[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                            THE PRESIDENT'S
                        FISCAL YEAR 2012 BUDGET

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


                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 15, 2011

                               __________

                            Serial No. 112-4

                               __________

           Printed for the use of the Committee on the Budget


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



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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                PAUL TONKO, New York
TODD C. YOUNG, Indiana               KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 15, 2011................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
        Questions submitted for the record.......................    66
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     3
        Prepared statement of....................................     4
    Hon. Jacob J. Lew, Director, Office of Management and Budget.     5
        Prepared statement of....................................     8
        Responses to questions submitted for the record..........    66
    Hon. John A. Yarmuth, a Representative in Congress from the 
      State of Kentucky, questions submitted for the record......    81


                THE PRESIDENT'S FISCAL YEAR 2012 BUDGET

                              ----------                              


                       TUESDAY, FEBRUARY 15, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Simpson, Campbell, Calvert, 
Akin, Cole, Price, McClintock, Chaffetz, Stutzman, Lankford, 
Black, Ribble, Flores, Mulvaney, Huelskamp, Young, Amash, 
Rokita, Guinta, Woodall, Van Hollen, Schwartz, Kaptur, Doggett, 
Blumenauer, McCollum, Pascrell, Ryan of Ohio, Wasserman 
Schultz, Moore, Castor, Tonko, and Bass.
    Chairman Ryan. Director Lew, welcome back, I understand 
there is a traffic problem that tied you up, those things can 
happen. The President is fortunate that you agreed to a return 
assignment at Office of Management and Budget. This one is 
going to be a little different than the last one, I think, 
because the fiscal situation is so much worse. You have come 
under a darkening fiscal outlook. We are aware of the 
challenges that you face in putting this budget together, and 
we thank you for your hard work and for coming here today.
    Having said all of that, the budget of the United States is 
more than just about arithmetic. It is a statement of national 
priorities. It is a gauge of our national health. Because we 
face a crippling burden of debt, this year's budget in 
particular presented the President with a unique opportunity to 
lead our country.
    The President has disappointed us all by declining that 
opportunity. He punted. Instead of confronting our debt head-
on, the President has presented us with a budget that spends 
too much, borrows too much, and taxes too much, and that costs 
jobs and opportunities. His budget would double the amount of 
debt held by the public by the end of this term, and triple it 
on the 10th anniversary of his inauguration.
    To be sure, our country was already on an unsustainable 
fiscal trajectory before he took office. Our debt is the 
product of acts by many Presidents and many Congresses over 
many years. Both of our political parties share the blame in 
where we have come to. Nevertheless, the President's policies 
have accelerated us down this disastrous path. He has made our 
spending problems worse with policies such as the failed 
stimulus and a brand-new open-ended health care entitlement. He 
has argued for massive tax increases that would stifle economic 
growth and job creation, and make our fiscal picture worse. His 
budget alone contains $1.6 trillion in higher taxes on American 
families, businesses, and entrepreneurs. In our nation's most 
pressing fiscal challenges, the President has abdicated his 
leadership role.
    First, he punted to a bipartisan Fiscal Commission to 
develop solutions to the problem. Then, when his own commission 
put forward a set of fundamental entitlement and tax reforms, a 
commission comprised of a majority of Democrats, he ignored 
them. He even failed to take the commission's advice on less 
sensitive subjects, such as discretionary spending. His budget 
would increase discretionary spending by $353 billion, relative 
to his commission's proposals.
    Former Clinton Chief of Staff, and co-chair of the Fiscal 
Commission, a man who I have great respect for, a Democrat, 
Erskine Bowles said, quote, The budget goes nowhere near where 
they will have to go to resolve our fiscal nightmare. The 
President's budget disregards the drivers of our debt crisis 
and the insolvency of our entitlement programs. Every day that 
passes without leadership on this crucial challenge is another 
day of uncertainty for job creators, and a darkening economic 
prospect for millions of Americans living in the shadow of our 
growing and unsustainable debt.
    The politically safe response, I suppose, is to do nothing. 
I wonder about that, though. Unfortunately, this is the path 
the President has chosen. We feel that it is our responsibility 
to do things differently, to lead where he has fallen short, 
and that is exactly what we plan to do.
    With that, I will yield to Ranking Member Van Hollen for an 
opening statement.
    [The statement of Chairman Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget

    Director Lew, welcome back.
    The President is fortunate that you agreed to a return assignment 
to OMB under a darkening fiscal outlook. We are aware of the challenges 
you faced in putting this budget together, and we thank you for your 
hard work.
    The Budget of the United States is about much more than arithmetic. 
It is a statement of national priorities--and a gauge of our nation's 
health.
    Because we face a crippling burden of debt, this year's budget in 
particular presented the President with a unique opportunity to lead 
our country.
    The President has disappointed us all by declining that 
opportunity. He punted.
    Instead of confronting our debt head on, the President has 
presented us with a budget that spends too much, borrows too much and 
taxes too much. His budget would double the amount of debt held by the 
public by the end of his term--and triple it by the tenth anniversary 
of his inauguration.
    To be sure, our country was already on an unsustainable trajectory 
before he took office. Our debt is the product of acts by many 
presidents and many Congresses over many years. Both parties share the 
blame.
    Nevertheless, this President's policies have accelerated us down 
this disastrous path. He has made our spending problems worse with 
policies such as the failed stimulus and the new health care 
entitlement.
    He has argued for massive tax increases that would stifle economic 
growth and make our fiscal picture worse--this budget alone contains 
$1.6 trillion in higher taxes on American families, businesses and 
entrepreneurs.
    And on our nation's most pressing fiscal challenges, the President 
has abdicated his leadership role. First, he punted to a bipartisan 
commission to develop solutions to the problem.
    Then, when his own commission put forward a set of fundamental 
entitlement and tax reforms, he ignored them. Erskine Bowles, the 
Democratic chairman of the fiscal commission, said the White House 
budget request goes ``nowhere near where they will have to go to 
resolve our fiscal nightmare.''
    He even failed to take the commission's advice on less sensitive 
subjects, such as discretionary spending: His budget would increase 
discretionary spending by $353 billion relative to the commission's 
proposals.
    The President's budget disregards the drivers of our debt crisis 
and the insolvency of our entitlement programs.
    Every day that passes without leadership on this crucial challenge 
is another day of uncertainty for job creators and darkening economic 
prospects for millions of Americas living in the shadow of our growing 
debt.
    The politically safe response, I suppose, is to do nothing. 
Unfortunately, this is the path the President has chosen.
    We feel that it's our responsibility to do things differently--to 
lead where he has fallen short. And that's exactly what we plan to do.
    With that, I will yield to Ranking Member Van Hollen for an opening 
statement.

    Mr. Van Hollen. Thank you, Chairman Ryan, welcome Director 
Lew. I know that President Obama, like President Clinton, will 
be well-served by having you at the helm of Office of 
Management and Budget. And I thank you for being here to 
discuss the President's budget. And while we are still 
reviewing some of the details, I want to commend the President 
for putting forth a budget that reduces our deficit while also 
investing in our future.
    This is a tough-love budget. It cuts non-security 
discretionary spending by $400 billion, taking that category of 
spending to the lowest share of GDP since the Eisenhower 
Administration. And starting this year, it steadily decreases 
the deficit, and brings the budget to primary balance by the 
year 2017. But the President's budget cuts the deficit while 
making critical investments in areas like education, clean 
energy, infrastructure, and scientific innovation.
    Last week, Chairman of the Federal Reserve Ben Bernanke 
testified before this committee about the importance of 
targeted national investments to help grow the economy and keep 
America competitive. He highlighted the need to pursue policies 
to foster economic growth, quote, By encouraging investment in 
the skills of our workforce as well as new machinery and 
equipment, by promoting research and development, and by 
providing necessary public infrastructure. This budget does 
that.
    As we debate the best way forward, our conversation must 
include a comprehensive review of our national balance sheet. 
It is simply short-sighted to think we can try to balance our 
budget through cuts in domestic discretionary spending alone, a 
category that represents only 12 percent of the overall budget. 
We must look to other areas, including comprehensive tax 
reform, and eliminating special interest breaks in the tax 
code. The President's budget moves in the right direction by 
putting an end to taxpayer dollars going to subsidies for big 
oil companies at a time when gas is costing American families 
more than $3 a gallon, and oil companies are making huge 
profits; there is no reason to subsidize those companies and 
short-change investments in education and Head Start, as some 
of our colleagues are proposing to do today on the floor of the 
House.
    This budget extends tax cuts for middle class tax families, 
but rejects tax breaks for those at the very top. It takes a 
balanced approach, much like the budgets under President 
Clinton. Under the Clinton Administration, the country enjoyed 
real economic growth of 3.9 percent per year, and the economy 
added 20.8 million private sector jobs. That balanced approach 
allowed us to not only stop running deficits, but actually 
achieve surpluses and begin to reduce our nation's debt. 
Unfortunately, those surpluses disappeared under the previous 
Bush Administration. They cut taxes for the wealthy and turned 
a $5.6 trillion surplus into a sea of deficits, lost 653,000 
private sector jobs over that eight year period.
    In January, 2009, when the President raised his hand and 
was sworn in, he was handed an economy in free-fall that was 
losing 700,000 jobs a month, and a record $1.3 trillion 
deficit. Unfortunately, some of the first acts of the new 
Congress were to eliminate the PAYGO rule, and add $230 billion 
to that deficit in connection with health care reform.
    Having spent the first two years working to rescue the 
economy, working with Congress and the American people, the 
President's budget is now focused on strengthening the economy 
with a plan of targeted investments and deficit reduction. It 
stands in stark contrast, I might say, to the approach that we 
are seeing by our colleagues on the floor of the House, which 
is to slash important programs immediately, disregarding the 
impact on the fragile economy and workers.
    It is critical that our nation's budget strike the right 
balance with both spending and revenue, and I believe the 
President's budget makes an important effort to hit the right 
note. It is a starting point. I must say, it is interesting to 
hear many of our colleagues on the Republican side criticize 
the President for not putting more of the ideas of the 
Bipartisan Deficit-Debt Reduction Commission on the table, when 
in the House, the representatives to that commission voted 
against it.
    That being said, and I am going to conclude, Mr. Chairman, 
in order to tackle our longer-term fiscal challenges beyond the 
10-year period of this budget, it is important that the White 
House and the Congress, Republicans and Democrats, come 
together to seriously discuss and consider the ideas in the 
Commission's proposal. Compromise is not a dirty word. Getting 
things done requires give and take. We should begin that 
conversation now. Thank you, Mr. Chairman.
    [The statement of Mr. Van Hollen follows:]

 Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
                        Committee on the Budget

    Thank you very much, Chairman Ryan.
    Welcome, Director Lew. I know that President Obama, like President 
Clinton, will be well-served by having you at the helm of the Office of 
Management and Budget.
    Thank you for being here today to discuss the President's budget. 
While we are still reviewing some of the details, I want to commend the 
President for submitting a budget that reduces our deficit, while also 
investing in our future. This is a tough love budget. It cuts non-
security discretionary spending by $400 billion over the next decade--
taking that category of spending to the lowest share of GDP since the 
Eisenhower Administration. And, starting this year, it steadily 
decreases the deficit and brings the budget to primary balance by 2017.
    But the President's budget cuts the deficit while making critical 
investments in areas like education, clean energy, infrastructure, and 
scientific innovation. Last week Federal Reserve Chairman Ben Bernanke 
testified before this committee about the importance of targeted 
national investments to help grow the economy and keep America 
competitive. He highlighted the need to pursue policies to foster 
economic growth 'by encouraging investment in the skills of our 
workforce as well as new machinery and equipment, by promoting research 
and development, and by providing necessary public infrastructure.' 
This budget does that.
    As we debate the best way forward, our conversation must include a 
comprehensive review of our national balance sheet. It is simply short-
sighted to think we can try to balance our budget through cuts in 
domestic discretionary spending alone--a category that represents only 
12 percent of the overall budget. We must also look to other areas, 
including comprehensive tax reform and eliminating special interest 
breaks in the tax code. The President's budget moves in the right 
direction by putting an end to taxpayer dollars going to subsidies for 
big oil companies. At a time when gas is costing American families more 
than $3 a gallon and oil companies are making huge profits, there is no 
reason to subsidize big oil companies and short-change funding for Head 
Start and education, as our Republican colleagues are proposing to do 
today on the House floor. President Obama's budget also extends tax 
cuts for middle class families, but rejects tax cuts for the wealthiest 
2 percent of Americans. At a time of huge deficits, we cannot afford to 
ask our children to pay for tax breaks for the folks at the very top.
    The President's budget takes a balanced approach, much like the 
budgets under President Clinton. Under the Clinton Administration, the 
country enjoyed real economic growth of 3.9 percent per year and the 
economy added 20.8 million private-sector jobs. That balanced approach 
allowed us to not only stop running deficits, but actually achieve 
surpluses and begin to reduce our nation's debt. Unfortunately, those 
surpluses were squandered under the Bush Administration. The Bush 
Administration cut taxes for the wealthy and turned a $5.6 trillion 
surplus into a sea of deficits and lost 653,000 private-sector jobs 
over eight years. In January 2009 the Obama Administration was handed 
an economy in free fall that was losing over 700,000 jobs a month and a 
record $1.3 trillion deficit.
    Having spent its first two years working to rescue the economy, the 
President's budget is now focused on strengthening the economy with a 
plan of targeted investments and deficit reduction. The President's 
approach stands in stark contrast to the House Republicans' plan being 
debated on the House floor today. That plan would recklessly slash 
important programs immediately--disregarding the impact to American 
workers and our fragile recovery. The President's Bipartisan Commission 
charged with reducing our national debt and deficit stated that 'in 
order to avoid shocking the fragile economy, the Commission recommends 
waiting until 2012 to begin enacting programmatic spending cuts.' The 
Rivlin-Domenici Commission rendered the same advice. Deep cuts now will 
not create a single job; in fact, Mark Zandi and other economists have 
warned against deep spending cuts that would put thousands of American 
jobs at risk. President Obama, on the other hand, has laid out a long-
term, responsible path to fiscal sustainability. He has proposed 
significant but targeted cuts that stand in contrast to the House 
Republicans' hatchet job on the budget that will cost many Americans 
their jobs.
    It is critical that our nation's budget strikes the right balance 
with both spending and revenue, and I believe the President's budget 
makes an important effort to hit the right note. It is an important 
starting point. That being said, in order to tackle our longer-term 
fiscal challenges--beyond the 10 year period of this budget--it is 
important that the White House and the Congress, Republicans and 
Democrats, come together to seriously discuss and consider the ideas in 
the Commission's proposal. Compromise is not a dirty word. Getting 
things done requires give and take. We should begin that conversation 
now.

    Chairman Ryan. Mr. Lew, the floor is yours.

              STATEMENT OF JACOB J. LEW, DIRECTOR,
                OFFICE OF MANAGEMENT AND BUDGET

    Mr. Lew. Thank you, Mr. Chairman. Ranking Member Van 
Hollen, members of the Committee, thanks for having me here 
today to present the President's 2012 budget. It is a real 
honor to be here again after 10 years, presenting the 
President's budget, and I thank the Chairman and the Ranking 
Member for the very kind personal words that they opened with. 
I have a great deal of respect for each of them, and look 
forward to working together in a bipartisan way as we move 
through the long and difficult process.
    After emerging from the worst recession in generations, we 
face another historic challenge. We need to demonstrate to the 
American people that we can live within our means and invest in 
the future. We need to work our way out of the deficits that 
are driving up our debt, and at the same time make the tough 
choices to make sure that we are in a position to out-educate, 
out-build, and out-innovate our competitors. That is what it is 
going to take to return to robust economic health and to grow 
jobs in the future.
    This is the seventh budget that I have worked on at the 
Office of Management and Budget, and the most difficult. It 
includes more than $1 trillion in deficit reduction, two-thirds 
of it from lower spending, and it puts the nation on a path 
towards fiscal sustainability so that by the middle of the 
decade, the government will no longer be adding to our national 
debt as a share of the economy. By the middle of the decade, we 
will be able to pay our current bills and remain in primary 
balance for many years after that.
    The President has called this budget a down-payment. 
Because we still have work to do to pay down the debt and 
address our long-term challenges. But we can't start to pay 
down the debt until we stop adding to it. And that is what this 
budget does.
    The budget lays out a strategy for significant deficit 
reduction, the most deficit reduction in a comparable period 
since the end of World War II. It will bring our deficit down 
to about three percent of the economy by the middle of the 
decade, and stay there for the rest of this budget window.
    Changing the trajectory of our fiscal path is a significant 
accomplishment, but to do this it will take tough choices, and 
I would like to highlight just a few of them.
    Our budget includes a five-year, non-security discretionary 
spending freeze that will reduce the deficit by over $400 
billion over the next decade, and bring spending in this 
category of the budget to the lowest level since President 
Eisenhower sat in the Oval Office. To achieve savings of this 
magnitude, it is not enough to just deal with programs that are 
outdated, or ineffective, or duplicative, though we do start 
there. It is also necessary to make reductions in programs 
that, absent the current fiscal situation, we wouldn't be 
looking for reductions. Programs like low-income energy 
assistance and Community Development Block Grants.
    In national security, which we are not freezing, we are 
also making real cuts. Defense spending over the past decade 
has been growing faster than inflation, and we can no longer 
afford that. The budget cuts $78 billion for the Pentagon's 
spending plan over the next five years, which will bring 
Defense spending down to zero real growth. It cuts weapon 
programs that Secretary Gates and the military leadership says 
we don't need, and we can't afford. We are also capturing 
savings that come from bringing our troops home from Iraq, 
which, when you add it in, brings defense spending down by more 
than five percent, compared to the President's budget of last 
year.
    Of course, cutting discretionary spending alone can't solve 
our fiscal problems. This budget also deals with mandatory 
spending and with revenue, and it takes significant steps to 
address our long-term fiscal challenges. For example, this 
budget shows that we can pay for solutions to two problems that 
we have been all too willing to kick down the road by putting 
on the national credit card. One is preventing a nearly 30 
percent reduction in reimbursements to doctors in Medicare, to 
keep doctors in the system and treating patients. Another is 
preventing an increase in taxes on middle class families 
through the Alternative Minimum Tax, commonly known as the AMT.
    In December, there was bipartisan agreement to pay for a 
one-year extension of the so-called Doc-Fix, which was not 
required by budget rules, but it was the right thing to do. In 
this budget, we build on that, and we have $62 billion of 
savings to pay for the next two years of this fix. And those 
three years of paying for the Doc-Fix establishes a clear 
pattern and creates a window so we can work together, so that 
we can address this in the future without adding to the 
deficit.
    With regard to the Alternative Minimum Tax, we have offsets 
in the budget to pay for three years of what is called a patch. 
And we could pay for it by limiting the amount that those in 
the highest tax bracket can receive for itemized deductions. It 
is a big step towards cutting back on spending in the tax code, 
and it is consistent with the Fiscal Commission 
recommendations. If we continue on this path of paying for the 
AMT patch after 2014, it alone will reduce the deficit by one 
percent of GDP by the end of the decade. These both are down-
payments on long-term reform to reduce the deficit further, and 
the administration looks forward to working with Congress to 
permanently cover these costs once and for all.
    Similarly, as the President said in the State of the Union, 
we are eager to work together on a deficit-neutral corporate 
tax reform that will simplify the system, eliminating special 
interest loopholes and level the playing field, and lower the 
corporate tax rate for the first time in 25 years. And while it 
does not contribute to our deficits in the short or medium 
term, the President has laid out his principles to strengthen 
Social Security, has called on Congress to work in a bipartisan 
fashion, to keep this compact with future generations.
    As we take these steps to live within our means, we also 
invest in the areas critical to future economic growth and job 
creation: education, innovation, clean energy, and 
infrastructure. And even in these areas, the budget cuts 
programs in order to fund high-priority investments. For 
example, in education, we maintain the increased maximum Pell 
Grant level, which is enabling nine million students to pay for 
college education, and we pay for it with a $100 billion in 
savings that primarily come from eliminating summer-school Pell 
Grants and eliminating the graduate student in-school loan 
subsidy.
    In the area of innovation, we support $148 billion in 
research and development investments, including $32 billion for 
the National Institutes of Health. And we need visionary goals 
to bring about a new clean energy economy to help pay for these 
investments. Lower priority programs are cut, and we eliminate 
12 tax breaks for oil, gas, and coal companies, that will raise 
$46 billion over 10 years.
    And to build the infrastructure we need to compete, the 
budget includes a proposal for a $556 billion surface 
transportation re-authorization bill. Not only does this plan 
include the consolidation of 60 duplicative, often-earmarked 
programs into five, and it demands more competition for funds, 
but we insist that the bill be paid for, and we look forward to 
working in a bipartisan manner to do that.
    Mr. Chairman, I am under no illusions how difficult it is 
to make the tough choices needed to put us on a sustainable 
fiscal path. As we make these choices, I believe that it is 
important that we not cut areas that are critical to helping 
our economy to grow, and making a difference for families and 
businesses.
    Finally, cutting spending and cutting our deficits requires 
us to put political differences aside, and working together. I 
look forward to working with you and crafting a set of policies 
that enable us to live within our means and invest in the 
future. And I look forward to answering your questions. Thank 
you very much.
    [The statement of Mr. Lew follows:]

           Prepared Statement of Hon. Jacob J. Lew, Director,
                    Office of Management and Budget

    Chairman Ryan, Ranking Member Van Hollen, and Members of the 
Committee, thank you for inviting me to testify this morning about the 
President's Fiscal Year 2012 Budget.
    As the President has said, now that the country is back from the 
brink of a potential economic collapse, our goal is to win the future 
by out-educating, out-building and out-innovating our competitors so 
that we can return to robust economic and job growth. But to make room 
for the investments we need to foster growth, we have to cut what we 
cannot afford. We have to reduce the burden placed on our economy by 
years of deficits and debt.
    This is the seventh budget I have worked on at OMB and the most 
difficult. It is a budget of shared sacrifice across the Federal 
government. It is a budget that makes tough choices to begin to tackle 
our major fiscal challenges. It is a budget that transitions from 
rescuing the economy to investing in our future. It is a budget that 
lives within our means in order to compete effectively in the world 
economy.
                              then and now
    The world has changed since I last served at OMB. When I left OMB 
in January 2001, we had balanced the budget and projected a surplus of 
$5.6 trillion over the next decade. In fact, we projected that the U.S. 
would effectively be debt-free by 2013. Unprecedented economic growth 
was certainly a key driver of budget surpluses. But in a virtuous 
cycle, a commitment by the President and the Congress to maintain a 
surplus reinforced expectation of Federal fiscal responsibility, which 
had a positive impact on interest rates and further helped to spur 
economic growth. This surplus was the result of year after year of 
fiscal discipline including budget agreements in 1990, 1993 and 1997. 
Presidents and congressional majorities from both parties reached 
across the aisle to make tough policy choices.
    When I returned as OMB Director last November to a projected 
deficit of $10.4 trillion--a sixteen trillion dollar swing in just over 
ten years--the fiscal picture could not have been more different. Large 
deficits were driven by two main factors: first, the worst economic 
downturn in a generation and policy response necessary to rescue the 
economy, and second, the decision in prior years to give two large tax 
cuts without offsetting them and to create a Medicare prescription drug 
benefit without paying for it.


    Clearly, the challenges we face today are very different than those 
we faced more than a decade ago, when many of us worked together to 
balance the budget.
                               our record
    Bringing the Economy Back from the Brink
    It is useful to begin by reviewing the state of our economy, 
because it shows how far we have come but also how far we need to go.
    When the President took office the economy was in freefall. Real 
gross domestic product (GDP) was dropping at an annual rate of 4.9 
percent after falling at an annual rate of 6.8 percent the previous 
quarter. The economy was losing an average of 783,000 private sector 
jobs per month. A steep decline in the stock market combined with 
falling home prices led to a significant loss of household wealth. 
Between the third quarter of 2007 and the first quarter of 2009, the 
real net worth of American households declined by 28 percent--the 
equivalent of one year's GDP.
    In the last year, we have seen some encouraging signs that the 
trajectory has changed and that a recovery is beginning to take hold. 
An economy that had been shrinking for nearly a year is now growing 
again--over the past six quarters, through the first quarter of FY 
2011, real GDP has grown at an average rate of 3.2 percent. After 
nearly two years of job losses, more than one million private sector 
jobs were added to the economy in 2010. Capital and credit markets are 
functioning and gaining strength. And after teetering on the brink of 
liquidation just two years ago, America's auto industry is posting 
healthy gains and returning money to the taxpayers who helped it 
through a period of turmoil.
    What changed?
    Just 28 days after taking office, the President signed into law the 
Recovery Act to create and save jobs and to invest in an economy able 
to compete in the 21st century. Approximately one-third, or $288 
billion, of the Act's funds went to tax cuts for small businesses and 
95 percent of working families. Another third, or $224 billion, was 
used for emergency relief for individuals and state and local 
governments. The final third was invested in projects to create jobs, 
spur economic activity, and lay the foundation for future sustained 
growth.
    This investment had a powerful impact. The White House Council of 
Economic Advisers (CEA) estimates that the Recovery Act raised the 
level of GDP as of the third quarter of 2010 by 2.7 percentage points, 
relative to what it would have been absent intervention, and raised 
employment relative to what it otherwise would have been by between 2.7 
and 3.7 million jobs in the same time frame.
    And we have acted together to build on this growth. In March 2010, 
the President signed the Hiring Incentives to Restore Employment (HIRE) 
Act that provided subsidies for firms that hired workers who were 
unemployed for at least two months and other job creation incentives. 
In August, he signed into law $10 billion in additional aid to States 
to prevent the dismissal of 160,000 of teachers, police officers, and 
firefighters nationwide. In September, the President signed the Small 
Business Jobs Act. At the end of 2010, the President signed into law a 
bipartisan agreement on taxes that prevented a tax increase for middle-
class families, extended unemployment insurance benefits for millions 
of Americans hardest hit by the recession, provided powerful incentives 
for business investment and job creation, and temporarily reduced the 
payroll tax which also would help spur macroeconomic demand. Economists 
from across the political spectrum agree that this bill will boost 
economic growth in 2011 by 0.5 to 1.2 percentage points.
    From the Recovery Act to our financial stabilization plan, the 
President's tough choices over the past two years have helped to save 
the economy from a second Great Depression. But we are keenly aware 
that the recovery is not happening fast enough for the millions of 
Americans who are still looking for jobs, and our immediate task is to 
accelerate economic growth and job creation to get our fellow Americans 
back to work. That is why the President has proposed an up-front 
investment of $50 billion in building new roads, rails, and runways to 
upgrade our infrastructure and create new jobs. It is why the President 
is making key investments in innovation, clean energy, and education 
that will create jobs and make our workforce more competitive. And that 
is why the President laid out a commonsense approach to regulation that 
is pragmatic and evidence-based, and that will protect our health and 
safety and help lay the groundwork for economic growth and job 
creation.
                    restoring a sound fiscal policy
    While taking steps to rescue the economy, the President has also 
worked to restore accountability and fiscal responsibility. In his 
first Budget, the President confronted directly the fiscal situation we 
inherited, eliminating trillions of dollars in budget gimmicks. He made 
a commitment to restoring fiscal responsibility, while recognizing that 
increasing the deficit in the short term was necessary to arrest the 
economic freefall. The President pledged to cut the deficit he 
inherited in half as a share of the economy by the end of his first 
term, a commitment this Budget keeps. He signed into law pay-as-you-go 
(PAYGO) legislation that returned the tough budget rules of the 1990s 
to Washington. The principle behind PAYGO is simple: all new, non-
emergency entitlement spending and revenue losses must be offset by 
savings or revenue increases, with no exception for new tax cuts.
    In addition, the President signed into law the landmark Affordable 
Care Act (ACA), enacting comprehensive health insurance reforms that 
will hold insurance companies more accountable, lower health care 
costs, guarantee more health care choices, and enhance the quality of 
health care for all Americans while reducing the deficit. According to 
CBO analysis, the Affordable Care Act will save more than $200 billion 
over the next ten years and will reduce the deficit by more than $1 
trillion over the second decade. This is more deficit reduction than in 
any legislation since the 1990s. At the same time, the ACA's savings 
provisions tackle the single biggest contributor of our nation's long-
term deficits--rising health care costs.
    While taking major steps to bring down our deficits, the President 
also demanded that the Government spend every taxpayer dollar with as 
much care as taxpayers spend their own dollars. The President proposed 
legislation to create an expedited rescission authority so that 
unnecessary spending can be struck swiftly and constitutionally. 
Through his Accountable Government Initiative, the Administration has 
launched a host of initiatives to streamline what works, cut what does 
not, and eliminate wasteful spending. These initiatives include 
focusing agencies on identifying and delivering on their top 
priorities, a comprehensive strategy to reform Government contracting 
that will save $40 billion by the end of 2011, an initiative to reduce 
the amount of improper payments made by the Government by $50 billion, 
a review and reform of information technology use and procurement, an 
initiative to reduce administrative overhead by billions and improve 
performance, and an effort to dispose of billions of dollars of 
unneeded and under-utilized real property assets.
    Each year since entering office, President has asked his 
Administration to go line-by-line through the Budget to identify 
programs that are outdated, ineffective, or duplicative. In his first 
two Budgets, the President identified more than 120 terminations, 
reductions, and savings, totaling approximately $20 billion in each 
year. These terminations ranged from a radio navigation system for 
ships made obsolete by GPS to new F-22 fighter jets. While recent 
administrations have seen between 15 and 20 percent of their proposed 
discretionary cuts approved by the Congress, the Administration saw 60 
percent of its proposed discretionary cuts become law for 2010.
    Finally, in April 2010, the President created the bipartisan 
National Commission on Fiscal Responsibility and Reform, and charged 
the Commission with identifying policies to improve the fiscal 
situation in the medium term and to achieve long-term fiscal 
sustainability. The Commission made an important contribution, 
beginning the process of building a bi-partisan consensus on the nature 
of the challenge we face and expanding the debate to include a broader 
range of options. While the Administration doesn't agree with every 
recommendation in the report, there are many areas of this budget that 
reflect the work of the Commission.
          living within our means and investing in the future
    Now that the country is back from the brink of a potential economic 
collapse, our goal is to win the future. But we cannot do so if we are 
saddled with increasingly growing deficits. This Budget builds on 
recent progress and lays out a comprehensive and responsible plan that 
will put us on a path toward fiscal sustainability for the rest of the 
decade--a down payment that will build a strong foundation to tackle 
our long-term challenges.
    The projected deficit this year is nearly 11 percent of GDP, the 
highest level since World War II, reflecting the severity of the 
recession and our temporary measures to generate jobs and growth. The 
Budget lays out a path of rapid deficit reduction--the most deficit 
reduction in a comparable period since World War II. In the second half 
of the decade and beyond, debt is no longer growing as a share of GDP--
a key indicator of fiscal sustainability. Redirecting our fiscal path 
on this downward slope is a significant accomplishment, one which will 
take tough choices and shared sacrifice--and is essential for the long-
term competitiveness of the American economy.


    The first step to reducing our deficit is maintaining a strong 
economy, which is a key priority for the Budget. As the baseline 
projections show, with economic growth we begin to make substantial 
progress at reducing the deficit even before we make additional policy 
changes. However, even with a sustained recovery, simply continuing 
current policies does not get the job done--it would leave us with 
deficits of between 4 and 5 percent of GDP--with debt growing at an 
unsustainable rate through the end of the decade and beyond.
    To stay on a path towards sustainable deficits on the order of 3 
percent of GDP, we make tough choices across all areas of the Budget to 
identify more than $1 trillion in savings--two thirds from spending 
reductions. This requires decisions beyond just separating the good 
programs from the bad. It means broadly sharing sacrifices in all areas 
of the Budget in order to make critical investments in areas most 
important to growth and competitiveness. And it means reducing spending 
in areas where we continue believe there is still important work to do. 
It cannot be achieved by simply looking at discretionary spending--we 
need to look at mandatory and revenue policies as well. An overview of 
key decisions in the FY 2012 Budget is as follows:
     Non-security discretionary. The Budget proposes to freeze 
non-security discretionary spending for five years, which saves more 
than $400 billion over the next decade and brings this category of 
spending to its lowest level as a share of the economy since Dwight 
Eisenhower was in office.
     Security discretionary. The Budget reflects tough 
decisions in areas outside of the non-security freeze--bringing Defense 
spending down from a long period of significant real growth to zero 
real growth, saving $78 billion over the next five years relative to 
last year's plan. Reflecting the winding down of military operations in 
Iraq, the Overseas Contingency Operations (OCO) budget for DOD in 2012 
will be about 26 percent lower than levels in the President's 2011 
request. As a result, the overall defense budget, including OCO, will 
be down by 5.2 percent from last year's request.
     Health care. The Budget fully pays for a two-year 
extension of current Medicare physician payment rates with $62 billion 
in health care savings, preventing a payment cut of over 25 percent. 
The Budget also proposes incentives for States to implement medical 
malpractice reforms to further reduce the growth of health care costs.
     Revenues. The Budget pays for three years of AMT relief by 
cutting the value of tax expenditures for high-income taxpayers by 30 
percent. The Budget also opposes any further extension of the 
unaffordable upper-income tax cuts to two years.
     Fiscal stewardship. The Budget includes several proposals 
to reduce the risk of future liabilities. These include giving the 
Pension Benefit Guaranty Corporation (PBGC) the ability to adjust 
premiums to reflect all risks facing the pension insurance system and 
proposing reforms to encourage State responsibility and improve the 
solvency of the Unemployment Insurance Trust Fund.
                    shared sacrifices, hard choices
    To be competitive in the 21st Century, the United States cannot be 
weighed down by crippling budget deficits, ineffective programs that 
waste tax dollars, and a government that is not accountable to the 
American people.
    Five-year non-security freeze. It would be short-sighted to cut 
spending across the board and shortchange critical areas for growth and 
competitiveness--such as education, innovation, and infrastructure--or 
carelessly slash programs that protect the most vulnerable. This means 
that some cuts must be deeper to make room for key investments. In his 
2011 Budget request, the President proposed a three-year, non-security 
discretionary freeze. As the economic recovery takes hold, the 
President believes that it is important to go further and is now 
proposing a five-year, non-security discretionary freeze. This is an 
extension of the freeze proposed last year, based on 2010 enacted 
levels. This freeze would be the most aggressive effort to restrain 
discretionary spending in 30 years and, by 2015, would lower non-
security discretionary funding as a share of the economy to the lowest 
level since Dwight D. Eisenhower was president. Over the decade, the 
five-year freeze saves more than $400 billion.
    Program terminations, reductions, and savings. In part to meet this 
freeze, the Budget includes over 200 terminations, reductions, and 
savings totaling more than $33 billion in savings for 2012 alone. On 
their own, these cuts will not solve our fiscal problems, but they are 
a critical step to creating a more responsible and accountable 
Government and a key component of a comprehensive deficit reduction 
strategy. It is never easy to end or cut programs; they all have 
advocates. Some programs are duplicative, outdated and ineffective. But 
we also had to choose programs that, absent the fiscal situation, we 
would not cut:
     Low-Income Housing Energy Assistance Program (LIHEAP). The 
Budget cuts LIHEAP by more than $2 billion, returning LIHEAP funding to 
2008 levels, prior to the energy price spikes. However, in this 
difficult fiscal environment, we cannot afford to maintain the 
expansion to the program.
     Community Services Block Grant (CSBG). CSBG has helped to 
support community action organizations in cities and towns across the 
country. These are grassroots groups working in poor communities, 
dedicated to empowering those living there and helping them with some 
of life's basic necessities. These are the kinds of programs that 
President Obama worked with when he was a community organizer, so this 
cut is not easy for him. Yet for the past 30 years, these grants have 
been allocated to virtually the same organizations, using a formula 
that does not consider how good a job the recipients are doing. The 
Budget proposes to cut financing for this grant program in half, saving 
$350 million, and to reform the remaining half into a competitive grant 
program, so that funds are spent to give communities the most effective 
help.
     Grants-in-Aid for Airports. The Budget lowers funding for 
the airport grants program to $2.4 billion, a reduction of $1.1 
billion, by eliminating guaranteed funding for large and medium hub 
airports. The Budget focuses the traditional Federal grants to support 
smaller commercial and general aviation airports that do not have 
access to additional revenue or other outside sources of capital. At 
the same time, the Budget would allow larger airports greater 
flexibility to generate revenue with increased non-Federal passenger 
facility charges.
    These cuts are not limited to a few agencies. Rather, these cuts 
reflect shared sacrifice across the Federal government--even for 
agencies that are central to out-competing, out-building, and out-
educating in the 21st century. For example, the Department of Education 
has made difficult decisions in order to maintain historic increases 
for Pell Grants, which are critical to creating future generations that 
are well-educated and globally-competitive. The Administration would 
put Pell Grants on firm financial footing through steps that include 
eliminating the in-school interest subsidy for loans to graduate 
students and ending the new year-round Pell Grant, which offers 
students a second Pell Grant in one year, but has cost ten times more 
than anticipated. The Budget also eliminates 13 discretionary programs 
at the Department of Education and consolidates 38 K-12 programs into 
11 new programs that emphasize using competition to allocate funds.
    Federal civilian employee pay freeze. Federal workers are patriots 
who work for the Nation often at great personal sacrifice. They deserve 
our respect and gratitude. But just as families and businesses across 
the country are tightening their belts, so too must the Federal 
government. On his first day in office, the President froze salaries 
for all senior political appointees at the White House. In his Budget 
last year, the President proposed extending that freeze to other 
political appointees, and he eliminated bonuses for all political 
appointees across the Administration. Starting in 2011, the President 
has proposed and Congress enacted a two-year pay freeze for all 
civilian Federal workers. This will save $2 billion over the remainder 
of 2011, $28 billion over the next five years, and more than $60 
billion over the next 10 years.
    Savings in discretionary security programs. The President's Budget 
also demands cuts and savings in security programs. DOD, in particular, 
has seen an average increase to its base budget of 7.4 percent a year 
over the past decade. Moving forward, DOD is pursuing a variety of 
strategies to set the course for zero real growth in defense spending, 
and saving $78 billion in its base budget (including $13 billion in FY 
2012) relative to FY 2011's request for the next five years. Secretary 
Gates will oversee a package of terminations, consolidations, and 
efficiencies in operations to slow this growth, and these savings will 
be used to fund programs and efforts critical to the armed forces and 
the security of the Nation. Reflecting the winding down of military 
operations in Iraq, the Overseas Contingency Operations (OCO) budget 
for DOD in 2012 will be about 26 percent lower than levels in the 
President's FY 2011's request. As a result, the overall defense budget, 
including OCO, will be down by 5.2 percent from last year's request.
    Administrative savings. Allowing waste is never right, and it is 
especially intolerable in a time of tightening belts and tough 
decisions. Continuing the President's Accountable Government 
Initiative, the Budget cuts $2 billion in administrative overhead like 
travel, printing, supplies, and advisory contract services; establishes 
a process to quickly sell excess and under-utilized Federal real 
estate; and embraces competitive grant programs based on the Race to 
the Top model. This model is applied to programs from early childhood 
education through college; to allocate grants for transportation; to 
bring innovation to workforce training; and to encourage both 
commercial building efficiency and electric vehicle deployment.
    Reorganize government. We live and do business in a global economy, 
but the organization of our government has not kept pace with the 
private sector advancements of the 21st century. Many of our government 
organizations have strayed from their original or core missions, 
evolving out of inertia rather than in response to the changing needs 
of the groups they serve. This has resulted in duplicative and 
ineffective programs that persist and grow over time, and an 
organization of functions that doesn't always make sense. For example, 
as the President stated in his State of the Union address, there are 
twelve different agencies that deal with exports. Americans deserve a 
streamlined, efficient and well-functioning Federal government that is 
responsive to the needs of its citizens and of the private sector.
    The Budget reflects the President's commitment to reorganizing the 
Federal government to ensure that our resources are being used 
effectively and efficiently, with a particular focus on making the U.S. 
more competitive. In the coming months we will be working to identify 
where we can merge, consolidate and cut in order to better facilitate 
the needs of all American companies, entrepreneurs, and innovators and 
give these engines of economic growth a leg up in the global economy. 
The President plans to submit a proposal to Congress to enact the 
changes necessary to reorganize the Federal government in a way that 
best serves the goal of a more competitive America.
                       investments in our future
    The best antidote to a growing deficit is a growing economy, which 
spurs expanded employment, higher revenue collection, and lower demand 
for spending on safety net programs like unemployment insurance 
nutrition assistance. Putting the Nation on a sustainable fiscal path 
and getting our deficits under control are critical to making the 
United States competitive in the global economy, and the Budget lays 
out a strategy to do this. At the same time, it also recognizes that we 
cannot cut back on investments that will fuel future economic growth 
particularly since sustained and robust economic growth plays a very 
significant, long-term role in reducing deficits. While the Budget 
identifies cuts and savings and asks for shared sacrifices across the 
government, it also invests in areas critical to helping America win 
the race for the jobs and industry of the future.
    We must target scarce Federal resources to the areas critical to 
winning the future: education, innovation, clean energy, and 
infrastructure.
    Educate a competitive future workforce. In an era where most new 
jobs will require some kind of higher education, we have to keep 
investing in the skills of our workers and the education of our 
children. This Budget continues to support the President's commitment 
to once again have the highest proportion of college graduates in the 
world by 2020, and continues the reform agenda not just by devoting 
significant resources to where they are needed, but also by ensuring 
that those funds are being invested in programs that deliver results 
efficiently and effectively. This Budget calls for:
     Maintaining the Pell Grant maximum award at $5,550. Since 
2008, the Administration has increased the maximum Pell Grant by $819, 
ensuring access to postsecondary education for over 9 million students 
from low-income families.
     Supporting reform of K-12 education with expanded Race to 
the Top and other innovative, evidence-based programs that encourage 
innovation and reward success, and expands the Race to the Top concept 
to early childhood education with $350 million to establish a new, 
competitive Early Learning Challenge Fund for States.
     Establishing a Workforce Innovation Fund that will 
encourage States and localities to break down barriers among programs, 
test new ideas, and replicate proven strategies for delivering better 
employment and education results at a lower cost per outcome.
    Investment in R&D and transformational technologies. To compete in 
the 21st century economy, we need to create an environment where 
invention, innovation, and industry can flourish. That starts with 
continuing investment in the basic science and engineering research and 
technology development from which new products, new businesses, and 
even new industries are formed. We must focus in areas that show the 
greatest promise for job creation to position ourselves to get ahead of 
our competitors and be a leader in emerging industries. This Budget 
makes significant investments in clean energy technology and research 
and development to nurture the United States as a world leader in 
innovation. To meet these goals, the Budget calls for:
     Providing $148 billion for research and development. This 
level of funding continues the effort to double investments in basic 
research at the National Science Foundation, Department of Energy 
Office of Science, and the National Institute for Standards and 
Technology (NIST); provides robust investment in biomedical research at 
National Institutes of Health (NIH); and doubles energy efficiency 
research and development.
     Making the Research and Experimentation (R&E) tax credit 
permanent to give businesses the certainty they need to make these 
important investments. In addition, the Administration proposes to 
expand the credit by about 20 percent, the largest increase in the 
credit's history, and simplify it so that it is easier for firms to 
take this credit and make the investments our economy needs to compete.
     Bolstering economic rejuvenation in hard-hit areas of our 
country with new Growth Zone program. Growth Zones will deliver 
expanded tax incentives for investment and employment and a more 
streamlined access to government assistance to 20 new areas facing 
economic distress as well as growth potential.
     Providing $8.7 billion for clean energy technology 
research, development, demonstration, and deployment. This includes 
more than doubling energy efficiency investments and increasing 
renewable energy investments by over 70 percent. The Budget seeks to 
reinforce new approaches to energy research by adding three new energy 
innovation hubs and expanding investment in the Advanced Research 
Projects Agency--Energy (ARPAE). In addition, the budget provides $5 
billion for Section 48C tax credits for renewable energy manufacturing 
facilities.
    Build a 21st century infrastructure. To compete in the 21st 
century, we need an infrastructure that keeps pace with the times and 
outpaces our rivals, and for too long we have neglected our Nation's 
infrastructure, its roads, bridges, levees, waterways, communications 
networks, and transit systems. In the Recovery Act, the Administration 
made the largest one-time investment in our Nation's infrastructure 
since President Eisenhower called for the creation of a national 
highway system. We need to continue to build on those efforts--and to 
do so responsibly by paying for what we build. We cannot strengthen our 
economy with a modern infrastructure if at the same time it weakens our 
fiscal standing. To give America the world-class infrastructure our 
economy needs, the Budget:
     Proposes a six-year surface transportation reauthorization 
that increases average annual investment by $35 billion per year, in 
real terms, over the previous six year authorization plus passenger 
rail funding in those years; this represents a total inflation-adjusted 
increase of sixty percent over the life of the bill. To bring the trust 
fund under budget enforcement mechanisms, the Budget proposes to 
reclassify trust fund spending on surface transportation as mandatory, 
subjecting it to PAYGO rules and closing score-keeping loopholes.
     Provides $1.2 billion for the Next Generation Air 
Transportation System, the Federal Aviation Administration's multi-year 
effort to improve the efficiency, safety, and capacity of the aviation 
system.
     Invests in smart, energy-efficient, and reliable 
electricity delivery infrastructure. The Budget continues to support 
the modernization of the Nation's electrical grid by investing in 
research, development, and demonstration of smart-grid technologies to 
spur the transition to a smarter, more efficient, secure and reliable 
electrical system.
     Builds next-generation wireless broadband network to 
provide access to 98 percent of the population, creates a Wireless 
Innovation Fund, and establishes an interoperable broadband network for 
public safety. These proposals will be fully paid for with proceeds 
from proposed ``voluntary incentive auctions'' of underused spectrum 
and other spectrum management measures, which will generate more than 
$27 billion over the next decade. In addition to funding the programs 
above, nearly $10 billion of these proceeds will be dedicated to 
deficit reduction.
                        building on our progress
    Now that the recovery is beginning to take hold, taking further 
steps to ensure responsibility has to be a priority--not because fiscal 
austerity in and of itself is virtuous, but because there is no way 
that we can compete and win in the world economy if we are borrowing 
without an end in sight.
    The President's Budget is a down payment. It puts the government on 
a path to reach sustainable deficits over the next ten years. This 
means that for the first time in 10 years, the government will again be 
fully paying for all of its programs and the debt will stabilize as a 
share of GDP. This is an important milestone--but not the finish line--
on the path to a balanced budget.
    We cannot achieve sustainable levels with ever deeper cuts in non-
security discretionary spending, which is simply not a large enough 
share of the picture either to cause or to solve the whole problem. The 
President has been clear that we must work on a bipartisan basis to 
find long-term solutions across all areas of the Budget, including 
Medicare, Medicaid, and tax reform.
    Continue efforts to restrain the growth of health costs. Health 
care comprises one-quarter of non-interest Federal spending, and it is 
the key driver of future deficit growth. According to CBO analysis, the 
Affordable Care Act will save more than $200 billion over the next ten 
years and will reduce the deficit by more than $1 trillion over the 
second decade. This is a pivotal achievement, and the President is 
resolutely committed to implementing the ACA fairly, efficiently, and 
swiftly. But the job is not yet done. The Budget builds on the ACA with 
additional proposals to contain health care cost growth:
     The ACA made important advances in the area of program 
integrity, but there are other important opportunities to reduce fraud, 
waste, and abuse in Medicare and Medicaid. The Budget includes ideas 
pulled from external sources, including recommendations from the 
President's Fiscal Commission and from legislation that has received 
bipartisan support. The $62 billion in health savings in the Budget 
focus on increasing program integrity, efficiency, and accountability--
not reducing beneficiary access or benefits. For example, the Budget 
extends efficiencies from Medicare competitive bidding for durable 
medical equipment to Medicaid, and prohibits brand and generic drug 
companies from delaying the availability of new generic drugs (``pay-
for-delay '').
     At the same time, these health savings pay for two years 
of relief from the Sustainable Growth Rate (SGR) formula--preventing a 
decrease of nearly 30 percent in physician payments that would hurt 
Medicare. This paid-for extension is on top of the three previous paid-
for extensions of the SGR fix, including the one-year extension enacted 
in December, establishing a pattern of practice that we hope to 
continue as we work with Congress to achieve a permanent fix.
     Fully implementing the Affordable Care Act achieves cost 
savings and promotes efficient care, including reimbursing doctors and 
hospitals as Accountable Care Organizations, and adjusting payments to 
hospitals with high readmissions or hospital-acquired conditions. 
Implementing the Act also has the potential to fundamentally transform 
our health system into one that delivers better care at lower cost--a 
potential that is not fully captured in the ACA savings estimates. In 
particular, the Act incorporates the most promising ideas from 
economists and leaders from across the political spectrum to control 
health care costs.
     The President's Budget includes $250 million in grants to 
States to reform their laws on medical malpractice through various 
approaches such as health courts, safe harbors, early disclosure and 
offer programs, or other legal reforms. These grants would be awarded 
and administered by the Bureau of Justice Assistance (BJA) in 
consultation with the Department of Health and Human Services. The goal 
of any reform would be to fairly compensate patients who are harmed by 
negligence, reduce providers' insurance premiums, weed out frivolous 
lawsuits, improve the quality of health care, and reduce medical costs 
associated with ``defensive medicine.'' This proposal is in line with 
the Fiscal commission's recommendation for ``an aggressive set of 
reforms to the tort system.''
    Make a Down Payment on Tax Reform. To foster a competitive economy, 
we must have sensible and affordable tax policy that is consistent with 
our overall objectives of deficit reduction and economic growth. Since 
the last comprehensive overhaul nearly three decades ago, the tax code 
has been weighed down with revenue-side spending in the form of special 
deductions, credits, and other tax expenditures that do little for 
middle income families, and burdened with generous upper income tax 
cuts and more generous estate tax cuts for families making more than 
$250,000 a year. To compete and win in the world economy, we cannot 
sustain a tax code burdened with these unaffordable benefits. This is 
why the President has called on the Congress to undertake a fundamental 
reform of our tax system. As progress towards this goal, the Budget 
calls for:
     Allowing the 2001 and 2003 High-Income and Estate Tax Cuts 
to Expire. The Administration remains opposed to the permanent 
extension of these high-income tax cuts past 2012, as now scheduled, 
and supports the return of estate tax to 2009 rates and exemption 
levels. These policies save nearly a trillion dollars over the decade 
including interest effects. We cannot afford these unpaid-for tax 
breaks for the wealthiest Americans and we are committed to limiting 
the current extension to two years.
     Beginning the Process of Corporate Tax Reform. The United 
States has the highest corporate tax rate in the world. Part of the 
reason for this is the proliferation of tax breaks and loopholes 
written to benefit a particular company or industry. The result is a 
tax code that makes our businesses and our economy less competitive as 
a whole. The President is calling on Congress to work with the 
Administration on corporate tax reform that would simplify the system, 
eliminate these special interest loopholes, level the playing field, 
and use the savings to lower the corporate tax rate for the first time 
in 25 years--and do so without adding a dime to our deficit.
     Paying for the Alternative Minimum Tax (AMT). This Budget 
provides for a three year extension of AMT relief, and is offset by an 
across-the-board 30 percent reduction in itemized deductions for high-
income taxpayers. This is the first time an extension of AMT relief has 
been fully paid for. While our base projections do not assume that we 
continue to pay for AMT relief after 2014, the President is committed 
to working with Congress to fully pay for AMT relief beyond this 
window. Doing so reduces the deficit by an additional 1 percent of GDP 
by the end of the decade relative to the deficit reduction in the 
Budget.
    Take Steps Now to Reduce Future Liabilities. Looming debts and 
unfunded liabilities can put taxpayers on the line for bailing out 
programs in the future. The Budget promotes fiscal stewardship by 
restoring responsibility to key areas. First, the Budget proposes to 
give the Pension Benefit Guaranty Corporation (PBGC) Board the ability 
to adjust premiums and directs PBGC to take into account the risks that 
different sponsors pose to their retirees and to PBGC. This will both 
encourage companies to fully fund their pension benefits and give the 
PBGC the tools to improve its financial soundness without over-
burdening the companies it ensures, saving $16 billion over next 
decade. Second, the 2012 Budget provides short-term relief to States by 
providing a two-year suspension of State interest payments on their 
debt and automatic increases in Federal unemployment insurance (UI) 
taxes. At the same time, the Budget proposes steps to encourage States 
to put their UI systems on firmer financial footing and pay back what 
they owe to the Federal government. Beginning in 2014, the Budget 
increases the minimum wages states can subject to unemployment taxes to 
$15,000. Finally, the Budget proposes to gradually reduce the loan 
portfolios and eligible loan sizes of Fannie Mae and Freddie Mac and 
end the conservatorship of these companies, scaling back government 
support in a way that allows private capital to return without 
undermining the housing market recovery.
    Begin a Dialogue on Social Security Solvency. The President 
considers Social Security to be one of our most successful programs, 
and indispensable to workers, people with disabilities, seniors, and 
survivors. The President has been clear that we need to strengthen 
Social Security to make sure that Social Security is sound and reliable 
for the American people, now and in the future. The Budget lays out the 
President's principles: Reform should strengthen the program and its 
protections for the most vulnerable, without putting at risk current 
retirees and people with disabilities, without slashing benefits for 
future generations, and without subjecting American's guaranteed 
retirement income to the whims of the stock market. The President 
believes that the best way forward is for leaders of both parties to 
come together to discuss the way forward on a bipartisan basis.
    Social Security is not contributing to our deficit any time soon. 
Our goal is to make sure that current and future generations are 
assured that the system will remain sound for the long term as well--to 
provide the peace of mind that is one of the important benefits of 
insurance.
                             a way forward
    There has been a vibrant national conversation on fiscal 
responsibility over the past several months. The President's Fiscal 
Commission made important progress in launching a serious bipartisan 
discussion last year, and I commend them for resetting the debate on 
further deficit reduction. While the President has not embraced all of 
their proposals, many of them are included in this year's Budget. 
Federal employee pay freezes, medical malpractice reform, a call for 
government reorganization, and the elimination of in-school subsidies 
for graduate student loans are just a few examples. Our Terminations, 
Reductions, and Savings volume includes numerous proposals that were 
also recommended for termination or reduction by the Fiscal Commission. 
And like the Commission, we make proposals to improve budget 
discipline, including subjecting the Transportation Trust Fund to PAYGO 
rules and providing for program integrity cap adjustments. We must take 
serious steps to both cut spending and cut deficits. We must address 
these issues in a bipartisan way. And we must do so in a way that is 
consistent with our core values.
    The Fiscal Commission was clear that that the only way to tackle 
our deficit is to cut excessive spending wherever we find it--in 
domestic spending, defense spending, health care spending, and spending 
through tax breaks and loopholes. Now that the worst of the recession 
is over, we have to confront the fact that our government spends more 
than it takes in. That is not sustainable and we need a comprehensive 
approach
    The five year non-security freeze achieves significant savings with 
a dramatic reduction in discretionary spending over the coming decade, 
and it will require commitment from both the Administration and 
Congress to live within that framework. But we have to remember that 
this category of spending represents a little more than 12 percent of 
our Budget. To make further progress, we cannot pretend that cutting 
this kind of spending alone will be enough. Looking forward, we will 
have to make hard decisions to further reduce health care costs, 
including programs like Medicare and Medicaid, which are the single 
biggest contributor to our long-term deficit. Health insurance reform 
will slow these rising costs, which is part of why nonpartisan 
economists have said that repealing the health care law would add a 
quarter of a trillion dollars to our deficit. Still, we need to look at 
other ideas to bring down costs, and the proposals in this year's 
Budget are a first step. And we cannot afford a permanent extension of 
the tax cuts for the wealthiest two percent of Americans if we are 
committed to achieving a sustainable deficit.
    This Budget builds on the work of the last two years, and makes a 
down payment on a strong American future. Much work remains to be done. 
We need to take steps to reduce our future liabilities. And we need to 
work to shape our government into one that is more affordable, more 
effective, and more efficient.
    I look forward to working with both houses of Congress in the 
coming months as we work to put our fiscal path back on a sustainable 
course.

    Chairman Ryan. Thank you. Mr. Lew, before I get into this, 
how long do we have you for? I understand you have to testify 
over in the Senate later this afternoon.
    Mr. Lew. I believe we have until 12:30.
    Chairman Ryan. But a little bit longer than that, since you 
were a little late, how does that sound?
    Mr. Lew. I apologize for being late. I hadn't allowed for 
the new security rules.
    Chairman Ryan. No, don't apologize. I am just trying to 
manage time so everybody gets a shot at their questions.
    Mr. Lew. Actually, Mr. Chairman, the issue was, the 
gentleman in front of me in line had to take his shoes off as 
he went through the metal detector, and it took a few minutes.
    Chairman Ryan. Okay. I am reading in the Washington Post 
today, an editorial board which is, you know, more often 
thought as favorable toward the administration's point of view, 
quote, the title of the editorial is, President Obama's Budget 
Kicks the Hard Choices Further Down the Road, quote, The 
President punted. Having been given the chance, the cover and 
the push by the Fiscal Commission he created to take bold steps 
to raise revenue and curb entitlement spending, President 
Obama, in his fiscal 2012 budget proposal, chose instead to 
duck. To duck, and to mask some of the ducking with the sort of 
budgetary gimmicks he once derided.
    We just heard from the Congressional Budget Office director 
and the chairman of the Federal Reserve, one of the best things 
we can do for the economy today is put in place a plan that 
gets this deficit and debt under control. Why did you duck? If 
George Bush brought this budget to the House, I would say the 
exact same thing. You know the drivers of our debt, you 
understand the issues. I think the fact that the President even 
gave us this Fiscal Commission to start with acknowledged, we 
agree on the size and the scope and the nature of the problem. 
Why did you duck, why are you not taking this opportunity to 
lead?
    Mr. Lew. Mr. Chairman, I think the President's budget, if 
you look at the bottom line, addresses the fiscal challenges 
that we face in the short and the medium-term, and he has 
called it a down-payment, acknowledging that we need to work 
together in the long-term. If you look at what the mandate of 
the Fiscal Commission was, it was to bring the deficit down to 
three percent of GDP by the middle of the decade. Our budget 
does that.
    Surely there are things in our budget that we will have 
disagreements about. I know that we are going to have a serious 
debate about priorities. But the President's budget 
accomplishes the goal. And I think if you look at the budget, 
it does it with some very, very tough decisions. The spending 
reductions are very real, the revenue provisions are very real, 
and the mandatory savings are very real. There certainly are 
other things that we will need to work on together to address 
the long-term challenges, but if our goal is to get to a 
sustainable deficit by 2015, I think the President's budget 
puts down a comprehensive deficit reduction path.
    Chairman Ryan. Okay, using your own table S-4 on page 176 
of your budget, you don't get the primary balance in your own 
numbers until 2017, and then immediately thereafter you have 
more problems.
    Mr. Lew. So, let us look at S-4. If you look at S-4, where 
it starts, the deficit is 10.9 percent of GDP. It comes down to 
3.2 percent of GDP in 2015. We then stay between 2.9 and 3.2, 
3.3, in that area around three percent of GDP for the rest of 
the decade, and if you had a series that went beyond, it would 
go on for years beyond that. I think it is a mistake to think 
of three percent of GDP as a bulls-eye. I think if you compare 
10.9 percent to 3.2 or 3.1 or 3.0, it is a world of difference. 
And I think we achieved primary balance in this budget.
    Chairman Ryan. So let us get into what is behind that 
primary balance, behind your claims of balance. And I can go 
through the tables. Am I correct that the budget proposes 
revenues that are $819 billion greater than your current policy 
baseline, and that within your policy baseline, you have an 
$807 billion, 10-year tax increase built into it, because it 
assumes the expiration of the 2001 and 2003 tax cuts for higher 
income earners, and assumes the estate tax reverts back to 2009 
level? Am I correct that that is what your baseline assumes?
    Mr. Lew. Mr. Chairman, our baseline assumes, consistent 
with where there was bipartisan agreement in December, that we 
would permanently extend the middle class tax cuts, and that we 
would have estate tax relief. We did not have long term 
agreement on the upper income rates, or on the richer estate 
tax relief.
    Chairman Ryan. I just wanted to make sure we have an equal 
understanding.
    Mr. Lew. Yeah. We tried to construct a baseline so that the 
difference would be clear.
    Chairman Ryan. So, adding the additions in the baseline 
revenue increases, that is about $1.6 trillion in additional 
revenues from where we are today, correct?
    Mr. Lew. Well, the upper-income tax cut is $709 billion, 
and the estate provision is $98, and then there is some debt 
service on top of that.
    Chairman Ryan. Right, so 1.6, okay.
    Mr. Lew. It is 953, actually, I believe.
    Chairman Ryan. What about debt service?
    Mr. Lew. It is 709 for the upper-income, 98 for the estate, 
and 147 in debt service.
    Chairman Ryan. So, let me get to this because you have to 
go, and I have a lot of questions, and I am going to send you 
more. Your economic assumptions, which are how you achieve 
primary balance, which is how you achieve the claims you are 
making. I want to walk you through this and ask you why you 
make these economic assumptions.
    You are expecting very robust growth in the coming years. 
Your forecast calls for real GDP growth well above four percent 
in 2013 and 2014, much, much higher than the private sector 
Blue Chip consensus or Congressional Budget Office, but I find 
it interesting that 2013 also marks the year where you are 
calling for a big rise in taxes across all segments of our 
economy. You basically are raising taxes on successful small 
businesses, on investment, as part of the expiration of the 
2001-2003 tax cuts and the health care tax cuts. Specifically, 
there is a new 3.8 tax increase on investment. As of 2013, the 
top income tax rate will rise from its current level of 35 
percent all the way to 44.8 percent. The tax on dividends could 
triple from its current level of 15 percent to 45.4 percent. 
And the tax on capital gains will rise from 15 percent to 23.8 
percent.
    But you are calling for robust economic growth in that very 
year. Do you think that the tax increases that you are planning 
on in 2013 on mostly successful small businesses in the 
investment community in America, on job creators; you think it 
is not going to impact the economy? You think that is the year 
when the economy takes off? Because if it doesn't, then you 
never reach primary balance, as you are claiming.
    Mr. Lew. Mr. Chairman, there was, in December, an agreement 
that we should extend certain tax provisions for two years. And 
there are some provisions that do take effect, or go out of 
effect, because of that. I think if you look at our economic 
assumptions, the economic assumptions in the short-term are 
actually a little bit more pessimistic than some of the outside 
observers. In the long-term they are a little bit more 
optimistic, and it is driven by one key difference, which is an 
important conceptual difference. The question is will we 
recover from this recession the way we have recovered from past 
recessions?
    If you look historically, financially-led recessions have 
had slightly longer periods of recovery, but in the end we get 
back to where the economy would have been. We assume that that 
is the case. We are within the range of recoveries from past 
financially-led recessions, and we think that they are very 
prudent, reasonable assumptions. Undoubtedly, and I apologize I 
am a lawyer not an economist, so I could get into a level of 
detail here which is probably beyond my own training. But 
economists can disagree about what year it would happen and 
they can disagree about whether or not we will get back to what 
was the potential GDP before. We think it is the right thing to 
do, to get our economy back. That is one of the reasons we have 
put forward a budget that invests in the things that it takes 
to keep growing the economy; and we think that education, 
innovation, and infrastructure are key to it.
    Chairman Ryan. Here is what does not add up to me; you are 
saying, in 2013, you are going to have economic growth 1.3 
percent higher than what the Congressional Budget Office 
believes, 1.4 percentage points higher than what the Blue Chip 
believes, and you are claiming this explosion of growth in a 
year where you are raising taxes across the board on 
entrepreneurs, small businesses, investors, investment.
    History doesn't square with your comments. And if we are 
right and you are wrong about this, then you will never reach 
primary balance. The $1.7 trillion you are claiming in extra 
revenue because of the higher economic growth, you are claiming 
above and beyond what the Congressional Budget Office claims, 
doesn't materialize then, and we are in a world of trouble.
    And I will just finish with this. What is so frustrating 
about this is, you know the drivers of our debt are the 
entitlement programs. And yet, you are doing nothing to address 
that. We are in different parties; that is fine. But when 
people elect a President, they expect a President to lead, to 
take on the country's biggest challenges before they become 
actual crises. And we all know that this debt is becoming a 
crisis. And you are not even touching these programs. You are 
assuming the economy is going to take off in a year in which 
you are raising taxes everywhere, all over the economy. And if 
your math doesn't add up, then we are all in a world of hurt, 
and this will cost us jobs.
    Mr. Lew. Mr. Chairman, if you look at tax provisions, the 
vast majority of the revenues that you are talking about are 
associated with the tax rate at the top end; the tax rates for 
people who earn $250,000 a year or more. I would just note 
that, during the last administration I served, and during the 
Clinton Administration, at those tax rates we had the longest 
period of uninterrupted growth in American history. So they are 
not tax rates that have been historically challenging to 
growth. If you look inside our budget, where there are new 
proposals, we have a lot of tax cut proposals that are designed 
to promote the kinds of investment that we need in this 
country. And we, net, have $360 billion of new revenue. So it 
doesn't amount to a large amount in 2013.
    Chairman Ryan. Yeah. I don't know where you are from, but 
where I come from, most of our jobs come from successful small 
businesses. In Wisconsin, you drive to any city, and there is 
going to be an industrial park with a Sub-S, a LLC with 100, 
maybe 200, 300 employees. They file taxes as individuals. Most 
of the top tax rate is actually small businesses. And when we 
are taxing our small businesses at rates above 50 percent in 
most states, like Wisconsin, 44.8 percent in this country, 
where most of our competitors are taxing their businesses at 
rates lower than we are, how do we expect to win global 
competition? How do we expect to create jobs when we are taxing 
the engine of economic growth and job creation, small 
businesses, at rates in excess of 50 percent in most states?
    Mr. Lew. I think that if we look at who are the taxpayers 
in that class, at $250,000 or above, and where the revenue 
goes. I am from New York, a lot of it goes to finance and a lot 
of it goes to law. And I think that it is not the case that the 
top rate is something that is principally a small business 
issue. I think that we have a lot of tax proposals that would 
make taxes easier for small businesses. The right way to target 
small business is to make sure that we do the things that are 
targeted to investment, and not to the kinds of income that 
drives people into that top bracket, in the most cases.
    Chairman Ryan. All right. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman. Director Lew, as I 
indicated in my opening statement, I think it is an important 
achievement that in this budget you reach primary balance by 
the year 2017 and begin to stabilize the problem. But I also 
indicated that I think we all need to work together, especially 
to take actions, now, to deal with what are going to be 
projected deficits in the next 20 years, and I think that 
conversation should begin now.
    But I do want to point out that this is not easy to do when 
you have dug yourself as a country in a deep hole, digging 
itself out, that there are other alternatives out there. And 
the Chairman of the Committee has put forward an alternative 
road map, in good faith, in a sincere effort to reduce the 
deficit. So it is in that spirit that I just want to point out 
that when the Congressional Budget Office, last January, scored 
that budget proposal, that deficit proposal, that they 
indicated that in the year 2020, the deficit would be 3.7 
percent of GDP. And that the budget would not be in primary 
balance under that plan, as of that day. And that, in fact, if 
you go out another 20 years, until 2040, the deficit in percent 
of GDP is 4.5 percent, and the budget is just then getting into 
primary balance.
    And I point that out, Mr. Chairman, to show you how hard it 
is. As some criticize the President's effort, just recognize 
that other sincere efforts that were made actually brought the 
deficit into primary balance later than the President's budget. 
And there are going to be conversations about different 
assumptions, but my point is, these deficit numbers were the 
result of a good faith effort, and I think the President has 
made a good faith effort. We do all need to get together.
    Now I want to discuss the longer-term outlook. I want to 
discuss what is happening today on the floor as it draws 
contrast with the approach that the Obama Administration is 
taken with respect to the deficit. As you indicated, you are 
talking about significant cuts in domestic discretionary 
spending. As you know from listening to many of my colleagues, 
these are going to have a real impact, and a painful impact on 
many people's lives. But you have decided that, in order to get 
deficit under control, we are going to have to make these tough 
decisions, and we agree.
    At the same time, today on the floor, there are proposals 
to cut immediately and deeply. I just want to read to you a 
statement from the President's Bipartisan Deficit Commission, 
that we are hearing lots of positive things about, from our 
colleagues, about their recommendations and approach. Here is 
what they said, and I quote, In order to avoid shocking the 
fragile economy, the commission recommends waiting until 2012 
to begin enacting programmatic spending cuts.
    Another bipartisan commission, the Rivlin-Domenici 
Commission, rendered the same advice. Mark Zandi and other 
economists have indicated that deep, immediate cuts, in 
contrast to responsible and planned cuts over a period of time, 
those deep, immediate cuts, could harm the fragile economy, and 
hurt job growth. If you could please comment on the proposals 
today, for very deep and very immediate cuts and the impact 
they would have on the economy and job growth, in your opinion.
    Mr. Lew. Mr. Van Hollen, I think we have a tough balance 
that we have to strike. We agree that it would be a mistake to 
do drastic deficit reduction in this year that we are in, 
beginning in next year. We had bipartisan agreement in December 
on the tax bill, largely because of the concern that we needed 
to keep the economy moving, that we couldn't afford the drag 
that a tax increase in January would have had. At the same 
time, we need to focus on reducing spending, we need to focus 
on making decisions that will turn the corner on the deficit, 
and we can't really wait years to do that.
    I think our budget has a frame that we think is the right 
frame for making the tough trade-offs. And we are going to have 
to work, as we go through the remainder of the legislation for 
fiscal year 2011, and then as we work together on next year, to 
come up with the right balance. I think it is important that we 
have the right balance. You don't need to make the kinds of 
cuts that you are describing in order to get on the right path, 
but you do need to tighten the belt, which is what our budget 
is saying.
    And we are watching carefully as the House continues work. 
We will be working with the House and the Senate, and then 
ultimately together, to do the responsible thing and fund the 
government. But I think it is a question of not mixing too many 
things together. The long-term challenge is what we have got to 
keep our eye on. When I say long-term, in this window of the 
next 10 years, we have got to look to the middle of the decade. 
And are we on a path towards getting down to a deficit where we 
stop adding to the debt? That is what we have tried to do with 
the budget.
    Mr. Van Hollen. Some of our Republican colleagues have 
indicated that, if they don't get their way, in terms of these 
very deep and immediate cuts that could harm the economy, that 
if they don't get their way on those cuts, that they would shut 
down the government. Now, we have seen this movie before, I 
know you have. If you could just make clear what some of the 
impacts of that would be on things like the Social Security 
Administration and other essential functions of government.
    Mr. Lew. Well, I take the Congressional leadership at their 
word, that we all want to avoid a situation like that. It is 
not the right way to run the government, and I think we have a 
broad agreement that we have to keep essential services going. 
When the government shut down in the mid-1990s, it was very 
unpleasant. It was unpleasant when people needed to apply for 
passports because a relative was ill or passed away overseas, 
and they couldn't get a passport. People started to appreciate 
things that they just took for granted, but when the government 
shut down, they stopped.
    I hope we don't get to the point where we have to go 
through that again. And I think if we all work together in a 
bipartisan way to look for the things we can agree on, and take 
some of the things that we can't agree on, and put them off to 
the side, we can accomplish a great deal.
    Chairman Ryan. Thank you, Mr. Van Hollen. I will just 
simply say for the record, it is not our desire to see the 
government shut down, but equally we don't want to rubber-stamp 
these elevated spending levels. We want to see a beginning of a 
down-payment on spending reductions. With that, Mr. Simpson.
    Mr. Simpson. Thank you, Mr. Chairman, and I would just 
reiterate what you just said. It is nobody's desire to shut 
down the government; what we want to do is reduce spending. And 
that is what we are trying to do with the budget that we are 
bringing to the floor. Everybody talks about draconian cuts. 
You have got to remember, this is on top of enormous increases 
that have occurred over the last couple of years, so it is not 
as draconian as a lot of people would like. But I appreciate 
your testimony; I appreciate your hard work on this budget. I 
know it is hard to put together a budget, even if it is one 
that most people, I want to say this respectfully, but most 
people don't take seriously.
    Most people don't think this is ever going to be enacted. 
All the right words are used. I think the Ranking Member said, 
this is a tough-love budget. If this was the tough-love that my 
father had shown me when I was young, I would still be a 
juvenile delinquent. Some people think I still am; I understand 
that.
    I have heard that we have to make tough choices; they are 
going to be necessary. We have to live within our means. Let me 
ask you, this budget, theoretically, goes to balance in, what, 
16 years?
    Mr. Lew. Well, it is going to take a long time to go to 
balance, we first have to stabilize the debt.
    Mr. Simpson. Is there ever a balance projected out there?
    Mr. Lew. To get to balance will require a set of decisions 
that are beyond what anyone is discussing right now.
    Mr. Simpson. Why is no one discussing that?
    Mr. Lew. Well, I will tell you the last time I testified 
before this committee, I presented a balanced budget with a 
surplus. I understand what it takes to get to a balanced 
budget. We have gone through 10 years of a combination of 
things that have driven the deficit up. We have had an economic 
crisis, but we also had decisions to not pay for what we were 
doing. We now have to deal with the results of that, and it is 
not going to be a quick process. I know that I left things in 
pretty good shape 10 years ago, and I look forward to leaving 
things in better shape when I am done this time.
    Mr. Simpson. I do not deny that you did. We have a tendency 
in this committee to sit and look back at certain indicators 
that prove our point of view. All of those don't really matter. 
What matters is where we are today, and where we are going to 
be in the future. And what the American people are saying is, 
get your fiscal house in order. I don't see this getting our 
fiscal house in order. I have noticed that everybody says, Well 
we are going to have $400 billion in cuts and savings in this 
budget, like that is some big deal. Four-hundred billion 
dollars, yeah it is a lot of money, that is over 10 years, 
right?
    Mr. Lew. Yes.
    Mr. Simpson. That is like $40 billion a year. The budget 
this year's proposal is $3.73 trillion? Forty billion in 
savings? Less than one percent, or around one percent in 
savings? This is not tough-love. This is continuing the path we 
are currently on with no future balanced budget ever, in this 
proposal, and the American people are rejecting it, frankly.
    Mr. Lew. Congressman, let me just say a couple things. 
First, we have put what we believe to be a very serious 
proposal, it is comprehensive, forward. We don't think we have 
a monopoly on all knowledge and wisdom; we look forward to 
seeing the ideas that are put forward. And when you put forward 
a budget that reduces the deficit, I am sure there will be 
things in it that we can agree on, there will be things that we 
can't agree on. This is the first step in the process. I know 
that it is easy for pundits on the outside to dismiss the 
starting point, but the President's budget is the starting 
point. It is a frame, it is a comprehensive frame. And I think 
that it does achieve something very important, which is it 
stabilizes the deficit at three percent of GDP by the middle of 
the decade, and while I totally agree that we need to be on a 
path that goes beyond that, and I wish we were on a path where 
we could, together, talk about balance. Until we stop adding to 
the national debt, we can't talk about getting to balance, and 
this budget would get you there.
    We won't agree on all the details. And I know that some of 
the actions that have been taken in this House do cut spending. 
I haven't seen the actions yet that reduce the deficit. And I 
look forward to that. I know that it is the beginning of the 
process, and we will work together when we see your proposals.
    Mr. Simpson. Well we all understand that you are not going 
to get to balance by simply cutting spending. The spending is a 
portion of how you get there. You also have to look at the 
entitlement programs which this budget totally left out, in 
terms of reform of the entitlement programs. And everyone, I 
think the American people understand, that we have to address 
entitlement reform, and leadership has to come from the White 
House to do that, quite frankly.
    Mr. Lew. Congressman, we agree that we need to reduce 
spending. I think if you look in this budget, this is possibly 
the toughest budget that certainly a Democratic President has 
ever put forward, cutting things that are very, very important 
priorities, things that many of us have worked for decades to 
grow. We have said we have got to tighten our belt; we have got 
to do what every American family does and make the tough 
choices. So I think there are real tough choices in this 
budget. I don't think that it is fair to say that we haven't 
dealt with entitlements. We certainly haven't dealt completely 
with entitlements, but $62 billion of savings to pay for 
Medicare in the next two years is something. It is real, it is 
a first step, it is a down-payment.
    I think that if we are going to work together on 
entitlements, we also have to acknowledge that Social Security 
is not driving the deficit between now and 2021. You know, I 
worked on Social Security Reform. In 1983 I was working on the 
reform bill. So I deeply, deeply believe that we have an 
obligation to current workers, to future retirees, to current 
retirees, to have a system that is sound and reliable for 
decades and decades to come. But it is not contributing to the 
short-term deficit. We should do it because it is the right 
thing to do.
    Mr. Simpson. Right. Appreciate it, thank you.
    Chairman Ryan. Ms. Schwartz.
    Ms. Schwartz. Thank you very much. Good to have you here 
and thank you for your good work on this first budget that you 
are presenting. And I appreciate, and it was more in your 
written remarks than what you said here, but you reference, you 
did reference how we got here. And I don't want to dwell on 
this, but I appreciate the fact that you laid out very, very 
clearly that the national debt and the economic crisis that the 
President inherited. And the work that the President and the 
Democratic Congress did in the last two years to bring us out 
of what was obviously a really deep, really broad, and in many 
cases, devastating recession for this country. But being clear 
that the President inherited a $10 trillion debt; this didn't 
all happen in the last two years. And of course, the recession 
actually meant that there were few people paying taxes, too; so 
this reduced our revenues.
    The President's budget really does, I believe, make very 
clear that we can't accept the status quo; that where we have 
gotten to is a better place. We are beginning to see a growth 
in the economy, beginning to see some growth in jobs, which is 
good, and we just can't sit on our hands. Nor do I think that 
we, and I think you have rejected this, the notion that we can 
get to a place where we can balance the budget and grow the 
economy simply by spending cuts. My Republican colleague did 
acknowledge that, and I appreciate that, because that is their 
proposal right now. The only thing we can do is spending cuts, 
and actually tax cuts, but that alone is not going to get us 
there. And that is what is being presented by the Republican 
majority.
    But I also will agree, those made by the Republican side, 
that budgets are about priorities and values, and I think this 
is something that the President has made very clear: that we 
cannot only focus on deficit reduction. We need to reduce the 
deficit, but if we are going to grow the economy, put people 
back to work, then we have to invest in the future. And that is 
what I wanted to ask you about. I wanted to acknowledge, of 
course, that the budget does reduce the deficit by $1.1 
trillion, and that is real money for most of us. And it is not 
easy to get there. And it brings fiscal stability to the nation 
in 2017, primary balance, again none of this is easy.
    But the budget also does make strategic investments in the 
future. For many of us in our districts across the country, if 
we are going to see growth in this economy, the focus on 
energy, on innovation, on education, on infrastructure, is 
important. And every business I talk to says to me, We need, we 
look at, we locate, do we have incentives for innovation? Do we 
have the kind of infrastructure that allows us to move our 
products and our workforce? Is there an educated workforce? 
They ask about taxes, too. But they want to know, and it starts 
with, where is the infrastructure? Where are the advantages for 
innovation?
    And so, I think we need to talk about that. Because 
otherwise we are really just looking at a slash-and-burn, 
willy-nilly, let us just cut spending right now. And again, the 
Budget Deficit Commission said, not a good idea in a fragile 
economy. So I would like you to elaborate a bit on the tax 
credits that are available to businesses to incentivize 
research and development, key to our growth. Because it is the 
private sector in this country that does create the new 
discoveries, the new technologies, the new products. But they 
often look to us for that helping hand.
    Mr. Lew. Thank you. I think that, if you were to ask most 
businesses that are in the high technology area, what is the 
single thing we could do that would give them stability looking 
forward, it would be to make permanent the R&D Tax Credit. The 
uncertainty from year to year is a very difficult way to do 
business. And while, in Washington, there is a kind of 
conventional wisdom that we know it will be extended because it 
has to be extended, if you are a business person trying to make 
a decision, trying to go get financing, trying to get 
investors, having that ambiguity out there can be life or death 
as far as your business is concerned. So I think, putting in 
our budget a permanent extension in the context of a fiscal 
policy that pays for it, is very important.
    I think it is also important to remember that there is a 
role for government-funded programs and tax support in R&D. 
Basic research in this country has really been very much 
enhanced by what we do at the National Institutes of Health, 
what we do in the National Science Foundation, what we do in 
the Department of Energy, and what has made us the leaders in 
innovation is that the technology that is discovered in places 
where, frankly, the risk should be shared by all of us, it is 
then handed off to a private sector that has the capacity to 
implement it more effectively than any other in the world. And 
we have tried to balance that.
    Chairman Ryan. I hate to cut you off, but I just want to 
make sure that every member gets a chance, and it is way over 
the five minute limit.
    Ms. Schwartz. I appreciate your comments; we will keep 
working together on that. Thank you.
    Chairman Ryan. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman, and welcome, 
Director Lew.
    Mr. Lew. Thank you.
    Mr. Campbell. In your budget, you propose to increase 
federal civilian employment outside of the Department of 
Defense by 22,400 people in the coming fiscal year, 2012. 
Seriously, you want to increase the number of federal employees 
now?
    Mr. Lew. Well, we have an awful lot of agencies that are 
going down. The increases are very much concentrated in areas 
where there are new missions, and they are missions that, I 
think, are shared concerns. If we put in place new screening 
procedures at our airports, and we put in the machinery so that 
we can make sure that no one gets on an airplane with an 
explosive. We also need to have the inspectors there, who run 
the machines, who know what is in them. I think if you go 
through the increases, they are very heavily in areas where 
there are new missions that we are undertaking, and I am happy 
to get back to you after and go through some of them.
    Mr. Campbell. Okay, so you do propose to increase by 
22,000?
    Mr. Lew. No, in general, if you look through the budget, 
there are a lot of agencies that go down, so we don't have a 
general approach.
    Mr. Campbell. Twenty-two thousand, four-hundred is the net 
increase outside of defense. Another question, Your 
predecessor, Dr. Orszag, before this committee on several 
occasions, said that the current fiscal trajectory of the 
country was unsustainable. Do you share that view?
    Mr. Lew. I think this budget stands for the principle that 
we have to get our fiscal house in order, and that we have to 
take seriously stopping the practice of treating deficits like 
they don't matter. And we have put a plan forward that would 
get us to primary balance by the middle of the decade. That was 
the challenge that he was describing ahead of us at the time.
    Mr. Campbell. Absent this budget, you agree that the 
current trajectory is unsustainable?
    Mr. Lew. If you look at what is driving the deficit down, 
part of it is getting the economy moving again.
    Mr. Campbell. Director Lew, I understand you are a lawyer, 
but is it unsustainable? That word is used by a lot of people.
    Mr. Lew. I was going to answer your question; I just need 
to break it into the pieces in order to answer your question. 
We need to keep the economy growing in order to not have an 
unsustainable deficit, because the kind of financial crisis we 
are in, the recession, creates enormous problems in our fiscal 
policy. We have got policies in place to do that, but then we 
can't stay at deficits that are five percent of GDP, which is 
roughly where we would be if we didn't make policy. We need to 
make policy to bring it down so we can get to primary balance. 
We have done that, and I do think that that is what we have to 
do to have a sustainable fiscal policy.
    Mr. Campbell. So is this budget sustainable? Does it solve 
the problem?
    Mr. Lew. Those are two different issues. Sustainable is a 
step along the way; I think the problem is bigger than that. I 
think that, you know, I preferred sitting in this seat when I 
could project surpluses in healthy economic times. We are a 
long way from being able to do that on either side of the 
aisle. We are going to need to work together to get to the 
point where we stop adding to the problem, and then we are 
going to need to work together to solve the rest of it.
    Mr. Campbell. Earlier I believe you did use the word 
sustainable with this budget. So do you believe that if we did 
this budget, it was enacted for the next 10 years exactly as it 
is on this paper, that we would move along fine, we don't have 
a debt problem, we don't have a problem?
    Mr. Lew. No, I think this budget produces a deficit that is 
sustainable for a period of time so that we can then work 
together. It is a down payment, and then we need to work 
together.
    Mr. Campbell. Afterwards the deficit goes up, after the 10 
years of this budget.
    Mr. Lew. It starts to creep up, but as you get 20 years out 
it starts to be a problem again. There is more work ahead of 
us. I totally agree with the notion that we cannot just look at 
the next five or ten years, but I am saying we have to start by 
looking at the next five or 10 years.
    Mr. Campbell. So we do have to deal with the entitlement 
programs?
    Mr. Lew. The President said in the State of the Union, and 
in his budget, that we have to look to the short-term and the 
long-term. We need to work together on that.
    Mr. Campbell. Why not propose something now?
    Mr. Lew. Well, this budget proposes a great deal to get us 
to primary balance. It gets us to a place that is sustainable. 
And it extends the offer, as the President did in the State of 
the Union, to work together. We have tried to leave options on 
the table, we have tried to create an environment where we will 
be able to work on things that have historically been 
challenging, and I think we need to do both.
    Chairman Ryan. Mr. Doggett.
    Mr. Doggett. Thank you very much, Mr. Chairman, and thank 
you for your service. And I want to draw attention to the last 
time you came before this committee, because it was an unusual 
time in which you did not just talk about a balanced budget, 
but as you made reference in an earlier comment, you, working 
with President Clinton and this Congress, produced a balanced 
budget, something that no Republican President, before or 
after, has done in decades. And the unfortunate thing is, 
having produced that balanced budget, our Republican colleagues 
in the Bush-Cheney administration, when they took over, instead 
of building on that success, squandered on that success. They 
never met a tax break they didn't like, they believed in the 
alchemy that every expert who came here, Republican and 
Democrat alike, told them that those tax breaks wouldn't pay 
for themselves, they abandoned pay-as-you-go government, they, 
in addition to all the tax breaks that they advanced, they 
advanced one increase in spending after another, increasing 
government spending at an incredible rate, but not wanting to 
pay for it.
    And so after eight years of running our debt up and our 
economy down, they are complaining today that you haven't 
solved all the problems that they created in eight years fast 
enough. And I think that is basically the circumstance in which 
we find ourselves. With reference specifically to this question 
you were just asked about the 22,000 increase in government 
employees, isn't a large part of that related to the honesty 
that this administration brings to federal employment, that you 
can contract out and create the appearance that you are 
reducing the size of the government, but many of these 
contracting out experiments of the last eight years just ended 
up costing tax payers more and producing less?
    Mr. Lew. That is part of it. And the other kinds of 
examples that I have used explain the other part of it. We also 
have a very, very large work force, and this is a very small 
percentage of the total.
    Mr. Doggett. And then I want to ask you about one type of 
entitlement spending that I am encouraged to see, and I want to 
explore with you a minute about it, that the administration 
again seems to be focusing on for the first time, something 
prior administrations have not done; and that is the whole area 
of tax expenditures, because they really do amount to 
entitlements since they are entirely out of the budget process. 
You have, for the first time since 1993, of any President, 
revised that section of your budget, and it would appear that 
tax expenditures, which now rival direct discretionary 
expenditures, will receive some type of thorough evaluation by 
the administration, and I just ask you first to comment 
generally about what you see going forward, and whether perhaps 
we will eventually have a tax expenditure budget to allow a 
more thorough comparison of the tax expenditures and the direct 
expenditures?
    Mr. Lew. Congressman Doggett, the issue of tax expenditures 
is a very important one. If you look at the work the Fiscal 
Commission did, one of the places where I think they made a 
real contribution was in having a conversation about spending 
on both the revenue and direct spending side. If you look at 
the President's budget, the proposal that I described as the 
way we pay for the alternative minimum tax extension is a prime 
example of how we begin to get that spending on the tax side. 
It says that we have a host of provisions in the tax code that 
are of more value as you get into a higher and higher tax 
bracket, and that we should limit it so that someone who has a 
family at 250,000 and above gets the same value as people at 
250,000 and below. It doesn't take the deduction away, it 
starts to trim the value of it. We think that is a measured way 
to start getting at this issue of spending in the tax code. And 
we think it is something that ought to be the basis for being 
able to begin a serious conversation.
    Mr. Doggett. Have you envisioned, during the coming year, a 
thorough and careful evaluation of these tax expenditures, and 
implementing what you say in your budget appendix?
    Mr. Lew. The President has proposed in his State of the 
Union and the budget that we begin to work together on 
corporate tax reform and that we have a general bipartisan 
consensus.
    Mr. Doggett. Just on that point specifically, I am very 
pleased that the President, in his State of the Union, and 
Secretary Geithner indicated that must be revenue neutral. I 
think it actually ought to be revenue increasing to help deal 
with this problem, but that is a non-negotiable position in the 
administration. We are not going to see us borrow from the 
Chinese in order to give tax cuts to corporations, are we?
    Mr. Lew. So the principle the President set forth was that 
we should broaden the base, lower the rates, so we can be more 
competitive, and it is really, principally, a way to drive our 
international competitiveness. That is going to be challenging 
because once we have all agreed on that broad principle, 
broadening the base means that you take away special interest 
tax provisions.
    Chairman Ryan. Thanks. Mr. Calvert.
    Mr. Calvert. Thank you, Mr. Chairman. I just want make a 
point; my friends on the other side of the aisle took over the 
Congress in 2007, and that is when you see significant spending 
increases, and as I understand it, Congress does have something 
to do with spending around here. And that is certainly a big 
part of it. I want to thank our guest for coming out today, I 
understand the traffic was bad, I saw it out there, it was 
pretty difficult. A couple of things you pointed out to drive 
people to investment. I am a small businessman, was a small 
businessman; how do you drive people to investment if you have 
significant increases down the road in capital gains rate?
    Mr. Lew. I think that the responsibility that we have, 
first and foremost, is to keep a healthy, growing economy where 
there is demand and there is business activity out there. So I 
think that, going to our big frame, the most important thing we 
can do to promote investment is to be responsible in the way we 
conduct our fiscal policy. Within that, we have made the kinds 
of choices that we think are where the government can really be 
helpful in terms of driving the economy of the future. When you 
talk to business leaders, in my job I fairly frequently talk to 
business leaders, I hear over and over again where they have 
problems right now is hiring people with the right skills, 
engineering skills, technical skills. By producing the 
workforce that our businesses need, we are helping to promote 
business in this country.
    Mr. Calvert. Reclaiming my time, I find it difficult to 
believe that--the folks that I did business with--finding 
capital gains rates going up significantly is going to make it 
easier for them to do business. But I have another question I 
want to ask. My other job--I am on the Defense Appropriation 
Committee--and I wanted to understand this new account that you 
have to cover the diplomatic and development costs of the U.S. 
involvement in Iraq, and Afghanistan, and Pakistan. As you 
know, in past years that was handled in the regular base-
budget. And I want to know what standards were used to 
determine what costs were appropriate for inclusion in this 
account, and can you send us a written guidance for the account 
for the record?
    Mr. Lew. I am happy to get back for the record, but I can 
give you a brief answer if you would like. The funding for 
military operations overseas are funded through what are called 
overseas contingency operations funding. It has not 
historically been an issue for the civilian side, but with 
things like the withdrawal of troops in Iraq, and the build-up 
of a civilian mission that is quite labor-intensive, security-
intensive, it creates the same challenges that the military 
does. The simple rule that was used in putting it together was, 
to the extent that we have activities that wouldn't carry on 
once we normalize our diplomatic footprint, those should be 
handled in the base. To the extent that we have activities that 
are more like the military surge, they should be in the 
overseas account.
    Mr. Calvert. I would like to have that. Also, the budget 
request, $117 plus billion for Department of Defense's account 
for conduct of the war in Iraq and Afghanistan; and that is 
obviously dependent on U.S. troop level in Iraq and 
Afghanistan, and as you understand, under the SOFA agreement, 
the Status of Forces Agreement, we are reducing the force in 
Iraq at the end of this calendar year, and Afghanistan has 
announced policy to a troop withdrawal in July, 2011, though 
the size of that withdrawal is still yet to be determined. On 
your assumption, what troop level are you assuming for 
Afghanistan and Iraq in this funding request?
    Mr. Lew. In Iraq we have a clearly stated policy to 
withdraw our troops on schedule, and the funding levels reflect 
that policy. In Afghanistan, our policy is that we will begin 
to withdraw troops. We have not used the budget as the place to 
project specific numbers. That will have to be worked through 
by the national security team.
    Mr. Calvert. Okay, yet to be determined. Last question, you 
expect an additional war supplemental to be asked for here in 
the short term?
    Mr. Lew. We have requested funds that we know to be needed 
for the coming fiscal year. We have not yet seen what the 
appropriations are for fiscal year 2011, and we obviously don't 
know what the appropriations will be for fiscal 2012, so I 
can't give you a guarantee, not knowing what will be 
appropriated, but I know we have estimated, to the best of our 
ability, what the costs will be.
    Mr. Calvert. Thank you, Mr. Chairman.
    Chairman Ryan. Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chairman. Mr. Lew, thank you 
for being here today. Now, we have three challenges facing us 
and they need to be all addressed simultaneously. We need to 
reduce the deficit, at the same time we need to grow the 
economy, and create jobs that will keep America competitive. 
Now, as far as I am concerned, the best way to reduce the 
deficit is to get American back to work. But we have tough 
choices to make. The big difference between making sound 
investments and smart cuts, as President Obama has proposed, or 
the path that our Tea Party Republican colleagues are taking on 
the fiscal year 2011 budget with ideology, mean-spirited, or 
just plain dumb, cuts. Now, Mr. Lew, over the past years, 
Congress has provided tax breaks, tax cuts, tax loopholes, and 
special tax perks, estimated to reduce revenues by more than $1 
trillion. In December's legislation to extend the Bush tax 
cuts, some of the beneficiaries of these tax break earmarks 
were NASCAR racetrack owners, Caribbean rum manufacturers, at 
the cost of hundreds of millions of dollars in foregone 
revenues.
    The last point I would like to make before I ask you three 
questions is: The discretionary defense spending over the next 
five years will approach $3 trillion, not including the cost of 
the wars in Iraq and Afghanistan. Yet this budget proposes only 
a $78 billion reduction in defense spending, which is nothing 
more than a rounding error. Now, I know Congress is part of the 
problem. Despite the Pentagon's objections, I am aware the 
Republicans have included an alternative engine for the F-35 
Joint Strike Fighter and the F-11 CR at the cost of $45 
million. Now, this is a total waste of taxpayer dollars, and an 
example of Congressional pork, and it should be eliminated.
    So, Mr. Lew my questions are; the defense discretionary 
spending is dwarfing all other domestic investments, keeping 
our community safe, and strong, and prospering. Where can 
greater defense spending reductions take place over the next 
decade? Can you also elaborate on the administration's plan to 
close tax loopholes, and end special tax perks, and cut off the 
special interest tax giveaways that are adding hundreds of 
billions of dollars to the deficit. And then, if you have time, 
could you explain more on some of the President's ideas on how 
to grow this economy and create jobs?
    Mr. Lew. Thank you, Congresswoman McCollum. Let me start on 
Department of Defense. We, I think, share on a bipartisan basis 
the belief that we have a core responsibility to provide for 
national defense. Over the last 10 years, the spending on 
defense has been considerably above inflation, and it wasn't 
subject to the same kind of rigor that other things were, and 
we were also going through extraordinary times.
    This is not a judgment being made about the past, but as we 
look to the future, this budget says that we have to start 
pulling back, but not pulling back in a way that sacrifices our 
national security. The policy in this budget says that the 
Department of Defense will tamp down its increases so that it 
will have no real growth in the five-year window. That is $78 
billion of savings compared to their five year plan for the 
last year's budget. We think that is a very important step.
    It is an important step which requires tough choices. It 
means you can't afford the second engine that you don't need 
for the Joint Strike Fighter, it means you can't afford the 
Marine Expeditionary Vehicle. There are tough decisions that 
have to be made, and I think we have a Secretary of Defense and 
a leadership in our military, that is prepared to make the 
tough choices, and we look forward to working with Congress. 
But they are hard--it means that there are things that are made 
now that won't be made in the future, and that is what it is 
going to take to start getting our defense budget under 
control.
    On the question of closing loopholes, the President's 
budget includes a number of specific proposals, I mentioned the 
oil, gas, and coal provisions in my opening remarks, but we 
also have provisions that would take away the tax benefits that 
come to companies that export jobs, and we think that it is 
important to have policies in our tax code be designed to 
reflect what we need to do in our economy. So, in our economy, 
for the future, we need to develop the new renewable energy 
technology industry. That is going to create jobs in the 
future. I am kind of getting to your third question by 
answering the second within the five minutes. Ware going to 
build the new economy in renewables and in clean energy, and 
that is where we need to put our investment. So if you look at 
the withdrawal of a special provision for oil, gas, and coal, 
and the investment in new technologies, it kind of tells a 
story about how we think you invest in the future.
    Chairman Ryan. Mr. Akin.
    Mr. Akin. Thank you, Mr. Chairman. Just a couple of 
thoughts. Years ago, I was taught what was called the Harvard 
Case Study Approach to solving problems, and it was taught in 
business schools, and the idea was that you are given this 
complicated situation, and you could see all sorts of things 
that would be a good thing to do, and you got this-this-and-
this, you have all these good ideas, but part of the discipline 
was, pick the number one thing. What is the very first and 
essential element that you have got to deal with? And that was 
frequently the situation then that would determine whether a 
company was going to succeed or fail.
    As I take a look at many of the things we have discussed 
even here this morning, and that you are dealing with in the 
budget, we are dealing with, to some degree, some peripheral 
things, but it seems like there has been pretty good emphasis 
that the elephant in the room is the tremendous growth of 
entitlements. I just heard references to the fact that maybe 
the defense budget is really the bugaboo here.
    But if you take a look at defense as a percent of GDP, 
going back to maybe 67 or so, you are looking at close to nine 
percent of GDP being spent on defense, it is now dropped to 
four-something. And one of the few people on this committee 
sitting on armed services; we talk about, Well, we are going to 
cut this Expeditionary Fighting Vehicle for the Marines. The 
only problem is, if you really believe in Marines, you have got 
to get them from the ocean to the shore. So, I am not so sure 
that you have already cut the percent of GDP for defense not 
quite in half, and in the meantime entitlements have gone from 
about 2.5 percent, if you go beyond Medicare, Medicaid, Social 
Security, to the other entitlements, you are well up at 
whatever it is, 12 percent. And you put entitlement and debt 
service together, and all of a sudden, voila, that is what our 
revenue is.
    So it seems to me that the elephant in the room is the 
entitlements, and courageous leadership is going to acknowledge 
that fact and say, Okay, now let us have the conversation, and 
talk about what we are going to do with those. Because all of 
us know we are talking about some heavy cuts in discretionary, 
but that is just the tip of the iceberg. So I guess it is 
disappointing not to say, Hey, let us at least make this the 
main subject the main subject. The second thing that I don't 
quite understand is the idea that we are somehow going to shock 
the fragile recovery by cutting discretionary income. I guess 
that is assuming that that discretionary income, by spending 
all that money, it helps the economy. If you could enlighten me 
on that line of reasoning, because I don't understand that.
    Mr. Lew. Thank you, Congressman. I have a soft-spot for 
those business school case studies; I paid my way through 
college by working on producing those case studies, so they 
have played an important part in my life. The first thing I 
would do, looking at a university class on how do you solve the 
problem, is say, Where do we need to be on the bottom line? And 
bottom line is we need to have a three percent of GDP deficit 
in order to say we are not adding to the debt. Then I would 
ask, What are you doing to get there? And we have put forward a 
plan that gets there. And then, I would say, you separate the 
question of what do you need to do for the long term. And that 
is exactly what we have done in this budget.
    So, I think we are dealing with the short-term and the 
medium-term, we are saying in a very direct way that we need to 
work together on the long-term, and we are trying to leave as 
much open for discussion so there is an environment where we 
can actually reach agreement. The easiest thing to do is kind 
of polarize the environment. We are deliberately leaving room 
for that conversation.
    Mr. Akin. Let me just jump in. In order to come up with the 
numbers that you have come up with, some of the assumptions 
strike me as being a little odd. For instance, some of my 
Democrat colleagues have talked about how, when President Bush 
took office, everything was rosy and perfect, but I recall 
there was quite a recession going in 2000, 2001. I do remember 
the numbers in May, 2003 we did three unpopular tax cuts, 
capital gains, dividends, and death tax. They weren't popular 
because we were tarred-and-feathered as sticking up for the 
rich guy. But the trouble was it was those rich guys that owned 
the businesses that hired people. And if you destroy the 
businesses by overtaxing the owners of small business, then you 
don't have any jobs.
    So, I took a look at those numbers after capital gains, 
dividends, and death tax, and what we saw was that first of all 
the GDP jumped, and it had the kind of growth that you want to 
make the budget numbers work, but we did it by cutting those 
taxes on the small business and the investors. We also saw that 
the employment turned right around. We went from un-employing a 
lot of people to jobs being created. And last of all, according 
to just what Laffer predicted, the government revenues actually 
jumped up when we cut the taxes, because of the fact that the 
economy got back going. So I don't understand how you make it 
work with growth and still raising taxes.
    Mr. Lew. I would love to respond but I suspect from the 
tapping I don't have time.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman. Thank you for your 
service.
    Mr. Lew. Thank you, Congressman.
    Mr. Pascrell. I find it remarkable, and I say this with 
fondness, Mr. Chairman, I am glad you smiled. I say this with 
fondness. You have become an existential party. You have 
amnesia about how the past and how we got to this place, and 
you don't want us to invest in the future. We are stuck with 
the here and now. I don't think we are stuck. I think this is a 
pretty credible blueprint. And it is not going to be like this 
when we finish, but it is a credible blueprint to begin with. 
There is a simple juxtaposition going on here. The President's 
budget, correct me if I am wrong Mr. Lew, the President's 
budget achieves substantial deficit reductions, and achieves a 
sustainable debt of three percent of the GDP by 2015. Is that 
correct, or incorrect?
    Mr. Lew. I would only correct you that it is the deficit.
    Mr. Pascrell. I am sorry. A sustainable deficit; that is 
what I meant to say. Second question is, isn't it true that in 
this President's budget, there is $5 billion in small business 
tax cuts for 2012, and if you add up the 10 years there is $116 
billion in real tax cuts for small businesses. Is that correct?
    Mr. Lew. There are substantial incentives for small 
business. They do add up to a number like that. I don't have 
the exact number in front of me. I assume you have the correct 
number.
    Mr. Pascrell. Okay. Here is my second question then, some 
of my colleagues, who I admire, and respect, and that is 
nothing to smile about, I mean it. I don't have to agree with 
them, right? Some of my colleagues criticized the President's 
budget that it does not cut entitlement programs like Medicare. 
In fact, Mr. Chairman and I went outside for water, and the 
President was providing us with his address at 11 a.m. about 
the budget, and that was his first question. Why didn't you 
show leadership,--I think those were your words yesterday--Why 
didn't you show leadership in going after Medicare and Social 
Security?
    We know Social Security has very little to do with the 
deficit. We would agree with that, correct? I personally 
believe we can balance the deficit without cutting Medicare for 
seniors. That is my own personal belief. You could do other 
things. However, is it not true, Mr. Lew, that federal health 
care reform adopted many recommendations from Congress own 
independent advisory commission, the Medicare Payment Advisory 
Commission, we established that, did we not?
    Mr. Lew. Correct.
    Mr. Pascrell. And that by having a Medicare Center for 
Innovation, Medicare now can test and use new payment models. 
We fought to have that in there for a very specific reason, to 
not only improve patient care, but lower our national spending 
on health care. Would you just respond to that, please?
    Mr. Lew. Congressman, I think there are many, many things 
that we have done in the last couple years that are very 
important in health care. We have real savings in the 10 years, 
bigger savings beyond that, and we have put in place mechanisms 
like the ones you have described, which give us the ability to 
get the best practices, which are the way we are going to 
reduce spending overall going forward. A lot of those things 
don't score easily, because there is a question about when they 
will have results. We believe that they will have results, and 
we have to stay on the course of implementing it that we make 
sure we get the benefit.
    Mr. Pascrell. And many of those were not even scored.
    Mr. Lew. Correct. That doesn't mean they are not real. It 
just means you first have to demonstrate it.
    Mr. Pascrell. Why should we be paying for police to patrol 
the streets of Kabul and Baghdad? Why is that exempt when we 
say defense appropriations? Why is that exempt, but not cops on 
the beat in Patterson, New Jersey, or Camden, New Jersey, or 
anywhere? Why?
    Mr. Lew. I want to start by saying that we provide funding 
to make sure we can keep cops on the street in Camden, New 
Jersey, as well. So we don't believe that the choice is you 
either do one or the other. One of the things we have tried to 
do is preserve funding for the cops program. I think he short 
answer to the question of why we should be supporting the 
training of the police in Afghanistan, is that in order for us 
to get to the point where we can withdraw American troops, 
Afghanistan is going to need to have the ability to protect 
itself so that we are not put at risk, and that is part of our 
plan.
    Mr. Pascrell. I was talking about the security in our own 
country. Thank you, Mr. Chairman.
    Chairman Ryan. A lot of our problem here is we have 
witnesses in high demand. I want to make sure every member gets 
his chance, so I ask unanimous consent that we reduce our four 
minutes each, so that we can make sure that we can accommodate 
everybody and still allow Mr. Lew his chance to go over to the 
Senate to testify. Without objection. Mr. Cole.
    Mr. Cole. Well, I was going to object, because it was my 
time. My friend Mr. Price and I think we either need to get 
taller or you guys in the front row need to get a lot shorter, 
it is very hard to see you there.
    Mr. Lew. This has actually changed since the last time I 
was here. I find myself leaning forward a lot more.
    Mr. Cole. But since my time is short, I have got three 
areas I would like to ask you about. The first is, just looking 
at your budget; you basically keep 80 percent of the Bush tax 
cuts for about 95 percent of the people that received them. 
Does that suggest, one, that you don't think those went to the 
rich particularly, and two, that you see them as having been, 
and continuing to be, beneficial to the economy?
    Mr. Lew. You know, we believe that the tax cuts for the 
middle class are a good thing, and there was too high a tax 
rate burden, and we should continue to do what we can to 
minimize the tax burden on the middle class. One thing I would 
just point out is that we don't take the benefits of those tax 
breaks away from anyone; even if they are above 250,000, we 
just say there shouldn't be additional tax breaks.
    Mr. Cole. No, I understand that, and again, I applaud the 
President for embracing, literally 80 percent of the Bush tax 
cuts, something that seems to be forgotten around here 
sometimes. We can disagree about 20 percent, but 80 percent we 
actually do agree on. Second question, and this gets maybe to 
your philosophy, the administration's philosophy, in your 
deficit reduction plan over several years, you have some tax 
increases, you have some spending restraints. Roughly, what is 
the balance that you strike between tax increases and spending 
cuts or restraints?
    Mr. Lew. Well, I apologize that it is a little bit of a 
complicated answer, just because baselines make how you measure 
complicated, and I want to be clear. We start with a baseline 
that assumes that the tax rate in the top bracket stays where 
it will be when the provisions enacted last December expire. 
From that baseline, we have net $360 billion of additional 
revenue. But I say net because we have $392 billion of tax 
cuts, so after you pay for the tax cuts, net $360 billion of 
new revenues.
    Mr. Cole. And how much in spending restraint?
    Mr. Lew. We have $751 billion in mandatory and non-security 
discretionary savings, and we do count debt service as spending 
because we have to pay for debt service.
    Mr. Cole. Obviously we would probably disagree over whether 
letting those tax cuts run out amounts to a tax increase or 
not, but let me put that aside. Let me get to the last point I 
wanted to ask you about and this really does get down to, 
actually, some questions my friend Mr. Akin raised. Look, we 
all know entitlement spending is going to be a major focus.
    As an appropriator I will be thrilled the day we finally 
move to tax expenditures and entitlement expenditures, because 
that is where the problem is. But since you have expressed a 
lot of the President wants to do this, doesn't want to take 
options off the table. I am like everybody else, I am really 
disappointed we haven't seen more, at this point, but can you 
tell me when that discussion would begin, is the President 
going to propose a format in which it would take place, does he 
think he should lead with a proposal of his own, or wait for 
Congress to put one on? I am sort of mystified about how we get 
to the elephant in the room that Mr. Akin was talking about.
    Mr. Lew. The President has put quite a lot on the table in 
the budget that we presented yesterday, and it is the first 
step in the process. We have a lot of work to do together, both 
in terms of finishing the work on 2011, getting to work on 
2012. I have to tell you from my own personal experience, 
having watched and been part of the deficit reduction efforts 
in the late 70s, 80s, 90s, when we have had real success in a 
bipartisan basis, it is come from people working together 
behind the scenes and in an environment where there could be 
the kinds of open conversations where there is trust. And I 
think if we concentrate on developing that kind of a 
conversation, we will again produce the best results for the 
American people.
    Mr. Cole. Thank you gentlemen. Thank you, Mr. Chairman.
    Chairman Ryan. Ms. Castor.
    Ms. Castor. Thank you, Mr. Chairman. Welcome. I would like 
to show you a chart, here.


    I understand you were the head of Office of Management and 
Budget in the last few years of the Clinton administration, 
where there were burgeoning debts and growing deficits, but at 
the end of the Clinton administration, is it true that you left 
when we had a projected 10 year surplus of $5.6 trillion?
    Mr. Lew. I would just correct that I was director of Office 
of Management and Budget three years in a row when we had 
surpluses. We didn't have deficits, we had surpluses. We were 
paying down the debt, so that is what that chart says.
    Ms. Castor. I stand corrected. And then when President 
Obama took office, we were facing an $8 trillion, 10-year 
deficit. It must be entirely frustrating to you, it must have 
been frustrating, during that eight year period, to watch what 
happened to the surpluses left at the end of the Clinton 
administration.
    Mr. Lew. I don't exaggerate when I say it breaks my heart. 
I think that you look at what drove the deficit up, some of it 
was beyond our control, in terms of the economy. When there is 
a recession, there is a loss of revenue and there is certain 
spending that you have. Some of it was because of wars, which 
you don't necessarily choose, but if you go to war, that is an 
extraordinary circumstance. Some of it was because we just 
suspended the basic common sense of paying for what we did. And 
we had tax cuts and spending increases that weren't paid for, 
and that is what has created the long-term problem we are 
dealing with now. These other things correct themselves; the 
economy is recovering, and we are going to see revenues and 
spending get back to their more normal levels. The wars will 
come to an end; we are pulling our troops home from Iraq. The 
other creates a problem that we have to deal with.
    Ms. Castor. And that is why I am grateful that you have 
taken on this new challenge. We all agree, the government has 
got to live within its means. But we must remain mindful that 
we are coming out of the most severe recession in our 
lifetimes, and we have got to build on the economic foundation 
for the future, and that is why I am particularly focused on 
job creation, and jobs, and our workforce. My district is home 
to one of the largest universities in the country, and a lot of 
community colleges, and private universities, and I am 100 
percent behind you on what this budget does to maintain the 
maximum Pell grant for students. It remains at $5,550 for 
students. You all know that the Pell Grant helps over nine 
million students across America afford college.
    Now, over the last couple of days there is been a lot of 
confusion in the press, however, over what is happening with 
the Pell grant. It appears President Obama maintains the 
maximum Pell grant, at $5,550 for 2012, for students, and you 
pay for it by cutting the relatively new year-round Pell grant 
that allowed some students to qualify for two Pell grants. I 
wasn't aware that they could do that.
    Are you also aware that in contrast to what the President's 
budget is trying to do, right now on the floor of the House, 
the Republican continuing resolution has proposed cuts in the 
Pell grant by $845 per student for 2011? I think that is moving 
in the wrong direction when we want to ensure that we have the 
most competitive workforce across the globe. So could you 
explain your budget and why you viewed this as a priority, and 
your view of the Republican efforts to diminish support for 
students, and how it will hurt our national goal of supporting 
an educated workforce that can out-compete others?
    Chairman Ryan. And I ask you to explain that in six 
seconds, otherwise give the rest in writing, please.
    Mr. Lew. We think Pell grants are an enormously important 
program. We have taken the tough steps in this budget to pay 
for it, and when you look at where some of the increases in 
spending since 2008 and now are, Pell grants is one of the 
biggest, and we think it is one of the best investments we can 
make in our future.
    Chairman Ryan. All members, if you ask your question at the 
end of your time allotted, you are taking away from our fellow 
colleague. So that is why I am being judicious with the gavel, 
here, so everybody gets a chance. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. Director Lew, thanks so 
much for joining us. Some of our friends on the other side of 
the aisle, one of them said on our side there is an amnesia 
about the past. So I want to visit a little bit of the amnesia 
that goes around to the other side. You said that the last time 
you were before this committee it was a good time because you 
had produced a balanced budget. What party was in control of 
the House of Representatives at that time?
    Mr. Lew. I am proud to say we worked on a bipartisan, 
balanced budget agreement.
    Mr. Price. But the answer to that would be Democrat or 
Republican?
    Mr. Lew. We worked with Republican leadership.
    Mr. Price. Republican leaders. Thank you very much.
    Mr. Lew. The Republicans and Democrats in Congress.
    Mr. Price. Can you tell me, Director Lew, what the debt was 
in this country at the end of 2006?
    Mr. Lew. I would have to look that number up. I have a lot 
of numbers in my head, I don't have that number in my head.
    Mr. Price. If I told you that the debt at the end of 2006 
when the Republicans ended their control of Congress--the House 
of Representatives--was $8.4 trillion. Would you say that was 
about right?
    Mr. Lew. When we took office it was approaching $10 
trillion.
    Mr. Price. When Speaker Pelosi began her reign would be 
about right in 2007, correct? And the debt right now, Director 
Lew?
    Mr. Lew. The debt right now, I can look that up.
    Mr. Price. About $14 trillion?
    Mr. Lew. $14 trillion.
    Mr. Price. Somewhere in that range. So about $6 trillion in 
the last four years under Democrat leadership in the House, is 
that correct?
    Mr. Lew. You know, I think that one can go through these 
numbers, and we can look it up in the book, and we can 
establish what the numbers are. I think one has to understand 
what was going on in these periods.
    Mr. Price. Absolutely.
    Mr. Lew. We were going through the worst economic 
conditions since the Great Depression.
    Mr. Price. I will reclaim my time Director, I am sorry. I 
only get four minutes. And as the elephant in the room has been 
discussed, it is a remarkable, remarkable display that we 
believe has come out of the administration. When I was a kid we 
used to play kickball in the street or in the backyard, and 
when we turned around and headed to our house, we knew that the 
house was going to be there. The house is burning down, Mr. 
Director.
    And the fact of the matter is that the administration is 
playing kickball and not attending to the work that needs to be 
done. To put a budget before the American people that doesn't 
address the entitlement issues is reckless and irresponsible. 
And you talk about, To get to balance, a set of decisions needs 
to be discussed, that no one is discussing right now. But I 
will tell you who is discussing them, Mr. Director, and that is 
our constituents. They are scared to death. And they don't see 
any leadership coming out of this administration as it relates 
to the entitlements. When does that discussion begin?
    Mr. Lew. You know, Congressman, if you look at what was 
going on during the period.
    Mr. Price. When, Mr. Director, when does that discussion 
begin?
    Mr. Lew. I am happy to answer that discussion if you give 
me a moment.
    Mr. Price. I have got four minutes and the fact of the 
matter is that you are not answering the question, and you 
haven't answered the question.
    Mr. Lew. The President has put down a budget that we think 
takes the first, and very important, step of showing how we get 
to a sustainable deficit by the middle of the decade. That is 
an important step. And the President has also said that we need 
to work together on a bipartisan basis to do what we need to do 
in the long term, and I think we can't confuse the two issues.
    Mr. Price. Does this budget deal with the entitlements that 
[inaudible].
    Mr. Lew. This budget begins to, but those entitlement 
issues did not cause the increases that you have just 
described. The worst economic recession since the Great 
Depression drove those numbers. We need to get the economy 
moving, and we need to take the steps that we have put forward 
in this budget and then more, on a bipartisan basis, working 
together.
    Mr. Price. We look forward to that. As you well know, and 
as you have stated here, this budget does not deal with the 
entitlement issues. I want to turn my attention very quickly to 
the tax issues. The assumptions under this budget assume that 
the tax increases will occur for those making more than 
$250,000 in two years; is that correct?
    Mr. Lew. It assumes that the tax rates that are in current 
law will remain in effect.
    Mr. Price. So that a tax increase for small businesses 
occurs within this budget window, is that correct?
    Mr. Lew. It means that individuals, families that earn over 
$250,000 a year will pay the same taxes that they did during 
the end of the 1990s when the economy was growing at the 
fastest rate.
    Mr. Price. And the amount of tax increase in this budget is 
about $1.6 trillion, is that correct?
    Mr. Lew. Again, it gets to this question of measurement. I 
have tried to be very clear that there is a portion that we are 
not taking credit for because it is in the baseline, and I am 
happy to work through those numbers.
    Chairman Ryan. Thank you, we already established the 1.6 
number. Mr. Tonko.
    Mr. Tonko. Thank you, Mr. Chair. Director Lew, thank you 
for joining today.
    Ms. Moore. Mr. Chair, excuse me. What happened to me? I 
just want to know.
    Chairman Ryan. Ms. Moore, as you know, the rule is in the 
order in which you show up, so we have Tonko, Bass, Moore, 
Wasserman Schultz, Ryan, and Blumenauer on your side of the 
aisle.
    Ms. Moore. Okay, I just wanted to make sure I hadn't 
disappeared.
    Chairman Ryan. No, you are still there, Gwen.
    Ms. Moore. Okay, got you.
    Mr. Tonko. Thank you for providing insight on the 
President's proposed budget. Also, I am aware that you are a 
fellow New Yorker. Last month, members of the New York 
delegation in the House, myself included, wrote to you about 
extending the Federal-State Health Reform Partnership. As you 
know, this innovative partnership between New York and the 
federal government has led to significant modernizations and 
improvements for several hospitals and health systems. 
Established by former Governor Pataki and Secretary Leavitt to 
improve New York's outdated health care system, the funds have 
been allocated already, but not all the projects that have been 
authorized by the agreement have been finished. The New York 
delegation also wrote to urge you and Secretary Sebelius to 
extend the waiver for three years, and my concern is that be 
agreed to here. It is a common-sense thing to do, and do you 
know if the Office of Management and Budget extends the waiver 
before it expires late this year?
    Mr. Lew. Congressman, I know it is under review. There are 
actually two waivers that are under review. I have been at the 
Office of Management and Budget for eight weeks, it is one of 
the things that I have actually looked at; it hasn't come to me 
for a decision yet, we will continue to work with the state as 
we review it.
    Mr. Tonko. Great. We look forward to working with you on 
that. And also, the President's budget, I am very concerned 
about the investment in R&D and basic research, and happy to 
note that the President's budget proposes to invest some $148 
billion in R&D, in energy efficiency, and key basic research, 
contrasted with the Republican spending plan that would slash 
R&D. The President's budget also proposes robust investments in 
the National Institutes of Health, where doctors and scientists 
work to cure cancer, heart disease, and diabetes. Alzheimer's 
and other diseases that together claim the lives of millions of 
Americans every year are also impacted by that budgeting. The 
GOP spending plan on the floor today cuts the National 
Institutes of Health budget by about a billion, and medical 
research has proven to extend life expectancy, for instance, 
from 50 years in 1911 to nearly 80 years now in 2011. Can you 
explain the approach taken with R&D and research, basic 
research in the President's plan? Some call it spending, others 
reference it as investing.
    Mr. Lew. I am happy to. We have taken a very close look at 
the R&D budget and we have looked kind of beyond some of the 
traditional boundaries. There has been a broad consensus that 
biomedical research is important. We agree with that. We have 
an increase in biomedical research. But we have looked at areas 
like energy research, and we have put significant resources 
into developing the technologies that will make us the most 
competitive country with the technologies of the future. We 
have put money into basic research. I think that we have to 
have a comprehensive research agenda in order for us to be in a 
place where, as the President says, we can out-innovate other 
countries.
    It has been an area, historically, of enormous strength in 
the United States. Even today, we spend more as a country, 
public and private combined, on research than any other country 
in the world. There are certain aspects of it which don't 
happen in the private sector alone, because there is too much 
risk, too many experiments and things that aren't going to 
become commercially viable, but you need to go through that 
process in order to get the material, the knowledge, out there. 
And I think we have had a history of very effective partnership 
in this country of transferring research from government-funded 
research to private-sector development, and we have tried to 
put together a budget that will continue what we think is the 
best of the American tradition.
    Chairman Ryan. Thank you. Mr. McClintock.
    Mr. McClintock. Mr. Lew, welcome. I want to join Ms. Castor 
and others for complimenting you on the job you did under the 
Clinton administration. You guys did an absolutely magnificent 
job managing the nation's fiscal affairs. You cut spending by a 
miraculous 4 percent of GDP during your years; historic reform 
of entitlements ending welfare as we know it; what amounted to 
the biggest capital-gains tax cut in American history; four 
years of budget surpluses. It is true it was a Republican 
Congress, but give credit where credit is due. You guys did a 
great job. But I look at this budget, and it seems to be 
exactly the opposite.
    Mr. Lew. I wanted to just say thank you.
    Mr. McClintock. No, with all sincerity, thank you. It was a 
great job. But I look at this budget and it is exactly the 
opposite: record increases in spending, biggest peacetime 
deficit in American history, no effort to address entitlements, 
which have grown significantly more challenging over the last 
several years. Wouldn't you call this the anti-Clinton budget?
    Mr. Lew. No, Congressman. I am very proud of the work I did 
in the Clinton administration and I would point out that one of 
the reasons that spending was falling as a percentage of GDP is 
the economy was growing so fast because we had a good fiscal 
policy that promoted confidence and economic growth. I think if 
you look at the projections today, spending now and in the 
future, we are projecting the retirement of the baby boom. We 
are seeing more people become 65 and claiming their benefits.
    Mr. McClintock. Actually, that is my very next question. I 
want to get to your long-range projection.
    Mr. Lew. And I think that it is part of the reality of 
projections that even if we cut spending in the policies that 
we are making, as we pay the benefits that people are due, 
there will be areas of the budget where spending goes up. I 
don't think any of us would want to be saying that people 
shouldn't be able to collect their Social Security benefits 
when they are 65, but that and Medicare for people retiring is 
really driving those aggregate spending levels. On the 
discretionary side, we are cutting spending.
    Mr. McClintock. Exactly right, which is why we are all 
baffled that you haven't tackled entitlements that are driving 
our long-range projections right off a cliff. But speaking of 
those long-range projections, I look at the claims that you are 
reducing the deficit in the long-term. You know, we have enough 
trouble projecting 10 quarters into the future without 
projecting 10 years, but I look at what you are doing here and 
you take the current year's war-funding level of $165 billion 
this year, pay for operations in Iraq and Afghanistan, 
including the surge, you then take this level and project it 
out for 10 years and this represents your current policy 
baseline. You then assume a policy or placeholder $50 billion 
for the war from 2013 to 2021, and then you count the lower 
funding in your budget relative to this current policy baseline 
as a $1.1 trillion spending cut over 10 years. You take the 
related debt service, that is another $1.3 trillion. Are you 
guys really planning to stay in Iraq at current levels and to 
continue the surge for the next 10 years? It has either a yes 
or no question. Yes or no?
    Mr. Lew. No, the budget reflects our withdrawal from Iraq.
    Mr. McClintock. And you are claiming that as savings. You 
take a baseline assuming of $165 billion a year, including the 
surge, and then you count everything below that as savings. 
Well we are planning to do that anyway.
    Mr. Lew. I am happy to respond. We are almost out of time. 
The overseas contingency operation account is something that 
really solved a problem that the Obama administration 
inherited, which was there was no orderly way to fund war 
operations, and supplemental appropriations were very much in 
disrepute as being a way of not having honest budgeting.
    Mr. McClintock. In the five seconds I have got left, that 
is an intellectually dishonest way of presenting the budget, 
particularly when the other part is $819 billion of tax 
increases.
    Mr. Lew. That is an important issue, and I would love to be 
able to respond in more detail on it.
    Chairman Ryan. How about in writing, because I would love 
to hear the answer to that one too. Ms. Bass.
    Ms. Bass. Thank you. Director Lew, thank you for your 
testimony.
    Mr. Lew. Thank you.
    Ms. Bass. You and the President should be commended for 
crafting a $1.1 trillion deficit-cutting budget that strikes 
the right balance, frankly, between spending reductions and 
targeted investments in infrastructure, innovation, and 
education. Prior to Congress, I served in the California 
Legislature where we had to make tough choices, such as 
eliminating Pell Grants for summer school to sustain the 
maximum award for all eligible students.
    Having said that, I do want to take a moment to draw 
attention to the choices made in the continuing resolution that 
will be debated this week. Not only does the spending plan make 
devastating cuts to critical programs that families depend on 
to get back on their feet, but the continuing resolution would 
result in lost jobs of 1,300 police officers, 2,400 
firefighters, and 16,000 private-sector construction jobs from 
cutting $1.7 billion from the federal building fund.
    The most promising new source of economic growth and job 
creation is in our public infrastructure system, from roads and 
bridges to broadband and air-traffic control systems to a new 
energy grid. I am pleased to see that the budget invests in 
these key areas that will spur job creation, and based on this, 
what do you believe are the potential numbers of jobs that 
would be created by what you and the President are proposing?
    Mr. Lew. Congressman, I thank you. I can't give you a 
specific job forecast. I think we have all learned that there 
is uncertainty in the projections when you get to a pinpoint 
number. I think what we know is that when you build roads, when 
you build ports, when you build the infrastructure we need to 
be competitive in the future, it puts men and women to work on 
those projects in real time. And in our Surface Transportation 
Reauthorization Proposal, we do propose that $50 billion be 
done at the beginning to get a head start and to get people to 
work. I would be happy to get back to you with some notions of 
what that means in terms of specific jobs, but it is clearly a 
lot of jobs.
    Ms. Bass. I would appreciate that, even if you could give 
us a range. If you could get back to me, I would appreciate 
that. Second question, with the cuts that are taken in the 
defense part of the budget, I do believe that we can find 
additional savings. I wanted to ask you, for example, as I 
understand it, there is nearly 270 bases in Germany, 65 years 
after World War II ended. And I wanted to know if the 
administration has conducted a savings estimate on closing 
these bases that probably no longer serve a strategic value, 
and if some of them do, I would question whether over 200 do.
    Mr. Lew. You know, I think that these are the kinds of 
questions the Department of Defense needs to ask, not just 
about Europe but about its operations everywhere. What do we 
need for our current and future defense, what could we live 
without? I don't want to prejudge the answers to any of those 
questions, but I think that by putting in this budget the first 
step to bringing the Department of Defense back into the normal 
budget tradeoffs, where we are saying no real growth. That is a 
cut, in terms of what you can buy; it means you have to start 
doing less things. That is a step in the direction of asking a 
lot of very hard questions.
    Ms. Bass. Thank you, and then just finally I wanted to 
thank you for your comments earlier, especially about the R&D 
credit. Being in California and the Silicon Valley, we hear 
that all the time from the tech community, the need for that to 
be long-term so that they can do the planning. So thank you 
very much for your time.
    Mr. Lew. Thank you.
    Chairman Ryan. Mr. Chaffetz.
    Mr. Chaffetz. Thank you, Mr. Chairman. Director, thank you 
for being here and your good work. I do appreciate it, the work 
you have done in the past. But what I have a problem with is 
this budget. It was suggested earlier that budgets reflect the 
priorities and values of those that present them, and I think 
in this case it is true. I think it is very true, that this is 
a case that is being made by the administration. They want big 
government, more government, the bottom line is this doubles 
the debt in 10 years, and that it is fiscally irresponsible. 
You know, the decisions we make in Congress are all about what 
kind of money we are going to pull out of people's pockets and 
give to somebody else. I find it reprehensible that we continue 
to talk about investments and other things when we are pulling 
money from people's pockets to try to give it to somebody else. 
The most important thing we can do is allow money to stay in 
their own pockets. It is the American people's money, it is not 
Congress money, it is not the White House's money.
    I want to get very specific at some of the things you said. 
This budget is a down payment was one of the things I heard, a 
quote from you, I believe, yesterday. This is a down payment on 
mortgaging our future, and it exacerbates the problem. It 
doesn't actually solve it.
    I want to talk about part of your testimony on page six. It 
says, quote, To stay on a path towards sustainable deficits. 
Sustainable deficits seems like an oxymoron to me. We are on a 
trajectory where we can't afford anything. We are paying $600 
million a day just in interest. I would appreciate, at a future 
date, to please try to define for us sustainable deficits, 
because I think to the average American, to me, it does not 
make sense. We have no sustainable deficits.
    To further go on with that quote, you say, On the order of 
three percent of GDP, we make tough choices across all areas of 
the budget to identify more than $1 trillion in savings, two-
thirds from spending reductions. Where does that other third 
come from? As I understand it, it is from tax increases, is it 
not?
    Mr. Lew. I am happy to answer all the questions you just 
asked.
    Mr. Chaffetz. Just this last one, please. I know our time 
is short.
    Mr. Lew. The net savings come from a number of provisions, 
but a lot of it comes from the provision that would pay for the 
alternative-minimum tax, which would reduce the value of tax 
deductions for families with $250,000 and above.
    Mr. Chaffetz. And a significant portion does come from tax 
increases, correct?
    Mr. Lew. Well, one-third.
    Mr. Chaffetz. A third is coming from tax increases. You 
have a statement in here about federal civilian employee pay 
freeze. I find this to be terribly disingenuous. The reality 
is, when Barack Obama took office to now, we have 145,000 
additional federal workers. To suggest that pay is being frozen 
is not an accurate statement. Through step increases, through 
bonuses, through others, we have dramatically increased the 
federal payroll. The budget that is being proposed, when you 
say pay freeze, does that mean that expenditures on payroll 
will go up or stay the same?
    Mr. Lew. It means that people are not going to get a cost-
of-living adjustment, a raise from the pay that they get right 
now.
    Mr. Chaffetz. So the total, the line-item going forward, 
will our total expenditure from the U.S. Government, will that 
go up or will that be the same?
    Mr. Lew. Well if we have more people, we will obviously 
have to pay the people who we are hiring, but for an individual 
federal worker they are going to see their pay frozen.
    Mr. Chaffetz. I guess what I am worried about for the 
American taxpayer is their expense for federal employees is 
going to go up, correct?
    Mr. Lew. Well I think if we want people to work at the 
airports and check to see that bombs aren't getting on planes, 
we have to pay them.
    Mr. Chaffetz. We already have 65,000 TSA agents.
    Mr. Lew. But we have new technology, and the new technology 
requires people to use it.
    Mr. Chaffetz. How many is enough? How many more TSA agents 
do you need? You have 65,000 TSA agents.
    Mr. Lew. Congressman, I am happy to go into detailed 
answers.
    Mr. Chaffetz. How many more TSA agents do you need?
    Mr. Lew. I think as we put new technology at the airports, 
we needed to hire people to work that equipment. I can get you 
an exact number.
    Mr. Chaffetz. We have 65,000. I need to know how many more 
people is it going to take?
    Mr. Lew. I know that it is not worth buying equipment that 
we don't have people to operate.
    Mr. Chaffetz. I appreciate it. Thanks, Mr. Chairman.
    Mr. Lew. And I would like to answer your other questions if 
I have time. I don't know if I have time.
    Chairman Ryan. If you could get to the gentleman in 
writing, only because we want to watch your time and the rest 
of the members time.
    Mr. Lew. Sure, okay.
    Chairman Ryan. It has now my pleasure to yield time to Ms. 
Moore.
    Ms. Moore. Thank you so much, Mr. Chairman, and thank you 
Mr. Lew for appearing. Now as you can tell, members on both 
sides of the aisle are very frustrated, because this is a very 
difficult budget. And coming from a cold place like Wisconsin, 
it is just chilling to see things cut like the low-income 
housing energy assistance program, for example. But I do 
appreciate the fact that the administration has attempted to 
have somewhat of a balance in terms of revenue and spending 
cuts and defense cuts, and entitlement cuts. I just want to ask 
you a very simple question: If we cut every dime of 
discretionary non-defense spending, would that put us on a 
course toward ending our deficits? Every single dime.
    Mr. Lew. It has not a big enough part of the budget for us 
to solve the problem.
    Ms. Moore. Thank you. That is what I want to know, because 
there is an attempt to really describe the solution as simply 
just cutting everything, not just low-income heating assistance 
but everything.
    Entitlements, my questions are generated from just 
listening here today. I get a little bit nervous when my 
colleagues talk about the White House not having dealt with 
entitlements. Did you say earlier in your testimony that you 
had found, what was it, $65 billion.
    Mr. Lew. $62 billion.
    Ms. Moore. In savings from Medicare?
    Mr. Lew. It is Medicare, Medicaid, federal employees health 
benefit programs; it is dozens of different provisions.
    Ms. Moore. So thank you. So you did, in fact, deal with 
entitlements. The reason I get nervous is entitlements is a 
really big category. The Medicare prescription drug program, 
can you remind me of how much that cost and was not paid for?
    Mr. Lew. Well I can tell you none of it was paid for. The 
exact estimate at the time was on the order of $500 billion.
    Ms. Moore. $500 billion?
    Mr. Lew. I wasn't working on this at the time, I might have 
the number wrong.
    Ms. Moore. And I wasn't here, and Democrats weren't in 
control of Congress. That is an entitlement that needs 
reforming.
    Social Security, I get very nervous. Can you just clarify 
for me who pays for Social Security? It comes out of our 
paychecks and employers paychecks, and you said earlier it was 
not driving the deficit. Why do they keep lumping Social 
Security into this deficit situation that we are in, and saying 
that it needs to be dealt with?
    Mr. Lew. Well, Social Security is financed by payroll tax, 
half by the employer, half by the employee. And if you look at 
the Social Security trust fund, it is projected to remain in a 
position to pay benefits until 2037, so we don't have any 
immediate crisis in Social Security funding. I think that it is 
also the case that we are spending more year to year on Social 
Security because people are retiring. If you turn 65, you get 
benefits.
    Ms. Moore. Okay, so thank you. I hate to cut you off but I 
keep hearing an awful lot about how the White House is harming 
small businesses, the business creators. I am just wondering, 
what are they talking about? If I have a hedge fund operating 
from my living room with a computer, I am a small business and 
I make, you know, several million dollars, am I considered a 
small business? A job creator? Like you said, law firms. Who 
are these small businesses that we are harming with the tax?
    Mr. Lew. I think if you look at the budget proposals we 
have, we have targeted assistance for small businesses that 
meet the kind of definition that I think most of us would, in a 
common-sense way, think of a small business. A small factory, a 
small shop, and it wouldn't apply to services like law and 
finance. So we have incentives that we propose that would make 
the tax code more attractive.
    Ms. Moore. You have differentiated here so that we are just 
not the mom-pop shop.
    Mr. Lew. We don't need to have the overall tax rate on the 
wealthiest Americans go back down to the [inaudible] level.
    Ms. Moore. Okay, let me ask one final question in my last 
five seconds, or just to make a statement maybe. The Bush era 
tax cuts, which I think we ought to have gotten rid of, period; 
those earning over $250,000 a year still benefit six times as 
much as everybody else.
    Chairman Ryan. Thank you, Ms. Moore. Ms. Black.
    Mrs. Black. Thank you, and thank you Mr. Lew. I want to go 
back and continue in the vein of the question related to a 
sustainable deficit. You started out by saying that this budget 
is just a starting point. I am a little disappointed in that 
because my understanding is that as the role of the President, 
he is to set forth a plan, not a skeleton. I am disappointed 
that there wasn't more of a plan here along the areas of the 
entitlement programs, but that is really not the direction I 
want to go. The direction that I want to go in is talking about 
sustainable deficits.
    Now, as has already been said here, we admire the work that 
you did during the Clinton administration, and particularly 
having a budget surplus, and that it broke your heart that we 
are not in that situation. However, it seems as I read your 
testimony and what I hear today, that the goal here was to have 
a sustainable deficit. And I think our goal should be to be out 
of debt, and that we shouldn't have a sustainable deficit but 
we should have a balanced budget. Do you agree that we should 
be in a situation where our goal should not be a sustainable 
deficit, but should be that we would have a surplus and not 
spend more money than what we bring in?
    Mr. Lew. The reason we call this a down payment is because 
we do agree that we need to get beyond stopping the building up 
of the debt, and we then need to work on surplus so that we can 
pay it down. The problem is you don't get there quickly. You 
have to stop putting more onto the bill before you can pay it 
down. It is going to take hard work to do that. The three 
percent of GDP gets us only to the point where we are paying 
our current bills with revenue, and we still have the deficit, 
the long-term debt, out there. And then we are going to need to 
work together on dealing with that.
    Mrs. Black. And I want to go to that too, because if our 
goal over the next 10 years is to just have sustainable 
deficit, we will never pay down the debt. And frankly, one of 
the reasons why I ran is because I look at my six 
grandchildren, and I am really sad to think that my goal over 
the next 10 years, or my goal of serving for however long I 
serve, is just to sustain the deficit and not go toward the 
debt. And I think that it is short-sighted for us to think 
along those lines. I want to see a plan that gets rid of the 
deficit and begins to start to pay on the debt.
    Mr. Lew. I think that having presented budgets that had 
surpluses and now working on a budget that is a tough budget, 
that stops building the debt, I agree that we need to look 
beyond getting to the point where we are not adding to the 
debt, and we need to look to the point where during good 
economic times, we are paying down the debt. It is not a simple 
process. We are not going to get there quickly. It took a long 
time to dig this hole; it took a lot of decisions to get us 
where we are. It is going to take a lot of hard work to get 
out. And I think that the notion that this is a starting point, 
I don't mean to say it is not a serious starting point. It is a 
comprehensive, responsible budget. The President doesn't get 
the final word; he gets the first word. He has put his plan 
forward.
    Mrs. Black. But I want to go back, again, to words that you 
used on one of the other comments that you made, and you talked 
about all of the things that got us to where we are. But you 
said the number-one thing was, we suspended common-sense 
spending where we are spending more than what we bring in. And 
this budget that we have gotten does the same thing, and I 
don't think it gets us to where our goal really should be, and 
that is to stop deficit spending and start paying down our 
debt.
    Mr. Lew. Well this budget actually adheres to the principle 
that we need to pay for what we do, and with all respect I 
would note that changing the rules of the House so that tax 
cuts don't require offsets is not something that is going to 
help get to the goal that you are looking for. We need to have 
a clearheaded understanding that whether it is a tax cut or 
spending increase, if we don't pay for it, it increases the 
deficit.
    Mrs. Black. Well the more that we take from the people that 
are out there creating the jobs, the less jobs we will have, 
the less taxes we will collect. Thank you.
    Chairman Ryan. Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you Mr. Chairman. Welcome, it 
is good to see you.
    Mr. Lew. It has good to be here.
    Ms. Wasserman Schultz. I think it is interesting that the 
gentle lady from Tennessee laments the lack of a plan. Here it 
is. This looks like a plan to me.
    Mr. Lew. Felt like a plan putting it together.
    Ms. Wasserman Schultz. I bet it did. This from the party 
that still after six weeks in the 112th Congress, still has no 
jobs agenda, still has not put forward a plan to create jobs, 
not a single piece of legislation, nothing that has as many 
pages as this, 207 pages like this plan does. I think that when 
casting aspersions about the lack of a plan, they should look 
inward first. But your testimony referred to $62 billion in 
savings from increasing efficiency and accountability of health 
spending. Now we really focused on cracking down on waste, 
fraud, and abuse, and that was a huge priority in the 111th 
Congress for Democrats, particularly when we passed the 
Affordable Care Act. What are some of the significant policies 
in the budget that will contribute to that kind of savings?
    Mr. Lew. Congresswoman, there is kind of three baskets of 
savings. There is one set, which is about 16 provisions, which 
we would call program integrity. It is to make sure that if a 
provider has been paid erroneously, we recoup payment. If a 
provider submits bills for things that shouldn't be paid or 
duplicate bills, we have a process to make sure we pay once and 
we pay properly. That saves a little over $30 billion.
    We then have a number of provisions that would give 
Medicare and Medicaid the ability to take advantage of generic 
drugs, particularly generic biologics. That saves a little over 
$10 billion. Then we have a couple of changes in the Medicaid 
program, one of which would make sure that when we have 
expanded coverage and less uncompensated care, we calibrate 
correctly the disproportionate share payments that are supposed 
to pay providers who are providing uncompensated care. And then 
there is another that just lines up the state payment rates so 
that there is accuracy in what they are being matched for.
    Ms. Wasserman Schultz. The $62 billion in savings to which 
I just referred: Is that separate and distinct from the $125 
billion in savings included in the budget related to program 
integrity?
    Mr. Lew. It is only counted in the budget once, and it is 
in the mandatory section, the $62 billion. We may have a 
display that shows it somewhere else, but it is only in the 
numbers once.
    Ms. Wasserman Schultz. Thank you. I want to focus on the 
cuts in Community Development Block Grants. In recent years, 
Congress has typically provided more than the President 
requests for Community Development Block Grants. And that is 
obviously a program that helps local governments fund housing, 
and sewers, and streets, and economic development, particularly 
in low and moderate income neighborhoods. Let me just give you 
a couple of examples of it for folks that really don't know 
Congressional speak. You know, Community Development Block 
Grants funds things like three grants in 2010 to the cities of 
Janesville, Kenosha, and Racine, Wisconsin, totaling nearly $4 
million, and $2.4 million in two grants to Lima and Mansfield, 
Ohio. So my question is, the President's 2012 budget cuts 
Community Development Block Grants by about $646 million, and 
that is compared to the CR, where the Republican cuts it $3.1 
billion, below, from the CR, $2.4 billion below the President. 
Can you classify the distinction between the President's 
approach to Community Development Block Grants cuts and the 
cuts in the CR, from the Republicans?
    Mr. Lew. The President's budget is a comprehensive budget 
where we have made tough tradeoffs. Reducing community-
development block grants by 7.5 percent is a tough decision. We 
have got a lot of cities and towns that do good work with this 
money. But we didn't think it was necessary to make a deeper 
cut than that to hit the target of the $400 billion savings.
    Chairman Ryan. Thank you, Mr. Chairman.
    Ms. Wasserman Schultz. Thank you.
    Chairman Ryan. The gentleman from Appleton, Wisconsin, Mr. 
Ribble.
    Mr. Ribble. Thank you, Mr. Chairman. Thank you, Director 
Lew, for being here today. Just reading out of your testimony 
on page five, you say, Now that the country is back from the 
brink of potential economic collapse,--I would dare say that 
there is about 10 million Americans who wouldn't agree with 
that because they don't have a job today--Our goal is to win 
the future. But we cannot do so if we are saddled with 
increasingly growing deficits. Do you believe that statement, 
or was it just put in there as hyperbole?
    Mr. Lew. No, I believe it. I think that we were in a state 
of free-fall in the economy. We are not content with 
unemployment where it is now, or growth where it is now, but we 
have gone from negative growth and losing jobs to positive 
growth and creating jobs. And I believe that if we don't deal 
with the deficit, it is going to become a real threat to our 
economy.
    Mr. Ribble. So we cannot win the future if we are saddled 
with increasingly growing deficits. That is a statement that 
you agree?
    Mr. Lew. Yeah, no, I definitely agree with that. I wrote 
it, and I agree with it. That's a good thing.
    Mr. Ribble. Why would the President project a budget that, 
for the last five years, whose deficits are $890 billion, $891 
billion, $960 billion, $1.05 trillion, and $1.16 trillion? All 
growing deficits.
    Mr. Lew. I think if you look at these last few years, there 
have been extraordinary things going on because of the 
recession. We have had a collapse in terms of revenues because 
of lower economic activity, we have had increased expenditures, 
some of them automatic stabilizers, some of them actions 
Congress and we took together to get the economy moving again. 
We have said that we are now at a pivot point. We cannot accept 
that as business as usual. It was necessary during the 
recession. We had to get out of this recession; if we were 
seeing negative growth right now and rising unemployment, that 
would be a terrible thing. So we are very proud of the work we 
did. We inherited an economy that was not in good shape, and we 
have gotten it on the path towards being in much better shape. 
The job is not done. And we are now looking to the future, and 
that is why we are putting together a budget that we think 
invests in the future.
    Mr. Ribble. Yeah, but the first five years, you project 
decreasing deficits and the last five years, you project 
increasing deficits, which will prevent us from winning the 
future.
    Mr. Lew. I think the deficit, as a percentage of the 
economy, stays in that 3 percent range in the entire period of 
this budget, and that is what we need to do to be able to pay 
our bills and not to put our current expenses on the credit 
card. We are going to have to do a lot more to pay down the 
debt. We are, and we are not pretending that we can do that all 
at once. We need to do that together, but we have got to get 
started.
    Mr. Ribble. On page seven, you use, It would be 
shortsighted to cut spending across the board and short-change 
critical areas for growth and competitiveness, such as 
education, innovation, and infrastructure, or carelessly slash 
programs that protect the most vulnerable. It is a little 
incendiary to think that those are the only two choices, but 
maybe it wasn't written with that intent. I will tell you what 
I believe is careless; when all the adults in this room leave, 
cameras are gone and the television announcers go home, I 
believe there is going to be a five-year-old sitting here with 
the bill. I think that is careless. Thank you sir.
    Chairman Ryan. Thank you. Mr. Ryan.
    Mr. Ryan of Ohio. Thank you, Chairman Ryan, thank you, Mr. 
Lew. I think this is the best budget you could put together 
given the circumstances, and I think it is important for us to 
remember that it was the President and this administration that 
said we need to have a Debt Commission, that made that happen 
while a lot of Republicans on the other side were doing the 
Potomac two-step, backpedalling away from it. And I think we 
need to go back and read those press clippings. You were here 
in 1993. Would you say that 1993 budget, when we had great 
economic growth during the 90s, 20 plus million new jobs being 
created, was it the 93 budget that really got the economy back 
on track?
    Mr. Lew. Congressman, I would say that what really made a 
difference was that from 1990, under President Bush, to 1993 
under President Clinton, to 1997, when there was a bipartisan 
budget agreement, we showed continued emphasis on reducing the 
deficit, and paying for what we were doing, and getting our 
economic house in order. 1990 and 1997 were bipartisan; 1993 
was not. I hope that we are now going back into a period where 
we can work together, because I actually believe that people 
draw a false distinction between, Is the economy causing us to 
get out of the deficit or is it our policies? They are 
connected. When we pursue policies that promote confidence in 
the future, it is good for the economy. When the economy grows, 
it is good for the deficit; a virtuous cycle.
    Mr. Ryan of Ohio. I think it is important that we realize 
that mature decisions were made in 1990; mature decisions were 
made in 1993. In 1993, there wasn't one Republican that voted 
for that budget. Vice President Gore had to break the tie in 
1993, and then when we got into the 90s, we had some money to 
invest in children's healthcare and R&D, and set the stage for 
T-Com revolution and the Internet revolution and everything 
else.
    Two quick questions. One is, is a concern of yours, we have 
got $100 billion in cuts that our friends in the House want to 
make immediately in the next few months. We have got about $140 
to $150 billion in cuts being made by states across the 
country, $2 billion is going to be pulled out from the federal 
employees. Are you concerned that in the short-term, that we 
are pulling too much money out of the economy and it is going 
to hurt the growth that we have had and the success that you 
have had over the last year or two?
    Mr. Lew. We have put together a budget that tries to step 
on the brakes at the right time, and to not jump too fast into 
fiscal consolidation. I think we are going to have to look and 
see how the debate develops here in Congress. I think there is 
a concern in the states, as they are facing their fiscal 
challenges. We were careful in this budget that overall, the 
impact on the states, we don't think will create more of a 
problem there, though there are some things we reduce, there 
are other things we increase.
    Mr. Ryan of Ohio. I am concerned. You guys have the veto 
pen, and I just want to encourage you to not be afraid to take 
a stand, because we have come a long way in the last two years 
and we need the President to continue to lead us out of this. 
We are doing the right things now, I disagree with what my 
friends on the other side are saying. That leads me to my next 
and final question, and you have got 35 seconds to try to sum 
it up. How do these investments that you are making, R&D, 
education, high-speed rail, infrastructure, how do these 
investments compare as a percent of the GDP to what China is 
doing, what Germany is doing, what some of these other 
countries are pumping money into; how do our investments 
compare to these other countries, as we try to be competitive 
and compete?
    Mr. Lew. Well overall, the United States as a private-
public combined, spends more money on research and development 
than the next four largest countries put together, so we are 
the leaders in R&D. I think in these areas, we frankly have not 
kept up with some of our competitors. The infrastructure 
investment needs to keep up in order to be able to ship goods 
and buy and sell goods.
    Chairman Ryan. Thank you. Mr. Flores.
    Mr. Flores. Thank you Mr. Chairman, and thank you Director 
Lew for joining us today. I want to continue the conversation 
that Mr. Price started about amnesia regarding the past. Do you 
recall what the unemployment rate was in December, 2006? It was 
about 4.4 percent. The unemployment rate in December, 2010 was 
in the mid-nines. I would submit that what you claim that you 
inherited was due to a legislative process that occurred during 
that four-year period, and that wasn't controlled on this side 
of the aisle.
    I am new to this job, I have been in it about six weeks. 
Before I did this, I was a CPA and a CFO and a CEO for a number 
of successful companies, and so I know what it is like to sign 
the front side out of a paycheck, to make the decision to 
commit to hire an employer, to make an investment. This so-
called plan doesn't put me in a position, if I were in that 
chair today, to do that.
    The other thing is that I know a little bit about 
businesses and budgeting, and I have learned some new 
terminology. Sustainable deficits is a new term, and then 
primary balance, that is another interesting term. When 
Chairman Bernanke was here last week, he said that the federal 
deficit over the long term should not exceed the interest cost 
that we pay on our debt. We have come up with this definition 
of primary balance, that it is okay to run a deficit of 3 
percent of GDP. How many businesses and families do you know of 
that can operate in primary balance and for how long?
    Mr. Lew. We haven't set the goal of stopping at primary 
balance. We have said you have to get to primary balance in 
order to get beyond that, and I think it is an important 
difference.
    Mr. Flores. This doesn't get better than primary balance.
    Mr. Lew. You are not going to get to balance if you don't 
pass through primary balance.
    Mr. Flores. Let me submit to you that most families and 
most businesses that I know of cannot operate in primary 
balance. I commend you for having balanced budgets during the 
Clinton administration. That is what I call primary balance, is 
where you have zero deficit or a surplus.
    Mr. Lew. If I could just respond on the first point. You 
know, I think most families have had some experience with 
building up balances on their credit card that they really were 
facing really hard decisions.
    Mr. Flores. They don't do it over 10 years. They don't do 
it over 40.
    Mr. Lew. They start by cutting up the card, not putting 
more on it, and that is what primary balance is.
    Mr. Flores. And they start by cutting their net deficit to 
zero, and this plan doesn't do that. My questions are this, you 
have got average spending during, what was it? Let me rephrase 
that.
    Mr. Lew. I am going to have to bring historical statistics 
with me the next time I testify.
    Mr. Flores. I can answer it for you, but do you recall what 
spending was as a percent of GDP during the Clinton 
administration?
    Mr. Lew. It was around 20 percent.
    Mr. Flores. Correct. And what is the average spending as a 
percent of GDP under this plan?
    Mr. Lew. I think that when you look at spending as a 
percentage of GDP over time, it does grow as the population 
grows, because people become eligible for Social Security and 
Medicare. So when one talks about those numbers, you have to 
look at what is behind them.
    Mr. Flores. It is almost 23 percent, and if we really 
wanted to develop a plan to have sustainable deficits of zero 
or a primary balance of zero, we should have spending down 
around the same level as taxes and that is around 18.3 percent 
of GDP over the long-term.
    Mr. Lew. You don't get the balance if your revenue and your 
spending don't cross. The question is, at what level they cross 
providing what we need for the country.
    Mr. Flores. I understand. I yield back.
    Chairman Ryan. Ms. Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman. Welcome, Mr. Lew. Each 
member of Congress arrives here from different life 
experiences, and one truth in our family is going back nearly a 
century, that when Republicans occupied the White House in 
Congress, members of our family were thrown out of work. And 
when Democrats regained those offices, our family members 
started going back to work. It is one of the reasons I am a 
Democrat. I know until all Americans who want to work are able 
to become productive again, we won't be able to balance our 
budget nor reduce the deficit. No American I know wants to 
borrow more money from China or any other foreign country to 
keep this economy afloat. The administration budget, in my 
opinion, makes a responsible start and takes the deficit 
seriously, and so do I. In fact, I have served in this Congress 
long enough to have been a part of the solution during the 
1990s that some of my Republican colleagues have referenced, to 
balance the budget and grow jobs in this economy. Mr. Lew, you 
were a part of that, I think the President has the right man in 
your position.
    Also this man, Mr. Panetta, who now has the CIA. We sat in 
this room, I was a member of the Budget Committee back then. I 
know what we did for America, and when we did it, Alan 
Greenspan said he didn't think it was a good idea to balance 
the budget. That is the most unbelievable statement I ever 
heard in my life. Congress did it by making tough choices, by 
cutting waste and also curbing special interests. I support the 
administration's proposals to get rid of those oil subsidies. 
Let them compete in the global economy. In the tough times we 
are facing today due to the Wall Street abuses that caused the 
recession we are in, the problem with the Republican budget is, 
it hurts job creation and it goes after the people who can 
least afford to hold their lives together in this economy.
    In fact, their budget cuts off almost four million student 
loans, it takes away five million meals to the homebound 
elderly, it lays off meat and poultry inspectors, and it cuts 
40,000 jobs in preschools and Head Start. I don't think that is 
a very good set of proposals, so my questions, really Mr. Lew, 
to you deal with jobs, which is where we should be focused in 
two areas; one transportation, and the other one energy. For 
where I come from, which is not a government platform like 
capital cities like the one we are sitting in right now, and it 
is not a trading virtual platform like New York or Chicago or 
San Francisco, these places that deal in virtual stuff, we are 
the real economy in northern Ohio, and for us transportation 
and energy are destiny.
    So let me ask you, the administration has put some focus in 
its budget, despite tough times, on investing in 
infrastructure, and also in new forms of energy. That is music 
to our ears in our part of the country. We have to compete in 
an unsubsidized, free-enterprise economy in northern Ohio. 
Could you please tell us a little bit about the investments 
that the administration is going to be making in transportation 
and in renewable energy, and how this will contribute to job 
creation, which we all desperately want?
    Mr. Lew. Thank you, Ms. Kaptur. I am going to try in 50 
seconds to do justice to our program, but we have an approach 
that is designed to make sure that we build the infrastructure 
so that we can have goods come and go between American markets 
and shipped internationally from our seaports and our airports. 
We have taken a broad view of surface transportation, because 
it also means having the kind of modern communications 
technology so that northern Ohio becomes part of the virtual 
economy because there is no part of the country that is left 
behind. That is what it is going to take to win the future. In 
R&D, in energy, you know we look at the new technologies in 
renewable energy and where other countries are frankly putting 
their money down, saying That is the future. If we don't do the 
same, we are going to find ourselves left behind. America has 
never been left behind before, and we shouldn't start now.
    Ms. Kaptur. I wish you could say more. Thank you very much, 
Mr. Chairman. Thank you, Mr. Lew.
    Mr. Lew. Thank you.
    Chairman Ryan. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman. Mr. Lew, I am also 
one of the folks who is new around here, but I am familiar with 
budgets, I have written them, I have read them, and I can 
assure you, sir, that if you let me play around with the 
assumptions, I can make you a budget that looks as good or as 
bad as I want it to. I am looking at your assumptions regarding 
the revenues in the future, and you have assumed, essentially, 
that revenues have become about 19 percent of GDP in the next 
couple of years and then steadily increase over the course of 
your budget, peaking out above 20 percent. These are the 
historical numbers going back to the 1960s, and I suggest to 
you sir, or I would ask you, are you making an assumption that 
we have only seen once or twice in the last 40 years?
    Mr. Lew. You know, the revenue projections are based on a 
combination of current law and specific proposals, and it is 
driven by what is happening in the economy overall.
    Mr. Mulvaney. But the truth of the matter is that you are 
assuming numbers that, you are assuming the numbers will be 
average. Nineteen percent, 19 percent, 20 percent, and we have 
only seen that sporadically once, maybe twice, in the last 40 
years. You take a look at the GDP, another one of your 
assumptions, Mr. Ryan mentioned it earlier, the Washington Post 
beat you up on it today; you are assuming rates of growth in 
the economy that dramatically exceed even what the 
Congressional Budget Office is assuming. Against that backdrop, 
you are also assuming interest rates dramatically lower than 
the Congressional Budget Office. I would suggest to you, sir, 
that to assume growth rates that are higher but interest rates 
that are lower is internally inconsistent, and I draw your 
attention to the fact that you have assumed an interest rate on 
the 10-year Treasury note of this year of 3 percent. Do you 
know what the 10-year traded at last week?
    Mr. Lew. I did not check the [inaudible] rates last week.
    Mr. Mulvaney. Three point six five. And your assumption is 
that it will be 3 percent this year. The Congressional Budget 
Office, by the way, says it will be 3.4; they are already too 
low. The Congressional Budget Office also testified that for 
every percentage point that they assume the interest rate is 
too low, it is $1.3 trillion of additional debt over the course 
of the 10 years. You have assumed revenues that are way higher 
than average, GDP that is higher than anybody else thinks, and 
interest rates that are dramatically lower than anybody else 
thinks. And I put it to you, sir, that that is the reason that 
this is not a credible document.
    And I go back and I look at the past couple of budgets that 
the President has offered. Two years ago, he told us the 
deficit this year would be $900 billion in his budget. Last 
year, he told us the deficit this year would be $1.3 trillion. 
Yesterday, he told us it was $1.6. Two years ago, he projected 
that the budget deficit next year would be $557. Last year, he 
told us that number was going to be $829. Now he is telling us 
the number is going to be $1.1. I can't believe the numbers. I 
can't do it. And until we can get numbers that we can agree on 
are at least in the middle of the assumptions, it is going to 
be very difficult for us to focus on policy.
    Is it a question? No, sir, it is not. Am I beating up on 
you? Perhaps unfairly so. But the point is this; we should be 
here talking about policy. We should be here talking about what 
the President wants to do to fix the country, and what we want 
to do to fix the country. I happen to be one of those 
Republicans who does not believe the President doesn't want the 
country to succeed. I believe that he does, but we have to have 
a discussion about policy, and when you give us numbers that 
are simply not credible, it really prevents us from doing that. 
I expect better.
    Mr. Lew. Can I respond at least quickly?
    Mr. Mulvaney. Very briefly. I expect better out of you, and 
I have already spoken to the Chairman, I expect better from us. 
When you see our budget, you are not going to see unreasonable 
assumptions. But yes, sir, you may.
    Mr. Lew. The economic assumptions in this budget reflect 
what is the middle in terms of where the Federal Reserve Board 
looks at what the likely patterns of recovery are. So, there 
are mainstream assumptions.
    Mr. Mulvaney. Well then you need to walk to the 
Congressional Budget Office and tell them that their numbers 
are whacked out.
    Mr. Lew. And there is a conceptual difference between the 
Congressional Budget Office numbers, where they believe the 
economy never gets back to the level of strength that it had 
before the recession. That hasn't been the experience of past 
recessions, even financially-led recessions. It is taken 
longer, but we have gotten back. So there may be year-to-year 
disagreements, but we think we have very credible economic 
assumptions, and I am happy when we have more time, to go 
through them in some detail. Thank you.
    Mr. Mulvaney. Thank you.
    Chairman Ryan. Thank you Mr. Huelskamp. Mr. Huelskamp, will 
you just yield for 10 seconds?
    Mr. Huelskamp. Yes, sir.
    Chairman Ryan. Here is what we think is wrong. You are 
assuming 3.9 percent growth in the first five years, 3.2 
percent over 10 years. That is above trend, and only with those 
rosy assumptions can you ever get close to the primary balance 
you are claiming. That is why when we see blue chip 
Congressional Budget Office far below where you are, it sort of 
strains the credibility of these claims. That is the point we 
are trying to make.
    Mr. Lew. Mr. Chairman, I would just say that in the short 
term, we actually are slightly less optimistic. In the long 
term, we are slightly more optimistic, because of the 
difference in approach I just described.
    Chairman Ryan. And medium-term, where you hit your 
objectives more often.
    Mr. Lew. The idea behind the economic projections is, will 
we or won't we track the recovery patterns from past 
financially-led recessions? We believe we will. That is what 
the projection is. So it is to that trend.
    Chairman Ryan. Mr. Huelskamp.
    Mr. Huelskamp. Thank you Mr. Chairman. Mr. Director, I 
appreciate you being here, and back in February 23, 2009, the 
Congressional Budget Office at that time outlines a $1.186 
trillion deficit. The very next day, the President made his 
promise to pledge to cut the deficit in half by the end of my 
first term in office. In your comments, and the President's 
yesterday, he made a claim that he was going to meet that 
pledge, at least projected. But the numbers show one-half of 
the Congressional Budget Office figures are a $593 billion 
deficit. What do you predict?
    Mr. Lew. If you look at it as a percentage of GDP, we cut 
it in half by the end of the first term.
    Mr. Huelskamp. That was not the statement of the President. 
That is what bothers me, how the President can stand up, and 
you can stand here in this document, and claim that you are 
cutting the deficit in half, when you did not.
    Mr. Lew. We are cutting it in half as a percentage of GDP.
    Mr. Huelskamp. That was not the claim the President made. 
Would you agree with me?
    Mr. Lew. I know what we have done in this budget. I know 
what we have said in this budget. We have cut the deficit in 
half as a percentage of GDP.
    Mr. Huelskamp. I appreciate that. Again, I will just note, 
that is not what the President said, and that is not accurate 
of what is in your budget, and that is some of my difficulty. 
Where I come from, if you are wrong, you are wrong, but to 
stand up and again make that claim, I was very disappointed in 
that particular claim. But I am also particularly disappointed, 
Mr. Director, in another statement in your document where you 
state, quote, We are going to stay on a path towards 
sustainable deficits. How long are deficits sustainable?
    Mr. Lew. We need to get to the place where we stop adding 
to the national debt. This is a down payment. We need to work 
together to go farther than that. But you have got to walk 
before you run. You have got to get rid of the deficit before 
you cut the debt.
    Mr. Huelskamp. I understand, but this budget never does 
that, does it?
    Mr. Lew. It gets us on a path where we will able to do it, 
yes.
    Mr. Huelskamp. The path is unsustainable. Your path in this 
budget is unsustainable. The deficit is not sustainable.
    Mr. Lew. I look forward to seeing the plan.
    Mr. Huelskamp. We are not talking about a proposed plan, 
Mr. Lew. That is why I am dissatisfied. The language that is 
coming out of this administration is telling the American 
people that we can borrow for 10 years or longer, and are going 
to call it sustainable. We are going to say 3 percent borrowing 
is sustainable. It is not sustainable. There is no way we can 
sustain the track that is being presented here, and that is 
disappointing, because I know the American people. I know 
people that work every day and try to balance their budgets and 
they understand that sometimes you go under water awhile. But 
to sit here today, and have the President claim, somehow, it 
will be all okay, even if we are going to have a $768 billion 
deficit in two years and we are going to sustain that forever, 
and that is why I am very disappointed that the President 
didn't stand. I am very disappointed in that. That is what I 
wanted to convey. Because the President has the opportunity to 
stand up and provide proposals to save and strengthen Medicare. 
And you have said here that those are not contained in here.
    But I just want to note, to the American people, the folks 
that are listening here, and in the media, this is not 
sustainable. You can call it whatever you want. Sustainable 
deficits do not work. Primary balance is a figment of our 
imagination. Only in Washington could you run a deficit and 
claim it is balance, and somehow use the word balance. Mr. Lew, 
you couldn't do that anywhere else. They would laugh you out of 
the room. And I come at the state level. I served in the state 
legislature. We had a requirement; balance. It wasn't a primary 
balance. We couldn't run a deficit. This country is on a course 
for un-sustainability and I would expect the President to stand 
forward and say I am not going to keep my word, but to stand up 
and tell the American people, I kept my pledge. He did not.
    Mr. Lew. I disagree with you Congressman.
    Mr. Huelskamp. He is $193 billion off of his promise. That 
is a false claim and I am very disappointed in that. I yield 
back the balance of my time, Mr. Chairman.
    Chairman Ryan. Do you want to take a second?
    Mr. Lew. No, I would be delighted to, Mr. Chairman.
    Chairman Ryan. You know it is coming out of your time.
    Mr. Lew. I understand. I have missed lunch a lot of days. I 
think that if we want to use the kinds of common-sense language 
that people understand, we should just do that. We should say, 
Can you bring down the debt before you eliminate the deficit? 
No. You can't start paying down the debt until you stop adding 
to it. That is all we mean by primary balance. We are not 
talking about it being okay. We are just saying that you can't 
honestly tell people that we can pay down the debt, while you 
are still adding to it.
    Chairman Ryan. Mr. Young.
    Mr. Young. Mr. Director thanks so much for being here 
today. I know it has been a long morning and early afternoon 
for you. My focus here in Congress is on sustainability, but it 
is on sustainable job creation. And in the testimony we 
received from Bernanke the other day, he indicated that the one 
thing that really is missing from our policymakers in 
Washington, the Executive Branch and Congress alike, is that 
coherent plan, as he phrased it, and as Moody's recently 
phrased it when they downgraded Japan's debt. A coherent plan 
to deal with our entitlement programs. That is pointedly absent 
from this budget, this roadmap, if you will. I think that is a 
dereliction of duty on the part of the President.
    Now you have indicated in today's Wall Street Journal, if 
they quoted you correctly, that such proposals to deal with 
these matters are better left in closed-door settings. Fair 
enough. Perhaps that is the political judgment you make. I 
actually think we owe it to the American people to own up to 
them and to treat them like adults. That is what I intend to 
do. What is our pathway into this meeting? How are we going to 
begin this conversation? Will a letter be forthcoming? What 
will the date of that meeting be? Please enlighten us.
    Mr. Lew. Congressman, I don't believe that is exactly what 
I said, but what I do believe and what I have said is, we have 
put down a plan, which is the President's plan for how we are 
going to get to the point where we stop adding to the debt. We 
have also said that we need to have an environment where we can 
work together on these long-term issues and have conversations 
about things that it is frankly hard to have conversations 
about. History shows that it is much harder to create an 
environment where we can have trust and conversations to work 
on a bipartisan basis, than just to take polarizing positions. 
We have tried to strike a balance, putting a responsible plan 
out there and creating an environment for that conversation. We 
just took the first step yesterday. Congress is going to come 
forward. You will write your budget and we will engage. It is a 
long process. This is the first step.
    Mr. Young. What is the next step?
    Mr. Lew. Congress will write a budget. We look forward to 
seeing what you do and your budget, and how you reach primary 
surplus, how you reach deficit reduction, if you bring down the 
debt. We really do think that you will have ideas that we want 
to take advantage of and we look forward to working together.
    Mr. Young. In this remaining minute and a half, let us 
narrow down exactly what concerns the President has. People on 
this panel here, at least on this side of the aisle, invite and 
encourage the dialogue with the White House on this. Is it 
people in his own party that are a barrier, and what might I do 
as a freshman member of Congress to create the political space 
where the President can step up and take a leadership role in 
these matters?
    Mr. Lew. I have worked on bipartisan negotiations from both 
sides of the street, I was in the Speaker's office when the, 
with a Democratic speaker when there was a Republican 
President, and with a Democratic President and Republican 
speaker. I can tell you the hardest part of the process is 
developing the trust, where you can talk about the things that 
you have to do. I think the attempts to characterize this 
budget in the way that we have done it today are things that I 
hope people take another look at, because this is a serious 
proposal. I know you don't agree with it. I know there are 
things that will be in your budget that we don't agree with. We 
have to come from those positions, to find the middle where we 
can agree. That is how you reach bipartisan agreement.
    Mr. Young. Well I would encourage the President, I know he 
is watching C-SPAN today, to move forward aggressively on this 
matter. We are running out of time. We don't know what the 
optimal debt to GDP ratio is, as Bernanke and others have 
testified, and I think we need to very quickly embrace this 
issue and solve it, as opposed to dancing around it and doing 
the Potomac two-step.
    Mr. Lew. We look forward to working together. We share the 
same long-term goal. We may have different ideas about how to 
get there and that is what we need to work through together.
    Chairman Ryan. Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman. Thank you, Mr. Lew. 
Representative Young, Representative Stutzman, and I come from 
a state that has a balanced budget. In fact we have a triple-A 
bond rating, haven't raised taxes, and our secretary of state 
for the last eight years has been running the office on a 1987 
budget, unadjusted for inflation, and by and large, no one 
seems to have missed a beat, no one is complaining about lack 
of services or anything else. Can you imagine if we could have 
Washington work on 1987 dollars? Hold on, don't answer that.
    Mr. Lew. I think there would be a lot of people who asked 
where their Social Security check was.
    Mr. Rokita. No, I don't think so. I don't think so. But we 
have to get to that, because you are right. You have 
acknowledged here a couple times that we have this pig in the 
python, the baby boomers you described, getting older and need 
their check, and that is, I think, the frustration here, is 
yeah, we all see that. But where is the leadership? You 
mentioned a few times that you are a lawyer, I am one too, I 
feel your pain.
    Mr. Lew. I haven't practiced in a long time.
    Mr. Rokita. But, classic basic skills of negotiation 
dictate that, when you are kicking off a process, which you 
just did yesterday, leadership dictates even, that you kicked 
off up here. And it seems that you are right here, and saying, 
Okay, you guys fill in the blanks.
    Mr. Lew. No, I don't agree with that. I think we kicked off 
the process with a comprehensive plan that put an awful lot on 
the table, that is, we think, the best way to deal with the 
immediate challenges in front of us. And if that is not 
something that you agree with, we look forward to seeing your 
plan, and then we will work together to find where we can 
resolve it. So I don't agree with the characterization. I do 
agree that, as the President said, when he said this is a down-
payment, there will be issues that we have to deal with beyond 
this, and those are totally consistent.
    Mr. Rokita. Okay, so in that regard, let me ask you some 
specific things. There has been a bipartisan agreement. Steny 
Hoyer, if I am quoting him correctly, said, Democrats agree 
that spending cuts are necessary to tackle our deep budget 
deficit. So we have got bipartisan agreement that we have got 
to start cutting spending. Given the reality that spending cuts 
are coming, has Office of Management and Budget approved any 
agency's spending in excess of fiscal year 2010 levels?
    Mr. Lew. We are currently operating under a Continuing 
Resolution. Under the Continuing Resolution, we neither can 
begin or terminate activities. So we have been operating under 
the terms of something that provides for funding, in most 
cases, at fiscal year 2010 levels. It is an imperfect way to 
run the government, we should have full-year spending bills, 
and there undoubtedly will be complications as we move through 
the year, adjusting these numbers as we go along.
    Mr. Rokita. Have you advised agencies to prepare to start 
lowering their budgets?
    Mr. Lew. Well, we advised agencies that they should follow 
the law. The law is that under continuing resolution, you do 
not initiate or terminate programs.
    Mr. Rokita. Well, for the future, are you starting to get 
these agencies acclimated to a culture of spending cuts?
    Mr. Lew. I think the budget exercise we went through to 
produce this budget was a transition for many agencies, where 
things that were sacred cows that only grew, were frozen or 
reduced. There are tough decisions in this budget, really tough 
decisions, and I think there isn't an agency of government that 
hasn't made those trade-offs.
    Mr. Rokita. You acknowledged that there is a net excess of 
22,000 federal employees under your plan.
    Mr. Lew. I am acknowledging that there is an increase, 
which is a very small percentage of the federal workforce, to 
address new activities in this period.
    Mr. Rokita. In Indiana, 22,000 is a lot of people.
    Mr. Lew. It is a lot of people, but it is a big country, 
too, so when you put a few people at airports all over the 
country, it starts to add up.
    Mr. Rokita. Oh, don't start the airport business.
    Mr. Lew. I could give other examples if I had more time.
    Mr. Rokita. One more thing on Social Security. You 
mentioned that Social Security wasn't much of an issue, I am 
paraphrasing, obviously, but I want you to tell me whether or 
not the trust fund has any money in it or not.
    Mr. Lew. Trust fund has been running a surplus since 1983.
    Mr. Rokita. That is been taken.
    Mr. Lew. And it has bonds in it.
    Mr. Rokita. Thank you.
    Chairman Ryan. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman. Thank you, Mr. Lew, 
for your time today. Does the administration have any concern 
about the national debt?
    Mr. Lew. Yes.
    Mr. Stutzman. I mean, am I right in reading that, on page 
202, that our debt is going to go from $13.5 trillion to $26.3 
trillion over the next 10 years?
    Mr. Lew. Yeah, I think that we are very concerned about 
controlling the deficit so we stop building the national debt. 
We then have to start bringing down the debt so that the 
interest payments can also be reduced.
    Mr. Stutzman. There is no plan, or no idea, in here, that 
even starts the curve back to some sort of solvency with 
national debt. I mean, to me, as we waited for the President's 
budget, I really felt that, you know, the President was going 
to come back and he was going to, in this town as a freshman, I 
am finding it is very political, I see great divides between 
the party, and I thought maybe the President's going to try and 
one-up the Republican party, and do something that, you know, 
maybe we are going to try to jump out in front and do.
    And it totally surprised me to see this type of a budget. 
As a small business owner back in Indiana, to project deficit 
spending, project doubling the debt; when are we going to start 
to see some sort of action to show otherwise?
    Mr. Lew. First, I mean, you are looking at, there are 
different measures of the debt. The debt held by the public is 
the part of the debt that has the impact on credit markets. And 
I would just note there are different ways of looking at it, it 
gets to a much lower number in 2021.
    Mr. Stutzman. Where does it start to do, to go back down? 
Am I looking at the wrong line?
    Mr. Lew. No, I mean, until we start paying down the debt, 
the interest payments on the debt will still be increasing that 
number. I don't disagree that we need to ultimately turn the 
corner and start paying down the debt. I just am arguing, and I 
think it is common sense, that until we stop adding to the debt 
through our spending policies, to pay down the old debt is 
impossible. So we have got to do this in two steps. This down 
payment has that first step, which is the critical and 
necessary first step.
    Mr. Stutzman. As I am going back through, there are a 
couple of departments that get minimal increases. But it 
appears the largest increase is to the Department of the 
Treasury, specifically the IRS. Can you comment why?
    Mr. Lew. Well, there are several reasons. First of all, we 
are implementing financial regulatory reform, which is an 
important area. We certainly don't want to be exposed to the 
future risks of bail-out that we have seen in recent years.
    Secondly, we have enforcement initiatives where, I think we 
all agree, that if two people live next door and they are in 
the same income tax status, they have the same income, they 
should pay the same taxes. It shouldn't be that if you cheat 
you pay a lower tax rate. And there are enforcement efforts in 
there.
    Mr. Stutzman. So how many of the 22,000 new federal 
employees are anticipated to be hired by the IRS?
    Mr. Lew. I would have to go back and check the specific 
numbers.
    Mr. Stutzman. I have got a couple of miscellaneous 
questions. How many federal employees do we currently have?
    Mr. Lew. I could give you an exact number, I am happy to 
get back to you.
    Mr. Stutzman. Okay, and then real quick, I think I heard 
you say earlier, that employers' number one concern is that 
they need an educated workforce, is that right?
    Mr. Lew. I said, when I meet with CEOs, one of the big 
concerns that I hear them express is that they are having 
trouble hiring people with the skills they need in science, 
engineering, and math.
    Mr. Stutzman. Okay, all right. Thank you, Mr. Chairman, I 
will yield back.
    Chairman Ryan. Okay. Mr. Lankford.
    Mr. Lankford. Thank you. You got to do this whole exercise 
last year, and go through all the dance and all the hearings 
and everything else, and then the budget was actually not 
passed.
    Mr. Lew. I have only been here eight weeks on the job.
    Mr. Lankford. Congress just passed on it, and so getting a 
chance to do this again, and that we can hopefully get a chance 
to pick up and pass a budget this time, and get us through all 
that. I am hearing a perpetual sense that the certain 
apocalypse is coming if Republicans actually try to balance the 
budget and move us from, out of just deficit spending, to 
actually cutting down the debt. But I can tell you, I see the 
other side of this, to say $26 trillion is a more frightening 
thing to me that balancing the budget is a frightening thing to 
me on that.
    Let me just set a quick stage for you, just the emotions of 
that, because you are walking to this, early on at this point, 
returning back, as I am walking into it. Here is the sense that 
I walk into it with. When I came on January 5, this year's 
budget deficit was projected to be $1.4 trillion. By the State 
of the Union, it was $1.5 trillion. As of yesterday, it is 
$1.65 trillion. Now, what I am hearing is this sense of 
consternation that we are talking about cutting $100 billion 
out of this year's budget when actually our deficit has 
increased $250 billion, just in the six weeks that we have been 
in this session, at this point.
    So there is a real sense among a lot of people that I have 
talked with, to say we cannot just slow down the amount of debt 
that we are adding each year. We have actually got to get back 
to balance. And I know you are walking a fine line, and I know 
you are fulfilling the President's mandate to say let us slow 
down the curve somewhat on it. But you go out 10 years, and 
there is no debt reduction. I know you said a bunch of times, 
we have got to get back to this primary balance. But it seems 
as if the next President and the next Congress is left with the 
hard decisions, and this is just some simple decisions that get 
into it.
    Mr. Lew. In fairness, President Obama took office and 
inherited a situation that was out of control, and we are 
getting it under control and we are doing it as we emerge from 
the recession.
    Mr. Lankford. What I am hearing are terms like sustainable 
deficits, that doesn't seem to be working towards getting it 
under control. That seems to be working towards getting it to 
some manageable balance that we only add a trillion or so a 
year to our debt, and we are not really getting out of this.
    The other side that really concerns me is this whole sense 
of trying to split up the way that we are handling energy, that 
there is a preferred energy and there is a non-preferred 
energy. And we are going to try to sink a lot of money into 
R&D, into new technologies and energy, while punishing people 
that are in traditional. There has been a lot of conversation 
about jobs and about small businesses. And my question, in 
multi-fold in this; my concerns on it, number one is, is an 
independent producer of traditional energy sources who has 
three to five employees a small business?
    Mr. Lew. If that was the entirety of the business, I 
believe it would be a small business.
    Mr. Lankford. For a lot of independent producers around the 
country, they have three to five employees. And there is this 
sense of, we are going to go hammer on the big oil companies, 
when the majority of our energy companies aren't the big giant 
companies. They are small independent producers that are 
scattered all over the country. There are hundreds and 
thousands of them, scattered all over, that are about to get 
hammered, that are living in fear that the administration is 
going to come hammer them to come do another type of energy, 
very similar to what President Carter did when he said we are 
going to have 20 percent of our electricity produced by solar 
power by the year 2000. Yet here we are, in 2011, it is not 
even one percent.
    Mr. Lew. We are seeing that other countries are investing 
in the technology now, and the technology has advanced, and we 
are entering a different period of time.
    Let me just respond to one point that you made.
    Mr. Lankford. Let me just finish, I have no issue with all 
forms of energy. I have an issue with going and punishing one 
group that is actually fueling our vehicles and powering our 
cars and getting our homes ready, so we can go try to do 
something else that may work ten years from now. It feels like 
the sustainable debt, you are saying, We will try to manage 
this and hopefully that will work out at some point. That is 
what I feel like we are doing to energy by trying to punish the 
energy companies.
    Mr. Lew. I know we are almost out of time, but I just want 
to go back to one point you were making earlier, when you 
described the increase in the projected deficits. I just want 
to point out that in December, I know you weren't here in 
December. In December, my first couple of weeks in this new 
position, we had an important bipartisan agreement to do 
something that I think most of us agree on, which is taxes 
shouldn't have gone up January 1 of this year. We needed to 
have economic activity, it was the wrong time to let a tax 
increase take place. We also needed to do some things because 
we were still in a recession. That is driving up the numbers, 
but we knew when we passed it at the time, that it would have 
that short-term impact.
    Chairman Ryan. Thank you. Mr. Guinta.
    Mr. Guinta. Thank you, Mr. Chairman. Thank you, Mr. Lew, 
for being here. I have a couple of quick questions, and I will 
try to not take up the full four minutes. First of all, I 
understand earlier this morning we agreed on the $1.6 trillion 
deficit number for fiscal year 2012, as proposed. Correct?
    Mr. Lew. I am not sure I understand what you are referring 
to.
    Mr. Guinta. Did you agree that this budget proposal has a 
$1.6 trillion deficit?
    Mr. Lew. Our budget states in its four corners, what the 
deficit is each year.
    Mr. Guinta. 2012, it is $1.6 trillion, correct?
    Mr. Lew. In 2012, it is 1.1.
    Mr. Guinta. One point one trillion, okay. You had said that 
we want to cut the deficit in half, as it relates to GDP. You 
had also made statements about the deficit as a percentage of 
GDP. You also said that we need to be talking more clearly to 
the country about the challenges we have. I don't disagree with 
that. My point would be, I don't think the country appreciates 
the verbiage that we use. Municipalities, states, and homes do 
not budget the way the federal government budgets. I agree with 
you, and I think most people here agree, that we do have to 
reform and reduce spending. We do have to get on a path to have 
a greater fiscal soundness moving forward.
    I don't see that path in this budget. You have conveyed 
that this is a first step. You have also made the statement 
that we need to put the, step on the brakes at the right time. 
I believe that the country believes that this is the right 
time. Our time is now, in order to change course, change 
direction. And I am certainly willing to work with you, and 
anybody, who recognizes that point. I don't see it in the 
budget, and maybe I am missing it, but I will continue to look 
through.
    A couple of things that I would consider. First of all, I 
would like to know, how many programs for this budget did the 
administration audit?
    Mr. Lew. How many did we audit, we reviewed every program 
in the Federal Government. We have terminations, reductions, 
and savings in over 200.
    Mr. Guinta. In this budget proposal? Okay, do you know how 
much money that saves?
    Mr. Lew. $33 billion, those 200 plus terminations, 
reductions, and savings, save over $33 billion in 2012.
    Mr. Guinta. And where did you end up spending that savings 
in this proposal?
    Mr. Lew. We are living within the freeze. We are paying for 
the extension of the Medicare Doc Fix, we are doing, there is a 
whole host of things. In just a few seconds, it would be hard 
to give you the complete, comprehensive answer.
    Mr. Guinta. Is there a proposal for a reduction in force of 
federal employees?
    Mr. Lew. There is not a general policy. I believe there are 
some agencies that may well have some reductions enforced. It 
is not that it was a government-wide policy.
    Mr. Guinta. But you could instruct the departments to 
reduce their size and scope?
    Mr. Lew. Right, we have a pay-freeze, which is a reduction 
in compensation for federal workers. And we have budgets that 
are very constrained, which mean that they are going to take on 
new missions without new people. And I think these are very 
tight budgets for federal agencies.
    Mr. Guinta. Okay. And the final point I would like to make 
is, in New Hampshire, my home state, 94 percent of our 
employers are small business owners. I note on the Office of 
Management and Budget Website that you project over 10 years, 
500,000 new jobs will be created in New Hampshire. Our total 
population is about 1.3 million. I fail to see how we are going 
to create 500,000 new jobs in my state, particularly when we 
have got the marginal rate lapsing at 45 percent with the 
number of small business owners we have.
    Mr. Lew. I am not familiar with the specific projection you 
are referring to. I am happy to take a look at it and get back 
to you.
    Mr. Guinta. Okay. Thank you very much.
    Chairman Ryan. That is it?
    Mr. Lew. Thank you very much.
    Chairman Ryan. I hope you get some time to eat lunch before 
your next hearing. Thank you for coming by. We obviously have a 
chasm that separates our opinions on these issues. I look 
forward to further meetings with you in the future, this 
hearing is adjourned.
    Mr. Lew. Thank you, Mr. Chairman.
    [Questions submitted for the record and their responses 
follow:]

         Questions Submitted for the Record and Their Responses

Chairman Ryan:
    Director Lew, in Table S-7, there is an adjustment to the BEA 
baseline of $118 billion over ten years ($12 billion per year) to 
``reflect the incremental cost of funding the existing Pell maximum 
grant award.''
    Could you provide a more detailed justification for this adjustment 
and tell us if it is mandatory or discretionary funding?

    A: The adjustment to the BEA baseline reflects the special 
scorekeeping rule for Pell Grants that CBO, OMB, and the Congressional 
budget committees have used since 2006. The scoring rule charges the 
appropriations committees for the full cost of funding the Pell maximum 
award for all eligible students, regardless of the amount of budget 
authority specified in the appropriations bill. The proposed outyear 
adjustment to the BEA baseline reflects the full cost of funding the 
current discretionary maximum award level--$4,860--for the projected 
number of students who would qualify in each fiscal year of the ten-
year budget window. Finally, the adjustment is discretionary and does 
not suggest mandatory funding for the entire Pell Grant program.
Chairman Ryan:
    Your predecessor's June 8, 2010 budget preparation guidance to 
agencies ``requested that each non-security agency submit a budget 
request five percent below the discretionary total provided for that 
agency for FY 2012 in the FY 2011 Budget.'' Despite this guidance, many 
agencies including Commerce, Education, Energy, HUD, Interior, 
Treasury, EPA, GSA, NASA, NSF, SBA, and SSA saw increases over the 
projected 2012 level or decreases smaller than 5%.
    Why did the administration not reduce spending that the agencies 
themselves decided were low priority?
    Please provide for the record a list of the programs identified by 
the agencies pursuant to this guidance.

    A: The agency submissions to OMB are part of the deliberative 
process which informed the development of the 2012 Budget. Like in past 
years, OMB provided guidance to agencies on their 2012 Budget request, 
including the top-line funding level for each agency. This past year, 
we also asked agencies to identify lower priority programs that are 
less critical in advancing their missions.
    The materials agencies submitted were critical to developing our FY 
2012 Budget request, and directly informed decisions to terminate or 
reduce funding for many low priority programs. Overall, the budget 
proposed 200 terminations and reductions that save $30 billion in 2012. 
In other cases, the Budget proposes to consolidate funding for low 
priority programs and use the funding more effectively, or reform 
programs so they can better accomplish their mission.
    All of this contributed to the President's proposal to freeze non-
security discretionary spending for five years.
Chairman Ryan:
    Please provide the Committee with a list of proposed terminations 
and major reductions in the President's budget for FY 2002-FY 2010 and 
the ultimate funding level provided by Congress for these programs.

    A: Attached is the list of discretionary programs that were 
proposed in the President's Budget for termination or reduction from 
2006 to 2010, compared with the funding levels enacted by the Congress. 
The 2006 Budget was the first year that the President's Budget included 
a supporting document detailing proposed terminations and reductions. 
From 2006 to 2009, the supporting document was titled ``Major Savings 
and Reforms.'' Since 2010, the supporting document was titled 
``Terminations, Reductions, and Savings.''




























Congressman Yarmuth:
    Director Lew, for the past two years I have opposed the 
Administration's proposal to repeal the Last In, First Out (LIFO) 
accounting method for tax purposes. American companies have been 
operating under the assumption that LIFO is a perfectly sound 
accounting method since 1939, when Congress enacted tax code section 
472, which expressly makes LIFO an acceptable method of tax accounting. 
Repealing LIFO would have a devastating impact on a number of companies 
in my district, particularly Brown-Forman, a wine and spirits company 
that is one of the largest producers of Kentucky bourbon. Brown-Forman, 
which employs about 1,300 people in Louisville, estimates repealing 
LIFO would raise its taxes by hundreds of millions of dollars. The 
company, and the spirits industry at-large, has long used LIFO as its 
standard accounting method, which is, in part, attributable to the fact 
that it produces whiskey, a product which necessitates aging over long 
periods and which federal law specifically requires to be aged.
    There is one aspect of the President's proposal that has me 
particularly concerned for American companies, and that is the fact 
that the proposal would not only repeal the LIFO method going forward; 
it would also ``recapture the LIFO reserve'' of every LIFO taxpayer. 
This proposal would retroactively repeal deductions that were clearly 
authorized by the U.S. tax code and that in many cases were taken by 
the taxpayer as far back as several decades ago. This would be the 
equivalent of repealing the mortgage interest deduction and forcing 
homeowners to repay all of the deductions they took. This, like the 
current LIFO proposal, would be exceedingly unfair, as are most 
retroactive tax changes. I, therefore, urge you to reconsider your 
proposal--and respond to these concerns.

    A: The repeal of the LIFO (last in, first out) method of accounting 
will eliminate a tax deferral opportunity available to taxpayers that 
hold inventories, the cost of which increase over time. This tax 
benefit does not accrue to taxpayers who use the FIFO (first in, first 
out) method of accounting. In addition, LIFO repeal would simplify the 
tax code by removing a complex and burdensome accounting method that 
has been the source of controversy between taxpayers and the Internal 
Revenue Service. International Financial Reporting Standards do not 
permit the use of the LIFO method, and repealing LIFO would remove this 
possible impediment to the implementation of these standards in the 
United States.
    Taxpayers that currently use the LIFO method would be required to 
write up their beginning LIFO inventory to its FIFO value starting in 
2013. Allowing LIFO taxpayers to exclude the amount of the inventory 
write up from gross income would represent a substantial windfall for 
those taxpayers relative to others who have been using FIFO for years 
and potentially paying more tax as a result. Furthermore, the 
Administration's proposal mitigates the burden of the retroactive 
effect by allowing the one-time increase in gross income to be taxed 
over 10 years, rather than all at once; in short, the Administration's 
proposal provides appropriate transition relief.

    [Whereupon, at 12:55 p.m., the committee adjourned subject 
to the call of the Chair]

                                  
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