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




                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION




                            Serial No. 112-6


           Printed for the use of the Committee on the Budget

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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
FRANK C. GUINTA, New Hampshire

                           Professional Staff

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

                            C O N T E N T S

Hearing held in Washington, DC, March 10, 2011...................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     3
        Prepared statement of....................................     4
    Douglas Holtz-Eakin, president, American Action Forum........     5
        Prepared statement of....................................     7
    Carmen M. Reinhart, Dennis Weatherstone senior fellow, 
      Peterson Institute for International Economics.............    13
        Prepared statement of....................................    14
    Maya MacGuineas, president, Committee for a Responsible 
      Federal Budget, the New America Foundation.................    16
        Prepared statement of....................................    18
        Response to question submitted...........................    73
    John D. Podesta, president and CEO, Center for American 
      Progress Action Fund.......................................    21
        Prepared statement of....................................    23
        Response to question submitted...........................    74
    Hon. Marcy Kaptur, a Representative in Congress from the 
      State of Ohio, submission for the record:
        Biographies and reported sources of private funding of 
          witnesses..............................................    72
    Hon. Michael M. Honda, a Representative in Congress from the 
      State of California, questions submitted for the record....    73



                        THURSDAY, MARCH 10, 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, Campbell, Calvert, Price, 
McClintock, Stutzman, Lankford, Ribble, Flores, Mulvaney, 
Huelskamp, Young, Rokita, Woodall, Van Hollen, Schwartz, 
Kaptur, Blumenauer, Pascrell, Ryan of Ohio, Moore, Castor, 
Shuler, Tonko, and Bass.
    Chairman Ryan. Let me just say, I am excited about this 
impressive list of witnesses we have. We have well-known, well-
regarded witnesses on this issue. So I am really excited about 
getting into these details, and I am looking forward to this 
hearing. I will start with a brief opening statement then turn 
it over to my friend, Mr. Van Hollen.
    This is an important hearing, basically on the future of 
our country. We here in Congress have our differences over how 
to solve our most urgent fiscal challenges, but I don't think 
that there is any serious debate over the urgency of these 
challenges. I doubt anyone here would dispute the fact that if 
we fail to act, we are inviting a debt crisis with potentially 
catastrophic consequences. Those seeking to cling to our 
unsustainable status quo are, quite frankly, putting us at the 
greatest risk.
    Erskine Bowles, the Co-Chair of the Fiscal Commission, 
former Chief of Staff to former President Clinton, I think said 
it best, quote, The era of deficit denial is over. The failure 
to address the structural drivers of our debt has been a 
bipartisan failure over the years, yet the gusher of government 
spending and the creation of new, open-ended health care 
entitlements turned a fiscal challenge into a fiscal crisis.
    The White House appears to acknowledge the problem, but 
seems determined to avoid tackling the problem. The latest 
budget proposal from the Obama Administration not only fails to 
address the drivers of our debt, but accelerates us down our 
unsustainable path. It would impose growth-killing tax 
increases and lock in Washington's reckless spending spree. Its 
claimed savings amount to little more than slogans and budget 
gimmicks. The status quo which the President's budget commits 
us to threatens not only our livelihoods, but ultimately our 
way of life. We must work together to lift this crushing burden 
of our debt.
    The good news is this: We still have time to address the 
drivers of our debt and save our nation from bankruptcy.
    We have several witnesses; we have experts today who will 
help us get our arms around the problem. I appreciate your 
testifying today before this committee on the difficulty and 
about the climb we have ahead of us. This is going to be a 
difficult climb. Our country is facing perhaps the greatest 
economic challenge in the history of our nation. But we do know 
that we can fix this. We do have time, and we can make this 
climb. The question is whether we have the political resolve to 
do that.
    So the stakes of this challenge are no less than the unique 
American legacy of bequeathing to our children and 
grandchildren a better America; that is basically the legacy of 
this country. Each generation confronts its challenges in front 
of it, whether it is depression, world wars, or whatnot, so 
that their kids are better off. We know this. We know what is 
coming. The question is: Are we going to do what is necessary 
to prevent that from happening?
    The way I look at it is, the worst experience that I have 
had in Congress was TARP. And I think most of us would probably 
agree with this. That is an economic crisis that caught us by 
surprise. We had all these meetings with the Federal Reserve 
Chair and the Treasury Secretary, talking about a deflationary 
spiral, a depression, bank failures were coming, and caught 
everybody by surprise. And I always ask people, What if your 
President and your member of Congress knew what was coming, saw 
it ahead of time, knew what they needed to do to prevent it 
from happening, but chose, instead, not to do anything about it 
because it was bad politics? Think about that.
    This debt crisis is the most predictable economic crisis we 
have had in the history of our country. And if we actually 
don't do anything to prevent it from happening, shame on us. 
And this is the moment of truth. We have got to start talking 
about this stuff. And I hope that we can get there. I believe 
we can. Ultimately, the parties are going to have to come 
together to fix this problem, and I for one believe that the 
key is to go after spending. Spending is the driver of it. And 
if we do this, then our kids will have a better future. Then we 
will preserve the American legacy of leaving the next 
generation better off.
    With that, I want to yield to my friend, the Ranking 
Member, Mr. Van Hollen.
    [The prepared statement of Paul Ryan follows:]

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

    Welcome all, to this important hearing on the future of our 
    We here in Congress have our differences over how to solve our most 
urgent fiscal challenges.
    But I don't think there is any serious debate over the urgency of 
these challenges.
    I doubt anyone here would dispute the fact that, if we fail to act, 
we are inviting a debt crisis with potentially catastrophic 
    Those seeking to cling to our unsustainable status quo are, quite 
frankly, putting us at the greatest risk.
    Erskine Bowles, the co-chairman of the President's fiscal 
commission, said it best: ``The era of deficit denial is over.''
    The failure to address the structural drivers of our debt has been 
a bipartisan failure over the years, yet the gusher of government 
spending and the creation of new open-ended health care entitlements 
turned a fiscal challenge into a fiscal crisis.
    The White House appears to acknowledge the problem, but seems 
determined to avoid tackling it.
    The latest budget proposal from the Obama Administration not only 
fails to address the drivers of our debt, but accelerates us down our 
unsustainable path. It would impose growth-killing tax hikes and lock 
in Washington's reckless spending spree. Its claimed savings amount to 
little more than slogans and budget gimmicks.
    The status quo, which the President's budget commits us to, 
threatens not only our livelihoods, but also our way of life. We must 
work together to lift this crushing burden of debt.
    The good news is this: We still have time to address the drivers of 
our debt and save our nation from bankruptcy.
    We have several expert witnesses here today who will help us get 
our arms around the problem. I appreciate your testifying today before 
this committee on the difficulty of the climb ahead and the 
consequences of inaction.
    It will be difficult, but it is a climb we must make.
    The stakes in this challenge are no less than the unique American 
legacy of bequeathing to our children a more prosperous nation than the 
one we inherited.
    With that, I will yield to Ranking Member Van Hollen for an opening 

    Mr. Van Hollen. Thank you, Mr. Chairman. And I want to join 
Chairman Ryan in welcoming our distinguished witnesses today. I 
am very pleased we are having a hearing on this important 
subject, and I think we can all agree that the long-term debt 
trajectory is unsustainable and unacceptable. And I believe we 
all agree that it is important to come together now, as the 
Chairman said, to develop and enact a sensible plan to reduce 
that debt in a steady and a predictable fashion. We should have 
a healthy discussion on what such a plan would look like.
    What we should not be doing is taking actions that would 
hamper our fragile economic recovery. While last month's jobs 
numbers were promising, millions of Americans remain out of 
work. Enacting measures that would slow down job growth would 
not only impose additional and unnecessary economic pain on 
American families, it will harm the goal of deficit reduction. 
That is why the House Republican plan to make additional, deep, 
and immediate cuts in various investments in order to hit an 
arbitrary number is such a mistake.
    Say what you will about Goldman Sachs, they know a little 
bit about the impact of investments, and their analysts predict 
that the House Republican plan will cost 700,000 Americans 
their jobs. Mark Zandy of Moody's Analytics, who, like Mr. 
Holtz-Eakin, was an advisor to the presidential campaign of 
Senator John McCain, reached a similar conclusion, as did the 
Economic Policy Institute.
    Now, I see in Mr. Holtz-Eakin's testimony that you dispute 
some of those figures, and we can discuss them, but I would 
point out that the Chairman of the Federal Reserve, Ben 
Bernanke, testified just very recently that slashing the budget 
that way would, quote, Translate into a couple hundred thousand 
jobs, so it is not trivial, unquote. In fact, that would wipe 
out all the job gains from just last month. So the question is 
this: Whether the number of jobs lost is 200,000 or 700,000, 
why in the world would we be doing anything right now to cost 
thousands of Americans their jobs? That is a reckless and 
senseless approach that does virtually nothing to address long-
term debt. And that is why the bipartisan fiscal commission 
that was charged with reducing our deficits specifically warned 
against that action right now.
    Yesterday, the members of this committee had an opportunity 
to meet with Erskine Bowles and Alan Simpson. Here's what the 
bipartisan commission wrote in its report, quote, In order to 
avoid shocking the fragile economy, the commission recommends 
waiting until 2012 to begin enacting programmatic spending 
cuts, and waiting until fiscal year 2013 before making large 
nominal cuts, unquote. That is also what Bowles and Simpson 
said in their testimony before the Senate Budget Committee the 
other day, and that is what the bipartisan Rivlin-Domenici 
Commission recommended. They issued a similar warning.
    So, Mr. Chairman, I am glad that, today, we are going to 
take a more comprehensive look at the budget situation, rather 
than focus only on the 12 percent sliver of the budget that 
includes critical investments in education, in scientific 
research and innovation, and transportation and energy 
infrastructure: investments that are critical to growing jobs 
in America, and winning in the competitive global marketplace.
    As the bipartisan commission observed, a serious debt 
reduction plan will require a combination of spending cuts in 
discretionary and mandatory programs, as well as revenue 
increases. So I hope, Mr. Chairman, that this will provide an 
opportunity to take a, a serious and comprehensive look, rather 
than what many of us see as a short-term approach to hit an 
arbitrary number that will cost Americans their jobs. Thank 
    [The prepared statement of Chris Van Hollen follows:]

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

    I join Chairman Ryan in welcoming our witnesses today. I am pleased 
we are having a hearing on this important subject. We all agree that 
our current long term debt trajectory in unsustainable and 
unacceptable. And I believe we all agree that it is important to come 
together now to develop and enact a sensible plan to reduce that debt 
in a steady and predictable manner. We should have a healthy discussion 
on what such a plan would look like.
    What we should not do is take actions that would hamper our fragile 
economy recovery. While last month's jobs numbers were promising, 
millions of Americans remain out of work. Enacting measures that would 
slow down job growth will not only impose additional and unnecessary 
economic pain on American families; it will harm the goal of deficit 
    That is why the House Republican plan to make additional deep and 
immediate cuts in various investments in order to hit an arbitrary 
number is such a mistake. Say what you will about Goldman Sachs, they 
know a little bit about the impact of investments, and their analysts 
predict the House Republican plan will cost 700,000 Americans their 
jobs. Mark Zandi of Moody's Analytics, who like Dr. Holtz-Eakin was an 
advisor to the presidential campaign of Senator John McCain, reached a 
similar conclusion, as did the Economic Policy Institute. Now I see 
that Dr. Holtz-Eakin disputes these figures in his testimony. But the 
Chairman of the Federal Reserve, Ben Bernanke, testified last week that 
slashing the budget that way ``would translate into a couple hundred 
thousand jobs. So, it's not trivial.'' That would wipe out all the job 
gains from last month. So the question is this: Whether the number of 
jobs lost is 200,000 or 700,000, why in the world would we be doing 
anything now that would cost Americans their jobs? That is a reckless 
and senseless approach that does virtually nothing to address the long 
term debt. And that is why the bipartisan Fiscal Commission that was 
charged with reducing our deficits specifically warned against such 
action. Yesterday, members of this Committee met with the co-chairs of 
the Commission, Erskine Bowles and Alan Simpson. Here is what the bi-
partisan Commission wrote in its report: ``In order to avoid shocking 
the fragile economy, the Commission recommends waiting until 2012 to 
begin enacting programmatic spending cuts, and waiting until fiscal 
year 2013 before making large nominal cuts.'' That is also what Bowles 
and Simpson said in their testimony before the Senate Budget Committee 
last week. The bipartisan Rivlin-Dominici commission issued a similar 
    So I am glad that today we will take a more comprehensive look at 
what it will take to seriously tackle deficits and the debt rather than 
focus only on the 12% sliver of the budget that includes critical 
investments in education, scientific research and innovation, and 
transportation and energy infrastructure--investments that are critical 
to growing jobs in America and winning in the competitive global 
marketplace. As the bi-partisan Fiscal Commission observed, a serious 
debt reduction plan will require a combination of spending cuts in 
discretionary and mandatory programs as well as revenue increases.
    I will close with this observation. In his recent testimony here, 
Jack Lew, the Director of the Office of Management and Budget, pointed 
out that when he had last appeared before this Committee as President 
Clinton's Budget Director, we were projecting a $5.6 trillion surplus. 
Today, we have with us John Podesta, who was Chief of Staff to 
President Clinton at that time. When President Obama was sworn in 8 
years after Bill Clinton left office, he inherited a record annual 
deficit of $1.3 trillion and an economy in total freefall with more 
than 700,000 Americans losing their jobs every month. I make this 
observation to make this point--during the intervening eight years of 
the Bush Administration, some terrible decisions were made that wreaked 
havoc on the fiscal stability of our nation. If we are going to chart a 
fiscally responsible course, we are going to have to do many things, 
including reversing some of those fiscally reckless actions.

    Chairman Ryan. Thank you, Mr. Van Hollen. I would simply 
just ask the witnesses, in the interest of time, because we 
have lots of members who have questions, if you could keep your 
opening remarks to five minutes, paraphrase your statements, 
and your written statements will be included in the record. I 
think we are just going to go left to right, right? So, Mr. 
Holtz-Eakin, why don't we start with you and then we will go on 
down the line.



    Mr. Holtz-Eakin. Chairman Ryan and Ranking Member Van 
Hollen, members of the committee, thank you for the privilege 
of being here today. You have my written statement, I will be 
brief; I will make three points.
    First is to echo the remarks of the Chairman about the 
seriousness of the situation, and the implications of the 
outlook for rising debt.
    Second is to concur that the problem is spending, by almost 
any metric that has got to be the focus.
    And the third is to address the concerns of the Ranking 
Member about the implications of cutting spending for near-term 
economic growth and jobs.
    Everyone has a different way of saying this, but I believe 
we are at a juncture when America's prosperity and freedom is 
at stake. As I said in my testimony, there is a good news 
version of continuing down our current path. And in the good 
news version, massive federal borrowing is displacing 
investments in workers, in equipment, in innovation, 
productivity stagnates, wages don't grow, and we don't see the 
standard of living rise for a prolonged period, but we somehow 
muddle through and leave our children a diminished economy and, 
as the Pentagon folks would say, A diminished ability to 
project our values on the globe. That has been the core of our 
ability to protect our freedoms. That is the good news version.
    The bad news version is one in which we actually get 
something that is 2008 or worse. We get a cataclysm in 
financial markets, we see sharp freezes in credit, main street 
economy collapses, and in the aftermath of that we still have 
the same problem to fix. So it is unacceptable, in my view, to 
continue down the path.
    We have to change direction. We have lots of indicators 
that this is coming. Carmen's much more versed in the 
implications of rising debt to GDP levels, but ours is much too 
high. Moody's has put out an advisory on how they rate 
sovereign debt; and if you just take their technical criteria 
at face value, we are on track to be downgraded as a sovereign 
borrower in a matter of three or four years. And we have seen 
the borrowing around the globe.
    So this is literally, as the Chairman of this Commission 
called it, a moment of truth, and a time to stop deferring the 
tough decisions that are necessary to get us on the right 
track. Those decisions are about spending. As the Congressional 
Budget Office's long-term budget outlook has said, again, and 
again, and again, for a decade, if you look at current policy 
in the United States, current law, spending rises under current 
law, above any sensible metric of the potential to tax. It 
rises to 35 percent of GDP or higher. It is driven by, largely, 
the entitlement programs, and especially the health programs. 
There is one, and only one, solution to that problem. You will 
not grow your way out of it, you will not tax your way out of 
it, you simply must modify those programs; entitlement reform 
is at the heart of getting this right. And we have done very 
little, in recent years, to do that. We wasted the decade we 
had before the baby boomers started to retire; they are now 
retiring. We went the wrong direction with the Medicare 
Modernization Act and Affordable Care Act, to add more health 
programs, not fix the ones we had. And now we are both out of 
time, and in the financial crisis, we have lost our cushion. 
The GDP has gone up by 20 percentage points.
    The time is now to control spending. Now there are these 
concerns that somehow this is going to be bad for the economy, 
and I want to close with that. If you are a businessman in the 
United States right now, you are an international business 
trying to figure out where to locate, and you look at a country 
where the good news scenario is a future of higher interest 
rates, or higher taxes, or both, and the bad news scenario is a 
future that has a financial crisis followed by higher interest 
rates, higher taxes, or both. Why would you locate in that 
country, or why would you expand in that country? Why is that a 
good thing for the economic outlook? It is simply not.
    So fixing that problem, undertaking control of the debt, is 
the single most pro-growth policy that Congress and the 
administration could undertake. And that will be at the heart 
of getting the economy going again, now, and in the future.
    The kinds of studies we have seen, from Goldman Sachs and 
the man I made famous, Mark Zandy, have, at their heart, 
several problems.
    Problem number one is that they get the magnitudes all 
wrong. The Congressional Budget Office estimates that out of 
HR-1, we would see a reduction of $9 billion in actual outlays 
in fiscal year 2011 from that bill, in a $14 to $15 trillion 
economy, this is peanuts; it will do nothing, with all due 
respect to the other economists.
    Second is that not all outlays are purchases of goods and 
services. They make that mistake. A lot of them are transfer 
payments. And if you look around the globe at the evidence that 
has been accumulated, the successful strategy for growing and 
fixing a fiscal problem is to keep taxes low and cut transfer 
payments and government payrolls. That is the strategy that 
works; this is part and parcel of that strategy.
    The third, and most importantly, the analyses are devoid of 
any capacity to change the outlook of individuals in the 
economy. They rule out anything that has to do with sentiment 
and optimism, and they, thus, rule out the very reason you are 
doing this. You couldn't possibly get another answer. So they 
are stacked against finding a beneficial conclusion. And I find 
it ironic that they are called Keynesian analysis, because John 
Maynard Keynes was a very sophisticated student of human 
nature, and put animal spirits and optimism at the heart of his 
economic theories. And so I disagree with the bottom line those 
analyses have. Thank you, Mr. Chairman. I look forward to your 
    [The prepared statement of Douglas Holtz-Eakin follows:]

         Prepared Statement of Douglas Holtz-Eakin, President,
                         American Action Forum*

    Chairman Ryan, Ranking Member Van Hollen and Members of the 
Committee thank you for the privilege of appearing today. In this short 
statement, I wish to make the following points:
    * The opinions expressed herein are mine alone and do not represent 
the position of the American Action Forum. I am grateful to Sam 
Batkins, Ike Brannon, Cameron Smith and Matt Thoman for assistance.

     The outlook for deficits and debt threatens the Nation's 
prosperity and freedom. Changing the fiscal course should be our top 
national priority.
     Controlling the growth of future federal spending should 
be the central objective of policymakers in pursing this goal.
     Effectively controlling spending, reducing deficits, and 
eliminating future debt accumulation can aid near-term economic growth.
    Let me discuss each in turn.

                       THE THREAT OF FUTURE DEBT

    The Fiscal Outlook. The federal government faces enormous budgetary 
difficulties, largely due to long-term pension, health, and other 
spending promises coupled with recent programmatic expansions. The 
core, long-term issue has been outlined in successive versions of the 
Congressional Budget Office's (CBO's) Long-Term Budget Outlook.\1\ In 
broad terms, over the next 30 years, the inexorable dynamics of current 
law will raise federal outlays from an historic norm of about 20 
percent of Gross Domestic Product (GDP) to anywhere from 30 to 40 
percent of GDP. Any attempt to keep taxes at their post-war norm of 18 
percent of GDP will generate an unmanageable federal debt spiral.

    \1\ Congressional Budget Office. 2010. The Long-Term Budget 
Outlook. Pub. No. 4130. http://www.cbo.gov/ftpdocs/115xx/doc11579/06-
    This depiction of the federal budgetary future and its diagnosis 
and prescription has all remained unchanged for at least a decade. 
Despite this, action (in the right direction) has yet to be seen.
    Those were the good old days. In the past several years, the 
outlook has worsened significantly.
    Over the next ten years, according to the Congressional Budget 
Office's (CBO's) analysis of the President's Budgetary Proposals for 
Fiscal Year 2011,\2\ the deficit will never fall below $700 billion. 
Ten years from now, in 2020, the deficit will be 5.6 percent of GDP, 
roughly $1.3 trillion, of which over $900 billion will be devoted to 
servicing debt on previous borrowing.
    As a result of the spending binge, in 2020 public debt will have 
more than doubled from its 2008 level to 90 percent of GDP and will 
continue its upward trajectory.
    \2\ Congressional Budget Office. 2010. An Analysis of the 
President's Budgetary Proposals for Fiscal Year 2011. Pub. No. 4111. 
    The President has now released his budget for Fiscal Year 2012. 
While CBO has yet to have the opportunity to provide a non-partisan 
look its implications, my reading of the budget is that it is largely 
replicates the previous year's outlook.
    The ``Bad News'' Future under Massive Debt Accumulation. A United 
States fiscal crisis is now a threatening reality. It wasn't always so, 
even though--as noted above--the Congressional Budget Office has long 
published a pessimistic Long-Term Budget Outlook. Despite these gloomy 
forecasts, nobody seemed to care. Bond markets were quiescent. Voters 
were indifferent. And politicians were positively in denial that the 
``spend now, worry later'' era would ever end.
    Those days have passed. Now Greece, Portugal, Spain, Ireland, and 
even Britain are under the scrutiny of skeptical financial markets. And 
there are signs that the U.S. is next. The federal government ran a 
fiscal 2010 deficit of $1.3 trillion--nearly 9 percent of GDP, as 
spending reached nearly 24 percent of GDP and receipts fell below 15 
percent of GDP.
    What happened? First, the U.S. frittered away its lead time. It was 
widely recognized that the crunch would only arrive when the baby 
boomers began to retire. Guess what? The very first official baby 
boomer already chose to retire early at age 62, and the number of 
retirees will rise as the years progress. Crunch time has arrived and 
nothing was done in the interim to solve the basic spending problem--
indeed the passage of the Medicare prescription drug bill in 2003 made 
it worse.
    Second, the events of the financial crisis and recession used up 
the federal government's cushion. In 2008, debt outstanding was only 40 
percent of GDP. Already it is over 60 percent and rising rapidly.
    Third, active steps continue to make the problem worse. The 
Affordable Care Act ``reform'' adds two new entitlement programs for 
insurance subsidies and long-term care insurance without fixing the 
existing problems in Social Security, Medicare, and Medicaid.
    Financial markets no longer can comfort themselves with the fact 
that the United States has time and flexibility to get its fiscal act 
together. Time passed, wiggle room vanished, and the only actions taken 
thus far have made matters worse.
    As noted above, in 2020 public debt will have more than doubled 
from its 2008 level to 90 percent of GDP and will continue its upward 
trajectory. Traditionally, a debt-to-GDP ratio of 90 percent or more is 
associated with the risk of a sovereign debt crisis.
    Indeed, there are warning signs even before the debt rises to those 
levels. As outlined in a recent report,\3\ the credit rating agency 
Moody's looks at the fraction of federal revenues dedicated to paying 
interest as a key metric for retaining a triple-A rating. Specifically, 
the large, creditworthy sovereign borrowers are expected to devote less 
than 10 percent of their revenues to paying interest. Moody's grants 
the U.S. extra wiggle room based on its judgment that the U.S. has a 
strong ability to repair its condition after a bad shock. The upshot: 
no downgrade until interest equals 14 percent of revenues.
    \3\ Moody's determines debt reversibility from a ratio of interest 
payments to revenue on a base of 10 percent. Wider margins are awarded 
to various governments to indicate the additional ``benefit of the 
doubt'' Moody's awards. The US finds itself on the upper end at 14 
percent. The ratios are ``illustrative and are not hard triggers for 
rating decisions.'' See: Aaa Sovereign Monitor Quarterly Monitor No. 3. 
Moody's Investor Service. March 2010.
    This is small comfort as the 2011 Obama Administration budget 
targets 2015 as the year when the federal government crosses the 
threshold and reaches 14.8 percent. Moreover, the plan is not merely to 
flirt with a modest deterioration in credit-worthiness. In 2020, the 
ratio reaches 20.1 percent.
    Perhaps even more troubling, much of this borrowing comes from 
international lending sources, including sovereign lenders like China 
that do not share our core values.
    For Main Street America, the ``bad news'' version of the fiscal 
crisis occurs when international lenders revolt over the outlook for 
debt and cut off U.S. access to international credit. In an eerie 
reprise of the recent financial crisis, the credit freeze would drag 
down business activity and household spending. The resulting deep 
recession would be exacerbated by the inability of the federal 
government's automatic stabilizers--unemployment insurance, lower 
taxes, etc.--to operate freely.
    Worse, the crisis would arrive without the U.S. having fixed the 
fundamental problems. Getting spending under control in a crisis will 
be much more painful than a thoughtful, pro-active approach. In a 
crisis, there will be a greater pressure to resort to damaging tax 
increases. The upshot will be a threat to the ability of the United 
States to bequeath to future generations a standard of living greater 
than experienced at the present.
    Future generations will find their freedoms diminished as well. The 
ability of the United States to project its values around the globe is 
fundamentally dependent upon its large, robust economy. Its diminished 
state will have security repercussions, as will the need to negotiate 
with less-than-friendly international lenders.
    The ``Good News'' Future under Massive Debt Accumulation. Some will 
argue that it is unrealistic to anticipate a cataclysmic financial 
market upheaval for the United States. Perhaps so. But an alternative 
future that simply skirts the major crisis would likely entail 
piecemeal revenue increases and spending cuts--just enough to keep an 
explosion from occurring. Under this ``good news'' version, the debt 
would continue to edge northward--perhaps at times slowed by modest and 
ineffectual ``reforms''--and borrowing costs in the United States would 
remain elevated.
    Profitable innovation and investment will flow elsewhere in the 
global economy. As U.S. productivity growth suffers, wage growth 
stagnates, and standards of living stall. With little economic 
advancement prior to tax, and a very large tax burden from the debt, 
the next generation will inherit a standard of living inferior to that 
bequeathed to this one.


    The policy problem facing the United States is that spending rises 
above any reasonable metric of taxation for the indefinite future. 
Period. There is a mini-industry devoted to producing alternative 
numerical estimates of this mismatch, but the diagnosis of the basic 
problem is not complicated. The diagnosis leads as well to the 
prescription for action. Over the long-term, the budget problem is 
primarily a spending problem and correcting it requires reductions in 
the growth of large mandatory spending programs and the appetite for 
federal outlays, in general.
    As an example, using the President's 2011 Budget, the CBO projects 
that over the next decade the economy will fully recover and revenues 
in 2020 will be 19.6 percent of GDP--over $300 billion more than the 
historic norm of 18 percent. Instead, the problem is spending. Federal 
outlays in 2020 are expected to be 25.2 percent of GDP--about $1.2 
trillion higher than the 20 percent that has been business as usual in 
the postwar era.
    Just as some would mistakenly believe that the federal government 
can easily ``tax its way out'' of this budgetary box there is an 
equally misguided notion in other quarters that it can ``grow its way 
out.'' The pace of spending growth simply must be reduced.
    The Need for Rapid Action. The potential for a U.S. fiscal crisis 
is rising each day. This, it makes sense to quickly adopt reductions in 
annual discretionary spending to reduce future deficits. Discretionary 
spending is appealing as a starting point because it is the spending 
most easily and quickly modified by Congress. Any successful strategy 
will likely be built on three pillars:
     Rolling back spending to the ``normal'' funding levels 
preceding the financial crisis in 2008 and economic downturn;
     Adhering to a disciplined vision for a small, contained 
government. Such a vision would provide a demarcation between those 
things the government is uniquely equipped to undertake and those that 
are best not funded and left to the private sector; and
     Relying on strict oversight to defund those programs that 
do not effectively meet the government's service obligations.
    At the same time, mandatory spending programs cannot be left to 
evolve as dictated by current law. It is equally important to quickly 
undertake entitlement reform. To see the need for urgency, consider 
first Social Security.
    Social Security contributes to the current deficit. At present, 
Social Security is running a modest cash-flow deficit, increasing the 
overall shortfall. As the years progress, these Social Security 
deficits will become increasingly larger. They are central to the 
deficit outlook. More importantly, the stream of future outlays is 
heavily driven by demography. In particular, if the future benefits of 
the baby boom generation are exempted from reform, either by design or 
a failure to move quickly, then the outlay ``problem'' will have been 
effectively exempted from reform. This would be a fundamental policy 
    For this reasons, an immediate reform and improvement in the 
outlook for entitlement spending would send a valuable signal to credit 
markets and improve the economic outlook.
    Naturally, it would be desirable to focus on the larger future 
growth in outlays associated with Medicare, Medicaid, and the Patient 
Protection and Affordable Care Act (ACA). These share the demographic 
pressures that drive Social Security, but include the inexorable 
increase in health care spending per person in the United States. From 
a policy perspective, it would be desirable to replace the ACA with 
reforms that raised the efficiency of health care spending and slowed 
the growth of per capita health care outlays. At the centerpiece of 
such reforms would be reforms to the Medicare and Medicaid programs. 
However, in the absence of a political consensus to revisit the ACA, 
Medicare and Medicaid reforms will remain paralyzed and the most 
promising area for bipartisan entitlement reform is Social Security.
    The Role for Tax Policy. While it will not be possible or desirable 
to rely on pure revenue increases to address the looming debt 
explosion, there is a role for improved tax policy to support economic 
growth. What is needed now is a tax policy that has incentives for 
businesses and entrepreneurs to locate in America and spend at a faster 
rate on innovation, workers, repairs, and new plants and equipment.
    The place to start is the corporate income tax, which harms our 
international competitiveness in two important ways. First, the 35 
percent rate is far too high: when combined with state-level taxes, 
American corporations face the highest tax rates among our developed 
competitors.\4\ The rate should be reduced to 25 percent or lower.
    \4\ Some defend the high corporate tax rate by arguing that the 
effective corporate tax rate is much lower. This misses an important 
point. Every country's effective tax rate is also lower than its 
statutory rate. A recent study by two economists at the University of 
Calgary (http://www.cato.org/pubs/tbb/tbb--64.pdf) concludes that the 
marginal tax rate in the U.S on new investment is 34.6 percent, higher 
than any other country in the OECD.
    Second, the United States remains the only developed country to tax 
corporations based on their worldwide earnings. Our competitors follow 
a territorial approach in which, say, a German corporation pays taxes 
to Germany only on its earnings in Germany, to the U.S. only on its 
earnings here, and so forth. If we were to adopt the territorial 
approach, we would place our firms on a level playing field with their 
    Proponents of the worldwide approach argue that because it doesn't 
let American firms enjoy lower taxes when they invest abroad, it gives 
them no incentive to send jobs overseas. Imagine two Ohio firms, they 
say: one invests $100 million in Ohio, the other $100 million in 
Brazil. The worldwide approach treats the profits on these two 
investments equally, wisely giving the company that invests in Brazil 
no advantage over its competitor.
    But this line of reasoning ignores three points. First, because 
firms all over the world will pay lower taxes than the two Ohio 
companies, the likeliest outcome of the scenario is that both firms 
will fail, unable to compete effectively with global rivals. Second, 
when American multinational firms invest and expand employment abroad, 
they tend also to invest and expand employment in the United States. In 
the end, healthy, competitive firms grow and expand, while 
uncompetitive firms do not, meaning that our goal should be to make 
sure that American companies don't end up overtaxed, uncompetitive, and 
eventually out of business. And finally, because the U.S. is the 
holdout using a worldwide approach, it is at a disadvantage as the 
location for the headquarters of large, global firms. As the U.S. loses 
the headquarters, it will lose as well the employment, research and 
manufacturing that typically is located nearby.
    The corporate tax should be reformed further. At present, companies 
must depreciate their capital purchases over time. Instead, they should 
be allowed to deduct immediately the full cost of all investments, 
which would provide a dramatic incentive for spending. We should also 
consider phasing out the tax-deductibility of the interest that 
companies pay on their borrowing. Because this interest is deductible 
and the companies' own dividends are not, firms have an incentive to 
borrow excessively. Removing that incentive--making a firm's tax 
liability dependent not on its financial decisions but on its real 
economic profitability--would discourage financial engineering and 
focus corporations on their core mission.
    A more competitive corporate-tax system would be a good start in 
our effort to encourage private-sector growth. But a lot of private-
sector economic activity in the U.S. isn't affected by the corporate 
tax at all. Activity that takes place in sole proprietorships, 
partnerships, and other ``pass-through entities''--organizations whose 
income is treated solely as that of their investors or owners--is 
instead affected by the individual income tax. Congress' Joint 
Committee on Taxation projects that in 2011, $1 trillion in business 
income will be reported on individual income-tax returns.
    It's important to note that nearly half of that $1 trillion--$470 
billion--will be reported on returns that face the top two income-tax 
rates. A conservative estimate is that more than 20 million workers 
would be employed by firms directly affected by those two tax rates. 
Tax reform should avoid higher marginal tax rates in favor of lower 
rates and a broader base. Marginal tax rates and the taxation of 
dividends and capital gains directly affect companies' decisions about 
innovation, investment, and savings.
    Americans--from homeowners to small businesspeople to the millions 
of unemployed--are in desperate need of faster and prolonged economic 
growth. Congress should therefore evaluate tax proposals based on 
whether they're likely to trigger and support that growth. Tax policy 
can play a key role in spurring an economic recovery--but not without 
sustained reform of both the corporate and individual income-tax 


    The top issue facing Americans is the need for robust job growth. 
According to the National Bureau of Economic Research the recession 
began in December 2007. Their data show that there were 142.0 million 
jobs in December of 2007--the average of payroll and household survey 
data. In June 2009, NBER's date for the end of the recession, the same 
method showed 135.3 million jobs, for a total job loss of 6.7 million 
attributed to the recession. These numbers are quite close to those 
using the Bureau of Labor Statistics non-farm payroll data, which 
showed a loss of 6.8 million.
    There are glimmers of promise. Since December 2009, 945,000 payroll 
employment jobs have been added. However at the same time, there are 
14.5 million unemployed persons in the economy and many more 
discouraged workers. Since the start of the recession the labor force 
has fallen by nearly 500,000.
    For these reasons, the current unemployment rate of 8.9 percent 
likely understates the real duress. Using the BLS alternative 
unemployment rate (U-6), one finds that unemployed, underutilized and 
discouraged workers are 15.9 percent of the total. As evidence of the 
difficulties, the number of long-term unemployed (27 weeks or more) is 
currently 5.9 million and accounts for 43.9 percent of all unemployed 
    The fiscal future outlined above represents a direct impediment to 
job creation and growth. The United States is courting downgrade as a 
sovereign borrower and a commensurate increase in borrowing costs. In a 
world characterized by financial market volatility stemming from 
Ireland, Greece, Portugal, and other locations this raises the 
possibility that the United States could find itself facing a financial 
crisis. Any sharp rise in interest rates would have dramatically 
negative economic impacts; even worse an actual liquidity panic would 
replicate (or worse) the experience of the fall of 2008.
    Alternatively, businesses, entrepreneurs and investors perceive the 
future deficits as an implicit promise of higher taxes, higher interest 
rates, or both. For any employer contemplating locating in the United 
States or expansion of existing facilities and payrolls, rudimentary 
business planning reveals this to be an extremely unpalatable 
    In short, cutting spending is a pro-growth policy move at this 
juncture. As summarized by a recent American Action Forum the research 
indicates that the best strategy to both grow and eliminate deficits is 
to keep taxes low and reduce public employee costs and transfer 
    \5\ See http://americanactionforum.org/news/repairing-fiscal-hole-
    Keynesian Arguments and Reducing Spending. Recent analyses of H.R. 
1, the continuing resolution that called for $61 billion in reduced 
federal spending, by Goldman Sachs\6\ and Economy.com\7\ have been 
touted by some as evidence that it is not feasible to engage in 
spending reductions. I believe these arguments miss several key points.
    \6\ http://blogs.abcnews.com/thenote/2011/02/goldman-sachs-house-
    \7\ Zandi, Mark. 2011. A Federal Shutdown Could Derail the 
Recovery. Moody's Analytics. http://www.economy.com/dismal/article--
    The first thing to note is that while Members are aware that a 
reduction of $61 billion in budget authority does not translate into an 
immediate $61 billion cut in outlays, many analysts appear to not 
understand these budgetary facts. Indeed, on average, a $1 cut would 
translate into only 52 cents during the current fiscal year.
    To generate their estimates, Goldman Sachs assumed outlay 
reductions of $15 billion in the 2nd quarter and $30 billion in the 3rd 
quarter of calendar 2011. Naively interpreted, this could produce 
noticeable impacts on quarter-to-quarter GDP growth. But this is a 
misleading and highly overstated estimate of the likely impact because:
     The CBO estimates an outlay reduction of only $9 billion 
in fiscal 2011, or an impact of at most 0.3 percentage points;
     The calculation assumes full dollar-for-dollar reduction 
in GDP as spending declines. This is too large, especially because;
     Not all outlay reductions are actual cuts in the purchases 
of goods and services to contribute to measured GDP. Instead, some are 
transfers payments to states or individuals that will have a more muted 
impact. Indeed, while FY 2010 showed outlays of $3,456 billion on a 
budget basis, the National Income and Product Accounts\8\ showed under 
30 percent ($1,030 billion) as consumption purchases;
    \8\ Congressional Budget Office. 2011. CBO's Projections of Federal 
Receipts and Expenditures in the Framework of the National Income and 
Product Accounts. Pub. No. 4250.
     Not all of the budget authority cuts are from new 
spending. Instead, some are rescissions of the authority for spending 
that never occurred and might never occur; and
     Most importantly this is a static calculation that assumes 
no beneficial offset in private sector spending because of the improved 
budget outlook and prospect of lower future taxes and interest rates. 
Put differently, the criticisms ignore the rationale for making these 
beneficial cuts to begin with: to clear the way for private sector jobs 
and growth.
    A different way to make the last point is to note that these 
``Keynesian'' arguments invoke a sterile, mechanical view of his 
economic views. In fact, Lord Keynes placed considerable importance on 
the role of expectations and optimism regarding the economic 
environment--so-called ``animal spirits''. Policies that enhance the 
willingness and desirability of businesses to invest fit neatly in to 
his view of business cycles and economic growth.
    Importantly, recent movements in indexes of economic confidence 
ranging from small businesses, to CEOs, to households have shown 
considerable improvement (See Table).

                                         MEASURES OF ECONOMIC CONFIDENCE
                                          Jul '10  Aug '10    '10    Oct '10  Nov '10  Dec '10  Jan '11  Feb '11
NFIB Small Business Optimism Index\1\...     88.1     88.8       89     91.7     93.2     92.6     94.1       NA
Chief Executive CEO Confidence Index\2\.      4.7        5      4.9      5.1      5.8      5.8      6.3      6.4
Reuters/Michigan Survey of Consumer          67.8     68.9     68.2     67.7     71.6     74.5     74.2     77.5
\1\ http://www.nfib.com/Portals/0/PDF/sbet/sbet201102.pdf
\2\ http://www.chiefexecutive.net/ME2/Audiences/Default.asp?AudID=328DCF73ACA1493ABBD34BF8AB37D74A
\3\ https://customers.reuters.com/community/university/

    No definitive explanation of month-to-month movements in measures 
of confidence will emerge from this hearing. However, I find it 
supportive of the basic argument that confidence improved markedly as 
the election and Congressional debate shifted toward control of future 
spending, deficits, and debt.
    Two final aspects of the recent, Keynesian-based opposition to 
controlling spending are perplexing. Often those who make the claim 
that a $61 billion cut in spending will endanger the recovery are 
equally willing to argue that tax increases are needed to close the 
deficit. However, in a Keynesian model tax increases and transfer 
decreases enter in exactly the same manner. If the latter endanger the 
recovery, so must the former!
    More importantly, entitlement reform--the repeal of the Affordable 
Care Act, Medicare reform, Medicaid reform, or Social Security reform--
is likely to have no immediate impact on federal outlays. Instead, they 
are commitments in the present to reduced spending in the future. By 
construction, they can have no negative, Keynesian impacts on recovery. 
Instead, they carry only beneficial impacts on the expectations of 
employers and other market participants.


    At this juncture, the United States needs a keen focus on enhancing 
the rate of economic growth. Workers and economy as a whole will 
benefit from pro-growth policies. Central aspects of a pro-jobs and 
growth agenda are controlling federal spending growth; eliminating the 
potential for debt accumulation that generates a fiscal crisis, or 
higher taxes and interest rates; and improved tax policy.
    I look forward to answering your questions.


    Chairman Ryan. Thank you. Ms. Reinhart.
    Ms. Reinhart. Thank you, Chairman Ryan, and other members 
of the committee, for this opportunity.
    Chairman Ryan. Please pull your mic right in front of you.
    Ms. Reinhart. The first part I would like to address is 
just put where we are a little bit in historic perspective, and 
then talk about the growth implications of where we are. As 
regard to where we are, historically, I would like to highlight 
that whether you look at gross debt, gross debt right now is 94 
percent of GDP, the peak debt in 1946 was 121. But let's move 
    Let's look at what the Federal Reserve, the flow of funds 
include debts of the State and local government, and also 
federal enterprises, which now include Fannie and Freddie. That 
ratio of debt to GDPS of the third quarter is 122 percent, 
which surpasses the peak that we established in 1945.
    Let me highlight that hidden debts are a big issue. And 
what do I mean by hidden debts? I mean contingent liabilities, 
and not just of the Social Security variety. There are huge 
contingent liabilities in the financial industry that we have 
to be aware of. If you don't think contingent liabilities 
matter, think of Ireland.
    Let me proceed, very quickly, by saying that the march from 
financial crisis, to high public debt, to a public debt crisis, 
is the one that we are seeing unfolding in Europe. And that is 
what one could call debt with drama. And it is not over, and it 
has consequences for the U.S. Spain was downgraded overnight. 
The presumption that we are exempt from that pattern is a 
dangerous one, I would point out. It can happen.
    But let's not go there just yet. Let's talk about where we 
are now and implications for growth. I have done work with Ken 
Rogoff that did a very simple exercise that looked at various 
levels of debt, and how it related to growth. We have found 
that years in which growth that is above 90 percent of GDP, 
median growth rates are about one percentage point lower. And 
this is based on post-war analysis. It includes 44 economies; 
it is robust, whether you look at emerging markets, whether you 
look at advanced economies alone, whether you look at the post-
war, whether you look at longer periods. In effect, I want to 
highlight that the ECB and the IMF have done subsequent studies 
which actually clarify some of the areas, because our analysis, 
we do not pretend to do causality in our analysis. But the 
subsequent studies have taken that issue up. And there are two 
findings worth highlighting.
    One is there is a strong negative causal relationship from 
high debt to lower growth. And secondly, those studies suggest, 
particularly the ECB study, which is for 12 European economies, 
ours is much broader, does suggest that the debt levels, the 
thresholds in which we placed at 90 percent, may be, actually, 
somewhat lower in the vicinity of 70 to 80 percent.
    The bottom line is we have passed those thresholds, I 
think, without talking about drama, or default, or anything 
like that. I think the growth consequences are in the here and 
    Let me say something in what time I have left, that the 
contingent liability issue is a huge one. Right now, states 
also have what we call in the IMF ``below the line financing.'' 
This is financing through arrears. Illinois, of course: six 
billion. None of these things are embedded in those debt 
figures, which are in the public domain. By the way, all the 
analysis that we have done, all this data is in the public 
    So, without any melodrama, the debt numbers are 
considerably worse than the official estimate because we do 
have a lot of off balance sheet items that we need to be 
thinking about.
    Let me conclude, then, on the same note as my testimony 
about a year ago before your Senate counterparts. At that time, 
I cautioned, it was premature to start cutting, because I was 
concerned about a frail recovery from a very severe financial 
crisis. But we are now, 2001, the crisis began in the summer of 
2007, the clock has been running.
    Let me conclude, then, the sooner our political leadership 
reconciles itself to accepting adjustment, the lower the risk 
of truly paralyzing debt problems down the road. Although most 
governments still enjoy strong access to financial markets at 
very low interest rates, market discipline can come without 
warning. Countries that have not laid the groundwork for 
adjustment will regret it. This time is not different.
    [The prepared statement of Carmen M. Reinhart follows:]

 Prepared Statement of Carmen M. Reinhart, Dennis Weatherstone Senior 
         Fellow, Peterson Institute for International Economics

    Thank your, Chairman Ryan and the other members of the Committee 
for the opportunity to comment on the U.S. economy and the risks for 
the federal budget and debt. I am currently Dennis Weatherstone Senior 
Fellow at the Peterson Institute for International Economics. I suspect 
that I was invited to this hearing titled Lifting the Crushing Burden 
of Debt because, for more than a decade, my research has focused on 
various types of financial crises, including their fiscal implications 
and other economic consequences. Specifically, some of this work has 
focused on the historical and international evidence on the links 
between public debt and economic growth.
    The march from financial crisis to high public indebtedness to 
sovereign default or restructuring is usually marked by episodes of 
drama, punctuated by periods of high volatility in financial markets, 
rising credit spreads, and rating downgrades. This historic pattern is 
unfolding in several European countries at present. That situation is 
far from resolved and remains a source of uncertainty for the United 
States and the rest of the world. However, the economic effects of high 
public indebtedness are not limited to turmoil in financial markets. 
Quite often, a build-up of public debt often does not trigger 
expectation of imminent sovereign default and the associated climb in 
funding costs. But in the background, a serious public debt overhang 
may cast a shadow on economic growth over the longer term, even when 
the sovereign's solvency is not called into question.
    In a paper written over a year ago with my coauthor Ken Rogoff from 
Harvard University, we examined the contemporaneous connection between 
debt and growth. I summarize here some of the main findings of that 
paper and as well as our recent related work and relevant studies from 
the IMF and European Central Bank.
    Our analysis was based on newly-compiled data on forty-four 
countries spanning about two hundred years. This amounts to 3,700 
annual observations and covers a wide range of political systems, 
institutions, exchange rate arrangements, and historic circumstances. 
The annual observations were grouped into four categories, according to 
the ratio of gross central government debt-to GDP during that 
particular year: years when debt-to-GDP levels were below 30 percent; 
30 to 60 percent; 60 to 90 percent; and above 90 percent. Recent 
observations in that top bracket come from Belgium, Greece, Italy, and 
    The main finding of that study is that the relationship between 
government debt and real GDP growth is weak for debt/GDP ratios below 
90 percent of GDP. Above the threshold of 90 percent, however, median 
growth rates fall by one percent, and average growth falls considerably 
more. The threshold for public debt is similar in advanced and emerging 
economies and applies for both the post World War II period and as far 
back as the data permit (often well into the 1800s).


    Mapping a vague concept, such as ``high debt'' or ``over-valued'' 
exchange rates to a workable definition for interpreting the existing 
facts and informing the discussion requires making arbitrary judgments 
about where to draw lines. In the case of debt, it turns out that 
drawing the line at 90 percent was critical one detecting a difference 
in growth performance.
    A hint about how important is that cutoff comes from the fact that 
countries rarely allow themselves to enter that high-debt range. 
Pooling the debt/GDP data for the advanced economies over the post-
World War II period reveals that the median public debt/GDP ratio was 
36.4. Fully three-quarters of the observations were below the 60 
percent criteria in the Maastricht treaty governing the European Union. 
About 92 percent of the observations fall below the 90 percent 
threshold. If debt levels above 90 percent are indeed as benign as some 
suggest, one has to explain why they are avoided so often over the long 
sweep of history. (Generations of politicians must have been 
overlooking proverbial money on the street).
    We do not pretend to argue that growth will be normal at 89 percent 
and subpar at 91 percent debt/GDP, any more than a car crash is 
unlikely at 54 mph and near certain at 56 mph. However, mapping the 
theoretical notion of ``vulnerability regions'' to bad outcomes by 
necessity involves defining thresholds, just as traffic signs in the 
U.S. usually specify 55 mph. Subsequent work suggests that we were 
generous in putting the threshold so high. An analysis at the European 
Central Bank, for instance, presents evidence that the negative impact 
of debt on growth may start at a lower 70-80 percent threshold for 
European countries.

                       DEBT AND GROWTH CAUSALITY

    Our analysis looked at contemporaneous relationships between 
average and median growth and inflation rates and debt. Temporal 
causality tests are not part of the analysis. But where do we place the 
evidence on causality? For low-to-moderate levels of debt there may or 
may not be one. For high levels of debt, the evidence suggests 
causality runs in both directions.
    Our analysis of the aftermath of financial crisis presents 
compelling evidence for both advanced and emerging markets on the 
fiscal impacts of the recessions associated with banking crises. There 
is little room to doubt that severe economic downturns, irrespective 
whether their origins was a financial crisis or not, will, in most 
instances, lead to higher debt/GDP levels contemporaneously and or with 
a lag. There is, of course, a vast literature on cyclically-adjusted 
fiscal deficits making exactly this point.
    A unilateral causal pattern from growth to debt, however, does not 
accord with the evidence. Public debt surges are associated with a 
higher incidence of debt crises. In the current context, even a cursory 
reading of the recent turmoil in Greece and other European countries 
can be importantly traced to the adverse impacts of high levels of 
government debt (or potentially guaranteed debt) on county risk and 
economic outcomes.
    There is scant evidence to suggest that high debt has little impact 
on growth. Kumar and Woo (2010) highlight in cross-country analysis 
that debt levels have negative consequences for subsequent growth, even 
after controlling for other standard determinants in growth equations. 
For a dozen European countries a study from the European Central Bank 
(Chechrita and Rother, 2010) provides further evidence of negative 
causality from debt to growth.
    I will conclude on the same note of my testimony of about a year 
ago before your Senate counterparts. The sooner our political 
leadership reconciles itself to accepting adjustment, the lower the 
risks of truly paralyzing debt problems down the road. Although most 
governments still enjoy strong access to financial markets at very low 
interest rates, market discipline can come without warning. Countries 
that have not laid the groundwork for adjustment will regret it.
    This time is not different.


    Chairman Ryan. Thank you. Ms. MacGuineas.
    Ms. MacGuineas. Thank you. Chairman Ryan, Congressman Van 
Hollen, members of the committee, thank you for having me here 
today. You all know better than most the tremendous threats the 
United States faces due to our high debt load. In my written 
testimony, I go over a number of the numbers, including a 
realistic baseline that we put out that shows the problem is 
worse than you often see it looking at current assumptions.
    Bottom line, our debt is unsustainable. Interest payments 
will be nearly $950 billion by the end of the decade, more than 
all domestic discretionary spending on its current path. And if 
we do not make changes, we will, at some point, face a fiscal 
    The solution is a multi-year, comprehensive fiscal plan 
that tackles each area of the budget. And the sooner we enact 
such a plan, the better. We face two paths. Under one, fiscal 
consolidation is used as part of an economic strategy that also 
includes preserving, and, in many cases, increasing, productive 
investments, and a sound safety net, and also fundamentally 
reforming our tax code to enhance competitiveness. The economy, 
the U.S. standard of living, and our well-being would benefit 
from having taken thoughtful preemptive actions.
    On the other course, we delay due to the difficult policy 
choices and the political stalemate, and it causes the debt to 
continue to grow, which pushes up interest rates and payments, 
squeezes out our important priorities, chokes off economic 
growth, and it affects working families, and ultimately, it 
leads us to a vicious debt spiral which damages the entire 
economy, and the country. And under that scenario, we still 
have to make the same difficult spending and tax choices we 
face now, but they would be much larger and more painful.
    So I will dig a little bit deeper into some of the areas 
that are threatened by high debt levels. There are five major 
ones: economic, budget, fiscal, psychological, and inter-
generational. In terms of the economy, increased federal 
borrowing and debt will eventually crowd out private investment 
and lead to a smaller capital stock, lower incomes, a lower 
standard of living, and a lowering of our global 
    In terms of the budget, higher debt levels necessitate 
higher interest payments--which crowd out room for other 
spending priorities--and tax cuts. This will make our current 
battle over limited resources seem easy when compared to what 
we would be facing in the future.
    The fiscal risk is that higher debt levels lead to reduced 
budget flexibility as interest payments grow to consume larger 
portions of the federal budget, and they compromise our ability 
to respond to future crises and opportunities as they come 
along. High debt levels are also psychologically damaging, 
contributing to business and household uncertainty, and harming 
our willingness to invest in ways that would spur the recovery. 
They also make planning difficult.
    And I will just talk about one policy challenge. We know, 
in no uncertain terms, that changes need to be made to Social 
Security. We know that the sooner they are made, the better. 
And yet, for years and years of delay, it means that we are not 
letting current retirees, workers, or taxpayers know what the 
future holds for the program and its sustainability; and thus, 
they cannot plan accordingly. It is a terrible disservice to 
all participants of Social Security. The same level of 
uncertainty, of course, is there with regard to other needed 
policy changes that affect business owners, students, and 
normal families trying to plan for their future.
    So finally, high debt levels not only threaten current 
standards of living, but the well-being of future generations. 
Higher borrowing today pushes the costs onto our children and 
grandchildren. So basically, we should just look our kids in 
the eye and say, Sorry we wanted to spend more today, and we 
didn't want to pay for it, so we are passing the bills onto 
    Ultimately, if changes are not made, the country will 
experience some kind of a fiscal crisis. And under such a 
scenario, creditors would demand spending or tax changes to set 
the new fiscal course. We would be doing it on their terms, not 
our own. No one knows exactly when this will happen, what it 
will look like, or what will set it off, but we know this: that 
the problem will not fix itself, and that without changes there 
will be some kind of painful crisis. It will be the worst of 
all worlds in terms of what it does to our economy, and all of 
our policy priorities.
    So, in terms of a solution, I believe we need to adopt a 
multi-year, comprehensive budget plan to put the country on a 
glide path to stabilize the debt at a sustainable level. We 
probably want to bring the debt back down to around 60 percent 
of GDP over a decade, still significantly higher than our 
historical levels of below 40 percent, and then continue on 
that path to get us closer to historical levels.
    While the debt threat is serious, it is also an opportunity 
to restructure our budget and tax system. In order to be 
competitive down the road, we must strengthen critical 
investments. By shifting our budget from a consumption-oriented 
to an investment-oriented budget, we could lay a new foundation 
for growth. Entitlement reform must be at the center of any 
turnaround plan. The largest programs in our budget that are 
growing faster than the economy: Social Security, Medicare, and 
Medicaid, must be reformed.
    Finally, our tax code is simply a mess. There is over a 
trillion dollars of tax expenditures, which are truly more like 
spending programs in disguise. And we should look at reducing, 
if not eliminating, many of them, so that we can reduce tax 
rates, and more effectively encourage work and investment, 
while also helping to fuel growth and reduce deficits.
    So while the policy choices involved in tackling and 
controlling the debt are not easy, they are far easier than 
what we will face if we continue to delay. It is our hope that 
we will spend this year developing specific options for 
tackling the debt, discussing the trade-offs, making the 
necessary compromises, and ultimately passing a multi-year plan 
to change course. This will reassure markets, provide families 
and businesses with the stability they need, and set us on a 
course for a much brighter economic future. Continuing to delay 
is obviously a very risky strategy. So thanks again for having 
me today.
    [The prepared statement of Maya MacGuineas follows:]

   Prepared Statement of Maya MacGuineas, President, Committee for a
         Responsible Federal Budget, the New America Foundation

    Chairman Ryan, Congressman Van Hollen, Members of the Committee, 
thank you for inviting me here today to discuss the problems presented 
by our large and growing federal debt.
    I am Maya MacGuineas, president of the bipartisan Committee for a 
Responsible Federal Budget and the director of the Fiscal Policy 
Program at the New America Foundation. I am also a member of the 
Peterson-Pew Commission on Budget Reform, which recently released two 
reports--Red Ink Rising and Getting Back in the Black, which focus on 
the need to adopt multi-year budgetary targets and automatic triggers 
to help improve the budget process, and which we believe can be a 
helpful part of fixing our budgetary challenges.
    You all know better than most, the tremendous threats the United 
States' debt situation poses. Not only is our debt higher than it has 
ever been in the post-war period as a percentage of our economy, we are 
on track to continue adding to this debt indefinitely.
    This year, public debt--the amount the U.S. government owes to 
domestic and foreign investors, and ignoring sums that the government 
owes to itself via intergovernmental accounts--is set to grow from $9.0 
trillion, or 62 percent of GDP at the end of last year to $10.4 
trillion, or 69 percent of GDP at the end of this year, according to 
the most recent projections from the Congressional Budget Office. By 
the end of the 10-year period, the debt will have grown to an 
astronomical $18.3 trillion, or 77 percent of GDP. Interest payments 
will be nearly $800 billion in that last year, or more than all 
domestic discretionary spending.
    Yet even these assumptions are probably too optimistic. The 
Committee for a Responsible Federal Budget recently released its 
``Realistic Baseline'', which includes more realistic assumptions about 
future tax and spending policies than the current law assumptions CBO 
is directed to follow.\1\ Our baseline shows deficits growing to over 
$1.3 trillion, or 5.7 percent of GDP by the end of the ten-year window; 
debt growing to $21.8 trillion, or 91.5 percent of GDP; and interest 
payments reaching $947 billion in that final year.
    \1\ Projections based on CRFB Realistic Baseline, which assumes the 
2001/2003/2010 tax cuts are fully extended, war costs slowly decline, 
scheduled reductions to Medicare payments to physicians continue to be 
waived for remainder of the decade. After 2021, projections follow CBO 
Alternative Fiscal Scenario, except that revenues are allowed to rise 

                                                           FIGURE 1.--CRFB REALISTIC BASELINE
                                              2012      2013      2014      2015      2016      2017      2018      2019      2020      2021     10-Year
                                                                   BILLIONS OF DOLLARS

Net Interest..............................      $264      $329      $406      $484      $569      $652      $727      $800      $880      $947    $6,058
Deficits..................................    $1,103      $896      $821      $870    $1,006    $1,000    $1,037    $1,170    $1,267    $1,347   $10,516
Debt......................................   $11,601   $12,581   $13,479   $14,427   $15,507   $16,596   $17,726   $18,990   $20,353   $21,798       N/A
                                                                     PERCENT OF GDP

Net Interest..............................      1.7%      2.0%      2.4%      2.7%      3.0%      3.3%      3.5%      3.7%      3.9%      4.0%      3.0%
Deficits..................................      7.0%      5.5%      4.8%      4.8%      5.3%      5.0%      5.0%      5.4%      5.6%      5.7%      5.4%
Debt......................................     73.9%     76.7%     78.1%     79.3%     81.0%     82.8%     84.7%     86.9%     89.2%     91.5%       N/A
 CBO Baseline Interest....................      1.7%      2.0%      2.3%      2.5%      2.8%      3.0%      3.1%      3.2%      3.3%      3.3%      2.8%
 CBO Baseline Deficits....................      7.0%      4.3%      3.1%      3.0%      3.4%      3.1%      2.9%      3.2%      3.2%      3.2%      3.6%
 CBO Baseline Debt........................     73.9%     75.5%     75.3%     74.9%     75.0%     75.2%     75.3%     75.8%     76.2%     76.7%       N/A

    I believe it is highly unlikely we would even make it to that point 
without experiencing some type of a fiscal crisis.
    Under realistic assumptions, debt will continue to grow throughout 
and beyond the decade, rising to over 100 percent of the economy in the 
mid-2020s, to over 200 percent in the 2040s, and eventually to over 500 
percent by 2080. Driving the growth in debt will be the aging of the 
U.S. population, rising health care costs, and of course, spiraling 
interest costs.
    Clearly, no country could sustain debt levels at such heights 
without destroying economic growth, eliminating vital investments, and 
slashing standards of living. But even at heightened levels of debt, 
like those the U.S. is currently experiencing in the short-term and 
increasingly into the medium- and long-terms, the economy and society 
at large can suffer.
    The solution to all of the risks of higher debt is a multi-year, 
comprehensive fiscal plan that tackles each area of the budget. The 
sooner we enact such a plan, the better.
    We face two paths. Under one, fiscal consolidation is used as part 
of an economic strategy that also includes preserving--and in many 
cases, increasing--productive public investments and a sound safety net 
and fundamentally reforming our tax code to enhance competitiveness. 
The economy and U.S. standard of living would benefit from having taken 
thoughtful preemptive actions. Under the other, we delay due to the 
difficult policy choices and political stalemate, which causes the debt 
to continue to grow, pushing up interest rates and payments, squeezing 
out more important priorities, choking off economic growth and 
affecting working families, and ultimately leading to a vicious debt 
spiral, which damages the entire economy and country. And under that 
scenario we still have to make the same difficult spending and tax 
choices we face now--but they would have to be larger and more painful.
    I'd like to dig a little deeper into the problems caused by high 
debt levels:
    1. Economic: Many noted economists and respected organizations, 
including the International Monetary Found (IMF) and the Congressional 
Budget Office (CBO), have conducted analyses on the effects of 
heightened debt on interest rates; inflation; incentives for workers, 
businesses, and investors; and economic growth in general. They have 
found that higher levels of debt do not bode well for continued 
economic strength or living standards.
    Increased federal borrowing and debt would eventually crowd out 
private investment in potentially more productive ventures via higher 
interest rates for government debt. Down the road, the nation would 
face a smaller capital stock. This need not be the case if increased 
federal borrowing was directed toward investments on public capital 
with returns greater than or equal to returns on forgone private 
investments.\2\ Examples of such investments could include 
infrastructure, research and development, and education. However, the 
U.S. budget is primarily a consumption oriented budget, with spending 
on health care and retirement costs far out stripping investments, and 
oftentimes, our public investments are not well-directed.
    \2\ Other complicating factors are that larger budget deficits tend 
to increase private savings, for several reasons, and can help increase 
foreign investment, both of which can mitigate the negative effects of 
increased borrowing. However, CBO states that, overall, these factors 
do not reverse the conclusion that increased borrowing would crowd out 
private investment.
    A smaller capital stock down the road would eventually cause 
incomes to fall, making future generations worse off. Lower incomes 
would reduce people's incentives to work. The combined effects of a 
lower capital stock and labor supply would harm economic output in the 
long-term and decreases U.S. global competitiveness.
    Economists Carmen Reinhart, who is here today, and Ken Rogoff of 
Harvard University have estimated that debt levels of roughly 90 
percent of the economy--looking at a broader measure of debt, which 
incorporates debts the government owes to itself--are correlated with 
lower annual economic growth of about 1 percentage point.\3\ Likewise, 
economists at the IMF have estimated that a 10 percentage point 
increase in debt lowers potential output growth by 0.15 percentage 
point in advanced economies.\4\
    \3\ Reinhart and Rogoff. Growth in a Time of Debt, January 2010.
    \4\ Kumar and Woo, Public Debt and Growth, July 2010.
    Higher debt can also contribute to higher inflation, whereby 
deficits add too much to aggregate demand in a given time frame, lead 
monetary authorities to try to reduce the real value of debt by 
printing more money (often referred to as ``monetizing'' the debt), or 
lead some people to believe that monetary authorities could 
deliberately increase inflation.\5\ Such outcomes would have obvious 
negative implications for business and investor confidence and economic 
growth, as well as many savers in society--in particular, the elderly.
    \5\ Sargent and Wallace (1981), Barro (1995), Cochrane (2010), 
cited in Kumar and Woo.
    2. Budget: Higher debt levels necessitate higher interest payments 
on existing debt. Last year, interest payments on our $9 trillion debt 
totaled $197 billion. By 2021, however, interest payments are projected 
to jump fourfold to $792 billion, according to CBO. If policymakers 
enact legislation that increases deficits and debt over the next ten 
years, interest payments will also increase by even larger factors. All 
of these scenarios assume rather favorable interest rates. As interest 
payments rise, they will squeeze out room for other spending priorities 
and tax cuts. This will make the current battle over limited resources 
seem easy when compared to what is looming in the future.
    3. Fiscal: Higher debt levels lead to reduced budget flexibility as 
interest payments grow to consume larger and larger portions of the 
federal budget, and compromise our ability to respond to future crises 
and opportunities.
    Policymakers would have limited resources to respond to unforeseen 
events, such as wars, humanitarian crises, and economic downturns. In 
2008, public debt stood at about 40 percent of the economy, affording 
us the fiscal space to significantly increase spending and cut taxes to 
support an economic turnaround. Larger debt would have hindered such 
efforts, and threatens our ability to respond to the next emergency. By 
nature, these budgetary costs are unpredictable, both in timing and in 
magnitude. Living at our fiscal limits is an immensely dangerous way to 
operate the government given the many uncertainties the nation faces.
    4. Psychological: Uncertainty surrounding the country's fiscal path 
is eroding confidence among businesses and individuals. They don't know 
what spending and tax policies to expect in the future, and thus cannot 
plan accordingly. If businesses and individuals do not know what 
spending cuts and/or tax increases they might face in the future, or 
even if the country might face a fiscal crisis of some form or another, 
they will be less willing to make longer-term investment decisions in 
our economy. As the economic recovery continues to lag, uncertainty 
contributes to the problem of how to encourage businesses to be the 
engine of growth.
    A lack of confidence or certainty can stem not only from economic 
expectations, but also from policy uncertainty. Whether large spending 
cuts or tax increases, uncertainty over which spending programs 
lawmakers might eliminate or which taxes they might create or increase 
are not optimal for growth.
    Just as one example, we know in no uncertain terms that changes 
need to be made to Social Security. We know that the sooner they are 
made, the better. And yet the years and years of delay means that 
current retirees, workers, and taxpayers, don't know what changes will 
be made to make the program sustainable, and thus, cannot plan 
accordingly. It is a terrible disservice to all participants of Social 
Security. The same level of uncertainty with regard to other needed 
policy changes affects business owners, students, and normal families 
trying to plan for their futures.
    5. Intergenerational: Higher debt levels not only threaten current 
standards of living, but the wellbeing of future generations of 
Americans. Higher borrowing today pushes the costs onto our children 
and grandchildren. Each generation of Americans has passed on improved 
opportunities and standards of living to the next generation. But for 
the first time, our fiscal course threatens to burden our children and 
grandchildren with enormous debt and reduced opportunities for the 
future, as well as a lack of fiscal flexibility as we lock them into 
certain programs and large interest burdens.
    Basically we should all just look our kids in the eye and say, 
sorry, we wanted to spend a lot but not pay for it, so we are passing 
the bills onto you. Good luck with that.

                            A FISCAL CRISIS

    Ultimately, if changes are not made, the country will experience 
some type of fiscal crisis. Under such a scenario, creditors would 
demand spending and/or tax changes to set a new fiscal course. No one 
knows exactly when this will happen, what it will look like, or what 
will set it off. But we know this problem will not fix itself and that 
without changes, there will be a fiscal crisis.
    A year ago, we held a conference on what a tipping point might look 
like. At this cheery gathering economists and budget experts in 
attendance noted that a crisis could take many forms, including 
scenarios ranging from a gradual rise in interest rates and slowing of 
economic growth, to a rapid crisis where investors pull the plug on an 
economy--with triggering events ranging from a credit rating warning, 
to state budget problems, to a totally unforeseen factor. There was 
general concern that markets were underestimating how soon such a 
crisis might hit, and that the greatest risk was that our economy is 
already negatively affected by high debt levels, and that a crisis 
could hit in the next few years.
    Under an abrupt fiscal crisis scenario, the U.S. would not have the 
luxury of spreading fiscal adjustment out among a larger group of 
federal spending programs or taxes, or across more generations. 
Investors would force immediate spending cuts and/or tax increases, 
threatening our ability to protect the programs on which the most 
vulnerable in society rely. A fiscal crisis would surely exacerbate all 
the negative economic, fiscal, psychological, and intergenerational 
effects of high debt.
    For older generations, a fiscal crisis would hurt job security and 
incomes, and threaten retirement security if federal spending on 
retirement programs or taxes had to be altered abruptly. For younger 
generations, a crisis would also threaten job opportunities, incomes, 
and affordability of big ticket items. Workers would have to expect to 
work much longer than their parents and grandparents' generations.
    We can never be sure when we might confront such a scenario, but we 
know for sure that we would ultimately face some type of crisis. It is 
far better to make fiscal changes on our accord than have markets force 
changes on us.\6\
    \6\ CRFB, Fiscal Turnarounds: International Success Stories, 
February 2010.
                      THE SOLUTION: A FISCAL PLAN

    We need to adopt a multi-year, comprehensive budget plan to put the 
country on a glide path to stabilize the debt at a sustainable level. 
We probably want to bring the debt down to around 60 percent of GDP 
over a decade--still significantly higher than the historic average of 
below 40 percent, and continue on a path that leads us back down closer 
to historical averages beyond that.
    All areas of the budget should be on the table. Spending caps on 
discretionary portions of the budget--including both defense and non-
defense programs--, entitlement reform, and fundamental tax reform are 
critical for tackling the magnitude of future deficits.
    The debt threat is serious, but it is also an opportunity to 
restructure our budget and tax system for the 21st century. In order to 
be competitive down the road, we must strengthen critical investments 
in infrastructure, high value research and development, and education. 
By shifting our budget from one based more on consumption to 
investment, we can lay a new foundation for growth.
    Entitlement reform must be at the center of any turnaround plan. 
The largest programs in our budget that are growing faster than the 
economy--Social Security, Medicare, and Medicaid--must be reformed. 
Their open-ended growth is already squeezing out other parts of the 
budget, threatens to push up tax rates to truly damaging levels, and 
their automatic nature removes the critical oversight and evaluation 
processes that should be a central part of budgeting.
    And finally, our tax code is simply a massive mess. It is littered 
with over 250 special credits, deductions, exemptions, and exclusions 
that cost us nearly $1.1 trillion a year. These ``tax expenditures'' 
are truly just spending by another name. By reducing, if not 
eliminating, many of them, we can reduce tax rates to more effectively 
encourage work and investment, while also helping to reduce deficits. 
Fundamental tax reform is key in turning our fiscal situation around 
and strengthening our economic well-being.
    A comprehensive fiscal plan that stabilizes debt and then reduces 
it thereafter must be center to any economic recovery and growth 
strategy. The economy and private investment would become unburdened by 
debt, the country would have the budget flexibility to respond to 
emergencies and to invest in critical areas for long-term prosperity, 
investors would remain confident in our ability to repay our debts, and 
businesses and consumers would have certainty over future spending cuts 
and tax changes. Most importantly, we would be handing down even better 
opportunities to the next generation.
    While the policy choices involved in tackling our out of control 
debt are not easy, they are far easier than what we will face if we 
continue to delay. It is our hope that we will spend this year 
developing specific options for tackling the debt, discussing the 
trade-offs, making the necessary compromises, and ultimately passing a 
multi-year plan to change course. This will reassure markets, provide 
families and businesses with the stability they need, and set us on a 
course for a much brighter economic future. Continuing to delay is a 
very risky strategy.
    Thank you to the Committee for all your work on this and the 
opportunity to appear here today.

                   STATEMENT OF JOHN PODESTA

    Chairman Ryan. Thank you. Mr. Podesta.
    Mr. Podesta. Thank you, Mr. Chairman, and Mr. Van Hollen, 
members of the committee, thanks for inviting me back to the 
committee. Mr. Chairman, you will be surprised to know that I 
agree with your goal in your opening statement. I, of course, 
disagree a little bit with the analysis of how we got here, so 
let me just start there and do it very briefly.
    I was fortunate, as you know, to serve as President 
Clinton's Chief of Staff. When our administration came to a 
close, the budget outlook was very different than it is today. 
Although President Clinton did inherit a budget deficit of 4.6 
percent of GDP and growing, by 1998 we had a balanced budget. 
We left the incoming administration with a balance sheet that 
was $236 billion in the black, the largest surplus since 1948. 
And CBO projected that by 2008, the federal government would 
essentially be debt-free on the policies then in place. By the 
time President Obama was sworn in, the deficit had already 
reached $1.2 trillion, a remarkable swing of 11 percent of GDP 
since our administration left office.
    How did we get from record surpluses to record deficits? 
First, deep tax cuts especially for high earners in 2001 and 
2003 dramatically affected the federal balance sheet. The wars 
in Iraq and Afghanistan, and a major new entitlement program, 
Medicare Part D, were enacted without being paid for. The 
predictable result was a swift return to massive deficits and a 
growing debt. By 2007, instead of being nearly debt-free, the 
federal government's publicly held debt had nearly doubled.
    Second, near the end of President Bush's second term, the 
onset of the Great Recession made a bad fiscal situation worse. 
Tax revenues plummeted, and this is the point where I disagree 
with you, Mr. Chairman. In fiscal year 2009, they dropped to 
their lowest level since 1950, where they have stayed. In fact, 
decline in tax revenues between 2008 and 2009 were four times 
larger than the new spending passed during President Obama's 
first year in office. We are left with a serious mid-term 
deficit problem, as well as an acute deficit and debt outlook, 
and on that, I agree with the panelists.
    The only way to improve our long-term budget outlook is to 
combine fiscal discipline, as we did in the 1990s, with 
policies that create robust economic growth. So while we must 
reduce wasteful spending and take bold steps toward fiscal 
balance, both today and in the long run, it is also clear that 
sudden drastic spending cuts to government programs to keep the 
wheels of our economy turning will cost jobs, stall the fragile 
economic recovery, and that is why we both supported at cap 
[spelled phonetically], targeted investments, but have also 
listed specific cuts.
    We look for savings in every part of the budget because it 
is impossible to balance the budget by cutting non-security 
discretionary spending alone. Not only is this one area of 
spending decidedly not the source of our deficit problems, it 
is also home to the most important public investments that are 
fundamental to our future economic growth. And it adds, as Mr. 
Van Hollen noted, at less than 15 percent of the budget, there 
are just not enough non-security discretionary dollars to fill 
the budget gap.
    Rather than limiting the spending discussion to one part of 
the budget, we should broaden it to include mandatory spending, 
defense spending, government efficiency improvements, and 
especially tax expenditures, as Ms. MacGuineas noted. Every 
year we are spending twice as much on tax expenditures, more 
than a trillion dollars, as we do on non-security discretionary 
spending. Yet many of these tax expenditures are wasteful 
giveaways. They provide the biggest tax breaks to those who 
need them the least. They are subject to much less scrutiny and 
oversight than spending. And some are so specific and targeted 
on such a few number of people, that I think it is fair to call 
them tax earmarks.
    Finally, new revenue absolutely must be part of the 
solution. There is little hope for deficit reduction, no matter 
what the size in spending cuts, without looking to revenue side 
of the ledger. With so many challenges facing our country 
today, we have to continue to invest in infrastructure, in 
clean energy, and science, and innovation, and education, to 
keep our economy competitive, to support the middle class, to 
create jobs, and to get wages growing again.
    As I go into in some detail in my written testimony, 
limiting federal revenue to the historical average, or some 
level slightly above that, is going to be insufficient to 
address the challenges of the day. In fact, the last time the 
historic level of revenue would have actually balanced the 
budget was in 1966. And both the country and the budget looked 
quite a bit different 45 years later, after we passed Medicaid 
and Medicare in particular.
    So I urge the committee to scrutinize and realize savings 
from every part of the budget, including in entitlements 
alongside strategic investments in revenue. We have identified 
specific cuts in non-security discretionary spending, in 
unneeded Pentagon spending, in wasteful tax expenditures, in 
mandatory spending, in restrained health care costs, in 
addition to targeted revenue increases.
    Our plan, and hopefully I think, the blueprint for this 
committee that you will put forward soon would bring the budget 
into primary balance where federal revenues equal program 
spending by 2015. I hope that you can meet that mark, and put 
us on a firm footing to fully balance the budget in the future. 
It enforces fiscal discipline through the proven mechanisms of 
hard but realistic discretionary caps, and a real and 
comprehensive PAYGO system. And will bring the budget closer to 
balance without the weighing or reversing the fragile economy 
we have fostered over the past two years. So, again, thank you, 
and I look forward to your questions.
    [The prepared statement of John D. Podesta follows:]

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

    Chairman Ryan, Ranking Member Van Hollen, and members of the 
committee, thank you for the opportunity to testify concerning 
America's deficit and debt challenges.
    The broad contours of our long-term deficit challenge are well-
known. Over the next several years, the eye-catching deficits during 
the Great Recession will subside, but deficits will not disappear. Over 
time, if nothing is done, those deficits will widen, causing us to take 
on an unsustainable debt burden, and forcing us to put an ever-
increasing share of our national income toward servicing that debt, 
rather than making important investments in our economy and our people. 
This is clearly a future we must avoid.
    But our long-term deficit dilemma is not, as is so often claimed, 
purely a ``spending problem.'' There is no question that current 
projections of federal spending are alarming and clearly unsustainable. 
It is not the case, however, that all federal spending is contributing 
equally to that trajectory. In fact, most federal spending is actually 
expected to remain steady or even fall, as a share of the economy, over 
the next 10 years and beyond. The exception, however, is federal health 
spending, and to a much smaller degree, Social Security. This suggests 
that, far from being a ``spending problem,'' what the United States 
actually faces is an aging population, and a ``rising cost of health 
care'' problem.
    That is why it is so important that Congress and the administration 
work diligently to implement the cost containment strategies and 
delivery reforms that were part of the Affordable Care Act. These 
reforms, along with the rest of the bill's provisions, are projected to 
reduce the deficit by more than $230 billion over the next 10 years and 
begin to restrain the growth in health care spending.
    We also have a problem on the other side of the balance sheet. 
While rising health care costs and an aging population will combine to 
drive up government spending, at the same time a stubborn devotion to a 
tax code riddled with inefficiencies and loopholes will ensure that the 
country takes on ever more debt to pay for even the most basic of 
public services. Those who would limit federal revenue to the 
``historical average'' of 18 percent of gross domestic product are 
ignoring an important, inescapable reality: The challenges we face 
today and will face in the future are different from those we faced 50 
years ago.
    They are also ignoring the simple fact that this historical average 
level of revenue has always been inadequate, even by historical 
standards. In 45 out of the past 50 years, the federal budget was in 
the red. I am proud to have served as chief of staff to President Bill 
Clinton, who oversaw three of those five elusive budget surpluses. The 
last time that 18 percent of GDP in revenue would have been sufficient 
to balance the budget was 1966. The budget and the country looked quite 
a bit different 45 years ago than they do today.
    Forty-five years ago, Medicare and Medicaid had just passed and 
total federal health care spending was less than 0.3 percent of GDP. We 
spent about one-fourth as much on veterans' hospitals and medical care, 
in real dollars, as we do today. We spent about one-tenth as much on 
law enforcement. There was no school breakfast program, no Children's 
Health Insurance Program, no Transportation Safety Administration, to 
name a few. These programs and services arose to meet new needs, like 
the need for greater airport safety, or as ways to address enduring 
problems like childhood and elderly poverty.
    The underlying demographics of the country have also shifted 
dramatically and will continue to do so. In 1966, just 9 percent of the 
population was over the age of 64. Today, 13 percent of the population 
is. By 2030, that proportion is expected to rise to almost 20 percent. 
How could we realistically expect to meet the needs of a population in 
which one out of every five people is a senior citizen using revenue 
levels from a time when less than 1 out of every 10 was? Remember, too, 
that programs like Social Security, Medicare, and Medicaid have been 
remarkably successful. In 1966, nearly 30 percent of all senior 
citizens lived in poverty. Today less than 10 percent do. Unless we 
decide, as a society, that we no longer have a responsibility to ensure 
a secure retirement and adequate health care for all older Americans, 
that we would be willing to go back to the senior poverty levels of the 
early 1960s, then we will, necessarily, be required to spend more over 
the next several decades than we have over the past several.
    Higher spending to meet new challenges is clearly nothing new. 
Neither is raising more revenue. Citing the postwar average of federal 
revenue makes it appear as if that level of revenue was constant during 
that period. It was not. In the 1950s, average annual federal revenue 
totaled 17.2 percent of GDP, but then increased in every subsequent 
decade of the 20th century. In fiscal year 2000, revenue peaked at 20.6 
percent of GDP. Far from being constant or stable at 18 percent, there 
is a clear pattern of higher revenue in each new decade. The pattern 
held for five straight decades, and it was only broken by the massive 
tax cuts implemented by President George W. Bush.
    Even slightly higher levels of revenue--the chairman, for example, 
has suggested 19 percent of GDP as a target--have been and would 
continue to be inadequate. Only five times in the past 40 years would 
19 percent of GDP be sufficient to balance the budget. And that is 
before taking account of the major demographic and health care cost 
challenges we are now facing.
    Unfortunately, there is no magic level of revenue or spending that 
will balance the budget now and forever. Fundamentally, we need to make 
budget decisions based on our current and future circumstances, not on 
our past ones. We must grapple with the real underlying causes, and 
offer real and specific solutions, to address our growing federal debt.
    The Center for American Progress, since our founding eight years 
ago, has been consistent in calling for a national effort to address 
these long-term challenges. When we began, the fiscal discipline of the 
Clinton administration had been recently abandoned in favor of massive 
tax cuts skewed heavily toward the wealthy. These were enacted during a 
time of war with its attendant spending increases. Adding to the fiscal 
damage was a new domestic entitlement program, Medicare Part D, which 
was passed without adequate funding. The predictable result was a 
return to large deficits and an unprecedented run-up of debt. This was 
the fiscal situation before the onslaught of the Great Recession, which 
itself had a dramatic effect on the nation's bottom line. The combined 
effect of the recession and the poor fiscal stewardship prior to it was 
to pull our long-term deficit problems closer toward us and create an 
intermediate deficit problem to go along with the long-term one.
    Over the past few years, the Center for American Progress has 
offered several specific plans for spending cuts and revenue increases 
that would put the country on a path back toward fiscal stability. We 
have also been glad to see others start producing similar plans that, 
importantly, have started to be as specific and detailed as ours. There 
appears to be a growing recognition of something that we have long 
believed: Once you get past political rhetoric, solving the deficit 
problem is going to be extremely difficult. There are simply no easy 
answers or magic bullets. Solving this problem will require careful 
consideration of all the options, a fair weighing of the costs and 
benefits, and compromise.
    There is one additional prerequisite to achieving our shared goal 
of a more sustainable federal budget: a strong and growing economy. We 
should not labor under the illusion that we can grow our way out of our 
budget woes. But neither should we ignore the fact that without a 
strong economy, solving our fiscal problem will go from being merely 
very difficult to being truly impossible. Given this reality, we 
strongly believe that every care must be taken in the near term not to 
disrupt the fragile recovery. While we strongly believe in getting the 
budget back to full balance eventually, our initial steps must be 
    The shock of vastly constrained government spending, in the 
immediate, would have undeniably deleterious effects on the wider 
economy. Analysts from Goldman Sachs recently estimated that the cuts 
contained in H.R. 1 would slice 1.5 to 2 points from economic growth in 
the second and third quarters of this year. Moody's chief economist 
Mark Zandi estimated that the cuts in the House bill would lead to a 
loss of about 700,000 jobs. Federal Reserve Chairman Ben Bernanke 
agreed that H.R. 1 would result in a ``couple of hundred thousand 
jobs'' lost.
    Though estimates clearly vary on the magnitude, there is wide 
consensus on the general impact. And given the crucial moment that we 
now find ourselves in--with private sector job growth just beginning to 
expand--it would be counterproductive to deliberately undertake 
contractionary policies of this magnitude in the near term.
    Instead, we should be focusing on putting in place policies that 
will bring the federal deficit down to sustainable levels in the medium 
term and full balance over the long term. During normal economic times, 
there is no good reason to take on debt to pay for the ordinary, day-
to-day operations of the federal government. There is no need, however, 
to try to solve the entire budget deficit at one enormous stroke. 
Steady, clear, step-by-step progress toward the eventual goal is both 
more likely to ultimately produce success and has the great advantage 
of requiring less dramatic change in the intermediate period.
    Eventually, balancing the budget is going to require some difficult 
spending cuts and tax increases that neither Republicans nor Democrats, 
nor the American public for that matter, seem ready to embrace. We 
commend the efforts of the bipartisan group of senators who are even 
now trying to develop a framework for solving our long-term budget 
problems. We are hopeful that their effort, building on the general 
framework of the Bowles-Simpson proposal, will yield results that will 
be acceptable to both parties and both chambers of Congress. But even 
if it proves impossible to achieve a consensus right now on all the 
elements of a long-term deficit budget plan, that does not absolve us 
of the responsibility to start down the path toward fiscal 
sustainability. That is why we should also agree to adopt an 
intermediate goal somewhere between here and full balance.
    We suggest a path to put the federal budget into primary balance by 
2015 as that intermediate goal. Primary balance is when total 
government revenues equal total government expenditures, with the 
exception of net interest payments on the debt. This equates to a 
deficit of about 3 percent of GDP. At that level of deficits, publicly 
held debt, as a share of GDP, ceases to rise. Getting to primary 
balance by 2015 will not be easy. With the deficit currently standing 
at just under 10 percent of GDP, reducing it all the way down to 3 
percent will require not just a restored economy but some substantial 
policy changes.
    Nevertheless, we can reach primary balance without the kind of 
dramatic, fundamental shifts in public services and the tax code that 
will likely be required to achieve full balance. And by doing so, we 
will stabilize the debt-to-GDP ratio, demonstrate our resolve, and buy 
ourselves some much-needed fiscal breathing room.
    There are four basic steps that we must take over the next several 
years to reach that intermediate goal. First, Congress and the 
executive branch should focus intently on making government work more 
effectively, more productively, and more efficiently. Don't 
misunderstand. Eliminating so-called, ``waste, fraud, and abuse,'' will 
not, by itself, solve our deficit problems. Not even close. Nor is it a 
simple matter to even determine what constitutes wasteful spending. 
Improving the productivity of the government, and identifying and 
rooting out inefficiency, will take a serious commitment and effort. 
The recent report from the General Accounting Office that identified 
dozens of areas of potential duplication in the federal government is a 
good starting point.
    The real work of figuring out exactly which programs and services 
are successful and which are not begins now. At the Center for American 
Progress we have an entire project that we call Doing What Works, which 
is devoted this effort. Our premise is that the American people deserve 
a government in which every tax dollar is spent wisely, every program 
is held to clear standards, and everyone is accountable for achieving 
goals in an efficient manner. We believe that these efforts also have 
the potential to save billions, perhaps even hundreds of billions. 
We've already identified the potential for up to $16 billion in annual 
savings from modernizing government informational technology systems 
and another $40 billion from federal contracting and procurement 
    Though improving government efficiency and rooting out waste will 
save money, we cannot pretend that it will dramatically alter the 
trajectory of government spending. To do that, we need to take a hard 
look at all parts of the federal budget and not merely limit our 
attention to one small sliver. The recent focus on nonsecurity 
discretionary spending is badly misplaced. Nonsecurity discretionary 
spending makes up less than 15 percent of the entire budget, and it is 
actually projected to decline over time. These are not the programs and 
services that are driving up our long-term deficits.
    On the contrary, this category is home to most of the vital 
investments that are the keys to our future economic growth: education, 
transportation and infrastructure, science and technology research, and 
services that foster competiveness and innovation. H.R. 1 would cut all 
of these substantially including $1 billion from Head Start, which 
would force 200,000 children out of the program; $700 million from 
grants to local school districts; and $500 million from teacher quality 
grants. It would slash $6 billion from science and technology research 
including reductions to the National Science Foundation, the National 
Laboratories, and more than third from the National Institute of 
Standards and Technology. It would even cut the Small Business 
Administration and the International Trade Administration--offices that 
seek to bolster American businesses and American exports.
    The misguided limitation of spending cuts to just this one category 
forces these kinds of cuts to investments that are fundamental to our 
future economic growth. Not only will these cuts cause job losses right 
away, but they will drag down our economy for years to come.
    And despite the name of the category, we also end up cutting a 
variety of services designed to keep every American safe as they go 
about their daily lives. H.R. 1 would mean cuts to meat inspections, to 
the Centers for Disease Control and Prevention, to poison control 
centers, to law enforcement grants to cities and towns, to the Consumer 
Product Safety Commission, and to the Federal Aviation Administration. 
Meat inspections and poison control are not the reason we face a budget 
deficit. But they are fundamental services that the American people 
expect out of their government.
    By concentrating only on this one category of spending, we ignore 
the potential for savings in all other parts of the budget. The 
Department of Defense, for example, is certainly not immune from waste 
and excess. Over the past several years, the Center for
    American Progress has released several reports detailing specific 
savings that could be had from the Pentagon's budget without weakening 
our national defense.
    There is also no reason to exempt mandatory programs from scrutiny. 
The Center for American Progress has identified several programs that 
could be streamlined or scaled back. For instance, in a time of 
exceedingly high commodity prices and high net farm income, should we 
continue paying high direct agriculture subsidies? The Government 
Accountability Office recently reported that billions of dollars are 
wasted in improper payments in Medicare. Restricting our attention to 
nonsecurity discretionary spending leaves these inefficiencies in place 
and leaves savings on the table.
    Similarly, we should not ignore those spending programs that 
operate through the tax code. These tax expenditures are economically 
equivalent to their direct spending counterparts, but they are 
generally subject to less scrutiny and evaluation. Some of them are so 
specific and target such a tiny number of people or industries that 
they are best thought of as ``tax earmarks.'' A balanced approach to 
cuts should include close examination of all spending programs, 
including tax expenditures, to make sure they are achieving their goals 
efficiently and effectively. The days of hiding special spending 
programs deep in the bowels of the tax code have to come to an end.
    We also need to return to the successful budget processes of the 
1990s, which will help ensure that any steps taken in the coming years 
to restrain the deficit are not undermined by future Congresses. These 
processes include statutory PAY-GO, which the 111th Congress 
successfully reinstated, as well as meaningful caps on both defense and 
nondefense discretionary spending, enforced through sequestration. The 
lesson of the 1990s is that caps such as these can work, so long as 
they are not arbitrary or punitive. Successful budget enforcement 
processes should also include congressional rules that make it 
difficult to pass legislation that would increase the deficit. The 
Senate has such rules, and in the previous Congress, so too did the 
House. Unfortunately, the current House leadership has chosen to 
abandon those rules in favor of something they call ``Cut-Go,'' whereby 
spending increases must be offset by spending cuts, but tax cuts do not 
need to be offset at all. This is a recipe for fiscal disaster. 
Allowing tax cuts to not be paid for will inevitably result in massive 
deficits, as President Bush's economic policies convincingly and 
repeatedly proved.
    We must remember that the word ``deficit'' is not a synonym for 
``spending.'' The deficit is actually a product of a mismatch between 
spending and revenue. While improving government efficiency and 
subjecting all parts of the federal budget to close scrutiny will help 
in addressing one half of the deficit equation, we simply cannot afford 
to ignore the other side of the balance sheet.
    This year, for the third year in a row, federal revenues will be at 
their lowest level, as a share of GDP, in nearly 60 years. While the 
effects of the recession explain much of the dramatic drop in revenues, 
the other culprit is repeated tax cuts. Going forward, the obvious 
first step must be to jettison the bonus tax cuts for the wealthy put 
in place under President Bush. During the last decade and before the 
Great Recession, average income for the richest 1 percent grew by more 
than 20 percent, while at the same time median household income 
actually fell. Those at the top also weathered the recent economic 
storm far better than the middle class, and they are recovering faster 
as well.
    The enormous tax cuts bestowed on the very rich in 2001 and 2003 
were a mistake then, as they were an important contributor to the 
unnecessary deficits of 2002 through 2007. Maintaining them is an $800 
billion mistake now.
    In our plan for reaching primary balance, we also recommend 
implementing a millionaires' surtax. This would be 2 percent on 
adjusted gross income over $1 million and an additional 3 percent on 
AGI over $10 million. This surtax would raise about $30 billion a year. 
Ideas like these should be part of the discussion, not least because a 
tax on millionaires is, as evidenced by a recent Wall Street Journal 
poll, the single most popular way to reduce the deficit.
    Balancing the budget and reducing our debt burden is going to 
require making hard choices. But by approaching the issue in a balanced 
and measured way, it does not have to mean sacrificing our future 
economic prosperity or a robust safety net for the vulnerable. If we 
dedicate ourselves to scouring the government for efficiencies, to 
subjecting the entire federal budget to scrutiny, not just one sliver 
of it, and to raising the revenue that the 21st century requires of us, 
then we will be able to balance the budget and leave the next 
generation with a fiscal inheritance that we can be proud of.

    Chairman Ryan. Thank you. First, let me just start off. You 
know, we obviously don't agree on everything, but I want to 
thank you for having been a member of the fiscal commission. 
Your think tank, Center for American Progress, actually gave us 
ideas. You know, you actually did a lot of work and a lot of 
research and you are contributing to the debate, and for that, 
I thank you. And some of them, believe it or not, I agree with. 
So, thank you for that.
    I want to bring up the chart on the bond markets.

    I want to ask the economists, and there is a lot of members 
here, so give me the five minute deal, is that all right? So, 
let's do that for ourselves, because I want to get to people.
    This is what the, PIMCO calls the ring of fire. This is 
rating our countries in this very dangerous debt zone. And the 
U.S.A. is right up there with France, Italy, Japan, Greece, 
Ireland, the U.K., Spain. Ms. Reinhart, do you see it this way? 
I understand PIMCO, which gives us this chart, dumped their 
Treasury bills in their major bond fund the other day. I am 
very worried this thing is starting to accelerate. And Doug, 
because you are an economist as well, what does this look like? 
What does a debt crisis look like? I mean, everybody says, debt 
crisis is coming. What does that mean, exactly? What form does 
it take place? What does it look like? And I am going to have 
to ask you the question which I know no one likes to answer: 
How much time do you think we actually have? I hear speculation 
from bond traders and economists. What is your speculation? And 
then I want to get to the non-economists. Not that that is a 
bad thing, but go ahead.
    Ms. Reinhart. [inaudible] was, was using some of our data. 
So, that tells you something about highlighting some of the 
same problems I was in my remarks. In terms of the timing: I 
tried to reiterate that you don't know when bond markets will 
turn, but I think the perception that we have, a five nice year 
window in which we can do things, we can wait for oil prices to 
be in the right place, is not in the cards.
    How do debt crises build up? They build up with a lot of 
hidden debts, and if they were not hidden, we would know about 
it. That is part of the problem. When you see the build-up of a 
debt crisis coming, you also see build-up of arrears, which we 
are seeing, certainly, at the municipal level; we are seeing it 
at the state and local level. We see now, then, also, that the 
closer you get to surpassing any historic benchmark, which we 
have already done, when we take into account state enterprises, 
the closer you move to a downgrade.
    Japan, which is a lender to the rest of the world, has 
already been downgraded several times. You don't get to a debt 
crisis with very predictable, unless you are shut out of the 
credit market, like Argentina was; we are not Argentina. But 
where we see it is in these hidden debts in which contingent 
liabilities continue to build up. The bottom line is that at 
the current pace, we do not have a five year window in which we 
can wait for the right opportunity.
    Chairman Ryan. Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. I concur with this analysis. The 
horizontal axis is what I talk about, prosperity, right? The 
more you public debt you have, you are crowding out the ability 
of people to get educations and do investments; so as you go 
out that way, you are imperiling your prosperity. As you go 
down the vertical axis and you are borrowing from abroad, that 
is, that is our freedoms. We are not going to negotiate with 
our bankers. And some of our bankers don't share our values. So 
that analysis is right.
    What would it look like when it hits? Well, you know, you 
would see a spike overnight in Treasury borrowing costs. We 
have an enormous amount of Treasury financing this very short-
term right now, and so essentially we are borrowing at teaser 
rates. They would bounce right up, we would have to refinance 
at much higher rates that would flow right through into every 
mortgage, every car loan, every interest rate in the economy, 
and you would see just a collapse in the economy.
    So it would be a very painful, very shocking experience. 
And we have been through something like that. We don't want to 
do it again.
    The last thing I would say is, people always want to say 
that the U.S. is different. You know, we are not being 
disciplined by bond markets, we are exempt, and I want to echo, 
you just can't believe that. I mean, Rudy Penner, who was the 
former director of the CBO, always says, We are the best-
looking horse in the glue factory, and that doesn't mean we 
won't turn out to be glue. And it is very important that we not 
even test the notion that, somehow, as the world's largest 
economy or its reserve currency, we are exempt. We control our 
future. The indicators say trouble arrives soon, within five 
years, so let's not go there, and let's not find out if we 
really are different.
    Chairman Ryan. Let me ask the two, because I want to be 
respectful of time, if neither political party, if neither the 
House, the Senate, or the administration proposes in the next 
year or two to fix this problem, does that send the signals to 
the credit markets that the Americans are done? That the 
Americans don't have this figured out, that the Americans 
aren't serious? And does that, therefore, accelerate a debt 
    Mr. Holtz-Eakin. In my opinion, yes. I am terribly worried 
about this.
    Chairman Ryan. I mean just showing political leadership 
buys us time. Is that your assessment?
    Mr. Holtz-Eakin. Absolutely. I want to echo what Maya said 
in her opening remarks. Fiscal security. A, it is the right 
thing to do for everyone now and in the future. B, it is 
analytically not hard. C, it sends the right message to bond 
markets: that we are willing to take the country in a different 
direction. Do it, and do it tomorrow.
    Ms. MacGuineas. I am going to first give a non-economist 
answer to your economics question. But when you are walking on 
thin ice, right, lots of things can cause it to crack. And so 
we are at risk for so many things right now, whether it is 
sovereign debt contagion, or something that goes wrong in the 
States, any of these landmines in the budget, the contingent 
liabilities that are there. PIMCO, when they start to get out 
of Treasuries, that sends major signals. Right? Everybody on 
Wall Street is looking; everybody around the world is looking 
at this right now. So suddenly, anything can make a change 
very, very quickly.
    And the bottom line is even though our bond markets have 
looked like there is not a problem, and people keep saying, 
Look, rates are so low, what are you worrying about? As soon as 
you start to see the problem in the markets, it is too late to 
do this on our own terms. There is no excuse for not getting 
ahead of a crisis which you know is coming your way.
    In terms of policy and politics, we know the policies are 
incredibly difficult, and we also know what is involved in 
them, and we can do it. And I encourage, you know, as many 
roadmaps, let's get them out there, as possible. We need to get 
to specifics. We are now past the point of just talking about 
this is a problem, and kind of worrying about it. We need to 
know we get the specifics on the table and figure out how to 
fix the problem, and we need to do enough this year, hopefully 
a comprehensive plan, but enough to make markets more confident 
in the political process.
    When I talk to folks from Wall Street, and someone who runs 
the Committee for the Responsible Federal Budget, Wall Street 
people didn't used to care, really. It wasn't like the people 
who called all the time. And they do now. The markets are 
paying a whole lot of attention, and they really are worried 
about our political process in all of this.
    So, I think there is no question that, particularly with 
the Fiscal Commission having come out with a solution, that if 
this all dies on the vine and nothing happens politically, the 
next two years is not okay. We can't delay until after the 
election; something has to happen before then to reassure 
markets, other countries, and everybody who is watching this, 
that we have the political ability to face up to these 
    Chairman Ryan. I know we have gone over, but John, I do not 
want to stifle you, so please, go ahead.
    Mr. Podesta. Well, Mr. Chairman, I would note that I am 
more used to the fire than the ellipses on that chart. But I 
would say this: This is the year where we have to show, on a 
bipartisan basis, a determination to stop our debt from going 
up. And that has to be in the midterm. I suggested 2015, you 
may have a different year in mind, but I think if we can do 
that on a bipartisan basis and lock that in, get on a path so 
that our debt does not continue to grow, and then we could 
begin the tough path of bringing it down, bringing the debt 
down, hopefully getting on a path back to balance. We would 
have accomplished a lot. And that is going to require a 
balanced plan, and as I said in my opening comments, it can't 
just be in one narrow part of the budget. It is going to have 
to work across the entire federal budget.
    Chairman Ryan. Thank you. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman. I want to join the 
Chairman in thanking all of you for your testimony. And, as I 
said in my opening remarks, this is a very important hearing. 
And I agree that we need to come together on a bipartisan basis 
now, to come up with a plan that shows we are going to reduce 
the deficits and debt in a predictable, sustained manner. So I 
think there is agreement on that.
    As I said in my opening remarks, also, I do think it is 
risky to do anything that could weaken the economy during this 
very fragile time. And Chairman of the Federal Reserve, of 
course, Mr. Holtz-Eakin is the guy who is supposed to be expert 
in interpreting the animal spirits, in fact, every time he 
makes a comment, he has got to be thinking of the confidence 
levels. And when he says that he thinks that a reduction of the 
magnitude we are talking about in the Republican plan, in the 
time period that we are, would cost a couple hundred thousand 
jobs, and makes the point it is not insignificant. I do think, 
when we are measuring confidence in the economy in part by the 
month-to-month job numbers, if we start to see any dip in that 
it is a big problem for confidence; it is also a big problem 
for the people who have lost their jobs.
    But here is what I would like to focus on for a minute. I 
want to accept the premise, absolutely accept the premise that, 
in order to get the deficit and debt down, we have got to 
reduce spending. We are going to have to reduce spending in 
discretionary programs, and we are going to have to do it in 
mandatory programs. So let's accept that premise, for many of 
the reasons we have talked about here. And we should come up 
with a plan to do that now.
    But I do want to pick up on some of the remarks that Mr. 
Podesta made. Because it is absolutely true that when he and 
the Clinton Administration left office, they left with large 
projected surpluses, and now when President Obama was sworn in 
he inherited a $1.3 trillion deficit. The day he put his hand 
on the Bible, he had already had a record deficit for that 
    So, if I could start with you, Mr. Holtz-Eakin. Because 
when you left the Bush Administration and went to become the 
Director of the Congressional Budget Office, there were many 
who wanted you to do analysis that showed that the Bush tax 
cuts in 2001, at that time, actually paid for themselves. And 
you rejected that analysis. And as recently as last August, 
August 2010 you stated, and I am quoting, I have never been in 
the camp that believes that, quote, `tax cuts pay for 
themselves,' unquote, there is no serious evidence to support 
that. I assume it is safe to say that you hold that same 
opinion today that you did in August.
    Mr. Holtz-Eakin. Yes.
    Mr. Van Hollen. Okay. Now, so on pages two and three of 
your testimony, you say that, for the past eight years, nine 
years, we have frittered away our time without addressing the 
problem. And you list three things that made the problem worse. 
Three things. You mentioned the financial crisis: no dispute 
there. You mentioned the prescription drug bill that was signed 
by President Bush, that was not paid for: no dispute there, 
that makes things worse. You mentioned the Affordable Care Act; 
I am not going to get into a big debate about that, other than 
to say, we have had this discussion in this committee, the CBO 
scored that it is 2010 in deficit reduction, and a trillion 
over 20 years, we throw that in.
    No mention of, of the wars that we didn't pay for, and 
continue to pay interest on. But most importantly, as Mr. 
Podesta pointed out, no mention of the 2001 and 2003 tax cuts 
during the Bush Administration, which, of course, your former 
boss, Senator McCain, voted against, because of his concern 
about the impact on the deficit.
    Now, in today's CBA, they just issued in January, they 
estimate that if you continue all the tax cuts--I am not 
proposing that we stop all the tax cuts, but just make the 
point here, they say in their analysis, if you were to return 
to moving from Clinton era tax rates to the Bush tax rates, we 
are adding $3 trillion to the deficit over the next 10 years, 
if you include the debt service: two and a half trillion 
dollars just because of the tax cuts, another half trillion 
dollars debt service.
    So, my question is this: You have a reputation as a 
straight shooter. Seriously, now, how can you have testimony 
that doesn't even address the revenue side? And again, I 
understand we have got to get it, there is no dispute. This 
hearing is entitled, Lifting the Crushing Burden of Debt.
    Mr. Holtz-Eakin. Right.
    Mr. Van Hollen. How can you not even address that issue in 
your testimony?
    Mr. Holtz-Eakin. Right. Because I am not interested in 
relitigating history. I think the central problem we face is 
that, if you look forward 10 years, using the President's 
budget, or, or any other projection, those projections have the 
following character: They say, we are out of Iraq and 
Afghanistan; the financial crisis is a distant memory; we are 
back to full employment; and we are raising revenue that is 
well above historic norms, 19, 20 percent of GDP, and despite 
that we have enormous deficits, trillions of dollars, much of 
which is interest on previous debt, and so it is the future 
accumulation of debt, driven by that characteristic that 
concerns me. And at the heart of that is spending issues. And 
the additions to spending that have been most threatening have 
been those in the health area. We did the Medicare 
Modernization Act, and we did the Affordable Care Act. So that 
is how I got to that conclusion, it is very straightforward.
    Mr. Van Hollen. Well, let me just to follow up on that. And 
again, I am accepting the premise that we have got to deal with 
the spending side. What I find interesting is that even when 
you were at CBO, and you issued these reports, you showed that 
the consequences of going from the Clinton era tax rates to the 
Bush era tax rates had serious consequences on the deficit. And 
I just point out, in 2004, when you were here in a non-partisan 
capacity, testifying and making comments on the budget, you 
said, you weighed these two things. You weighed the positive 
aspects of the tax cuts, and then you counterbalanced that with 
the concerns with respect to the deficit.
    And here is what you said. I am quoting: The cumulative 
corrosive impacts of sustained deficits in the face of a full 
appointment economy, would unbalance, make the extension of the 
tax cuts a, quote, `modestly negative policy choice'?
    Now, that was at a time when projected deficits and debt 
were a lot lower than they are now. And so we have the Fiscal 
Commission. The Fiscal Commission said we have got to look at 
these tax expenditures. By the way, the Fiscal Commission's 
baseline, the baseline assumes that we return, with respect to 
the high-income individuals, assumes that we return to the 
Clinton era tax cuts.
    So, I guess my question is that, we are not disputing that 
spending is part of it. What accounts for this total reversal 
from 2004, when that was a, a modestly negative choice. In 
other words, continuing them, even though the projected 
deficits and debt were not as bad, and today.
    Mr. Holtz-Eakin. So, I don't remember the context; I was 
probably asked. I believe that it is important to identify the 
top priorities. And those are on the spending side, I won't 
repeat that. The second point, which I think, the Fiscal 
Commission has said very clearly, is that should it be the case 
that, collectively, we decide we are going to raise more 
revenue: the route is tax reform. Our tax system is deeply 
broken. I have a long discussion in my written testimony; I 
encourage you to read it. Simply raising tax rates, going back 
to the, to the Clinton era tax rates, is not a good solution to 
raising more revenue.
    And the third thing I would say, a personal opinion in my 
judgment, is I am deeply concerned about the following 
phenomenon: We have a rising projection of spending that is 
undisputed. And we have this concern that the international 
community is going to just cut us off, and we will have a 
fiscal calamity. Well, suppose you raise taxes a little to run 
off concerns out there in the bond markets, but you don't deal 
with the spending problem. Well, everyone calms down for a 
couple years. You go forward, same problem arises, you bounce 
tax rates up a little bit, problem goes away for a little 
while. You go a couple more years, you bounce taxes up again. 
Pretty soon, you are jacking taxes up right along that 
projected spending route, and that takes you to 30, 40 percent 
of GDP. And you will, you don't have to be a crazy 
[unintelligible] setter, you will kill the economy.
    So, I am just trying to lobby, in an undisguised fashion, 
for, A, good tax policy; I am all for that. But B, dealing with 
the fact that if you don't control spending, you are going to 
have enormously higher taxes come, one way or another, and that 
is a bad thing.
    Chairman Ryan. Thank you. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman, and thank you, 
panelists. Let me try and summarize what I think I heard a 
little bit from all four of you, and, frankly, from the 
Chairman and Ranking Member, too, that there is some 
disagreement as to how we got here, and that there is some 
disagreement on the weighting of the different elements of the 
solution. But that there is no disagreement that the solution 
has to involve basically all of the above: has to involve 
mandatory spending, discretionary spending, tax reform, and the 
revenue side, in one form or another. And that there is no 
disagreement that we are heading towards a debt crisis which, 
when the Chairman asked his question, What does it look like? I 
think I heard you all pretty much say, It looks really ugly. 
And maybe, this is my words, not yours, but maybe like 
September, October of 2008, only a lot worse. And that it is 
probably coming--we have five years or less to solve the 
problem. Did I misstate anything?
    Okay. If that is the case, that we are facing a really 
ugly, ugly economic scenario, for anything that any of us in 
this room care about, and we have five years or less to deal 
with it. And the entitlements, mandatory spending, have to be 
part of the solution because they are such a large chunk of 
spending. Can we solve this without reducing costs of Social 
Security, Medicare, Medicaid, and the other entitlements, 
within the next five years? In other words, not changing things 
that might affect five years, or 10 years, or 15 years out, but 
reducing the costs of those programs within the next five 
years. And whoever wants to comment on that can comment. Yes.
    Mr. Holtz-Eakin. If I could, I mean, there are two kinds of 
urgency involved. Number one is the urgency I think we have 
conveyed about the debt crisis and the fact that reducing 
spending is going to have to be a comprehensive effort, so that 
would include the entitlement programs. The second urgency I 
try to describe this way: think of Social Security. I am 53 
years old. I am the trailing edge of the baby boom generation. 
It has been conventional in Social Security reform proposals to 
exempt those in, for good reasons, or near retirement. And 55 
has been the industry standard for near retirement. If we 
continue to do that, that means you have two years before I get 
grandfathered. If you grandfather me, you grandfather the baby 
boom, which means you have grandfathered the problem.
    So yes, in the next five years, it is absolutely essential 
that we move, and move quickly.
    Mr. Campbell. Okay. Other comments on it, Mr. Podesta, did 
you, go ahead, oh sorry.
    Ms. Reinhart. Very briefly on the five years. I think there 
is a second scenario that I would like to put on the table, 
which is death by a thousand cuts. And it is still death. And 
that doesn't involve a big blowout crisis, but a stalling. And 
so, my own view is that when it comes to the budget we really 
should leave no stone unturned because of the orders of 
magnitude. And the need to act quickly, I think, is in my view, 
imperative. But your point about no stone unturned is, I think, 
called for, by the order of magnitude.
    Lastly, let me say that the prospect of a delay does not 
necessarily mean that we are going to have a crisis tomorrow. 
And I don't know whether I am more worried about not having a 
crisis tomorrow or muddling through, in Japanese style, for the 
next 10 years.
    Mr. Campbell. Thank you. Mr. Podesta.
    Mr. Podesta. Mr. Campbell, I think the big numbers really, 
are on the health care side, and particularly in Medicare. So I 
think that continuing and accelerating, the President has some 
ideas in his current budget, on how to do that. Cost 
containment, on the health care side, both in the public 
programs and in the overall health care system, including in 
the private sector system, by changing the way we deliver 
health care, and reducing the overall costs. It is really, I 
think, the thing that is the most needed and it is going to do 
the most to contain the big surge in the projections that Mr. 
Holtz-Eakin talked about.
    I don't think anybody anticipates that tax rates are going 
to climb to those levels. They never have, they never will. But 
they need to be consistent with the commitments we have at a 
time by 2020, 20 percent of our population is going to be over 
65. And, as I noted in my testimony, in 1965 when Medicare and 
Medicaid was passed, nine percent was over 65. We are going to 
have to have revenue to do that, but we are going to have to 
have deep restraint.
    With respect to Social Security, just very briefly, I don't 
think, in the short term, it really compounds this problem. It 
is a solvable problem. We have thrown out a full-blown plan to 
get to 75 years, at my center, have thrown out a full-blown 
plan to get to 75 years of actuarial integrity, and strengthen 
the bottom, restrain the top. It has some near-term effect on 
the deficit and debt, but not much.
    Chairman Ryan. Thank you. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman. And thank you, 
panelists. I think, pretty much, we have all talked. And I want 
to thank some of you, particularly, for the important work that 
you have done in helping to put out very clear ideas out there, 
about how we can, and must, reduce this deficit.
    Let me just disagree, if I may, with the previous question, 
at least as a beginning premise that there is disagreement 
about how we got here. I think, except possibly for the first 
speaker, there has been pretty clear agreement about how we got 
here. The only reason to go back over that at all is that we 
don't repeat negative history, that we don't actually believe 
that tax cuts pay for themselves, which there is some agreement 
on. Or that it doesn't matter if we actually have two, three 
trillion dollars of unpaid-for war, or tax cut, or additional 
health benefits. I mean, it is really clear. I think all of you 
would agree, you are all nodding, that in fact the way we got 
here was, and the way this President inherited an enormous 
deficit, and a terrible recession that reduced revenues, were 
expenditures that were not paid for by the previous 
    I know the other side doesn't want to hear that, but that 
is the reality. So we have inherited that problem. Tax cuts of 
a trillion dollars for the wealthiest two percent of Americans, 
that they want to continue unpaid for. The Part D prescription 
drug benefit for Medicare, which was the largest growth in the 
entitlement of Medicare: a trillion dollars, unpaid for; they 
don't want to talk about. We think we ought to do Part D, but 
we ought to pay for it. And, and of course the wars that cost 
us a trillion dollars.
    So I think we have agreement on that. And we also have 
agreement that we have to tackle spending. And that includes 
the current year, which we have already offered and passed $50 
billion this current year, almost $50 billion in cuts. So the 
issue really is going forward. Can we, and this is going to be 
a debate that is pretty clear, so they all want to know what 
your answer is. Can we solve the problem, the serious, serious 
problem of the debt this country is in, and the cost of the 
interest payments on that debt, simply by tackling twelve 
percent of our budget on spending cuts in non-defense 
    That is, so far, the only action that the other side has 
taken, is to say we have got to have dramatic cuts in twelve 
percent of our budget. Not defense. Not on the tax side, tax 
expenditures, apparently, are not expenditures, as far as the 
other side is concerned. That is serious from our point of 
view. So my two questions are: Is it true that we can actually 
tackle this problem long-term by simply, and it is a big deal, 
cutting education, cutting infrastructure, cutting investments 
that the government makes today, in a fragile economy? Will 
that get us there.
    And secondly, my question is: What if, in fact, we do 
nothing on investments for the future? Mr. Ryan talks a lot 
about investments for our children. We all make investments for 
our children; it is usually called education, helping them go 
to college, helping them be able to be prepared. What if our 
nation does nothing? What if the other side continues to reject 
the President's proposal that we not only cut, but we make 
investments for the future so we can grow economically in a 
global marketplace, that we can be economically competitive? 
Can we be the great country that we have always been, 
economically and politically, if in fact, we do nothing about 
investments for our future, to grow the economy?
    So my questions are simple, and I am going to start with 
Maya, because you, I think, were very clear in articulating the 
importance of everything being on the table: tax expenditures, 
and spending, includes DOD, and making the investments. And I 
would like Mr. Podesta, also, to speak. So Ms. MacGuineas.
    Ms. MacGuineas. Great. Thank you. I mean certainly when we 
think about where we have come from there is so many 
contributing problems to where we are, right? We ran deficits 
for a decade when we should have been running surpluses. You 
want to balance the budget over the business cycle, or 
something like that. So we came into this problem in a weakened 
fiscal state. We then were hit with a terrible economic 
downturn which caused us to enlarge our deficits, both because 
of the economy and the policy responses.
    And now, the biggest problem that we face has always been 
there: the long-term spending problem fueled by health care and 
aging, which was a long-term problem, we delayed taking action, 
it is now at our doorstep. So we sort of are getting hit with 
all the fiscal problems you could have.
    Ms. Schwartz. I only, I only have a couple seconds left, 
but I wanted John Podesta to answer as well.
    Ms. MacGuineas. Okay, well then let me quickly just agree 
with you in terms of investments, that absolutely, we should 
not be shortchanging the piece of our investment budget. We 
should expand this discussion beyond the twelve percent of the 
budget to the entire budget. But I also think we want to think 
about reorienting our budget. Because so much is focused on 
consumption; we need to think about retargeting inefficient 
spending and spending on consumption, and move it towards 
investment so those dollars are better spent in a time of 
fiscal austerity.
    Mr. Campbell [presiding]. Okay. Next. Mr. Calvert.
    Ms. Schwartz. Thank you.
    Mr. Calvert. Thank you. And I am an optimist by nature, but 
being on this committee, it is difficult.
    You know, we talk about revenue and, of course, spending 
and I would remind the gentle lady that we may have cut $60 
billion, but the United States Senate has not determined yet 
that we are cutting anything. So as Mr. Rayburn used to say, 
Our friends on the other side are our adversaries. The Senate 
is the enemy. So that is where we are at. I think we can all 
agree with that.
    One thing I was looking at on the chart, the ring of fire: 
Italy, Japan, France, Ireland, U.K., Greece, and of course 
U.S.A. in the middle. One thing that you notice, or at least I 
notice on that chart, is that the one thing that U.S. has 
different than the rest of these countries is we have 
resources. And I look at the chart, the countries outside that 
chart, for the most part, Norway, the Netherlands, and 
Australia have resources. And the United States, you know, we 
are a country that puts extension cords out everywhere, you 
know, into the Middle East, and our friends in Canada and 
Mexico. And we extract resources from them, rather than from 
ourselves. And we have significant resources within our own 
country, and certainly in Alaska and in the upper State.
    If, in fact, we are talking about revenues, and I just had 
a hearing the other day, I am an appropriator, I confess. But 
we were having a meeting the other day about the former MMS 
left $50 billion on the table in not collecting revenues from 
metal resource extraction. If, in fact, the United States went 
out after its own resources, extracting those resources, and 
the revenue that brings to the country, and obviously, national 
security benefits and the rest, don't you think that would be a 
significant part of turning this country around? I know the 
entitlement spending part is the biggest issue that we have got 
to deal with. But when you say everything is on the table, 
don't you think when we are paying $4 a gallon for gasoline, 
that that is a tax? That every consumer out there right now is 
paying a considerable tax because we don't face up to the 
problems in our own country, and developing our own resources? 
So with that, I will just leave it to the committee.
    Mr. Podesta. Well Mr. Calvert, I think that you put your 
finger on something that is really quite important, which is 
the interrelationship between our dependence on oil and the 
fact that 50 percent of our trade deficit comes from importing 
oil, and the ability to move to a different kind of energy base 
in this country, and what that would do for the economy. How it 
would spur innovation, job growth, and business formation.
    I think the biggest place to look right now, in that 
regard, is both, clean technology, the kinds of things that are 
going to make the economy more efficient, including in the 
building sector as well as in the transportation sector; and 
then utilizing the vast resources we have of natural gas that 
are available to us, need to be done in a smart way. The New 
York Times has been writing a bunch of articles about what is 
happening in Pennsylvania right now. They need to be done in a 
smart way, but if we could move more of our transportation 
fleet to natural gas it would have a dramatic impact, I think, 
on our transportation sector, in particular.
    And the problem with keeping, down the track, of just 
drilling for oil even in the Gulf, which you know, I think we 
need to do, is that it just keeps that dependence alive on 
foreign oil, which is at 60 percent now. So I think we need a 
comprehensive strategy to use all the resources that we have in 
our country.
    Mr. Calvert. I agree on all the above, I agree with you. 
Let's kind of move across here.
    Mr. Holtz-Eakin. I think two points. I mean, number one, I 
don't know the numbers on the receipts that would flow into the 
Treasury if we had greater exploration and extraction. I doubt 
it solves the problem.
    Mr. Calvert. I am not saying that it solves the problem.
    Mr. Holtz-Eakin. We have to be realistic. The second thing 
is that, in the end, our current account deficit is the 
difference between how much we save and how much we invest. And 
while, if we don't change how much we save and we don't change 
our investment, we can change the nature of our energy 
portfolio dramatically. We will just change the composition of 
our trade deficit. It will still be there. So we have to change 
the fundamentals. And our biggest problem with our saving is 
our federal budget deficit.
    Mr. Calvert. Well I would just make the point, if folks 
back home are spending four bucks for gas, they don't have a 
lot of money to save even for a pizza and a beer on the 
weekend. Thank you.
    Mr. Holtz-Eakin. The last thing to remember on this, and I 
know that time is up, is that if you are going to change the 
energy portfolio, that is costly. And we are coming out of a 
recession; and to change our energy portfolio dramatically is 
not a benefit, it is a cost. It might be worth it, we can have 
that debate. But let's be clear, it is a cost.
    Mr. Campbell. Thank you, Mr. Holtz, I am going to try and 
be a little ruthless on the time so we make sure we get to 
everybody. Mr. Blumenauer.
    Mr. Blumenauer. Thank you. Although I would note that if we 
drain America dry of our oil it goes into a global pool. We 
only consume 20 percent of it; it is kind of goofy that we 
consume 20 percent of it. But it is a global price. And to the 
extent to which it drives anything down, most of the benefit 
will flow through the Chinese, to the Japanese, to the 
Europeans. I don't know that we are going to get anywhere on 
that. But I want to come back to gas prices in a moment.
    But, again, the more I sit on this committee, and listen to 
witnesses like that, the more optimistic I get. Because having 
had a chance to look at various ups and downs in the government 
process over the last 40 years from all different levels, we 
end up affirming Churchill's aphorism that, You can rely on 
Americans to do the right thing after they have exhausted every 
possibility. I think we are reaching that point now on the 
federal level, and it is of a greater magnitude. But it seems 
to me that the whole issue underlying this is how we do 
    And I actually think there is a lot of agreement that is 
coming forward. I think there is an opportunity; I feel guilty 
for being away from a Ways and Means meeting right now where we 
are talking about tax reform. And I think there is an 
opportunity to change that system. I think there is a dramatic 
opportunity, in this Congress, to change how we subsidize 
agriculture in this country to help more farmers and ranchers, 
and spend less money doing it, with less market distortion. And 
I think there is bipartisan interest in pursuing that.
    And I agree, Social Security, any 10 people around a Rotary 
Club table could, in 30 minutes and a website, can come up with 
three alternatives that are largely going to represent what we 
will ultimately do. I hope, and I agree with Ms. MacGuineas, 
let's get to some specifics.
    And I would like to focus on one specific. Because for over 
50 years, there has been an agreement in this country, going 
back to President Eisenhower, about a self-supporting trust 
fund for infrastructure investment. And that always, to this 
point, has been bipartisan. Ronald Reagan, in 1982, when 
economic times were tough, supported a five cent increase in 
the gas tax, a user fee that helped us move forward. Yesterday 
we had lunch with Senator Simpson, Mr. Bowles, and they had 
proposed a significant and periodic increase in the gas tax to 
be able to deal with both problems with that, and the fact that 
we are draining the general fund to prop up something that has 
been sub-supporting to this point.
    We have record unemployment in the construction industry. 
We have infrastructure in every one of our communities that is 
falling apart, for roads, transit, and water. Isn't this an 
area where we could move forward with a tax increase or user 
fee that actually has broad support? This panel, in a prior 
hearing, had people from the Chamber of Commerce, AAA, and 
construction unions come in and testify in support of an 
increase. Is that part of a solution that might get us moving 
in this direction, put people to work, protect the budget 
deficit, and maybe even reduce some dependence on foreign oil 
at some point?
    Anybody want to take that on the panel?
    Mr. Holtz-Eakin. So I will be brief. I mean, there was a 
report that came out of the bipartisan policy center from a 
commission that I served on two years on transportation reform. 
And I would encourage everyone to look at that. What it says 
pretty clearly is, number one; we have to reform the 
transportation programs, because we have never identified, what 
is really the federal role. We know that, in principle, 
infrastructure is important, but we have never decided what is 
the appropriate role for the federal government.
    We have a hundred programs over there, and we proposed 
creating four. And then you have to finance them effectively. 
And I completely agree with that. One thing to note is that 
many people believe the gas tax itself is obsolete, and that we 
need to go to an alternative.
    Ms. Reinhart. Let me just point out that I think we have to 
be very discriminating and very clear about how we define 
infrastructure. Japan spent a massive amount on infrastructure 
in an effort to prop up the economy, and I am not an expert in 
that area, but it has to be very focused on productivity 
    Ms. MacGuineas. Yes, I agree with so much of what you said. 
I think we need to focus far more on investment spending than 
consumption spending, and this is one of the more important 
areas. Second, we need to tax more the things we want less of, 
like pollution, through energy taxes, not the things we want 
more of, like work and saving. Third, I think the commission's 
proposal on how to not spend more than the tax raises, and to 
increase the tax to cover our highway costs and other 
transportation costs is a very good idea.
    Fourth, I do think we have to make sure that what we do in 
terms of investment we do very well. We don't want to run the 
risk of suddenly calling everything investment, you know, farm 
subsidies, that is investment, and suddenly it loses all 
credibility. We want to do investment that really has 
productive payoffs.
    Finally, I want to increase investment spending, and I 
also, on the tax side want to do some, I would call, 
sweeteners. I want to lower the corporate tax rate. These are 
the things that I think should be part of a broad, 
comprehensive deal, as sweeteners, to help move them forward. I 
would be worried to do them on their own.
    Mr. Campbell. All right, thank you. Have to cut off now, 
and go to Dr. Price of Georgia.
    Mr. Price. Thank you, Mr. Chairman. I want to thank the 
panelists as well. And I think there is a remarkable unanimity, 
as has been discussed, the need to address the spending side in 
both discretionary and entitlement, automatic spending, and how 
we get there is the challenge. It seems that every one of these 
comments in this committee starts with some finger pointing at 
the other side, and I would just remind my friends on the other 
side of the aisle that the Budget Committee's responsibility is 
to come up with a budget to provide direction for the country. 
And in the last Congress, of course, there was no budget. So as 
we grapple with these challenges, I think it is important to 
remember that.
    I would also point out, and I don't know if we can bring up 
S6, but it is the deficit record by President. And, here it is. 
And you kind of bop along there for, for, with some deficits in 
the 200 to $400 billion range, and under a Democrat president 
and Republican Congress, we balanced the budget appropriately 
and had some surpluses. And then you see what has happened 
under the current administration. I think all of us can look at 
that, certainly the American people look at that and say, What 
the heck is going on?
    In terms of, I don't know if we could put up S2, which is 
the tidal wave of debt that is coming, and the red chart here, 
the red line here that you can see, it increases 
astronomically, and clearly unsustainable. And then, finally, 
the issue that I want to get the panel to weigh in on is 
something that hasn't yet been talked about to a significant 
degree, and that is the issue of short-term debt and interest 

    All of the presumptions, candidly, on both sides, have low 
interest rates. If interest rates increase any significant 
degree at all, then it blows up the models that all of us have. 
So I would ask you each if you would comment on the 
consequences of any increase in interest rates, and what, if 
anything, we are able to do about that.
    And then, also, if you can touch on short-term debt, the 
chart that I had wanted to refer to has a significant increase 
in the short-term debt, the debt that comes due within a year 
to three years. And we are up in the 60 percent, or pushing the 
60 percent range on that. What are the consequences of that? Is 
there anything that we can do about that? So if I could ask you 
to address interest rates and short-term debt, please.
    Mr. Holtz-Eakin. I will just be real brief. I mentioned 
this in my remarks, we have moved to very short-term financing, 
it is like financing on a teaser rate. And if we get a sharp 
spike, we are going to have to roll over a big fraction of 
Treasuries at much higher interest rates; that is going to feed 
through the budget, it is going to feed through all the 
interest rates in the economy, whether they are mortgages, or 
car loans, or anything else. So, we are exposed, both in terms 
of a financial management point of view, and also an economic 
point of view.
    Mr. Price. And anything that we can do, I would ask to 
address that issue, as a Congress.
    Ms. Reinhart. Let me say that a characteristic, when 
Chairman Ryan asked, of what a crisis looks like, in the run-up 
to debt crisis, in the run-up to severe financial crisis, you 
see the rise of short-term debt, in total debt. That is 
worrisome. What has been done? Some of the stuff that was done 
was quite out of the picture now. In 1951, we actually had a 
debt conversion, called the Treasury-Federal Reserve Accord, 
which took marketable medium to short-term debt and converted 
it to 29-year bonds. Now we don't call that a restructuring or 
a default because an interest rate sweetener was offered. But 
it was, of course, under very different circumstances.
    But what I am suggesting is that if we are faced with a 
sudden rise in interest rates, we may see a return of what is 
called financial repression. And captive audiences, like 
pension funds and financial institutions would be targets. It 
has happened.
    Mr. Price. Maya.
    Ms. MacGuineas. CBO recently, a couple years ago, I guess, 
did a great study on this showing the massive costs that are 
affiliated, I think it was at the request of Congressman Ryan, 
the massive costs that are affiliated with increases in 
interest rates. Obviously we are highly vulnerable to that; if 
you look at where we are right now. It is like a credit card 
teaser rate, right, it is luring us in, we are borrowing more, 
Look, rates are low, we can keep borrowing. When those rates go 
up, we are incredibly vulnerable.
    There is another issue which I don't know exactly what to 
make of it, but when QE2 ends this summer, nobody knows exactly 
how that is going to play out. We don't know whether it is the 
flow or stock of debt that is going to have an effect. But we 
are more vulnerable than we would have been.
    Third, you asked what we could do, and you made the first 
point. Stop finger-pointing and come up with specific 
solutions. It is the only thing we can do to be less vulnerable 
to the upward tick in interest rates.
    Mr. Price. Great. John.
    Mr. Podesta. Well, I basically agree with Maya's points. I 
think that they, right now we don't see that spike in interest 
rates, but we are vulnerable to it. And I think we need to 
ensure, as I think Mr. Bernanke and the Fed have tried to 
ensure, that this recovery gets roots, that jobs begin to grow, 
that is the most important thing to, I think, solve both the 
debt crisis and the jobs crisis and the economic crisis, over 
the long term.
    But I think the one thing that Congress could do is, you 
know, we are now repeating ourselves, is to come up with a 
framework in which the debt stops growing. And I think if you 
could do that on a bipartisan basis over the next couple of 
years, that would, I think, settle these markets down.
    Mr. Price. Within the five year window. Thank you.
    Mr. Campbell. Thank you, Mr.Podesta; Mr. Pascrell of New 
    Mr. Pascrell. Thank you, Mr. Chairman. You know, I agree 
with my friend from Georgia that we can't point fingers. I 
would rather put it a different way, we need to put things in 
context. We need to put things in context so we understand. You 
know, sometimes I get the impression in this committee, and 
other committees that deal with the budget, spending, and 
revenue, that we are involved in a gigantic science project. 
And all science projects turn out very positive. They all do. 
But, you know, we can have brilliant results, it will have very 
little positive impact on the people we represent in reality.
    See, I read a story this morning about a quadriplegic guy 
from New Jersey. His parents are fighting insurance companies 
over denial of 24 hour care. So, you know, we are not simply 
dealing in a numbers project here. We are dealing with human 
beings. And we have to deal with the numbers, there is no 
question about it. But those numbers need to be placed in 
context so we have a Gestalt, an overview of what really is 
    We are all to blame, and we are all to gain. There is no 
one party that caused this mess. I think we all should agree on 
that; that is a good starter. But I look at reports, for 
instance, from the SMP indexes in the year ending December 10, 
health care costs covered by commercial insurance rose by 7.75 
percent, as measured by the SMP health care economic commercial 
    Medicare claim costs associated with hospital and 
professional services for patients covered under Medicaid 
increased at a more modest 3.27 percent rate, over the ending, 
as of December, as measured by the, the SMP.
    So, health care reform is important in the, quote unquote 
entitlement, or, better known, a sure objective, Obamacare, 
when you take a look at it; it is interesting. One third of 
that entire document talks about the budget, we need to put 
that budget together, dealt with Medicare and Medicaid. If we 
read the bill, all 975 pages, because our 2,200 page document 
was rejected, so that we really accepted the Senate version.
    According to the CBO, the Affordable Health Care Act 
reduced deficits by $210 billion over 10 years, and by more 
than one trillion over 20 years, the most significant deficit 
reduction since 1997, the Balanced Budget Act, which I proudly, 
and some of us may have voted for.
    So, Mr. Podesta, I have always enjoyed working with you 
because you are a pretty straight shooter, I think Mr. Ryan is 
a straight shooter, Chris is a straight shooter. But when you 
put things in context, we might come out with different 
answers, I think. We have been attacked, on our side, with 
accusations that neither we nor the President has come forward 
with proposals for entitlement reform, which we say, if we are 
going to look at everything in the budget, that is one of the 
things we will have to look at. We certainly need to look at 
it. I reject the claim.
    Last Congress, we passed the Patient Protection Affordable 
Care Act. As I said, one third of it is devoted, if you read 
it, if you get a chance, in the document, I can list 17 places, 
Mr. Chairman, and the Ranking Member. Seventeen places. The 
first step of entitlement reform was received with attack ads 
claiming 500 billion in benefit cuts to seniors in death 
panels. I heard somebody mention death panels yesterday.
    To date the only action this majority has taken at 
entitlement reform is repealing the reforms. So Mr. Podesta, 
are you familiar with the roadmap?
    Mr. Podesta. Yes, Mr. Pascrell.
    Mr. Pascrell. Mr. Podesta, are you familiar with how it 
proposes to control costs in Medicare?
    Mr. Podesta. It basically voucherizes Medicare.
    Mr. Pascrell. I am sorry?
    Mr. Podesta. It creates a voucher in Medicare. It 
essentially shifts costs from the federal government onto 
    Mr. Campbell. Mr. Pascrell, your time has expired.
    Mr. Pascrell. Can I finish my sentence, my question?
    Mr. Campbell. Okay. But he won't be able to answer. I am 
just trying to get everybody a chance.
    Mr. Pascrell. Thank you. Has the cost of health care risen, 
as compared to inflation? That is what we are concerned about. 
And what happens in the voucher system is you never, ever, ever 
catch up.
    Mr. Campbell. Thank you, Mr. Pascrell.
    Mr. Pascrell. So let's be, put everything on the table in 
context, Mr. Chairman. Thank you.
    Mr. Campbell. Time has expired. Thank you, Mr. Pascrell. 
Mr. McClintock of California.
    Mr. McClintock. Well, Professor Reinhart, you mentioned 
that there has been one other time in our history when we had 
proportional debt. I am hoping that history offers us some lab 
notes. How did we get out of that? And we have also had several 
other spikes right after the Assumption Act in 1792; we 
suddenly had 35 percent debt. We were able to finance the War 
of 1812, and the Louisiana Purchase, and pay off all of that 
debt by 1830. What lessons can history offer us?
    Ms. Reinhart. Okay. Let me be very brief. One thing that 
makes the situation of more concern than the end of World War 
II, which was our last really big debt spike, is private debt. 
At the end of World War II we were lean and mean. Households 
and firms, financial and non-financial, were lean and mean. So 
it was exclusively a public debt issue. But public debt now is 
much more broadly defined. We have a lot of contingent 
    But how did we get out of World War II, well, making cuts 
after war was a lot easier. But let me also say, I mentioned 
the issue of financial repression. That was actually a tax, but 
it was a tax that was never legislated. We kept interest rates 
very low through a lot of financial regulation. We created a 
lot of markets in the financial industry for holding government 
debt. That was a factor. We also ran balanced budgets for an 
extended period of time.
    So you had the post-war reductions, which were somewhat 
more obvious than they are today.
    Mr. McClintock. About $85 billion.
    Ms. Reinhart. Indeed. There was a series of balanced 
budgets, even some surpluses. And there was a lot of financial 
repression; do not underestimate the power of that. It amounts 
to about three percent in revenues, meaning lower interest 
costs and actual liquidation of debt. That is how we got out of 
debt out of World War II.
    Mr. McClintock. So we had repressed demand, plus dramatic 
reductions in spending.
    Ms. Reinhart. Indeed.
    Mr. McClintock. And then actually produced balanced 
budgets. Which gets me to the next question, and that is, we 
talk about taxes and deficits as if they are opposite things. 
Aren't they really the same thing? Isn't the deficit is simply 
a future tax? Aren't those merely the two ways that we finance 
spending? And isn't spending the principle?
    Ms. Reinhart. And this is now seat of the pants because I 
have not tested this empirically, as I have other things, but 
one of the reasons why we find high levels of debt cause low 
growth, or associate it with low growth, has to do with 
anticipated future uncertainty, either of lower benefits or 
higher tax liabilities.
    Mr. McClintock. So, to borrow from the Clinton 
Administration, with obvious apologies, it is the ``spending, 
    Ms. Reinhart. The point I am trying to make is that the 
last time we were in this, we really did touch all bases. We 
had severe, or sharp spending cuts.
    Mr. McClintock. If I may, I am going to need to go to Mr. 
Podesta for a moment. Mr. Podesta, you mentioned that the state 
of the economy at the outset of the Clinton Administration, we 
were running huge deficits; we were in some economic 
difficulty. The Clinton Administration ended up reducing 
federal spending by a full four percent of GDP, which is 
miraculous, produced the only four surpluses that we have had 
in the last 40 years. It approved the biggest capital gains tax 
cut in U.S. history, it tackled entitlement spending with 
welfare reform. We were doing pretty well at the end of that 
administration, as you pointed out.
    Mr. Podesta. Well, I agree with that, Congressman. I think 
that was a combination. We did increase revenues in 1993, and 
painfully, because it led to, at least in part, losing both 
Houses of Congress in 1994, but they did increase revenues. But 
he did restrain spending over the whole period of time, and 
that resulted in an economy that produced 10 times as many 
jobs, much stronger wage growth.
    Mr. McClintock. Cut spending four percent. Now, George W. 
Bush takes office, and ends up increasing federal spending by a 
full two percent of GDP. He approved the biggest increase in 
entitlement spending since the Great Society, he embarked on 
massive stimulus spending, and as we all know, the condition of 
the economy and the budget wasn't so hot at the end of that 
experiment. So my question is why do we keep employing policies 
that we know don't work, and instead go back to those policies 
that your administration employed, by reducing spending, that 
the Truman Administration employed, that the Reagan 
Administration employed, all of which were marked by 
substantial economic progress and advancement.
    Mr. Campbell. Just to remind members, the five minutes 
includes the answer time.
    Mr. Podesta. Well, I will send you a note on that, 
    Mr. Campbell. All right. Mr. Tonko of New York.
    Mr. Tonko. Thank you, Mr. Chair. Mr. Chair, I know that we 
have colleagues here from both sides of the aisle that share my 
appreciation for American history, and I would like to use my 
time here today to explore a few elements of our shared past.
    Mr. Holtz-Eakin, certainly you were the director of the 
Congressional Budget Office from 2003 to 2005. The CBO, as we 
know, is a non-partisan institution. So I would like to 
highlight some of your non-partisan observations from that 
time, as I think they were insightful and fair, and have real 
meaning, I think, for the debate that we have here today.
    This is a, a Washington Post article from January 27 of 
2004, and CBO's annual budget report had just come out, under 
your direction, showing that the Bush Administration had asked 
for more than $1 trillion, had added more than $1 trillion to 
the deficit in just six months, and that that government debt 
could more than double if President Bush succeeded in making 
his tax cuts permanent. According to this article, you noted at 
that time that the massive deficits that would result from 
extending the Bush tax cuts, which were grossly skewed to favor 
the wealthy would, and I quote, lower national savings, reduce 
economic productivity, and ultimately, ultimately, curtail 
economic growth. Is that accurate?
    Mr. Holtz-Eakin. That is what I said, yes, absolutely, and 
I continue to worry about deficits; that is the implication to 
    Mr. Tonko. This is a Washington Post article from one year 
later, on January 27, of 2005. You were still at CBO, and due 
to the rising cost of the wars in Iraq and Afghanistan, the tax 
cuts for the wealthy, and a prescription drug plan that wasn't 
paid for, things were looking worse. You are quoted in this 
article in saying, again, and I quote, We are doing a little 
bit worse over the long term, and it is largely due to policy, 
policy changes. Could you tell me, is that quote accurate? And 
which political party was in charge of the White House, the 
House of Representatives, and the Senate at the time?
    Mr. Holtz-Eakin. I have no reason to believe it is not 
accurate, and Republicans controlled both Houses of Congress 
and the White House.
    Mr. Tonko. Finally, this is an op-ed that you posted 
through your organization, the American Action Forum, just two 
weeks ago. And it reads, There has been talk that the House 
would pursue a series of short-term, two-week CRs, instead of a 
full-year CR. There could be no greater management nightmare 
than the inability to plan for more than two weeks at a time. 
And my point is that I agree with you on that point, certainly. 
And though we may not agree on everything, I think you have 
offered this chamber very sound advice in the past.
    I was not here in 2004 and 2005, but I cannot help but 
think that if our leaders would have listened to you then, we 
might not be in the place we are in right now. Today our fiscal 
challenges are so great that the Republican leadership in our 
House is proposing calling for cuts to programs that range from 
preschool literacy programs, to senior health benefits. And 
yet, we still refuse to look at the policies that really got us 
here. And two wars on the credit card, the deregulation of Wall 
Street, and tax cuts for billionaires, simply didn't appear to 
be the formula for success.
    No matter how many times we say it, the Koch Brothers are 
not a small business, and I do not believe they need taxpayer 
dollars to fund union-busting campaigns in Wisconsin. I don't 
believe it any more than I believe that if we are going to give 
oil companies bigger subsidies, they will someday become 
charitable institutions that won't gouge my constituents at the 
pump, and bring in record profits in the midst of the Middle 
East crisis.
    Tax cuts for the wealthiest two percent of Americans were a 
bill of goods sold to us on the promise that they would create 
jobs, but even before the financial meltdown, they failed, at a 
cost of trillions of dollars. If we are going to spend that 
kind of money, America should be better for it. But while CEO 
pay doubles and triples throughout the decades, the purchasing 
power of the minimum wage has declined by nearly 10 percent. 
Where is that American? Where is that fair?
    According to the CIA, the United States ranks 42nd globally 
in income and equality, putting us in the same range as Uganda, 
Nicaragua, and Iran. We cannot move forward this way and hope 
to compete economically with numbers like that. And we just 
need to address, I think, the inequitable treatment in our 
situation which has really seen a growth, exponentially, in the 
top one percent of wealth in this country and its income 
availability. And how can we go forward without strengthening a 
middle class in this country? It just confuses me economically, 
and irritates me programmatically. Thank you.
    Chairman Ryan [presiding]. Thank you. Mr. Ribble.
    Mr. Ribble. Thank you, Mr. Chairman. I have been listening, 
somewhat entertained here this morning, but disappointed in 
several ways with some of the hyperbole with massive tax cuts 
and all this kind of stuff, and how our deficit is because of 
massive tax cuts. And that revenue after the tax cuts in 2003, 
by OMB's numbers, went up in the next five years by 100 
billion, 371 billion, 624 billion, 785 billion, 801 billion, 
and in 2010, after the global meltdown overnight, over 2003 
numbers after the tax cuts, up 400 billion.
    So, revenue is a difficult thing to really project what is 
going to happen, quite frankly. I have run my own business for 
30 years. When we do budgeting I realize that a cut in spending 
is a direct savings, and something I can control 100 percent. I 
can choose whether to spend the money, or not to spend the 
money. I have the choice. I cannot choose whether a customer 
will buy from me, whether my business will grow. I can plan and 
strategize and try to do those things. And in the broad 
economic sense, addressing this strictly on the revenue side is 
nearly impossible. Not that it shouldn't be done, not that we 
shouldn't include that. But I do know that on the spending side 
we do have lots of control. And a dollar not spent is a dollar 
    I actually have a question for Ms. MacGuineas. I 
appreciated your testimony a lot, and I want to give you a few 
minutes here to expound a little bit on something that I have 
talked about for about the last six months, and that is the 
psychology of the American consumer and the American business 
owner. You address it a little bit.
    We have a psychological problem in this country and it 
relates to and affects economic growth, don't we? And could you 
talk a little bit about that? You didn't have enough time in 
your comments to do that.
    Ms. MacGuineas. Great. Thank you for the opportunity, 
because I do think that the lack of certainty that surrounds 
businesses and households is certainly a factor in keeping the 
economic recovery from moving forward as much as we want it to. 
And if you look at, sort of, the ideal model for fiscal 
consolidation, and how to deal with the fact that we are also 
coming out of a very weak economy, most people have said that 
what we want to do is put in place a multi-year plan that 
doesn't have to phase in so quickly, because you can still 
leave some time for the recovery to take hold. So you wouldn't 
have to have tax increases or spending cuts very, very early 
on. We recommended starting them next year. As long as that 
plan was credible, and so that markets believed that that plan 
was going to be implemented.
    I think that plan, to be credible, would have to be 
bipartisan, it would have to be put in statute, and it would 
have to come with budgetary triggers, so if those changes 
weren't made, that changes would come automatically. That would 
allow households to know what is going to happen. Importantly, 
because of all the capital on their balance sheets right now 
that would allow businesses to know what is going to happen.
    If you look at part of the model in London, when they are, 
in England, going through their consolidation efforts, they 
have hoped that businesses would, kind of, be the drivers of 
growth, and fuel the recovery. There haven't been as many 
policies to help enable that, so you want to surround that with 
policies that allow businesses to help be an engine of growth 
in this recovery. We can't look to government to spend our way 
out of this, or households, who are over-indebted, to spend our 
way out of this. We do want businesses to be the engine of 
growth. None of that works in place, in terms of reassuring 
markets, letting households know what to expect, in terms of 
tax and spending policies, or having businesses invest in the 
longer term, unless we put in place policies that are credible, 
and likely to stay in place, and will put us on a glide path to 
something stable.
    Mr. Ribble. How long have you been studying this topic, and 
this whole issue of economics here, as it relates to this 
budget crisis? Been a few years?
    Ms. MacGuineas. It has been a few years. We haven't made 
that much progress.
    Mr. Ribble. Do you think that, that the Congress has acted 
credibly in the past? Are there examples that we can point to 
that might help us?
    Ms. MacGuineas. I mean, sure, the budget deals that we had 
in '90, and '93, and '97, all of those are different models, 
when we fixed Social Security, they were all different models 
for people coming together. There were a number of factors that 
made them work. You need leadership, you need real leadership. 
You need an understanding in the public of the problems and a 
commitment to fixing them. You do need bipartisan cooperation 
for anything that is hard, otherwise there is going to be 
immediate pressure to take back whatever policy changes you 
have put in place. And I do think that public component is 
actually quite important. You need people to understand.
    Remember there was the Ross Perot moment; it kind of 
changed the whole world, right? But you need people to 
understand why this is something that you do for the country. 
And the narrative really has to be that this is part of a 
successful growth strategy. It is not just all about, you know, 
we are the eat your spinach crowd, it is not all doom and gloom 
though; it is about part of building a long term economic 
growth strategy in the country. And I think that has to be told 
to people, and then they are willing to step up to the plate 
and make those changes.
    Mr. Ribble. That psychology will change, then, won't it?
    Ms. MacGuineas. Absolutely.
    Mr. Ribble. Okay. Thank you very much, and I yield back. 
Mr. Chairman.
    Chairman Ryan. Ms. Bass.
    Ms. Bass. Thank you. Ms. MacGuineas, I wanted to ask you a 
couple of questions. If I heard you right, I think you said, a 
few minutes ago in your presentation, that several events could 
tip us over the edge, seriously increase the crisis. And one of 
those events could be something going wrong in the states. And 
I really wondered, given what is happening in the states, what 
you meant by that, considering so many of the states are in 
such a deep crisis. California, a couple of years ago, had a 
budget of $110 billion: budget now is $83 billion, and we are 
facing a $23 billion deficit with no real clear way out of it. 
They are attempting a balanced approach in California, 
hopefully it will be voted on in the next week. But I wanted to 
know what you meant. What else could go wrong in the states 
that you are referring to?
    Ms. MacGuineas. Well, there is certainly the situation that 
states may not be able to pay what they owe on their debt, and 
that this could be the beginning of a cycle of markets losing 
faith in the ability of the U.S. to make good on all of its 
commitments. There are also the structural problems in the 
states, which are a result of the economy. And then there are 
also the long-term problems, that we are all aware of, but 
their pensions and their health care commitments, which are 
obviously unsustainable. And again, much like what is going on 
at the federal level, this is a problem that we need to get out 
ahead of. This is a problem where they, these reforms need to 
take place in advance so that the states don't bump up against 
their limits.
    Just one final problem with the states that we have been 
seeing is that the information, the data on the states is very, 
very poor. You can't make an apples to apples comparison of 
fiscal positions of various states. And so, transparency is a 
piece of all of this. We need to understand the fiscal well-
being of the federal government and the states, and right now 
we don't have the information to do that.
    Ms. Bass. Thank you. One other question. It seems as 
though, in several of your comments, that you were supportive 
of a balanced approach to us getting out of this crisis. And, 
on the revenue side, which I think we spend an awful lot of 
time talking about the spending side, and I would agree we 
certainly need to pay very careful attention to that, and rein 
in spending, but I don't think a whole lot is said on the 
revenue side. And it seemed as though, you talked about tax 
reform, and I know I have certainly attempted that in my time 
in California, and that is very big, very difficult to get to. 
So I would see that as a long term, and something that we 
definitely need to do. But in the short term, in terms of 
revenue, what suggestions would you have? And would you 
include, maybe closing some tax loopholes as part of it?
    Ms. MacGuineas. Yes. I actually think that the answer to 
that question, what you would do in the short term, closing 
those tax loopholes, is in many ways the right start for the 
long term fundamental reforms, too. I think the fiscal 
commission put out a really, really smart structure, which 
said, let us show you how much we can bring rates down 
aggressively by clearing out all the trillion dollars in tax 
expenditures from the base.
    Now, realistically, they are not all going to be cleared 
out. But, once you start funneling them back, and you say, 
well, we want part of this to still be there, or we want all of 
this to still be there, you bring up rates accordingly, and you 
actually have the cost of these. So we haven't had a budget for 
tax expenditures, they have been like mandatory spending, on 
automatic pilot. This creates a sense of the tradeoffs, and it 
certainly starts the, the right direction for fundamental tax 
reform, which is broaden that rate base as much as possible, 
bring rates down. And I believe you need to use a piece of that 
revenue to close the fiscal gap. And because tax expenditures 
are so big, there is actually plenty to do on both sides. So I 
think the framework by the fiscal commission is immensely 
    Ms. Bass. Thank you. We attempted the broadening in 
California, too, and everywhere you talk about broadening.
    Ms. MacGuineas. Somebody likes that tax break, of course.
    Ms. Bass. Exactly, it is so difficult. But in my remaining 
time, Mr. Podesta, you mentioned that health care spending was 
one of the drivers. And I wanted to know if, in the last few 
seconds, if you could give us your opinion as to whether or not 
the Affordable Care Act begins to address some of the concerns 
you raised around health care spending.
    Mr. Podesta. Well, Mr. Pascrell went through a list of the 
items in which there is restraint in the Affordable Care Act 
that begins to move that cost curve down. The CBO, as has been 
noted, estimates that it has some savings in the, in the near-
term budget window, but over a trillion dollars in the second 
20 years, which is really where the money is.
    I think that the other place to look is to the CMS 
actuarial report from last summer, which indicated that health 
care spending would, would rise just slightly in the United 
States, by .2 percent, but include coverage for 32 million 
people. So I think that, at that point, the trend line is going 
down, whereas if you repealed health care, the trend line would 
continue to rocket up, as it has been for the last decade. So 
it is really important, I think, to be able to fulfill the 
authorities that are included in the Affordable Care Act, 
including the IPAB, the demonstration projects, changed the way 
we deliver health care, get on with trying to put more emphasis 
on primary care, try to get more errors, as the administration 
is currently doing, out of the system, so that we, across the 
board, in both the public programs, and in private sector 
health care, we begin to reduce the cost, which is extremely 
expensive, and not producing the results that we need.
    Chairman Ryan. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman. My colleague raises 
the issue of the balanced approach, which is something that we 
have been talking about as a committee, both within our party, 
and in a bipartisan basis. I think you have started to see in 
some of the discussion today that a lot of us agree that, in 
fact, I think Mr. Van Hollen actually said that we agree that 
we need to have some spending cuts. What is the right balance? 
I will put that question to each of you, very briefly. What is 
the right balance between spending cuts and revenue 
enhancements, to use a euphemism? Is it 50-50, is it 80-20, is 
it 110 with tax cuts? What is the right balance? Has anybody 
given that any thought? Let us go right to left because Mr. 
Podesta always gets left off at the end, and I am always good 
with starting on the right hand start of things.
    Mr. Podesta. Thank you. I think that the right balance is 
probably in the arena of 50-50. I think that the Simpson-Bowles 
was two-thirds, one-third. I am looking more at the near term, 
at the course of the next five years; it is probably in the 
range of 50-50. Over the long term, particularly as we get 
these health care costs under control, it shifts, and begins to 
probably look more like two-thirds, one-third. Two-thirds on 
the spending restraint side, one third on the revenue side.
    Ms. MacGuineas. Great question. When you think about 
balance, two things complicate it; baselines, what baseline are 
you using, and how you allocate interest. I look at this as, 
actually, you could solve the problem on the spending side 
alone, but nobody wants to. There is not a politician who is 
talking about what you would have to do to current retirees. So 
we might as well get realistic, that revenues have to be part 
of it. And I think one of the keys is that that has to be 
combined with very serious structural reforms to entitlements. 
And there has to be an understanding that those revenues are 
going to close the fiscal gap, not to funnel into new spending. 
And then I think we can start being more realistic about that.
    I don't think 50-50 is the right balance. I think, if you 
look at the problem, it is a spending problem, if you look at 
where the growth in the budget is, and compare it to historical 
averages. But since no one is willing to close it completely on 
the spending side, I think you start at, maybe, 80-20, and you 
end up at, maybe two to one. And you, you do what you have to 
do to get it done. But the problem is a spending problem, and 
both are going to have to be on the table for the solution.
    Ms. Reinhart. Two-thirds, one-third. And I say that on the 
basis of, simply, demographics. And this is not a short-run 
issue, but a medium-term issue. And a lot of our problems have 
to do with an aging population; this effects both the health 
and the social security side.
    Mr. Holtz-Eakin. I don't think you should frame the 
question that way. I really don't. I think we get lost in a, in 
a debate over whether the number is eight or nine, we lose our 
way. We need to rethink the government budget from top to 
bottom, identify those things the government can and should do, 
their traditional roles, fund them effectively, and, and build 
a vision for growth and opportunity, and articulate that. And 
there is nothing right now that is going to produce growth or 
opportunity. Congresses of both parties have a long history of 
spending tons very ineffectively and not funding them 
adequately. That has got to change. Spend the money 
effectively; fund it adequately. And let us, let us get started 
    Mr. Mulvaney. And here is why I asked the question, and I 
appreciate that. But, if you look at it historically, no one 
has ever been able to turn this type of situation around on a 
50-50 basis. It simply has never happened. And if you look at 
it historically, Ms. Reinhart, maybe you can speak to this, Mr. 
Holtz-Eakin, really, that the folks who do this successfully 
are the folks who are more down in the 80-20 range. In fact, of 
the successful fiscal consolidations in the last several years, 
there is actually more evidence that 110 percent worth of cuts 
in spending, with tax reductions, because it leads to what you 
have just described, which is the opportunity for growth and 
economic development, that that is the model that we use.
    Mr. Holtz-Eakin. I want to concur with that. I mean, that 
is the, that is the international evidence. Successful growth 
and consolidation episodes are grounded on keeping taxes down 
and cutting kinds of spending, government payrolls and transfer 
programs. Those are the, those are the heart of those things, I 
completely concur. I just think if you want to go to the 
American people and say, We are going to cut X dollars, that is 
not a very compelling story. What you need to do is explain to 
them, This is important for the opportunities that our children 
will have. These are the roles we have assigned for our 
government. We are going to do that, and this is how it adds 
    Mr. Mulvaney. Mr. Podesta.
    Mr. Podesta. Congressman, that might be true, if you are 
starting from a very high revenue base, but as I noted in my 
testimony, we are starting from a historically low revenue 
base. We are at 15 percent of GDP in collections. That hasn't 
happened since 1950. We have a lot bigger government than we 
had in 1950. And so if you begin, particularly with the notion 
that we are going to go further down the revenue stream from 
there, and begin to think you are going to be able to make that 
up on the spending side, it is just not realistic.
    Under President Reagan, our average spending was 21, 22 
percent of GDP. How are we going to get down to that 15 percent 
rate that is currently the base that we are looking at? Mr. 
Holtz-Eakin said that the Obama budget gets to 19.6 percent. It 
does, but on the basis of a bunch of policies which I don't 
think he supports. So I think that we have got to have some 
balance here, on mandatories, on discretionary, including 
defense, as well as with respect to revenue. And I think, if 
you look at the '93 balanced budget, I think it was about 60-40 
cuts versus revenue. So I think we are in similar places, but 
you have to start from the premise that revenue is at a very 
low base right now.
    Chairman Ryan. Mr. Shuler.
    Mr. Shuler. Thank you Mr. Chairman. I would like to thank 
the Chairman and the Ranking Member, put a great panel 
together. Here is the ironic thing about it, four non-elected 
officials could probably sit down and come up with a plan that, 
that would, the American people would agree with. 
Unfortunately, and I will say this on both sides, the maturity 
level is not there from the United States Congress yet. We are 
still playing politics with the future of the next generation. 
And at some point in time we are going to have to stop that, 
because time is of the essence. I look around the room; there 
are not many moderates on this committee. There is very few of 
us. I would, I would ask each of you: is there a policy out 
that is available now for us to review, that you think would be 
acceptable to the American people? I am not asking, would it be 
acceptable to the Congress, because we are not there yet.
    Mr. Holtz-Eakin. I think you could do a lot worse than to 
start with what Bowles and Simpson came up with. That 
commission did a remarkably good job of examining the problem 
and proposing solutions. And I am deeply disappointed that it 
has been left on a shelf, and in the dustbin. We really need to 
take this problem on.
    Mr. Shuler. Dr. Reinhart.
    Ms. Reinhart. I really would like to echo that. It is in 
the spirit of starting afresh, we are here where we are, and 
maximizing the options. Bowles-Simpson is a good starting 
    Mr. Shuler. Ms. MacGuineas.
    Ms. MacGuineas. Bowles-Simpson is a great starting point. I 
mean, they gave us exactly what we need. They gave us good 
policies, they found where good political compromises are. It 
is a commission report, so it gives you all the political cover 
to get behind it, and say what they are all saying, we don't 
like every part of it, but it is a good way to start the 
discussion. You can see what is going on in the Senate, and it 
is a very productive discussion that is moving forward.
    This is what the country needs. It saves $4 trillion over 
10 years. I think anything less than that is probably 
insufficient. And so I wouldn't see why anybody would walk away 
from this opportunity to start the discussion there.
    Mr. Shuler. Mr. Podesta.
    Mr. Podesta. I just want to add one note of caution. I 
think, actually, there is a lot of agreement, to some extent, 
on the panel, on the long-run. One note of caution is, to the 
extent that, it is what Ms. Bass said, to the extent that 
moving forward requires a complete revision of the tax code, I 
am for that. We should get rid of a lot of the junk in the tax 
code and get rates down. I am for that. But the process of 
producing that is going to be very, very difficult. And we 
can't wait for that to be done before we begin to tackle these 
midterm deficit problems, so that we get the debt stabilized.
    So if it has to be in two bites, I can live with that. And 
I think the first bite, I think we also mostly agree on, you 
have got to go after mandatory, you have got to go after 
discretionary, and restrain it. I am for putting defense on the 
table, because I think there is a lot of waste in the defense 
budget, you could save some money there. And I think, 
particularly going after these tax expenditures, and getting 
rid of these loopholes that really don't produce much, 
economically for the country, you could get a balanced package, 
and get bipartisan support for it.
    Mr. Shuler. Well I certainly hope, and I am very optimistic 
that we can come to a conclusion. At some point in time, we are 
going to have to be grown-ups about this. And the next 
generation will look at us, and wonder if we made the right 
decision. And if we lose our elections, if all of us lose our 
elections in 2012 because we made the right decision for the 
next generation, then that is good for us, and that is good for 
the American people. Because, 10 years from now, they will say 
that we will be the best Congress to have ever served.
    So I am pleading, I have heard all the back and forth, and 
unfortunately, most of the, the higher-ranking, up on the top 
tier, on both sides, continue their political debate and 
posturing, because it is easy for them to get reelected. And I 
want to see us start working together across the aisle to make 
this work for the American people, and for our next generation. 
I yield back.
    Chairman Ryan. Thank you. Mr. Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask a few questions, and as a member of the 
freshman class, I know there is a lot of finger pointing in 
this room, but there are some members here that shouldn't be 
pointed at. I am not saying anybody is, but just to point out, 
that is the lead-in to one of my questions. And that would be, 
throughout the last 20 years of Congress, there have been all 
kinds of balanced budget mechanisms; we are going to solve 
    We can sit here and talk about tough decisions and making 
those, and I guess the question would be for Mr. Holtz-Eakin, 
what mechanisms would you say are necessary in order to make a 
deal secure in future years? Because I would say folks in my 
district have no confidence, in either the Congress or the 
President, to actually implement, and to maintain. And I would 
agree, I think multiple congresses, multiple presidents that 
haven't balanced that, didn't care to balance it. And so what 
kind of mechanisms would you suggest are necessary for 
    Mr. Holtz-Eakin. I have a couple of observations. The 
first, and the one that I think is most important, is there are 
no budgetary mechanisms, PAYGO rules, discretionary spending 
caps, or anything of that sort, that are a substitute for the 
Congress having the political will to do this, and agreeing it 
has to be done. Because any Congress can circumvent rules, and 
does on a regular basis.
    So, rules are not the solution; deciding to solve the 
problem is the top priority. Having done that, you can then 
agree on some sort of fiscal goal. I actually don't care deeply 
which one. Whether it is debt to GDP, spending targets, 
anything that gives you a way to identify that you are off 
track; we agreed to do this, but we are off track, you get a 
warning signal, and gives you a way to say no, Yes, we would 
like to do that, but the larger priority is our kids and the 
growth of this economy, we are not going to do that, we have 
this limit that we can't bust. That is what you need.
    And there is no magic to the particular flavors. You have 
to have an agreement to do it, you have to have identifiers you 
are not doing it, and you have to have a way to say no.
    Mr. Huelskamp. Would the rest of the panel agree with that 
assessment? In short response?
    Ms. MacGuineas. I would just jump in, because we ran a 
commission called Peterson-Pew Commission for two years that 
focused on budget process. And we recommended a set of 
budgetary targets, so everybody knows what you are trying to 
get to, triggers, so that if you don't get there they would 
enforce them and move you back on track, and help keep you on 
track, and transparency. So the three T's: targets, triggers, 
and transparency.
    But the bottom line is, it won't force anybody to do 
anything they don't want to do, but it will give you political 
cover if you do want to do the right thing, and it gives you 
the way to say no. So I think that framework is really 
important to help move us in that direction and keep us on 
    Mr. Podesta. What did produce a balanced budget and a 
surplus were hard budget caps on the discretionary side, and a 
real PAYGO that covered both mandatory and revenue. And so, I 
think, if you go back and look at history, it is worth at least 
attempting to say, that worked before, why don't we try it 
    Mr. Huelskamp. Yeah, and I appreciate that, historically. 
But we are at such historically high levels, and I don't know 
how you could implement that. I mean, you lock in trillion 
dollar deficits, as the President's indicated, sustainable 
deficits forever. So, Carmen?
    Ms. Reinhart. Simply put, in this environment, debt 
targets. Taking into account that Europe has blown Maastricht, 
but having credible debt targets would be a useful starting 
    Mr. Huelskamp. I didn't hear anyone mention though, and I 
come from state-level, where we have a mandatory balanced 
budget requirement unlike some other states; no one mentioned a 
balanced budget amendment, those kind of things, which would 
be, there would be no legislative way around that, is there 
opposition to that from any of these members here that believe 
they don't work, or would not work at the federal level?
    Mr. Holtz-Eakin. That is a fiscal rule, and would have the 
same benefits that, that I mentioned for others. Getting there 
is going to be awfully hard. We are so far from balanced. And 
so, I am all for a balanced budget, but I encourage you first 
to tell me how we are going to get there.
    Mr. Huelskamp. Well, that, that was the requirement for the 
panel members today.
    Mr. Holtz-Eakin. I have my plan.
    Mr. Huelskamp. The follow-up question I would have, in 
reference to that is, and quickly, for each of you, I just have 
a few seconds left. How many years do we have, and it might 
have been asked already, counts to five years, I have heard 
less years, I am going to be listening very closely. How many 
years do we have, quickly?
    Mr. Holtz-Eakin. We don't know; pretend you have none.
    Ms. Reinhart. Great answer.
    Ms. MacGuineas. It is a great answer. I am worried, because 
I have heard the number five around today. And I think that 
that is too optimistic, chances are that is too optimistic. 
There are a lot of people who believe that the risk is it could 
be in the next year or two.
    Mr. Podesta. I think you have this year to lock in a 
bipartisan agreement to stop the debt from going up.
    Mr. Huelskamp. All right. I look forward to help from the 
Senate, and from the administration. Thank you.
    Mr. Lankford [presiding]. Great. Thank you, Mr. Ryan.
    Mr. Ryan of Ohio. Thank you, Mr. Chairman. We had a meeting 
yesterday with Mr. Bowles and Senator Simpson, and I have got 
to say it was very sobering, to just sit with them for an 
extended period of time, and kind of embody the real gravity of 
the problem here. I know Mr. Van Hollen has said this, as well 
as others in the Democratic Caucus, I think, and to Mr. 
Podesta's point that he just made, I believe that this needs to 
happen in the next year because if it doesn't, we are going to 
get into a political year, which we are already actually into 
the presidential election, already, as the media is portraying 
it. And, so that whole year will be wasted.
    And now we are two years down the line, and all of you are 
saying, act like it is happening now, which I think we need to 
do. So just from this perch here, I think we need to drop the 
rhetoric on both sides and come to an agreement. I think it is 
important, it has been noted here, President Reagan raised 
taxes eleven different times, gas, tax, and others. So we are 
not going to get there from here. We have got to get ourselves 
in a position where we all agree that the wealthiest, as the 
Bowles-Simpson proposal has, the wealthiest are going to have 
to pay more. Because the larger issue for them with investments 
and business creation, are going to be the credit markets.
    And so I think most of them would be willing to pay an 
extra 30, 40, 50, $100,000 a year, if you are making millions 
of dollars, if they know that business activity is going to 
increase. And I think we have got to talk about all of this in 
that context as well. And also, to make the point that there 
are tradeoffs here, when we ask the wealthiest to pay a little 
bit more, what are those programs, what is that money going 
into? It is going into Pell grants, it is going into job 
retraining, it is going into research, it is going into things 
that are going to yield us all a lot of economic activity, as 
we see China investing hundreds of billions of dollars into 
clean energy. And I am from a steel district, in Youngstown, 
Ohio, and Ms. Kaptur is from Toledo, where they are generating 
solar panel industry.
    We are starting to lose the solar panel industry to China. 
So we are going to reduce our dependence on foreign oil, and 
then we are going to become dependent on China for our 
batteries, our solar panels, and everything else. So these 
investments have to be made, and we have got to ask everybody 
to participate. And remember that George Herbert Walker Bush 
lost his election, as Mr. Shuler was just talking about, 
because he raised taxes because he had to. And that led to Mr. 
Podesta and crew coming in, and President Clinton, and that 
leading to enormous economic activity, 20 million new jobs.
    One point, and then one question I will let everybody kind 
of take a bite at, that I wanted to make. The point has been 
made, and we talked about animal, animal spirits, and my friend 
Mr. Ribble was talking about psychology, we have a 
psychological problem. We have a psychological problem in the 
market because wages have been stagnant for 30 years. This is 
not psychological; it is a real problem that we have. In the 
last 10 years we have lost wages. And in Ohio we are going to 
see tuition increases because of the economic collapse, we are 
going to see a lot of cuts, we are going to see more burden 
placed on families. And so, if we don't address the issue of 
wages, and Paul Krugman's column just talked about this in the 
last day or so, about the high-growth jobs in the recovery 
aren't coming. It is the low-growth jobs that are expanding 
    So we have got a real issue, if we are going to continue to 
have this economic instability and political instability if we 
don't address the issue of wages in the United States, and 
health care and other things fit into that.
    So, my time is out, Mr. Podesta, if you could just comment 
on this, and if there is time, we could just work our way down, 
about the top tax rates. There has been a lot of talk about, 
those are the people who create jobs. I know you guys, when you 
came in in '93 made that decision, raised the top tax rate.
    Mr. Podesta. Yes raised the top tax rate, the top two 
    Mr. Ryan of Ohio. How did that play out, and how would all 
of you guys see that playing out as a big diminishment in 
economic growth?
    Mr. Podesta. Again, you can't make a direct comparison, but 
GDP growth was twice as strong during Clinton as it was under 
Bush. Business investment was much stronger under Clinton than 
it was under Bush, with a 39.6, you know, top tax rate. And so 
this idea that just by merely cutting the top tax rate we are 
going to eliminate investment and the economy is going to tank, 
I think it is just not borne out by history. I think you need a 
balanced program, one that does exactly what you are 
suggesting: invests in human capital in science and technology, 
in the things that power the economy forward. And that is what 
is going to get wages growing again.
    And the only thing I would disagree with you about, Mr. 
Ryan, is that wages did grow in the 1990s, and they grew 
substantially in the middle and at the bottom during the 1995 
to 2000 period.
    Mr. Lankford. I wish we had time to get all the other 
responses. Mr. Young.
    Mr. Young. Thanks so much to all of our panelists, I really 
appreciate you being here today. I am going to focus my 
question on, if time permits, the role of the U.S. dollar in 
the world, its current position as the world's reserve 
currency, how that might be threatened, and the implications 
    Before I get into that, though, I would like your thoughts 
on, what I typically discuss in southern Indiana, as I mix with 
my constituents, and try and inform them on this issue, get 
their thoughts and concerns. And one of the things that I try 
and do is bring it down to the human level. Individual persons 
and businesses and families, and I thought you might be able to 
add some additional texture to that overall portrait.
    What will things look like if the doomsday scenario, if the 
debt crisis does in fact play out, if the United States suffers 
from a Greece, or Japan-like, situation, where either they have 
to go through a lost decade themselves, or instead, there is a 
sudden response by the markets as a result of a lack of a 
credible plan to bring down our debt to GDP ratio.
    Some of the things I emphasize are the increase in our 
interest rates for our treasury instruments, which redounds to 
an increase in interest rates for all manner of different loans 
and credit instruments that will impact individuals that I 
serve. An increase in taxes, perhaps an immediate increase, 
required to calm the credit markets. An immediate decrease in 
spending, in a non-deliberative and, frankly inhumane way; it 
is inhumane, not because our efforts wouldn't be well-
intentioned to calm the credit markets, it would be inhumane 
because we failed to act now, when we could put in place a 
smooth trajectory, a gradual mechanism to get our debt under 
control, one that would maintain our social insurance programs 
for the least fortunate. It would also result, this doomsday 
scenario, I anticipate, in a decrease in investment, in 
physical capital, in human capital, all these things that help 
us enjoy those higher-paying jobs that Mr. Ryan was just 
lamenting are not as abundant as they once were. Can someone 
speak to that overall private human impact that we might 
    Mr. Holtz-Eakin. I am not the place people usually go for 
humanizing events. But I think you have captured the mechanics 
of the collapse pretty well. But it will be far more 
devastating than that, because in that collapse, you will have 
panic. You think back to 2008, there was palpable panic among 
individuals, among policymakers, and when people are panicky, 
and seeing their social services, you know, rendered, you lose 
a sense of social cohesion. So I believe that there is a lot 
more at stake here than the economics of it. I believe our 
social cohesion is, and will be tested, if we fail to address 
this. And we will, in those moments, also pull back on 
commitments we have made around the globe. You know, we will 
bring back the troops from those bases, we will cut off our 
ground forces in different ways, and we will be more exposed 
and less of a leader in liberty than we want to be. And I think 
those are all very damaging things.
    Ms. Reinhart. I would say, at the very human level, one 
thing we have to, at some point, start to face, is that the 
past 10 years were not a good indicator of the next 10. 
Households have negative equity. That some, many households 
have negative equity, that is something that has to be dealt 
with. Households have a debt overhang. Those are issues that 
were not issues 10 years ago, that we have to think about. I 
would like to think that, sort of a gradualist approach to debt 
reduction is more likely. It is, historically, it hasn't worked 
out that way.
    Let me conclude with a commentary on the dollar. One of the 
things that is actually, actually helping us be more gradualist 
than we otherwise could be, is that people, notably central 
banks from all over the world, willing to hold U.S. Treasury 
securities. But that is also a dangerous proposition. Without 
gloom and doom, it involves a level of vulnerability that we 
didn't have 20 years ago.
    Mr. Podesta. Congressman, you know, I think you can go too 
far with this. I think that, we are not Greece. The United 
States is not Greece. We have a pretty darn strong set of 
fundamentals and basics in this country, including the best 
workforce in the world, the most liquid capital markets, the 
most innovation, the highest levels of science and technology. 
But I think what will happen is we will get further away, for 
many, many people, from the American dream, the ability to 
really make their children's lives better than theirs, to 
succeed in their own right. And that is what we have got to be 
worried about, that is why we have got to take the steps now, I 
think, to get on a better path.
    Mr. Young. Thank you all.
    Mr. Lankford. Thank you, thank you as well. Ms. Castor.
    Ms. Castor. Thank you very much, and thanks to the panel 
for all of your expert advice and involvement in this critical 
issue. Back home, when folks focus on the debt and deficit, I 
think they do appreciate that President Obama named a national 
commission of fiscal responsibility and reform. But if he has 
seen some of the polling across the country, they, they rank 
the debt and deficit very high as a problem, and then you say, 
but they don't want any cuts on anything. So we really need to 
find something to pull us on that glide path with a 
comprehensive plan. And the one that seems to get a little 
traction at home is tax reform, and lowering the rates.
    And then you have got to begin this dialogue about, 
especially, the tax expenditures, I think. Because when you are 
talking about the tax code, it has got to be holistic. And I 
want you all to be specific. You can go back to the commission 
on fiscal responsibility and reform and highlight your 
favorites, but give us the targets for these tax earmarks, and 
tax expenditures, especially the ones that have been built up 
over the years by high-paid lobbyists; people know it, they 
know it at home.
    Give us those, your best targets, so that we can reduce the 
overall tax rates for the average hardworking American. I would 
like to hear from each of you on this.
    Ms. MacGuineas. Well, I will say, I think people are going 
to want to understand two important things. And one is, do you 
have a plan? And two, is it fair? And that is going to help 
people be willing to sacrifice. I think they need to feel that 
if they make these sacrifices themselves, it will not lead to 
not fixing the problem, but it will lead to an actual fix.
    In terms of tax expenditures, you are putting out a tough 
question there, but I am sure we will all give you pretty 
similar answers. There are two big ones that need to be 
reformed: the health care exclusion, the home mortgage interest 
deduction. That is the bottom line, every policy analyst on 
both sides of the aisle knows that these are not good policies, 
and that is, the core of really thinking about tax reform. And 
people can choose to go after them and try to demagogue them, 
or people can talk about the benefits of a better tax system 
that is not regressive, that has more oversight, that leads to 
lower rates, and is part of a fiscal fix. And these tax breaks 
and others have to be reformed.
    Mr. Podesta. Well, Ms. Castor, I think they fall into two 
big categories. Maya mentioned one, which is on the personal 
income tax side: the exclusion and home interest deductions. 
And, particularly on second homes, you could go after that 
fairly easily, I think. But I think there is a lot in the code 
on the business side that would strike people back home as, 
what I would describe as, you know, tax exclusions that they 
think of, tax expenditures that are really narrow, they are 
focused on a very small number of businesses.
    I guess my favorite still remains the tax breaks to the oil 
and gas industry. The top five oil companies have made $931 
billion in profits in the last 10 years. Do they really need 
additional incentives to continue to produce what they are 
producing in their business? I don't think so. And it is a 
waste of money, and I think people are getting gouged at the 
pump right now, and they would understand why that level of 
support to an industry that doesn't need it could be withdrawn, 
in a time when we have high deficits.
    Ms. Reinhart. I would like to point out that, 
realistically, I think there is broad agreement that we need 
higher savings and that interest deduction on housing is 
something that should go. But let us look at the housing 
market. The housing market is in an all-time, historic slump. 
The timing for that is probably problematic. So it really goes 
back to my two-thirds and one-third. I do really think that one 
has to go back to, I would like to be told by the doctor that I 
can lose weight and eat just as much. But I really do think 
that the expenditures side, particularly in light of 
demographics, is unavoidable.
    Mr. Holtz-Eakin. Briefly, I think we have to educate the 
American people on the reality of the tax code. For the 
majority of Americans, the biggest tax they pay is the payroll 
tax. So if you talk about tax reform to them, there is nothing 
to do. A minority of Americans are now paying the income tax, 
and it needs to be radically reformed to reflect the reality.
    Go to the President's panel from a couple years ago, the 
growth investment tax plan, adopt it tomorrow. Way better than 
anything we have got.
    Ms. Castor. I am not even familiar with what that is.
    Mr. Holtz-Eakin. I would encourage you to become familiar. 
Mortgage interest, the health exclusion; those have been on the 
table for years. Congress has never touched them. You should go 
do exactly what Bowles-Simpson did with the corporate tax. You 
should go to a territorial system with a low rate, because, in 
the end it is the American worker who is paying that tax. 
Companies don't pay taxes, people do. And the workers are 
getting hurt by the uncompetitiveness.
    Ms. Castor. Thank you.
    Mr. Lankford. Thank you. Mr. Flores.
    Mr. Flores. Thank you, Mr. Chairman. And I want to thank 
the panel for joining us today. And except for the rock-
throwing back and forth, it has been a fairly-informed panel, 
and I apologize, I am sorry that you had to put up with the 
rock-throwing. I am not going to throw any rocks. I am going to 
ask a couple of questions for you. We have got a couple of 
alternatives out there. We have got this, that is supposed to 
be winning the future. You have got the Bowles-Simpson 
Commission that I think did some really good work. Looking at 
the Bowles-Simpson plan, and I would like each of you to limit 
your answers to about 15 or 20 seconds, what would you do to 
make the Bowles-Simpson plan better? We all said that is a good 
place to start. What would you do to make it better? So let us 
start on the right with Mr. Podesta.
    Mr. Podesta. Well, I think that, I noted earlier, that we 
think that Social Security reform could be tackled, but I think 
the way they tackled it is wrong. And I think there is a way to 
protect people at the bottom in Social Security and still get 
that 75 years of actuarial integrity and that is where I would 
probably start.
    Mr. Flores. Okay.
    Ms. MacGuineas. I think it is a terrific plan, I think the 
main thing that needs to be filled out is how you would live 
within the health care budget that they proposed. So in the 
decade when you would start controlling health care cost to GDP 
plus one, we need to figure out structures that are going to 
fill that in. And I actually think, on Social Security, we use 
too much of the revenue to funnel into Social Security, and I 
would use that more on investments, and bring benefits down for 
the well-off in Social Security a little bit more aggressively.
    Mr. Flores. Okay. So greater means-testing. Ms. Reinhart?
    Ms. Reinhart. I think we need to be a little more 
aggressive on Social Security benefits.
    Mr. Flores. Okay. Mr. Holtz-Eakin?
    Mr. Holtz-Eakin. I am going to echo those, I think the 
biggest hole though is, we really took a pass, a serious pass 
on health programs. And those are the problem going forward, so 
you have to take those on.
    Mr. Flores. You talked about health programs, but it seems 
to me like Medicare is the biggest issue, that is the biggest 
gaping wound that we have in our future financial security.
    Mr. Holtz-Eakin. I believe that if you look at Medicare, 
Medicaid, and the Affordable Care Act collectively they are the 
    Mr. Flores. Okay, thank you. Looks like I have some more 
time, so I am going to ask you another question. This hasn't 
been brought up. One of the things that I have seen, I was a 
CEO of a small company, and one of the things that I felt, and 
that people are feeling today, is the impact of regulation on 
the economy. We haven't touched that, and that is not going to 
be in the budget, but I think it is an important component of 
what is restraining the economy. And so I would like each of 
you just, again, 10, 15 seconds, do you think that our 
regulatory zeal today is hurting our economic potential? Let us 
start on the left.
    Mr. Holtz-Eakin. Absolutely. A chief indicator of 
regulatory activity is federal register pages, and last year we 
set a record, exceeding even when the Bush Administration set 
up the Department of Homeland Security, I never thought we 
would beat that. And that is before we see the implementation 
of the Affordable Care Act, before we see the Dodd-Frank common 
line and before the EPA rolls out its boilers and other 
foremeasure rules. So we are in the midst of a massive 
regulatory push.
    Mr. Flores. That is a terrifying metric. Ms. Reinhart.
    Ms. Reinhart. I alluded to this in my earlier remarks; I 
think we are going to see even more heavy-handed regulation. It 
won't be called financial repression, it will come under the 
guise of prudential regulation, but I think we will, and 
pension funds will be importantly affected.
    Mr. Flores. But is it or is it not hurting us, in terms of 
economic potential?
    Ms. Reinhart. The historic experience has been that 
financial repression is not conducive to growth.
    Mr. Flores. Okay. Ms. MacGuineas.
    Ms. MacGuineas. Yes, I certainly agree with that point, and 
I think we need to do everything we can to enhance 
competitiveness, both by lowering the corporate tax rate in a 
revenue-neutral way, and dealing with regulations. And I think 
that principle, that businesses don't pay taxes, people pay 
taxes is very important. I also, however, have a real belief 
that the income and equality problems that we have are real. 
And so, while I would try to bring down burdens on businesses, 
I am perfectly comfortable with a more progressive tax code 
that reflects people who are doing well also contributing at 
the personal level, and letting businesses thrive and be an 
engine of growth.
    Mr. Flores. Okay. So, by having a more moderate regulatory 
scheme, I am assuming, partially.
    Ms. MacGuineas. That is one of the necessary components for 
increasing competitiveness.
    Mr. Flores. Right, good. Mr. Podesta.
    Mr. Podesta. I think one, I think one of the history 
lessons of the past couple of years is that, if you take the 
argument too far, regulatory laxity produces really disastrous 
results. And the failure to regulate the financial sector led 
to a meltdown that is being felt today in every community 
across America. So you have got to find the right balance. I 
think that the new executive order that the President signed at 
the beginning of the year to try to find that right balance, 
get rid of regulations that are not producing the results that 
they are seeking to achieve, while you push forward with smart 
regulation is where the country needs to be.
    Mr. Flores. One last question, as I am about to run out of 
time. Ms. Reinhart, I really appreciate your work that you have 
done to talk about the impact on GDP versus debt levels. My 
question is this; inside the President's budget this year, it 
has some GDP growth assumptions based on what I consider to be 
a fairly high debt level. It doesn't even talk about actuarial 
unfunded liabilities. What do you think about the economic 
assumptions of, basically, four percent GDP growth in this?
    Ms. Reinhart. In one word, improbable.
    Mr. Flores. Okay.
    Mr. Lankford. One word is perfect for the timing.
    Mr. Flores. Thank you.
    Mr. Lankford. Mrs. Moore.
    Ms. Moore. Thank you so much, Mr. Chairman. And thank you 
very much for appearing today. I am really proud to see women 
as experts in economics, and so I really appreciate your being 
here. Everything has been asked, except that everybody hasn't 
asked it. So forgive me if I am asking some of the same kinds 
of questions. I want to get right into the discussion of some 
of the Bowles-Simpson's recommendations, and to really flesh 
out this whole thing about entitlements. You know, it has 
become such a buzz word; we have got to reform entitlements.
    In my understanding, I am glad there was already a 
discussion about some of the tax expenditures. But farm 
subsidies, and as you pointed out, Mr. Holtz-Eakin, the 
prescription drug program where we did not ask pharmaceutical 
companies, at all, to lower their prices, or to negotiate with 
them, as being one of the problems. And you also pointed out, 
Mr. Holtz-Eakin, that the problem was the cost curve in health 
care, period, at least I thought, not being curved. Not so much 
a problem with, as I think Mr. Podesta pointed out, that when 
Medicare and Medicaid came into effect, just like three-tenths 
of one percent of federal spending on health care. But this 
unsustainable growth.
    So I want you all to comment on the problem with 
entitlements and mandatory spending as being something other 
than Social Security. I don't think that that is the driver of 
the debt, I think it is these mortgage interest deduction tax 
expenditures, which are mandatory spending, farm subsidies, is 
that correct? People are using this entitlement thing, and 
people are interpreting it as Social Security, and that is not 
correct, am I correct about that?
    Mr. Holtz-Eakin. It is not just Social Security, but Social 
Security is certainly part of the problem. Running a cash flow 
deficit right now and those cash flow deficits will rise with 
time, and the program is on track to deliver to the next 
generation, 22 percent across the board cuts, that is 
    Ms. Moore. Okay, so let others answer, please.
    Ms. MacGuineas. Well, entitlements are all programs of 
mandatory spending that don't go through a normal 
appropriations authorization process.
    Ms. Moore. Like the mortgage interest deduction, for 
something, it goes to Oprah.
    Ms. MacGuineas. That is right, I would completely agree, 
that tax expenditures are very much like entitlements in their 
automatic nature, and that we should be budgeting for all.
    Ms. Moore. So when we talk about it, I am just saying, we 
need to not just hone in and say Social Security.
    Ms. MacGuineas. No, I think we hone in on the ones that are 
the biggest drivers of growth, though, which are the ones that 
are related to aging and health care. So Social Security, 
Medicare, and Medicaid are the most problematic, but the way we 
budget, we need to look at all of these things on a regular 
    Ms. Moore. Let me get Mr. Podesta to answer this question, 
and then let me move on.
    Mr. Podesta. Well, I think you are exactly right, 
Congresswoman, that the mandatory spending is broader, I think, 
with respect to health care. That is a challenge of delivering 
better health care at a lower cost across the board, not just 
in the federal programs. That is where we really need to, I 
think, spend our time and attention, which will have impact on 
the federal programs, I think as one of the previous members 
pointed out, the inflation in the federal programs is actually 
lower than it is on the private sector. So we need to produce 
that result.
    Ms. Moore. I didn't understand, for example, why Mr. Holtz-
Eakin, said we ought to get rid of the American Care Act, but 
then he agreed we need to slow the growth in the private health 
care. I just didn't understand how that could be done. And Mr. 
Podesta, I want you to comment on his testimony.
    Mr. Podesta. Well Doug and I have debated this for a long 
time, I think that the drivers in the bill will restrain the 
growth of health care spending, and I think, if you repeal it, 
as the CBO indicated, you are going to have both a negative 
effect on the overall federal budget deficit, and a negative 
effect on health care spending.
    Ms. Moore. Thank you, Mr. Podesta. I do have 50 seconds 
left. I turned on the news today, and thank God they weren't 
talking about Charlie Sheen or Lindsay Lohan but they mentioned 
that there were, you know, 199 new billionaires during this 
whole worldwide recession. And so I guess I wanted to ask you, 
I didn't vote for the extension of the Bush-era tax cuts, even 
the ones that benefit the lower-income people, because I see 
that they benefit wealthy people six times as much as they do 
higher-income people. How does inequality fit in with some of 
our deficit problems? There won't be people to consume, for 
example. Mr. Podesta.
    Mr. Podesta. Inequality; I think that if judged by history, 
when we have a thriving middle class, when we have people at 
the bottom who are getting into the middle class, that produces 
a stronger economy overall, stronger receipts, it actually has 
an effect on the budget, so I think we very much should be 
concerned about it.
    Ms. Moore. Thank you so much. This is a great panel. Thank 
you Mr. Chair.
    Mr. Podesta. Thank you.
    Mr. Lankford. Thank you. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman, and thank you to the 
panel for being here today; I really enjoyed the conversation 
today. The title of the hearing today is Lifting the Crushing 
Burden of Debt and I guess what I have heard a lot of today is, 
we need to control spending, we need to possibly raise revenue 
through tax increases, and I want to start with Mr. Podesta. In 
your testimony, we are all talking just recently, here in the 
House, about where do we start cutting debt? And on page six of 
your testimony, you mention the shock of asset-constrained 
government spending in the immediate would have an undeniable 
effect on our wider economy. Our Moody's chief economist says 
that it could lead to a loss of about 700,000 jobs, and then 
Chairman Bernanke agrees that it could result in a couple of 
hundred thousand jobs, and then you mention that there is wide 
consensus on the general impact.
    Mr. Podesta. Except for Mr. Holtz-Eakin.
    Mr. Stutzman. Well this is what I want to ask, is what kind 
of job loss are we looking at?
    Mr. Podesta. Well I think that virtually everybody who has 
taken a look at this, Doug is an exception, has said that there 
will be some loss of jobs, and there is a range of forecasts 
there. And I think that the general direction is clear, and 
that is why I am not saying that we shouldn't restrain non-
defense discretionary spending. We call for specific cuts to do 
so. But the deep cuts that are included in HR 1, I think, would 
have a negative effect in the very near term, and my other beef 
is that you don't go after any of the other components. You are 
narrowly focused on 12 percent of the budget. So those things 
will have an impact in the short term.
    Mr. Stutzman. Are these primarily public or private jobs?
    Mr. Podesta. I think they are on both sides of the ledger, 
mostly in the private sector.
    Mr. Stutzman. This is what concerns me, and I give the 
Clinton administration a lot of credit for the way that they 
handled the situation throughout the 90s. There were tax 
increases right at the beginning, there were tax cuts at the 
end, and I believe that Republicans, when they were in charge 
were in the early part of this last decade, failed, and that 
there should have been better control in spending. And I think 
that we need to go into this very disciplined, and my concern 
is when we start--we are only talking about $6 to $60 billion 
in cuts right now, and when we go out and we hear the rhetoric 
saying, Well we are going to lose up to 700,000 jobs, that puts 
fear in the American people. That puts fear in Congress. We 
don't want to do that. And if we can't even cut $6 to $60 
billion right now in the near term, I don't see the political 
will long-term, ever. And I guess that is my concern, at some 
point this type of rhetoric needs to stop, because I think the 
American economy is more resilient than this.
    Mr. Podesta. Well so far, it has been partly because of the 
deep financial shock from the recession, it has been less 
resilient than I think a lot of people would have predicted. 
But it is coming back, the private sector is producing jobs, 
almost a million jobs produced last year, we need to make sure 
that keeps going, I think. That is key, I think, to create the 
circumstances under which you actually can get the deficit down 
because it takes money out of the unemployment insurance 
system, et cetera. And it will increase revenues.
    Mr. Stutzman. Okay, really quick, I just want to ask this 
question of the entire panel, and answer is as long as we have 
time. My question is what is a predictable and sustained rate 
of debt to GDP?
    Ms. MacGuineas. Well we have recommended that it be brought 
back down to 60 percent of GDP within a decade, but that it 
needs to go back to historical levels of below 40 percent to 
maintain fiscal flexibility.
    Ms. Reinhart. The median debt-to-GDP in the advanced 
economies has actually been 36 percent post-World War II. We 
are a long range from there. I think 60 is a good starting 
    Mr. Holtz-Eakin. I concur.
    Mr. Stutzman. Okay. I think that again, we need to start 
looking at our, we need to control spending first before we 
even discuss, and I like what Erskine Bowles and Simpson did 
propose, I think that is a great starting point in the 
dialogue, but until we start controlling our own spending, and 
I think this sort of fear put into not only Congress.
    Ms. MacGuineas. One quick question which is, while I think 
there is some problems with HR 1, that it is probably too 
large, too small a part of the budget, and a little bit too 
early, we are starting to control spending, and that is going 
to have large positive fiscal effects, the fact that we are 
talking about cuts. And even though it will have some negative 
effect in the short run, what these studies don't show is that 
it will have positive gains over a longer period, to make these 
fiscal improvements. And that is what we need to emphasize.
    Mr. Stutzman. Thank you.
    Mr. Lankford. Thank you. The gentlelady from Ohio is 
    Ms. Kaptur. Thank you, Mr. Chairman. Welcome to the 
panelists, I am sorry I had two, actually three concurrent 
hearings, so I came late and I have read your testimonies. The 
housing sector's continued demise, with 26.5 percent of the 
American people being underwater on their mortgages and in my 
district, 37.5, continues to be a serious damper on recovery. 
Ohio, Wisconsin, where we see people mobilizing in the state 
capitals, are in deep trouble because their property taxes have 
not been paid in at the normal rate, and with the large numbers 
of foreclosures, school systems and state governments just 
simply can't keep up. And therefore the solution I see them 
proposing out there, at least those governors is, Well, get rid 
of teachers, get rid of police, rather than solve the 
fundamental problem, which is recovery in the housing sector.
    Now a few Wall Street banks took us down this very 
dangerous road, and they threw our economy into a very deep 
ditch, and what I see happening is that the six big ones that 
remain, that now control two-thirds of the banking system of 
this country; Citigroup, J.P. Morgan Chase, Wells Fargo, 
Goldman Sachs, Morgan Stanley, and Bank of America are making 
extraordinary profits, $55 billion just last year for those 
six. This year, Bank of America is going to get a $666 million 
refund, and those six institutions have paid a net effective 
tax rate of 11 percent when businesses in my district are 
paying a 35 percent rate. I am thinking, what is fair about 
this? Wait a minute; we are not addressing the housing problem. 
Not one prosecution, not one. And the housing sector continues 
to deteriorate, and they are running away with the money, and 
they control two-thirds of the banking system in this country. 
I call that a great crime. Now I notice a number of you 
actually have ties to Wall Street, and I am going to place this 
in the record. Mr. Holtz-Eakin, the Board of Directors for 
American Action Forum, does it still include Robert Steele?
    He is gone. Okay. He had been a former executive of Goldman 
Sachs when he served on your board. You personally were a 
senior staff economist for President Bush at the Council of 
Economic Advisers, am I correct on that?
    Mr. Holtz-Eakin. That is correct.
    Ms. Kaptur. Correct and Mr. Bush never submitted one single 
balanced budget to this Congress, because I served during those 
years. I am not saying you don't have a lot to contribute to 
the conversation, but let us look at the record. Now Ms. 
Reinhart, you are a fellow at the Peterson Institute, and you 
had been the chief economist, am I correct? For the investment 
bank of Bear Stearns back in the 1980s. And the Peterson 
Institute receives major contributions from Mr. Peterson, and 
he had been the former chairman and CEO of Lehman Brothers. Am 
I correct in that? Is my information correct?
    And he co-founded the private equity firm of Blackstone 
Group. I am just saying, the influences on Congress, where we 
get our opinion from, we have many new members. It is important 
to know who is giving us information and who isn't. Ms. 
MacGuineas, you are with the Committee for a Responsible 
Federal Budget.
    Mr. Peterson also contributes money to the Committee for 
the Responsible Federal Budget, am I right on that, Ms. 
MacGuineas? Yes, I think that is really important to place on 
the record. And Mr. Podesta, you were the chief of staff to the 
only president that ever gave us a balanced budget in my whole 
career here, so it seems to me you have got something to 
contribute to the conversation here. But my fundamental 
question is, in the housing sector, we lack a solution as a 
country, and that is pulling us down coast to coast. You really 
haven't addressed it in your testimonies to any great extent. 
The fact that it is missing is of great concern for me. Should 
it be?
    Ms. Reinhart. It certainly should. One of the things I have 
been saying for many years now, since the crisis began, is that 
we should move forward to write down bad loans. The problem of 
having mortgages with negative equity is a serious one, and it 
is time to start having financial institutions price those 
loans closer to market. Until we do get rid of that debt 
overhang and those zombie loans, they were called zombie loans 
when they were in Japan, we will have a very weak housing 
    Ms. Kaptur. You know, by the way, that the majority of 
those asset-backed securities, the mortgage-backed securities, 
were traded through Cancun? I don't know if people on the 
committee know that. Any comments about why that might have 
been done? You know it is a tax haven? Goldman Sachs and the 
companies that did that made a whole lot of money. Nobody has 
done a single thing about it. Thank you, Mr. Chairman.
    Mr. Lankford. The gentleman from Georgia, Mr. Woodall, is 
    Mr. Woodall. Thank you, Mr. Chairman. I want to inherently 
I associate myself with my friends on the left because I think 
they bring a lot of value. I want to disassociate myself with 
Ms. Kaptur's comments and tell you how much I appreciate you 
being here, in particular Mr. Podesta and Ms. MacGuineas. You 
all invested time in us at the bipartisan freshman retreat, and 
I remember those sessions well. We had a particular amount of 
fun on the chief of staff session; you all gave us a lot of 
good stories, and I don't know where we go as freshman if folks 
aren't willing to come and invest in us like this. I tell folks 
regularly that the best part of my job is really smart people 
who want to come by and make me smarter. And I certainly 
appreciate the willingness to engage and do that as the last 
fellow who generally gets to ask questions here in the Ws, 
folks are often anxious to depart, but I just had a couple of 
things on my mind.
    Everybody talks a lot about tax expenditures. I wish there 
were more of my colleagues left, I actually have the only bill 
in Congress that eliminates all corporate tax expenditures. I 
am a big believer that those are spending measures. It is the 
Fair Tax Bill, it actually abolishes the corporate tax rate 
altogether, because I believe, as you all have said, that only 
consumers pay taxes, whether it is the shareholders or whether 
it is the employees or whether it is the purchaser, it is only 
us at the end of the day that pay those taxes, and I would have 
welcomed more support for going after those tax expenditures, 
but let us talk about the regulation side again, and we started 
down that with Mr. Flores a little bit earlier.
    Do you think that is coming? Because I saw an editorial in 
the Wall Street Journal, I think it was in January, that had a 
giant spike in the cost of compliance with reg.s back in '92, 
as the Clean Air Act was coming online, and then it dropped 
down and was fairly level throughout the '90s and the early 
part of this decade, but the last four years, we had spiked 
back up to those 2000, or that 1992 level and even gone 25 
percent higher in 2010. If we can agree that tax expenditures 
are just the same as spending and ought to have the same amount 
of oversight on them, can we also say that about regulation, 
that we ought to consider each and every reg. with the same 
critical process that we consider each spending bill and each 
tax bill?
    Mr. Holtz-Eakin. I believe so, yes. I mean, these are the 
same as taxes. Just as you remit tax payments, you have 
compliance costs, you have to spend money, and in the same way 
that taxes can cause a business not to hire one more person, 
not to make the last investment, regulation can have the 
exactly the same influence in economic activity. And so I am 
concerned about the pace at which new regulations are being 
rolled out for two reasons. One, the overall economic burden 
might not be matched by benefits. I mean, these things aren't 
done gratuitously. There is a reason regulations show up. But I 
am worried that we have gone too far. And the second is that 
rapid rule-making is generally bad rule-making. The Affordable 
Care Act and the Dodd-Frank Bill both share a characteristic of 
what I think are unrealistic rule-making deadlines that will 
produce bad regulation in the end.
    Mr. Woodall. We talked a little bit about income 
inequality, that is something that concerns me as well, though 
it concerns me more that if it comes from a place of 
productivity, inequality. And I actually think of what we are 
doing on the tax code and the reg. side of things as creating 
productivity inequality among American citizens. It doesn't 
trouble me if we have income inequality if it is in line with 
what one produces and contributes. Can anybody point me to any 
studies, information where I can educate myself about whether 
we have seen a change in productivity inequality as we have 
seen a change of income inequality?
    Mr. Podesta. Mr. Woodall, I would be happy to try to get 
you something for the record. I think the one thing that is 
characteristic really, of the recent period of economic history 
is that productivity gains in the economy have not been shared 
by the entire workforce of the enterprises that are making 
those productivity gains, the way they had been in previous 
decades and particularly in the post-World War II period. So we 
have a lot of productivity in the economy, most of the revenue 
from that, most of the gains from that, have gone to the top, 
and that has been a change and that has led to the deep income 
inequality that was commented on earlier.
    Mr. Woodall. And let me use my last 10 seconds to say, as 
much as I value the Gingrich-Clinton years, and I do, I view 
those as very productive years, I look back at what we did with 
Medicare reform, where we are still kicking the doc fix and the 
SGR down the road, what are we now? Twelve years later, 15 
years later, and so as scary as it is to do things today, to do 
things now, to do things immediately, I have seen what happens 
when we put something on the list for three years from now, and 
I appreciate folks being willing to do things today. Thank you 
all for being here.
    Mr. Lankford. Thank you. The Hoosier from Indiana, Mr. 
    Mr. Rokita. Thank you, Mr. Chair. Only place where Hoosiers 
are from, really. Unless I am missing some of my constituents I 
need to get to. Thank you for your leadership, Mr. Chair. I 
want to put some things on the record, and for nothing else, I 
appreciate today's discussion. I appreciate you all coming, I 
appreciate what Mr. Ryan from Ohio said, I appreciate even what 
Mr. Pascrell said earlier, and I also enjoy Congresswoman 
Kaptur. We have been able to have some excellent conversations 
in the short time that we have known each other, maybe with 
today's issue aside. But even with today, I know that what you 
say comes from a genuine concern.
    What I saw that was disingenuous, Mr. Chairman, on this 
committee today are comments from Ms. Schwartz. And they are 
almost so silly that I risk using time to refute them, but I 
think the record deserves it. To say that what we are dealing 
with here in terms of a $14 trillion debt, in terms of $100 
trillion in promises made to future generations, is somehow the 
fault of the last administration, that is her words, is 
ridiculous. And then to further compound that problem by saying 
the only thing that this current Congress has done is propose 
$61 billion in cuts, really puts salt in the wounds. Her party 
can't even get to $61 billion in cuts, and I agree with her 
that it is only 12 percent, that discretionary spending is only 
12 percent of the budget. Can't even get there. And that is why 
Mr. Ryan's comments, Ms. Kaptur's, and Mr. Pascrell's, even, 
are so important. We need to get there. To make sure we have a 
full picture for the record, Mr. Podesta, I just want to ask 
you a few direct questions before I get onto some other ones, 
and hope they have direct answers. And I hope you would agree 
with them.
    The years that President Clinton, and I appreciate his 
leadership, because he led on the budget--in the years that we 
had a balanced budget, which party controlled Congress in each 
one of those years?
    Mr. Podesta. In 1998, 1999, 2000, and I would probably put 
2001 in that as well, the Republican Party led the Congress.
    Mr. Rokita. That is what I wanted to know. I will get to 
some other questions here now, reclaiming my time. And under 
the Constitution, is it not the Congress' job to control the 
purse strings? To create and pass a budget is one of our core 
constitutional duties.
    Mr. Podesta. I would hope so.
    Mr. Rokita. Okay, right. And wasn't Ms. Schwartz's party in 
the last Congress that failed to do that?
    Mr. Podesta. Well, Ms. Schwartz's party passed a continuing 
resolution that funded the government.
    Mr. Rokita. That is what I thought, okay. Just want to make 
sure we have that full picture there. As much as I appreciate 
Mr. Clinton's leadership, it takes two to tango, especially 
when it comes to a budget, in this case, a Congress that is 
also willing to lead. And that is what we need now, and that is 
what we are trying to do now.
    Mr. Podesta. You know what? I agree with you.
    Mr. Rokita. Thank you. Can you put the cartoon slide up, if 
you can, please? The one with the ship and the submarine? Let 
me get to that question. As they are putting that up, let us 
talk about the way in which the growing U.S. debt could impact 
America's status as a world power, as well as its freedom to 
act. According to the CBO's long-term budget projections, U.S. 
interest payments on the debt will begin to exceed our yearly 
defense spending in 2022, and then double in 2037. Can a 
country that borrows this much maintain its economic and 
military power and diplomatic leverage over the long run?
    Mr. Holtz-Eakin. I clearly expressed my concern about that. 
I don't believe so.
    Mr. Rokita. Okay, thank you. Ms. Reinhart.
    Ms. Reinhart. All we have to do is look at the loss of the 
British Empire.
    Mr. Rokita. Okay, thank you. Maya.
    Ms. MacGuineas. Our influence in the world is clearly 
already on the decline, and I will just quote a friend of mine, 
former member of Congress Tanner, who always says, We have an 
agreement that we would protect Taiwan. If China were to 
attack, the problem is we would have to go and borrow the money 
from China. That is just not the position we want to be in.
    Mr. Rokita. I laugh so I don't cry. John?
    Mr. Podesta. I agree.
    Mr. Rokita. Final thing, just to put all your comments in 
context, I just want to ask you a basic one real quick. Art 
Laffer's curve, does it have validity or not when it comes to 
the tax issues you brought up?
    Mr. Holtz-Eakin. It is correct in principle, but we have 
never been over the top of it.
    Ms. Reinhart. I concur.
    Ms. MacGuineas. It is not relevant to where we are in the 
tax rates right now.
    Mr. Rokita. John?
    Mr. Podesta. Well, I again reference back to the last 
couple decades of history, and I think it would probably be a 
bad place to begin this conversation.
    Mr. Rokita. Thank you all very much. I yield back.
    Mr. Lankford. Thank you, and I yield to myself the five 
minutes that remain here as the final person doing the 
questioning. Yesterday we had the privilege of having a joint 
session of Congress and the prime minister of Australia; she 
came and spoke to Congress and to all of us as American people. 
And one of the interesting things she kept coming back to was 
this clear statement, that she believed as a child watching us 
land on the moon, Those are Americans and they can do anything. 
And there is this sense that is rising up that I sense from 
Americans, saying we have got to take on the big, difficult 
thing of our time, and that is our debt. And it has been very 
interesting to be able to hear your comments on it, and to 
especially hear you say, this is not something that can be done 
five years from now. This is something that has to be done 
right now. So I appreciate your comments and all of your work, 
and for you coming here and spending so much time with us and 
letting us get a chance to ask you some random questions with 
    Knowing that, we are fully aware you can't just shut the 
government down for a couple years and say we are not going to 
spend money on anything. This conversation that is happening 
between investing while we are also trying to cut the debt. We 
understand we have to do infrastructure projects; there are 
things that still need to be able to continue on. What would 
you recommend as a balance, or as a thought that you have 
clearly between this balance between investing, and also we 
have got to get aggressive in cutting the debt.
    Mr. Holtz-Eakin. I think the key is to recognize that the 
budget at the moment is structured so that the legacy programs 
of our past, the Medicare's, the Medicaid's, the Social 
Securities, are going to crush our ability to invest in the 
future. They are literally just pushing out any ability to do 
discretionary spending. And if you are going to let your past 
crush your future, you are going nowhere as a nation. So you 
have got to fix that.
    Mr. Lankford. Any comments from anyone on that?
    Mr. Podesta. Yes, Congressman. You know, this is where the 
rubber hits the road. Because this is where the tough choices 
need to get made. And I think that we know what produces 
productivity in the economy, we have seen it in the past, 
investments in education, and building human capital in giving 
people the skills they need to succeed in science and 
technology, those produce strong results. So we have to find a 
way to pay for those. And the issue around health care and 
particularly Social Security, I come back to what I said in my 
prepared statement, which is in the early 1960s, nearly 30 
percent of elderly Americans lived in poverty. Today less than 
10 percent do. So we can't abandon that commitment; we have got 
to find a way to produce health care in a way that is going to 
produce good results at a lower cost.
    Mr. Lankford. Right. And I don't hear a lot of people 
trying to abandon that commitment. The question becomes how do 
we do that? Because currently we are trying to make life in 
this generation easier by making it harder on the next 
generation, and it is progressively getting closer and closer 
to this generation making it much tougher, based on putting the 
hard decisions off, putting it off, putting it off.
    Mr. Podesta. I agree with that.
    Mr. Lankford. Let me bring up just some process things to 
you as well, just for perspective. Since 1921, the President 
has submitted a budget to Congress, which I understand since 
1922 has been dead on arrival each year when it comes, but just 
this perpetual process of the President setting out the wish 
list, both parties, and then Congress trying to work through 
the process on that. Is there a benefit to setting some harder 
caps on it a year before, that Congress is able to send to the 
President, You can submit a budget no larger than, please work 
with your agencies and submit a budget that fits under this 
criteria, and that allows the Executive Branch and the 
Legislative Branch then that next year to work on a budget, 
knowing that we are all dealing with the same numbers.
    Ms. MacGuineas. I would say that right now, given where we 
are in our budget challenges, what we should really be thinking 
about is multi-year budgeting. And we need to have a fiscal 
path that would bring us to stabilizing the debt at a 
sustainable level and then below over more time, and I think 
the way to do that is multi-year budgeting, and I think you 
have to put hard caps and triggers in the budget. Again, budget 
process will never fix this problem alone, but it needs to be 
there to strengthen whatever policy deals people came up with 
so we can stay on track over the multi years it will take to 
get us back to a place of fiscal health.
    Mr. Lankford. Thank you. Other comments on that?
    Mr. Podesta. I agree with that, I just had one note, which 
is that in the 1980s, after Gramm-Rudman-Hollings passed, the 
caps were set at an unrealistically low level, and therefore 
they were continuously blown through and Congress set them 
aside. I think they have to be realistic, but I think having 
hard caps that can be enforced is really the trajectory on the 
discretionary side, and as I said earlier, I think you have to 
have the same kind of discipline through a strong PAYGO 
mechanism on mandatory and the revenue side.
    Mr. Lankford. Terrific. Thank you all for coming and for 
being a part of this, I really appreciate it. You worked right 
through lunch, I am sure you had a long day of preparing 
yesterday and then a trip to be able to get over here and come 
through security and everything that you did today, so I 
appreciate very much your time and for being here and investing 
in the future of our country. With that this budget hearing is 
    [Additional submission from Ms. Kaptur follows:]

     Submission of Hon. Marcy Kaptur, a Representative in Congress
                         From the State of Ohio


Douglas J. ``Doug'' Holtz-Eakin--President of the American Action Forum
    In early 2010, Mr. Holtz-Eakin became president of the conservative 
American Action Forum.
    According to the New York Times, the Board of Directors for the 
American Action Forum includes Robert K. Steel, a former executive of 
Wachovia and Goldman Sachs. A major contributor is believed to be 
Kenneth G. Langone, a founder of Home Depot and a former director of 
the New York Stock Exchange.
    1. Appointed to the Financial Crisis Inquiry Commission in 2009
    2. Chief Economic Policy Adviser to U.S. Senator John McCain's 2008 
presidential campaign
    3. Senior Staff Economist for President George H. Bush's Council on 
Economic Advisors.
    4. Director of the Congressional Budget Office, from 2003--2005
    5. Visiting Fellow at the Peterson Institute, from 2007--2008
    6. Former academic appointments at Princeton and Columbia 
Universities. He later received tenure at Syracuse University.
Carmen M. Reinhart, Ph.D.--Fellow at the Peterson Institute for 
        International Economics
    Reinhart is also a researcher at the National Bureau of Economic 
Research and the Centre for Economic Policy Research and a member of 
the Congressional Budget Office Panel of Economic Advisers and Council 
on Foreign Relations.
    The Peterson's Institute receives major contributions from Peter G. 
Peterson and his wife. Mr. Peterson is a former Chairman and CEO of 
Lehman Brothers, and he co-founded the private equity firm the 
Blackstone Group. In 2009, he reportedly gave the Peterson Institute 
$8.5 million.
    1. Formerly a professor of economics at the University of Maryland
    2. Chief Economist and Vice President at the investment bank Bear 
Stearns in the 1980s.
    3. Also spent several years at the International Monetary Fund.
Maya MacGuineas--President of the Committee for Responsible Federal 
    She has served as the group's President since 2003.
    Ms. MacGuineas' organization reportedly receives major funding from 
billionaire Pete Peterson. (Peterson, who also provided contributions 
to the Peterson Institute for International Economics, was Chairman and 
CEO of Bell & Howell, from 1963 to 1971. From 1973 to 1984, he was 
Chairman and CEO of Lehman Brothers. In 1985 he co-founded the private 
equity firm, the Blackstone Group. He also served as Secretary of 
Commerce under Nixon.)
    1. Served on The Washington Post editorial board, in the Spring of 
2009, covering economic and fiscal policy, and writing extensively on 
the health care reform debate
    2. Social Security Adviser to the McCain Presidential Campaign. 
(She claims to be nonpartisan)
    3. Worked at the Brookings Institution and the Concord Coalition
    4. Worked on Wall Street (Firms Unknown)
John Podesta--President and CEO of the Center for American Progress
    Major individual donors include to the Center for American Progress 
include Peter Lewis (Ohio based Chairman of Progressive Insurance), 
Steve Bing (New York Real Estate Developer and liberal philanthropist), 
George Soros, and Herbert M. Sandler.
    1. Co-chairman of the Obama-Biden Transition Project, and visiting 
Professor of Law at Georgetown University
    2. Assistant to the President, Deputy Chief of Staff, and White 
House Chief of Staff during the Clinton Administration
    3. In 1988, Podesta founded with his brother, Tony, Podesta 
Associates, Inc., a Washington, D.C., ``government relations and public 
affairs'' lobbying firm. Now known as the Podesta Group, the firm ``has 
been retained by some of the biggest corporations in the country, 
including Wal-Mart, BP and Lockheed Martin.''
    4. Podesta held positions on Capitol Hill, including Counselor to 
Democratic Leader Senator Thomas Daschle (1995--1996); Chief Counsel 
for the Senate Agriculture Committee (1987--1988); Chief Minority 
Counsel for the Senate Judiciary Subcommittees on Patents, Copyrights, 
and Trademarks; Security and Terrorism; and Regulatory Reform; and 
Counsel on the Majority Staff of the Senate Judiciary Committee (1979--
    5. Podesta worked as a trial attorney for the Department of 
Justice's Honors Program in the Land and Natural Resources Division 
(1976--1977), and as a Special Assistant to the Director of ACTION, the 
Federal volunteer agency (1978--1979).

    [Questions for the record and their responses follow:]

     Questions for the Record Submitted by Hon. Michael M. Honda, a
        Representative in Congress From the State of California

    Ms. Reinhart: Economists contend that mandatory spending will drive 
the impending fiscal crisis. Because of this, would you agree that it 
is impossible to bring our debt and deficit crisis in line through a 
plan that solely cuts non-defense discretionary spending?*
    *Editor's Note: As of publication deadline, the committee has 
received no response from the witness.

    Ms. MacGuiness: You testified today about the psychological aspects 
of the debt crisis. As I understand it, you are suggesting that as long 
as we pass a credible plan that brings our debt-to-GDP level to 
sustainable levels in a reasonable amount of time, it will create 
enough certainty in the bond markets to stave off disaster and allow us 
the time to implement that plan. Is that correct?
    Since we agree that the Republican spending bill, HR 1, is not a 
credible plan and therefore is not an effective way to calm bond 
markets and delay the onset of a major fiscal meltdown, there seems to 
be no reason to pass this legislation--legislation that hundreds of 
notable economists including Goldman Sachs, Mark Zandi and Ben Bernanke 
believe will cost hundreds of thousands of jobs and endanger our 
economic recovery.
    We know there is a better way.

    Mr. Podesta: You outline an alternative, credible plan. The plan 
has a number of features including reducing spending and increasing 
revenue. It also, however, includes strategic investments in education, 
transportation, infrastructure, and R&D, all areas slashed in HR 1. 
Please explain to the Committee why these kinds of investments are a 
key component of any credible long-term plan to put our fiscal house in 

    Ms. MacGuineas' Response to Mr. Honda's Question for the Record

    You testified today about the psychological aspects of the debt 
crisis. As I understand it, you are suggesting that as long as we pass 
a credible plan that brings our debt-to-GDP level to sustainable levels 
in a reasonable amount of time, it will create enough certainty in the 
bond markets to stave off disaster and allow us the time to implement 
that plan. Is that correct?
    Yes, that is correct. I believe that we cannot completely backload 
a plan or it will appear that politicians are merely pushing all the 
hard choices into the future. But if we adopt a credible multi-year 
plan we can buy ourselves some time and don't need to implement major 
policy changes this year when they are more likely to disrupt the 
economic recovery. It is worth noting that whenever we start fiscal 
consolidation, it is likely to have short-term negative affects on 
growth, but it will be extremely beneficial in the long-term compared 
to doing nothing.
    But any plan will have to be credible. I think that means being 
bipartisan, so one party does not try to undo it, statutory, and 
coupled with triggers so that if changes do not occur, automatic 
changes will.
    I believe the best approach is a comprehensive, multi-year plan 
that includes cuts to domestic discretionary spending, as the House 
Republicans are pushing--though I would prefer to wait another year or 
two for ones this large--but also changes to defense, entitlements and 
revenues. But it is important that those who oppose the cuts in 
domestic discretionary spending go on record on the comprehensive 
budgetary changes they do support-not just argue against those they 

     Mr. Podesta's Response to Mr. Honda's Question for the Record

    Of course, deficit reduction is going to have be a mix of spending 
restraint and new revenue. But we cannot ignore a third crucial 
ingredient: strong economic growth.
    There is a broad consensus that overall investment levels are key 
driver of future economic growth and prosperity. Public investment 
drives technological innovation and productivity growth, builds a 
strong workforce through education and job training, and helps new 
industries like clean energy to grow. Often, it induces the private 
sector to invest as well: a 2003 study of 17 economically developed 
countries found that for every dollar of public investment in research 
and development, private firms spent about 70 cents more thanks to new 
opportunities created by government investment. And it supports and 
expands the American middle class, who can take advantage of better 
education and employment opportunities to start a business or pursue an 
invention, move up in the workforce, and give their children a better 
    Moreover, while other countries are investing in the technology, 
infrastructure, and education systems of the future, net U.S. 
investment is currently at its lowest level since World War II. We need 
to invest to stay competitive in the global economy, and we are already 
falling behind.
    While our budget problems are too big and too complicated to simply 
``grow our way out of,'' without robust economic growth, we can never 
hope to solve them. Public investment is critical to getting our 
economy back on track and spurring strong, sustained and broadly shared 
prosperity. Deficit reduction and renewed public investment need not be 
mutually exclusive. On the contrary, strong public investment must be 
made alongside targeted deficit reduction to create jobs, encourage 
private investment, and help grow our economy back to health.

    [Whereupon, at 12:56 p.m., the committee adjourned subject 
to the call of the Chair]