
unhappy with us. They are not happy with us. Unemployment is 
high. The numbers were not good this last week, another 20,000 
increase in unemployment. And I think it takes about an 
800,000-increase to begin to reduce the total unemployment 
numbers. So I am really worried about unemployment. We want to 
have growth, and hopefully we can.
    Mr. Chairman, thank you. I am sorry Senator Gregg is not 
here. I know he has got a difficulty, but I know you and he 
have worked on a number of issues that are important, and I 
hope to be able to work with you, too.
    Chairman Conrad. Thank you, Senator. Again, thank you very 
much for being here. Now we will turn to the witnesses. Dr. 
Carmen Reinhart, Professor of Economics and Director of the 
Center for International Economics at the University of 
Maryland. Very timely for you to be here given the developments 
on the international front. Please proceed with your testimony. 
Then we will go to Dr. Johnson and Dr. Marron. Dr. Reinhart.

STATEMENT OF CARMEN M. REINHART, PH.D. PROFESSOR OF ECONOMICS, 
AND DIRECTOR, CENTER FOR INTERNATIONAL ECONOMICS UNIVERSITY OF 
                            MARYLAND

    Ms. Reinhart. Thank your, Chairman Conrad and other members 
of the Committee, for the opportunity to comment on the U.S. 
economy and the risks for the budget and debt. I am a professor 
in the Department of Economics at the University of Maryland. I 
suspect that I was invited here today because, for more than a 
decade, my research has focused on various types of financial 
crises, and that includes their fiscal implications and other 
economic consequences. One of the main lessons emerging from 
this work is that across countries and over time, severe 
financial crises follow a similar pattern.
    In a paper written over a year ago with my coauthor Ken 
Rogoff, we examined the depth and duration of the slump that 
invariably follows financial crises. The recessions following 
severe post-World War II crises tended to be protracted 
affairs. Asset market collapses were deep and prolonged. On a 
peak-to-trough basis, real housing prices declined, on adviser, 
35 percent, and this decline stretched out over 6 years. Equity 
prices collapsed on an average of 55 percent; the recovery from 
the bottom was quicker. To put it in context, in the present 
downturn, here in the United States real housing prices have 
already fallen 36 percent from their February 2006 peak.
    Not surprisingly, banking crises are associated with 
profound declines in output and employment. The unemployment 
rate rises an average of 7 percentage points over the down 
phase of the cycle, which lasts an average of 4 years. We are 
following this track: the U.S. unemployment rate bottomed at 
4.4 percent in December 2006, about 6 months before the crisis 
broke; and by its recent peak level in October of 2009, the 
unemployment rose 5.7 percentage points.
    Historically, these conditions produced a marked 
deterioration in budget deficits. Correspondingly, the real 
value of Government debt soars after financial crises of this 
order of magnitude, rising an average of 86 percent in the 
major post-World War II episodes. The main cause of the debt 
explosion is not the widely cited costs of bailing out the 
banking system. Nor is it the fiscal stimulus, as many 
countries in our sample did not implement such policies. In 
fact, the critical factor is the collapse in tax revenues that 
follows in the wake of deep and prolonged economic contraction. 
Our estimates of the rise in Government debt are likely to be 
conservative--the 86 percent--as they do not include increases 
in Government guarantees, which also soar.
    Government debt has been soaring in the wake of the recent 
global maelstrom, especially in the epicenter countries. In 
related work with Rogoff I completed only a few weeks ago, we 
calculated the increase in inflation-adjusted public debt that 
has occurred since 2007. And for five countries with systemic 
financial crises--which include the United States and the 
United Kingdom--average debt levels are up by about 75 percent. 
Even in countries that have not had a major financial crisis, 
debt rose an average of 20 percent in real terms between 2007 
and 2009.
    So our main focus is on the longer-term macroeconomic 
implications of much higher public and external debt. We 
examine in this work the experience of 44 countries spanning up 
to two centuries of data on central government debt, inflation, 
and growth. Our main finding is that across both advanced 
countries and emerging markets, high debt-to-GDP levels, debt 
levels, gross debt above 90 percent, are associated with 
notably lower growth outcomes. Above 90 percent, median growth 
rates fall by 1 percent; average growth rates fall considerably 
more. In addition, for emerging markets, there appears to be a 
tighter threshold for external debt, a lower threshold, so that 
when external debt reaches 60 percent of GDP, annual growth 
declines by about 2 percent, and for higher levels of debt, 
growth is cut in about in half. Our international and 
historical shows that seldom do countries simply grow their way 
out of their debt burdens.
    There are also thresholds in debt. Why 90 percent? While 
the exact mechanism is not certain, we presume that at some 
point, interest rate premia react to unchecked deficits, 
forcing governments to tighten fiscal policy. Higher taxes have 
an especially deleterious effect on growth. We suspect that 
growth also slows as governments turn to financial repression 
to place debts at sub-market interest rates.
    Of course, there are other vulnerabilities associated with 
debt buildups that depend on the composition of the debt 
itself. One common mistake as debts soar is for governments to 
``play the yield curve,'' shifting to cheaper short-term debt 
to economize on interest costs. Unfortunately, a government 
with massive short-term debts to roll over is ill positioned to 
adjust if rates spike or market confidence fades.
    Even aside from high and rising levels of public debt, many 
advanced countries, particularly in Europe, right now are 
saddled with extraordinarily high levels of external debt, or 
debt issued abroad by both the government and private entities. 
In the case of Europe, the advanced country average exceeds 200 
percent of GDP. In private debts, U.S. debts exceed 300 
percent, and they are at their highest level since 1916 where 
the historical statistics of the United States began to record 
this data. Current high private domestic and external debt 
burdens would also seem to be an important vulnerability to 
monitor. Downgrades, ratings downgrades, usually follow debt.
    Given these risks of higher government debt, how quickly 
should governments exit from fiscal stimulus? This is not an 
easy task, especially given weak employment, here in the United 
States and elsewhere. In light of the likelihood of continued 
weak consumption in the U.S. and Europe, rapid withdrawal of 
stimulus could easily tilt the economy back into recession. To 
be sure, this is not the time to exit. It is, however, the time 
to lay out a credible plan for a future exit. The sooner our 
political leadership reconciles itself to accepting adjustment, 
the lower the risks of truly paralyzing debt problems down the 
road, the likes of which we are seeing in Europe right now. 
Although most governments still enjoy strong access to 
financial markets at very low interest rates, market discipline 
can come without warning. Countries that have not laid the 
groundwork for adjustment will regret it.
    This time is not different. Thank you.
    [The prepared statement of Ms. Reinhart follows:]

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    [GRAPHIC] [TIFF OMITTED] T8153.143
    

    Chairman Conrad. Thank you for your excellent testimony.
    We go to Dr. Johnson next and then Dr. Marron, and then we 
will open it up to questions. Dr. Johnson.

   STATEMENT OF SIMON JOHNSON, PH.D., RONALD A. KURTZ (1954) 
   PROFESSOR OF ENTREPRENEURSHIP, MASSACHUSETTS INSTITUTE OF 
  TECHNOLOGY, SLOAN SCHOOL OF MANAGEMENT, AND SENIOR FELLOW, 
         PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

    Mr. Johnson. Thank you, Senator.
    About a year ago, I testified before this Committee, and I 
think our discussion together at that point came to the 
conclusion that we faced a pretty tough year, and I think that 
that discussion turned out to be exactly right.
    My recollection is that we discussed contraction in the 
global economy for the first time since World War II, roughly 
around a 1-percent decline on a year-on-year basis. The IMF's 
latest number for 2009 is a minus 0.8 decline, so I think we 
were exactly in the right place there.
    Now, of course, at this stage we should be discussing a 
recovery. We have a sharp decline. The post-war experience for 
the global economy and for this economy is you have a fairly 
rapid recovery. And the numbers that you showed us for the 
third and fourth quarters for last year, of course, are 
encouraging in that direction.
    But I am worried, again, about the dynamics that we face 
during this year. I think there is a great deal of volatility 
ahead, some of which is domestic for the reasons that Professor 
Reinhart just talked about; some of which has a global origin 
that I can expand on in a moment. And I think that while the 
headline numbers for this year, the year-on-year average growth 
numbers, will indicate recovery, a modest recovery, if you look 
at the fourth quarter-on-fourth quarter numbers, so look at the 
dynamic within 2010, you are going to see something quite 
different.
    In particular, in the second half of this year, I think 
there is going to be a slowdown. I am not suggesting at this 
point that we will have a double-dip recession. That would 
imply an actual decline in output in the second half. But I do 
think that the pace of growth will slow. I think the pace at 
which jobs come back will slow. And I think this is a major 
concern for the budget and for job creation, as you mentioned 
at the beginning, Senator Conrad.
    My overall projection on the fourth quarter-on-fourth 
quarter basis, which is, I would suggest, the number we might 
focus on today, is that the global economy will grow around 3 
percent. Now, traditionally, that is where the IMF would draw a 
line on global recession. They have moved the goalpost, given 
what we have seen in the past 2 years, so that now they will 
call it global recession at perhaps a 1-percent rate. But 3-
percent global is fairly slow, and this rate would be mostly 
held up by what is happening emerging markets. And I think if 
we have time we can probe to what extent that is sustainable 
also beyond 2010.
    Now, I think the weaknesses in the U.S. economy are well 
known to you, and Professor Reinhart already mentioned the main 
points. Let me just flag for you that the consumer sector is 
weak. Lower-income households in particular have a substantial 
debt overhang. Housing prices seem soft in most parts of the 
world, and asset prices, based on particularly the global 
picture that I am painting, will remain volatile. So households 
do not feel their wealth has gone back up matching their 
recovery in stock prices, for example.
    Residential investment is almost certainly not going to 
lead this recovery. Business investment I think may be 
stronger. There are issues of credit availability for the small 
business sector, which I imagine we will talk about later, but 
in any case, this component of final demand is not big enough 
to pull the U.S. back to the kinds of growth rates we want.
    Now, in addition to all of that, net exports, which has 
been a brighter part of the picture in the United States over 
the past 12 months, is likely not to be so strong over the next 
12 months for the reasons that I will talk about in a moment.
    The fiscal stimulus, as you said, continues, but its impact 
on growth weakens. I agree with the Goldman Sachs analysis on 
that. And, of course, we should expect the Federal Reserve to 
withdraw its support for mortgage-backed securities as we go 
into the spring. Despite the weakness of the economy, despite 
the continuing high unemployment, this is what the Fed, I 
think, is very clearly indicating, both directly and 
indirectly. So all this adds up on domestic grounds to a 
difficult second half.
    But that is not the worst part of the picture. The worst 
part of the picture is, I am afraid, that a serious crisis is 
brewing in Western Europe where there are many people who 
actually claim this time is different, and I agree--well, I 
would apply Professor Reinhart's book and conclusions to 
suggest that it is actually not that different. Greece has a 
serious sovereign debt problem. These issues are spreading also 
to Portugal and Spain, without doubt. There may be implications 
for Ireland and even Italy.
    There is a great reluctance on the part of the stronger 
European countries to help the weaker European countries. We 
can discuss the details if you would like, but basically, they 
do not have an institutional mechanism in place. They are not 
good at creating one quickly. They will not, in my assessment, 
bring in the International Monetary Fund. And I was, as you 
know, chief economist at the IMF through August of 2008, and I 
am very happy to expand on both the procedures and the politics 
behind that assessment.
    But if you put all of this together, you are looking at a 
substantial shock to government credit, which you will see in 
credit ratings, you will see in interest rates, you will see in 
credit default swap spreads. And the big unknown in this 
picture is what will happen to the financial sector.
    Now, we obviously have still too-big-to-fail banks. In 
fact, I think we can reasonably argue that certainly as we wait 
for financial reform to come through, this problem has not been 
addressed. If anything, it has gotten worse. The Europeans have 
this problem on a much larger scale, by the way. Their big 
banks are much bigger relative to their economies, and some of 
these very big banks are in quite small economies that cannot, 
in my assessment, sustain from a fiscal point of view an 
additional big financial shock.
    So Switzerland, for example, has two massive banks 
currently with assets and liabilities roughly 6 or 7 times the 
GDP of Switzerland, looking at the global picture. We can argue 
about the right metric there. But if the bank fails, it is the 
size of the bank's global balance sheet relative to your 
domestic fiscal position.
    The situation in the United Kingdom is not much better. 
There is a massive contingent liability on their balance 
sheets, as, I would argue, there is on our balance sheet. And I 
think Senator Sessions was exactly right to stress the TARP 
experience where you were asked to provide money to buy toxic 
assets and then it turned out to buy shares in banks and other 
companies. I do not think that is off the table now in Europe, 
and I fear that it will come back to haunt us and come back to 
you as a budget matter in the United States. That contingent 
liability is very big. I would say it is at least 40 percentage 
points of GDP based on our recent experience. If you follow 
Professor Reinhart's book carefully, I think you would even say 
it is larger than that. We are still carrying that liability; 
so are the Europeans.
    Now, how this will spread through the financial system is 
very hard to say. My current estimate is that some of it will 
spread through the credit default swap market, which is, again, 
unreformed, completely opaque, and actually has not been 
addressed. The issues of derivatives and off-balance-sheet 
liabilities have not been addressed since the crisis of 1999 
when Long Term Capital Management failed. We are a long way 
behind this, and this all has fiscal implications.
    And, in conclusion, I would like to stress and reinforce 
what you said, Senator, and what Senator Sessions said and what 
Professor Reinhart said, about the necessity of a medium-term 
framework. You do not want, I think, to have fiscal austerity 
now. That would not be the right measure. If Europe swings into 
fiscal austerity because of their inability to manage their way 
through this crisis, that would be bad for growth. The euro 
will weaken substantially anyway, in my assessment. That is 
part of what is going to hurt our next exports. They and we 
need an exit strategy, a medium-term framework that tells you 
how entitlements are going to be handled over a 5-, 10-, 15-
year framework and what the tax base is and what the gap is 
between those. And, of course, Senator Conrad, when you said 
that the debt has to be controlled, you are absolutely right. I 
would just add to that the foreign dimension, because we have 
not just a large domestic debt, which, of course, Japan 
sustained for a long time and now it really catches up with 
them. That is 20 years of struggling with that debt. Most of 
their debt is held domestically. An increasing amount or a 
large amount of our debt is held by foreigners, and this has, I 
think, both economic and geopolitical consequences.
    Thank you.
    [The prepared statement of Mr. Johnson follows:]

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    Chairman Conrad. Thank you very much for your excellent 
testimony.
    Dr. Marron, welcome back. It is always good to have you 
here. Please proceed.

    STATEMENT OF DONALD MARRON, PH.D., VISITING PROFESSOR, 
               GEORGETOWN PUBLIC POLICY INSTITUTE

    Mr. Marron. Great. So thank you, Chairman Conrad and the 
members of the committee, for having me up to talk about the 
economic outlook and the fiscal situation.
    I guess on a personal note, I want to say that I have 
previously appeared before you in a professional capacity 
working for the Congress, and now I am appearing as a private 
citizen, and I must admit I find it incredibly liberating. So I 
am now free to have my opinion, so watch out for what you have 
asked for.
    [Laughter.]
    Mr. Marron. So as this committee and all its members are 
very well aware, our nation is on an unsustainable fiscal path. 
If current policies continue, we will run trillion-dollar 
deficits in the years ahead, even after the economy recovers, 
which is quite striking, and the public debt will rise faster 
than our ability to pay it. Persistent deficits and rising debt 
will undermine American prosperity, threaten beneficial social 
programs, and weaken our position in the world.
    Those threats deserve immediate attention, but as this 
committee is also well aware, our economy remains fragile. 
Payroll employment has fallen by about 8.4 million jobs since 
the start of the recession and long-term unemployment is at 
record levels. Recent data, as the Chairman mentioned, have 
provided some glimmers of hope, strong GDP in the fourth 
quarter and a decline in the unemployment rate in January, but 
our economy has a very long way to go. You thus face a very 
difficult challenge of balancing concern about current economic 
conditions with a meaningful response to our looming fiscal 
crisis, and in thinking about that balance, I just want to make 
five points.
    So the first, and this will now repeat what the Chairman 
said and what my fellow witnesses have said, we should not 
expect a rapid recovery. It is a good sign that the economy 
grew strongly in the last quarter of last year, but for a whole 
host of reasons that we have already heard discussed, I would 
not anticipate that to continue. We are on a recovery path, but 
I think the Chairman used the word tepid. I would call it 
moderate--modest, not one where we should expect rapid.
    Second is that uncertainty is actually one factor that has 
been holding the economy back. Uncertainty discourages 
investment and hiring and thereby undermines growth, right. If 
you put the shoes of someone deciding whether to make an 
investment, whether to hire someone, that is a much easier 
decision to make if you have some visibility into what the 
future will hold.
    Now, the good news is that economic uncertainty has gone 
down dramatically, that the economic environment has improved 
and is more conducive to growth. The bad news, though, is that 
policy uncertainties are very high. Senator Sessions, you 
mentioned that some of your constituents are mad with you. I 
sort of tried to talk to all the business people I know before 
I came up for this testimony to ask them what was on their 
minds and what would encourage job creation, and for better or 
for worse, a lot of them are very upset about just the 
uncertainty they face. They don't know what is happening with 
tax policy. They don't know what is happening with health care, 
in addition to what they don't know that is happening with the 
economy.
    Having worked up here in government for a long time, I 
understand why some of these uncertainties exist and are 
necessary, but I think there are opportunities to get rid of 
unnecessary uncertainties and give people some more clarity 
about what the future holds. The extreme example of that would 
be what is happening with the estate tax, which is more of a 
personal thing, but in some cases a business thing, but 
obviously there are many other examples on the tax side.
    No. 3, persistent deficits and rising debts pose a serious 
risk to long-term economic growth, and so again, as my fellow 
witnesses have said, concerns about the near-term economic 
outlook should not deter Congress from taking steps to 
strengthen our fiscal positions over the next decade. Again, 
you know, major steps toward fiscal consolidations shouldn't 
take effect immediately, right. We are not looking for cuts in 
2010 and 2011. But Congress should begin now to plan for 
deficit reduction and debt stabilization in later years. We 
need an exit strategy, and that exit strategy should include 
clear goals and a credible means for achieving them.
    President Obama outlined some steps in that direction in 
his budget, but to be honest, I feel that they fell far short 
of what is required. Indeed, under his budget, the debt would 
grow faster than the economy in every single year of the budget 
window.
    To address that concern, the President also proposed the 
creation of a fiscal commission that would be tasked with 
stabilizing the debt-to-GDP ratio in 2015 and beyond. I have 
two concerns about this proposal. First, I don't think the 
target is aggressive enough. If you took it seriously, as 
written, it would have the effect of stabilizing debt-to-GDP 
around 71 or 72 percent of GDP. That is obviously better than 
exploding and growing, but my own personal preference would be 
to see it come down to some number like 60 percent of GDP by 
the end of the budget window. And so I would like to see a 
commission's target be more aggressive.
    And then second, obviously, as you know, there are 
institutional features of the proposal that are troublesome. My 
preference would be what you, Chairman Conrad and Senator 
Gregg, have proposed, of having an actual statutory commission 
that is backed by the political legitimacy of being passed by 
the Congress, signed by the President, with all the things that 
go along with that. And I have concerns and questions about 
whether a non-statutory commission can get there.
    Obviously, what I would be looking for is something that 
has the power to obviously be paid attention to in Congress, 
something for which everything would be on the table. I am very 
troubled when I hear some people say that Social Security ought 
to be off the table, other people saying that tax revenues 
ought to be off the table. I think if we are seriously trying 
to address our fiscal concerns, you ought to let this 
commission pull on all the levers and they can judge how to 
balance them.
    Fourth, and this is a short one, just bringing the long-
term to the present day, a credible plan to reduce future 
deficits is not just about the future. If we do it well, it 
will help keep long-term interest rates low today, thus 
strengthening our current recovery.
    And then fifth and finally, in the long term, bringing our 
deficits under control will require both spending restraint and 
increased revenues. Spending restraint should receive greater 
emphasis, I think, both because spending is the primary driver 
of our long-run budget imbalances, and because higher 
government spending may slow economic growth. Given the 
government's existing commitments, however, it is unlikely that 
spending restraint alone can put our nation on a sustainable 
fiscal trajectory.
    As policymakers consider how to finance a larger 
government, they should, therefore, give special attention to 
figuring out ways to make our tax system more efficient. For 
example, think about ways to tax consumption rather than 
income. Think about ways to broaden the tax base rather than 
increase rates. And, to the extent possible, think about ways 
to tax undesirable things, like pollution, rather than 
desirable things, like working, saving, and investing.
    Thank you.
    [The prepared statement of Mr. Marron follows:]

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    Chairman Conrad. Excellent testimony, all three, just 
terrific, and I appreciate it very much.
    So let us go right to it. This committee has a special 
responsibility to our colleagues with respect to the budget, 
and it is pretty hard to find a time in our history, at least 
since this Budget Committee was formed, when budget policy can 
have such a profound effect on economic issues, economic 
growth, and all the rest.
    So, Dr. Reinhart, if you had this responsibility, what 
would be the strategy that you would pursue, short-term, long-
term, with respect to deficits and debt, with keeping the eye 
on the effect of the economy? What would you advise this 
committee to do, both short-term and long-term?
    Ms. Reinhart. Let me begin by saying that the--in my 
remarks, I highlighted that I think this is the time to lay out 
a credible plan for deficit and debt reduction, but it is not 
the time to start implementing that, and I would like to just 
elaborate on that remark, especially as it pertains to the 
experience of other episodes, including here in the United 
States, in which victory was declared prematurely and stimulus 
was withdrawn. This was the case in Japan, which has had a 
decade-long lingering crisis. It was the case in the Great 
Depression. My work with Vincent Reinhart has documented these 
episodes--
    And that risk is one that should be borne in mind and that 
is why I stress the credible path, and the credible path, I 
think, could benefit from looking also at the experience of our 
neighbor to the north, Canada, in the mid-1990's, which 
implemented a very significant debt reduction program.
    Chairman Conrad. And what was the result?
    Ms. Reinhart. The result was very--I would describe it as 
three-fold. One was they achieved their intended goals in 
bringing their deficits and their debts, the Canadian debt 
profile. That has been reflected in the risk premium. Canada's 
risk premium had risen and, in fact, was moving in tandem with 
emerging markets by the mid-1990's.
    Chairman Conrad. Higher interest rates?
    Ms. Reinhart. Higher interest rates. Higher interest rates, 
higher debt servicing costs, more volatility.
    Let me add that a second element of their program was 
also--which I highlighted briefly in my remarks--is paying a 
lot of attention to how when you have a lot of debt, how debt 
is managed and reducing their vulnerability to and reliance on 
short-term debt, and in the Canadian case, on foreign currency 
debt, which, of course, we don't have.
    Chairman Conrad. Dr. Johnson, same question to you. What 
would your advice be to this committee, short-term and long-
term?
    Mr. Johnson. Well, Senators, as I think you know, I am not 
in general a fan of fiscal stimulus. In fact, I testified 
before this committee and some other Congressional committees 
more than a year ago saying that it was only the extraordinary 
circumstances we faced due to the collapse of our credit 
system, due to the problems brought on by the reckless behavior 
of our big banks, that led me to suggest that we should at that 
point have a stimulus around $500 billion. Roughly speaking, I 
think we ended up in the same ballpark.
    I now would hold back again from further stimulus. I think 
we need to see what happens. I think within the menu that the 
Congressional Budget Office, for example, has assessed for you 
addressing employees' payroll taxes, if we come to that, may be 
an appropriate measure to consider. But I am not yet ready to 
do that.
    So in terms of the short-term, I am not advocating further 
stimulus at this time. And in terms of the longer-term, I think 
that the fiscal commission idea is an important one. I think 
Dr. Marron hit a couple of key points, including nothing being 
left off the table. And, of course, Medicare is the big item. 
Now, this is not a call for fiscal austerity immediately. 
Professor Reinhart explained why that is a bad idea. I fear 
that may happen in Europe, which will have a negative impact on 
the global economy that should be avoided, and I am calling for 
them to not do that in Europe and to find ways to help 
themselves.
    But I do think that a fiscal commission that explains to 
the holders of our debt where the trajectory is going, and 
perhaps you would argue--we can argue technically and we could 
argue politically about what will be the priorities, but 
everything should be on that table. I think that is absolutely 
critical. If you had that in place, if you had a credible 
medium-term framework in the United States now, you would have 
a lot more room for maneuver on short-term measures. In fact, I 
might even right now call for reduction in payroll taxes if we 
had the medium-term framework, but we don't. That is dangerous.
    Chairman Conrad. So you are in some ways linking the two in 
your mind. That is, it would be a lot more credible to do 
something with respect to payroll taxes to provide additional 
lift to the economy if you had some credible process in place 
to deal with the longer-term debt.
    Mr. Johnson. Absolutely. Using fiscal stimulus, as you 
know, is something that we have moved away from, actually, in 
general, in industrialized countries over the past 20 years 
because it comes with long and variable lags and it tends not 
to hit the economy exactly as you hope and when you hope. But 
there is a case for using it on a temporary basis, particularly 
if you can persuade the financial markets, which includes the 
Chinese government.
    I mean, let us be frank. If you can persuade everyone that 
your debt is not on an explosive path and you have the 
legislative or other institutional mechanisms in place to 
ensure this is not just a vague promise--the British government 
today faces a huge problem because their commitments on the 
fiscal side are, in my assessment, not credible. We don't have 
that problem yet in the United States, but you need a fiscal 
commission to really assure that going forward. If you had that 
commission, it would create a lot more room for short-term 
maneuvering.
    Chairman Conrad. Dr. Marron, same question to you. If your 
responsibility was to advise this panel short-term and long-
term, what would your advice be?
    Mr. Marron. Sure. So starting with the long-term, as I 
hinted before, what I personally personally would like to see 
is a numerical target that lays out what is it that in the 
latter part of the budget window we want to accomplish, and----
    Chairman Conrad. What do you think it should be?
    Mr. Marron. We can obviously negotiate numbers, but just to 
make up numbers that are plausible for discussion purposes, say 
something like you want to cap the growth of debts to GDP at, 
say, 70 or 72 percent in 2013----
    Senator Sessions. Mr. Chairman, could I interrupt? I am 
sorry. I see some of my students from Alabama, St. James 
School.
    Chairman Conrad. Absolutely.
    Senator Sessions. That is an excellent school in 
Montgomery. You see that lady on the front row with her red hat 
with an ``A'' on it? That is the No. 1 football team in 
America, University of Alabama. So St. James is----
    Chairman Conrad. Well, wait a minute. Wait a minute. Wait a 
minute. In North Dakota, we make that same claim.
    [Laughter.]
    Senator Sessions. You have a good, competitive team. We 
usually lose to them in the playoffs. But thank you for coming.
    Chairman Conrad. Thank you, and thanks for----
    Senator Sessions. They had a hard day in the snow, but I 
think they are probably enjoying it.
    Chairman Conrad. Thanks for acknowledging them.
    Senator Sessions. Sorry to interrupt you, Mr. Chairman.
    Chairman Conrad. No problem at all. Glad that you did.
    Dr. Marron?
    Mr. Marron. Sure. So, say, 70 percent of debt-to-GDP ratio 
in 2013 is a nominal goal, and then, as I said, to then bring 
it down through the budget window. I suggested----
    Chairman Conrad. Seventy percent by when?
    Mr. Marron. In, say, 2013, as a cap.
    Chairman Conrad. OK.
    Mr. Marron. And then 60 percent by the end of the budget 
window. Now, you may be familiar with the Pew-Peterson 
Commission on Budget Reform recently. They put out a goal of 
getting to 60 percent by 2018, so I'm being slightly less 
aggressive than they are.
    Chairman Conrad. Yes.
    Mr. Marron. And again, you know----
    Chairman Conrad. Let me just say, I just this morning 
looked at a plan that would get us on that path. It is 
daunting.
    Mr. Marron. It is.
    Chairman Conrad. It is truly daunting. I hope that my 
colleagues understand how serious the situation is that we 
confront, because it is dire. The long-term circumstance that 
we confront is truly dire. Now, certainly, we are not in as bad 
of shape as Japan, debt-to-GDP. We are not in as serious of 
shape as parts of Western Europe that confront a debt crisis 
today. But it is very clear that we could, in very short order 
confront our own debt crisis, and the consequences to this 
country would be enormous.
    I wish it weren't so. I wish it weren't so. But if you have 
studied the trend lines--Dr. Marron, you have, Dr. Johnson, you 
have, Dr. Reinhart, you have--if there is anything that jumps 
out at you is long-term. I am talking now 10 years and out. We 
are really facing, if we don't do something about it, 
consequences that could have enormous adverse impact on this 
nation's economy.
    Do you agree with that statement, Dr. Marron?
    Mr. Marron. Oh, absolutely.
    Chairman Conrad. And what leads you to that conclusion? I 
just said something that in some circles is very controversial. 
Why do you think it is true?
    Mr. Marron. Well, and this is something I have relied a lot 
on the research by Carmen Reinhart and Ken Rogoff, that if you 
look at history, which is our best place to look, for examples 
of other countries that have experienced these things, getting 
on a path where the debt grows faster than the economy 
persistently, right, ends in tears. And it is something where 
we remain a very strong economy and a very strong nation that 
in principle can head this off and that that is a beneficial 
thing to do. You know, we haven't even covered all of the 
reasons. Carmen talked about how you have to worry that if 
interest rates go up, all of a sudden there is a snowballing 
effect and you find yourself in much worse circumstances than 
you imagined.
    From the United States point of view, our ability to borrow 
is basically our rainy day fund and we have used it--it has 
been raining, right, so we have used up a lot of the rainy day 
fund and that is appropriate. But you need to walk that back 
down so that if something unforseen happens 8 years from now, 
you can go to the world capital markets again and say, by the 
way, I need $2 trillion because something terrible happened. 
And you lose that flexibility if you don't get on a more 
sustainable path.
    Chairman Conrad. All right. I have used my time.
    Senator Sessions?
    Senator Sessions. Dr. Marron, I agree with that last 
statement very strongly. In other words, there is only so much 
margin that you have before you are in a crisis and we are 
using that up today as if we are never going to be in another 
crisis. And I am a little disappointed that you seem to be 
going along with the idea that we can't begin to ask about 
spending now. I just do not believe that we can afford to throw 
another $270 billion of stimulus package when we got so little 
from the one that we have done. Dr. Johnson, you said you 
recommended $500 billion. Well, $845 is a good bit over $500 
billion, in my view. So we have used this margin up.
    I would just criticize the thinking during the Bush 
administration. It seemed to be, and this word leaked out, that 
deficits don't matter. That is what those of us who worried 
about----
    Mr. Marron. Not from me.
    Senator Sessions. But it did, and one of the--Mr. Greenspan 
has talked about that, actually. But he didn't realize what was 
occurring politically and morally in the country. What was 
happening politically and morally was we were losing our 
discipline and people were buying into that language. Yes, we 
could have carried more debt than we were carrying in 2001, 
2002, but once you lose your discipline, it just seemed like we 
just roared forward as if it didn't matter at all, and now we 
are reaching this level of debt above which we are really 
endangering our nation if we go above. I just am really worried 
about it.
    And Dr. Marron, you mentioned one thing that is important, 
and I just need to put it on the table to economists--masters 
of the universe, I call them affectionately--who think they can 
just pull the strings to manipulate this massive international 
economy, and that is a lot of us and a lot of American people 
do not believe in a growing government, and you mentioned that 
in your remarks, about that question, and if we get a bigger 
government, how it ought to be. But I would just say a lot of 
us oppose that. We don't believe in that. So some modest 
containment of spending today is maybe not enough to satisfy my 
concerns.
    Dr. Reinhart, you read commentators and the essence of a 
lot of things you see in financial magazines and newspapers and 
articles and all is a concern in the real world out there where 
people are buying and selling and loaning money is that this 
could lead to a devaluing of the currency and a surge in debt 
can lead to a difficulty as the Brits have had in selling their 
debt and could drive up interest rates and deflate the 
currency. As one man caught me after a speech last week when I 
was expressing concern about the debt, he said, well, we will 
just inflate our way out of it. That is what we always do, and 
don't worry about it.
    Would you share with us any thoughts you have about the 
danger of that kind of thinking? Is that a danger?
    Ms. Reinhart. I think the danger that I tried to--I think 
there are two kinds of dangers that I would like to highlight. 
One is what I mentioned about perceptions of higher risk. That 
will translate into higher interest rates, which we are taking 
for granted the very low, near zero interest rates over which 
we can finance and we should not take that for granted. So we 
are on the same line.
    I think the second risk that I would like to highlight, 
which I briefly mentioned in my remarks, is the growth. Even 
absent a gloom and doom scenario, one has to take very 
seriously that at high levels of debt--and we are close to 
gross debt being at that 90 percent threshold, we are very 
close to it--growth declines by about 1 percent. This is a 
fairly robust result. So lower potential output growth is, in 
and of itself, even absent a crisis scenario, a source of 
concern.
    Let me add, though, that a weaker dollar would not hurt us. 
One of the things that has been a drag on this recovery from 
the crisis is if one looks at the typical recovery from such a 
crisis, exports in other episodes have led the way. We haven't 
had that benefit, in part because a good chunk of the rest of 
the world is also in crisis, and in part because the dollar has 
not really, relative to other experiences, budged.
    So my concerns have to do with the interest rate, the 
risks, and with the growth. What happens to the dollar? Well, 
the dollar has been known to go up and to go down. That is less 
of a--there is less of a lesson there, as far as I can make it.
    Senator Sessions. Dr. Johnson?
    Mr. Johnson. Well, Senator, I think the situation in what 
we are calling the out-years is actually considerably worse 
than you might think for three reasons. First of all, I think 
that the debt numbers that we were discussing a moment ago are 
Federal Government debt, whereas if you look on a comparable 
basis across countries, the IMF usual procedure is to look at 
general government debt, which includes other levels of 
government, and that would increase the debt target, I think, 
in Dr. Marron's picture and push us closer toward the danger 
threshold identified by Professor Reinhart.
    Second, there is, I think, almost a taboo subject around 
these issues which is Fannie Mae and Freddie Mac. Now, in the 
absence--again, let me speak as a former IMF official, what the 
IMF would say to you if the IMF were in a position to speak 
freely to the United States--they would say, well, unless you 
show us a plan for privatizing these entities, which you talk 
about, but we haven't seen the plan, we have to start thinking 
about these as liabilities of the U.S. Government. Now, that is 
a substantial increase. And, of course, they hold assets, 
right, and I wouldn't exaggerate the losses. But if you are 
talking about debt owed by the public sector, then Fannie and 
Freddie would enter into that picture.
    And third, what I worry about most of all is----
    Senator Sessions. So that is not being scored in the 
numbers that we are looking at today----
    Mr. Johnson. It is not in the headline numbers. Obviously, 
the CBO can give you a number on that. That is not an unknown 
number. But it is not in the headline numbers and it is not, I 
think, in Dr.----
    Senator Sessions. But when we talk about the tripling of 
the debt in the next 10 years based on the chart that the 
Senator showed earlier, that is not being scored? Is it or 
isn't it? Does anybody know?
    Mr. Marron. I mean, there is a small--in the official 
budget that the President put out, there is a small amount of 
money in there which are the future cash-flows from our support 
from the two of them. But the several trillion dollars' worth 
is not in the debt there.
    Senator Sessions. All right.
    Excuse me, Dr. Johnson.
    Mr. Johnson. If I could finish, in exactly that vein, the 
``too big to fail'' banks are also an implicit contingent 
liability of the U.S. Government, right, which is not--that is 
absolutely not scored in any way, because if those banks fail, 
they will come to you again and say, oh, we need TARP 2, 
Senator, and we will tell you later what we are going to use it 
for. That part--and in speaking of it, I understand this is 
usually considered part of the jurisdiction of the Budget 
Committee--the Banking Committee, and I did speak to them last 
Thursday, but I think this is a budget issue, too. A contingent 
liability of this magnitude--an avoidable one--I mean, these 
other--reforming Medicare, obviously, is a huge conversation, 
as you said, Senator. We have to discuss that and the tax base 
that people are going to generate to support paying for health 
care for people over 65.
    But the contingent liability of the banking system is 
completely, largely avoidable if you take it on, and if you 
regard it as a budget matter, I think that is a major step in 
the right direction.
    Senator Sessions. Dr. Marron? And before you proceed, I 
would like to welcome the same group of kids from Montgomery, 
Alabama. We are glad that this group could join us this 
morning.
    Chairman Conrad. Welcome.
    Senator Sessions. As we are talking about things, Mr. 
Chairman, as you just said earlier, that affect how much debt 
they will have to pay as they grow up.
    Go ahead.
    Chairman Conrad. If I could just interrupt for one moment, 
on this question of Fannie and Freddie, my understanding that 
the operations of those institutions are included in the CBO 
budget numbers now, but not in the OMB numbers. And Senator 
Gregg and I have made a determination that we would follow CBO. 
We would put them in our numbers, because we think that has got 
to be on budget. You can't say this is somewhere off in the 
wilderness, not accounted for. So we have made a determination 
that it would be included in the numbers that we have----
    Senator Sessions. But that has not been in the past, or----
    Chairman Conrad. No. It was not in the past.
    Senator Sessions. Thank you for that decision.
    Mr. Marron. And so just on the Fannie and Freddie, my 
understanding is that CBO's numbers--so they have, like, larger 
numbers in the deficit for the conservatorship, if you will, of 
Fannie and Freddie. But when you look at their publicly held 
debt numbers, they haven't suddenly gone up, whatever, $5 
trillion yet, if I understand it correctly. So they have taken 
a step there, but they haven't gone quite as far as Dr. Johnson 
would suggest.
    I wanted to go back to--the very beginning of your 
question, Senator, was about inflation and about the concern 
that our fiscal troubles might lead us to pursue inflation as a 
strategy for dealing with it. That is certainly a legitimate 
concern given what folks have done around the world in the 
past. I just want to point out that it won't actually work very 
well for the United States, the reasons being that, A, on the 
spending side, we have an enormous number of spending programs, 
Social Security being the most obvious, that are indexed, and 
that if inflation goes up, there is a one-for-one increase in 
our spending, and that is also true in many of the payment 
rates in Medicare and other programs.
    And then, No. 2, increasingly, we have started issuing 
inflation-indexed debt. So it is probably smaller than it ought 
to be, but we have Treasury indexed protected securities whose 
interest rate will rise if inflation takes off.
    And then, in addition, we have a decent portion of our debt 
that is relatively short-term, and so its value could go down 
for a couple of years because of surprise inflation, but then 
you have got to go out in the market and the market is going to 
charge you a premium interest rate and say, you know, you 
fooled us once, but this time we are going to charge you a much 
higher rate on your 3-year bonds.
    And so for all those reasons, actually, in practical terms, 
right, inflation is not going to be an effective strategy, 
right, even though it may be a legitimate concern that some 
folks have.
    Senator Sessions. Well, thank you. We do expect, according 
to CBO's score, interest on the debt last year, the public 
debt, was $187 billion and they are projecting in the tenth 
year of this budget an $800 billion annual interest payment. 
Interest rates, therefore, are hugely significant as to how 
much that would actually be in the out years. Thank you.
    Chairman Conrad. Thank you, Senator Sessions.
    Senator Merkley?
    Senator Merkley. Thank you very much, Mr. Chair.
    Professor Reinhart, you note that Government debt tends to 
soar in the wake of a financial storm, and also that often that 
is as a result of a drop of revenue rather than spending on 
stimulus. Could the deficit that we incurred here in the United 
States have been even larger if we had not invested in building 
a financial bridge through the stimulus?
    Ms. Reinhart. One of the things about this situation, to 
answer you honestly, is we do not know what the counterfactual. 
We know that at the time in the fall of 2008, confidence, 
worldwide confidence, was shattered and that the stimulus 
package played an enormous role, not just the stimulus package 
in the United States, the stimulus packages that went into 
effect in different orders of magnitude, in restoring 
confidence. So it is very difficult, you pose a very difficult 
question for me to answer.
    I do think that, absent the stimulus--I cannot quantify, I 
cannot give you a counterfactual. Absent the stimulus, it would 
have been worse. Our GDP decline relative to declines in other 
severe financial crises is smaller. Our unemployment increases 
are pretty much close to the average but are still below the 
average.
    I would have to imagine that, given the magnitude of this 
crisis, which we have not seen the like since the 1930's, 
because of its global nature as well, absent those actions, we 
would not be below the average in growth declines and 
unemployment increases. We would be doing much worse.
    Senator Merkley. So for me to restate that, although you 
cannot prove the counterfactual, it is possible we could have 
had the same levels of debt, but had no signs of the recovery 
that have been created partially by the stimulus, or that we 
might have even had lower levels of employment and had 
additional current-year deficits, which would be the worst of 
all cases.
    Ms. Reinhart. Which is why I tried to highlight the 
Japanese experience in that regard. Japan, in the mid-1990's, 
assuming that the crisis was over, withdrew stimulus, saw a 
double dip, and wound up with the worse of two worlds. It is 
important to remember Japan's debt, which today stands at about 
200 percent, was around 70 percent of GDP before the crisis 
started, so they wound up with both.
    Senator Merkley. Thank you.
    Professor Johnson and Mr. Marron, would either of you like 
to comment on that same question?
    Mr. Johnson. Yes. I would give the stimulus a very positive 
assessment. I am not a fan of stimulus in general, but I think 
this was a very unusual set of circumstances, and I think it 
saved jobs, and I think it prevented damage to potential output 
that you would have seen otherwise.
    The crisis of confidence, when we met a year ago, was 
extraordinary. As Professor Reinhart said, it was global, it 
was everywhere. And the fiscal stimulus was an essential part 
of U.S. leadership in turning the world economy around. If you 
remember the G-20 summit in April where President Obama took a 
very positive broad role and brought a lot of countries with 
him, for example, in recapitalizing the IMF, that also helped 
to rebuild confidence. That would not have been possible or it 
would have been very hard and not credible without the U.S. 
Fiscal stimulus.
    I do not think that debt necessarily would have been higher 
in the short term if we had not done the stimulus. But I think 
the medium-term prospects would have been much bleaker for this 
country. And let us face it. The medium-term budget issues 
which we face, these out-year budget deficits, are mostly--not 
entirely about Medicare, but mostly about Medicare, and that is 
a longstanding problem that we have not got around to 
addressing even though it has obviously in the cards for a 
while. That is mostly driven by demographics and by the rising 
cost of health care, itself driven by technological progress.
    And I would say also in contrast to other countries, other 
industrialized countries are almost all in the same place. They 
just do not recognize it. The European Commission's accounting 
for future technological progress in health care is much less 
honest than the CBO's accounting. So we are looking very 
directly at our future, this bleakness of the future, getting 
growth back on track. Preventing the destruction of potential 
output is very important and helpful, so the stimulus was worth 
doing. And hopefully it will help us tackle those medium-term 
problems.
    Senator Merkley. Please be very brief, because I have a 
bunch of other questions and I am running out of time.
    Mr. Marron. Sorry. I just wanted to say that with the 
standard models that, say, CBO uses or the administration uses 
to analyze the stimulus, those have in technical terms 
multipliers in them that would imply that stimulus does not pay 
for itself. And so the choice is you do end up with more debt, 
as Dr. Johnson suggested, but you also get the economic bang in 
the short run, and that there is a trade-off.
    Senator Merkley. Thank you. And, Mr. Marron, you had noted 
that uncertainty is a problem. You mentioned resolving the 
status of the estate tax. What about the rules of the road in 
general? And I believe, Professor Johnson, you had noted that 
we still have not addressed credit default swaps, and, in 
general, we have not addressed proprietary trading, 
derivatives, leverage, and many of the risk factors that were 
inherent and kind of completing the trio here. Professor 
Reinhart, you noted that following banking crises there are 
profound declines in output. Certainly all that argues for 
having rules of the road for our financial community that do 
not result in high risk taking followed by a collapse. How 
important is it that we get the rules of the road back in place 
to address these risk issues within our financial structures? 
And anyone who would like to jump in on this, I would 
appreciate it. Yes?
    Mr. Johnson. Senator, I think it is fundamentally essential 
because the problems that you just laid out, they are all 
wrapped up in what happens if there is another financial 
crisis, what happens if substantial financial players--it could 
be banks, it could be hedge funds, it could be something else--
fail. How does that amplify it for our system? And then if it 
is a big enough shock, you will be called upon either to do a 
discretionary fiscal stimulus or to use, of course, the 
automatic stabilizers that are a good thing. But, again, it 
would mean our debt is increased.
    The problems that you identify are fixable. They are not 
being fixed. They must be fixed from a responsible budgetary 
point of view. That is what I would argue.
    Senator Merkley. And I believe in your testimony, your 
written testimony, you addressed at length issues in Europe and 
Greece and Germany and so forth, and the argument that the 
stress test we put our banks through has not been a highly--was 
not a high level of stress, if you will, and that if we do not 
prepare for that, we may have another wave of stress coming 
that could result in a second financial crisis. Is that a fair 
summary?
    Mr. Johnson. Yes. My view is that our financial system is 
undercapitalized. The stress tests were not tough enough 
because the stress scenario was not that stressful. And I do 
not think we are facing at this point--my baseline view is we 
are not facing more financial collapses, but we are facing 
banks that do not have big buffers against future losses. They 
are going to hunker down and be more careful. You will see 
tighter credit conditions in the second half as a result of 
throughout the United States, and this is the global side. It 
is the commercial real estate impact, too; it is the continuing 
weakness in the consumer sector.
    Senator Merkley. Thank you. I am not out of time, so I will 
leave it up to the Chair whether----
    Chairman Conrad. Senator Merkley, let me just say, because 
others have gone over and because of the attendance we have 
because of the weather, I think you should feel free to use 
another 2 or 2-1/2 minutes. Is that OK, Senator Whitehouse? I 
would do the same for you, obviously.
    Senator Merkley. Thank you very much, Mr. Chairman.
    Mr. Marron, would you want to address that same issue?
    Mr. Marron. Certainly. The issue is that we need good 
rules, and, if possible, it would be good to get the good rules 
sooner rather than later so that everyone can begin to plan 
what the new environment looks like. So in my testimony, 
particularly in my written testimony, I emphasized that there 
are a lot of policy uncertainties that are hanging over people 
at the moment that make it difficult for them to plan. Some of 
them were, frankly, you know, in both the previous 
administration and the current one, that when we finally fell 
into this financial crisis, we fell back on a lot of 
discretionary government actions, a lot of confusion. There was 
confusion about what the role of TARP was and various other 
things.
    Those may have been necessary in the heat of the moment, 
but they have created doubt about how we actually run parts of 
our system. And clarifying that, and then clarifying it in a 
way where incentives are being created for these firms to 
behave appropriately, is very important.
    Senator Merkley. Let me throw out as my final question two 
issues that we face. One is the challenge in the commercial 
real estate world that will be coming up--well, it is here now, 
but it will continue the next year or two. And the second is 
undercapitalized community banks and their inability to do 
additional lending.
    On the community bank side, I have proposed and the 
administration has proposed recapitalizing banks in order to 
enable them to do more lending to small businesses to enable 
those firms, the small businesses, to recharge the economy.
    On the commercial real estate side, though, I have heard 
very few ideas for how we address the challenge of the fact 
that folks are rolling over balloon mortgages, but they are 
trying to do so with a drop in the value of their asset and 
often decreased cash-flows due to tenants who they have lost 
during this recession.
    So should we pursue strengthening our community banks to 
lend more to small businesses? And what can we do about 
commercial real estate?
    Ms. Reinhart. Let me say that the issue of 
recapitalization, I think helping banks recapitalize should 
come with a carrot-and-stick approach. One of the concerns that 
I have about the way that we have gone about addressing the 
toxic loans is that it is too Japanese, meaning there is too 
much forbearance. I think the forbearance issue is very 
pertinent for lending behavior going forward. If you feel you 
have a lot of bad debt overhang, it will be reflected in your 
lending practices. That is a lesson that I have taken from the 
very long Japanese experience.
    So I think the idea of helping the banks that lend to small 
businesses recapitalize, with a proviso toward more aggressive 
writedowns, is important.
    Senator Merkley. Thank you.
    Commercial real estate, small bank lending?
    Mr. Johnson. I think that commercial real estate should be 
left to sort itself out. Honestly, I think it is very hard for 
the Government to get involved terrorism.
    I am sympathetic to this idea of trying to recapitalize the 
community banks. I think what Professor Reinhart said makes a 
lot of sense. It will be difficult because the banks will worry 
about the stigma, and they will worry about what the signal is 
they are sending if they take more capital. I would be 
surprised if you can do it, run a program big enough to have a 
macroeconomic impact, unfortunately.
    Senator Merkley. Thank you. A final comment?
    Mr. Marron. Oh, I would just say, just building on the 
uncertainty point, another issue for the community banks will 
be to what extent there are strings attached with the 
assistance, both known up front and then possibly, you know, 
future ones that are difficult to predict. And that also may 
discourage them.
    Senator Merkley. Thank you all very much.
    Chairman Conrad. Thank you, Senator Merkley. Excellent 
questions and very interesting responses.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman, and thank you to 
the witnesses for being here on this challenging day for travel 
in Washington.
    We are sort of caught between the scissor blades here of, 
on the one hand, wanting to support the economy so that people 
are employed and that we can begin to have the nascent recovery 
we are seeing work for everybody and not just financiers, but 
have it hit Main Street; and, on the other hand, having this 
overhang of debt that has sort of dominated our discussion 
today.
    It strikes me that where we have very significantly 
degraded core infrastructure--in Rhode Island, for instance, we 
have a bridge through one of our major cities, through 
Pawtucket. It carries Highway 95, a major national artery, and 
it is under a weight restriction so that big trucks have to 
actually take a circuitous route around it. That is going to 
have to be fixed sooner or later. We cannot have that. It is 
getting worse, not better. There is a bypass in Providence that 
the Department of Transportation is refusing to put any more 
maintenance money into because it is so degraded. It needs to 
be replaced. But local budgets are so stressed that it is very 
hard for people to get those jobs done.
    Does it make sense to focus under the old-fashioned 
theories of, you know, if you are going to have to fix it 
anyway, it is not really adding to your debt, and the 
proverbial stitch in time saves nine, when you do maintenance 
more quickly, it tends to reduce the overall or ultimate cost, 
to focus particularly intently on degraded infrastructure that 
is going to have to be repaired sooner or later anyway as a way 
to increase employment without adding to the Nation's overall 
actually liabilities? Dr. Reinhart?
    Ms. Reinhart. Let me say that the remarks I am going to 
make have to be taken with a grain of salt because they are 
weighed heavily with the experience of one country.
    Infrastructure spending was at the forefront of the 
Japanese stimulus plan. The streets of Tokyo were repaved every 
other week, and it does add to the debt.
    Senator Whitehouse. Well, let me just challenge you right 
there, because the streets of Tokyo do not have to be repaved 
every other week.
    Ms. Reinhart. Right.
    Senator Whitehouse. If you are creating make-work, if you 
are building bridges to nowhere, clearly that is, to me, a 
different proposition. That is why I focused so much on things 
that you have to fix anyway. If my roof has a hole in it and 
the rain comes in, the sooner I fix that, the less my family's 
long-term cost of that repair. If at the same time my son also 
needs to make some money for the summer, to send him up to do 
that now would seem to make a lot of sense. Why doesn't that 
sort of simple wisdom prevail--or does it--when you are dealing 
with truly irreplaceable, necessary infrastructure work like 
bridges that are condemned?
    Ms. Reinhart. Well, if we are talking about things that 
need to be replaced is a subset of the more general proposition 
of infrastructure as a way to go forward in terms of 
channeling, which is what my remarks were addressing. I think, 
however, that in the end, anything--be it infrastructure or be 
it a transfer, it does impact debts. I cannot discriminate 
across types of--they add debt. But if this is the----
    Senator Whitehouse. But don't we have, in effect, a capital 
liability to fix that bridge, that if we were accounting in a 
full kind of all-in way, we would recognize some way? I mean, 
if I were budgeting and it was my house and I had a hole in the 
roof and I had to put together a family budget, I would put in 
got to fix that hole in the roof sometime, and whatever it 
costs, if I am doing a fair family budget, I would put it in, 
even if it was 5 years or 10 years, if I figured I could not 
afford it right away and had to put something, you know, to 
cover it in the meantime.
    Ms. Reinhart. I understand and I take your point. I would 
just add that we really should go toward--and looking at any 
activity as activities that do have debt consequences over the 
short run.
    Senator Whitehouse. Well, since I have used a lot of time 
on that question, I would like to shift to another one. Since 
it is just the two of us, if you do not mind, I will take----
    Chairman Conrad. No, I will give you some additional time. 
I think you were on a very----
    Senator Whitehouse. I have two eager hands up, so let us 
give both gentlemen a chance.
    Mr. Johnson. Very quick points. First of all, as a way to 
score the economy, I would look at the CBO's scoring, and I 
would look at the advantages of payroll taxes over 
infrastructure spending.
    Second, I think your points about having a proper capital 
budget are essentially right. We should do that. And one way to 
think about it in the context of the specific instances you are 
talking about is toll roads and tolls. So as Dr. Marron said, 
we should be discouraging with our tax system things that are 
bad, like congestion on major roads. And as somebody who uses, 
is a willing and happy user of an EZ-Pass scan tag on my car, 
if you move--and I understand this is not all a Federal 
Government issue. But if you move people toward a system where 
people are paying to use roads, paying to use very busy roads, 
paying to use roads that are more expensive to maintain, that 
will help address your issue; that will help raise revenue for 
the specific issues which are much broader than just Rhode 
Island, obviously infrastructure decaying.
    Mr. Marron. I would just add that--so I agree with you 
entirely on the theory, which is if you can identify things you 
would have done anyway and move them up, that is almost--you 
know, that is incredibly logical stimulus. But there were some 
if's in there. The first would be, you know, do you have budget 
discipline that says, wow, if I spend an extra $1 million today 
I literally will commit myself to spending $1 million less in 
2013? You know how highway funding works. That is a hard 
discipline to institute. But, in principle, you could do that.
    The second concern is that in our political system--I do 
not want to be--this is the mean, flippant version, right? The 
mean, flippant version would be suppose there are 50 projects 
like that, but our system requires us to fund 435. So that the 
theory you have described may be true for a handful of 
projects, but it is difficult for our system to focus the money 
just on those.
    Senator Whitehouse. The theory is true, but the politics 
around it make it hard to adhere to the discipline.
    Mr. Marron. Yes.
    Senator Whitehouse. OK. Let me jump to health care quickly 
because, Dr. Johnson, you have said twice that Medicare is the 
big item, and----
    Mr. Johnson. Well, it is the Congressional Budget Office 
that says that.
    Senator Whitehouse. I am not disagreeing with you, and I 
just think it is very important that we look at that. This is 
an eternal point that I keep insisting on making. Medicare is 
the big item, to quote you, Dr. Johnson. According to a variety 
of different sources, the amount of waste, duplication, excess 
cost, and inefficiency in the health care system runs between 
$700 billion and $1 trillion a year. We have ways to get at 
that. But as CBO has testified to us, they require a certain 
amount of flexibility, experimentation. There is a continuing 
executive management problem to work your way through that, and 
it requires providing the executive branch with some new tools. 
But I happen to believe that very, very significant savings can 
be achieved that way, and when they are achieved that way, they 
are achieved in a beneficial way, because it is the extra test 
that you did not, in fact, need. It is the, you know, hours in 
the hospital waiting for your paper records to get there and 
having tests redone in an emergency. It is all of the clutter 
and all of the clunkiness of our existing health care system.
    What I worry very much about is that if we get into a 
fiscal commission, a statutory commission, and it gets very 
narrow and it is given a really urgent charge--because this is 
an urgent problem--if you do not have people who understand the 
possibilities of taking advantage of those efficiency gains in 
the health care system--and they are hard to quantify. CBO 
cannot quantify them effectively. They sort of quantify dribs 
and drabs around the corners. But they will admit it is not the 
kind of thing you can quantify because it requires executive 
administration to make it succeed, and they cannot predict 
executive administration.
    But it really worries me that what we are laying out is an 
incredibly easy shortcut for fiscal hawks to take hold of this 
thing and say, ``I can document that we will have real savings 
in the Medicare system if we just throw these people off the 
system.'' And the pressure to do that becomes irresistible 
because we have whipped up this great panic about the debt and 
we have given people who only understand those tools the 
controls over this expedited, high-powered system. And I think 
that would be a terrible, terrible, terrible mistake when you 
look at a system that is as wasteful and as complicated and as 
grotesque, where doctors are paid for doing more procedures 
rather than for outcomes--I mean, every way you look at it, our 
system is, well, somewhere between $700 billion and $1 trillion 
a year in waste and excess cost.
    How do you go at that in the timeframe--let us say it takes 
4 to 5 years to really build out an effective way of dealing 
with that. How would you relate that into the urgency of 
dealing with our fiscal debt given the primacy of the Medicare 
problem in that fiscal debt equation?
    Mr. Johnson. Well, Senator, I do not disagree with anything 
you have said. I think we have time. The fiscal situation that 
we are worried about here, as a number of you have said 
already, is something that approaches us over the next decade 
or decade and a half. But we are fortunate, and we should look 
at the countries in Europe that are now beset by pressing 
crises, for example, in the United Kingdom. They do not have a 
decade or a decade and a half. So I would strongly support your 
proposal that we find ways to control the costs and manage 
Medicare better.
    I would point out----
    Senator Whitehouse. Is there any doubt that the efficiency 
gain could be somewhere between $700 billion to $1 trillion a 
year if we could get it all out? Obviously, there are problems 
of gaining it, but----
    Mr. Johnson. I am not an expert on the details of Medicare, 
so I would not want to comment on that. I would go----
    Senator Whitehouse. Well, it is systemwide. That is not 
just Medicare.
    Mr. Johnson. I do not have sufficient expertise, but it 
would make sense to me that some process of rationalization 
there would make sense. Also, I am sorry that your colleagues 
have left, but passing an unfunded prescription medicine 
component for Medicare under the Bush administration was most 
unfortunate in this context. And, you know, there are going to 
be some very tough choices about who gets access to what kind 
of care.
    As I said, the big difference between our projections and 
the European projections is the expected cost of technological 
change for treating patients, which has been very much the same 
across the U.S. and other industrialized countries. We are more 
honest about looking out in the future and saying we expect for 
something of the same. The Europeans only take into account 
their demographic changes.
    So there are very tough choices ahead, and I am not on the 
size of saying throw people off Medicare. I think that would be 
completely objectionable and unacceptable. But it is a budget 
issue that we cannot duck forever.
    Senator Whitehouse. I have gone well over the time that 
even the Chairman allowed me, and I thank him for his courtesy.
    Chairman Conrad. Let me just say to the gentleman from 
Rhode Island, I believe the risk is just the flip of what you 
see. I believe the risk to Medicare and Social Security 
recipients is a failure to act in a timely way to deal with the 
long-term debt trajectory that virtually every expert that has 
come before this Committee says is unsustainable. That is, as I 
look ahead--and, you know, I am a beneficiary of Social 
Security. I lost my parents when I was young. Social Security 
helped me through college. I have seen it in the lives of my 
family. I have seen Medicare in the lives of my family. And I 
have seen it in the lives of my constituents.
    My great fear, for the very positive things that those 
programs do, is that our failure to act to deal with the long-
term trajectory is what really threatens them. That is my 
belief.
    Senator Whitehouse. Mr. Chairman, I could not agree with 
you more, and I think that we have a window of time, as the 
witnesses have said--we are fortunate. We have a window of time 
to address this. The wolf is not fully at the door right now. 
The fiscal knives do not have to come out in the kind of 
emergency ways that you are suggesting they will have to if we 
do not get ahead of this. And it is one of the reasons that 
watching this health care bill be delayed and strung out and 
attacked and that we have lost an entire year of this 
administration already before we can really deal with this is 
so agonizing for me. Because I do think that while we are in 
this window, we should be focusing relentlessly on that 
delivery system reform area while we can, because that is the 
tool that evaporates as the emergency gets closer. The fiscal 
knives will always be there. You can always throw people off 
programs. You can always shut programs down. It would be a 
human tragedy to do so, and we can avoid it if we are 
responsible about delivery system reform in the time that we 
now have.
    Chairman Conrad. Well, I agree with the gentleman, that, 
for some reason, delivery system reform got almost no attention 
in this debate on health care, and yet every serious expert 
that came before us told us it is the single most important 
thing. And, frankly, I think the media have done a grave 
disservice to the American people for getting distracted--
chasing every rabbit of an issue that matters very little to 
dealing with what has to be done. I largely point the finger of 
blame on network media that have a minute and a half for a 
story and never have a chance to explain to people what are the 
things that really matter to this debate. Instead, they obsess 
on things that are complete side issues. And I think that has 
been an enormous disservice to the American people.
    I would also blame ourselves for not doing a good job of 
coming back to what really matters. And it is that delivery 
system reform that every serious expert that came before us 
said is the No. 1 opportunity to get costs under control. But 
it is almost nowhere in the debate, almost nowhere. Instead it 
is death panels and things that do not even exist that get the 
attention.
    Let me, if I could, go back to the question of where we 
are. Dr. Reinhart, you testified that once you get to a debt of 
90 percent of GDP, your research shows that that has an adverse 
effect then on economic growth of roughly 1 percent. Is that 
correct?
    Ms. Reinhart. That is correct.
    Chairman Conrad. My calculus tells me that me that this 
year we will hit gross debt to GDP of just over 90 percent. And 
if we stay on the path we are on, that will continue to rise, 
with no policy changes--no policy changes--to 97 percent in 
2012 and then start coming down only very, very gradually--very 
gradually, almost imperceptibly.
    So that tells me that, according to your research, we 
already face a consequence of reduced economic growth in the 
future because of debt levels today. Would that be a correct 
interpretation of your testimony?
    Ms. Reinhart. That would be a correct interpretation. I 
tried to highlight in my remarks and in my written statement 
that while the plan should not necessarily start today because 
of weakness in economic activity, a conception of a clear plan 
to reduce the debt would be or should be forthcoming today. Let 
me say one thing we can say with a fair amount of certainty. We 
never know when the wolf will beat down our door. The wolf is 
very fickle and markets can turn very quickly. And a high debt 
level makes us very vulnerable to shifts in sentiments that we 
cannot predict.
    Chairman Conrad. I thank you for that. Let me just say, 
what I have heard the three of you say--and I will get to you, 
Dr. Johnson, just momentarily--what I have heard from each one 
of you very clearly is that you would not take immediate steps 
to reduce deficits and debt because of the risk that could 
create to a double-dip. But what I also have heard each of you 
say is that you do have to put together a credible long-term 
plan to deal with the debt threat. And, if we do not, that will 
fundamentally threaten the economic security of the country 
going forward. Is that a correct restatement of the testimony 
here? If anybody disagrees with any part of that--Dr. Johnson?
    Mr. Johnson. If I could just clarify, my position would be, 
following what I think is the IMF practices, the focus on net 
government debt, or the general government, which the numbers 
would be slightly lower than your numbers, but----
    Chairman Conrad. Yes. When I talk gross debt--we probably 
should just say that for people that might be listening. When I 
talk about gross debt, I am talking about the debt that is owed 
to the public plus the debt that is owed to the various trust 
funds of the United States. I use that figure of gross debt 
because, in a budget context, that is what matters the most, 
because all of that debt has to be serviced. It has to be 
serviced out of current income.
    Economists like to look at what is called publicly held 
debt, which is a lower percentage, in the 60 percent range now 
of GDP, because they look at the effect of government borrowing 
on the public sector. Dr. Johnson?
    Mr. Johnson. Well, 60 percent is the Federal Government 
number. If we are again on a comparable basis, general 
government would push it higher, toward 80 percent. The IMF 
position is that all industrialized countries face a similar 
situation and require a fiscal adjustment either of taxes or 
revenue between four and 8 percentage points of GDP over the 
medium term. That is my position, also, which I think is not at 
all inconsistent with the spirit of what you are saying.
    Chairman Conrad. Yes, and that is the position--I can't 
speak for Senator Gregg, but he and I have gone on this effort 
to have a commission, because we have been convinced you have 
got to have an overall plan for the longer term, and one that 
takes account of where we are headed in recognition that Dr. 
Reinhart's research is accurate, that as you add debt, you 
fundamentally weaken economic growth.
    Let me go to the next point, if I can, and we are going to 
come back. Senator Cardin has joined us, and I will stop and 
recognize him next because he has not had a round.
    As we look ahead to this medium- and long-term plan, 
spending has got to be adjusted, and yes, that means Social 
Security and Medicare have to get on a lower growth trend. It 
has to be, because that is where most of the spending is. And I 
also think the revenue side can't be exempt because we now have 
the lowest revenue--right today, we have the lowest revenue as 
a share of the Gross Domestic Product in 60 years. We have the 
highest spending as a share of GDP in 60 years. So we have got 
the lowest revenue as a share of the economy in 60 years, the 
highest spending as a share of GDP in 60 years. I don't know of 
any logical reason that you don't have to deal with both sides 
of the equation.
    But then it goes to the question as to what should the 
balance be, and I would like each one of you to answer this 
question. Going forward, in the longer term, should most of the 
emphasis be on the spending side? Should most of the emphasis 
be on the revenue side? Or what do you think the appropriate 
balance should be between spending and revenue, contributions 
to dealing with this long-term debt? Dr. Reinhart?
    Ms. Reinhart. I think both the spending and the revenue 
side have to be addressed. I had mentioned in my earlier 
remarks that looking at actually what Canada did would be 
useful, and no stone was left unturned. From decisions that 
involved unemployment insurance to decisions that involved 
retirement age, everything--and, of course, on the revenue 
side, as well. When one is dealing with the gaps that we are 
dealing with right now, even extracting from the cyclical 
component that is obviously very big right now, you cannot 
leave any stone unturned.
    Chairman Conrad. Dr. Johnson?
    Mr. Johnson. Well, as we have been discussing, unless, as 
you just said, Senator, unless you bend the curve for Medicare, 
unless you change that growth rate, that swamps everything, OK. 
So that is first and foremost.
    Chairman Conrad. That is the 800-pound gorilla.
    Mr. Johnson. Absolutely, and it is a very unfortunate thing 
and it is more about--perhaps more about ethics than economics 
to decide what to do there. That is a very hard social 
conversation.
    On the taxes, though, I think we also have to address it. I 
mean, honestly, this is a fantastic country. The hope for our 
nation is based on a very thin and small fragile tax base. If 
the United States wants to be one of the leading powers in the 
world, I don't see any alternative but tax reform. And in this 
context, I would emphasize what Dr. Marron said before, which 
is we don't--our tax reform kind of grew in a very particular 
history. We have not redesigned it in a long time and not tried 
to think about what do we tax to discourage, rather than taxing 
income, which we actually want people to go out and earn.
    And I think we have to address in this context the low 
private savings rate in the United States. We have built a 
system in which people don't feel that they should save, and 
this is clearly a counterpart to our foreign borrowing. One 
thing is our budget deficit. The other thing, which we haven't 
talked about today, is that we finance so much of that budget 
deficit not with private savings, which is what they do in 
Japan, but by borrowing from China and essentially from the 
Chinese government. That makes no sense at all in geostrategic 
terms.
    And even if you address--even if we come up with a strong 
medium-term fiscal framework, you have still got the current 
account issue. You have still got the low private sector 
savings. Tax reform, fundamental tax reform to be addressed by 
your fiscal commission, strikes me as inescapable unless you 
wish the United States to slip into the ranks of second-rate 
powers, which, of course, has happened to other countries many 
times in the past.
    Chairman Conrad. I couldn't agree with you more. I think if 
this fiscal commission does its work, one part of it should be 
fundamental tax reform. We have a tax system that is 
inefficient, and by that I mean a high percentage of what is 
owed is not being paid. We have incredible leakage through 
offshore tax havens. If anybody doubts it, go punch in 
``offshore tax havens,'' see what you get. Just Google that and 
see what you get.
    We also have a tax system that was never designed for the 
period we are in. It was designed when America was completely 
dominant in the world, and we did not have to worry about our 
competitive position. And we have a tax system that now 
disincentivizes savings, therefore disincentivizes investment, 
and if you don't have investment, you can't grow. I mean, it is 
almost an upside-down system given the circumstance that we are 
in today.
    Dr. Marron?
    Mr. Marron. Thanks. So the first point, which I think the 
members of this committee will appreciate, is a geeky budget 
process one in answer to your question of where should the 
emphasis be, on taxes or on spending, which is we are actually 
in a situation where it is going to be difficult to have an 
intelligent conversation about that because of the disparity of 
views as to what the baseline is, and that there is one view of 
the baseline that has various tax provisions expired and 
definitely there is another view of the baseline that has them 
all notexpiring. As you saw in CBO's recent report, if you add 
all of them up, the difference is almost 3 percentage points of 
GDP in 2012.
    And so I am not going to have an answer for you, which one 
is wrong. I am just going to say, politically, that is going to 
be a hard conversation to have kind of intelligently because 
people will differ in what they choose.
    In terms of substance, the basic story is once the economy 
is on a recovery path, what happens every year is spending 
makes our situation worse because it grows faster than the 
economy and tax revenues make our situation better because they 
grow faster than the economy. And so it has to be the case that 
spending is going to get more of the emphasis than the revenue 
side, just because they are growing faster and that they are 
the thing that is causing the challenges.
    However, if you look ahead and ask yourself, you know, can 
we go back to a historical 18 percent of GDP tax level and 
finance the types of things that our government, you know, our 
society appears to want our government to do, my answer to that 
is no, right, that the arithmetic doesn't add up, and that 
finding a way to raise more tax revenues in the future seems 
inevitable given the trajectory that we are on.
    And then I am right back with my colleagues here in just 
saying that if you are going to do that, scaling up our 
existing tax system is not an intelligent way to do that, and 
that as you just described, what you want to do is go revisit 
it and ask what tax system makes sense for the economy we have 
today if we have decided that instead of 18 percent we are 
going to raise 20 percent or whatever of GDP in tax revenues.
    Chairman Conrad. Senator Cardin?
    Senator Cardin. Well, Mr. Chairman, let me thank you for 
calling this hearing. I think this discussion is critically 
important to our committee and to our country, so thank you for 
doing this. I welcome all three of our witnesses, particularly 
Dr. Reinhart from the University of Maryland. It is nice to 
have you here. I thank all three of you for your testimony and 
for focusing on how we can get our economy back on track with 
the amount of debt that we have incurred. But the bottom line 
is, what are we doing about the standard of living for the 
American people?
    I know we can't rewrite what happened in the past, Mr. 
Chairman, but we need to understand and learn from our 
mistakes. I find it inexcusable that when we had a growing 
economy, we still allowed the debt to increase. There was no 
excuse for cutting taxes and increasing spending without paying 
for it when we had a booming economy.
    Dr. Johnson made a point about savings--when our economy 
was performing the strongest in the world, by far, when we were 
leading on every good economic indicator during the 1990's and 
into the 2000's, our savings ratios during that time were among 
the worst of the industrial nations of the world. 
Unfortunately, we said, oh, that is OK. We don't have to worry 
about saving; because Americans are actually saving because the 
value of their homes is increasing by such a dramatic amount. 
Then we found out what happened to the values of their homes.
    So we really need to learn from the mistakes that we made 
when our economy was growing: the mismanagement of our debt and 
the failure to enact policies that encourage savings. Many of 
us, including the Chairman, tried during that period. I am 
proud of the work I did in the House with Congressman Portman 
to focus on policies that would increase our national savings. 
Congress didn't do as much as we should have.
    Now, we are in a recession, when it is difficult to get 
attention to reducing debt, cutting spending, or increasing 
taxes. It is even difficult to develop policies for Americans 
to save because we want Americans to spend during a recession.
    So my concern is that as we look at how to deal with the 
national debt, and the Chairman's commission is by far one of 
the most credible proposals, I am concerned that the focus may 
be short-term rather than on long-term, because we are in a 
recession, so we need to grow. We need to create jobs and we 
need to spend and we need to make taxes less burdensome in a 
recession, but that may not be in America's best long-term 
interest. It certainly is not if it allows the debt to 
increase, and if we don't deal with issues that the Chairman 
raised about a tax policy that encourages savings.
    My friend, Senator Whitehouse, raised the issue of health 
care in this context. The good news about the bills that passed 
both the House and the Senate is that their two principal goals 
are to reduce the growth rate of health care costs in America, 
and at the same time to reduce the Federal Government's budget 
costs.
    My concern is that if we look at health care costs solely 
in light of the Federal Government's budget exposure, and say 
that we have succeeded if we can reduce entitlement costs to 
the Federal Government, but we don't look at how much seniors 
might be asked to pay, how much businesses might be asked to 
pay, or what individual workers are going to be asked to pay, 
at the end of the day, we might, in fact, be weakening our 
economy. We may be strengthening the Federal Government's 
budget commitment as far as reducing its costs, but we would be 
reducing our economy, certainly reducing the standard of living 
for the American people.
    So I am concerned as to how we focus today in a recession 
on reducing our debt. We are all saying the right things. We 
want to bring the debt down. We want to increase national 
savings. We certainly want to increase the standard of living 
for the American people. But if we tunnel vision this health 
care debate into the Federal budget and don't look at health 
care costs as growing rate, I think, long-term, we are doing a 
major disservice to the people of our country.
    So how do you put this in context? How do you deal with the 
current recession? How do you deal with the current crisis that 
Americans are facing and still allow our economy to grow and to 
deal realistically with the problems that Americans are facing, 
whether it's the small business owners trying to maintain 
health insurance for their employees or the seniors struggling 
to decide whether they can afford their medicines, or workers 
finding themselves falling further and further behind when they 
look at their paychecks. They are wondering what happened 
during this prosperous time when America grew and why they 
should trust us now to get this right when government didn't 
act responsibly when the economy was growing.
    Any advice you have for us? Dr. Johnson?
    Mr. Johnson. Senator, my view is that if you create the 
fiscal commission with everything on the table, both the 
spending side and the tax side, and people regard that as being 
a credible step forward, which I think they would if it came 
with the right legislative framework, that gives you the scope 
in the short term to take measures that will help the standard 
of living----
    Senator Cardin. If the commission's charge is to deal with 
the Federal budget deficits, which is its charge, and if we are 
in a recession when this commission is required to issue its 
ruling, how does it overcome those two major obstacles to the 
long-term issues that you raised regarding our tax code, for 
example?
    Mr. Johnson. Well, the good thing about being the United 
States, in our current position in the world, and, in fact, we 
have the only reserve currency, really, at this point, 
particularly given the problems we have been discussing in the 
Euro zone--the Euro is seriously under pressure from a broader 
point of view where the countries want to hold their reserves--
this gives us time. It means, to go back to the Chairman's 
math, we will be able to run up more debt. The markets will let 
us do that at lower interest rates than they would otherwise. 
This buys us time to tackle the medium-term issues around 
health care spending, around Social Security, and around a 
sustainable tax base, which I think we are agreeing is about 
tax reform.
    So we have 10 years or 15 years, maybe if you push it we 
have 20 years to confront those issues. The fiscal commission's 
mandate, I think, would not be slash the budget deficit now, 
because that won't help our economy. It will be, get the 
medium-term budget onto a sustainable basis, take the debt off 
this explosive path, according to the CBO projections, and if 
people feel that you are moving in that direction, then the 
markets will allow us to finance a greater budget deficit. You 
will be able to spend money on various----
    Senator Cardin. I am not sure we have other options. I am 
not challenging that. I am not sure there are any better 
suggestions that have been made than the Chairman's suggestion, 
quite frankly. So I am not sure there is a better suggestion.
    All I can tell you is a lot of us worked on savings issues, 
and we didn't have a lot of support out there to do things to 
bolster national savings. We got some things done, relatively 
minor things when you look at the overall problems we had as a 
nation, and it wasn't easy getting that done. I just hope that 
the political will will be there to deal with some of the 
fundamental issues that have been raised here.
    We shouldn't be talking about how much revenue we want to 
raise, but how we want to raise it. I believe that our tax code 
really does need major revisions. We need to rely more on 
consumption-based revenues than income-based revenues and we 
have to do it in a progressive way. So I will be interested to 
see whether the type of political support exists for that--Dr. 
Reinhart?
    Ms. Reinhart. I would like to address the issue you raised 
that in good times, our policies have tended to be procyclical. 
Namely, in good times, the government--there are two things the 
government can do. One is it can save during good times 
directly, and then it can create incentives for the private 
sector to save. During the last boom, we didn't really do 
either. I think the role of the commission to ensure that 
during boom periods we don't congratulate ourselves too much--
the seeds of the next crisis are sown during the boom. That is 
when overspending has historically tended to take place.
    I do completely agree that--which as I said earlier, no 
stone left unturned--that the tax code particularly--this is 
also Simon Johnson's point that we need to address the issue of 
low savings rates and dependence on borrowing from abroad as 
part of the medium-term issue.
    One very last comment I have to say is I don't know that we 
do have ten, 15, or 20 years. We just don't know. And so the 
sooner that we can articulate a plan--you raised the issue of 
uncertainty. People today, if the debt is perceived to be 
growing out of bounds, that will create uncertainty not only 
about future investment, but what people expect as to future 
benefits. And so a credible plan cannot be articulated too 
soon.
    Senator Cardin. Thank you, Mr. Chairman.
    Chairman Conrad. Thank you. I would just say this to my 
colleagues. I have just gone through an exercise to get the 
deficit down to 3 percent of GDP by the fifth year of the 
budget period and to balance by the end of a 10-year budget 
window. I have just gone through that exercise. I ask all my 
colleagues to go through that exercise before we get into our 
budget negotiations. I think you will find it as sobering as I 
have. I think you will find it as sobering as I have, what it 
really takes in 10 years to get to balance on a very modest 
downward trajectory of deficits and debt to GDP. It is very 
sobering.
    Let me go to the question of political will. What is going 
to be necessary to get this under control, and that means to 
get back down to 60 percent of GDP on a publicly held basis. 
That is very, very sobering.
    Senator Sessions?
    Senator Sessions. That was an insightful challenge to us, 
Mr. Chairman. I think you are correct. I would just share a few 
thoughts, that the tension is--I think we have too light a 
treatment to the need to contain wasteful spending now, that is 
not producing much for the economy. The $800 billion, I mean, 
was Medicaid, welfare, many things that may need to be 
strengthened, but the extent of it was so great that we haven't 
had enough emphasis on job creation which will pull us out of 
this, I think.
    And I would just ask you to think about how will we pay 
back $800 billion? I mean, the organization proposed at the 
State of the Union saving $15 billion this year and that might 
amount to $250 billion over 10 years. That is a lot less than 
$800 billion. And now we are talking about another $200-plus-
billion stimulus package.
    So, I mean, these numbers are so large, you are just not 
going to be able to spend today unlimitedly. We will pay this 
back, one way or the other. It is going to be a burden. My 
Democratic colleagues have got to recognize, we just can't 
ignore the year we are in and the next year as if we are in 
this severe recession, therefore, all the rules don't apply. 
The money we borrow is going to be a burden on us. It will be a 
burden on us.
    Dr. Reinhart, I would like to followup with your comments 
and that of the Chairman about the amount of the debt that we 
have and the question--maybe all of you discussed it 
generally--between the internal debt and the public debt. Would 
you not agree that 30 years ago, 20 years ago, there was a 
bigger difference than there is today because we did not see 
quite the dramatic actuarial unsoundness of our entitlement 
programs. Now that we see those programs are actuarially 
unsound and we are going to have to call the debt that they 
loaned to the government for discretionary spending, any 
addition to the internal debt really is, for anybody analyzing 
the soundness of the United States financial condition would 
consider the internal debt too.
    Did I make that clear? In the debate over health care, the 
President asserted, I believe, this plan in 10 years would have 
a $130 billion surplus, but that was not true, really, and CBO 
eventually made that quite clear, because it created about a 
$300 billion surplus in the Medicaid account, but it spent it 
on a new plan. And they didn't score the internal debt going 
back to the Medicare Trust Fund. It is a reality. And since 
Medicare is clearly heading to default and will call that debt 
pretty soon, it seems to me we have got to understand that this 
is not--the reality of the internal debt is more significant 
than it may have been when Lyndon Johnson first started doing 
this.
    Would you comment on that and if you think it is 
significant?
    Ms. Reinhart. Well, I certainly think it is significant in 
a major way. The work that I have done emphasizes gross Federal 
debt. Ultimately, we feel that it is ultimately the Federal 
Government, whether the debt is held by other branches of 
Government or by the public, that we care about. I would say 
about gross--even using gross Federal debt, that it does not 
take into account all these important liabilities, hidden debts 
that are associated with our Social Security system and all 
other implicit guarantees even outside our Social Security 
system, such as Simon Johnson mentioned, Fannie Mae and Freddie 
Mac. But----
    Senator Sessions. But your gross debt that you figure does 
include the internal debt that the Treasury owes to Medicare 
and Social Security?
    Ms. Reinhart. Partially. Partially.
    Senator Sessions. But not totally.
    Ms. Reinhart. Not totally. Partially.
    Senator Sessions. And for us who are worrying about the 
health of the American economy, you think we should consider 
the gross debt more than just the public debt?
    Ms. Reinhart. I think that when one looks at the debt 
issue, we are going to be looking at very different measures of 
debt. I would start out with gross debt, but I would not end 
with gross debt. I think to take into account medium-term debt 
sustainability, a lot of these other hidden debts need 
quantification along the way. It just so happens that gross 
debt is something that we can measure more readily and more 
transparently than some of these other explicit or implicit 
liabilities that we have.
    Chairman Conrad. Senator Sessions, would you allow me just 
to interject on this point?
    Senator Sessions. Yes, please.
    Chairman Conrad. Because for those who are listening, I 
think it is a hugely important point that you are making. The 
publicly held debt--that is, the money that we have borrowed 
from the public--is at 60 percent of GDP today. The gross debt 
is at 90 percent. The difference is the gross debt that you are 
referring to includes the money that we owe to the trust funds 
of Social Security and Medicare. I think for people who are 
watching, this is always confusing. And it is important so that 
they understand the gross debt. The reason you are focused on 
it, I am focused on it, is because all the debt has to be 
repaid. And from a budget standpoint, debt can only be paid out 
of current income. By definition, the only money we have to pay 
this debt to Social Security has to come out of current income.
    So there is a real budget consequence when those trust 
funds that have been producing more money than was needed all 
of a sudden flip and now all of a sudden they are spending more 
money in Social Security and Medicare than is coming in, trust 
fund income. And that has happened to both those programs 
today. Both of them are cash negative today. That is why I want 
to pivot--I am sorry for interrupting you.
    Senator Sessions. No, I could not agree more.
    Chairman Conrad. But it is so important that our colleagues 
understand the implications of this.
    Senator Sessions. When I came here, I kind of acquiesced 
into the idea that public debt, well, we will just argue over 
it as a base, the public debt, and use those numbers. But as I 
have come to realize, the actuarial unsoundness of Medicare and 
Social Security, you really cannot do that.
    Of course, they do show up, Mr. Chairman, as you know, to 
be fair. They are showing up on the surge of the public debt's 
increase as these bonds that the Treasury executes t these 
trust funds are called. That is one of the reasons, is it not--
Mr. Marron, you have been at CBO. That is one of the reasons 
the public debt is moving as dramatically as it is.
    Mr. Marron. Right. I mean the debt is subject to a limit.
    Senator Sessions. So it is beginning to move and transfer. 
We are having less and less internal debt, I assume because it 
is being converted to public debt, inevitably, as we go 
forward, because there is not enough money to fund Social 
Security and Medicare without calling the bonds that are out 
there.
    I just would say that any--maybe you would--my time is 
about up, so if any of the two of you who have not commented, I 
wish you would.
    Mr. Marron. OK. Just a couple thoughts. So you notice 
whenever I speak of the debt I always focus on the publicly 
held debt, which is kind of the notion of debt that we need to 
go place with world capital markets to finance ourselves. And 
it is not because I do not worry about the other ones. It is 
just that I worry that when you are worried about the other 
issues, actually the gross debt understates the scope of the 
problem from those programs, that we have raised money for 
Social Security and to a much lesser extent for a part of 
Medicare and labeled them as trust funds for budget accounting, 
and adding those us we can have a larger measure of debt.
    But if you take seriously the commitments that we seem to 
have made, say, for Medicare, for the other parts of it that 
are not covered by a trust fund, you know, you have seen these 
numbers millions of times. People come in with the $40 trillion 
number and the $60 trillion number, and just these gigantic 
numbers, which are an attempt to measure what the overall kind 
of commitment is. I will not call it a debt because, obviously, 
we can dial it up and down--hopefully down at some point in the 
future. But I think even the gross debt understates just how 
severe the trajectory is that we are on.
    Senator Sessions. Understates it. Do you agree with that, 
Dr. Johnson?
    Mr. Johnson. Yes, I think that Dr. Marron said it very 
well. In addition, the contingent liabilities, which we know 
are there, and as Professor Reinhart said, that does not fit 
our standard methodology. But if we have one or two more 
crises, we will be changing the methodology to recognize that 
explicitly. And I think it is right. Do not think of the gross 
debt as the full extent of our problem. Focus on the--I would 
focus, as you said, on the publicly held debt for what you have 
to sell and what you have to find what the market will or will 
not buy, and then you have to look at the projections going 
forward, including the contingent liabilities and the scenarios 
around that.
    Senator Sessions. Briefly, the uncertainty that Dr. Marron 
and others have mentioned, I believe a lot of that throughout 
the entire economy, throughout the entire financial world, is 
the concern over the debt, and would you not agree that it 
creates a cloud over economic growth and productivity, 
psychologically as well as otherwise, and that the sooner we 
get a clear path out of this fix we are in, the better it will 
be to restart economic growth?
    Ms. Reinhart. I think one of the scenarios that I alluded 
to earlier is one in which if there is no plan for containing 
debt and deficits medium term, I think uncertainty is a factor 
why we get the results that we get that higher debt levels are 
associated----
    Senator Sessions. So you are factoring that in your scores 
to some degree.
    Ms. Reinhart. Yes.
    Senator Sessions. Dr. Johnson.
    Mr. Johnson. I think we should take events of the past few 
weeks in Europe, Senator Sessions, as a wake-up call exactly 
along the lines that you are suggesting. You need a fiscal 
commission. You need it now. If you do not have it, and the 
second half of the year is a substantial slowdown, which is 
what I am expecting, your room for maneuver, your room for 
sensible short-term programs to support the economy--and you 
can argue about what the programs are, but the route does not 
matter. Whichever way you want to go on that, you are not going 
to have that room because the financial markets are going to 
becoming increasingly difficult because they are going to push 
you on the lack of a medium-term credible fiscal framework in 
the United States. This is what the Europeans have woken up to 
just now. Tomorrow they have a big meeting in Europe, a summit. 
This for them is the topic. How do you limit the damage? How do 
you make the fiscal adjustments credible? They are looking at a 
lot of austerity in Europe right now. We do not want to go 
there. Raising taxes, cutting spending--you do not want to do 
that in the second half of this year. You do not want the 
financial--if the financial markets force you into it, that is 
a disaster.
    Chairman Conrad. Do either of the other Senators want a 
second round? Senator Whitehouse, would you want a second 
round?
    Senator Whitehouse. If it is not too much of an ordeal for 
our witnesses.
    Chairman Conrad. Well, they are here and they are ready to 
answer.
    Senator Whitehouse. Well, thank you.
    Dr. Marron, in your written testimony, you looked at the 11 
million households that are underwater on their home mortgages 
and concluded, A, that they are likely to default and, B, that 
that will eat away at the thin capital cushions of many banks.
    To what extent do you believe that the liability for these 
mortgages has already been written down by the banks? And would 
you distinguished between mortgages that have been securitized 
and mortgages that are actually held by the banks?
    Mr. Marron. I do not have a good answer to your first 
question. Maybe Dr. Johnson does.
    On the second, right, so there are--as you know, some of 
these mortgages have been securitized and have moved various 
places, including circuitously back on, in essence, the Federal 
balance sheet through Fannie and Freddie. And you have got 
other ones that are out there held by the banks. And, you know, 
the reality is--and this goes back to kind of the uncertainty 
point and the ``to what extent have we realized the 
difficulties we are in'' point--that financial institutions 
still differ in the degree to which they have recognized their 
losses. Some have been more aggressive about it than others, 
and that that casts, you know, continuing uncertainty over the 
financial viability of the various firms. And it is ultimately 
hard to track this through.
    Senator Whitehouse. Isn't it advisable to try to move 
through that uncertainty as quickly as possible?
    Mr. Marron. Yes, I mean, at some level, you know, the end 
state you want is where everyone honestly appraises what their 
losses are and then moves on in life. And the difficulty we 
faced over the last couple of years is it is very hard to get 
people to go through that process.
    Senator Whitehouse. Go ahead.
    Mr. Johnson. Just to complement that answer, I think the 
lack of success that the Government programs have had, 
particularly this PPIP, which is supposed to buy distressed 
assets from the banks, it just has not got up to scale because 
the banks do not want to sell. I do not think they have written 
this down. In fact, they do not want to sell partly because 
they do not want to take the writedowns. And I think that the 
strategy that they have had and that has been encouraged by the 
previous administration and this administration is sit on your 
losses, wait for the economy to recover, and then you do not 
have to do the writedown. Eventually the assets will recover.
    That works unless you have a double dip or further losses 
or more strategic default, which I think is, to my mind, what 
we are looking at here.
    Senator Whitehouse. Well, the reason that I was asking that 
question is that it strikes me we are prolonging the agony by 
continuing to forbid the residential home owner, if they are in 
appropriate financial circumstances, to simply go to bankruptcy 
court and settle their debt the way everybody else does. In 
fact, I saw a news article earlier today. The Mortgage Bankers 
Association argued vehemently against allowing regular folks to 
go to bankruptcy court and get that debt settled the way they 
can with every other single kind of debt. And I guess it turns 
out that they may have written down their own mortgage on their 
building here in Washington, and because it is a commercial 
mortgage, they can get away with it. So they know it is the 
right thing to do. They know it moves you quickly to a market-
based solution and then everybody can adapt and move on, as 
opposed to being in this sort of frozen state in which banks 
are asked now to determine what their losses are going to be 
mortgage by mortgage, and then the nightmare begins for the 
person on the other end. We do not have a balance sheet that 
quantifies the nightmare for the family that has to put up with 
this. But, clearly, it is a nightmare. We do not have a balance 
sheet that quantifies the loss in property values around that 
house as it gets foreclosed and abandoned and stripped. We do 
not have a quantification of what that means in revenue to 
municipalities that are struggling.
    There is a whole piece of collateral damage that I think 
gets avoided if we solve that problem in addition to moving 
quickly to a market base for those, and it is so disingenuous 
of the Mortgage Bankers Association to be here lobbying against 
it for regular people when they are doing it with their own 
darn building themselves.
    I would be interested in your thoughts on wouldn't that be 
the quickest way to find the bottom, as soon as people could 
cut to a bankruptcy court and have a quick, fair, final 
determination of it, then everything adapts. There is your 
finality. Mr. Marron, this was your point, so I will start with 
you.
    Mr. Marron. So I will take a stab at that. I will confess I 
have not thought about Chapter 13 and those issues for some 
time now, so my memory is a little bit hazy. I am an economist. 
I am going to invoke many hands.
    On one hand, I am generally reluctant to do things that are 
kind of, you know, changing the rules in the middle of the 
game. I am sympathetic--I may not find it dispositive, but I am 
sympathetic to the argument that the mortgages were originally 
initiated under a set of expectations about what the rules of 
bankruptcy were, and----
    Senator Whitehouse. What we have been through in the past 
year----
    Mr. Marron. No, no. I know. I am just--I am going to be 
whatever the many-handed right thing is. So I am sympathetic to 
that. With the passage of time, kind of the emphasis I place on 
that goes down as we seem--I do not know what Federal program 
we are on, six or seven or eight, for trying to address this 
problem. And no disparagement to the previous administration, 
the current one, and the Congress. It is a really hard problem, 
so it is not surprising it has taken this long.
    There is an issue--and, again, I do not remember the 
details, but there is an issue that houses are different than 
most of the assets that normally go through Chapter 13 
bankruptcy procedures, so you would need to think about ways--
you know, most of those things are cars or boats or whatever 
whose asset value is depreciating rapidly, and it is easier to 
figure out a payment plan and move on. It is more challenging 
to apply that to housing, and you would need to figure out a 
way to do it.
    You know, I guess I would say over time I have become more 
sympathetic to the notion that some reform in bankruptcy could 
be part of the help. You know, the numbers I saw a year ago 
when I used to think about this more seriously suggested that, 
you know, even if you did kind of your dream scenario on that 
front, you know, it is still only a relatively small fraction 
of the homeowners who are facing these difficulties, but it 
would be a portion of it.
    Senator Whitehouse. Can you think of any other circumstance 
ever in which there are actual market losses that need to be 
processed through and a system whereby you did not get to the 
actual market loss but instead allowed an interested party to 
be the definer of how much they are going to lose on something 
was an efficient or effective way of finding the--of letting 
the market operate?
    Mr. Marron. Oh, so the first part is yes, I can think of 
folks who are trying that separately, like commercial real 
estate would be a classic example, right? As mentioned, there 
are plenty of balloon mortgages on commercial properties that 
are underwater for which the lenders are doing things like 
extending terms by a year, trying to put off the day of 
reckoning, hoping that a rebounding economy will bail them out. 
And so the problem is certainly not unique to resident real 
estate.
    But then at the end of it, you had the second part of your 
question, which is and then it works well, and history does not 
suggest that it works well.
    Senator Whitehouse. Clarity is what works well and finding 
the actual value, correct?
    Mr. Marron. Yes.
    Senator Whitehouse. Mr. Johnson? Let me ask both of you to 
answer, and then I will conclude.
    Mr. Johnson. I completely agree that taking your mortgage 
through bankruptcy makes sense. Of course, this measure did 
come up last year, and it was defeated by the lobbies involved. 
And that is a problem.
    Look, these are not--this is not lifetime servitude. This 
is a no-recourse loan. The more people who default, the more 
people who walk away, the lower cost for other people to walk 
away. And I honestly think that over time this will change. 
Most of the bankruptcy law in this country has emerged 
organically over the past 200 year in response to big debt 
crises and exactly this kind of confrontation and this kind of 
crisis. This one will change, too. You know, in 5 or 10 years, 
you will be able to modify first liens in bankruptcy. It will 
not do us a lot of good right now, though.
    Senator Whitehouse. Dr. Reinhart.
    Ms. Reinhart. Extremely briefly, I think that when we talk 
about overleveraged households and overleveraged financial 
institutions, restructuring is a viable way of bringing down, 
at least partially, that overleveraging. And part of my remarks 
about forbearance, delaying the inevitable in the case of 
banks, and your comments, delaying the inevitable on the part 
of households, are doing just that, delaying the inevitable and 
making the slowdown much more protracted than it need be.
    Senator Whitehouse. Making the slowdown much more 
protracted than it need be. Thank you.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator. I would like to just 
conclude by trying to make sure that we clear up, for those who 
might be listening, the gross debt, publicly held debt, and 
then we got into unfunded liabilities, which is a third 
category, so that we do not leave that confused in the record 
or confused perhaps in public mind.
    The gross debt is all of the debt that is owed by the 
Federal Government to all of the entities--publicly held as 
well as to the trust funds, Medicare and Social Security, for 
example.
    The publicly held debt is just that debt that is due to the 
public. That does not count the debt to the trust funds.
    The unfunded liability is still another concept that looks 
at the differences between the promises that have been made in 
legislation versus the revenue streams that go with those 
spending commitments.
    Now, that is a more future-oriented look at where we are 
headed, and the unfunded liability of the United States is in 
the trillions of dollars. And the biggest part of that is 
Medicare. The unfunded liability, if my memory serves me 
correct, in Medicare is 6 or 7 times the unfunded liability in 
Social Security.
    So they are three separate concepts. The reason that we 
were focusing here, I think--I cannot speak for Senator 
Sessions, but we were talking about that--is from a budget 
standpoint, from what we have to deal with, we have to produce 
the money in this Committee to meet those debt obligations, 
both the publicly held and the gross debt, because those 
obligations to the trust funds are backed by the full faith and 
credit of the United States. They are real obligations. But 
they can only be funded out of current resources. So when 
Medicare is cash negative, Social Security is cash negative, 
that has budget consequences. And we are the Budget Committee.
    So I know economists like to look at publicly held debt. 
Dr. Reinhart is demurring. She is fully prepared to talk about 
the gross debt. But we have a special obligation to our 
colleagues to deal with the revenues that are going to be 
needed to meet these requirements not only of the publicly held 
debt but also of the gross debt, the obligations to the trust 
funds. And that has significant budget consequences.
    And we have been in this long-term period where the trust 
funds were producing more money. There was more money coming in 
than going out. That has been a very happy circumstance. That 
is all changing now. And I think it is when the changes occur 
that it is often least recognized. You know, it kind of gets 
missed by our colleagues.
    But this is going to have very, very significant budget 
consequences, and it is important for our colleagues to know 
that, and it is important for those who are watching to 
understand it.
    Senator Sessions?
    Senator Sessions. Just to followup on that, with regard to 
the way we account for the money in our Government that allows 
this confusion to continue. It was very dramatically revealed 
to me and I really did not fully understand it until just 
before the final vote on the health care bill. President Obama 
submitted a score from the Medicare that said if you raise 
Medicare taxes and you cut Medicare benefits, as they propose, 
it would extend the life of Medicare for 9 years, I believe. I 
think as it was stated, that is a true fact.
    But in the report from the CMS Chief Actuary for Medicare, 
he had a little parenthetical, basically, and it said, ``But, 
of course, you cannot simultaneously use that money to fund a 
new program and also extend the life of Medicare.''
    All right. But the CBO score--Dr. Marron, you used to be at 
CBO for a period. CBO said that you could, because the CBO 
score does not score internal debt. And so the President also 
used the CBO score to say that he could fund his new health 
care program and extend the life of Medicare by 9 years. And he 
had a CBO score that agreed with him. And basically what it 
said--they do not score the internal debt. So you had an 
increase in revenue out of Medicare, and it was spent on the 
new health care program, and it did not score as increasing the 
debt.
    Where did the money come from? It was borrowed from 
Medicare. A debt instrument shows that debt. And when Medicare 
gets back into its deficit, it will call that debt. And it did 
increase the debt, as CBO eventually said, by about $226 
billion.
    So the whole argument that this health care reform was 
going to save the country $130 billion was wrong. It actually 
was going to add to the gross debt of the country $200-plus 
billion, according to CBO, when they finally got the numbers 
straightened out. And we have got to watch that. Somehow that 
is a mix-up in the way we score. Both agencies scored according 
to their accounting conventions, but together they created a 
misimpression.
    Anyway, that is one of my sore sports.
    Chairman Conrad. Senator Whitehouse?
    Senator Whitehouse. I am sure that Senator Sessions did not 
want to create any misimpression himself, but I believe that he 
said that the President was cutting Medicare benefits, and I 
think it was clear that he was cutting Medicare spending. But--
--
    Senator Sessions. Right. The President did contend that he 
could cut spending without reducing benefits.
    Senator Whitehouse. Particularly in the area of the 
insurance company that is making 14 percent profits on Medicare 
and areas like that.
    Senator Sessions. Well, that is good argument. I would just 
say that if we can extend the life of Medicare 9 years without 
cutting any benefits, let us do it today. The problem is you 
cannot use that saving to fund a new program and also extend 
the life of Medicare, of which the CBO was absolutely crystal 
clear.
    Chairman Conrad. Well, you know, it is going to be an 
interesting year, isn't it?
    Let me just say this: I think we do have an extraordinary 
challenge, and the question for all of us: Are we up to this 
challenge? There are differences among us on this issue, but I 
believe the testimony here has been quite clear. in the short 
term, it would be a mistake to start to reduce the deficit too 
soon. We have seen what happened in the Depression when that 
was done. Additionally, Japanese experience cautions us against 
doing that.
    At the same time, it would be a profound mistake not to 
have a plan to deal with this longer-term debt challenge, 
because the burgeoning debt fundamentally threatens economic 
growth, economic security, and the position of our country in 
the world. And this is not just numbers on a page.
    I want to emphasize I think sometimes people listen to us 
and they hear us talk about this number and that number. Why 
are these numbers important? The reason they are important is 
that they ultimately affect people's lives, the ability of 
people to have a job, to buy a home, to get a college 
education. All of these things are directly affected by the 
strength of our economy, and the strength of our economy is 
fundamentally affected by the decisions the United States makes 
with respect to its budget obligations and its debt 
obligations.
    The Federal Government represents 20 percent of the 
economic activity of the country and it has a broader impact 
with respect to our long-term economic position, because if we 
take on too much debt, as Dr. Reinhart has testified in a very 
compelling way here--she has looked at the history for extended 
periods going back and looked at countries that have faced 
similar circumstances and then saw what happened. And what she 
is telling us is very clear. If you take on too much debt, it 
affects the rate of economic growth in a country adversely. 
That translates into people's quality of life.
    So it is very important for us, I think, to connect the 
dots for people. This is not just numbers on a page that are 
just of interest to Government accountants. These things 
contribute to the economic strength of the country or the 
depletion of our strength. And that is going to have an effect 
on every single American and, more broadly, is going to have an 
effect on the global economy.
    So we have a very serious burden here, a serious challenge, 
and we have got to prove that we are up to it. We have got to 
prove that we are up to it.
    I just want to thank the witnesses today for their 
assistance to us in that task. Dr. Reinhart, you were terrific, 
the first time before the Committee. We certainly will invite 
you back. You were really a great help to the work of the 
Committee.
    Dr. Johnson, it is always good to have you here, a lot of 
great clarity of thought as well as the ability to articulate 
these issues in a way that is understandable, even to those of 
us who are not economists.
    And, Dr. Marron, always good to have you back. You are 
somebody with great credibility before this Committee.
    I thank all of you, and I thank my colleagues for being 
here. The hearing stands in adjournment.
    [Whereupon, at 12:31 p.m., the Committee was adjourned.]
    QUESTIONS FOR THE RECORD
    [GRAPHIC] [TIFF OMITTED] T8153.271
    

    A. ANSWERS FROM SIMON JOHNSON TO QUESTIONS FROM SENATOR 
SESSIONS

    1. The best comparative cross-country data we have on 
government spending, revenue and deficits come from the IMF. 
They report gross general government debt, which is 
informative-but not exactly what we (rightly) focus on in the 
United States (i.e., net federal government debt held by the 
private sector).

    The comparison with Europe is difficult. I would strongly 
recommend using only net debt measures.

    2. Switching to accurual accounting has some appeal, but it 
would also introduce new complications. The US government has 
substantial assets on its balance sheet that are not valued at 
current market prices (e.g., gold holding of the Federal 
Reserve, various rights of way, and large land holdings.)

    Definitely we should recognize more explicitly our future 
liabilities. But the CBO already does a good job of this in its 
various alternative baseline projections.

    3. The fiscal position of the United States was under 
control around the year 2000. It moved out of control during 
the following decade as a result of tax cuts and spending 
increases (including, but not limited to, foreign wars.) 
However, the real damage was done by the financial crisis-most 
of the increase in debt in the CBOs baseline is due to 
automatic stabilizers, particularly the fall in taxes due to 
the recession (not the discretionary spending).

    For more detail, please see this article and the links to 
other related research: http://baslinescenario.com/2010/10/14/
there-are-no-fiscal-conservatives-in-the-united-states/

    Spending caps could play a role going forward. But we also 
need to look at comprehensive tax reform - our tax system is 
antiquated and long overdue for an overhaul.

    4. A tax on banks of this nature would be unlikely to have 
much impact in terms of lending, interest rates or anything 
else.

    5. We face a great dilemma in our budget. If we do not 
address the budget deficit, rising levels of debt will - one 
way or another - choke off growth. But when and if we either 
reduce spending or raise taxes (using our existing tax system), 
this can also impact growth in the short-term.

[GRAPHIC] [TIFF OMITTED] T8153.126


[GRAPHIC] [TIFF OMITTED] T8153.127

    ANSWERS FROM CARMEN REINHART TO QUESTIONS FROM SENATOR 
SESSIONS

[GRAPHIC] [TIFF OMITTED] T8153.272

    QUESTIONS FOR THE RECORD FROM SENATOR WHITEHOUSE TO SIMON 
JOHNSON

    Dr. Johnson, at the hearing, you pointed out that CBO and 
OMB deficit and debt projections do not include a placeholder/
estimate for future bailouts of too-big-to-fail firms. Would 
you recommend that CBO and OMB include such an estimate? In 
your view, how would this estimate be calculated?

    Dr. Johnson, at the hearing, you suggested that CBO and OMB 
do not properly score the assets and liabilities of Fannie Mae 
and Freddie Mac in the baseline of the federal budget. How 
should the assets and liabilities of these entities be scored? 
If scored according to your recommendations, what would be the 
approximate net changes in the deficit and debt projections 
over the ten-year window?

    B. ANSWERS FROM SIMON JOHNSON TO QUESTIONS FROM SENATOR 
WHITEHOUSE

    The cost of potential future crises should be estimated in 
the same way the CBO thinks about other potential events-
considering the probability and the likely scale of what could 
happen. The CBO is perfectly capable of approaching financial 
risks in this fashion.

    The current balance sheets of Fannie Mae and Freddie Mac 
are too murky for any outsider to take a definite view on the 
ultimate final cost. Hopefully, the regulators have better 
information. Buth the principle that should be applied is 
clear--the budget should reflect the probable costs of 
``bailing out'' these institutions both today and in the 
future.



  SETTING AND MEETING AN APPROPRIATE TARGET FOR FISCAL SUSTAINABILITY

                              ----------                              


                      THURSDAY, FEBRUARY 11, 2010

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:03 p.m., in 
room SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Nelson, Cardin, Whitehouse, and 
Sessions.
    Staff present: Mary Ann Naylor, Majority Staff Director; 
and Winnie Chang, professional staff member.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    I want to welcome everyone here today. I especially want to 
thank the witnesses for making a special effort given the snow 
conditions here in the Washington, D.C., metropolitan area. It 
is difficult to move around. I was up very early this morning 
shoveling--and I know many others were as well--and getting a 
little bit of a late start because the trains are not running 
here either. I was in the weekly caucus, and a surprising 
number of Senators were there for the conditions. But that made 
having this hearing challenging. We had really intended to do 
this yesterday but had to put it off because transportation was 
not functioning. The witnesses could not get here; members 
could not get here.
    I can say this: that other colleagues will be joining us. 
There are still caucuses going on, and there are members in 
those caucuses, and they are discussing important jobs 
legislation. But they will be joining us as we proceed.
    Those of us from North Dakota feel right at home with these 
conditions, but in fairness, this city I think has done a 
remarkably good job given how much snow has fallen here. I have 
certainly found that once you are able to get your car dug out, 
you can move around. So hats off to the D.C. Government for 
really, I think, doing a remarkably good job in extremely 
difficult conditions. This would be even tough back home.
    Our hearing today is entitled ``Setting and Meeting an 
Appropriate Target for Fiscal Sustainability.'' We are joined 
by a very distinguished panel of witnesses: Dr. Alice Rivlin, 
Ms. Maya MacGuineas, and Dr. Rudy Penner. I really cannot think 
of a better group of witnesses for a hearing like this one.
    Dr. Rivlin is the Director of the Greater Washington 
Research at the Brookings Institution. She is also now Co-
Chair, along with former Senator Domenici, of the newly 
established Bipartisan Policy Center's Debt Reduction Task 
Force. They are doing very important work, and it could not 
come at a better time. She is the former Vice Chairman of the 
Federal Reserve, former OMB Director, and she was the first 
Director of the Congressional Budget Office. What a remarkable 
series of contributions. So Dr. Rivlin brings an incredible 
amount of knowledge and experience to the table.
    Maya MacGuineas is President of the Committee for a 
Responsible Federal Budget and Director of the Fiscal Policy 
Program at the New America Foundation. Ms. MacGuineas appeared 
before this Committee last November and provided very valuable 
testimony at that time. We are delighted to have her back.
    Dr. Penner is a fellow at The Urban Institute and Co----
    Chair of the Committee on the Fiscal Future of the United 
States. He is also a former Director of the Congressional 
Budget Office and someone who has very high credibility with 
this Committee. So we are very pleased to have Dr. Penner with 
us as well.
    Again, special thanks for your being here. I think this is 
a critically important hearing because we are about to work on 
a budget resolution for either the next 5 or 10 years. We have 
not yet made a determination if this will be a 5-year budget or 
a 10-year budget, but in addition to that, we also have most 
certainly a commission that is going to go to work to try to 
come up with a plan to be voted on by the Congress before the 
end of this year to get us back on track. And so this hearing, 
I think, is very much in line with the larger challenge that we 
confront this year.
    We focus today on the question of what is an appropriate 
target for the long-term fiscal sustainability for our Nation. 
In an ideal world, our budget would be fairly close to balance 
most of the time. But given the tremendous long-term fiscal 
challenges that we confront, we need to determine a level of 
deficits and debt that is sustainable over the long term.
    Our goal must then be to adopt policies that will over time 
keep our deficits and debt at or below those target levels as 
much as possible. If we fail to confront our burgeoning deficit 
and debt, we put our Nation's economy at risk with consequences 
that could be far worse than anything we have seen in recent 
times. Each of our witnesses has been involved in efforts to 
identify such fiscal sustainability targets, so we have an idea 
panel for considering this subject.
    I would like to begin just briefly by outlining the problem 
we face and some of the fiscal sustainability targets that have 
been proposed. At its core, our fiscal problem stems from an 
imbalance between spending and revenue. We can see that 
spending in 2010 is projected to be over 25 percent of the 
gross domestic product of the United States--higher than at any 
point in over 60 years, as measured by the gross domestic 
product. Meanwhile, revenues are projected to be 15.6 percent 
of GDP--the lowest they have been in 60 years. Whatever 
solution we adopt over the long term is going to have to 
involve both spending and revenue. They both contribute to the 
problem, and they both have to be part of the solution.

[GRAPHIC] [TIFF OMITTED] T8153.144


    This next chart shows the deficits as a percent of GDP 
under President Obama's budget over the next 10 years. We can 
see that, according to the Office of Management and Budget, the 
deficit is projected to drop from 10.6 percent of GDP in 2010 
to 3.6 percent in 2018, and then it begins to creep up again 
after that. The deficit would never drop to the 3 percent of 
GDP that the administration has set as a goal last year. And I 
expect when CBO examines the President's budget, the 
President's deficit levels will be even higher. So one question 
we can consider today is whether a 3-percent-of-GDP goal is an 
appropriate target in the first place.

[GRAPHIC] [TIFF OMITTED] T8153.145


    The next chart I would like to put up shows that we have 
found that many outside budget groups, including the Peterson-
Pew Commission on Budget Reform, which Ms.
    MacGuineas is working on, and the Committee on the Fiscal 
Future of the United States, which Dr. Penner co-chairs, have 
identified a 60-percent debt-to-GDP level as an appropriate 
target for fiscal sustainability.
    To be clear, that is debt held by the public at 60 percent 
of GDP, not the gross Federal debt, and we are approaching this 
year--we are going to be measured against the gross Federal 
debt, a debt of 90 percent of GDP. We have not been that high 
since after World War II.
    The next chart shows the gap over the next 10 years between 
projected debt under CBO's January baseline, adjusted for 
alternative policies, and that 60-percent-of-GDP level. 
Clearly, the debt gap is growing dramatically with debt held by 
the public reaching 88 percent of GDP by 2020 under this 
alternative fiscal scenario.

[GRAPHIC] [TIFF OMITTED] T8153.146


    The next chart summarizes some of the fiscal sustainability 
plans that have been proposed. Peterson-Pew proposes a goal of 
stabilizing the debt-to-GDP level at 60 percent of GDP by 2018 
and reducing it further over the longer term. The Committee on 
the Fiscal Future of the United States proposes a goal of 
stabilizing the debt-to-GDP level at 60 percent by 2022 with a 
deficit of 1.9 percent of GDP in that year. The Center for 
American Progress proposes a goal of overall budget balance by 
2020 and estimates that reaching this goal would stabilize debt 
as a share of GDP at 65 percent. The Center on Budget and 
Policy Priorities proposes annual deficits of no larger than 3 
percent of GDP, which they estimate would stabilize the debt-
to-GDP at about 70 percent.

[GRAPHIC] [TIFF OMITTED] T8153.147


    Now, that is a lot of numbers. That is a lot of things to 
try to get your mind around. I provide that background to show 
that there are different goals that people have in mind, that 
various groups have in mind, as to what is an appropriate level 
of debt to be shooting for. I am not here to endorse any of 
those plans today, but I do want to highlight the six-step plan 
for achieving fiscal sustainability provided by the Peterson-
Pew Commission because it provides a specific timeline for 
action. It recommends the Committee committing immediately to 
stabilizing the debt at 60 percent of GDP by 2018; developing a 
specific and credible debt stabilization package in 2010; 
beginning to phase in policy changes in 2012; reviewing 
progress annually and implementing an enforcement regime to 
stay on track; stabilizing debt by 2018; and continuing to 
reduce the debt as a share of the economy over the longer term.

[GRAPHIC] [TIFF OMITTED] T8153.148


    None of this will be easy, whichever of these goals is 
adopted. And it is interesting how similar the goals are, many 
of them focusing on a debt-to-GDP of 60 percent, again, 
publicly held debt.
    Stabilizing the debt at that level will require very 
difficult decisions. As I said in the last hearing, I have gone 
through an exercise that I will be sharing with my colleagues 
of trying to get to 3 percent of GDP by the fifth year of this 
budget and then to balance before the end of a 10-year period, 
and I can tell you it is daunting. It is really striking how 
tough the decisions will have to be to accomplish a goal like 
that one. It is really striking how tough things are going to 
have to--the toughness of the decisions to be made.
    Senator Nelson. Mr. Chairman, may I ask you a question on 
that point?
    Chairman Conrad. Yes.
    Senator Nelson. If I recall, the President's budget 
projected over at least the next 5 years, if not over 10, 15 
years, does not even bring down the deficit to 3 percent of 
GDP. Is that correct?
    Chairman Conrad. That is correct. So getting to 3 percent 
by the fifth year, that in and of itself--you know, the 
President's budget has got some tough things in it. But that 
does not get down to 3 percent. And then it starts going up in 
the second 5 years as a share of GDP. And as I said, if one 
seriously goes through the exercise--which I have asked all of 
our colleagues to do before we get into the budget. I have 
asked everybody to do their own exercise, see what decisions 
have to be made to achieve any of these goals that have been 
outlined. I tell you, I think it will really sober people how 
really tough the decisions are going to have to be.
    It is clear the longer we wait, the harder these choices 
become. The chart that I want to show now shows one example of 
the magnitude of the difference in the level of deficit 
reduction required if we start gradually phasing in changes 
beginning in 2012 versus waiting 3 years longer. In this 
example, waiting 3 more years to begin phasing in changes 
results in an additional $588 billion in deficit reduction 
needed.

[GRAPHIC] [TIFF OMITTED] T8153.149


    The final chart is summarizing the point that the bottom 
line is that we are on an unsustainable course. Our Nation's 
foremost budget and economic experts have all come before 
Congress and told us this is the case. Here is what they have 
said:
    Treasury Secretary Geithner said, ``Our deficits are 
unsustainable.''
    The CBO Director, Mr. Elmendorf, said, ``The Federal budget 
is on an unsustainable path.''
    The OMB Director, Mr. Orszag, said, ``The path that we are 
on is unsustainable.''
    The Federal Reserve Chairman, Mr. Bernanke, said, ``We 
cannot allow ourselves to be in a situation where the debt 
continues to rise, which leads to an unsustainable situation.''
    The former Treasury Secretary, Mr. Paulson, said, ``It is 
clearly unsustainable.''
    The former head of the GAO, General Walker, Comptroller 
General Walker, said, ``We are on an imprudent and 
unsustainable long-term fiscal path.''

[GRAPHIC] [TIFF OMITTED] T8153.150


    And the former Chairman of the Federal Reserve, Mr. 
Greenspan, said, ``The Federal budget is on an unsustainable 
path.''
    You notice the similarity--unsustainable, unsustainable, 
unsustainable?
    Look, I know that there is a sense of denial among our 
colleagues about the seriousness of this threat. I see it every 
day. I have just come from a meeting in which I see it. This is 
tough, but it has got to be dealt with. If we let this get away 
from us, we will rue the day. We will rue the day. We will 
regret forever the consequences for the country.
    So, look, we have got to face up to this. Whether it is 
through the commission that the President proposed or some 
other method, we have got to deal with the consequences of a 
failure to act. So we have to act. The sooner, the better. The 
economic security of our Nation depends on it, and with that, 
we will hear from our witnesses. I will go to you, Dr. Rivlin. 
Thank you so much for being here. It would be hard to have a 
more perfect background than you have had for helping us 
understand what needs to be done in this circumstance. Please 
proceed.

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

    Ms. Rivlin. Thank you very much, Mr. Chairman and Mr. 
Nelson. I am really glad to be here because I greatly admire 
this Committee for your persistent efforts to focus the 
attention of the Congress and the Nation on the dangers of 
projected increases in the public debt and the importance of 
moving the budget onto a sustainable trajectory. I thought it 
was a shame that the commission that you and Senator Gregg 
proposed did not pass. I hope that the President's commission 
can receive strong congressional bipartisan support. But those 
of us who care deeply about this issue just cannot give up. So 
I really appreciate the opportunity to be here today.
    As you have pointed out, and so many others, on any 
reasonable set of economic assumptions, the U.S. budget is on 
an unsustainable track. There really is not any disagreement 
about that or about the reasons for it. In the next decade and 
beyond, Federal spending, driven by the impact of an aging 
population and rising health care costs on Medicare, Medicaid, 
and Social Security, will rise substantially faster than the 
whole economy can grow--faster than the GDP. Revenues, at any 
set of tax rates, will grow only slightly faster than the GDP, 
so there will be a widening gap.
    These projections are not new. They predate the financial 
crisis and the current recession. But 2 or 3 years ago, 
deficits, while inappropriate in a prosperous economy, were of 
manageable size, in the range of 3 percent of GDP, and the debt 
was not off the charts. It was around 40 percent of GDP. So the 
warnings of this Committee and the rest of us about the bigger 
deficits looming in the future were just not gaining traction.
    But the financial crisis of 2007-08 and the deep recession 
that it precipitated have changed the budget outlook 
dramatically. The deficit, as you pointed out, peaked at more 
than 10 percent of GDP, and the debt has soared to an estimated 
64 percent of GDP this fiscal year, and climbing. The big 
deficits will recede as the economy recovers and the temporary 
spending measures expire. But they will not recede far enough, 
as you pointed out, and, moreover, the double impact of aging 
and medical spending--which we once thought of as a long-run 
problem--is already driving deficits and debt higher and will 
accelerate by the end of the decade. So solutions must be 
found, and soon.
    As our debt mounts, the risk grows that our creditors, 
especially the foreign creditors who own about half our debt, 
will lose confidence in our ability to get our house in order. 
We have to take action very soon to arrest the debt buildup.
    Stabilizing the debt increase seems to be a sensible goal, 
and stabilizing the debt at 60 percent of GDP, while no magic 
number, has certainly gained credibility. Two high-level groups 
that you mentioned, including both Republicans and Democratic 
budget experts, have recently recommended stabilizing the debt 
at 60 percent og GDP by a date certain. The crucial question is 
by when. One could take another number, but 60 percent is good 
enough.
    The Peterson-Pew Commission, of which Maya and I were 
members, suggested getting to 60 percent by 2018. That is very 
aggressive. The National Academy Commission, which Rudy co-
chaired, suggested a slightly more gradual trajectory, get 
there by 2022. Even this more gradual trajectory would require 
substantial changes in current budget policy.
    I believe that a credible, politically viable plan to 
stabilize the debt must have two characteristics:
    First, as you pointed out, it must include both reductions 
in projected spending and revenue increases; and it must have 
the support of the leadership of both political parties.
    The widening gap between projected spending and projected 
revenues is too large to be closed by either spending cuts or 
revenues alone. Given the rapid aging of the population, 
especially in the near term, the high demand for medical care, 
and other necessary and widely supported functions of 
Government, I believe it is unrealistic to bring the growth of 
spending into line with the growth of GDP in the next decade.
    In addition, our tax system is extremely inefficient and 
complex. Part of the gap should be closed by reforming the 
Federal tax system so that it produces more revenue with less 
drag on economic growth.
    Now, no one needs to tell a Member of the Senate that 
partisanship has grown more extreme in the last few years. 
Neither party wants to take the lead in proposing unpopular 
policies such as cutting the growth of entitlements or 
increasing revenues, and each is eager to blame the other. But 
putting the budget on a sustainable track requires unpopular 
actions, and the only way to accomplish them is for both 
parties to work together. I have personally never been a big 
fan of commissions. It would be much better if the Congress 
could stabilize the debt by using its regular budget process. 
But a bipartisan commission with fast-track authority it seems 
to me is the best hope for serious debt reduction right now. I 
hope there will be an opportunity for the Congress to 
reconsider its rejection of the Conrad-Gregg proposal or to 
treat the President's proposal in a similar manner and to give 
it the force of law.
    Meanwhile, as you mentioned, former Senator and former 
Chairman of this Committee, Pete Domenici, and I have launched 
a Bipartisan Debt Reduction Task Force that we hope will 
demonstrate that Republicans and Democrats can work together to 
produce a sensible, viable debt reduction plan. Under the 
auspices of the Bipartisan Policy Center, which was founded by 
Senate Leaders Dole, Daschle, Baker, and Mitchell, we have 
launched an effort that we profoundly hope will show that 
crafting a bipartisan deficit reduction plan is not an 
impossible task. We have recruited an impressive group of 
citizens, former elected officials, and budget experts--I 
attach a list--and we will report by the end of the year. We 
hope to support the efforts of an official commission, whether 
statutory or created by Executive order, or whatever, and in 
any case to make our recommendations available to the public 
and to the Congress for further discussion and debate. We will 
be happy to assist this Committee in any way that we can.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Rivlin follows:]

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    Chairman Conrad. Thank you very much for that testimony, 
and thank you very much for the effort, because the clock is 
ticking, this is the time.
    One of the things I want to emphasize is Senator Gregg and 
I, who joined together after 2 years of working together on a 
proposal, were delighted to get 53 votes in the Senate. That is 
a majority. But all of us know it takes a super majority to 
pass. And we would have passed if everyone who had been an 
original cosponsor had stuck with us. But we had a number who 
did not. We had a number of other who had committed to 
supporting it who did not. And so that leaves us with a 
circumstance that either we go back and offer a statutory 
commission again, with the hope that some others will be 
persuaded to join us; or the President goes forward with his 
Executive order commission, which has now been buttressed by 
very specific pledges by the Speaker of the House and by the 
Majority Leader, that the recommendations of that commission 
will be brought to a vote in the Senate and in the House. And 
that is a very, very important difference from the way other 
commissions have operated.
    Ms. MacGuineas, welcome. It is good to have you here. 
Please proceed with your testimony, and then we will go to Dr. 
Penner.

   STATEMENT OF MAYA MACGUINEAS, PRESIDENT, COMMITTEE FOR A 
    RESPONSIBLE FEDERAL BUDGET, AND DIRECTOR, FISCAL POLICY 
                PROGRAM, NEW AMERICA FOUNDATION

    Ms. MacGuineas. Thank you. Thank you so much, Senator 
Conrad. It is really a privilege to be here again, and I think 
it is such an important topic because this is kind of moving 
toward helping people understand the specifics of what it is 
going to take to put the budget back on a sustainable path.
    What I would like to touch upon today is the need to pick a 
fiscal goal, how to think about the right goal, how to think 
about the right policies to achieve that goal, the types of 
policies that will be needed, and the consequences of failing 
to act.
    First, the need for a fiscal goal. Clearly, the Federal 
budget is on an unsustainable path, and while nobody can 
predict at exactly what point excessive debt would lead us to a 
fiscal crisis, we can all agree that we would rather not find 
out, so we need to get out ahead of this first.
    There are a number of compelling reasons to have a specific 
goal, and the first is to reassure credit markets that the U.S. 
is serious about controlling its debt and dependency on 
borrowing. While history and international experiences show us 
that cutting government spending or raising taxes too early 
when coming out of a recession can be destabilizing, we have 
also seen that announcing and committing to a credible plan can 
have positive economic effects and that an announcement effect 
can actually buy you some time.
    The second reason to commit to a fiscal goal is that it 
allows policymakers to say no. Even when there are new 
priorities that are compelling and have lots of good points 
that you want them in the budget, we can no longer afford to 
deficit finance additional policies, and I even believe that by 
picking a fiscal goal, it elevates the issue of coming up with 
a plan even before other policies that are paid for. So it 
really elevates that to a top-level priority.
    Third, having an agreed-upon goal allows comparisons of the 
tradeoffs between different approaches. So, for instance, 
health care reform only slows the growth of health care 
slightly. Much greater sacrifices will have to be found in 
other parts of the budget. If a plan doesn't raise taxes, 
entitlements and discretionary spending would have to take a 
tremendous hit. If the plan protects all beneficiaries over a 
certain age, then people who are younger will have to sacrifice 
more, and so on. So right now, it is much too easy for anybody 
to demagogue, and you can say, well, your plan would cut Social 
Security by X amount, or that would be the largest tax increase 
ever, and it is not fair to compare those against the option 
right now, which is staying on an unsustainable course. So this 
is really a way to level the playing field of options.
    I would also like to take this opportunity to thank you and 
Senator Gregg for the really important work you did on putting 
forward the plan for the commission, and I am sorry that some 
of your colleagues changed their minds and didn't support it, 
but I hope we will be able to turn that into some productive 
mechanism to move forward.
    So in terms of picking the right goal, there is no single 
right goal. As you mentioned, the Peterson-Pew Commission has 
recommended stabilizing the debt at 60 percent of GDP by the 
year 2018, and over the long term, we think it is critical that 
we continue to bring the debt down closer to historical levels 
at below 40 percent because of the fiscal flexibility that you 
need to have by not having excessively high debt levels. That 
is one of the things that helped us respond to this economic 
downturn.
    So we base the 60 percent target on international, 
economic, and political factors. Global markets are more 
likely, we believe, to embrace a goal that has international 
credibility, as the 60 percent number does. We also believe 
that it is the most ambitious and economically sensible target 
that can be achieved in the timeframe. Given the significant 
risks of high U.S. debt, a less aggressive target might be 
insufficient to reassure markets. We also worry that if a 
timeframe is too long, policymakers might not stick to the plan 
and they would change course in the middle of it.
    The goal really requires two pieces, bringing the debt down 
to a reasonable level of 60 percent or whatever target is 
picked, and then stabilizing it so it doesn't come back up in 
the longer term. We don't get into this in the report, but I 
think it is quite likely that you will need to have different 
kinds of policies to achieve those. So the medium-term target 
is going to need policies that can be implemented more quickly 
and they may well come on the discretionary and revenue side of 
the budget, while the longer-term goal, so that the spending 
side of the budget doesn't turn back up again, is going to have 
to really get at the drivers of growth, the policies that are a 
result of aging and health care problems, Social Security, 
Medicare, and Medicaid.
    When I had the opportunity to talk about the commission 
here, the bottom line, I felt, was that the most important 
thing is that the structure of the commission have widespread 
buy-in, and I think the exact same principle applies to a 
fiscal goal. But the most important thing here is that there is 
widespread buy-in to it so that we can have that be the first 
step and then move into the specifics of how you achieve it.
    So whatever fiscal goal we do end up picking, the starting 
point really, really matters. It will be greatly affected by 
whether policymakers let policies that are slated to expire do 
so, or whether they renew them but pay for them, or whether 
they are made permanent in a way that is deficit financed.
    If we assume the fiscal goal of stabilizing the debt at 60 
percent in 2018, it would require roughly--and you showed this 
in your posters, in your charts--it would require roughly $1.5 
trillion over 9 years that we don't assume you would start 
immediately under current law to get there. And it would take 
$5 trillion under current policy. That just shows you the huge 
additional debt that is layered on by extending a lot of 
policies without attempting to offset any of those costs.
    We include in our report a budget blueprint that is purely 
illustrative. It is not a plan that our commission endorsed, 
but it shows all the policies. We lay out the policies under 
both scenarios that it would take to get to that 60 percent 
target, and it is here and it is included in my written 
remarks.
    I also wanted to put forth a couple principles that I 
thought were helpful in coming up with the specific policies. 
The first is that changes should be conducive to economic 
growth, or at least minimize the degree to which it hinders 
growth, whenever possible.
    The second is that spending growth is the crux of the long-
term budgetary problem, but that both spending and revenues 
will probably have to be part of any budgetary solution.
    Third, reform should, indeed, focus on the drivers of 
programmatic growth, particularly for the long-term 
stabilization portion of a goal.
    And finally, the sluggish economy should not be used as an 
excuse to delay coming up with a plan, even though we need to 
be sensitive about implementing a plan too quickly.
    So the Committee for a Responsible Federal Budget doesn't 
endorse specific policy changes, so I will go ahead and speak 
only on my own behalf when I put forward a couple examples of 
what I think we should be talking about. And I do think it is 
so important to talk about specifics, because the kinds of 
things that are in the political discussion right now are much 
smaller than the types of policies it is actually going to 
require, and I think policymakers and the public have to come 
to an understanding of exactly what it is going to take.
    So some of the most promising policies that I would 
recommend are, first, raising the retirement age. As life 
expectancy increases, we just can't afford to support people in 
retirement for as long as we have currently under these 
programs. Increasing the retirement age also has positive labor 
market effects.
    Second, restructuring some of our entitlement programs so 
that we slow the growth of benefits for people who need them 
the least. Given that entitlement programs will have to change, 
you can either reduce benefits across the board or you can 
reduce them more for people who need them less, and I certainly 
think we should do that in terms of Social Security. We should 
look at ways to slow the growth of benefits at the upper end. 
And in terms of Medicare, it makes an awful lot of sense to ask 
people who can afford to contribute more to the cost of their 
benefits to do so.
    Third, we are going to have to do more on health care. No 
matter what happens with the health care bills that are being 
considered, as we have seen, they haven't done enough to 
control costs to really take a lot of pressure off the rest of 
the budget. So I think it is very important that we look at the 
pieces of the Medicare reforms that would be most likely to 
slow the growth of health care costs, including the Medicare 
Commission, including the tax treatment of employer-provided 
health care.
    And we need to have a rational discussion in this country 
about who should pay how much for health care. We are 
constantly kind of shifting it around so you pay for your 
health care, you pay for your health care, and people don't 
think that the costs come down to them. We need to have a more 
sensible discussion about it and bring people closer to the 
costs so that we can help control them in the longer term.
    I think reintroducing discretionary spending caps makes an 
awful lot of sense. In the past decade, discretionary spending 
grew faster than the economy, even excluding defense spending. 
That is the case. And so I think to ensure that politicians 
make tough decisions in this area of the budget, we can have 
strong, enforceable spending caps. They have always been the 
traditional counterpart to PAYGO and I think both of them 
should be in place as we go forward. Nobody thinks that they 
replace an actual budget deal, but they can certainly help us 
stay on track.
    Broadening the tax base, I think is a critical piece of 
this. Right now, the tax base is replete with credits, 
exemptions, deductions, exclusions. All told, tax expenditures 
lead to $1 trillion less in revenues collected by the Federal 
Government than would otherwise take place, and they are what 
account for the great complexity of the tax code. So I think we 
can do a lot of reforms on the tax base to simplify, make more 
efficient, make more progressive our tax base.
    Finally, even after all spending cuts have been put in 
place, it is very likely that there will still be a budgetary 
gap, and I think we are going to have to talk about what kind 
of broad tax reform should be on the table. I think it is 
likely that that discussion is going to look at a number of 
different revenue options, from increasing rates, to a 
transaction tax, which we have just started to hear a little 
rumbling about and you see more of that discussion going on in 
Europe right now, to a VAT, to an energy tax. My preference 
would be to look at an energy tax or a cap-and-trade which 
doesn't return all of the revenues back to families or to 
businesses. But I think it is important to think about if you 
can't get there on spending, you have to fill it in with 
revenues. What is the most efficient way that you can do that? 
We know that the higher taxes are, the more they can hurt the 
economy, so we want to be very thoughtful about that.
    Finally, two process recommendations. The first is that I 
think a budget deal should be enforced with a debt trigger. The 
type of trigger that we recommended in our commission report 
was one that is broad-based and applies equally to revenue and 
spending. Triggers have not been particularly effective in the 
past, and one of the reasons is that so many parts of the 
budget are exempt from that trigger. We wanted to have a 
trigger that was uncomfortable enough that nobody wanted to 
pull it, but possible that if it had to be pulled, it could 
actually be put in place. So we did a lot of thinking about how 
to construct that trigger.
    Second, we have the expiration of the 2001-2003 tax cuts 
coming up. I think that can serve as a very useful lever right 
here, where we have members of both parties who want to extend 
at least the bulk of the tax cuts. I think delaying doing that 
until we have a budget deal in place makes a good deal of 
sense. If we continue to give away all the sweeteners in the 
budget, it makes it so much harder to take the tough medicine.
    So just finally, the risk of inaction is becoming more and 
more apparent every day. We see what is going on around the 
world. We hear what Moody's and other credit agencies are 
warning to us. And we know that excessive debt can harm the 
economy in terms of interest rates, in terms of jobs, in terms 
of standard of living.
    The most prudent course of action would be to commit to a 
credible plan as quickly as possible and to phase in gradually 
as the economy is recovering enough so that it can accommodate 
that. If we don't get our fiscal house in order, we know that, 
ultimately, we will face some sort of fiscal crisis, either a 
steady deterioration of our standard of living or an abrupt 
crisis brought on by some external action. Clearly, nobody 
wants to see that happen, and so I once again thank the 
committee for holding this hearing and starting to talk about 
the specifics as we move forward.
    [The prepared statement of Ms. MacGuineas follows:]

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    Chairman Conrad. Thank you. Thank you for really excellent 
testimony.
    Dr. Penner, welcome. It is always good to have you here. We 
appreciate very much all of the effort that you have extended 
helping us understand the alternatives going forward. Please 
proceed.

  STATEMENT OF RUDOLPH PENNER, PH.D., INSTITUTE FELLOW, URBAN 
   INSTITUTE CO-CHAIR, COMMITTEE ON THE FISCAL FUTURE OF THE 
                         UNITED STATES

    Mr. Penner. Well, thank you, Mr. Chairman. I would like to 
thank the committee for the opportunity to testify on this 
report, ``Choosing the Nation's Fiscal Future''. It was 
organized by the National Research Council and the National 
Academy of Public Administration and I co-chaired the report 
with John Palmer of Syracuse University. I share Alice's 
admiration for the work of this committee and it is a 
particular privilege to be here.
    Like a number of other reports, this one makes the argument 
that today's budget policies are, indeed, unsustainable. As you 
noted, you have heard that argument many times before, so I 
won't go into it here. The arguments are in my prepared 
testimony.
    As recommended in the report, ``Red Ink Rising'', our 
committee believes that Congress should set a target for the 
debt-GDP ratio and not exceed it. We believe further that a 
prudent target would be to hold the debt to 60 percent of the 
GDP. If the Nation experiences good fortune while holding the 
debt to this level, it would be wise to lower the target 
further.
    Now, as Maya has said, the choice of 60 percent as a target 
is a matter of judgment. The committee had to balance the risks 
of choosing a higher target against the political difficulty 
involved in getting to something lower.
    A higher debt-GDP ratio means running higher deficits. To 
make the arithmetic easy, for example, if the GDP grows at 5 
percent per year, then arithmetically, a 60 percent target 
implies holding the deficit to 3 percent of the GDP, whereas if 
we went to 80 percent, the deficit consistent with that would 
be 4 percent of the GDP.
    As the target for the deficit and debt-GDP ratio is raised, 
government would draw on a higher proportion of the available 
supply of domestic and foreign saving, and interest rates would 
rise. To the extent that the deficit was financed out of 
domestic savings, there would be less available to finance U.S. 
private investment and that would mean lower productivity 
growth than otherwise, and therefore lower wage growth and 
lower standards of living.
    To the extent that foreign saving are used to finance 
deficits, Americans would have to devote a growing proportion 
of their incomes to paying interest and dividends to 
foreigners, and again, American living standards would suffer.
    And a higher debt-to-GDP ratio also raises the risk of a 
total meltdown in the market for our bonds. Problems would 
arise if recession, wars, or some other emergency pushes the 
ratio above the target and potential buyers of our bonds begin 
to doubt our ability to put fiscal policies back on a 
sustainable path.
    If people want to see what could happen next, they should 
look to Ireland and Greece. In the face of a debt crisis, 
Ireland has been forced to raise taxes quickly and slash 
spending. Civil service pay has been cut more than 7 percent 
and social programs have been decimated. Tax increases and 
spending cuts have amounted to over 5 percent of GDP, a huge 
negative stimulus that exceeds the value of our recent positive 
stimulus program.
    Greece may yet be bailed out by the EU, but I suspect that 
any lender is going to impose harsh conditions on their fiscal 
policies, and it raises a question, who would bail us out? The 
IMF? What would the American people think about having our 
policies dictated by a lender?
    All this suggests that it might be much better to choose a 
target for the debt-GDP ratio considerably lower than 60 
percent. However, as you suggested, Mr. Chairman, when you look 
at the policies necessary to get even to that level, they are 
extremely difficult politically.
    I believe that the most important contribution of our 
committee was to outline a rich menu of policy options that 
would get us from here to there. We group the options into four 
packages. At one extreme, the committee asked what spending 
cuts would be necessary to stabilize the debt-GDP ratio at 60 
percent if the total tax burden were maintained at its historic 
level between 18 and 19 percent of the GDP. That package is 
called the low spending option.
    At the other extreme, the committee estimated what tax 
increases would be necessary to finance currently promised 
Social Security, Medicare, and Medicaid benefits while other 
programs grew as determined by current law. There did 
eventually have to be some slowdown in health costs because 
they can't be allowed to consume the whole of the GDP. But such 
a slowdown could be put off for a long time.
    Two middle paths were also delineated. They differed 
primarily in the degree to which benefits were maintained for 
the elderly population. In the path that was relatively 
generous to the elderly, spending on infrastructure, research, 
and other types of spending had to be constrained, while the 
other middle path, non-elderly spending could be treated more 
generously.
    The four packages were put together for illustrative 
purposes only. The numerous policy options contained in those 
packages could be put together in an infinite variety of 
combinations.
    The package that avoided any significant increase in the 
tax burden required that the rate of growth of Social Security 
benefits be held to the level that could be financed with the 
current payroll tax structure. That required accelerating by 5 
years the speed with which the full retirement age reaches 67 
and indexing it to longevity after that. It involved reducing 
the indexing of initial benefits for the top 70 percent of 
earners and also switching to an experimental price index which 
has been developed by the BLS and which most people expect to 
grow more slowly in the long run than the current index.
    In assessing such a package, it is important to 
differentiate an absolute reduction in the purchasing power of 
benefits compared to today's level from a reduction in the rate 
of growth of benefits. Although the package seems severe, it 
would more than maintain the purchasing power of today's level 
of benefits for all but the most affluent. It would, however, 
reduce replacement rates considerably below the levels promised 
by current law.
    The rate of growth of health spending in the low-spending 
option had to be held back to that caused only by the aging of 
the population. That is to say, all other causes of excess 
health cost growth had to be wiped out. We divide health 
options into two categories, those that can be readily scored 
by the CBO and those that are so uncertain that CBO does not 
provide estimates.
    It would probably involve using every option mentioned in 
the chapter to some degree to achieve the health target for the 
low-spending path. To the degree that options with uncertain 
effect actually worked, the scorable options could be 
implemented less painfully.
    Another more radical approach to achieving the health cost 
target would be to put Medicare and Medicaid on fixed budgets. 
Fixed budgets are used in the universal coverage systems of 
Canada and the United Kingdom. In Canada, every hospital must 
work on a budget and physicians are limited as to their gross 
income. The rationing methods that go with the fixed budgets 
are anything but transparent.
    A different approach to a fixed budget would be to use a 
voucher system to provide Medicare. The voucher would be used 
by the elderly and disabled to buy insurance and the value of 
the voucher would vary inversely with income. Medicaid could be 
put on a fixed budget by shifting to a block grant.
    The low-spending option also implies severely constraining 
all other spending, as well. The low-spending defense path 
would allow the Pentagon to maintain the current personnel 
policies but would allow very little investment in new weapons 
systems. Although it would allow small foreign interventions, 
nothing as large as the current effort in Iraq or Afghanistan 
would be possible. All other non-defense spending would have to 
be lowered considerably below today's share of the GDP.
    In the package that attempts to maintain current law 
benefits, that is the high-spending option, two different 
financing mechanisms are proposed. In one, we just 
proportionately raise all tax rates in the current system until 
you hit 50 percent for the top rate. That happens by 2020. We 
don't want to go above that because of the inefficiencies and 
inequities that would cause, so we introduce a Value Added Tax 
at that point, at first at less than 1 percentage point, but 
ultimately reaching 7.7 percent by 2040.
    In the other approach, which I think is much preferable, 
the income tax is radically reformed. Almost all tax 
expenditures would be eliminated. The employer-provided health 
exclusion would be capped. There would be only two rates, one 
at 10 percent and the other at 25. The top would start at 
$44,950. They would rise temporarily, but the elimination of 
all the tax expenditures, especially those related to health, 
generates so much revenue in the long run that the rates could 
actually be lowered over time.
    Besides large increases in income tax revenue, the high-
spending scenario would require a doubling of the Medicare HI 
tax, and considerable increases in the Social Security payroll 
tax. The payroll tax cap would be gradually raised until it 
covers 90 percent of earnings. The payroll tax rate would have 
to go from 12.4 percent ultimately to 14.7 percent by 2080. And 
there would have to be a second tier surtax that didn't earn 
you any benefits, which would start at 2 percent and ultimately 
rise to 5.5 percent.
    So this high-spending option would raise the overall 
Federal tax burden by 50 percent compared to the 17.7 percent 
of 2008 and it would continue to rise after that. If you add a 
reasonable estimate of State and local taxes, the U.S. tax 
burden, which is now considerably below the OECD, would go 
significantly above the average by mid-century.
    Now, speaking for myself and not the committee, I think 
when you see the extraordinary spending cuts that would be 
required to keep the tax burden constant and the extraordinary 
tax increases that would be required to keep all of our 
promises to the elderly and others, I can't help but agree with 
you, Mr. Chairman, that some mixture of those two things would 
be required. But I certainly am not speaking for the committee 
on that point.
    We did, therefore, have these two middle options, which as 
I said before differ in their degree of generosity to the 
elderly. I can discuss those in detail later if you like.
    The testimony concludes by looking at a lot of process 
changes that our committee considered. We don't think process 
changes can cure the problem all by themselves, but we think 
they might be helpful in helping the Congress deal with this 
extraordinarily difficult task.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Penner follows:]

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    Chairman Conrad. Dr. Penner, thank you for that excellent 
testimony, and even more for the outstanding work to lay out 
specific options. I tell you, I think if our colleagues go 
through the exercise you have just gone through, the exercise I 
have just gone through with my staff, it will be so sobering to 
them that I think it will help advance the need to act soon, to 
begin the process.
    We know that in the midst of an economic downturn, in terms 
of good economic policy, you don't cut spending or raise taxes. 
Those both have a tendency to further jeopardize recovery. But 
very soon here, as recovery takes hold, we have to pivot and 
focus like a laser on this debt threat. All of you have made 
that abundantly clear.
    Senator Sessions has joined us. I know that he was in 
another committee. I am delighted that he is here. I want to 
recognize Senator Sessions for any opening statement that he 
would want to make----
    Senator Sessions. Thank you.
    Chairman Conrad [continuing]. And then we will open it up 
to questions.

             OPENING STATEMENT OF SENATOR SESSIONS

    Senator Sessions. I will be brief. First, thank you for the 
series of hearings you have been holding, Mr. Chairman, because 
we are hearing from some of the best people in the world, in 
America, on perhaps the biggest threat we have to our country 
at this time. I look forward to working with you and believe we 
are going to have to take some steps.
    On the question, you note that we shouldn't cut spending or 
raise taxes in a time of economic downturn. I think the real 
question we have is how much can we increase spending. $800 
billion that was passed--over my objection. Every penny of that 
will add to our debt, and I truly believe we did not get the 
kind of job creation and economic stimulus that was projected 
for it, and I think many people predicted that. I believe Nobel 
Prize winner Mr. Becker wrote that he saw that you should hope 
to get over $1 stimulus for $1 invested. He thought we would be 
well below that. That is why he opposed it. And apparently, 
reality has indicated that is so.
    I just would say to you wise thinkers sitting there--and I 
don't speak for other members of my party. This is such a big 
issue and it is very personal. I am not for a permanent 
increase in the size of the U.S. Government. I believe we have 
a culture, a history, a heritage of limited government and we 
have accelerated our debt situation through a number of bad 
decisions, in my view, and now the answer is, well, we just 
have to have a tax increase and this will raise up somewhat the 
percentage of GDP the government extracts every year and I 
don't like that.
    So you might say, well, Sessions, we are willing to cut a 
little bit, but you have got to raise taxes a little bit. Well, 
I am not too sure about that. I mean, that is not what my 
people are saying. They think government wastes too much money, 
spends too much money, and it needs to take a shave and not 
grow.
    So I guess I am being honest with you, Mr. Chairman. We 
have got a big problem here because this isn't an easy thing 
for me to say I am going to vote for tax increases this deep, 
in my view, of what I was sent here to do on behalf of my 
constituents. And that is not going--I think a lot of other 
people feel the same.
    So what we will do, I don't know, but we are going to have 
to deal with the reality that you are laying out for us and I 
will do my best to think about it.
    Ms. MacGuineas, thank you for the support--and Ms. Rivlin--
of the bipartisan bill we offered to contain spending at the 2-
percent or so level that the budget calls for. I think 17 
Democrats voted for that, close to the 60-vote majority needed 
to pass it, and maybe we can somehow get that across the hump.
    Finally, the containing spending is always about next year. 
We have just got one more year to keep thing going. And that is 
concerning to me. I think we have got to look at this year's 
budget and make sure that not a dime is spent that isn't 
critically important that it be spent. Thank you.
    Chairman Conrad. Thank you, Senator Sessions. Let me just 
say to my friend, you know, what we have is a circumstance in 
which those who are on the more liberal side of the spectrum do 
not want to change the trajectory on Social Security and 
Medicare by a nickel, and we have got those on the more 
conservative of the spectrum who do not want to raise taxes by 
a nickel. And we are in a circumstance, I believe, that is 
going to require both. I personally believe we are going to 
have to do more on the spending side long term than on the 
revenue side, because if you look at the long-term trajectory, 
the reality is I think more is going to have to be done on the 
spending side than on the revenue side. But I believe if we 
really set the kind of goal that we need for the country in 
terms of level of debt, that if we just did it on the spending 
side of the equation, as Dr. Penner said, the cuts would have 
to be so deep, so draconian, that it would not be sustainable.
    And, on the other hand, I know that there are passionate 
feelings about revenue, not raising revenue. I think the first 
place we look on the revenue side is a more efficient revenue 
system, because my calculation--and I know the Internal Revenue 
Service will not agree with this, but I believe we are only 
collecting 76 percent of what is owed under the current system. 
If we actually collected the money we are supposed to collect 
under the current system, we would not need any tax increase, 
we would not need additional revenue. We would have additional 
revenue, and we would in large measure eliminate the gap. We 
would still have very serious problems on the spending side of 
the equation because of the baby-boom generation, and the 
undeniable fact is we are going to double the number of people 
eligible for Medicare and Social Security.
    And I have had people who are on the more liberal side of 
the equation attack me and say I am for cutting Medicare and 
Social Security and that is what my whole goal is. I would just 
say to them, if they are seriously concerned about Medicare and 
Social Security beneficiaries, then they better get serious 
about how we deal with the utterly unsustainable course that we 
are on, because the fact is both of them are cash negative 
today. Medicare, according to the trustees, is going to go 
insolvent in 8 years. Social Security is not far behind. Both 
of them are now putting pressure on the general fund because we 
owe out of the general fund to the trust funds of Medicare and 
Social Security the money that we borrowed from them, and we 
have borrowed in the hundreds of billions of dollars. And that 
has got an immediate budget effect, which was the part of the 
conversation you and I were having the other day, that those 
who just focus on the publicly held debt--and I think it is 
important to repeat, because there is a lot of reference here 
to various debt stabilization levels, and the 60 percent of 
debt-to-GDP, gross domestic product, is based on the publicly 
held debt. That is the debt that we owe the public. It does not 
count the money that we owe the trust funds.
    When you look at all of the debt, the gross debt, which you 
and I were advocating we have to do--certainly from a budget 
perspective we do--because the reality is the debt that is the 
gross debt of the United States includes what we owe to the 
public; it also includes what we owe to the trust funds of 
Social Security and Medicare.
    When you look at it on a gross debt basis, we are already 
this year going to have a debt that is going to be 90 percent 
of the gross domestic product of the United States. Ninety 
percent. We have not been that high since after World War II.
    As a share of the publicly held debt, our debt is going to 
be over 60 percent of GDP, and what most of the witnesses here 
are advocating is a debt stabilization goal of 60 percent of 
GDP, which I think is a worthy goal.
    Senator Sessions. Which is using the public debt.
    Chairman Conrad. Yes, of the publicly held debt.
    But, again, I think it is very important for members of 
this Committee to know from a budgetary standpoint that gross 
debt has to be very much on our minds, because we have got to 
come up with the money to pay back those trust funds, and that 
can only come out of current income.
    Now, let me go to the witnesses, and let me ask you this 
question. You have done the scenarios, and I applaud you for 
going through and actually coming up with alternative 
scenarios. And, boy, it is sobering, is it not, Dr. Penner?
    Mr. Penner. It certainly is, Senator.
    Chairman Conrad. And you are well known as beining 
conservative financially. You are somebody that has been very 
clear with respect to the long-term trajectory. When you go 
through the effort to come up with a plan that stabilizes the 
debt at 60 percent of GDP, there are just a whole lot of very 
unhappy choices. Isn't that the case?
    Mr. Penner. Yes, sir. I think any reasonable path involves 
significant changes to what you might call the sacred cows of 
Social Security and Medicare and, as I said, I think some 
increase in the tax burden. I do think that the best way to go 
about it, as you implied, is through a radical tax reform, 
because the way economists see it, the inefficiency of the tax 
system increases with marginal tax rates. And if we can get rid 
of a lot of tax expenditures, we can lower those rates actually 
below today's level and still raise additional revenues.
    Chairman Conrad. But let us be very clear. When we are 
talking about that, we are talking about things like the 
interest deduction on mortgages. We are talking about the fact 
that today health care benefits are untaxed. You get, as we all 
do, benefits--or more of us do, benefits from our employers. 
Those are not taxed. That is $2.5 trillion, by the way of tax 
benefits for health care over the next 10 years--$2.5 trillion. 
That is real money.
    Mr. Penner. And it grows over time.
    Chairman Conrad. And it grows geometrically over time.
    So let me ask you, Dr. Penner, with respect to that--and I 
will go to the other witnesses as well. We are going to have to 
deal with Social Security and Medicare. Medicare is the 800-
pound gorilla. It cannot be allowed to continue to grow at its 
current rate without swamping the whole system. And to those 
who say they care about Medicare beneficiaries--and I believe 
all of us do--and to those who say they care about Social 
Security beneficiaries--and I believe all of us do--and to 
those who say they care about the tax burden on our taxpayers--
and I believe all of us do--isn't it true, Dr. Penner, that we 
are headed on a course that threatens all of those interests?
    Mr. Penner. Yes, it is, sir, but I think we should not 
exaggerate the pain involved in this too much, because as I 
noted, even in our most severe cuts to Social Security, most of 
the population ended up with higher real benefits than they get 
today. Now, that was not true with the most affluent because of 
our progressive indexing system. But in either of our middle-
ground scenarios, the real value of benefits does continue to 
go up over time.
    Chairman Conrad. But isn't Social Security the easiest one 
here to deal with?
    Mr. Penner. That is true. With regard to Medicare, that is 
much more difficult, both conceptually and politically--
conceptually because we do not know how well a lot of the 
frequently suggested options would work, politically for very 
obvious reasons.
    But, again, after you do what you can to get rid of the 
inefficiencies in the system, the major driver here is 
technological change, which makes health care more expensive 
every year. And so what we are talking about is improving 
quality of health care over time, and we should not lose sight 
of that. It would be easy to finance the quality of health care 
we have today, but it is what is promised for the future that 
is so difficult.
    Chairman Conrad. Let me just go right to the 800-pound 
gorilla, because it is Medicare. Dr. Rivlin, what would you 
recommend to this Committee and to the Congress that we do to 
deal with Medicare and its threatened insolvency?
    Ms. Rivlin. That is the hardest question, but I think there 
are a lot of partial answers. We do not know really how 
effective some of the things that have been suggested in terms 
of making the health care system more efficient can be, but 
they ought to be tried. We should put in place a strong 
Medicare commission that picks the best ways of changing the 
reimbursement rates so that they favor better, more efficient 
health service delivery, and cannot be overridden by the 
Congress--which has been happening time after time, as you well 
know--and other kinds of ways of reducing the rate of growth of 
Medicare spending. We are lucky in a sense. We have a very 
inefficient health system. That may sound counterintuitive, but 
compared to some other countries, we have very large 
opportunities to make this system more efficient in the near 
term. And in the end, we are going to have to worry about 
rationing. But I do not think we are going to get there for a 
couple of decades. We have the opportunity to be more 
efficient.
    Chairman Conrad. Let me ask you this question, and I will 
ask all the witnesses this question. Senator Gregg and I wrote 
the Congressional Budget Office, and we said, ``What would be 
the most effective things that we could do to contain exploding 
costs in health care?'' Their answer to us was clear and 
compelling.
    No. 1, they said, ``You have got to begin to tax Cadillac 
plans. You have got to reduce the tax exemption for health 
care.''
    No. 2, they said, ``You have got to reform the delivery 
system. Instead of paying for procedures, you have got to begin 
to pay for quality outcomes.''
    They said those are the two most important things you can 
do. Do you agree with that?
    Ms. Rivlin. I agree with that, and I think an enormous 
opportunity was lost actually by the Obama administration in 
not embracing Senator McCain's notion that the tax exclusion of 
employer-paid health insurance from income should be gradually 
phased out. That is, I think, a better approach, actually, than 
taxing the Cadillac plans, although they----
    Chairman Conrad. Well, in fairness, that is really what CBO 
did recommend. I morphed it a little there to taxing Cadillac 
plans. They really said phaseout----
    Ms. Rivlin. Well, they get to the same objective.
    Chairman Conrad. Yes, they do. In an economic sense, they 
do.
    Ms. Rivlin. Yes, and I think you could do it either way. 
But it is really important that we not have the tax system 
favoring excessively generous health plans which encourage 
people to use too much health care and encourage the providers 
to deliver it in an inefficient manner. And the other piece is 
all of the things that go with making the health care delivery 
system more efficient, not all of which we know yet. We need to 
experiment with that and figure out how to do it better, 
because it can be done better.
    Chairman Conrad. We know it can be done better because here 
in this country we have got systems that are relatively low 
cost that have the best outcomes: Mayo Clinic, Cleveland 
Clinic, Geisinger. They are operating at much lower costs and 
getting the highest quality outcomes.
    Ms. Rivlin. Right. And we know something about how they do 
it.
    Chairman Conrad. Yes, we do.
    Ms. Rivlin. It is a question of spreading it to other 
systems.
    Chairman Conrad. Maya, what would you say? With respect to 
Medicare, because I want to go right at the 800-pound gorilla, 
what do you think would be leading alternatives for us to 
consider to deal with the exploding costs?
    Ms. MacGuineas. Yes, well, I tend to always regularly bow 
to the reports of CBO, which I think are phenomenal, and so it 
is always nice to sit between two former CBO Directors. I think 
that report that you and Senator Gregg requested was really, 
really important, and it focused exactly on the right things.
    Clearly, our tax preference for health care is one of the 
things that is driving up the cost. It is putting us into 
insurance systems--we are demanding more health insurance and 
less in wages, which is not a rational policy normally, but 
that is what the tax incentive is to do when it is pushing up 
costs.
    So it is unfortunate that we have not been able to go at 
that head on. I am of the camp that you pull that back as much 
as possible. I basically say the things in the report, the 
things that make sense. I think paying for outcomes rather than 
procedures makes sense. I think the comparative effectiveness 
studies which were put in place, looking at what works, are 
very important. But you have to understand there is a second 
step of that. It is not just that you study it and then put the 
report on the shelf. You then have to use what we find to limit 
what health care would be compensated for by Medicare, 
Medicaid, or other insurance.
    And I think one of the things, like Alice said, rationing 
does not have to happen immediately. But we cannot make it a 
bad word. Rationing happens in a system like this. You cannot 
have everything paid for in an unlimited way. And we need to be 
able to have a discussion about what should be covered and by 
whom. And, unfortunately, health care is one of the most 
explosive discussions that is out there, and so while I do not 
think we need to go to any extremes right now because there are 
so many inefficiencies that could be wrung out, it needs to be 
acceptable to talk about the tradeoffs in health care just like 
in other areas of our economy.
    Chairman Conrad. All right. Senator Sessions.
    Senator Sessions. Thank you. We had an excellent hearing 
Tuesday, and Dr. Reinhart from the University of Maryland 
testified, and Mr. Johnson and Mr. Marron. But one of the 
things we discussed and we should get on the same page about 
is: What do we mean when we say debt-to-GDP ratio? What is the 
best number?
    The European Union uses a 60 percent debt-to-GDP. In a 
meeting we had with some German leaders a week before last, one 
person noted they count local government debt, too, in that. Is 
that right, Dr. Penner?
    Mr. Penner. It is indeed.
    Senator Sessions. I did not know that. And, second, I 
assume their 60 percent would include the internal debt, the 
non-public debt, too. I do not know if they have such a 
situation. Ours is driven by the unique accounting procedures 
we use, I think the CBO letter said.
    So I guess what I am saying to you is when we discuss this 
with the American people, what is the best number that we 
should start using? I have used the public debt simply because 
nobody disputed that that was a bottom-line debt figure. But 
what I have learned in the latest flap over health care 
legislation and my belief that the President understated the 
cost of the plan, it is because CBO does not score the internal 
debt. But since we now know that Medicare and Social Security 
are on an insolvency trajectory that is very real--not like it 
was 20 years ago when this reality was not so close--don't we 
now need to re-evaluate that and perhaps begin to discuss the 
issue by utilizing the gross debt rather than the public debt? 
Dr. Rivlin?
    Ms. Rivlin. I think you are stuck with using both numbers, 
because they have different significance and both are 
important. If you talk about the public debt, that really is 
what we owe to the public, including other countries, and 
roughly half of it is owed to other countries. They hold our 
debt. And it is important to----
    Mr. Sessions. When you say other countries, is that 
individuals or nation states?
    Ms. Rivlin. It is mostly nation states. It is--but----
    Mr. Sessions. I am sorry I interrupted you.
    Ms. Rivlin. Yes. It is governments and central banks in 
other countries. China and Japan are the largest ones, but not 
the only ones. And it is important to keep that in mind. That 
portion of the public debt makes us very vulnerable to the 
policies of those countries, and it is one of the reasons for 
worrying about the public debt.
    There are, I think, different reasons for worrying about 
the total debt because we are now at the point at which we are 
going to have to start redeeming that debt, and that means that 
we will be buying back those bonds--we, the taxpayers--in order 
to make sure that the Social Security and Medicare payments are 
made.
    So that total debt is important, too, and I think you 
cannot oversimplify the thing by saying there is only one 
important number. There are two important concepts and two 
important numbers here.
    Senator Sessions. Dr. Penner, it seems to me that what we 
are doing is, since we are not raising revenue or cutting 
expenses, we are converting the internal debt to public debt, 
inevitably, inexorably, because both of our trust funds are not 
in surplus or soon will not be in surplus. Is that the danger 
of the internal debt?
    Mr. Penner. That is exactly right, sir, and I wanted to 
point out that when we, in this report, do our baseline, that 
baseline implies that the debt in the trust funds is going to 
gradually be sold so that trust fund debt becomes debt held by 
the public. And, actually, it is not all that many years before 
the distinction between the gross and net debt essentially 
disappears because the two biggest funds, Social Security and 
Medicare, are emptied over time.
    Senator Sessions. But to keep us from being too overawed by 
it, Mr. Chairman, CBO is scoring that, I believe, are they not? 
In other words, CBO is scoring in their surging of the public 
debt the transfer of internal debt to public debt. If we 
focused on public debt, we do have some sort of a projection of 
the direction we are going. But when we increase, as the health 
care bill would have done, the internal debt, I do not think we 
can any longer suggest that that is not a cost, an increase in 
the debt of the country.
    Following up on debt, I believe it was Stephen Moore who 
has made the point, I do not know if this has been fully proven 
economically, but if we had a 1-percent greater growth rate 
than our projections now have for the American economy, Social 
Security would not go into default. Whatever, we know that 
growth makes a big difference, particularly, I think, in Social 
Security, and so does economic growth in the economy. And, of 
course, when you raise taxes, it diminishes growth and debt 
diminishes growth. Dr. Reinhart testified that the level of 
debt we are in will take us to a reduction in economic growth 
by 1 percent of GDP, which is a stunning figure, if that is 
accurate. And I think all the panelists agreed that it was 
accurate. Actually, the three of them did not dispute that and 
acknowledged that.
    So it seems to me we are caught between this ``damned if 
you do and damned if you don't'' to a degree. I am inclined to 
think that we have got to contain spending now, not let this 
money get out the door, like the stimulus package, when you get 
so little for it and make sure that every dollar gains us 
something in terms of growth and increases the debt as little 
as possible.
    But what is your thinking about the comment about growth 
and the size of debt, Dr. Rivlin?
    Ms. Rivlin. Growth is a very good thing. We are all for 
growth, I think, and the more the economy grows, the easier it 
will be to solve this problem.
    One of the illustrations of that is what happened in the 
several decades after World War II where we had a very large 
debt, over 100 percent of the GDP, and the economy was growing 
rapidly. Over that period the debt-to-GDP ratio came down 
primarily because the economy grew so fast, not primarily 
because the debtcame down .
    But, I just wanted to say one thing about Social Security, 
and that is, yes, growth is good for bringing the revenues into 
the Social Security trust fund. But our benefits are indexed to 
wages, and growth pushes up wages. So unless we change the way 
the formulas are calculated, growth does not help us all that 
much on Social Security.
    Senator Sessions. Do you think the index should be more 
fairly inflation rather than wages?
    Ms. Rivlin. I think it is not exactly a question of 
fairness, but if we are going to bring down the rate of growth 
of Social Security benefits in the distant future--not for 
people who are retired now--then I think we could index the 
benefits, the initial benefits, to prices for people above the 
middle or above the 60th percentile or something. One way to do 
that would be to phase in an indexing which would be less 
generous for people at the top than people at the bottom, and 
that would help a lot.
    Senator Sessions. Thank you. I would say that I just read a 
Fortune magazine that had four of the top investing people. One 
was Mr. Gross at PIMCO and Jeremy Siegel and two others. Three 
of the four said the new normal is low growth, and they 
attributed the low growth for the next decade to debt. Mr. 
Siegel took a more optimistic view thinking productivity, 
technological advancements could be the breakthrough that could 
help us not do this. But that was pretty grim. These are people 
who are telling their customers how to invest their money, and 
they were not optimistic about the future.
    Chairman Conrad. Let me just say on the point that you 
made, here is my rough recollection--because I was going over 
this with some intensity last year, and my rough recollection 
was if we have 1 percent more growth than the actuaries are 
estimating--because they are estimating very low growth for the 
next 50 years in the United States. They are----
    Senator Sessions. Two percent is it?
    Chairman Conrad. Yes, it is 2.2 percent, something like 
that. And if you had 1 percent more economic growth, my 
recollection is that takes care of about 75 percent of the 
problem.
    Here is the dirty little secret. From a budgetary 
standpoint, it does not take care of the problem at all, or 
very little of it, because we still have this circumstance 
where we have borrowed from the general fund, we have borrowed 
money from the Social Security trust fund. Now that money is 
going to have to be paid back. The only way it can be paid back 
is out of current receipts.
    This is a concept that most of our colleagues have not 
gotten their mind around. This is going to have a significant 
effect on the rest of the budget, because we have been in this 
very happy circumstance where the general fund has been able 
to, in effect, borrow from the Social Security trust fund $150, 
$180 billion a year. Now that is ending. That source of money 
is ending because Social Security right now is cash negative. 
It is going to be permanently cash negative in 2016.
    So now where is that money going to come from? Now where is 
that money going to come from when the situation is reversed 
and the general fund has to start paying off these bonds that 
represent the borrowing that has occurred? And somehow we have 
got to help our colleagues understand we are headed for a very 
different budget circumstance.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman. Thank you for 
holding this hearing, and I thank all the witnesses, who I 
think gave very valuable testimony. I want to extend my 
particular appreciation to Dr. Rivlin for being here and for 
her many, many years of service in the budget and economic 
environment.
    But my questions, I would like to particularly focus on Dr. 
Penner. I want to thank you for being here. I thank you very 
much for presenting from your Choosing the Nation's Fiscal 
Future Report. It is the first time that I have seen a budget 
document address in anything other than a very cursory way the 
value that can be achieved from reform in the health care 
delivery system.
    You put it in the context on pages 85 to 86, and then later 
on, 95 to 102, of the Medicare system, but if we are, in fact, 
engaged in achieving those--what did Dr. Rivlin say--very large 
opportunities to make the system more efficient in the near 
term, if we are engaged in capturing those, it is my 
understanding that because they are systemwide reforms in many 
cases, if a hospital increases quality, reduces hospital-
acquired infections conceivably to zero, is no longer paying--
we are no longer paying $70,000 per hospital-acquired 
infection, then it is not just the Medicare system that saves, 
it is everybody who is paying for health care that saves.
    I would like to ask you, if we are good at that, and I take 
the number as being somewhere between $700 billion a year in 
excess cost and waste, which is the White House Council of 
Economic Advisors number, and $1 trillion a year in excess cost 
and waste, which is the Lewin Group and Treasury Secretary 
O'Neill number, that if we can get a significant chunk of 
that--and I know it will take time, and I know, to use your, I 
think, very accurate phrase, it will be an ongoing learning 
process--I think Dr. Gawande wrote a very good, similar 
description of that recently--isn't it true that many of the 
benefits of that will fall outside of the Medicare and Medicaid 
system and will help with the overall burden of health care 
costs that the economy has to bear helping, in fact, private 
companies that are buying in the private market in parallel 
with the assistance to Medicare and Medicaid?
    Mr. Penner. I think that is absolutely right. You can 
categorize Medicare options into two categories. One contains 
the sort of options that you are talking about. If we could get 
rid of infections in hospitals or reduce the readmission rate, 
that would help the whole system, including private insurance.
    There are, however, other kinds of options, like increasing 
the eligibility age for Medicare, that are essentially means of 
shifting costs out of the government budget and onto the 
private sector.
    Senator Whitehouse. That, to me, is one of the real values 
of focus on delivery system reform, because it is really a win-
win. It is not a zero-sum game in which you are shifting costs 
off of government and onto the private sector, and because 
people resist that and build new devices to prevent it, you are 
actually probably adding to net health care costs in some of 
those circumstances as the insurance mechanism develops to try 
to continue to game the system and create additional costs for 
people in the system gaming behavior.
    But it is important to me that you said it. I think it is 
sort of discouraging, in a sense, that it is only two pages and 
five pages out of the whole volume when I consider how valuable 
it is. But I have to say, this is the high-water mark to me in 
the budget discussion, and I know that Senator Conrad and 
Senator Gregg are extremely keen on getting this statutory 
commission going, and I have to say that my single greatest 
reservation about it is that I worry that it will be populated 
with a lot of people who are fiscal, economic brilliant people 
but who don't really have the specialized sense of how delivery 
system reform can and must take place, who don't understand, as 
you do, the executive management function of developing it.
    It will be an ongoing learning process. It requires 
multiple building blocks to achieve. And that it will be 
overlooked. In the same way that CBO, as you point out, 
couldn't really score it effectively because of the nature of 
the process, that when we look at this going forward, people 
will say, well, you know, if we can just chuck some people off 
of Medicare, boy, we can count those savings right away and we 
can put them right in the bank. It is harder work to do the 
other thing, and therefore, there will be a bias in favor of 
what I would call the fiscal hawk.
    You said the two alternatives. I describe them as sort of 
the bloody Civil War surgeon's bucket of tools, you know, of 
saws and knives and things like that, and then a more modern 
doctor's tool kit with modern technologies and non-invasive 
procedures and pharmaceuticals and things like that. And we can 
do it the modern way, but there seems to be a huge firewall 
between the people who understand delivery system reform and 
the people who are looking at the fiscal problem. They are 
completely different silos. I see almost no overlap. How do we 
break down and penetrate those silos and get the more expert 
discussion of the delivery system reform happening in the 
fiscal budget context?
    Mr. Penner. Well, I think while I agree that the system is 
terribly inefficient and that if we could improve the 
efficiency, we could save enormous amounts of money, I wouldn't 
want to say it is easy, either. I mean, I think the very fact 
that we don't understand the cost savings that go with a lot of 
these proposals suggests how hard it is. We have got to do our 
best to learn more. As Alice said, maybe that can be done to 
some degree through various demonstration experiments and so 
forth.
    Senator Whitehouse. Let me ask her to chime in in my minute 
remaining so I get a chance to hear from her on this. Dr. 
Rivlin?
    Ms. Rivlin. Well, I agree with you, but I am a little less 
discouraged. I think there are quite a lot of people that are 
thinking very seriously about systemic reform and about budget 
problems at the same time. One of them is my Brookings 
colleague Mark McClellan, whom I believe you know. He and 
others, Dr. Fisher and the people who have worked on the 
Dartmouth Project, are definitely in this camp. They are people 
who deeply care about delivery system reform but who care about 
the economics, as well.
    Senator Whitehouse. I just want to try to populate the 
fiscal prudence camp----
    Ms. Rivlin. Good.
    Senator Whitehouse [continuing]. With more of those people 
who understand that and to make sure that that is the way that 
we proceed first on this.
    Ms. Rivlin. Yes.
    Senator Whitehouse. As the Chairman said very, very 
correctly yesterday--I think it is a critically important point 
that he made--you can go after Medicare with fiscal knives 
anytime you like. You can overnight chuck people off it. You 
can overnight cut benefits. You can overnight use the bloody 
Civil War tool box.
    Ms. Rivlin. You might not get reelected.
    Senator Whitehouse. In a crisis, who knows what people will 
do. But what is different about the delivery system reform 
piece is that it will take time to develop it. The building 
blocks have to be applied, to use Dr. Penner's testimony. The 
ongoing learning process has to take place, again using his 
words. And so every minute, every hour, every day that goes by 
that we are not very deliberately engaged in that is time lost 
against whatever that day of reckoning or moment of reckoning 
might be, as I think it was Ms. MacGuineas said. It could be an 
abrupt crisis that provokes this and we don't want to waste the 
time between now and then.
    So I would urge all of us to be as proactive as possible in 
urging that, and that includes the Obama administration, which 
I hope is not waiting around for the health care bill, which 
has a lot of important building blocks in it, to pass.
    I have gone beyond my time. I apologize, Chairman.
    Chairman Conrad. No, that is fine. I would just say this to 
you and for those who might be listening. One of the greatest 
frustrations I have had in being a participant and in some ways 
a witness to the health care debate is big chunks of the news 
media paid almost no attention to the things that the people 
who are most knowledgeable about health care have told us were 
the most important things.
    CBO told us phasing out the favorable tax treatment for 
health care, employer-based health care, is one of the most 
important things that needs to be done. They also said one of 
the most important things that needs to be done is this reform 
of the delivery system. Did you see any of the national media 
spend 30 seconds on that issue, on reforming the delivery 
system, to stop paying for every procedure, instead to pay for 
quality outcomes? Did you see one story that talked about that? 
I didn't. Instead, they chased every rabbit, everything that is 
a side show, a side issue, most of which doesn't matter a hoot, 
according to the experts, in solving the problem.
    And I will tell you, I don't know what is happening as a 
culture, but when we have the national news media obsessing on 
Michael Jackson and obsessing on side issues and giving no 
basis of information to people to make judgments on things that 
really matter to our economic future, we have got a very big 
problem. My plea to the national media is, look, I know it is a 
ratings game on TV. I get it. But you have got some 
obligations. You are using the public airwaves here. You have 
got some obligation to talk about things that are serious, that 
really matter to our future.
    Senator Cardin?
    Senator Cardin. Thank you, Mr. Chairman. I again thank you 
for having this hearing and thank you all for being here.
    The question really is how we can have a fiscally 
sustainable budget, so let me stay on health care for one more 
moment because, Dr. Rivlin, I might not agree with you on the 
politics of this. Cutting Medicaid may not be a terribly 
unpopular thing. I don't know. We are certainly having a hard 
time extending FMAP help to our States now where it is going to 
have a major impact on Medicaid budgets, I know in Maryland 
and----
    Ms. Rivlin. I thought we were talking about Medicare.
    Senator Cardin. Well, my point is this. If we are looking 
at a sustainable budget, one could say the Federal Government 
could cut back on its commitments to pay for part of health 
care, whether it is Medicare or Medicaid or other health care 
programs, and that certainly would, at least in the short term, 
reduce our Federal budget deficit. But that would be the wrong 
thing for us to do from the point of view of our economy, and 
it would be the wrong thing for us to do as to what is right 
for the Federal Government to do.
    On the economy, if we make it more expensive for businesses 
to pay for health care, they are going to have to compete 
internationally, and the President is talking about doubling 
our exports, it just makes it more difficult. But small 
businesses are already having a tough time paying their health 
care premiums, and if we don't do something to make it easier, 
but instead make it harder, it is going to cost jobs. And I can 
tell you, there are a lot of people in Maryland today who are 
withholding purchases--withholding going to a restaurant or 
buying a car--because of their concerns about paying health 
care bills, because, frankly, Medicare doesn't cover enough and 
private insurance is not covering enough and a lot of people 
either have no coverage or they have major gaps in coverage.
    So as we talk about entitlement reform and how are we going 
to deal with the projected huge deficits at the national level, 
I am very concerned about that. I hope that we will listen to 
what Senator Whitehouse and Senator Conrad are saying: that if 
we don't figure out a way to bring down health care costs in 
America, but instead just try to look at the Federal budget and 
say, we are successful and we can reduce our exposure, then I 
think we have missed the opportunity to remedy a real problem 
that we have with our economy, at the same time dealing with a 
sustainable and fiscally responsible Federal budget.
    I feel the same way that the Chairman feels about how 
coverage has been on this, and I hope the President is 
successful in bringing together Democrats and Republicans. I 
hope that what will clearly be nonnegotiable is that health 
care reform has got to bring down the growth rate of health 
care costs. It must be done in a way that is fiscally 
responsible for the Federal budget. And it must to provide 
affordable coverage for every American. That is what we should 
agree on. To me, that is how you are going to have a fiscally 
sustainable Federal budget. If you don't do that, the problems 
will even be greater in the future.
    I think that when you look at some of the proposals that 
are being suggested around here, I am concerned that we could 
get from, whether it is this commission or some other group 
using, as Senator Whitehouse said, Civil War tools to solve a 
problem when we should use modern technology.
    Ms. Rivlin. I don't disagree with that. I thought I was 
agreeing with Senator Whitehouse that the most important thing 
to do is to reform the delivery system and to make the health 
care system more efficient and effective for everybody.
    Senator Cardin. I think we are all saying the same thing, 
but----
    Ms. Rivlin. I think we are all saying the same thing.
    Senator Cardin. I think we are, but the Chairman started 
the hearing talking about the Federal debt, and we all talk 
about the Federal debt. It is way too big, and we know we can't 
have a sustainable, fiscally responsible Federal budget unless 
we deal with the debt. I always like to remind people, let us 
go back and take a look at what happened when we had a growing 
economy.
    And you know, Mr. Chairman, you and I supported the 
statutory pay-as-you-go, PAYGO. We should have had that when we 
had a balanced budget so we couldn't have passed Medicare Part 
D without paying for it, increasing Federal spending, or we 
couldn't have tax cuts that weren't paid for, so that we at 
least had some fiscal responsibility. Sometimes it is easier 
when you have a budget surplus to spend recklessly. And now we 
are paying a heavy price as a result of it.
    And as we found out at the last hearing, you also have 
another major problem, and that is lack of savings in America. 
During our growth time, we didn't save. Instead, we said, well, 
we are building up equity in our homes. Well, we saw what 
happened to the equity in the homes.
    So my question to the panel is, here we are, still in the 
aftermath of the worst recession in my lifetime, and we know 
that the Federal Government has a critical role to play during 
a recession in creating jobs, part of which is fueled by 
Federal spending. We also know that we need consumer confidence 
for people to spend. And yet we want to look at reducing 
Federal spending and increasing personal savings. How do you 
reconcile those differences as we look at this year's budget 
and the following year's budget? Any of you.
    Ms. Rivlin. Let me start quickly. I think you have to do 
two things at once. You have to do what is necessary to get us 
out of the recession and you have to start by enacting very 
soon measures that will bring down spending--bring down the 
rate of growth of spending. We are not going to bring down 
spending. We are going to bring down the rate of growth of 
spending over time. I think that has to include the entitlement 
programs. And I also think you have got to recognize that 
bringing the debt to a--stabilizing the debt is not going to be 
possible right away on just the spending side. You are going to 
have to have some more revenues, too.
    Senator Cardin. Yes?
    Mr. Penner. I basically agree with that. I don't think the 
conflict between the short- and the long-run is as severe as a 
lot of people make out. I think you could today talk about 
passing reforms that perhaps would slow down the growth of 
Social Security benefits or increase the payroll tax. You could 
today pass things that would be implemented, say, starting in 
2012 as our report suggests. And I think that might even help 
with the short-run economic situation, because there is a lot 
of concern out there about our debt and what it will imply in 
the future with regard to tax changes and spending changes. And 
if you could reduce that uncertainty, I think it would help a 
considerable amount.
    Senator Cardin. Thank you.
    Ms. MacGuineas?
    Ms. MacGuineas. To your health care and your stimulus 
comments, I mean, I think both you and Senator Whitehouse made 
very important points that we heard sort of in the beginning of 
the health care debate, that the No. 1 thing that we could do 
to get the fiscal situation under control is to slow the growth 
of health care costs. And unfortunately for me watching this, 
somebody who has had to learn more about health care than I 
ever wanted to--I want to be just a fiscal person, not with a 
bloody saw, but somebody who doesn't have to understand the 
technical pieces of health care, but you can't be a budget 
expert without learning about health care.
    I think one of the things that we saw which was somewhat 
discouraging was a little bit of the watering down of the 
pieces of the health care bills that would slow the growth. And 
what I would hope that we would see as we go back and revisit 
this is everybody who understands the importance of combining 
health care reform and budgetary reform really goes back and 
reemphasizes those pieces that we saw in the CBO report would 
help us the most slow the growth. The more that we get out of 
health care savings over time, the less we have to go to all 
the other pieces of the budget, and I think that is really 
important.
    I want to speak just a moment for a point Senator Sessions 
was making, which I think is about sort of mistrust of what the 
two parties are doing and standing in the way of this. But one 
of the things that you voiced a concern about is sort of 
Republicans looking at Democrats through stimulus and health 
care and feeling that they are trying to push an expansion of 
government that then means when we deal with a budget 
compromise, it puts taxes back on the table. And I think there 
is a different half of that, which was during the Bush era, 
when we decided to cut taxes before reforming entitlements, I 
think the other party could sort of see that as the same way. 
We chose to cut taxes before we dealt with the budget situation 
and that changes the negotiation.
    The result, of course--I mean, we know this--is a horrible 
high level of mistrust which makes coming up with the kind of 
compromise so, so difficult. And I come back to something that, 
Senator Conrad, you keep bringing up. Oftentimes, we try to 
convene members of both parties to talk through these things 
and think about what productive people can work on, and at this 
point, it is very hard, because when you get to the kind of 
specifics we have talked about in this hearing, things can get 
dicey.
    But I think there are three things that are really helpful 
for members to do together, and one is pick a fiscal goal. And 
again, it is not so important exactly what it is, but that 
there is a widespread commitment to a fiscal goal that levels 
the playing field.
    A second one is not to insult different ideas for helping, 
whether it is on health care reform or budgetary reform. 
Encourage people to come up with all the ideas they have so 
that we can then have a discussion about the tradeoffs between 
those reforms instead of saying, you know, no, we should not 
raise taxes. No, we should not cut Social Security. We need to 
encourage those.
    But the third thing that I think is so important is this 
exercise that you have been doing in your office. Every member 
needs to sit down and see how they would achieve the fiscal 
goal that they think is something that would reassure credit 
markets, because when you get into the nitty-grittys of the 
policies, you realize everything has to be at play here. This 
is not earmark reform. This is not just waste, fraud, and 
abuse. This is really big structural changes that we have to 
think about.
    Just quickly in terms of stimulus, I am somebody who didn't 
think the stimulus package was perfect, but thought it was 
very, very necessary and I was incredibly concerned about where 
the economy was headed, and I thought focusing on economy 
recovery was absolutely right. I don't know if the right thing 
is another stimulus or jobs package right now. I know it should 
be economically motivated, not politically motivated, meaning 
we shouldn't put a lot of unrelated things in the package and 
it should be something that is well targeted.
    It should be temporary. One of the things that has 
concerned our organization is watching how the White House has 
put some stimulus measures and a stimulus package into its 
baseline in a way to make them permanent without offsetting the 
costs. That shouldn't happen. These are temporary policies.
    And I do think now we have such a high level of debt, it 
may be worth thinking about offsetting the cost of stimulus 
measures over a long time period. So if there is something we 
need to do this year and/or next year and it is the right thing 
to do, you do it, but you also should include an offset so it 
is repaid over time, because the debt doesn't really care why--
what the dollar is borrowed for. Sure, you want it to grow the 
economy, but in the end, we are bumping up against our debt 
limit, so we need to figure out a way to bring down the debt 
once we get the economy strong again, as well.
    Senator Cardin. Well, I thank you for that response to not 
only my question but the other members'. That is good advice. A 
lot of what you are saying is what our Chairman has been urging 
us to do, including the exercise to try to balance the budget. 
I thought that would be a fun thing to do during the 
Presidents' Day holiday, so I will take my Chairman up on that.
    [Laughter.]
    Ms. MacGuineas. It is fun.
    Chairman Conrad. I would just say, even if one doesn't get 
to balance, in some ways it is less important than finding a 
way to get the debt stabilized, which is the testimony of this 
group after a lot of work that they have done. Perhaps a more 
appropriate goal than reaching balance is stabilization of the 
debt and then working it down over a longer term, because, 
frankly, we are at a debt level, I believe, that is going to be 
too high. Even that exercise is very daunting.
    I just say to my colleagues and their staffs who are here 
and listening, please have your member or you, as a staff, go 
show your member, what does it take. And it is not just dealing 
with earmarks, and it is not nibbling around the edges here and 
there in domestic spending. No, no, no. It is going to take 
bold strokes to deal with this challenge. It is going to take 
big ideas and it is going to take political courage, because it 
is every hot-button issue that is out there. It is Social 
Security. It is Medicare. It is revenue, all of them.
    We have got an obligation. I mean, history is going to 
judge us. History is going to judge us, whether or not we were 
up to this challenge and whether or not we were true patriots. 
Were we really concerned about the country, or are we just 
concerned about our own political hides? You know, history will 
judge. History will judge. Do we come through at a time our 
nation really needs us? I believe we can, and I hope that we 
will. But it is not going to happen nibbling around the edges. 
And it is not going to happen unless we find a way to come 
together, because political control switches.
    You know, I have been here 23 years. I am a Democrat. 
Sometimes we have been in control. A lot of times, we haven't. 
And it goes back and forth and it is going to go back and forth 
again. That is why, in my own personal belief, we have got to 
find a way to do this together, because when the political 
winds change next, if we don't have a plan that all of us 
basically think has got merit, it will be abandoned.
    If you look at the trend lines, it really is sobering. This 
is no joking around now. I mean, we are headed in a way that 
could take this nation to second-class status. That is how 
serious this is.
    So I just urge my colleagues, let us really make our best, 
best effort to work together and try to come up with solutions. 
And I know we can do it. I know we can. It is going to take all 
of us to give. I mean, I have got all kinds of things.
    Let me just say, I come from a farm State, one of the most 
heavily dependent States on agriculture programs of any State. 
I am ready to take on farm support and to reduce even what was 
in the bill that I just helped pass. That is how serious I am 
about doing what has to be done. So, look, it is time for all 
of us to get out every sacred cow and face up to this debt 
threat.
    Final thoughts, Senator Sessions?
    Senator Sessions. Well, thank you for this. We have got to 
confront the problem. You are doing so. I know you share with 
the administration realities that we are facing in unvarnished 
ways and I can only hope that that will help us deal with it.
    But you know, the President never was a mayor. He never was 
a Governor. He never ran a company. And he was only in the 
Senate a few years. It took me a number of years to begin to 
understand some of the complexities of our debt. So when they 
submit a budget that calls for a $170 billion jobs stimulus 
over the next several years, OK. But what is not stated is $100 
billion that they are going to be offering this year, all 
additional debt, and it is really $270 billion, and all $100 
billion of that would be emergency spending adding to our total 
debt.
    What I am saying is, I am thinking that our President is 
going to have to lead on this issue. He can't tell us that the 
health care bill was going to save money. He can't tell us his 
bill is $170 billion when it is $270 billion. We have got to 
get straight about it.
    Mr. Chairman, I wanted to ask one question, and I think 
this came to me clear in reading these financial people, their 
comments, and I think you said it, Dr. Penner. When we surge 
our debt from $5 trillion, $7 trillion it was a year or so ago 
to $17 trillion in 10 years, tripling it, that money, that is 
the public debt. So that is borrowed from either our individual 
Americans or other countries and that is money that would 
otherwise be available to be loaned into the commercial 
economy, creating jobs, and it crowds out and drives up 
borrowing costs for the private sector. I guess that is one of 
the factors that Dr. Reinhart was mentioning and why it slows 
our growth down. But would you elucidate on your comment on 
that? That will be my last question.
    Mr. Penner. Well, I think you have summarized my point very 
well. The money we borrow comes out of something. There isn't a 
free lunch here. And whether we use domestic saving to borrow 
or use foreign saving to finance our deficit, it will 
ultimately reduce our standards of living. I don't think you 
can get around that. Whether the line is between having or not 
having a large deterimental impact as bright as a 90 percent 
debt ratio, I find that a little hard to swallow in their work. 
But certainly, the higher the deficit, the more it impacts 
negatively on our potential to grow.
    Senator Sessions. The other two?
    Ms. MacGuineas. Sure. I think that is a good point. I have 
to say that I was actually trapped in my car on Tuesday trying 
to get into the line to get to the grocery store to find that 
there was no food and the only thing that kept me from having 
road rage was that I got to listen to the hearing on C-SPAN, 
and it was really an excellent hearing. It was really 
interesting.
    And when I first turned it on, Senator Conrad, you were 
talking about the difference between the public and the total 
debt, and I think they are so important, because the reason the 
public debt matters is when you are looking at financial 
markets and taking this capital out of the economy, and that is 
the point you are making, Senator Sessions, that right now, 
when you are thinking about job growth, this debt dependency is 
a real threat to it because you are taking away the capital 
that could go to job creation. And so we need to weigh those 
tradeoffs.
    And I also think it is right to point out that especially 
this Budget Committee needs to be aware of the total debt, 
because that is the one that affects what we are committing to 
in the future, and we are allocating our resources in the 
future, losing the control that we have over the budget. Now, 
usually you say you want to leave flexibility for the next 
generation. We care about our kids. I just spent 4 days locked 
in a house with my kids. I am not sure how much I care anymore. 
I am really, really glad to have gotten out of the house.
    [Laughter.]
    Ms. MacGuineas. But I know when I go back, I will look at 
them and I will feel the same sentimentality, that it is 
important that we do this for the next generation.
    But the debt right now is threatening our economic recovery 
in the short term as well as the long term, and I think that is 
a really critical and important point, and why when we think 
about stimulus job creation, it is not in a vacuum. The 
dependency on the borrowing that is allowing us to do that, we 
have already lost our fiscal flexibility, so it is hurting us 
to have stimulus programs. I think it is a great point.
    Ms. Rivlin. I substantially agree with all of that, but we 
are in a very deep recession, the result of financial 
mismanagement. We are not in a situation which we can return to 
budget balance quickly, nor should we. Raising taxes or cutting 
spending to create a balance very quickly would be disastrous 
and I think we should remember that.
    Senator Sessions. I agree. Maybe we can refrain from making 
it more bad than it is.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, Senator Sessions, and I want to 
thank the witnesses. I deeply appreciate your coming out, given 
these conditions especially. I very much appreciate the effort 
and the energy that you have put into your testimony here today 
and the committee has certainly benefited by your expertise and 
by your thoughtful consideration of these issues.
    With that, we will stand in adjournment.
    [Whereupon, at 4:02 p.m., the committee was adjourned.]



           DEFENSE BUDGET AND WAR COSTS: AN INDEPENDENT LOOK

                              ----------                              


                       TUESDAY, FEBRUARY 23, 2010

                                       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, Merkley, Gregg, and Sessions.
    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 everyone here this morning. I especially want to 
welcome our witnesses.
    Our hearing today will focus on the defense budget and war 
costs. We are joined by a very distinguished panel of outside 
defense experts.
    Dr. Cindy Williams is the principal research scientist at 
MIT's Security Studies Program. She is a former Assistant 
Director for National Security at the Congressional Budget 
Office.
    Dr. Gordon Adams is a professor of U.S. foreign policy at 
American University. He is a former Principal Assistant 
Director for National Security at the Office of Management and 
Budget.
    And General Paul Van Riper is a retired lieutenant general 
of the U.S. Marine Corps. He is currently serving on the 
Independent Review Panel of the Defense Department's 
Quadrennial Defense Review.
    Welcome to all of you. We could not have a more 
distinguished group of witnesses here this morning. We are 
delighted you are here.

[GRAPHIC] [TIFF OMITTED] T8153.217


    I thought I would begin with just a brief overview of the 
defense budget and the war costs that we face.
    First, I think all of us acknowledge on this Committee that 
national security must always be our top priority. We need to 
do whatever it takes to protect this Nation and to give our men 
and women in uniform the resources that they need. The Obama 
administration has made that point, and made it repeatedly.
    This is what Vice President Biden said in a speech to the 
National Defense University just last week: ``Even in these 
tight fiscal times, we will commit the resources our security 
requires.''

[GRAPHIC] [TIFF OMITTED] T8153.218


    And the President's budget backs up those words. It 
provides $549 billion for the Department of Defense in 2011, 
representing about a 3-percent increase over 2010. But given 
the Nation's deficits and debt, it is more important than ever 
that we get the most out of each defense dollar. A dollar 
wasted on an unnecessary or inefficient defense program is 
still a dollar wasted, and we need to ensure the funds we set 
aside for defense are actually going to efforts that will make 
us safer.

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    The administration has taken a number of steps last year 
and again this year to refocus defense dollars in a way to make 
them more effectively spent. Here are some of the changes made 
last year, that the administration made with the support of 
Congress: F-22 production was ended; the Army's Future Combat 
Systems was reconfigured; they halted the Army brigade combat 
team expansion at 45; they ended the Navy DDG 1000 destroyer 
production; ended production of a new Presidential helicopter; 
and shifted to regional missile defense. And this year, the 
administration proposes ending C-17 military transport 
production, ending the Navy CG(X) cruiser program; terminated a 
flawed human resources control system; and terminated a flawed 
command and control system.

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    Even with these efforts, the defense budget is taking up a 
tremendous and growing part of our national budget. In the 
President's latest request, the defense budget will have 
increased for 14 years in a row. The regular defense budget 
will have almost doubled over that time period, rising from 
$254 billion in 1997 to $549 billion in 2011. And when you add 
war costs on top of that, we will be spending over $708 billion 
in 2011. That is a tripling, roughly a tripling, from 1997.

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    But to put this in historical perspective, we can see that 
our defense funding, including war costs, is far higher than 
during the Reagan defense buildup and the Vietnam War, and it 
has exceeded the Korean War peak for the last 6 years.

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    I think it is important to recognize what Secretary Gates 
has said in testimony before the Senate Foreign Relations 
Committee. He said, and I quote, ``July 2011 is the beginning 
of a process of drawing down in Afghanistan. That process will 
be based on conditions on the ground. The President has not put 
deadline in terms of when our troops will be out, but clearly 
he sees July 2011 as an inflection point where we begin to 
drawn down those forces in Afghanistan, and with a view to 
transferring this responsibility to the Afghans over a period 
of probably 2 to 3 years.''
    So under the timeline, we would presumably have a military 
presence in Afghanistan until at least the middle of 2013 or 
2014.

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    We also need to remember the context within which we 
consider these defense requests. Our Nation is deep in debt. 
This chart depicts the projected deficits under the President's 
budget over the next 10 years. It shows the budget deficit 
coming down from a high of $1.56 trillion in 2010 to $706 
billion in 2014, but then starting to go back up. It is that 
pattern that is of great concern to this Committee.
    In the near term, I think we all understand what we 
confront. But what is of very deep concern to this Committee, 
certainly this member, is the long-term outlook of the 
President's budget. That is unsustainable, and it is going to 
have to be addressed. I am delighted that he is going forward 
with a commission to make recommendations and that those 
recommendations will come to this Congress for a vote before 
the end of the year. I think that is critically important.
    But we also understand we have a responsibility now to look 
at all spending that is proposed, to scrub it, to review it, 
and that is part of this process.
    We are joined by my colleague, the Ranking Member, Senator 
Gregg, and we will have his statement now, and then we will go 
to the panel for their testimony. Welcome.

               OPENING STATEMENT OF SENATOR GREGG

    Senator Gregg. Thank you, Mr. Chairman, and I thank the 
panel for being here today to give us their thoughts on the 
defense procurement issues and specifically the defense budget, 
and I appreciate your holding this hearing.
    Obviously, defense is the first responsibility of a 
national government. Having a strong defense capability and 
making sure that the people who serve us in the military are 
fully supported is absolutely a priority for us as a Congress. 
But that does not mean that we should not look at the way these 
dollars are being spent and make sure that we are getting the 
most for the dollars that we are spending in all functions of 
Government, including defense. And, thus, I would be interested 
in this panel's thoughts in this area, but especially as it 
relates to, as I see it, defense spending being divided into 
three areas.
    First, obviously, is fighting the war. What does it cost us 
to fight this war? What will it cost us to fight this war? What 
is a fair assessment of that cost? Whatever it takes, we are 
going to have to spend. That is just a fact of life because of 
the fact that we have troops, soldiers in the field, and they 
deserve our full support.
    Second, of course, is the issue of purchasing weapons 
systems to support our troops and the question of which weapons 
systems we should be supporting, whether we should be changing 
our focus--the entire military structure is changing its 
focus--and whether our focus is too much in a historical mode 
with strategic systems.
    And third is the cost of personnel, and specifically the 
cost of personnel post-service, and what are the real costs and 
what percentage of the defense budget is basically being locked 
down and put in place in a manner that basically cannot be 
adjusted as a result of those costs being put in place, and 
other things we should be looking at to try to bring those 
costs under control, especially in the area of health care in 
the Defense Department and in the area, obviously, of 
retirement benefits.
    So those are the three areas I am interested in hearing 
from the panel, and I appreciate the Chairman having brought 
them before the Committee today, and I look forward to their 
testimony.
    Chairman Conrad. Thank you, Senator Gregg, and we will 
proceed with Dr. Williams. Again, Dr. Williams, the principal 
research scientist at MIT's Security Studies Program, former 
Assistant Director for National Security at the Congressional 
Budget Office, and, of course, we rely on the CBO very much for 
estimates that we rely on.
    Dr. Williams, welcome. Please proceed.

    STATEMENT OF CINDY WILLIAMS, PH.D., PRINCIPAL RESEARCH 
SCIENTIST, SECURITY STUDIES PROGRAM, MASSACHUSETTS INSTITUTE OF 
                           TECHNOLOGY

    Ms. Williams. Thank you, Mr. Chairman, Senator Gregg. I 
appreciate the opportunity to appear before you today to 
discuss the Nation's defense budget. I have provided a written 
statement, and I am hoping that it will be entered into the 
record.
    The United States is privileged to have a military vastly 
more powerful than any other in the world, and our future 
national security demands that we provide it with adequate 
resources. But the Nation's resources are not unlimited, as you 
pointed out, and as in other areas of the Federal budget, the 
choices you make for the next decade will influence the choices 
available to the Nation in the future.
    Mr. Chairman, you already highlighted the rapid rise in 
defense spending since 1997. The administration's budget for 
fiscal year 2011 calls for additional real increases for the 
next 5 years.
    It seems to have become conventional wisdom that the 
defense budget must continue to rise in real terms just to keep 
the armed forces intact. Those who see increases as inevitable 
often argue that the same factors that have pushed portions of 
the budget upwards in the past must be unavoidable in the 
future. That is not the case. Rather, what seem like 
unavoidable increases often reflect specific policy choices 
that do not have to be repeated. In some cases, they actually 
augur an opportunity to spend less, not more, in the future.
    I would like to focus here on two examples: operation and 
maintenance, and the equipment purchases attributed to the wars 
in Iraq and Afghanistan.
    First, operation and maintenance. A glance at the raw 
trends does indeed leave the impression that the DOD's 
operation and maintenance budgets have nowhere to go but up. 
The Congressional Research Service estimates that O&M funding 
per active-duty troop climbed an average of 2.5 percent a year 
since 1955, as shown in Figure 4 of my written statement. But 
there are reasons for past increases, and generally they do not 
portend unavoidable budget growth in the future.
    These reasons include the expansion of infrastructure on 
military bases during the 1950's and 1960's as the U.S. turned 
to a large peacetime military. They include the added 
operational costs of the Vietnam War. They include the shift in 
1973 to the all-volunteer force. The creation of the all-
volunteer force prompted the Department to improve support of 
all kinds and showed up in the O&M budget. It also led to a 
major expansion of the population of military retirees. Their 
health care costs show up in the O&M budget.
    Another important factor was the transfer of work from 
uniformed personnel, whose pay is charged to the military 
personnel account, to contractors, whose costs are generally in 
O&M. During the 1990's, O&M budgets were also pushed billions 
of dollars higher by new missions like drug interdiction, 
cooperative threat reduction, and environmental cleanup.
    During the past decade, the biggest O&M cost driver was 
health care. We are all aware of the rising costs for health 
care across the United States, but the defense situation is 
made worse because of deliberate choices during the past decade 
to expand the benefits and hold to a fee structure that makes 
military health care much cheaper for retirees than other 
options available to them and, therefore, draws large numbers 
of military retirees into the military medical plan when they 
have other choices. Other factors during the past decade 
include the expansion of installation security and force 
protection measures and other changes made in response to 9/11.
    Factors like the adoption of the all-volunteer force, the 
shift of work to contractors, added missions like drug 
interdiction, and expanded missions like force protection are 
likely here to stay. Reducing their costs in absolute terms 
will require choices and tradeoffs, but there is no reason to 
expect that their costs will rise uncontrollably in the future 
just because they added to budgets as they were introduced. One 
thing is certain, though. Assuming that O&M costs face an 
unavoidable rise simply because they went up in the past is the 
surest way to make it so. It is also an invitation to waste.
    Now let me turn to the costs of equipment reset due to the 
wars. It seems, again, to have become conventional wisdom that 
huge amounts of military equipment have been destroyed, 
damaged, or just plain run into the ground by operations in 
Iraq and Afghanistan. To compensate, so the argument goes, the 
Army and Marine Corps will need major new investments in 
equipment during the coming decade. In fact, the evidence 
points in the opposite direction: the services are actually 
better off in terms of equipment as a result of the wars than 
they would otherwise have been.
    Since 2002, the Department has budgeted more than $230 
billion for procurement ostensibly related to the wars. A 
sizable share of that money went not to replace equipment lost 
in battle but to outfit the forces with entirely new equipment. 
Some examples include the Army's restructured brigades, modern 
equipment for the Guard, and the MRAPs. Moreover, the fraction 
of deployed equipment that has been destroyed in combat is 
actually quite small. There is also little reason to believe 
that the equipment is being ground down at a particularly rapid 
rate by being used heavily in the wars. In short, rather than 
signaling the urgency of a fresh round of procurements to fix 
things that broke in the wars, the wartime procurement should 
put the services in a better position to face the future.
    Let me summarize by saying that rising defense budgets are 
not a new law of physics. Assuming that they are will 
inevitably lead to waste that the Nation cannot afford.
    Mr. Chairman, Senator Gregg, that concludes my remarks.
    [The prepared statement of Ms. Williams follows:]

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    Chairman Conrad. Thank you very much.
    And now we will go to Dr. Adams. Dr. Adams is a professor 
of foreign policy at American University and a former Assistant 
Director for National Security at the Office of Management and 
Budget. Welcome, Dr. Adams.

 STATEMENT OF GORDON ADAMS, PH.D., PROFESSOR OF INTERNATIONAL 
RELATIONS, SCHOOL OF INTERNATIONAL SERVICE, AMERICAN UNIVERSITY

    Mr. Adams. Thank you very much, Senator. Mr. Chairman, 
Senator Gregg, it is a pleasure to see both of you this 
morning, and I thank you for the opportunity to appear and talk 
about the defense budget request and the issues that you have 
raised from the dais.
    You are discussing today one of the most sensitive and 
difficult spending issues you face: how to fund appropriate 
defense needs while ensuring essential budgetary discipline to 
our national defense budget at a time of continuing overseas 
combat operations. The administration has sent you a budget 
request that is historically high and has asked that it be 
exempt from the discretionary spending freeze it proposed for 
the remainder of non-defense discretionary spending.
    I will argue instead, and do in my statement--which I would 
appreciate being entered in the record--that the defense budget 
should be included in any budgetary freeze or overall 
discretionary budget caps or reductions the Committee is 
considering.
    I make four points in my testimony. First, although 
Secretary of Defense Robert Gates, who has done some remarkably 
good things at the Defense Department, has described this 
request and the accompanying QDR as ``bracing dose of 
realism,'' which makes significant tradeoffs, it actually, in 
my judgment, reflects very little discipline in defense 
planning and budgeting.
    Second, the QDR, which was just released with the budget, 
continues mission expansion for the military, broadening 
defense requirements in a way that makes budget discipline even 
more difficult.
    Third, the reluctance to impose planning discipline and 
make choices now will lead to pressures for continuing high 
defense budgets, a point that my colleague Cindy Williams has 
already underlined, with serious implications for deficits in 
the out-years.
    And, finally, you do have options to set limits on the 
mission and budgetary expansion. Let me briefly say a few 
things about each of those points.
    First, with respect to the lack of budget discipline, the 
budget you have received follows in the tradition of being 
based on the appropriation DOD received last year, plus more 
funding growth, and I would associate myself with Dr. Williams' 
comments about there is nothing inexorable about this kind of 
law. Defense has, in fact, been unconstrained relatively for 
the past 10 years, and it is now, as your own chart points out, 
higher than the 1952 Korean War budget peak, higher than the 
peak defense budgets of 1985, higher than the Vietnam budget 
peak for defense.
    By increasing defense resources to this level, the budget 
avoids priority setting, choice making, and tradeoffs. It would 
increase resources for near-term challenges, as described by 
the Secretary, but it does not rebalancing by reducing funding 
for longer-term priorities. Instead, it funds both. The 
procurement, operations and maintenance, and military personnel 
increases are not offset elsewhere in the budget. There are 
virtually no significant procurement programs eliminated this 
year. The two that are flagged--the C-17 and the F-35 engine--
provide no savings, as they were already not in the long-term 
defense plan.
    While overseas contingency operations would decline 
slightly, there is every prospect of a future supplemental, and 
the budget plug of $50 billion for the out-years is continued 
as the tradition in this budget as well. There is no visible 
effort to restrain O&M costs. Military personnel costs grow as 
well, with end strength continuing to increase, even if 
temporary, which sets a long-term track for budget expansion 
throughout. And the administration deserves credit for seeking 
more clarity and discipline in OCO budgeting--overseas 
contingencies--but there are a number of programs, as Dr. 
Williams suggests, that need to be examined closely in the OCO 
request as to whether they are, in fact, directly related to 
war costs. I particularly underline in my testimony the $2.8 
billion in funding for long-term reconstitution, which is 
something, arguably, that has gone on in the $230 billion or so 
that Dr. Williams mentioned.
    The second point on the link with the Quadrennial Defense 
Review, I suspect the dilemma you are going to face is being 
exacerbated by the new Quadrennial Defense Review. It has had 
an influence, I think, on the budget request, but I would 
suspect that the impact was not so much to restrain the budget 
as to encourage its continued growth.
    Secretary Gates has said that this shifts away from two 
major regional contingencies near simultaneously as a planning 
algorithm, but, in fact, it does not. As Secretary Gates 
himself has said, ``What I wanted to convey was a much more 
complex environment in which you have to do not just two major 
conflicts, which does not rule them out, but a broad range of 
things as well, or in the future one of those conflicts and a 
number of other contingencies.''
    The many missions and objectives offered in the QDR are not 
given any relative priority. Rather, the discussion of the risk 
in the document seems to support the idea that defense planning 
and budgeting needs to lower every risk at the same time.
    The QDR also fully endorses the mission expansion begun 
under the prior administration, pushing the military into 
missions and capabilities that have future implications for the 
expansion of the U.S. military role, the size and composition 
of our armed forces, future defense budgets, as well as the 
roles and capabilities of our foreign policy institutions.
    The third point, future pressures on the defense budget. 
Dr. Williams has mentioned pressures that are particularly 
coming on the procurement side. Let me add to that that mission 
expansion is going to cause upward pressure. Operations and 
maintenance spending unrestrained will exercise upward 
pressure, especially as the civilian work force expands. Health 
care costs, as she pointed out, are rising even more rapidly 
than those for Medicare. The mission expansion will lead to 
demands for force expansion, which is the underlying driver of 
most of the defense budget. And the administration will 
encounter continuing war costs and will have to adapt that $50 
billion plug to a more realistic estimate.
    Finally, the QDR itself and the budget point out that the 
Department has no way to scrub its underlying budget 
requirements in part because its budgeting and accounting 
systems are not up to the task, which means it is one of the 
sources of building the budget on top of last year's number. 
They are not really looking at what last year's number can 
save.
    Fourthly, options for the Congress. Do you have options? 
You know, defense budgets, as you will remember, Senator, were 
not exempt from past efforts at deficit reduction. They were 
including in Gramm-Rudman-Hollings. It helped seal the deal, in 
fact. They were included in the Budget Enforcement Act of 1990. 
Both first President Bush and President Clinton made sure that 
defense was included, planning was included under the caps that 
existed between 1990 and 2002. So there is no ipso facto reason 
for saying that defense ought to be exempt.
    In my statement--I will not detail them here, but I offer 
several areas where you might want to look, the Congress as a 
whole might want to look to include defense in an overall 
discretionary freeze, including the budget resolution as a 
freeze level itself, military personnel freeze, reducing the 
rate of growth in operations and maintenance spending, limiting 
base budget procurement growth, further reductions in R&D, and 
the careful scrub of the of the procurement part of the OCO 
budget I mentioned before.
    You face, as you yourself have pointed out, Mr. Chairman, 
very broad budgetary and economic challenges, and I think it is 
important for you to consider how you might include defense in 
dealing with this challenge, I believe at no sacrifice to our 
national security. A freeze at this point, combined with clear 
out-year caps in discretionary spending, could, in fact, 
provide the incentives for more disciplined planning and 
budgeting at DOD.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Adams follows:]

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    Chairman Conrad. Thank you very much, Dr. Adams, for your 
testimony.
    Now, we will go to General Van Riper. General Van Riper is 
a retired Lieutenant General of the Marine Corps, currently 
serving on the Independent Review Panel of the Defense 
Department's Quadrennial Defense Review. Welcome. Thank you 
very much for your service. Thank you for being here today.

  STATEMENT OF PAUL K. VAN RIPER, LIEUTENANT GENERAL, UNITED 
                 STATES MARINE CORPS (RETIRED)

    General Van Riper. Mr. Chairman, thank you for providing an 
opportunity to speak to you today. As you noted, I am a member 
of the Independent Panel to Assess the Department of Defense 
Quadrennial Defense Review. Because deliberations of the panel 
are ongoing with a final report not due to Congress until July 
2010, my remarks today will center on material contained in the 
seven chapters of the Fiscal Year 2011 Defense Budget Overview, 
not the one chapter that summarizes the QDR.
    The defense budget request specifies what the Department's 
senior leaders believe is needed for our national security. In 
other words, this budget identifies the means that the American 
Armed Forces will require, and in many cases use, in the coming 
years to protect our nation and its interest.
    More important than the identification of the means, 
however, is an explanation of why the Nation requires these 
means and how the Armed Forces will make use of them. Our 
national strategies, security, defense, and military, are to 
explain the why behind the means. That is, they are to give 
good reason for the purposes that underpin the strategies, 
goals, and objectives and describe how they relate to the 
resources the Department of Defense is requesting. The Joint 
Force and service concepts should explain how the force will 
use these means operationally.
    If we fail to get the strategies and the concepts right, we 
are unlikely to get the means right, either. A clear and 
compelling logic of ends, ways, and means must run through all 
of these strategic, budget, and operational documents. In the 
final reckoning, the quality of our thought will prove more 
significant than the quantity of our means.
    My written statement is based on an analysis of the defense 
budget overview using this ends, ways, means construct.
    In the 14 years after Congress enacted the legislation that 
required the President to transmit to Congress each year a 
report on national security of the United States, the 
administration submitted a national security strategy fairly 
regularly, but often not at the time specified. However, the 
last administration submitted only three national security 
strategies in 8 years and the current administration has yet to 
offer one. A national security strategy informs the budget. In 
its absence, we must seek other sources of strategic thought.
    To judge the thought behind the fiscal year 2011 defense 
budget request, I turned to President Obama's speeches that 
address his administration's strategic approaches. In addition, 
I read Secretary of Defense Gates' 2008 National Defense 
Strategy and his article, ``A Balanced Strategy in Foreign 
Affairs.'' To determine if the defense budget request leads to 
a force that can implement Admiral Mullen's vision of how the 
Joint Force circa 2016-2028 will operate, I looked to his 
Capstone Concept for Joint Operations.
    Let me place my conclusions up front. In general, I find a 
common theme and consistency among all these speeches and 
documents linking goals and objectives to the specific 
capabilities and capacities enumerated in the defense budget 
request. Furthermore, I am confident that achievement of those 
capabilities and capacities will, for the most part, support 
current and future operational ideas. This is not to say that 
room does not exist for improvement of selected aspects of the 
budget request. In my written statement, I identify several 
shortcomings.
    One of the most positive aspects of the defense budget 
request is a long overdue recognition of the real reasons for 
military innovation and change. Recent predecessors to this 
defense budget request made too many groundless assertions, 
positing that transformation would render obsolete current 
technology and methods of warfare. These unsupported claims 
revealed their authors' fundamental misunderstanding of why and 
how militaries alter or improve the means and methods they 
intend to employ in combat.
    For a decade and a half, U.S. military endured demands from 
senior defense leaders, supported by pundits on the sideline, 
that undertake transformation for transformation's sake alone. 
The effect was to draw most of the service's and joint 
community's intellectual energies into fool's work at the 
expense of thinking critically about how our forces might 
operate to meet emerging security problems. In my view, the 
Department of Defense wasted hundreds of millions of dollars in 
the name of transformation. For the most part, all we have for 
the money spent is a handful of vacuous concepts and 
disingenuous reports on flawed experiments.
    Recent leadership changes within the Department of Defense 
and U.S. Joint Forces Command have been a breath of fresh air, 
as this has allowed subordinates to think about and plan for 
war as it exists in reality, not as the uninformed wish it to 
be.
    I also find the defense budget request agreeable that it 
largely avoids focusing on many of the meaningless adjectives 
recently used to modify the nouns ``war'' and ``warfare,'' 
examples being fourth generation warfare, asymmetric war, 
netcentric warfare, et cetera.
    Promptly, the defense budget request starts to rebalance 
our forces, capabilities, and capacities between the only two 
forms of warfare that exist, regular and irregular. I find 
strong evidence in the defense budget request that it supports 
both acquisition and refurbishing of needed weapons and 
equipment. Unfortunately, I cannot find the same support for 
the professional education and training essential to 
reacquiring and building the knowledge and skills required to 
fight regular nation state enemies. The Joint Forces and the 
services too often look to training and education accounts as 
bill payers when funds and personnel are short in other areas.
    In closing, I urge this committee and the entire Congress 
to evaluate carefully the national security strategy when the 
White House submits its report in the near future, ensuring 
that it, in fact, does relate to and support the Department of 
Defense fiscal year 2011 budget request. Additionally, I 
entreat you to monitor closely the new national defense 
strategy that should flow from the Quadrennial Defense Review 
and the subsequent national military strategy that ought to 
draw from the defense strategy and defense review.
    Once more, I thank the committee for the opportunity to 
share my thoughts and concerns.
    [The prepared statement of General Van Riper follows:]

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    Chairman Conrad. Thank you, General Van Riper.
    I first want to go to you, because you have really raised 
strong words about these concepts of transformation that were 
bandied about so widely for a number of years. I must say, I 
agree with much of your assessment. After having consulted with 
top military leadership, uniformed leadership, both those still 
on active service and those retired--those retired, obviously, 
were in a much better position to speak their minds openly and 
candidly, as you have just done--and I heard very consistently 
from them an assessment very close to what you have just 
provided.
    That is, that in the discussion of transformation, it sort 
of became almost a movement and it was very hard to penetrate 
what it actually meant. It was something that had a lot of 
support and was used to justify actions that the Defense 
Department, frankly, at times, I thought were curious, 
especially from a budgetary standpoint. You said you think 
hundreds of millions of dollars were wasted. Frankly, I think 
you could multiply that. I think billions of dollars were 
wasted chasing a concept that didn't have much meat on the 
bones.
    I would just be interested in your further assessment of 
how did we get going down that track and how did it gain so 
much, I won't say credibility, but so much energy being focused 
on it? What is your assessment? How did we get into that?
    General Van Riper. Mr. Chairman, if there is to be change, 
transformation, some of the other words used, revolutions in 
military affairs, technical military revolutions, there needs 
to be a problem that we are going to solve. And this was the 
failure from immediately after Desert Storm up until some key 
changes in the leadership in the Department and some of the 
larger commands. And that is, there was never a problem 
identified. There was simply the assertion that we had to 
change. And my question in the forums that I would be in is, 
why? What for? It never was answered. There was a focus on 
technology as if technology was going to solve our problems. 
There was no quality of thought.
    In terms of an organizational look at it, it is surprising, 
because the generation that I came from, the post-Vietnam 
generation, went through an intellectual renaissance led by 
Admiral Stansfield Turner, General Don Starr, and General Al 
Gray in the 1970's and mastered conceptually the art of war, 
usually codified in air-land battle, but in a larger joint 
context. We demonstrated that mastery in Desert Storm and again 
in the takedown of Baghdad and then walked away from it for 
really a myth.
    Chairman Conrad. It was really a very curious period, a 
very curious period, and there seemed to be during that time a 
lack of respect for many in the uniformed military. I observed 
that repeatedly. Civilians at the Defense Department and those 
who were--I don't remember quite the words that you used--
pundits, I think you used the word, people were brought in to 
advise the Defense Department who had no defense background. 
Well, maybe they had written books, some of them fictional 
books, about military involvement in the past, but it was a 
very odd thing to witness and I appreciate your making the 
point here today.
    Let me go to a point I want to talk to you all about 
because this is the Budget Committee. We have got a special 
obligation to our colleagues on taking what the President has 
proposed and reworking it into a budget resolution to consider 
all of the tradeoffs that we confront.

[GRAPHIC] [TIFF OMITTED] T8153.221


    This is what we see in terms of defense spending in today's 
dollars related to previous buildups, the buildup during the 
Reagan years, the buildup during Vietnam, the buildup during 
the Korean War Peak, and we see we have surpassed that now and 
continue to go up. I don't think that is dispositive with 
respect to what we do with respect to defense spending now. It 
has got to be dictated to by the terms of what we confront and 
what we are dealing with.
    There is another aspect to this, and that is our long-term 
debt. Our long-term debt--I don't know if we have that chart 
available--that is the deficit. I think I took that out. It may 
be in the outer office here, maybe if somebody could get that 
for me.
    We are on a course that is absolutely unsustainable as a 
nation with respect to our overall debt burden. Very soon, we 
will have a debt that will be a gross debt that will be 100 
percent of our gross domestic product. Here is the chart I was 
referencing, and we are right at the dotted line. That is what 
has happened so far in terms of growth of debt.

[GRAPHIC] [TIFF OMITTED] T8153.224


    But look what is about to happen. And this is driven by a 
number of factors. It is driven by health care spending that is 
going up much more rapidly than underlying inflation. It is 
driven by demographic changes. The Baby Boomers are going to 
double the number of people eligible for Social Security and 
Medicare. It is driven by defense costs and war costs. It is 
driven by tax policy if we extend all of the tax policies that 
have been cast in the Bush administration and the Obama 
administration. I find there is a lot of confusion about what 
has happened to tax policy in the Obama administration. The 
fact is, taxes have gone down under the Obama administration. 
Every tax matter that has been proposed and passed has been a 
cut in taxes.
    So we now confront a circumstance in which our revenue is 
at the lowest level as a share of GDP that it has been in 60 
years. Our revenue is about 15 percent of GDP. Spending is at 
its highest level as a share of GDP in 60 years. It is at about 
26 percent of GDP. So we have a gap between spending and 
revenue of 11 percent of GDP. That is really stunning. To have 
a stable debt, economists tell us you need a deficit of about 3 
percent of GDP. So we are almost four times that.
    The reality that we confront on this committee is that we 
are on an utterly unsustainable course in every aspect of our 
spending, in every aspect of our revenue, because the gap 
between the two is utterly unsustainable, and it will lead, 
according to most witnesses that have come before this 
committee--in fact, every single one--every single one of 
whatever stripe, whether they were representing the Republican 
side of the aisle, the Democratic side of the aisle, or 
independents--every single one have told us, you are on an 
utterly unsustainable track.
    And the consequences of being on an unsustainable track 
with respect to deficits and debt is that at some point, those 
who are lending this money, and increasingly those are foreign 
entities--last year, 68 percent of the new debt financing came 
from abroad. China is now the biggest funder of the United 
States--China. Japan is No. 2. That, too, has consequences.
    I say all of this because I feel increasingly like I am in 
some netherworld on this committee, that the whole enterprise 
of the budget of the United States is utterly disconnected from 
reality. We have now had the Chinese warn us publicly and 
privately that they are increasingly reluctant to finance this 
debt. We have had Moody's tell us they are considering 
downgrading the quality of U.S. debt.
    And so on this committee, we confront a circumstance that, 
really, everything has to be on the table. Everything has to be 
up for consideration. That is clearly the charge that is being 
given to this debt commission the President has formed and is 
naming now.
    I saw them quizzed this week and they were asked, is this 
off the table? Is this off the table? And they said, nothing is 
off the table. Nothing is off the table. I take from that that 
defense cannot be off the table, either.
    I would just ask each of you, in turn, if you were advising 
this committee on where we could achieve savings in defense 
over time, what would be your top recommendations? Dr. 
Williams?
    Ms. Williams. My top recommendation is to stop the strategy 
that the Defense Department has currently embraced and that the 
Obama administration has embraced and that the Bush 
administration also embraced. It is hugely expensive. It 
encourages our allies to free ride. It encourages our other 
friends to behave badly toward their populations and their 
neighbors. It fuels the recruitment into the camp of our 
enemies.
    And so it strikes me that the only way that we can really 
turn defense into a sustainable operation that is going to fit 
within the kinds of budget cuts that other sectors are going to 
have to have is to cut back substantially on what we expect our 
military can do for us. Cut back substantially. If we did that, 
we could have enormous savings in the size of the force. We 
could reduce the size of the Air Force. We could trim the size 
of the Army. We could really get some savings.
    Short of that, we can live for the next 5 years under a 
budget that looks sort of like the administration's plan, which 
I actually agree with General Van Riper is fairly well 
matched--the administration's plan is fairly well matched to 
its strategy. So you can decide that you are going to have a 
mild freeze on defense by trimming here and there, and I will 
suggest some ways that you could do that. But if you really 
want to get some traction on this problem and turn defense into 
a sustainable operation for the long-term future, it has got to 
be with a different strategy.
    So, some things that you could do. First, the services need 
to stop choosing the most expensive of every single item, and I 
think the Navy's cancellation of the DDG-1000 and the return to 
the Arleigh Burke, its purchase of more smaller ships, those 
things are a good start. But what about the F-35 Joint Strike 
Fighter? It is hugely more expensive than the F-18. It is 
hugely more expensive than the Air Force's F-16. We cannot keep 
making choices that way in the world of equipment.
    We can certainly do a better job on bringing the costs of 
military health care closer to the costs that people pay in the 
civilian world by changing a couple of things. The first is 
that we must find a way to start bringing the cost sharing of 
the health care program for military retirees closer to what 
people pay in the private sector. If we don't do that, we are 
going to continue to have people migrate into the military 
system who otherwise would have used their second employer's 
insurance or their spouse's insurance, simply because it is so 
much more economical for them to be in TRICARE. The 
administration did not propose that this year. The Bush 
administration did propose it for the final 3 years of its 
budgets. The option was rejected by Congress. It strikes me 
that it is time for Congress to act on that, even though the 
administration didn't ask for it.
    Another option for reducing health care costs is to decide 
today to retain fewer personnel to retirement. In other words, 
don't keep as many people in the military all the way until 
they retire. Even if you had to pay something to encourage some 
of them to leave, we would be better off in terms of the 
defense budget over the longer term by doing that.
    Chairman Conrad. All right.
    Dr. Adams?
    Mr. Adams. Yes. Thanks for the question, Senator. I think 
it is a very important question. As I said in my testimony, I 
think you struggle with the enormous burden that you have of 
trying to get the budget under control and trying to get the 
deficit and the debt under control and to deal with 
extraordinarily explosive elements of budget expansion in the 
mandatory and the revenue side. That is a major challenge. 
There is no question that at 55 percent of discretionary 
spending, defense is also something that needs, in my judgment, 
to be included in how you think about debt.
    And then I think what Congress needs to do, and this is 
obviously a broader test than just your committee, is to think 
both about the external and the internal sources of growth in 
the defense budget and how those can be gotten under control.
    The external issue is an issue of strategy. It is an issue 
of mission. And I think the major problem that you face in the 
QDR and the problem that you are going to face in the source, 
the policy source of budget expansion is the enormous expansion 
of mission in the Department of Defense. What we are asking the 
troops to do has grown enormously. It started with things like 
counternarcotics and comprehensive threat reduction, but now it 
is enormously expansive in areas of counterinsurgency tactics 
and operations, counterterrorism operations, stability 
operations, and even more broad than that in the Department of 
Defense, strategic information operations. We have now got a 
military system that is acquiring task after task after task 
and it has enormous built-in budgetary pressures.
    I think that makes it very difficult for the Congress to 
confront the external source of growth because there is so much 
rhetoric that surrounds it. General Van Riper talked about the 
rhetoric around transformation. Well, there is a tremendous 
amount of rhetoric today around the threat, as well, and that 
threat expands from wars of choice--Afghanistan and Iraq, with 
the objective of regime change--into a rapid and expanding view 
that where every failed fragile state, insurgency, or terrorist 
operation is underway, it is the responsibility of the United 
States somehow to deal with it.
    And as I said in my testimony, we have not chosen between 
the classic state-on-state military missions that General Van 
Riper is talking about and this enormous expansion of missions 
that Secretary Gates has referred to in the QDR and in the 
budget presentation. Unless we can tackle that problem of what 
we think the appropriate role of the United States military is 
in the broader universe, it is going to be very hard to make 
the case for budget reductions. That amplifies the case for 
saying we need to grow defense now.
    It is not much of what you will discuss in the committee, 
but it is much of what Congress will discuss in looking at this 
budget on the defense side. What are the missions? Are these 
appropriate missions? Are the lessons of Iraq and Afghanistan 
and broad expansion of COIN and CT and stability operations 
around the globe or are they not? Do we need to rethink that 
and think about what the appropriately sized role of the U.S. 
military is, and, I suggest in my testimony, how we bolster our 
civilian capabilities to engage internationally in areas 
particularly where governance and failed states are causing us 
strategic issues?
    The only thing that I would exempt from that judgment in 
the budget today from the outside point of view is the war 
costs right now for the operations in place, and as I have 
suggested to you, even there, I think it is important for the 
Congress to take a very close look at the procurement 
investment. The reinvestment portion of this year's OCO budget 
title is over $20 billion. That is an awful lot of money on a 
history of appropriations of $20 to $30 billion a year 
particularly to the Army, for what is called reconstitution and 
reinvestment. So from a Congressional point of view, a tough 
brush scrub of what the wars require in the way of equipment 
replacement is a critical starting point.
    And then there are all the internal sources, some of which 
I have mentioned in my testimony. Interestingly, I think my own 
experience, having been around for a previous iteration of how 
you deal with budget deficit reduction and include defense, I 
would argue--and others will disagree with this--that one of 
the most successful defense build- downs that we have had in 
this country in our history since the Second World War was the 
period from 1989 to 1995 that we did not break a force. At the 
same time, we brought the defense budget down.
    The consequence, as I observed it from my position at OMB, 
was that the military and the Department engaged in one of the 
most sensible priority setting and management operations I have 
ever seen them engage in. In other words, there is nothing like 
external budget discipline to say you have got to focus on what 
your real tasks are.
    So one of the missions of this committee, I think, is to 
say we are going to include defense in this budget discipline. 
Now give us your best thinking of how you are going to 
accommodate that freeze. How do you get to it, not as a 
Washington Monument exercise, oh my God, the sky is falling, 
but as what would you really do? How would you prioritize? Part 
of that is going to be mission. Part of it is going to be 
things like military personnel. Do you need to grow the force 
when the force will be coming down, as we know, in Iraq and 
Afghanistan? Is it important, then, to add to the size of the 
force or are there ways we can gain force savings?
    Operations and maintenance, as I said in my statement, 
contains no external discipline in the Department of Defense. 
Eight-and-a-half percent growth in budget resources from 2010 
to 2011 says somebody is not managing the O&M store. That is 
one of those areas where there are enormous opportunities to 
savings, but you have got to bear down. So when you talk with 
defense witnesses, pushing them on operations and maintenance 
savings, I think, is important.
    Procurement--as I said, I don't think the 2011 budget makes 
many very serious procurement system choices. Mostly, it 
endorses increases in procurement, some of them highly 
desirable, like UAVs, some of them questionable. You know, 
Virginia-class submarine, questions need to be asked about it. 
Whether the F-35 ought to proceed as quickly as it is, the 
question needs to be asked about. The Department has not yet 
focused on the Marine Corps Expeditionary Fighting Vehicle, 
which is in trouble, but it can't somehow bring itself to cut 
it loose.
    Questions need to be asked about the research and 
development budget. For example, much is made of the 
cancelation last year of the Future Combat Systems Vehicle 
program at the Department of Defense. The replacement program 
in the budget request this year is $3 billion worth of R&D. In 
other words, there has been no budgetary resource saving to 
speak of in the area of vehicles for the Future Combat Systems 
program. It is a relabeling. It is a redrafting. It is the same 
budgetary amount. Is that a necessary program?
    And finally, I suggested in the area of overseas 
contingency operations, it is really important to scrub the 
procurement end of that budget request to see if there aren't 
programs that really belong in the base budget and ought to be 
traded off against other programs currently in the base budget, 
and as I say, overall budget discipline is going to push the 
Department to set those priorities and make those kinds of 
choices.
    Chairman Conrad. Thank you.
    Senator Gregg and I have made the point repeatedly, not 
during just this administration, but the previous 
administration, the kind of base budget creep that we see 
happening. It has enormous implications for the long term.
    You know, my colleagues get tired of us saying it, but it 
is true. We are on an utterly unsustainable course and no part 
of the budget will be exempt if, God forbid, we face a crisis 
because those who are lending us the money decide they are not 
showing up at the Treasury auction window weeks or months from 
now. Then all of us will be in the soup and we will be in the 
soup big time.
    Mr. Adams. Can I underline the point that you have made 
just briefly, Senator, on the base budget, because I think that 
is a critical point that I develop in my testimony. The 
Department itself will tell you that it cannot array its budget 
data by mission, that they have no way of doing that. That 
said, the Secretary has said that of the procurement requests, 
50 percent of the programs being bought are for long-range 
missions, 7 percent are closely axed on the war, and 40 
percent--the remaining 40 or 43 percent are dual-use. Frankly, 
if you can't array your budget data by mission, I don't know 
how he knows that to be true. There is really no way the 
Department can measure it.
    And when you look at how they are spending money, as the 
GAO has probably repeatedly testified for you, they have said 
they don't have the budgeting, financial accounting, and 
business systems that enable them to say, here is where we are 
wasting money in the base budget. They simply can't answer the 
question. The consequence is then we pile next year's budget on 
top of last year's budget.
    Chairman Conrad. You made another point that I have found--
the truth is the accounting systems that we have at the 
Department of Defense are so inadequate to analyzing what is 
actually going on there that it really is impossible to say. 
That gives this Committee an extremely difficult challenge 
because--how I started is what I believe. We have got to--our 
first obligation is to defend this Nation, and we have got to 
provide the resources to do that. And we cannot be penny wise 
and pound foolish with respect to providing those resources.
    At the same time, in the aggregate we are on a collision 
course with reality, and the reality is we cannot afford as a 
Nation all of the things that we are doing. It is inescapable. 
It is inescapable. We have doubled the national debt over the 
last 9 years. We are getting ready to double it again over the 
next 8 years. And we are headed for territory never seen before 
in terms of a debt as a share of the size of our economy. That 
is just a reality. We are going to have a debt that will be 
unmatched since right after World War II. And we are headed for 
a circumstance, according to the Congressional Budget Office 
and the Office of Management and Budget and the General 
Accounting Office, that we are going to have a debt three times 
the size of the debt that we had after World War II as the 
previous record. And nobody believes that that is sustainable. 
Not a single witness, whether it is the previous Secretary of 
the Treasury, the current Secretary of the Treasury, the head 
of the General Accounting Office, the head of the Congressional 
Budget Office, the head of the Office of Management and Budget, 
that has not said to us the course we are on is utterly 
unsustainable.
    So I have said to my friends--and I have very close friends 
in the uniformed military--you know, we are going to have to 
face up to this in every part of the budget.
    General Van Riper, what would be your recommendations to 
this Committee?
    General Van Riper. Mr. Chairman, I would like to answer 
first as a retired general officer with some 41 years of 
enlisted and commissioned service who has remained engaged in 
the defense community for the last 13 years, and then I would 
like to answer as a private citizen.
    I would urge first, what I have in my statement, that we 
need to focus on the budget, but let us look at what drives the 
budget, and that is, the strategies. Do not change the budget 
without changing the strategies, or you get a strategies-
resource mismatch. So we need to trace that through, and when 
the White House provides you its National Security Strategy, if 
we are going to do something to the budget, then it ought to 
work back into that national security strategy.
    On the other end, whatever is in that budget ought to 
support the operational concepts that the Chairman has 
published, or that concept ought to be changed. So there is, as 
I say, an ends-ways-means linkage here we ought to be very 
careful of.
    Specifically, though, in terms of the military, there would 
be a number of things. One is do not allow systems to go into 
acquisition with immature technologies. What began as the DD(X) 
became the DD-21, and then the DD-1000 that was just limited at 
three ships, began, as I understood it, with 18 immature 
technologies. It is just not the way to do procurement.
    Chairman Conrad. You are saying ``immature''?
    General Van Riper. Immature.
    Chairman Conrad. Immature technologies.
    General Van Riper. Immature, yes.
    We need to hold both the services and industry to account 
for problems. The amphibious ship the LPD-17, built by Northrop 
Grumman Ship Systems, the first one was a pure disaster in 
terms of its capabilities. It was either the second or third, 
the Navy accepted the ship, and then for 2 years put it into 
dry dock to finish it. No one seemed to be held accountable for 
these sorts of things.
    We found out with the Future Combat Systems that the lead 
system integrator does not work. These are Government skills 
that we need to keep. We cannot simply turn them over to 
industry and expect good results.
    I would suggest we take a look at lengthening our service 
career. We now look at 20 being norm, 30 for the senior 
officers and senior staff noncommissioned officers. Let us look 
to a 30-year career being normal. Twenty was when we did not 
understand our health issues, we drank too much, we smoked, we 
did not exercise. I am 72. I still run. I think I could still 
be a fairly decent general officer. I retired 13 years ago. So 
let us look at a 30- year being normal, our generals and 
admirals going to 40. And what that would do is, I think, have 
a very narrow top and a wide base, but cut down on the post-
retirement cost.
    I believe you have to see the consequences of what is going 
on, so I would advocate co-pay both for active and retired of 
all of these benefits that we have so you see some impact on 
it.
    As a private citizen, I worked very hard--I started from 
humble circumstances. My family up in Pittsburgh worked hard--
both as a Marine and since retirement. But my wife and I are 
blessed that we probably, in terms of income, are in the top 3 
percent of the citizens. You need to tax us. You need to tax 
all of us more.
    You need to pass health care reform because you will not 
fix military health care until you fix health care reform in 
general. And we need to have regulation of the financial 
industry.
    Chairman Conrad. OK. Thank you for all of that. Very clear.
    Let me just say one of the things that is very striking in 
these budgets is the health care accounts, and the health care 
accounts in every sector of our society are running amuck. It 
is true in Medicare. It is true in Medicaid. It is true in the 
private sector. It is true in the military. And I myself 
believe in co-pays. I had a very wise man who was a doctor in 
my State, who had practiced in India, had practiced in Europe, 
and had practiced in America. And he said the one thing--he 
came to one of my town hall meetings in North Dakota. He said 
the one thing he observed is that where you do not have co-
pays, you have overutilization. It has been clear to me in my 
career. And he talked about a circumstance they had in a lesser 
developed country where they had prescription medicine that was 
given away free. And he said, ``Every day we would come, and 
there would be a long line around the building and people 
getting free medications.'' And they imposed a very modest, 
even in that society a very modest co-pay, problem solved. And 
he had observed this in England. He practiced there. He 
practiced in the United States. He practiced in India.
    So, you know, as soon as you mention it, it is 
controversial. People say, well, you are creating a 
disincentive for people to join the military. Look, this to me 
is going to have to be throughout society. People are going to 
have to be part of the solution, and we cannot allow this to 
continue to spiral out of control.
    I see Senator Merkley has arrived and would recognize him 
for a statement and questions.

              OPENING STATEMENT OF SENATOR MERKLEY

    Senator Merkley. Thank you very much, Mr. Chair. I was at 
the Environment Committee on the budget hearing that Lisa 
Jackson was presenting. I wanted to make sure I got by in part 
to give a warm welcome to Cindy Williams, whom I worked with 
going on three decades ago at the Department of Defense. It is 
good to see you. So I apologize that I missed your 
presentations, and I will be catching up on them in the course 
of the day.
    But I did want to note--and just see if you all have any 
comments--I just came back from Afghanistan, Pakistan, and 
India to try to get a better sense of some of the challenges we 
face there and how our defense budget might respond to that. 
And I must say I found it to be a very daunting proposition.
    I was particularly struck when we had folks presenting the 
challenge that corruption presents in Afghanistan, and to give 
you a sense of this, the discussion of positions being sold, 
from Governorships on down; then within the police, very 
similarly police chiefs selling the positions--buying the 
position and then selling the positions under them; and then in 
the military, similar practices.
    I met with a bunch of tribal leaders, and the tribal 
leaders said: Here is the problem. The central government does 
a series of appointments that come down to our local level, and 
we know who the fair and capable people are, but they never get 
the appointments. The greedy and the corrupt people get the 
appointments, so the central government's appointees become an 
affliction. And they told story after story of this affliction.
    So it is a major dilemma for our strategy in Afghanistan, 
is if we are building a strong central government but the 
strong central government has this systematic corruption 
through it that results in the incompetent or the greedy 
abusing their powers at the local level, that is a big problem.
    Now, we are attempting everything possible--and I must say, 
I was so impressed by the American forces and the American 
planning. I think General McChrystal has put together as good a 
plan as could possibly be made. One person briefing us pointed 
out that the challenge we face is that you can start with folks 
who have taken jobs, for example, as police because it is a 
chance to make money. And after we get through training them, 
then they are better trained, but they are still--they are 
``better trained thugs,'' was the exact words that were used. 
And I think it recognizes that there are cultural designs in 
the system that cannot be changed overnight. And, clearly, we 
are basing our strategy on a strong central government. We are 
basing our strategy upon training of the armed forces and 
training of the police. And it is a fearsome, challenging task.
    I would just appreciate any insights that you all might 
have as it relates to our budget and our expenditures.
    Ms. Williams. I would like to say something about that. I 
am sorry that you were not here earlier because now everybody 
else has to hear why I think our strategy, our current strategy 
in dealing with the rest of the world is problematic.
    One reason is it encourages our allies to free-ride or to 
easy-ride. But another is that it encourages those who we think 
we are helping to behave badly, because they are getting money 
and they are getting protection for which they are not 
accountable to their people. And I think that, and not just the 
culture, is the problem in Iraq and Afghanistan, that we are 
creating friends who cannot help but act badly toward their 
people. They cannot help but be corrupt, because we are giving 
them oodles of money and oodles of protection without them 
having to ask for it from their people.
    So to me it is way more than culture, and a change of 
strategy would be a good thing. A complete change of strategic 
course for our national security strategy and our military 
strategy would be a good thing for the long-term future because 
it would save us money, but it would also keep us from getting 
into problems like these.
    Mr. Adams. Senator, I have----
    Senator Merkley. Before we go on, can I just ask you to 
take that a little further? What does that look like then when 
you refer to that change in strategy? What does that look like?
    Ms. Williams. We are obviously entrenched in the two wars 
where we are and have to--at least for the time being. I think 
we heard earlier that maybe we will be out of Afghanistan by 
2013. It looks like we will be out of Iraq next year. But over 
the longer term, it strikes me that we should not be in the 
business of nation building. We should not be in the business 
of regime change. We should not be in the business of imagining 
that security in every single country of the world is a 
national security matter to the United States.
    Instead, we should look to the immediate problems that we 
have. We should stop thinking that we can stop terrorism 
against the United States by invading other countries and 
running them. We should stop imagining that we are going to be 
the administrators of countries that are divided or countries 
that are losing their way from the point of view of their 
governments.
    Senator Merkley. Thank you. I really appreciate your 
comments.
    Mr. Adams. Senator, could I add to what Dr. Williams had to 
say here? Because it brings it down to budgetary terms here. I 
think there are something like $13 billion in the current OCO 
budget request for security force assistance in Iraq and 
Afghanistan alone. Thirteen billion dollars for us to invest in 
a process which I think, in my judgment, you very accurately 
described; that is to say, it is not at all clear that that 
investment is going to pay off because of the nature of the 
societies, the way in which those forces are organized, the way 
in which jobs are acquired, who gets promoted, who gets the 
position. And the press reports on the Marjah struggle today 
seem to indicate a kind of a reluctance, particularly in 
Afghanistan, to put those security forces forward in the combat 
situation that they are involved.
    What that suggested to me is not that the Afghanis are 
somehow inept and that we are somehow the most capable force in 
the world. It suggests to me that the process of building 
states is extraordinarily hard. It takes a long period of time. 
And as any good counterinsurgency expert will tell you--and the 
COIN manual that was put out by the Army makes it very clear--
most of that task, if it works at all is a civilian task. The 
ballpark figure everybody in uniform seems to think is right is 
about 80 percent. About 80 percent of this mission is a 
civilian mission.
    We have given that mission in two countries--which, I 
hasten to add, we invaded, which makes the conditions of state 
building even more difficult and challenging--to the United 
States military, absent any other capability to engage in the 
U.S. Government.
    The question I think we need to ask ourselves--and this 
jumps right on Cindy Williams' point--is: Who has this mission? 
And can we, in fact, accomplish this mission?
    I was in a Red Team panel for a proposal on a civilian 
intervention force that the Special Inspector General for Iraq 
Reconstruction has just announced, a couple of months ago, and 
I made the point in the group of 40 or 50 people--uniformed 
people, civilian people, people who have been in this mission 
for years--you know, this may be something that we are not very 
good at. And I was surprised at the number of heads that nodded 
around the room, saying, ``Yeah, you know, we ought to think 
about whether we are building a major capability to do this 
which is something that we are not very good at, is very hard, 
takes a long time, an awful lot of money, and may not produce 
results.''
    It is not like there is not a problem here, because there 
are a lot of countries around the world with failed, fragile, 
weak post-conflict governance which is problematic for their 
security, for regional security, and ultimately for our 
security.
    So the real question on strategy is: How does the United 
States lead in an international community in trying to cope 
with the structures and problems of governance in weak states? 
It is a bit challenge, but it is not one we can do alone. It is 
not one I think the military is particularly skilled at doing, 
and we ought not be asking them to do it. And it is one we are 
going to need more partners, collaborators, private sector, 
NGO, international organization, allied countries, and 
ourselves to say how do we tackle what is clearly a global 
security challenge, which is weak and fragile and failing in 
post-conflict states, where most of the job is a civilian 
investment, not a military investment.
    Senator Merkley. One thing I was very struck by is a number 
of very capable, very competent military trainers saying, ``We 
have come for a year and we have learned a great deal in the 
course of that. We have established a whole bunch of key 
relationships, and we are really starting to understand and be 
able to mentor in a meaningful manner. But next month we leave, 
and a new team comes in.''
    I thought, wow, that is another difficulty I had not given 
thought to, the rotation of our trainers and mentors through 
the system. The world is very different in different places, 
and it does take time, and we do not start out even speaking 
the language, if you will, and so forth. And about the time 
that you might start to build the relationships and have a 
sense of trust, you are rotating out. And when you say we are 
not very good at it, I think that is one of the challenges that 
we have.
    Mr. Adams. I fully agree.
    General Van Riper. Senator, in regards to your specific 
question about tribes, I think we will be well served if we 
build from both ends for the foreseeable future. At some time 
we are going to have difficulty, and I think the moves for 
tribal engagement, which I am sure you saw out there, are the 
way to go. You cannot build straight from the top down.
    In terms of 1-year tours and then leaving, this was our 
difficulty in Vietnam. It was not a 7-year war. It was seven 1-
year wars as we rotated our service people in and out.
    The Department of Defense now has a program that is called 
the ``Old Hands for Afghanistan and Pakistan,'' where some 
relatively large number will be expected to serve there, come 
back to a billet in the United States that is related to the 
war, and then go back immediately. So their rotations will be 
back and forth so this expertise will be built up that perhaps 
it would be worthwhile to be briefed on.
    In terms of the so-called whole of government, I think we 
are moving in the right direction, but the reality is there are 
some parts of our Government that do not have and may not ever 
be able to gain the sort of mind-set that the Department of 
Defense has. The Commerce Department, the Agriculture 
Department are not thinking about these sorts of operations 
that the military is engaged in. They are worried about farming 
and about agriculture.
    I believe within the Department of Defense, at least for 
the leading edge of these sorts of other sorts of skills, it is 
going to have to be in the Department of Defense with both the 
plan and the hope that you can turn over to the civilian side 
as quickly as possible. But certainly insurgencies, the 80-20 
percent is probably pretty accurate.
    Senator Merkley. Thank you all very much, and thank you, 
Mr. Chair.
    Chairman Conrad. Thank you, Senator Merkley.
    I would just say I had the opportunity in life to go to 
high school in Libya, graduated from an American Air Force base 
there, Wheelus Air Force Base in Tripoli, Libya, in North 
Africa. And I remember coming back and thinking to myself that 
if we believe we understand these cultures that are so 
different from ours, that we understand them so well that we 
can go in and meaningfully rearrange them, we are in a dream 
world. And that thought has followed me to this current 
position, and I remember some of the briefings we have had in 
407, secure briefings where I have heard described what we are 
going to do in places with cultures very different from ours. 
And I have thought, boy, it sounds pretty arrogant to me that 
we are going to go in there and fundamentally change the way 
they operate.
    I do not think so. I personally think it is a bridge too 
far. I think we are way overestimating our ability to 
meaningfully alter the way those societies operate. And my own 
view has been I would like us to set a good example. Let us do 
a good job here running our own affairs, which currently we are 
not doing, in my judgment, and let us set a good example. On 
defense, I think you have got to deal with the terrorist threat 
as it comes, and the notion that we are going to go and rebuild 
nations, put me down as a skeptic. I think the chance that we 
can go and rebuild nations in a fundamental way is way beyond 
our capability. We just do not have the people with the 
language skills.
    If you think about that, what an amazing thought it is that 
we are going to go in where we have got very few people that 
even speak the language, and we are going to change the way 
they operate? Wow. Really? Is that really going to happen? I do 
not think so.
    Senator Merkley?
    Senator Merkley. Mr. Chair, one of the things I was 
pondering on my way back from Afghanistan and Pakistan was what 
might initially sound like a completely disconnected 
experience, which was working in inner-city Portland, Oregon, 
in an area that had been very poor and very gang affected. And 
I was working for Habitat for Humanity, and we were attempting 
to make significant changes in that community, and to do so 
through homeownership and various other groups working at 
nutrition, working on education, and so forth. And those 
efforts made an impact, but it was not easy. And yet we spoke 
the language. We had far more--we had surrounding areas that 
were affluent and successful that provided a path, if you will, 
of influence, an example of how it could be done differently. 
But bringing a lot of resources to bear right within our own 
community proved challenging.
    And I think that if you take an entire nation that is 
poverty stricken, now it is not just a pocket of poverty, an 
entire nation that may have a different work ethic or education 
ethic, the fact that we do not even speak the language, and you 
put all those pieces together, you now have something that is 
many orders of magnitude more challenging than tackling poverty 
in pockets here in America. And I think that from a very 
different angle gave me a healthy dose of caution about the 
challenge we are undertaking.
    Chairman Conrad. You know, in my own reading of history, 
great powers bleed themselves in foreign adventures. Washington 
warned us about this in our own country, and there is a lot of 
wisdom in that, at least to me. I know that is maybe 
controversial with some of our colleagues who have visions of 
America transforming the rest of the world in very short order. 
I just do not think it is realistic. And when I look at just 
our budget circumstance, which is daunting, as every member of 
this Committee knows, the thought that we have got the will and 
the wallet to go around the world transforming cultures very 
different from ours when we do not even know the language kind 
of leaves me deeply skeptical.
    Senator Merkley. If I could throw in one more comment, it 
is about the law of unintended consequences. We are fighting 
the Taliban in Afghanistan, and the Taliban really had two--and 
the mujahedeen, and there were kind of these two sources. We 
were supporting the mujahedeen to take on the Soviets. Pakistan 
proceeded to take the students who were refugees in their 
country, train them and arm them and send them back into 
Afghanistan. And so those were the two driving forces that 
created the Taliban movement that we see now.
    I do not think in our wildest dreams at that point did we 
anticipate that this would become an enemy that would nurture 
terrorist attacks on the United States that would be a huge 
national security problem for us.
    One of the cautions that was mentioned when I was in 
Afghanistan, and another issue that I probably should have 
thought about but did not until it was raised, is if you create 
a very strong central military, how confident are you that that 
central military is not going to at some point say, ``To heck 
with the civilian process or the parliament or the 
appointments, we are taking over''? And that is just one 
example of how the path ahead might end up very different than 
the model that we might have in our minds as we undertake this 
nation building.
    Chairman Conrad. Well, those are all good thoughts.
    Let me just again thank our panel. I would ask them if they 
had any concluding thoughts that they would want to share with 
the Committee. Dr. Williams, anything that you would want to 
make sure is on our minds as we address the budget challenge 
for this year?
    Ms. Williams. I would like to pile on to the point that Dr. 
Adams made that nothing helps people make better choices than 
the imposed discipline of a tight top line, and this is the 
Committee that could start working toward that, helping the 
Defense Department make better choices just by giving it a 
much, much tighter top line.
    Chairman Conrad. Dr. Adams.
    Mr. Adams. Well, I certainly agree with that. I think that 
for this Committee you have such a challenge, and I think doing 
that kind of budget discipline in defense is vital to do this 
year, and it is going to be difficult in the policy and 
political environment we are dealing in, because it will be 
said that this is not supporting troops when they are deployed 
in the field, and that always makes it enormously difficult to 
do. So you will be standing kind of in front of a rhetorical 
truck if you engage in that kind of discipline, but I strongly 
encourage you to do it.
    The other thing is when you are dealing with issues that 
are the kind that Senator Merkley has raised, I think it is 
going to be important for you to drill down to the budgetary 
circumstances of them; for example, the $13 billion or so that 
we are doing in security force training; for example, the 
Pakistani counterinsurgency fund, over $1 billion; the CERP 
program at $1.3 billion; half a billion dollar in global train-
and-equip programs. There are $15 to $20 billion worth of 
spending that we are investing this way in this budget that is 
another place to look and raise questions and say: Is this 
really successful? Does it work? Where are the performance 
indicators? Can we change these countries, and ought we be a 
little bit less generous in how we go about funding them?
    Chairman Conrad. OK. And, General Van Riper, what would 
you----
    General Van Riper. Mr. Chairman, you mentioned the 
importance of history. History teaches no lessons, but it 
certainly provides a context. We cannot understand the future 
without that context.
    And to Senator Merkley's question, I think we would do well 
to look at two countries we have been involved in in the past. 
One is the Philippines, where a very long period, not great 
success, at least for many years. But then the Republic of 
Korea, South Korea, where we had similar circumstances, and we 
build a functioning government, obviously doing quite well 
economically over the years. So we might learn from those. Not 
so much Europe because you had functioning democracies and we 
re-established them.
    In terms of as we look to the future, and particularly 
Afghanistan and Iraq and our problem, I have always been 
troubled by the fact that if this is a global war and it is an 
existential threat, what is our strategy for that war? In 
looking to the last two examples of global wars, World War II 
and the cold war, we had a strategy. And you could stand back 
and look at that and understand where Afghanistan fit in if 
Iraq should have fit in, and the campaign plans for them.
    I for one felt that Iraq was not the right war at that 
time, but if we decided to do it, we needed a campaign plan. 
All we had was an operations plan for the takedown of Baghdad 
and, consequently, were not prepared for it.
    But without that national strategy that is akin to what we 
saw in World War II for this global war against Islamist 
insurgents and the campaign plan to support it, I am not sure 
how this body or any other body can judge where we are and what 
we are doing.
    Chairman Conrad. You know, you make a point that I think is 
very, very important. I have gone to dozens of briefings, and I 
am really left with the thought that we do not have what I 
would consider a comprehensive strategy to deal with what is 
clearly a threat. It is sort of an ad hoc strategy. You 
described Iraq as a plan to take down Baghdad and there was not 
really the follow-on, and I think that is true.
    It also strikes me, as we look at what happened, 9/11, the 
Taliban were providing sanctuary for those who organized the 
attack on us. We had to respond to that. We had to go and try 
to take down that growing insurgency. But that is not just an 
element that is in Afghanistan. That is an organization that is 
now spread around the world. I do not know what their latest 
estimate is, how many countries have an al Qaeda presence, but 
it is in the dozens. And the strategy of going to a nation 
state to try to deal with an insurgency that is operating sub 
rosa in dozens of countries around the world, I am not sure we 
have really put together a plan or a strategy to deal with that 
threat that is still there.
    As I said, I graduated from a military base in North 
Africa, and I could see then the kind of cultural chasm that 
exists. It is a very different way of looking at the world that 
many of those people have than the way we look at the world. 
They are mad about things that happened 800 years ago, and they 
are really angry about it.
    You know, who in the United States spends any time thinking 
about something that happened 800 years ago? We are very future 
oriented, looking ahead. And it is a very fundamental 
difference, and I am not sure that we really have got a plan to 
deal with that.
    Senator Sessions has joined us.
    Senator Sessions. Thank you. I saw Ron Paul on the 
television this morning. He said we are spending a trillion 
dollars to defend an empire. Obviously, he thought it was too 
much. And I guess if you get the State Department budget and 
the defense budget, it is pretty close to a trillion dollars in 
total for everything that we do. But I don't think we can avoid 
that responsibility that we have to defend the country, and 
sometimes defending the country is better to be done abroad and 
early rather than late when it is close and even more 
expensive. General, I guess that is what you spent a lot of 
your life trying to do and trying to help us do.
    Dr. Adams, you mentioned the CERP money is $1.3 billion. 
Ten minutes ago, I had General Casey at the Army's posture 
briefing on that very budget. The way it worked in Iraq was in 
areas, particularly in the Sunni areas, we were able to deal 
with the local leaders and that CERP money allowed them to 
deliver on promises made and transformed really--that is what 
transformed Iraq.
    As explained to me by one of the Marine generals, they met 
with a tribal leader. He was tired of al-Qaeda and he asked, 
``What can do I for you, General?'' and the general said, ``I 
need your young men.'' He said, ``I will have 500 Monday,'' and 
550 showed up and they helped arm them and somehow they found 
some money to help them be police officers. Within weeks or a 
few months, they had run al- Qaeda out of the area, and that is 
really how that happened in a lot of ways.
    So I guess, to me, that is maybe money from your 
perspective as a bookkeeper unaccountable. It is going out in 
ways that are not totally micromanaged. But at the same time, 
that was money that I really believe helped. And I think that 
they have got too many restrictions in Afghanistan, which was 
the reason of my question on that. And most of the money is 
going through the State Department, and more of it is supposed 
to be used for bridges and roads and drainage ditches, 
whatever, that they do. But essentially, you have to have, 
would you not agree, General, that security is a critical 
thing.
    General Van Riper. Certainly.
    Senator Sessions. So if you can get the local community on 
board and can help them with a small amount of money create a 
security force that actually defends their village, valley, 
then that maybe saves a lot of money, perhaps.
    So it is a difficult thing. These are life and death issues 
out there. Our soldiers are on the line. It is life and death 
for them, and it is not easy. Whatever tactic tends to work 
today, they figure a way to get around it.
    Despite the defense procurement spending, it is a job 
creating, stimulative program, and we do have a lot of defense 
needs in our country. I was very disappointed that the 
President's stimulus bill, the $862 billion, or the new one, 
the $270 billion stimulus package that is being talked about, 
does not have virtually any defense spending. Wouldn't it be 
prudent and smart on some of the systems that we definitely 
need for the future of this country to have created jobs in the 
short run and have advanced some of our defense systems through 
the stimulus funding? If you all briefly would like to comment 
on that, I would appreciate that.
    Ms. Williams. I will just mention that of the $800 billion 
in stimulus money last year, more than $7 billion of it did go 
to defense, and certainly defense spending----
    Senator Sessions. That would be less than 1 percent, 
wouldn't it?
    Ms. Williams [continuing]. Defense spending is just as 
stimulative as other spending. So I am not opposed to putting 
money into defense when it is going into a stimulus package. My 
concern is that defense has been so rich in recent years that 
there is just enormous temptation to waste money. Stimulus 
money, who cares if it is wasted? That is the point. Get it 
spent. But other money, I would be very concerned, and because 
of that, I am concerned about raising defense's top line in any 
way.
    Senator Sessions. I would certainly agree that every 
dollar, every penny needs to be spent wisely. That results in 
some very tough choices--and the Secretary of Defense is making 
them. Some I agree with, some I don't. But as to the amount we 
are spending as a percent of GDP, in the early 1980's, we were 
at 6 percent of GDP and now I understand it is about 3.6 
percent. Admiral Mullen, the Chairman of the Joint Chiefs, has 
indicated that he thinks a baseline of about 4 percent of GDP 
would be appropriate for our country.
    Do any of you see any value in discussing how much the 
Nation should spend on defense by matching it to the economy, 
the size of the economy, the GDP?
    Mr. Adams. It is an approach to defense spending, frankly, 
Senator, that I think doesn't do much for defense spending or 
for the economy, either one. It is a very small percentage, as 
you say. Therefore, its overall stimulative effect is 
relatively small.
    But more than that, and partly dealing with the earlier 
question that you raised, my judgment is that defense budgets 
ought to be built, as General Van Riper has been saying this 
morning, with respect to defense strategy, not with respect to 
its economic impact. The concern that I would have with respect 
to a share of GDP is what happens when the GDP share goes in 
the opposite direction? If the GDP were to go down, would we 
then stick with 4 percent of GDP of a declining number? I 
wouldn't. I would be looking at defense needs in terms of our 
strategy and our international position regardless of what the 
share of GDP is.
    Senator Sessions. I think that is a good point and I would 
value that. I guess what I would say, though, for those who 
contend that we are spending much larger amounts than we have 
ever spent before on defense, when you look at the size of the 
economy, I think there is an argument to be made that it is 
considerably below even in the 1980's, after Vietnam but still 
during the cold war. Would you agree?
    Mr. Adams. I think your data is unquestionable. That is 
absolutely the case. However, again, I think our choices about 
defense are choices about our security, not about the share of 
GDP. If we faced a serious major existential threat a la World 
War II-style, for example, it wouldn't bother me to spend 
significantly higher proportions of our GDP. But what ought to 
drive it is the nature of the international situation that we 
face, not a specified share of GDP. I think that could be a 
manacle as well as a promise.
    Senator Sessions. I tend to agree with that, but I also 
tend to believe, by historical standards, we are not above what 
we have been spending on defense.
    General Van Riper, do you want to comment on that?
    General Van Riper. Senator, my wife and I are blessed with 
a son who is a Lieutenant Colonel of the Marines now and has 
had three tours in Iraq, so I come from that perspective. As I 
look, and these are data points of one as I move about various 
bases and engage in the defense community, I think they are in 
good shape. I am seeing things built, programs that are 
underway, equipment being bought that I never saw in my 41 
years of active service.
    So as a judgmental, I was quite happy with where the 
stimulus went, the fact that it did not go to the Defense 
Department, and I am relatively happy with the budget request 
as we see it now.
    Senator Sessions. Well, do you want to cancel all our new 
aircraft and new naval systems? We have certainly surged our 
MRAPs. That was an immediate response. We put the money out. 
That was a lot of money that went forward and rushed those 
vehicles that would withstand IEDs. We have done that for our 
soldiers on the ground.
    But, General, we are adding 22,000 more troops, according 
to the President's request and the Secretary of Defense's, and 
we are authorizing more than that, I think, in the defense 
bill, but we are going to actually put on the payroll another 
22,000. We are in a war situation and they have to be paid and 
all of those things. It seems to me what I am seeing is a real 
retrenchment in procurement for the weapons systems, many of 
which we are using today that were funded quite a number of 
years ago and brought online. Do you see any danger that 
research and development, procurement of new systems, could be 
threatened if we keep our increase at about the cost of living 
while we are increasing soldiers and still in a conflict?
    General Van Riper. There are certain areas of the budget, 
research and development being one, that I wasn't as 
comfortable with. But in terms of the major systems which the 
Secretary identified, the rate at which he requests procuring 
them and the amounts, I felt comfortable with.
    Senator Sessions. Well, I have looked hard at a number of 
those issues and I am aware that he faces difficult choices, 
and I in no way criticize him for having to make some of the 
tough decisions he must make, but I am seeing a trend that if 
we don't watch it, we will end up, just by the natural increase 
in military personnel, expenses, their health care, their 
retirement, salaries, family benefits, and all of those things, 
with the cost of each soldier going up and the number of them 
going up. Then we may not be fulfilling our obligation to the 
next generation, as I think President Reagan deserved credit 
for, of investing in some things that now we have used but that 
he never used when he was President. So that is a challenge, I 
think, in how we wrestle with this budget. But I hope we can 
keep it down. I agree with that. We don't have the money. We 
just don't.
    Thank you, Mr. Chairman.
    Chairman Conrad. Thank you, and thank you for coming and 
thank you for your observations.
    Just on the GDP, the numbers I have show that for fiscal 
year 2009, we are at 4.5 percent of GDP for defense. For 2010, 
4.7. For 2011, 4.7. That is actually higher than during the 
Gulf War, much lower than World War II. Dr. Adams made the 
point, if we faced a similar threat--World War II, we were at 
34 percent of GDP for defense, and I don't think anybody 
quibbled about a dime.
    Senator Sessions. Well----
    Chairman Conrad. We had to save the world against fascism--
--
    Senator Sessions. Well, I thought that number was including 
the supplementals, but it must not have been. I think the 
number, 3.6 is baseline defense budget, more like we were in 
the 1980's. But it is--I am not saying we don't cut costs. I am 
just saying that we are not at a historically extraordinary 
high level with a war going on.
    Chairman Conrad. No. When measured that way--you know, I 
put up before the gentleman came a chart showing in dollar 
terms that we are the highest we have been in today's dollars. 
As measured against the economy, that is a different measure, 
and even on that measure, we are certainly at a healthy level.
    I think, really, Dr. Adams made probably the right 
assessment. We have got to build a defense budget. I started 
this by saying, our obligation--our first obligation is to 
defend this country. So we have got to spend what it takes to 
defend this country.
    We have got a larger issue that you referenced just at the 
close. Our problem was our total budget circumstance is on an 
utterly unsustainable course and we are going to have to deal 
with it and we are going to have to deal with it soon.
    Again, I want to thank this panel. I appreciate very much 
your testimony before the committee. It is of great assistance 
to this committee. We are going to be having another defense 
hearing with the Department of Defense, I think next week. We 
certainly welcome all members to participate actively in that.
    With that, the committee will stand in adjournment.
    [Whereupon, at 11:46 a.m., the committee was adjourned.]
    QUESTIONS FOR THE RECORD

    RESPONSES TO QUESTIONS ASKED BY SENATOR WHITEHOUSE

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     THE PRESIDENT'S FISCAL YEAR 2011 BUDGET FOR THE DEPARTMENT OF 
                             TRANSPORTATION

                              ----------                              


                      WEDNESDAY, FEBRUARY 24, 2010

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9 a.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
Chairman of the Committee, presiding.
    Present: Senators Conrad, Wyden, Feingold, Nelson, and 
Whitehouse.
    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 everyone to the Senate Budget Committee 
this morning. Our hearing today will examine the President's 
Transportation budget request. Our witness is the Secretary of 
Transportation Ray LaHood. I especially want to welcome you to 
the Senate Budget Committee.
    Secretary LaHood. Thank you.
    Chairman Conrad. This is Secretary LaHood's first 
appearance before the Senate Budget Committee, and we are 
delighted that he could be here. I would like to begin by 
providing an overview of transportation funding and the 
challenges we face in this area. And I also apologize to the 
Secretary because our attendance is affected. Members know that 
we typically do hearings beginning at 10. Because of your 
schedule and because of Senate votes that have been now 
scheduled in the middle of the hearing, which is unusual but 
unavoidable given the circumstances we are facing, members had 
previous obligations and other committee work. So that clearly 
is affecting our attendance. Our Ranking Member is delayed as 
well by other responsibilities, but we will press ahead because 
this is an important hearing for the Budget Committee.
    It is clear that transportation funding has played a role 
in helping to revive our struggling economy. When President 
Obama took office last year, we were in the midst of a deep 
recession, the worst since the Great Depression. The actions 
taken by the Federal Government over the last year. I believe, 
have helped pull our economy back from the brink. I think it is 
undeniable that the series of actions taken by the Congress, 
the President, and by the Federal Reserve have averted what 
could have been a global financial collapse. I was in the room; 
I saw the reports coming in that were truly dire.
    One of the actions that was taken was the Recovery Act, 
which included additional transportation investments. Those 
investments were certainly not the only factor contributing to 
our turnaround, but they appear to have made an important 
contribution. And those transportation investments will have 
the added benefit of improving our nation's long-term economic 
efficiency and competitive position.
    We have seen a remarkable turnaround during this last year 
in economic growth. Economic growth in the first quarter of 
last year was a negative 6.4 percent. By the last quarter, it 
has improved to a positive 5.7 percent.

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    We have also seen a steady improvement in the jobs picture. 
In January of last year, we now know the economy was losing 
more than 800,000 private sector jobs a month. I have 
previously used the number 700,000. We now know that, in fact, 
we were losing 800,000. By this January, the economy was losing 
about 12,000 jobs a month. That is a dramatic improvement. And 
I know it is cold comfort to those who do not have work or 
cannot find the work that they would like. But, nonetheless, we 
have to deal with the reality that we have seen a dramatic 
improvement in the jobs picture, and we are hoping to see 
positive job growth in the months ahead.

[GRAPHIC] [TIFF OMITTED] T8153.274


    Most economists agree the Recovery Act had a positive 
impact. This is what Dr. Simon Johnson, the former Chief 
Economist of the International Monetary Fund, said in testimony 
before the Budget Committee, this committee, earlier this 
month. He said, and I quote: ``I would give the stimulus a very 
positive assessment. I am not a fan of stimulus in general, 
but...this was a very unusual set of circumstances. And I think 
it saved jobs, and I think it prevented damage to potential 
output that you would have seen otherwise. The crisis in 
confidence...a year ago was extraordinary...it was global, it 
was everywhere. And the fiscal stimulus was an essential part 
of U.S. leadership in turning the world economy around.''

[GRAPHIC] [TIFF OMITTED] T8153.275


    I believe Dr. Johnson has that right.
    This chart highlights the key transportation investments in 
the Recovery Act. In total, it provided $48 billion to rebuild 
and modernize the Nation's transportation system, including: 
$27.5 billion to build and repair highways; $8.4 billion to 
expand transit systems; $8 billion to develop high-speed 
intercity passenger rail; $1.5 billion for investments in 
surface transportation projects; $1.3 billion to expand airport 
capacity and improve safety; and $1.3 billion to modernize 
Amtrak's equipment and upgrade tracks.

[GRAPHIC] [TIFF OMITTED] T8153.276


    Let me just say in the debates over the Recovery Act, I was 
an advocate for $200 billion in that category. I believed we 
should have put $200 billion in the infrastructure accounts. I 
did not win that debate. I still believe, looking back, that 
while we all acknowledge there is a delay in infrastructure 
projects and getting them moving, the job creation that would 
have flowed from that size of a package, as well as the need to 
deal with the backlog that we confront across the country in 
terms of highway repair, bridge repair, airport improvement, 
that those are investments that would have wise to be made now. 
You cannot get a better time to bid contracts than right now.
    And the President's budget request, I am happy to say, for 
2011 continues to make investments in transportation. The 
budget includes $42 billion for highways and $10.8 billion for 
transit and the extension of the Surface Transportation 
Program, or highway bill, through March of 2011 at current 
levels.

[GRAPHIC] [TIFF OMITTED] T8153.277


    The budget includes $16.5 billion for aviation, including 
funding to develop the Next-Generation Air Taffic Control 
System, which we simply must do. If we are going to remain 
competitive, we have got to go to the Next-Generation Air 
Traffic Control system.
    The budget also includes $2.9 billion for rail, continuing 
the investment in high-speed rail and increased funding for 
Amtrak, both very much needed. And the budget includes $4 
billion for the National Infrastructure Fund to allow for 
investing in projects of regional or national significance.
    But we have serious highway and transit funding problems 
going forward. This chart shows that Highway Trust Fund 
receipts are projected to be lower than Highway Trust Fund 
outlays in the years ahead, and this funding gap is growing. 
The jobs bill now under consideration includes a General Fund 
transfer to fill this gap for 2010 and 2011. This is not my 
preferred alternative. I do not think--and we heard yesterday 
from the Ranking Member very clearly on this matter, and I 
agree with him, on the long term. It is not satisfactory for us 
not to address this long-term funding gap.

[GRAPHIC] [TIFF OMITTED] T8153.278


    On the other hand, in the short-term what is the 
alternative? I think we have to be very serious, what is the 
alternative? Are we really going to raise taxes in the midst of 
a continuing weak economy, one that is improving but is still 
not fully recovered? Are we going to really raise taxes in that 
circumstance? Are we going to reduce the ability to go forward 
in this highway construction season when we have got the 
opportunity to have bids at very favorable rates; to create 
jobs and to improve the competitive position of the United 
States?
    For those who say, well, ``we ought to just shut it down, 
we ought to have dramatic cuts'', I profoundly disagree. I 
think that would be wrong on every count. I think that would be 
wrong in terms of the taxpayer interest. I think it would be 
wrong in terms of job generation. I think it would be wrong in 
terms of economic growth. I think it would be wrong in terms of 
improving the competitive position of the United States.
    But over the longer term, we have to find another way. 
Given our nation's dire financial outlook, we cannot afford to 
continue funding our highways and transits out of the General 
Fund. That cannot be the answer. That is why it is critical 
that we get a long-term highway reauthorization plan from the 
Administration. We need to know how the Administration would 
bridge this funding gap. We would like to hear from Secretary 
LaHood when Congress can expect to receive the Administration's 
long-term highway reauthorization plan.
    This next chart shows some of the options that have been 
proposed to address the highway funding gap, and these include: 
increasing the gas tax, charging for each mile traveled, adding 
more tolls, continuing General Fund transfers--which I strongly 
oppose, and identifying other funding sources.

[GRAPHIC] [TIFF OMITTED] T8153.279


    Now, let's be frank, none of these are popular options. But 
we have to find a way to close this funding gap. We are going 
to have to start making tough choices.
    With that, I want to go to Secretary LaHood for his opening 
statement, again, to welcome you. We are delighted that you are 
in that position; we have high regard for you. I followed your 
career when you were in the House of Representatives. You were 
known as somebody who reached across partisan divides, was 
eminently fair in the way you conducted yourself, and really I 
think in many ways are a role model for how Members of 
Congress, both the Senate and the House, ought to operate.
    With that, we very much appreciate your being here today. 
Please proceed, and then we will go to questions from members.

 STATEMENT OF THE HONORABLE RAYMOND H. LAHOOD, SECRETARY, U.S. 
  DEPARTMENT OF TRANSPORTATION (ACCOMPANIED BY CHRIS BERTRAM, 
  CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF TRANSPORTATION)

    Secretary LaHood. Thank you, Mr. Chairman. Thank you so 
much for that lovely, very generous compliment. Everybody has a 
copy of my opening statement, and I know that you are under 
some time constraints because of the vote. I would be happy to 
just forgo this and go to questions, or I will do it however 
you want to do it.
    Chairman Conrad. I think it would be most useful to the 
Committee if you would summarize, hit the high spots, what you 
want the Committee to be thinking of as we prepare the budget 
resolution.
    Let me just say I met with members of this Committee late 
yesterday and told them that we are on a fast track here to 
produce a resolution, given other business in the Senate, and 
so if you would not mind summarizing the high spots, and then 
we will go to questions.
    Secretary LaHood. The President's request for next year 
totaled $79 billion, a $2 billion increase over Fiscal Year 
2010. These resources will support the President's and DOT's 
top transportation priorities for safety on the road, in the 
air, making communities livable and sustainable, and 
infrastructure.
    Safety is our highest priority. I testified yesterday 
before the Energy and Commerce Committee in the House, along 
with the CEO of Toyota, and we talked a lot about safety. All 
last year, I spent a good deal of time traveling the country. 
When there was an air crash in Buffalo where 49 people were 
killed, the Colgan Air--we immediately held 12 safety summits 
around the country to try to and identify issues with small 
airplanes, with commuter planes. We came up with 
recommendations even before the NTSB acted. We held a day-and-
a-half distracted driving conference where we have identified 
the epidemic in America with people using cell phones and 
texting while and driving. The President was good enough to 
include in our budget request some grants that we will be 
making, once you all approve our budget, to really make this a 
high priority.
    So I want you all to know that safety is our No. 1 
priority. The President included in our budget 66 additional 
personnel for NHTSA. This is our safety organization. This is 
the organization that has the responsibility for working with 
car companies and others to make sure that cars are safe.
    We have, as you indicated, Mr. Chairman, $1 billion for 
NextGen. We have to get the next-generation technology which 
improve the air around airports, will relieve congestion, and 
will provide the safety that is necessary around airports. We 
are committed to doing that.
    We are seeking $1 billion to continue the 5-year $5 billion 
pledge Congress made in this year's budget on high-speed rail. 
We allocated $8 billion. Those announcements have been made, 
and now we have a request for an additional $1 billion. There 
is actually $2.5 billion in our current budget, for which we 
are grateful.
    We will also work with Congress on a transit safety bill as 
a result of the WMATA crash. We feel the law prohibits us from 
getting involved in safety when it comes to transit, which is 
ludicrous. There is a bill pending in Congress that we want to 
work with you all on that will give us the opportunity to 
improve safety. There is a request for $30 million to implement 
that legislation.
    Chairman Conrad. Mr. Secretary, could I just stop you? When 
you say WMATA, for those who are listening, that relates to the 
Metro----
    Secretary LaHood. That relates to America's metro system, 
which is right here in Washington, D.C., that delivered 2 
million people on Inauguration Day all over this city. That 
crash has alerted us to the fact that we need to really play a 
role in safety. We have been prohibited by law from doing that, 
and the new law will give us that--not just with WMATA, but any 
transit system across the country.
    Chairman Conrad. WMATA stands for the Washington Metro Area 
Transit Authority?
    Secretary LaHood. Yes, sir. In the budget, the President is 
requesting $150 million to help WMATA fix their safety 
problems.
    Chairman Conrad. And, you know, all of us have constituents 
coming here every week.
    Secretary LaHood. Correct.
    Chairman Conrad. I have dozens of people come from North 
Dakota every single week to meet with members of the 
delegation, to meet with agencies, and this has become a very 
significant concern. We have one serious question after another 
about what is happening with Metro, and it affects people 
coming here from all around the country every day. So I do not 
know why Transportation was precluded from being involved in 
safety considerations for Washington Metro, but it is 
absolutely imperative that these safety issues be addressed.
    Secretary LaHood. Well, there is a bill pending in the 
Senate, and I would encourage all of you to have your staff 
take a look at it, and if you can, cosponsor it. It is a very 
good bill, and it really addresses these safety issues for 
transit programs.
    Chairman Conrad. All right.
    Secretary LaHood. We have also requested over $500 million 
for our livable communities. We are working with HUD and EPA to 
really come together around the idea that people would like to 
have more transit, more light rail, more street cars, more 
walking and more biking paths. It is the first time that people 
can remember when agencies have really come together and are 
sharing resources. So we are grateful for that kind of 
collaboration.
    So, with that, Mr. Chairman, you have highlighted our 
budget on some of your charts, and I have tried to highlight it 
here. I think in order to save some time, I am willing to begin 
to answer questions.
    [The prepared statement of Secretary LaHood follows:]

    [GRAPHIC] [TIFF OMITTED] T8153.239
    

    [GRAPHIC] [TIFF OMITTED] T8153.240
    

    [GRAPHIC] [TIFF OMITTED] T8153.241
    

    [GRAPHIC] [TIFF OMITTED] T8153.242
    

    Chairman Conrad. All right. We appreciate that very much 
and let us wade right----
    Secretary LaHood. Can I just also indicate, Chris Bertram 
is our Budget Director at DOT. He is a very familiar face 
around here. We are grateful that he was willing to leave his 
position here in the Senate and come to work for us, and he has 
done a great job.
    Chairman Conrad. And very respected here, so we are 
delighted that he is here. Let me just begin, and we will go 7-
minute rounds this morning, if that is all right with 
colleagues. We are going to be interrupted with a vote or two 
votes, I am told by Leadership, so we do have to be mindful of 
that. Let me go right to it, if I can.
    First, with respect to stimulus, as I understand it, in the 
recovery package, of the $48 billion that was provided in the 
Recovery Act, 75 percent of that you have already obligated. Is 
that correct?
    Secretary LaHood. Yes. We followed every guideline that you 
all set in the bill. We have met every deadline. There are a 
couple of deadlines coming up in early March on transit and 
highways, and we will meet those. We have gotten the money out 
the door in the States, and the transit systemsand airports 
have been very helpful in making sure--that this money has been 
spent correctly and on time.
    Chairman Conrad. And that this money, even though this was 
part of a recovery package outside the normal process, that 
these funds are being spent in a way that we can assure 
taxpayers these funds are being spent carefully and wisely. Is 
that the case?
    Secretary LaHood. Absolutely. I know of no boondoggles, no 
earmarks, no sweetheart deals. All done by the book. The IG is 
looking at some of these, and ultimately there will be reports 
on this. I do not think anybody will ever be embarrassed by the 
way this money has been spent.
    I was pleased to read today that the Congressional Budget 
Office has now said that over 2 million jobs were created as a 
result of the stimulus. Now, unfortunately, it was buried in 
USA Today. If the story had been reversed, I know it would have 
been on the front page. But, look, this is a nonpartisan group. 
Over 2 million jobs created. We should all be very proud of 
that.
    Chairman Conrad. Well, let me just say, I personally 
believe, it was that a perfect package? No. I mean, no work by 
435 Members of the House and 100 Members of the Senate and a 
brand-new Administration is ever going to be perfect. But to 
me, it is very clear that the recovery package played a role in 
what is really a remarkable turnaround, both on the jobs front 
and in terms of economic growth.
    Let me go to the question further. Of the $48 billion, as I 
understand, $35 billion has been obligated, $9 billion has 
actually been spent. Of those obligated funds, do you have a 
handle on how quickly those funds will actually be spent in the 
States? I assume much of that will now be spent in this coming 
year.
    Secretary LaHood. It will be spent this year, and the way 
it works is we have to receive the proposals from the States.
    Chairman Conrad. Right.
    Secretary LaHood. We check all the boxes to make sure. We 
obligate the money, and then they go out and get contractors to 
do the work. That will take place this year with the remainder 
of the money. The jobs bill that you all pass will be a great 
follow-on to our ability to continue to make progress on 
projects that States were not able to get funded or projects 
that were not quite ready. It will be a great transition.
    Chairman Conrad. Well, I think that is the case.
    Let me go to a second issue, and that is the funding gap 
that I referenced. This chart shows what the receipts are of 
the Highway Trust Fund. Mr. Secretary, you are well familiar 
with this. And on the other hand, the red line, the dotted 
line, shows the forecast for the Highway Trust Fund outlays. 
And we have a gap there, a significant gap, in 2020 of $15 
billion and in 2010 of $8 billion. And it is a gap that is 
growing. That is the point.
    What is your strategy for dealing with that gap? When will 
the Adminstration come forward with a long-term reauthorization 
plan?
    Secretary LaHood. Let me say that we are grateful to the 
Congress for passing a bill that will extend the current 
program through December 31st, and I hope the House will adopt 
that because that really goes to what we talked about last 
year, which was an 18-month extension. That gives us time to 
work with all of you in the Congress on the way forward.
    Now, the President has said he does not want to raise gas 
taxes. In a very bad economy, that is not the thing that we 
should be doing to people who are out of work and can ill 
afford to buy a gallon of gasoline. We have talked about the 
infrastructure fund for which the President has included $4 
billion in our budget request. An infrastructure fund, commonly 
referred to as an ``infrastructure bank,'' if you like that 
term, creates a fund that can fund significant projects around 
the country, big projects that will have national significance. 
That is one way.
    We know that in some parts of the country--probably not in 
your part of the world--tolling is a way to pay for additional 
capacity, and we need to look at that. You can raise a lot of 
money through the use of tolls. We have talked about the idea 
of public-private partnerships. Where roads are going to be 
built, there can be some private dollars utilized to help with 
part of that infrastructure. That is going on in certain parts 
of the country.
    We know the Highway Trust Fund is insufficient. People are 
driving less. They are driving more fuel-efficient cars. Your 
chart shows it. We have a huge gap. There is no question about 
it. So we are going to work with Congress, try to find the way 
forward here on how to pay for all the things we want to do.
    If you look at Chairman Oberstar's bill, it costs $450 
billion, and it is a pretty good bill. It meets a lot of 
infrastructure needs in the country, but there is not $450 
billion at this point to pay for it.
    Chairman Conrad. Yes. Well, if I would have included on my 
chart the House proposal, we would see that, where I have $56 
billion, it would be $82 billion.
    Secretary LaHood. That is correct.
    Chairman Conrad. So, look, the question that I have, the 
specific question is, when can we expect a plan from the 
Administration on a long-term reauthorization?
    Secretary LaHood. I think soon after you all pass this 
extension. We are working on it now. We are working with OMB 
and the White House. I think we will have some very good 
principles for all of you to look at very soon after the 
extension.
    Chairman Conrad. All right. That is very important. It is 
important to this Committee. More broadly, it is important to 
both the House and the Senate in terms of long-term plans, 
which we now have a commission working on.
    Secretary LaHood. Yes.
    Chairman Conrad. And it is going to be critically important 
to the deliberations of that commission as well.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman Conrad, and 
welcome, Mr. Secretary.
    Secretary LaHood. Thank you.
    Senator Whitehouse. I wanted to ask three questions. The 
first is about TIGER grants and that program, and before I ask 
you the question, let me thank you. Rhode Island could not be 
more delighted to have obtained $22 million for the Quonset 
project, which will help provide vital infrastructure and 
support for a growing clean energy industry and the potential 
for that to be a real hub for offshore energy.
    Secretary LaHood. Well, thank you for your support, 
Senator. You and I met and we talked about some issues, and we 
appreciate your support.
    Senator Whitehouse. Well, it is very mutual. My question is 
this: You were able to fund $1.5 billion in TIGER grants.
    Secretary LaHood. Yes.
    Senator Whitehouse. When you put them out to bid, you got 
$60 billion worth of applications.
    Secretary LaHood. Yes.
    Senator Whitehouse. That leaves, assuming all the $1.5 
billion goes out, about $58.5 billion of projects that States 
and municipalities and others brought forward and that we have 
not been able to fund.
    In very broad strokes, how would you evaluate those $58.5 
billion? How many of them, if the funding were available, are 
really worthy of going forward with now as opposed to just, you 
know, sort of a fluff project thrown in on a Hail Mary? I mean, 
how many of them--and what sort of a number should we be 
considering to take advantage of all that ready-to-go, shovel-
ready work?
    Secretary LaHood. I would say the majority of those. 
Unfortunately for us, these were very hard decisions. I would 
say the majority of the applications were very worthwhile 
projects, that if we had had $60 billion, the majority of those 
would have been funded. They were good projects. They really 
were. I know there is a lot of disappointment around this 
building and the building across the way. I have met with some 
about that, and we will try to be helpful.
    We do have $600 million in our 2010 budget for TIGER, and 
we will be putting up guidance on the web. We know that some of 
these projects will come back to us, and we encourage that. 
$600 million is real money, but it is not nearly enough to meet 
all the needs.
    Senator Whitehouse. Yes. I have a more general point that I 
would like to ask your opinion on. We face twin problems: a 
dire need for jobs, particularly in my home State of Rhode 
Island but across the country, and a fiscal problem that is 
looming toward us. Those are in opposition. The spending and 
borrowing now to support the jobs adds to the fiscal problem 
later.
    It strikes me that there is something of a sweet spot in 
the middle of that where we are dealing with infrastructure 
that is sooner or later going to have to be repaired anyway. We 
have a Providence viaduct that is so decrepit that they have 
stopped committing--I think both State and Federal have stopped 
committing maintenance funds to it because it really needs a 
rebuild. We have a bridge that is requiring people to drive all 
the way around an outer highway loop to avoid going over the 
Pawtucket River because of weight restrictions that prevents 
large trucks from going over. It is highway 95. It is pretty 
central.
    Those things are going to be repaired sooner or later, and 
under the old Yankee principle that a stitch in time saves 
nine, we all know that very often maintenance projects are 
cheaper done early rather than when they are left to further 
erode and degrade.
    Is that a philosophy that we should be following, that 
where we can identify transportation projects that are clearly 
going to need to be accomplished at some point, why not speed 
them up now? And is there not a good argument for those 
projects that they really do not contribute to the long-term 
fiscal liabilities of the Nation?
    Secretary LaHood. Absolutely. There are many of those 
around the country, and we know for the last decade we have 
ignored our infrastructure needs. We have not put the resources 
into them, and that is why we have bridges falling down around 
the country. We have roads crumbling around the country. What 
you all did was very helpful in giving $48 billion to 
infrastructure. That money has been well spent, and a lot of 
people have gone to work in good-paying jobs around the 
country. But we still have many unmet needs.
    Senator Whitehouse. You have given me a great lead-in to my 
third question, which was about how we look at better capital 
budgeting, if you will, of our infrastructure needs. I really 
applaud what the President has done with the infrastructure 
fund. I think Chairman Dodd did a lot of work on that earlier. 
I think it is a great idea, very important, and it is a step in 
the direction, it is a mechanism for a form of capital 
budgeting.
    But our budget does not really reflect in any way that I 
can find the infrastructure deficit that we have as a country 
of failed and failing roads, water, bridges, basic 
infrastructure. And, moreover, when we go to build a piece of 
infrastructure that is going to last 20, 40, 60 years, we 
expense it in the year that we spend it. The private sector 
would never do that. If you were a corporation and you did not 
disclose those kinds of capital liabilities, you would have 
lawsuits all over you. And if you had a major project that you 
were going to amortize over 20 or 40 years, you would not be 
forced to expense it in the same year.
    Are there ways that you, within your existing authorities, 
can explore ways of trying to better budget in a way that 
matches private sector budgeting so that you are accounting for 
real infrastructure liabilities and able to expense over the 
life of a project?
    Secretary LaHood. Well, what we did, in anticipation of you 
all passing another jobs bill, is develop a list, which I will 
be happy to provide to the Committee, of the most immediate and 
long-term infrastructure needs around the country. It is a long 
list and it is billions of dollars. That is our guidepost as we 
work with Congress on a new authorization bill. Here are the 
unmet needs and here is the wish list for States and others in 
transportation, and----
    Senator Whitehouse. My time has expired, so if I could ask 
you to take that last question for the record. If you would 
like to----
    Secretary LaHood. OK.
    Senator Whitehouse [continuing]. Answer in greater detail, 
I would appreciate it, and I thank the Chairman.
    The Federal budget process has established rules and 
procedures for accounting for infrastructure costs over the 
useful life of a project, generally recognizing the project's 
total costs at the beginning of a project. The Department of 
Transportation does not typically own the assets that we 
provide grant funding toward. The infrastructure constructed by 
the funding that DOT distributes to States for highway and 
tranist construction finances projects that are typically owned 
by the State or local transit authorities. The closet 
comparison that the Department has to match private sector 
budgeting is credt program budgeting under the Credit Reform 
Act of 1990, as amended (FCRA). The FCRA changed the budgetary 
measurement of cost for direct loans and loan guarantees from 
the amount of cash flowing into or out of the Treasury to the 
estimated long-term cost to the Government. Only the 
unreimbursed costs of making or guaranteeing new loans are 
included in the budget.
    Chairman Conrad. I thank the Senator. I thank him very much 
for sticking to the time, and I ask other Senators to try to 
stick closely to the time, as well, given the fact we have a 
vote scheduled at 9:55.
    Senator Feingold?
    Senator Feingold. Thank you, Mr. Chairman, and I want to 
join with you in your words about Secretary LaHood. It does get 
my cheesehead a little irritated when I hear him talking about 
tolls, though, because I would like to have all the money I 
have paid out over the years coming down to Illinois through 
the tolls, but that is just a Wisconsin-Illinois thing and I am 
just giving you a hard time. But it is good to see you.
    Secretary LaHood. Thank you.
    Senator Feingold. Let me start by talking a little bit 
about high-speed passenger rail. I was pleased that the 
Adminstration included a significant investment of $8 billion 
in passenger rail as a part of the American Recovery and 
Reinvestment Act and continues to followup that initial 
investment with a proposal for another $1 billion in the Fiscal 
Year 2011 budget.
    Of course, I was particularly proud to support Wisconsin's 
successful $822 million application to the program that will 
extend passenger rail service from Milwaukee to Madison and 
link our State's two largest cities. Beyond the thousands of 
jobs that will be created directly, there should be numerous 
additional benefits from reduced congestion to reduced gasoline 
use and more desirable and livable communities.
    Even before the first dollar has been spent, there is 
already speculation on what the next passenger rail project 
will be to link Western Wisconsin and the Twin Cities to 
Milwaukee and Madison, or even eventually heading north to 
Green Bay.
    But before we get too far ahead of ourselves, I think it is 
important to take a little time to focus on the current project 
and how it can best fulfill its promise to create jobs, and 
that is, in my view, by ensuring that local small businesses 
can compete for contracts associated with this project. I have 
been hearing some concern about the potential for contracts to 
be so large or complicated that only huge national companies 
would be able to compete for the funding, so I would like to 
know, are there ways for the contracts for the large 
construction projects using this money to be structured, 
perhaps by breaking them up into smaller pieces, so that small 
businesses can participate? And if so, has the Department or 
State Departments of Transportation been actively encouraging 
ways to put out contracts for bid that will get the broadest 
and greatest applications?
    Secretary LaHood. Well, first of all, let me thank you for 
your support, Senator, on this initiative, and I also want to 
compliment your Governor. He has been right there, right from 
the beginning. I have had so many meetings with Governor Doyle 
on this, and he has been a real leader. Wisconsin is in the 
place it is in because of his leadership and also because of 
your leadership and I appreciate that.
    We have grant agreements that we now have to negotiate with 
the States for the money that has been allocated, for example, 
to Wisconsin. I take your point on this. We want to make sure 
that those that want to get in the high-speed rail 
manufacturing business have an opportunity to do that. We will 
be working with Governor Doyle and his team at the Wisconsin 
Department of Transportation to be sure that small businesses 
have an opportunity. That can be done through these grant 
agreements that we will be negotiating.
    Senator Feingold. I am pleased to hear that and I would 
like to be informed of any details of this as it goes forward--
--
    Secretary LaHood. You will be.
    Senator Feingold [continuing]. Because it is of vital 
interest to us and our State.
    I am also pleased to see some of the proposed spending cuts 
in the budget, including a proposal to terminate the Rail Line 
Relocation Program. I also included this proposal in my Control 
Spending Now Act that I introduced last fall, which would cut--
the overall bill would cut about half-a-trillion dollars over 
the next 10 years.
    But if we are going to start getting our deficits under 
control, we have got to find some places where more cuts could 
be made. For example, President Bush in his Fiscal Year 2009 
budget proposed to rescind $626 million in highway earmarks 
that were over a decade old and still had less than 10 percent 
of the funding utilized. I have expanded on this concept for 
another provision of the bill that I have introduced, so that 
all earmarks across all Federal agencies would be rescinded if 
90 percent of the funding remained unobligated after a decade.
    You can get back to me with the details, but can you tell 
me whether the $626 million in old highway earmarks still 
remains unspent and whether there are similar unwanted or low-
priority projects in other transportation accounts? And just 
more generally, would you be supportive of my proposal?
    Secretary LaHood. The answer is yes, we are supportive of 
your proposal, and we have identified significant--millions of 
dollars worth of earmarks. For the record, I will get you the 
specific number, but we support your idea, Senator.
    The amendment offered by Senator Feingold would rescing 
Department of Transportation earmarks if less than 10 percent 
of the appropiated funding has been obligated within 10 years 
(unless the Secretary determines that an additional obligation 
of the earmark is likely to occur in the upcoming year). The 
total estimated amount of highway projects that would be 
rescinded per the Geingold Amendment is $563.5 million. Of this 
amount, approximatel $469 million are balances from projects 
authorized by TEA-21.
    Senator Feingold. Very good. And then similarly, during 
reauthorization, would you oppose the special no-year contract 
authority and obligation limitation that means that these 
earmarks never expire?
    Secretary LaHood. Yes, sir.
    Senator Feingold. Thank you, Mr. Secretary. Continuing on 
the issue of earmarks, I am concerned that the funding for 
capital purchases of buses and bus facilities under the Section 
5039 program is typically completely earmarked. While 
Wisconsin's transit agencies and State Department of 
Transportation work together to distribute funds from a 
Statewide bus capital earmark based on need, smaller transit 
systems across the country are losing out. These systems, of 
course, as you know, provide vital services to communities and 
they are too important to let Congressional seniority and 
committee assignments determine which projects receive funds.
    During reauthorization of the highway bill, would you 
support creating a formula or competitive program to replace 
the current system, and if so, I would encourage you to talk to 
Wisconsin about how that is done.
    Secretary LaHood. We will do that, and we will certainly 
look at your proposal. We set a good record with Tiger, thanks 
to the bill that you all passed for the $48 billion. There were 
no earmarks for our portion of the Economic Recovery. We did it 
on a competitive basis. We know we can do it. It is the best 
way to do things. It is the fairest way to do things, and we 
hope that working with all of you under authorization, we can 
find that path forward.
    Senator Feingold. Thank you for all your very responsive 
answers. Good to see you.
    Chairman Conrad. Boy, Senator Feingold is batting a 
thousand, as I count.
    [Laughter.]
    Chairman Conrad. Senator Wyden?
    Senator Wyden. Thank you, Mr. Chairman, and thank you for 
holding this hearing. It is good to see Secretary LaHood here. 
We love him when he comes to Oregon. He has been a great 
advocate for some of our state-of-the-art efforts in 
transportation.
    Let me, if I might, Mr. Secretary, start with Build America 
Bonds. As you know, Build America Bonds are selling like 
hotcakes. Jurisdictions large and small have essentially said 
this is the way to turn around the deep freeze that we have 
been getting in the municipal finance market. We got the 
program started in the middle of last year. We estimated that 
you might see $4 or $5 billion worth of Build America Bonds 
issued. At the end of the year, it was $64 billion. It is 
projected to be about $130 to $150 billion this year, and I am 
very pleased that the Adminstration, and I know of very few 
instances like this, after a relatively short period of time 
has actually said this program ought to be made permanent. So I 
am very pleased with that and your help on this effort.
    What I want to do is go over with you, just so we have it 
on the record, the issue with respect to Build America Bonds 
and job creation. Now, as we have seen with your general 
figures, the Department of Transportation estimates that each 
$1 billion of direct spending in the transportation area 
creates more than 30,000 jobs. So my question is, why would it 
be any different with bond funding? In other words, when you 
get $1 billion spent on bond funding, wouldn't that be also a 
tremendous shot in the arm in terms of job creation for our 
country?
    Secretary LaHood. Well, Chris Bertram tells me that he 
thinks that you are right, you are spot-on on this, that it 
wouldn't be any different.
    Senator Wyden. I appreciate that, because what I like so 
much about what the Adminstration is trying to do on this 
transportation issue is to put more tools in the tool box. You 
know, I never ran around--and I am very appreciative of Senator 
Thune and Senator Collins, it has been a bipartisan effort--and 
say, oh my goodness, I just want everybody to use only Build 
America Bonds. What I wanted to do was to make sure, as I say, 
jurisdictions small and large would have more tools in their 
tool box, and I think we have been able to do that.
    I am very grateful that the Adminstration is really using 
its bully pulpit. You all have been showing up at announcements 
and jurisdictions from New York City to all kinds of small 
jurisdictions in America, and I thank you for that.
    Let me ask you one other point with respect to this new 
proposal from the Adminstration to make it permanent. Are there 
any other issues that you would like us to have on the record 
associated with making it permanent? What I like about that is 
it sends a message, again, of certainty and predictability, 
that there is strong support for that. Are there any other 
thoughts you would like us to know----
    Secretary LaHood. On Build America Bonds?
    Senator Wyden. Yes.
    Secretary LaHood. Well, not other than to say thank you for 
your leadership. This is a very innovative, creative way to 
improve infrastructure. It is as we said to the Chairman 
earlier, we have got to find creative, innovative ways to do 
all the things we want to do. There is none better than this, 
and you will continue to have our support. We will work with 
all of you on the way forward with authorization and make sure 
that whatever we can do to make this permanent, we will do it.
    Senator Wyden. Well, I am very appreciative. I have one 
other topic that I want to ask you about, and I probably ought 
to quit while I am ahead, and I thank you for your support on 
the effort.
    The other issue I just wanted to touch on is an area that 
relates to environmental policy but has real implications for 
transportation, as well, and that is the lack of recycling at 
airports. As you know, an enormous amount of trash and things 
travelers have and things generated by airports is not 
recycled, and it has been known for years that the airports 
don't recycle most of their waste. There is evidence they could 
save something like $100,000 a year by doing so. Of course, if 
airports recycled as much as we are trying to get people to do 
at home, you would have a significant reduction in carbon 
emissions, as well.
    I have been working with a broad coalition on this issue. I 
am going to be introducing legislation to create incentives to 
promote this. I have been working with the Association of 
Airport Executives, the Airport Council International, the 
flight attendants, and others. I just wanted to bring this up 
at the hearing and would just ask if you would be willing to 
commit this morning to just working with us on this issue and 
having your staff available so that as we go forward, we could 
make sure we had the expertise?
    Secretary LaHood. Absolutely. We would be happy to come up 
and meet with your staff and find out how we can be helpful. I 
think it is a great idea.
    Senator Wyden. I am not surprised at that answer, either. I 
remember when we were serving together in the House of 
Representatives, all of us felt that you were one of the people 
who always was a problem solver, always wanted to try to find 
common ground, and wasn't long on a lot of flowery rhetoric but 
wanted to get results.
    Secretary LaHood. We want to be helpful.
    Senator can I just mention one other thing----
    Senator Wyden. Of course.
    Secretary LaHood [continuing]. That I know is near and dear 
to your heart, and also to your colleagues from your home 
State. Streetcars are taking off all over America. What you all 
have done in Portland to really ignite the enthusiasm--you, Mr. 
Blumenauer, Mr. DeFazio, and others, but primarily the three of 
you--you should be thrilled. A lot of communities around 
America are getting into the streetcar business and many of 
them are going to be made right there in your home State. So I 
want to compliment you, Mr. Blumenauer and Mr. DeFazio, for the 
struggles that you have gone through over the years and for 
really hanging in there, because streetcars are coming back to 
America.
    Senator Wyden. I tell you, I think this country is falling 
in love with streetcars. If you talk to our folks at home, they 
are getting calls all over the country, all over the world. 
People have picked up on the fact that this is a chance to move 
people around in an efficient way. It is a chance to save 
energy. It is a winner from every perspective. So I thank you 
very much for that shout out for streetcars that are made in my 
hometown. You mentioned my House colleagues. We may have to 
form a Streetcar Caucus just to try to respond to all the 
inquiries of interest. It couldn't happen if we didn't have the 
support of the Adminstration and we thank you for it.
    Secretary LaHood. Thank you.
    Chairman Conrad. Thank you, Senator Wyden, and Senator 
Wyden, thank you for your focused leadership on Build America 
Bonds. It has made a big difference. It is going to be part of 
this package, this jobs package.
    You know, it is really hard to find something, I think, 
that works better than these Build America Bonds, conceptually, 
financially. People have skin in the game, so the money is 
spent responsibly. Senator Wyden, I think, deserves a shout out 
here, as well, from all of us for pressing this over a long 
period of time, and it is working and it is working beyond 
anybody's wildest imagination of how well it might work. We 
have actually tested it in the real world. This is one of those 
things that has actually worked and worked beyond what 
advocates claimed for it. So kudos to you.
    I also want to recognize Brodi Fontenot, who is with the 
Secretary today. Brodi was the budget analyst for the Senate 
Budget Committee for transportation and veterans. Now he is a 
Deputy Assistant Secretary of Transportation for Management and 
Budget and we welcome him back to the Committee. He is somebody 
that has a great deal of credibility with the Committee. Brodi, 
if you would stand and be recognized, we are glad to have you 
back.
    Secretary LaHood. Thank you for doing that, Senator. That 
is very nice.
    Chairman Conrad. Well, Brodi, as you know, is top notch. We 
are delighted when people leave here and move up because of 
their own good work, and we are delighted that you recognized 
it.
    Secretary LaHood. You have trained him well.
    Chairman Conrad. He is tight with a buck.
    [Laughter.]
    Chairman Conrad. If I can go to a question that I think is 
important that we get on the record before we end, and we are 
going to be better than our word to you, given the votes that 
are going to occur shortly, we won't ask you to wait while we 
go and vote and come back. We will just shut down the hearing.
    Let me ask you this because I think it is important for us 
to know. What is your assessment of how big the backlog is with 
respect to high-priority transportation projects around the 
country? Have you put a number on what the backlog might be?
    Secretary LaHood. Between $80 and $100 billion, and I will 
be happy to share the list with the Committee that we put 
together in anticipation of you all passing another jobs bill.
    Chairman Conrad. Between $80 and $100 billion. I tell you, 
I wish so much when we did the Recovery Package, those of us 
who believed it ought to be larger to accommodate this backlog, 
I wish we had been more successful in persuading our colleagues 
to have a bigger package, because you are talking about $80 to 
$100 billion, not just of requests that are out there, I 
assume, but the projects that have real merit.
    Secretary LaHood. Absolutely. As I said to Senator 
Whitehouse for a decade, we have really ignored infrastructure. 
We just haven't put the resources into it. There are a lot of 
lousy bridges and roads that need to be constructed--these are 
good projects, they really are.
    Chairman Conrad. Yes, they are good projects, and not only 
do they create jobs, and jobs that are here in America-----
    Secretary LaHood. Exactly.
    Chairman Conrad. I mean, you are building a road in the 
United States. Those are jobs that are going to be right here 
in this country.
    Secretary LaHood. Right, and the spin-off in terms of the 
materials that are needed and all the things that go into 
building a road or a bridge are all American jobs.
    Chairman Conrad. And it helps improve the competitive 
position of the United States. I would say anybody who goes to 
any major city and at four o'clock in the afternoon goes to try 
to get home--you can see it here in Washington, D.C. You get 
out on that Beltway, it is a total crapshoot. I often think 
when I am driving, what is the economic cost to our economy of 
all the goods that are moving, all the businesses that depend 
on the ability to move freight being ground to a halt? What is 
the economic cost of that? What does that do to our competitive 
position?
    Obviously, that involves not only roads and bridges, it 
involves our airports: it involves our rail systems. And what 
is happening with the Metro system here?
    In my home State, we are a major energy producer for 
America. Most people don't think of North Dakota that way. They 
think of us as an agricultural State, which we are proud to be, 
in many areas the No. 1 agricultural State in America. But we 
are also a major energy State. We produce the electricity for 
nine States in North Dakota at our mine-mouth coal plants. We 
are now the fourth largest oil producer in the United States. I 
don't think many people would think of North Dakota as a major 
oil producer, but we are. We have the greatest wind energy 
potential of any State in the nation.
    And these highways that are in the energy corridor with the 
major finds in the Bakken formation and now a new formation 
underneath the Bakken that also has tremendous reserves, we 
have got a two-lane road that is servicing that major energy 
corridor. I was just on that road a couple of months ago. It is 
unbelievable. It is like being on the beltway at four o'clock, 
big truck after big truck after big truck--hill, truck, curve. 
As my Grandfather used to say when we went through Wisconsin, 
hill, truck, curve.
    [Laughter.]
    Chairman Conrad. That is what is happening in North Dakota 
in this major energy corridor, Highway 85. There is going to 
have to be serious money spent there so that the energy needs 
of the country can be met efficiently.
    Let me go to one other matter before we go, and I know 
votes are ready to start momentarily on the Senate floor, and 
that goes back to the question of Tiger grants. You had $60 
billion, as I understand, more than $60 billion of requests, is 
that correct?
    Secretary LaHood. That is correct.
    Chairman Conrad. And you had $1.5 billion to meet the 
requests.
    Secretary LaHood. That is correct.
    Chairman Conrad. Your analysis of that $60 billion was that 
most of those were projects of merit, is that correct?
    Secretary LaHood. That is correct.
    Chairman Conrad. I am sure there were some that were not.
    Secretary LaHood. That is correct.
    Chairman Conrad [continuing]. And that is the way the world 
works.
    Secretary LaHood. The majority were meritorious.
    Chairman Conrad. The majority were meritorious.
    Secretary LaHood. Yes.
    Chairman Conrad. That is a big--is that included in your 
$80 to $100 billion of backlog?
    Secretary LaHood. I would have to check, but probably a 
few. Some of them were road and bridge projects that I am sure 
were in the $80 to $100 billion.
    Chairman Conrad. It would be very helpful for the Committee 
if you could look at those and look at the $80 to $100 billion 
of backlog and get us a number that takes out any duplication 
so that we have as good a sense as we can of what the total is.
    Secretary LaHood. We will do it.
    Chairman Conrad. All right.
    Secretary LaHood. Yes, sir.
    Chairman Conrad. I thank you very much for your testimony.
    Secretary LaHood. Thank you.
    Chairman Conrad. I thank you for your service.
    Secretary LaHood. Thank you.
    Chairman Conrad. I know these jobs are demanding, and you 
will note I didn't even ask you why North Dakota didn't get any 
Tiger grant money.
    Secretary LaHood. Thank you.
    [Laughter.]
    Secretary LaHood. I will be happy to come up and brief you, 
though, Senator. I know----
    Chairman Conrad. Look, I----
    Secretary LaHood. Look, you have been a strong supporter of 
infrastructure and transportation and I know you get it. Why 
don't we just make arrangements to come and brief you on--
because there is $600 million available in the next round and 
we ought to look at that.
    Chairman Conrad. Well, we would like to talk, and look, we 
respect the circumstance that you face. You have got $1.5 
billion and you have got $60 billion of requests, so----
    Secretary LaHood. We will come up and brief you on it.
    Chairman Conrad. Let me also indicate that for the 
knowledge of colleagues, the staffs who are here, colleagues 
who might be listening, leadership has asked us to be ready in 
about the third week of March for a budget resolution. Now, we 
don't know if that timing will hold as we go forward, but that 
puts us on a very fast track because the Senate schedule this 
year is a little different than it has been in the past in 
terms of when the break comes. So that really puts all of us on 
alert, if you will, that for us to get our work done in a 
timely way, or at least be ready to go when leadership may ask 
us to go to the floor, we have got to get ready.
    And so I am asking colleagues, if there are things that 
they want to make certain are in the resolution, if there are 
things that are of special concern to them, please get that in. 
I have asked on our side to get all of those things to the 
Committee by the end of the work day on Friday. I would say to 
my colleagues on the Republican side, if there are matters of 
significant concern to your members, if you would get that to 
us by the end of the work day on Friday, we will then be in as 
good a position as we can to go forward on the time that has 
been given to us.
    Again, Mr. Secretary, thank you so much for your testimony 
here today, and again, thank you for your service.
    Secretary LaHood. Thank you.
    Chairman Conrad. The committee will adjourn.
    [Whereupon, at 9:56 a.m., the Committee was adjourned.]
    QUESTIONS FOR THE RECORD

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         DEPARTMENT OF DEFENSE FISCAL YEAR 2011 BUDGET REQUEST

                              ----------                              


                        THURSDAY, MARCH 4, 2010

                                       U.S. Senate,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2 p.m., in room 
SD-608, Dirksen Senate Office Building, Hon. Kent Conrad, 
chairman of the committee, presiding.
    Present: Senators Conrad, Wyden, Nelson, Warner, and 
Grassley.

              OPENING STATEMENT OF CHAIRMAN CONRAD

    Chairman Conrad. The hearing will come to order.
    Let me just say that we have just been alerted by 
leadership that there will be five votes commencing at 2:30. 
That poses very difficult circumstances for this hearing to be 
conducted in the usual form. So what I am proposing is that we 
waive opening statements on our side, that we go immediately to 
the opening statements of our witnesses and ask them to be as 
succinct as they can, and then we go directly to questions. If 
that is acceptable on both sides, that will be the way we 
proceed.
    I want to welcome our witnesses today. I deeply appreciate 
the Deputy Secretary of Defense, William Lynn, and the Under 
Secretary and Comptroller of the Department of Defense, Robert 
Hale. As Deputy Secretary, Bill Lynn serves as the Chief 
Operating Officer of the Department, and as Under Secretary and 
Comptroller, Bob Hale serves as the Chief Financial Officer of 
the Department. This is the first appearance for both before 
the Senate Budget Committee and we want to welcome them and 
look forward to your testimony.
    Please proceed.

STATEMENT OF WILLIAM J. LYNN, III, DEPUTY SECRETARY OF DEFENSE, 
  U.S. DEPARTMENT OF DEFENSE; ACCOMPANIED BY ROBERT F. HALE, 
 UNDER SECRETARY OF DEFENSE (COMPTROLLER) AND CHIEF FINANCIAL 
              OFFICER, U.S. DEPARTMENT OF DEFENSE

    Mr. Lynn. Thank you very much, Mr. Chairman. You have a 
written statement, I think, in front of you. I would ask you to 
put that in the record. I will summarize briefly the main 
points of that and then we will go, as you suggested, to your 
questions.
    The top-line request from the Department for fiscal year 
2007 is $708 billion. That consists of $549 billion to fund the 
base Defense program and then another $159 billion to support 
overseas contingency operations. There is also a $33 billion 
request for a fiscal year 2010 supplemental to pay for the 
additional 30,000 troops deployed to Afghanistan.
    The base budget represents about a 3.4 percent increase in 
nominal terms and a 1.8 percent increase after adjusting for 
inflation. Measured in terms of share of the economy or Gross 
Domestic Product, the Defense budget would be steady at about 
4.7 percent this year.
    The priorities reflected in the Defense budget reflect 
those of the Quadrennial Defense Review, which was just 
completed. There are three major priorities that I would 
summarize for you. Rebalancing Secretary Gates is trying to 
rebalance America's defense posture, emphasizing the 
capabilities needed to prevail in the current conflicts while 
still taking appropriate steps to modernize against future 
threats.
    The second priority is reform. The reform agenda that 
Secretary Gates laid out in last year's budget, the fiscal year 
2010 budget that we are now executing, laid out a reform 
agenda. An important part of that was to cancel or curtail 
programs that were either underperforming, were in niche areas 
with exotic technologies, or we had sufficient quantities of. 
Those included last year, importantly, the F-22.
    This year, we have continued that approach of appropriate 
fiscal discipline and program discipline and we are proposing 
seven major systems be curtailed. The list of those are in my 
statement. I would highlight two, the C-17 and the Joint Strike 
Fighter. The C-17 is a fine airplane, but we already have 40 
more than the Defense Department originally requested and we 
are above the number that has been laid out in the recently 
submitted Mobility Requirement Study, so we would curtail that 
program. And the Joint Strike Fighter Alternative Engine, we do 
not think the up-front costs, which are substantial, are 
justified by the prospective savings, so we would propose not 
to go forward with that program.
    The third priority is resourcing. The President has made, I 
think, an important strategic decision, which is to give 
national security agencies, including the Department of 
Defense, real growth in this budget while holding domestic 
agencies flat. I think that represents a balancing of the 
important national security needs against fiscal austerity and 
he has tried to draw that balance appropriately.
    Modest real growth in the defense budget itself is 
necessary for several reasons. Some of our costs, such as 
benefits, especially health care, are growing faster than 
inflation, and ultimately, the overall cost of sustaining the 
force grows faster than inflation. So in order to maintain the 
force levels we have, we need at least some level of moderate 
real growth given that making force cuts when we are in two 
major operations is really not an option, at least in the near 
term.
    Mr. Chairman, in closing, we believe that the fiscal year 
2011 budget represents the minimum funding needed to provide 
for the defense of the United States and its people. It gives 
us the tools to prevail in the wars we are in while making 
investments for the future. We would strongly urge Congress to 
support the full Defense request in its upcoming budget 
resolution and its subsequent funding allocations.
    With that, Mr. Chairman, I would turn it to your questions.
    [The prepared statement of Mr. Lynn follows:]

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    Chairman Conrad. Thank you. Thank you for being so 
succinct.
    Of course, we have had a chance on this committee to 
already have a hearing on Defense and we have had a tremendous 
amount of material from your Department as well as our own 
independent analysis available to members of the committee. So 
I want people who are listening to understand there has been an 
enormous amount of work done trying to scrub these budgets to 
determine whether or not the taxpayers' money is being used 
wisely or not.
    Let me get right to it, if I can. First of all, we thank 
you for your service. We very much appreciate people of your 
quality and character being willing to serve in public life, 
and I say that to both you, Mr. Lynn, and to you, Mr. Hale. You 
both come before us with stellar reputations and we certainly 
want to recognize that.
    With that said, we have an extraordinarily serious problem 
facing the country. We understand our first obligation is to 
provide the resources to defend this nation, and we take that 
obligation seriously. This committee will provide the resources 
necessary to defend this country. So let there be no doubt 
about that.
    But we also have an obligation to try to determine whether 
or not taxpayer dollars are being spent as efficiently and 
effectively as they can be. One of the great concerns that we 
have on this committee is whether or not procurement dollars 
are being well spent, whether or not O&M dollars are being well 
spent, and this committee, as we have expressed repeatedly, 
wants to see funding in Defense, whether it is for ongoing 
Defense operations or war operations, be transparent and be 
budgeted for.
    So the first question I have goes to the request for $33 
billion of supplemental 2010 funding. Every time we see a 
supplemental coming our way that wasn't previously budgeted 
for, that raises red flags, especially with a committee that 
has the jurisdiction that we do. I hope you understand and can 
respect that. So could you tell us, why is there a need for $33 
billion of a supplemental over and beyond what was previously 
budgeted for for 2010?
    Mr. Lynn. Yes, Mr. Chairman. We share your policy 
preference to have all the operating costs for the conflicts 
budgeted up front. Frankly, we attempted to do that when we 
submitted the fiscal year 2010 budget. The reason for the $33 
billion supplemental is that the policy changed over the course 
of the year, and in particular, the President, after a detailed 
review of the policy in Afghanistan, decided to supplement the 
number of troops and add over 30,000 troops to the fight in 
Afghanistan. That required the additional funding. The funding 
that we had laid out did not anticipate that level--that 
increase in the troops as well as the forward operating bases, 
the logistics costs, the transportation costs, the training 
costs of bringing those troops in. And so there was a 
requirement for the supplemental.
    Frankly, we are submitting the fiscal year 2011 operating 
budget in advance this year for the conflicts. We are hoping 
that that budget will not require a supplemental.
    Chairman Conrad. OK. Let me get right to it, if I can, 
because we are on 5-minute rounds and then we will go to 
Senator Grassley, and if we need additional rounds, we will 
certainly do that because we are going to have until about 
2:45.
    Senator Grassley, do you think we should go a little longer 
than 5-minute rounds? Should we go seven?
    Senator Grassley. I will be able to ask my questions, so I 
don't care whether it is seven or five.
    Chairman Conrad. OK. All right. We will start with five, 
and then if you need more time, we will do it.
    Thirty-three billion--is it the testimony before this 
committee that that entire $33 billion is because of the 30,000 
ramp-up of troops for Afghanistan?
    Mr. Lynn. No. I think the bulk of it is, and that was, I 
think, the reason we went to a supplemental. But there are, I 
think, fuel costs, some of which would apply to Afghanistan, 
some of which would be broader, and I think there is some Iraqi 
training money, and I turn to Bob----
    Mr. Hale. Iraq security forces money for $1 billion is not 
related to it. All the others are at least partially related. 
Mr. Lynn mentioned the funding for Iraq security forces. We 
also have some money in there for Army mobilization costs to 
mobilize the troops. So I would say $30 billion is related 
directly. Another couple are partially related. And the $1 
billion of Iraq security forces is not related directly to 
Afghanistan.
    Chairman Conrad. All right. Let me say this to you, or ask 
you this. How confident are you that the $159 billion, as I 
heard your testimony, that is for the wars, that is separate 
and apart from the $549 billion for ongoing operations, how 
confident are you that the $159 billion that you are budgeting 
for 2011 will be adequate and sufficient and will preclude the 
necessity of a supplemental at this time next year?
    Mr. Lynn. I would say we are moderately confident. I think 
we have budgeted relatively conservatively and we think we have 
a pretty good understanding of the situations in both Iraq and 
Afghanistan. So if that holds, if those situations hold as we 
had projected, we think that the numbers will be accurate. If 
the situation on the ground changes in either Iraq or 
Afghanistan, that will probably make a liar of me.
    Chairman Conrad. All right. Let me first say that you have 
done a much better job than we have seen being done in the past 
with respect to budgeting on the front end. It does concern us 
to have a supplemental floating through here for over $30 
billion, and we hear your explanation.
    Let me go to several other areas of cost increase that are 
of special interest to the committee. Operation and maintenance 
costs are up, are up as I read this request by more than 8.5 
percent. That gives us concern in terms of what that means in 
future years. Can you give us any insight into that O&M 
increase of 8.5 percent and what it means for future budgets?
    Mr. Lynn. I would say two things and then ask the 
Comptroller for a bit more detail. The first is we have tried 
to do more accurate budgeting in two ways. We have tried to 
include more of the operating costs in the base budget versus 
the budgets for the conflict. That shift has caused--this was 
money that in prior years would have been in the supplementals. 
We have now, because we think it is going to continue with or 
without the conflict, so we have tried to put it in the base 
budget so that the OCO or what you were calling the 
supplementals isn't subsidizing the base budget the way I think 
it was in the past.
    The other, and this goes more to the out years, less to 
your first years, we have tried to account for the fact that 
there is--historically, over the last 50 years, almost without 
fail, there has been two to 3 percent real growth in the 
operating budgets. This is due to information technology costs, 
health care costs, a whole variety of cost increases. And so if 
you project lower than that, you tend to have to come back in 
the budget year and fix it, and that tends to come out of the 
investment account and disrupts your planning. So we have tried 
to project as accurately as we could the out-year operating 
costs and that has yet led to some increases.
    Bob, I don't know whether you want to add anything.
    Mr. Hale. Let me focus on three categories for why the 
increase between 2010 and 2011. It is about 8 percent. It is 
about $16 billion. It is substantial.
    One is what Mr. Lynn mentioned, about $1.4 billion in there 
for, we call it, OCO to base in wartime into the enduring 
budget.
    Chairman Conrad. Let me say, I personally applaud you for 
doing that. I think Senator Gregg has been very clear about our 
concerns about this not being done in the past.
    Mr. Hale. And you will see that in subsequent budgets as we 
are planning to move more.
    The second piece is essentially fiscal year 2010 is 
understated for a couple of reasons. One is the fuel costs. We 
thought fuel would be considerably lower than it is turning out 
to be. So about $2 billion there that we are asking for in 
fiscal year 2010. That lowers the base in 2010 and we have 
fixed it in 2011.
    And Congress cut about $1 billion out of the O&M budget in 
fiscal year 2010. We feel we need that back.
    The third part, and it is about half of the growth, is a 
wide variety of operational changes. We have higher training 
costs associated, for example, with training more helicopter 
pilots so we can make full use of our forces. We have higher 
military intelligence costs associated with building the 
capability that we need in wartime and otherwise. There is some 
higher maintenance, depot maintenance costs, particularly in 
the Navy as they have encountered higher costs to repair ships.
    O&M is the most diverse account in the budget, Mr. 
Chairman, and so there are dozens of reasons, and I don't known 
them all and I won't try to give them all, but if you would 
like more detail, we can get it to your staff or in the record.
    Chairman Conrad. I think that would be useful to the 
committee.
    I will recognize Senator Grassley now for 7 minutes.
    Senator Grassley. Thank you very much, Mr. Chairman.
    Secretary Lynn, in preparation for the debate over your 
nomination to be Deputy Secretary, we exchanged a number of 
letters on Department of Defense financial management issues. 
This correspondence pertained to what I consider misguided 
financial management policies that were pursued during your 
tenure as DOD Chief Financial Officer from November 1997 to 
January 2001. Many of my questions pertain to two payment 
policies known as pay-and-chase and straight pay. Neither of 
these policies complied with the law. They also addressed an 
arbitrary allocation scheme used by the Defense Financing and 
Accounting Service at Columbus Center for making progress 
payments on big contacts. This scheme is also called bucket 
billing. It has been declared illegal by both the Inspector 
General and by the Government Accountability Office.
    In responding to my questions, you made a personal 
commitment to me to address and correct these problems. As I 
understand it, all three of these problems persist today. Pay-
and-chase and straight pay have been morphed into the Direct 
Bill program and Power Track, which allowed huge sums of money 
to be paid out with essentially no supporting documentation 
other than pay vouchers. Many of the large Department of 
Defense contractors are approved for direct billing. These 
programs put the Department of Defense check-writing machine on 
autopilot.
    The Department of Defense IG audits clearly indicate that 
these payment programs are what they call high-risk zones, ripe 
for fraud. I also understand that the bucket billing operation 
at Columbus is still operating at full steam. Your predecessor, 
Mr. John Hamre, assured me that he would fix that problem after 
he was confirmed as Deputy Secretary, but he didn't keep his 
word.
    So, two questions. What are you doing to prevent fraud in 
the Direct Bill and Power Track programs, and second, what have 
you done to close down the bucket billing operation?
    Mr. Lynn. Senator Grassley, I mean, I think the policies 
that you are referring to, the pay-and-chase and straight pay, 
I think we can both--those are policies that are no longer 
being pursued by the Department. They are actually stopped 
either during or before my tenure before.
    Where I think the overall policy that you are referring to, 
the overall rubric goes under the phrase ``pre- validation.'' 
In other words, what you would like to see, and I think should 
see, is that we pre-validate that there is an obligation before 
we pay an invoice. I think that is the direction that you want 
the system to go.
    We have been making steady progress on that. It is not at 
100 percent at this point. It is at 99.5 percent. We do need to 
bring it to 100 percent. We are taking steps to do that. Maybe 
the most important overall step that we are taking is in the 
enterprise planning area, where we have set up a--you set up a 
system that is completely integrated. So the invoice, the 
receipt, and the obligation are all in a single integrated 
information, management information system so that the 
checking, the ability to check, is done inside one loop. That 
addresses that.
    I am in the process through the DBMC, the Defense Business 
Management Steering Committee, to implement that and we are 
working on that as a long-term solution to the issues that you 
have suggested.
    Senator Grassley. Well, I would hope that at least not 
because Chuck Grassley says so, but because the IG at DOD says 
so, that these are very still high-risk areas, that you keep 
that in the back of your mind, because I think my judgment is 
you have a ways to go. I am not going to challenge you that you 
are making progress, but I don't think you are there yet, and I 
guess you said you weren't there yet. But this is something 
that needs continual ongoing attention on your part because 
this is where we waste so much of the taxpayers' money.
    Question No. 2: In your letter of February 3, 2009, you 
gave me this assurance. Quote, ``If confirmed as Secretary of 
Defense``--I should say, ``Deputy Secretary of Defense, I will 
do my utmost to strengthen the Department's financial 
management and internal controls designed to prevent fraud.'' 
Just about every DOD IG audit--and when I say that, I have a 
staff person that goes over these audits, so I hope you know I 
give this attention--but just about every DOD IG audit finds 
that internal controls are weak or nonexistent and that it is, 
quote-unquote, ``impossible'' to audit contracts because 
supporting documentation is missing and there are no audit 
trails to follow.
    These are red flags. They are indicators of fraud. You 
assured me that you would strengthen internal controls, but 
they remain weak or nonexistent, and that leaves DOD resources 
vulnerable to theft and fraud. Since becoming Deputy Secretary 
of Defense, what exactly have you done to strengthen internal 
controls?
    Mr. Lynn. Senator, I have been working with Mr. Hale here 
to my left on the Financial Management Improvement Plan. 
Strengthening internal controls is part of that. Bringing the 
DOD audit standards up to snuff is part of that. The focus is 
that we have tried to focus our resources initially on the 
thing that is most important to the Department, which is 
keeping track of the resources that Congress provides the 
Department. So that means our initial focus is on the statement 
of budgetary resources, and so we have targeted our improvement 
plan in that direction.
    I don't know, Bob, if you want to add.
    Mr. Hale. I think the enterprise resource planning systems 
that Mr. Lynn mentioned before, which are being deployed right 
now in the Navy, the Army is beginning to deploy them, the Air 
Force is a little behind, and our two small agencies and we are 
moving ahead to the Defense agencies, will strengthen internal 
controls. These are systems that impose the controls. You can't 
make obligations without going through all of the steps 
required by the financial regulations. So as we get them in 
place, they will strengthen our internal controls.
    I would put this in context, Senator Grassley. I think we 
have got 50,000 men and women around the world in Defense 
financial management who are making Defense financial 
management work in support of the national security mission. We 
do have the ability, and I think the IG would agree with this, 
and their review is several years old, to track the money that 
you appropriate and ensure that it is distributed to the 
accounts that Congress says should receive them in law, so-
called funds distribution--appropriations received is the term 
that auditors use--and we are in the process as part of this 
Financial Improvement and Audit Readiness Plan of verifying 
that again, because I think it is particularly important, or 
should be, to the Congress to know that we are distributing 
these funds. If you put $100 billion in weapons to track combat 
vehicles, it will be in that account and it will be 
distributed, and with any restrictions you impose, and that is 
auditable or at least can be validated.
    So I think we are getting the mission done. We need to do 
better, and there are two broad pieces, as Mr. Lynn has said, 
the Financial Improvement Audit Readiness effort and these 
enterprise resource planning systems.
    Senator Grassley. I hope I am here next year to continue 
this discussion. Thank you.
    Chairman Conrad. And can I just rivet the point, because 
Senator Grassley, who has been a long-time consistent voice on 
these issues is right. I think all of us know the financial 
systems and internal controls at DOD need improvement. You have 
acknowledged that. You have indicated you have begun a process 
to make improvements. We will be looking at what the IGs report 
in the future with respect to those improvements, and it is 
critically important.
    I mean, we can't have a circumstance in which dollars, 
precious dollars that are being allocated for the nation's 
defense are wasted. And the only way we can determine whether 
or not that occurs is if we have auditable records, if we have 
a financial system that will allow us to check and ascertain 
whether or not the dollars have been used for the purposes 
intended and whether those dollars have been expended in a way 
that is efficient.
    With that, I will recognize Senator Warner for--
    Senator Warner. Thank you, Mr. Chairman. And, Secretary 
Lynn and Under Secretary Hale, thank you very, very much for 
your service and for being here.
    Let me say at the outset that I am going to raise an issue 
where my friend and colleague Senator Nelson and I have a 
difference, I think a legitimate difference, in opinion, but it 
is one that I want to try to bring my background in business 
and as a Governor where we actually had to balance our budgets 
on a regular basis and make ends meet. I have raises a series 
of questions for you gentlemen, perhaps Secretary Lynn first 
off, where I need a much fuller understanding to get to the 
point of accepting the decision that the QDR made.
    The issue I am raising, of course, is the porting of our 
carrier fleet on the east cost, currently homeported at 
Norfolk, Virginia, and the question that has been raised by the 
QDR that has said the need to create a new homeporting facility 
in Mayport, Florida. And I understand Senator Nelson has 
pointed out repeatedly and accurately the long history that 
Mayport has played serving the non-nuclear components of our 
carrier fleet, and it is a wonderful community and wonderful 
facility.
    The QDR said there was a need, and I believe the quote was, 
``to mitigate risk of terrorist attack, accident, or natural 
disaster'' to create this requirement to have some back-up or 
secondary facility. There was no analysis done that I have seen 
in any of the documents on whether the locations were given 
equal balance since clearly, in terms of natural disasters, in 
terms of hurricanes, there is a grave, actually higher 
incidence of possibility in Florida than in Virginia, and there 
were enormous amounts of recent expenditures made to upgrade 
the security facilities in Norfolk.
    So for my first question, I want to go through all of 
these, I would like to get an analysis done of was there an 
estimate--was one of those priorities higher than the other? 
Natural disaster? Terrorist attack? Accident? What was the 
ranking of those risks in terms of prioritization in of making 
this assessment, No. 1.
    No. 2, Under Secretary Flournoy, when she met with the 
members of the Virginia delegation, said that the Department 
went through this analysis and thought about the kind of back-
up that was needed to protect the security needs of our 
country. And let me make clear that I absolutely believe that 
the security needs of our country trump every other item, and I 
say that at the outset. But Under Secretary Flournoy said that 
the Department reached the conclusion in effect, two choices. 
And what was key in at least her description was that they were 
two valid choices, each that met the defense needs of our 
country. One choice was homeporting a carrier at Mayport 
permanently. The second choice was to continue the dredging 
efforts that I know Senator Nelson has supported and upgrading 
the pier and having that facility simply as a back-up in the 
event of disaster, attack, or accident in Norfolk.
    So the term was that this was, in effect, an insurance 
policy by making the substantially greater investments in 
Mayport. We have got a variety of numbers, but I believe the 
most recent number we have received from the Department is that 
insurance policy is at a cost of $671 million.
    My second question is: When we have got two valid choices 
both meeting by the Department's acknowledgment the security 
needs of our country--so this is not a question any longer of 
security; it is a question of how much additional insurance we 
may need or additional back-up to have, but not a security 
question, at a $671 million cost, where will that fall in terms 
of a prioritization when you have already got a $36 billion 
backlog in shore infrastructure needs that the Navy has 
documented? Will that trump that $36 billion in infrastructure 
backlog needs? Does it go at the front of the line, the back of 
the line, or the middle of the line? And I think this is really 
important for us as we weigh this financial decision that we 
are going to be asked to make. That is, I think, my third 
question.
    My fourth question is the one where I hope that I and 
others will continue to try to make the strong case. We think 
you have grossly underestimated the costs of this so-called 
insurance policy. I think we will show in coming weeks and 
months that these costs will be well in excess of $1 billion, 
especially when you build in the infrastructure needs for the 
basing of the crew and their support staff, look at the needs 
for creating the appropriate--when you have got a nuclear 
carrier there homeported--evacuation needs for the road 
structure, do the additional buildup that the Navy has 
committed and already successfully implemented in Norfolk to 
buildup against the possibility of terrorist attacks.
    And my last question, and the one that ultimately is the 
most important question that I personally need to get an answer 
for is: Even if you could ever get to the argument that this is 
a worthy investment, you are going to convince me that you are 
going to bump these other criteria, bump this other $36 billion 
backlog to move it somewhere on that list, at what price does 
this insurance become--since we have agreed there are two valid 
choices that meet security needs, homeporting or simply 
upgrading the facilities in Mayport as a back-up facility, if 
this ends being a $1 billion--if we can legitimately show this 
is a $900 million price tag, a $1 billion price tag, $1.2 
billion price tag, is there any dollar amount that this 
insurance policy does not become a valid choice and an 
appropriate choice for the Defense Department to make if we 
start again with the premise that the Department has already 
acknowledged that either option, homeporting or simply 
upgrading the facility as a back-up facility, both meet the 
security needs of the country?
    Mr. Lynn. OK, let me try and tackle those questions. Let me 
step back, though. When we came into office, there was a Navy 
recommendation to go forward with the homeporting at Mayport, 
to do the full facility. We thought that was a--it was a 
strategic decision. It is under the rubric ``strategic 
dispersal of carriers.'' We thought that was an important 
decision, and we thought it ought to be made within the 
Quadrennial Defense Review. So we essentially stepped back----
    Senator Warner. Excuse me a second. I know my time is 
almost expired, and Senator Nelson is going to want equal 
rebuttal time here, but----
    Mr. Lynn. Well, we will stay as long as you need.
    Senator Warner. Just one comment. Secretary John Warner, 
who held this position for a long time prior to me, who has got 
exponentially greater knowledge of the Navy and the DOD than I 
will ever have, former Secretary of the Navy, said that that 
decision that appeared in the waning days of the prior 
administration without any kind of preliminary work, kind of 
appeared whole cloth, and I appreciate you and Secretary Gates 
and others saying this needed to be in the QDR, but to somehow 
say that that prior decision point popped up at the end of the 
last administration, he claimed that it smelled of politics. I 
do not know, but I appreciate the fact that it got put into the 
QDR, and now that we can make this analysis on both the defense 
needs and the very legitimate extensive needs of the Navy's 
capital requirements.
    Mr. Lynn. I think we are agreed that is the right context. 
It was not popular at the time to do that, but that is what we 
did. And that goes to your two decisions. We did make a 
subsidiary decision, though, in that, and it was clear--however 
you came out on building the facility in Mayport or not, it was 
absolutely clear that we needed to dredge the harbor and to 
make at least an emergency port available in Mayport. And we 
went forward with that in the immediate timeframe, and we took 
a longer term to look at the much larger expense, frankly, of 
doing Mayport.
    So when you are saying there were two choices, I mean, it 
was sort of a stepped-up--there was one clear choice, which was 
do the--and immediate choice, which was to do the dredging and 
the emergency availability of Mayport for a carrier. And then 
there was a second longer-term decision, which was to evaluate 
should we put the funding in to put the nuclear facility.
    After doing----
    Senator Warner. Can I again just clarify one point here? 
Because this is really very, very important--how this plays 
out. My understanding has been that the Department has said 
that for the security needs of the Nation--both of these 
choices, permanent homeporting or an emergency back-up, both of 
those choices met the security needs of the Nation. And then 
there was a question of whether you--
    Mr. Lynn. Well, that is not actually the way I would phrase 
it. I would say that the threshold decision, which was the more 
modest financial commitment to have the emergency, was a 
decision we could take immediately. The more expensive decision 
and the longer term of whether to put a nuclear facility in was 
a decision that we wanted to put into the Quadrennial Review. 
It was really a strategic decision, a decision of strategic 
dispersal. On that decision, we came to the conclusion that 
although it did--I think it will cost what you say, the $671 
million. That was an increase from a prior estimate. We do 
think it will cost that. But despite that cost, we should pay 
that cost in order to continue the policy that has been 
longstanding of having two carrier ports on each coast. That is 
what we have on the west coast right now. It is what we have 
had on the east coast, but we were able to do it without a 
nuclear facility because it was a conventional carrier.
    So the decision that came up when the conventional carrier, 
the John Kennedy, retired, you had to make a decision, OK, do 
we invest in a nuclear facility at Mayport to keep the 
strategic dispersal or do we not? After looking at it in the 
QDR, we came to the conclusion that, yes, that is worth the 
investment.
    Now, you asked where does this rank kind of in other 
investments, and we pushed the Navy on that because there are 
other bills in the Navy, and the Navy does not--you know, no 
service has everything they want. That is just the way life is. 
So we asked them: Is this really something that is within--that 
you are willing to displace other requirements for? We sent 
them back. They came back and said yes. And the rationale--you 
were trying say priority. The rationale went a little bit 
different. You asked for a ranking of, you know, I guess, 
hurricanes versus terrorist assaults. It was the accumulation 
of all of them that caused us to think that there is a risk. We 
did not rank them, but we think there is a risk there. And I 
think the term ``insurance'' is not a bad one, that we wanted 
to buy some insurance. One way of looking at the premium is the 
investment in the carrier force is well over $100 billion. So 
this is a 1-percent or so insurance premium that you are going 
to pay.
    You also asked the question kind of what would be too much. 
Of course, you know, going to the extreme, if it cost us $100 
billion, we would not do that. Now, you want to where in 
between $671 million and $100 billion, and I cannot give you a 
precise number except to say that is the equation. How much 
insurance do you want to use to protect this large investment? 
We concluded that $671 million was a reasonable insurance 
premium to pay for that investment, and that was essentially 
what we did in the year intervening between when we came in and 
when we issued the QDR.
    Senator Warner. My time has expired.
    Mr. Lynn. I am staying as long as you need.
    Chairman Conrad. Senator Nelson.
    Senator Nelson. If the Senator wouldn't mind staying, I had 
deferred to the Senator instead of taking the time first 
because I was not going to bring this up. We have been through 
this process laboriously now for the 10 years that I have been 
Senator, and painfully, over the course of the last year of the 
Secretary's tenure, he has accurately characterized that he 
made the decision as he did with regard to dredging, the long 
lead items, the dredging and the pier at Mayport, and then the 
issue was deferred to the United States Navy, and the Defense 
Department, of course, signing off, and this went all the way 
to Secretary Gates with regard to the homeporting issue.
    Mr. Secretary, is it true that up until the retirement of 
the John F. Kennedy that there were always two homeports of the 
Atlantic fleet carriers on the east coast?
    Mr. Lynn. Yes, sir.
    Senator Nelson. Is it true that up until the late 1980's, 
Mayport was the homeport for two aircraft carriers?
    Mr. Lynn. I believe so.
    Senator Nelson. Is it true that not two but three homeports 
are located on the Pacific Coast?
    Mr. Lynn. Yes, two in close proximity, but that is correct.
    Senator Nelson. And is it true that the lessons of Pearl 
Harbor and the dismissal of Admiral Kimmel and the stripping of 
his two stars from his four stars and forced retirement as a 
result of the lessons of Pearl Harbor is still a lesson that is 
taught in the United States Navy?
    Mr. Lynn. I am sure the Navy well remembers Pearl Harbor 
and tries to learn its lessons. I would not put that as the 
principal reason here, though. I think we were looking more 
prospectively at the risks that we thought might face us as we 
go forward, and as I think Senator Warner correctly 
characterizes, this is an insurance premium that we want to 
pay. And it was more in that framework that we looked at it.
    Senator Nelson. Thank you.
    Now, with regard to that insurance premium and your 
commentary, are you aware when this issue was raised, first by 
the other Florida Senator--and I did not raise it first--in 
front of the Armed Services Committee, responded to by Senator 
Webb of Virginia, and then furthermore raised by me to the CNO, 
Admiral Roughead, and the Secretary of the Navy just recently 
in a hearing in front of the Senate Armed Services Committee, 
that Admiral Roughead testified to the fact that the cost of 
making Mayport nuclear capable was approximately $500 million 
instead of the amount that you have stated?
    Mr. Lynn. 500 instead of 671?
    Senator Nelson. Instead of the 671.
    Mr. Lynn. I guess I would have to look into that. I may be 
counting the costs of the dredging, and I do not know what you 
are----
    Senator Nelson. OK. And, specifically, I asked that 
question about the cost of the dredging and the amounts of work 
being done to one of the piers, which is roughly about $70 
million, which is already in this current funding bill of which 
you all, the Navy and DOD, had requested.
    So I asked Admiral Roughead, does that mean, then, since 
$70 million is being done right now in the dredging down to 55 
feet, a mile and a half out into the Atlantic, in order to get 
to the mouth of Mayport, is that cost then a cost that is part 
of the $500 million, therefore, the balance that is due is 
somewhat between $430 million and----
    Mr. Hale. Senator Nelson, I think the $500 million, which I 
believe includes the $70 million, is military construction. 
There are some other costs. There would be PCS costs. There 
would be some infrastructure costs. So I believe the $670 
million is a better total figure. And I will go back and get 
that for the record.
    Senator Nelson. All right. Well, let us get clarification 
because I am just repeating what Admiral Roughead testified to.
    Mr. Hale. I think he may have been referring only to the 
mil-con costs, but we will double-check.
    Mr. Lynn. We will get the record of that hearing, and we 
will get back to both Senators with our understanding.
    Senator Nelson. OK.
    Senator Nelson. You know, at some point we have to have a 
decision and move on, and I understand Senator Warner--he is a 
great, distinguished Senator. He is my personal friend. And I 
do not like the fact that we have to keep bringing this up, and 
I certainly am not going to look forward to a fight in the 
Budget Committee, the Senate Armed Services Committee, and the 
Appropriations Committee on a decision that the Navy and 
Secretary Gates have made that is essential to the national 
defense and national security of the country.
    I would just point out this in closing: In February of 
2005, the CNO, Admiral Vernon Clark, said that the Navy should 
have two carrier-capable ports on each coast, and this is 
testimony in front of the Senate Armed Services Committee. In 
March of 2006, the Deputy Secretary of Defense and the former 
Secretary of the Navy Gordon England stated that a nuclear 
carrier should be in Florida to achieve dispersion. In March of 
2006, the Vice Chairman of the Joint Chiefs of Staff, Admiral 
Giambastiani shared that we should disperse our carriers on the 
east coast. And I will never forget his riveting testimony that 
he saw, one holiday, five carriers all tied up next to each 
other of which we have shown pictures of that several times as 
clearly an indication that that is not in the interest of 
national security.
    In July of 2007, the Chairman of the Joint Chiefs, Admiral 
Mullen, stated, ``I am on the record more than once for this, 
very supportive of strategic dispersal of our carriers.''
    In December of 2008, Secretary Gates wrote, ``Having a 
single CVN homeport has not been considered acceptable on the 
west coast and should not be considered acceptable on the east 
coast.''
    And in January of 2009, the Navy issued the record of 
decision to establish a naval station at Mayport as a CVN 
homeport.
    And then, in the QDR that you have indicated, in 2010, it 
is complete, and the Defense Department has validated the 
Navy's position, stating, ``To mitigate the risk of a terrorist 
attack, accident, or natural disaster, the U.S. Navy will 
homeport an East Coast carrier in Mayport, Florida.''
    So, Mr. Chairman, I just want the record--I know our 
colleague from Oregon has come, and we have a vote. I am not 
going to take the additional time that my colleague took. I 
wanted that read into the record. I wish, since the Defense 
Department has made their decision, that we could let it be. 
But if it needs to keep being brought up, I am compelled to 
bring up the long, lengthy, and detailed record that has been 
established.
    Thank you.
    Chairman Conrad. I thank the Senator, and we will go to 
Senator Wyden for 7 minutes.
    Let me just indicate to colleagues the vote has begun. 
There is about 11-1/2 minutes left on the vote. I will 
recognize Senator Wyden for 7 minutes.
    Senator Wyden. Thank you very much, Mr. Chairman, and I 
will try to be shorter than that.
    Secretary Lynn, I think you are aware of the problems being 
encountered by the Shepherds Flat Wind Energy Project in our 
home State. The project would be an enormous boost to eastern 
Oregon, providing thousands of jobs and a huge source of clean 
energy in our State. Unfortunately, the project is threatened 
by a conflict with Defense Department radar systems in the 
area.
    My concern is--and, obviously, I care greatly about my 
constituents who are finding this is a very immediate problem. 
But, generally, I continue to be concerned--I serve on the 
Energy Committee as well--about the Department's apparent 
inability to adequately address its concerns with wind turbine 
replacement in an efficient fashion.
    As we see more of these wind farm projects established, we 
are seeing almost a trend where the services raise objections 
at the 11th hour. This costs local companies millions, and 
obviously, what we want is we want a system that promotes 
sensible renewable energy development and addresses our very 
obvious national security needs.
    So my question, Secretary Lynn, is: What steps has the 
Department taken to effectively and efficiently address these 
issues with respect to renewable energy projects in a fashion 
that is consistent with national security? Secretary Lynn.
    Mr. Lynn. Senator, I am afraid I am not familiar with the 
Shepherds Flat issue, so I am going to have to take that for 
the record and come back to you.
    Senator Wyden. All right.
    Senator Wyden. Has the Department established an office or 
designated a point person who can deal with this? Because, 
obviously, my constituents care greatly about this, but we are 
not going to be the only one. We are looking at this being a 
centerpiece of the President's economic development strategy. 
It is obviously important to help us break our dependence on 
foreign oil. Is there somebody who has been designated, or an 
office, to ensure that we coordinate this effort in a fashion 
that is efficient?
    Mr. Lynn. Well, actually, you did, sir. The Congress 
created a confirmed position for operational energy matters. We 
have submitted a nomination for this position. She is before 
the Senate, and she would be underneath the Under Secretary for 
Acquisition Technology and Logistics, and the responsibilities 
of that office would be, I think, exactly along the lines that 
you are talking about.
    Senator Wyden. And who is doing it until that gets put in 
place? I think that would really be the question. And I think 
your point is a valid one, and I think we want to know who do 
you go to until that is up and running.
    Mr. Lynn. We have starting to stand that office up in 
anticipation of getting the individual to lead it, but there is 
also an Office of Installations and Environment within the 
Under Secretary of Acquisition, and they are in a supporting 
role until we are fully staffed in the operational energy----
    Senator Wyden. If you could get me, Secretary Lynn, a name 
and a phone number, that is what I think my constituents want 
to know: Who are we going to go to now in order to try to 
address this? Because this is our biggest effort. It is going 
to cost a lot of money, and this is an 11th-hour objection. In 
other words, everybody has been working very constructively 
together, and obviously you are not aware of it today, so I 
have got to go back and try to address that. We just want to 
have a name and a phone number and somebody who has got some 
authority until this new position is up and running.
    Mr. Lynn. Let me investigate a little bit the issue, and we 
will get you a name and a phone number.
    Senator Wyden. One last question, if I might. My State does 
not have active-duty bases, but we have a tremendous level of 
participation in the National Guard and Reserves. We have 
developed a host of programs, yellow- ribbon programs and 
others, to try to help the troops make the transition. But, 
unfortunately, there still really is not the kind of transition 
structure back to civilian life that the Guard and Reserve 
folks say they need. It seems like it is almost you go from 
carrying your rifle overseas to carrying your child here, and 
if you are a Guard member and you are not from an area with a 
lot of active bases, there is really nowhere to turn. Our 
Reserve forces get 15 days of pay and benefits before they are 
essentially hit with the prospect of reduced income and tension 
in the family and concerns with respect to a transition from 
serving in the military to being home.
    I have introduced a piece of legislation called the Soft 
Landing bill that is intended to relieve the stress on the 
warriors who have come back by giving them active-duty benefits 
for another 45 days in effect so that there could be additional 
time to make a transition.
    What would be your general reaction to something like this, 
extending the transition time for Guard and Reserve folks when 
they come back from combat?
    Mr. Lynn. Well, I have two contradictory reactions, 
Senator. First, the issue you identify is a valid one. The 
transition for Reserve units coming back from the conflicts can 
often be more difficult because they come back and then 
disperse, and so they often do not have the same support 
structure and the same resources that our active-duty units 
might be able to draw on. So I think there is certainly an 
issue there.
    What you propose in terms of the 45 days of benefits, I do 
not know what the cost is, but I think it could be relatively 
substantial. I think we have put 500,000 troops through the 
conflicts from the Guard and Reserve to this point. So I do not 
expect our top line to be increased to accommodate that, so the 
question I would have is what other programs would we have to 
sacrifice to get this program, which I there is a valid need 
here, but is this the most cost-effective way to address it 
would be the question I have.
    Senator Wyden. Well, we will want to have that discussion 
with you. I think your point is a fair one as well. I think 
there have been a number of weapons systems that Secretary 
Gates, for example, has been on something of a crusade to try 
to say no longer meets the rigorous tests of being cost-
effective when you have got to make tough, tough choices. I 
just want to know what you think of the concept. You have 
indicated that conceptually we have got a valid point. We will 
continue to have the budget debate with you. I have introduced 
the legislation. Thank you for this discussion.
    Thank you for the time, Mr. Chairman. I know you have other 
items, and getting that phone number and name for the matter 
involving wind will be very helpful, Mr. Secretary. We will 
continue the discussion with respect to Soft Landing.
    Mr. Lynn. Thank you.
    Senator Wyden. Thank you.
    Chairman Conrad. I want to indicate that there are about 4-
1/2 minutes left in the vote, so then there are going to be 
four votes. I see no reason to ask you to stay for four votes. 
That would be an hour and a half. You have got a lot of other 
things to do at a time when we have two major conflicts and all 
the rest that is going on in the world. So I want to thank you 
for your testimony here today. I want to thank you for your 
service to the Nation. The Committee appreciates your answers 
here today, and we may, because of the unusual nature of this 
truncated hearing, need to submit other questions in writing 
from colleagues who were not able to be here because of votes 
on the floor, and I hope that you will respond to those in a 
timely way. Can we count on your to do that?
    Mr. Lynn. Absolutely.
    Chairman Conrad. All right. Thank you very much, and the 
Committee will stand adjourned.
    Mr. Lynn. Thank you, Mr. Chairman.
    [Whereupon, at 2:57 p.m., the Committee was adjourned.]

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