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


 
            THE BROKEN BUDGET PROCESS: LEGISLATIVE PROPOSALS

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, MAY 31, 2012

                               __________

                           Serial No. 112-26

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
                       www.gpo.gov/fdsys/browse/
            committee.action?chamber=house&committee=budget



                  U.S. GOVERNMENT PRINTING OFFICE
74-337                    WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                        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                KAREN BASS, California
TODD C. YOUNG, Indiana               SUZANNE BONAMICI, Oregon
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

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


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, May 31, 2012.....................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
        Submissions for the record:
            Heritage Foundation and Brookings Institution 
              article, dated July 2008: ``Taking Back Our Fiscal 
              Future''...........................................    24
            Washington Post article, dated May 16, 2012, 
              ``Boehner's Debt Ceiling Speech''..................    48
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     4
        Prepared statement of....................................     5
        Submissions for the record:
            Bloomberg article, dated May 28, 2012, ``Debt-Ceiling 
              Deja Vu Could Sink Economy''.......................    44
            Americans for Tax Reform's ``Taxpayer Protection 
              Pledge''...........................................    48
            Transcript, Douglas Holtz-Eakin posting from YouTube.    64
    Alison Acosta Fraser, director, Thomas A. Roe Institute for 
      Economic Policy Studies, the Heritage Foundation...........     7
        Prepared statement of....................................     8
    Douglas Holtz-Eakin, president, American Action Forum........    13
        Prepared statement of....................................    14
    Henry J. Aaron, senior fellow, economic studies, the 
      Brookings Institution......................................    18
        Prepared statement of....................................    20


            THE BROKEN BUDGET PROCESS: LEGISLATIVE PROPOSALS

                              ----------                              


                         THURSDAY, MAY 31, 2012

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m. in room 
210, Cannon House Office Building, Hon. Paul Ryan [chairman of 
the committee] presiding.
    Present: Representatives Ryan of Wisconsin, Simpson, 
Calvert, Cole, Price, McClintock, Stutzman, Ribble, Flores, 
Mulvaney, Huelskamp, Young, Van Hollen, Bass, and Bonamici.
    Chairman Ryan. The committee will come to order. So much 
for--we are cutting back on gavels around here. Welcome to 
House Budget Committee. The purpose of today's hearing is to 
examine the need to restore responsibility and accountability 
to how Washington spends its taxpayers' hard earned dollars. 
The breakdown of responsible budgeting is clear, out of control 
government spending. Four consecutive trillion dollar deficits 
and a crushing burden of debt in the years ahead. Both 
political parties share the blame for our fiscal mess.
    I believe it will require both political parties to work 
together ultimately to find common ground and to right this 
fiscal ship. Unfortunately, current leaders in the Democratic-
controlled Senate and the White House have failed to step 
forward with solutions to match the magnitude of our 
challenges. The United States Senate has failed to pass a 
budget in over 3 years. They didn't even propose a budget this 
year or the last year. And the President has punted on the key 
economic and fiscal challenges of our times with budgets 
calling for even more spending, higher taxes and empty promises 
that are quickly becoming broken promises if we don't fix these 
problems soon.
    This failure of leadership not only undermines America, it 
undermines the America our children will inherit tomorrow. It 
also stifles confidence in economic growth today. While budget 
process reform alone cannot solve our budget problems, we can 
strengthen this process and provide additional tools to help 
address the enormous budget problems we face. This is a good 
step in the right direction. Budget process reform alone is not 
a substitute for the political courage and leadership required 
to address our core of spending and the entitlement challenges. 
I don't think there is any doubt about the failure of the 
Federal budget process, but there are big differences in 
opinion on how to tackle these challenges and how to address 
these failures.
    Despite these differences, the ranking member and I were 
able to work out on a bipartisan basis to report out of this 
committee and pass on the floor the Expedited Legislative Line 
Item Veto and Rescissions Act. This committee has also advanced 
baseline budget reform, Budget and Accounting and Transparency 
Act, the Pro-Growth Budgeting Act, and today we continue the 
committee's efforts to bring greater transparency to the budget 
process.
    Mandatory spending, or what we consider autopilot spending, 
accounts for 60 percent of the Federal budget. Through the 
Budget Control Act passed last summer, Congress has established 
statutory limits on discretionary spending with enforceable 
spending caps. Implementing similar statutory controls on 
mandatory spending will help ensure the Federal Government can 
deliver on its promises with sustainable entitlement programs 
and a sustainable fiscal future.
    To that end, committee member John Campbell of California 
has introduced the Spending Control Act. Another criticism of 
the budget process is the failure to account for future 
consequences of today's decisions. As we develop the budget and 
consider legislation, we currently focus solely on the 10-year 
budget window, not taking into account the long-term impact of 
current programs or proposed legislation. The sole focus of the 
10-year window can also lead to accounting gimmicks that 
perversely worsen our long-term budget problems. This is 
something that was identified in the joint effort by the 
Heritage Foundation and the Brookings Institution, two of whom 
we have representatives from today.
    We need to improve the way Congress budgets in the long 
term and better assess the long-term implications of its 
policies.
    Mr. Mulvaney has introduced legislation to get that Federal 
Government to the budget for the long term. And Mr. Chaffetz 
has introduced a bill to bring greater scrutiny to Federal 
spending. In addition to these bills, Mrs. Black has introduced 
legislation to give the budget the force of law, Mr. Ribble 
would reform the process to move to a biannual cycle, and Mr. 
Lankford would remove the threat of government shutdowns.
    So just the members of this committee have put forward a 
robust set of proposal to reform and strengthen the budget 
process. To help further advance this budget process reform 
conversation, we welcome three terrific witnesses today. We 
have Dr. Doug Holtz-Eakin former CBO director, no stranger to 
this committee and the current President of the American Action 
Forum and an expert on the budget, he is back with us today.
    We have Alison Fraser, Director of the Thomas Roe Institute 
for Economic Policy Studies at The Heritage Foundation. And 
also no stranger to this committee, Henry Aaron, a senior 
fellow of economic studies at the Brookings Institution. All 
three bring expertise to this conversation, they have been 
around these budget debates for a long time and we look forward 
to your testimony.
    [The prepared statement of Chairman Ryan follows:]

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

    Welcome all to the House Budget Committee.
    The purpose of today's hearing is to examine the need to restore 
responsibility and accountability to how Washington spends taxpayers' 
hard-earned dollars.
    The breakdown of responsible budgeting is clear: out-of-control 
government spending; four consecutive trillion-dollar deficits; and a 
crushing burden of debt in the years ahead.
    Both political parties share in the blame for our fiscal mess.
    I believe it will require both political parties to work together 
to find common ground and right this fiscal ship.
    Unfortunately, the current leaders in the Democrat-controlled 
Senate and at the White House have failed to step forward with 
solutions that match the magnitude of our challenges.
    The United States Senate has failed to pass a budget in over three 
years. They didn't even propose a budget this year or last. And the 
President has punted on the key economic and fiscal challenges of our 
time--with budgets calling for even more spending, higher taxes, and 
empty promises that are quickly becoming broken promises.
    This failure of leadership not only undermines the America our 
children will inherit tomorrow, but it also stifles confidence and 
economic growth today.
    While budget process reform alone cannot solve our budget problems, 
we can strengthen this process and provide additional tools to help 
address the enormous budget problems we face.
    This is a good step in the right direction, but budget process 
reform is not a substitute for the political courage and leadership 
required to address our core spending and entitlement challenges.
    I don't think there is any doubt about the failure of the federal 
budget process, but there are big differences of opinion on how to 
tackle these challenges.
    Despite these differences, the ranking member and I were able to 
work--on a bipartisan basis--to report out of this committee and pass 
on the floor the Expedited Legislative Line-Item Veto and Rescissions 
Act.
    This Committee has also advanced the Baseline Reform Act, the 
Budget and Accounting Transparency Act, and the Pro-Growth Budgeting 
Act. Today, we continue the committee's efforts to bring greater 
transparency to the budget process.
    Mandatory spending--or autopilot spending--accounts for 60 percent 
of the federal budget. Through the Budget Control Act passed last 
summer, Congress has established statutory limits on discretionary 
spending with enforceable spending caps.
    Implementing similar statutory controls on mandatory spending will 
help ensure the federal government can deliver on its promises--with 
sustainable entitlement programs and a sustainable fiscal future. To 
that end, Committee member John Campbell of California has introduced 
the Spending Control Act.
    Another criticism of the budget process is the failure to account 
for the future consequences of today's decisions.
    As we develop the budget and consider legislation, we currently 
focus solely on the 10-year window, not taking into account the long-
term impact of current programs or proposed legislation.
    This sole focus on the10-year window can also lead to accounting 
gimmicks that perversely worsen our long-term budget problems.
    We must improve the way Congress budgets in the long-term and 
better assess the long-term implications of its policies.
    Mr. Mulvaney has introduced legislation to get the federal 
government to budget for the long-term and Mr. Chaffetz has introduced 
a bill to bring greater scrutiny to federal spending.
    In addition to these bills, Ms. Black has introduced legislation to 
give the budget the force of law, Mr. Ribble would reform the process 
to move to a biennial cycle, and Mr. Lankford would remove the threat 
of government shutdowns.
    So, just the members of this committee have put forward a robust 
set of proposals to reform and strengthen the budget process.
    To help further advance this budget process reform conversation, we 
welcome three terrific witnesses to the committee today.
    Doug Holtz-Eakin--a former CBO director, the current president of 
the American Action Forum, and an expert on the budget--is back with us 
today.
    Alison Fraser is the Director of the Thomas A. Roe Institute for 
Economic Policy Studies at the Heritage Foundation.
    And Henry Aaron is a Senior Fellow of Economic Studies at the 
Brooking Institution.
    All three bring expertise to inform this conversation. Thanks all 
of you for joining us today.
    With that, I yield to the Ranking Member, Mr. Van Hollen.

    Chairman Ryan. And with that, I would like to yield to the 
ranking member, Mr. Van Hollen.
    Mr. Van Hollen. Thank you very much, Mr. Chairman. I want 
to join the chairman in welcoming all our witnesses today as we 
explore ways to improve the budget process. I do hope that the 
Senate will take up the bill we passed over here in a 
bipartisan basis with respect to expedited rescission and 
legislative line item veto.
    We all agree that we have a budget challenge and a deficit 
and debt challenge, especially over the long term, and we agree 
that we need to fix it. But I think we also agree that the 
fundamental problem is not the budget process rules. And no 
bill that simply changes the budget process rules is going to 
solve the underlying issue. There is no substitute for making 
the tough policy issues to reduce the deficit in a balanced 
credible way. And once the President and the Congress develop a 
consensus on the policies on a budget agreement then the policy 
process reforms can be an effective tool for enforcing its 
implementation, at least at the margins. First you need to deal 
with the fundamental policy questions.
    Over the last 2 years, many serious bipartisan groups have 
met to examine ways to put our budget back on a path towards 
balance. Each of these groups has agreed that we need to take a 
balanced approach toward deficit reduction that involves a 
combination of spending cuts and cuts to--and revenues 
generated by eliminating tax breaks that are unproductive in 
many cases in the economy.
    Unfortunately our Republican colleagues continue to oppose 
the balanced approach. Again, 98 percent of our Republican 
colleagues in the House have signed a pledge that says they 
will not close a single corporate tax loophole for the purpose 
of deficit reduction and won't ask people making more than a 
million dollars a year to contribute one penny more for the 
purpose of deficit reduction. That, of course, leaves only very 
deep cuts in spending that help everybody else rather than a 
balanced approach asks for shared responsibility. And in an era 
of divided government, we need to be able to make the difficult 
compromises necessary to get the job done. Unfortunately in 
some parts of this House, compromise has become a dirty word.
    Today's hearing is designed to examine a number of bills 
put forth by our Republican colleagues. Two of them deal with 
different forms of spending caps. Effectively what these bills 
do is to try and enshrine in the law the House Republican 
budget, the unbalanced approach to the budget with all the 
requirements that it would make in terms of cuts ending the 
Medicare guarantee and other very deep cuts and important 
national investments.
    Interestingly, if you actually passed the bills that have 
been introduced with respect to the ceiling, they wouldn't even 
pass muster--the current fiscal year 2013 budget put forward by 
Republican colleagues wouldn't meet the test. It would require 
an automatic sequester under the bills that have been 
submitted.
    Moreover, and I think it is an issue that every member 
should focus on, the effect of these bills would be to take any 
future economic downturn and risk turning it into a full-
fledged recession or depression. And we will get into a couple 
of examples of how it would do exactly that and very interested 
in our witnesses views on that, because you have to anticipate 
these kind of events and the bills don't. They just take a very 
rigid approach.
    As Mr. Holtz-Eakin observed in testimony when he was the 
head of the CBO speaking about an earlier Deficit Control Act, 
and I quote, ``The target set under the Deficit Control Act, 
both the original ones and the revised ones were unrealistic in 
light of the prevailing economic conditions. For that reason 
and others, actual deficits remained above the targets during 
the years that the law was in effect.'' There is likely, if we 
don't make the tough underlying policy decisions that is the 
likely result here.
    As Peter Orszag recently observed in a Bloomberg column, 
all these things are a super version of SGR, right? We thought 
we were going to solve rising health care costs by putting in 
effect SGR cuts. Every year, this Congress on a bipartisan 
basis has found a way around it. Doing a super-sized version of 
SGR is not a way to resolve our issues.
    And finally, Mr. Chairman, I just want to say a word about 
sort of the Speaker's latest version of the mother of all 
sequesters, his threat that the United States would not meet 
its financial obligations. That, of course, would have the 
effect of immediate deep across-the-board cuts, but it would do 
so in a way that would devastate the economy. And even talking 
about the United States for the first time in its history not 
meeting its obligations is a reckless approach to economic 
policy and jobs.
    So that is kind of a sequester on steroids, these others 
are different versions of that. None of them meets the test of 
making the tough policy decisions. So I will end with this, Mr. 
Chairman: These bills, in their current form, are either very 
dangerous to our economy if they were actually to be put into 
effect and followed because of the fact that they would make 
much worse any economic downturn, or, at best, they are 
misleading because they create a sense that the Congress has 
done something, people go home and they say to their 
constituents and say we passed a cap on spending, don't worry 
about it, knowing full well that they won't be met.
    I don't know which of those consequences are worse. 
Although I would hate to see another full-fledged economy 
downturn compounded by bad policies in these bills. Thank you, 
Mr. Chairman.
    [The prepared statement of Mr. Van Hollen follows:]

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

    Thank you, Mr. Chairman. I welcome the opportunity to explore ways 
that we might be able to improve the budget process. I do hope that the 
Senate will take up the bill that we passed over here, on a bipartisan 
basis, with respect to expedited rescission and the legislative line 
item veto.
    We all agree that we have a budget challenge, and a deficit and 
debt challenge--especially over the long term. And we agree that we 
need to fix it. But I think that we also agree that the fundamental 
problem is not the existing budget process rules--and no bill that 
simply changes the budget process rules is going to solve the 
underlying issue. There is no substitute for making the tough policy 
decisions to reduce the deficit in a balanced, credible way. And once 
the President and the Congress develop a consensus on the policies of a 
budget agreement, then the policy process reforms can be an effective 
tool in enforcing its implementation--at least at the margins. But 
first you need to deal with the fundamental policy questions.
    Over the last two years, many serious bipartisan groups have met to 
examine ways to put our budget back on the path towards balance. Each 
one of these groups has agreed that we need to take a balanced approach 
toward deficit reduction that involves a combination of spending cuts 
and revenues generated by eliminating tax breaks that are unproductive, 
in many cases, in the economy. Unfortunately, our Republican colleagues 
continue to oppose that balanced approach. Again, 98 percent of our 
Republican colleagues in the House have signed a pledge that says that 
they will not close a single corporate tax loophole for the purpose of 
deficit reduction, and they won't ask people making more than $1 
million a year to contribute one penny more for the purpose of deficit 
reduction. That of course leaves only very deep cuts in spending that 
hits everybody else rather than a balanced approach that asks for 
shared responsibility. In an era of divided government, we need to be 
able to make the difficult compromises necessary to get the job done. 
Unfortunately, in some parts of this House, compromise has become a 
dirty word.
    Today's hearing is designed to examine a number of bills put forth 
by our Republican Committee colleagues. Two of them deal with different 
forms of spending caps. Effectively, what these bills do is try to 
enshrine into law the House Republican budget, the unbalanced approach 
to the budget with all of the requirements that it would make in terms 
of cuts--ending the Medicare guarantee, and other very deep cuts in 
important national investments. Interestingly, if you actually passed 
the bills that have been introduced, the current FY2013 budget put 
forward by our Republican colleagues would fail to comply with the 
spending caps. The bills would require automatic sequester cuts of over 
$70 billion to the proposed FY2013 Republican budget.
    Moreover, and I think this is an issue that every Member should 
focus on, the effect of these bills would be to take any future 
economic downturn and risk turning it into a full-fledge recession or 
depression. We will get into a couple of examples of how it would do 
exactly that, and I am very interested in our witnesses' views on that. 
Because you have to anticipate these kinds of events, and the bills do 
not--they take a very rigid approach.
    As Mr. Holtz-Eakin observed in this testimony when he was head of 
the CBO, speaking about an earlier Deficit Control Act, ``the targets 
set under the Deficit Control Act, both the original ones and the 
revised ones, were unrealistic in the light of the prevailing economic 
conditions. For that reason and others, actual deficits remained above 
the targets during the years that the law was in effect.'' And it is 
likely that if we don't make the underlying policy decisions--then that 
is the likely result here.
    As Peter Orszag pointed out in his Bloomberg column, all these 
things are a super version of SGR. We thought we were going to solve 
rising health care costs by putting into effect SGR cuts. Every year 
Congress, on a bipartisan basis, has found a way around it. Doing a 
super-sized version of SGR is not a way to resolve our budget 
challenges.
    And finally, Mr. Chairman, I just want to say a word about the 
Speaker's version of the mother of all sequesters--his threat that the 
United States would not meet its financial obligations. That, of 
course, would have the effect of immediate, deeper across-the-board 
cuts--but it would do so in a way that would devastate the economy. And 
even talking about the United States, for the first time in its 
history, not meeting its obligations is a reckless approach to economic 
policy and jobs.
    So, that is a sequester on steroids, and these others are versions 
of that, and none of them meets the test of making tough policy 
decisions.
    I will end with this, Mr. Chairman, these bills in their current 
form are either very dangerous to our economy if they were actually to 
be put into effect and followed because of the fact that they would 
make worse any economic downturn. Or, at best, they're misleading 
because they create a sense that the Congress has done something. 
People go home and they say to their constituents, hey, we passed a cap 
on spending, don't worry about it, knowing full well that the spending 
targets won't be met. I don't know which of those consequences is 
worse, although I would hate to see another full-fledged economic 
downturn compounded by the mindless sequesters in these bills.

    Chairman Ryan. Sure. Obviously we see things differently.
    Mr. Van Hollen. Talk about the math, the math.
    Chairman Ryan. So as we mention in my opening statement, it 
is not a substitute for getting the right policies, it is an 
enforcement for making sure that the right policy changes 
stick. But with that, I think we will start with Ms. Fraser and 
then we will go to Dr. Holtz-Eakin and Dr. Aaron.

  STATEMENTS OF ALISON ACOSTA FRASER, DIRECTOR, THOMAS A. ROE 
INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION; 
  DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION FORUM; AND 
HENRY J. AARON, SENIOR FELLOW, ECONOMIC STUDIES, THE BROOKINGS 
                          INSTITUTION

               STATEMENT OF ALISON ACOSTA FRASER

    Ms. Fraser. Thank you very much. My name is Alison Fraser, 
and I am the director of the Roe Institute for Economic Policy 
Studies at The Heritage Foundation. And the views that I will 
express today in my testimony are my own and shouldn't be 
construed as representing any official position of The Heritage 
Foundation. There is my disclaimer.
    Thank you very much for having me here to testify before 
you today at this hearing today. I will tell you what you 
already know, which is that congressional and executive 
oversight of the Federal budget are in turmoil. The political 
aversions to toppling Federal overspending, I believe, is 
enhanced an enabled by the inadequate processes that govern the 
Federal budget. I think two things are needed to prevent a 
European-style fiscal and debt crisis. One, our process changes 
that would require some would say enforce the solution and 
ensure fiscal results are achieved, and, of course, the robust 
policies solutions themselves. Today's hearing on process 
reform following the House's budget resolution which contains 
these robust policy visions is in my view particularly welcome.
    The sad fact is that U.S. Federal debt will soon reach 
economically damaging levels and spending will be the driver of 
that. The big elements of the spending growth stem from the Big 
Three entitlements, Social Security, Medicare and Medicaid. 
They compromise approximately 45 percent of the budget today, 
but, as we know, they will experience very fast growth in the 
future. A variety of projections show that it is highly 
possible, even likely, that the U.S. could experience a U.S.--a 
European style spending and debt crisis.
    The problem is that changing courses seems elusive. The 
process which governs the Federal budget has significant 
weaknesses and must be addressed as both an impetus and tool to 
driving the necessary changes to the budget. In my view, one 
major gap in the budget process today is that mandatory 
spending is in no way budgeted. Thus the Big Three entitlement 
programs which essentially enjoy open-ended appropriations are 
allowed to grow on budgetary autopilot. Or put another way, the 
biggest drivers of the Federal budget are able to enjoy sort of 
an automatic first call on tax revenues. The problem being then 
that they squeeze out other priorities, whether they are low 
taxes, strong defense, education funding or antipoverty 
spending.
    Another major gap is the seemingly arbitrary timeline of 
budget window. One-year estimates, of course, are necessary and 
longer term are as well, but from a budget perspective, there 
is nothing crucial or magical about 5 or 10 years. Neither 
adequately measures whether policies are affordable or as 
sustainable over a longer term time horizon. And indeed, these 
fixed, shorter-termed time frames even incentivize gaming the 
timing of new policies so they seem to stick within their 
budgetary targets and appear affordable.
    Bringing entitlements in a sense on budget is an important 
change in both the Spending Control Act and BOLT Act. Reviewing 
the budget over the longer time as in the BOLT Act is equally 
important.
    To be sure, there are tremendous challenges with making 
long-term budget projections. First of all, they all require a 
variety of assumptions which, together or alone, over the long-
term, will all be wrong. But it is vital to know the direction 
of the budget into the future and whether, based on today's 
knowledge, policies are both sustainable and affordable. 
Projections of this nature have been made regularly over the 
years by a number of departments, including the Congressional 
Budget Office. They are a good road markers of the direction 
that we are in. So the transparency sections of the BOLT Act 
featuring sustainability reports and regular review of long-
term spending to me are particularly important as is the long-
term reconciliation feature.
    I do worry that enforcing spending caps through 
sequestration against long-term projections could be 
problematic. So a couple of possible solutions would be to 
include some sort of margin of error for triggering 
sequestration itself, and/or a slower phase in to bring 
spending in line with the long-term caps. As for enforcement 
itself, there are very understandable reasons for excluding 
Social Security, but the program is, in fact, already running 
permanent deficits. The only way for Congress to ensure 
spending is sustainable is to put all programs in some way on 
budget, even those that are the most sacrosanct, such as Social 
Security.
    So in conclusion, the nature of the political process 
together has tremendous inertia to ignore our severe spending 
and debt problems until forced to by outside events. The 
objective of these bills are sound and sorely needed, I feel, 
to fix the budget process in order to provide more 
transparency, strong spending controls across the entire 
Federal budget, not just a small share, that provides that 
spending is sustainable over the long-term and to require steps 
for reining in spending to meet controls.
    In the end, only Congress will decide if and how it will 
act. But I believe it is better to do so in an intentional 
prudent way as these bills would provide rather than in a 
crisis. Thank you, and I look forward to your questions.
    Chairman Ryan. Thank you.
    [The prepared statement of Ms. Fraser follows:]

  Prepared Statement of Alison Acosta Fraser, Director, Thomas A. Roe 
     Institute for Economic Policy Studies, the Heritage Foundation

    My name is Alison Acosta Fraser. I am the Director of the Thomas A. 
Roe Institute for Economic Policy Studies at The Heritage Foundation. 
The views I express in this testimony are my own, and should not be 
construed as representing any official position of The Heritage 
Foundation.
    Congressional and executive oversight of the federal budget are in 
turmoil. The political aversion to tackling federal overspending is 
enhanced and enabled by the inadequate processes that govern the 
budget. The last time a concurrent budget resolution was passed on time 
was April 11, 2003. The Senate's record for failing to pass a budget 
resolution is even more discouraging. The budget process is especially 
inadequate for addressing and managing the long-term affordability and 
sustainability of fiscal policy. Indeed, much about the process serves 
to incentivize the avoidance of our long-term problems if not to 
exacerbate them. The biggest drivers of long-term spending--
entitlements--are not subject to annual or even regular budget review 
and they continue sharp growth under budgetary ``auto-pilot.'' And 
there are other problems with the budget process: from the way the 
budget window can be gamed to the exploitation of emergency spending.
    Two things are needed to prevent a European-style fiscal and debt 
crisis: process changes which require--some would say force--solutions 
and ensure fiscal results are achieved, and the robust policy solutions 
themselves. Today's hearing on process reform is particularly welcome.

                            NEED FOR ACTION

    Today, federal spending is at about 23 percent of GDP and debt held 
by the public is approximately 70 percent. When compared to the 
historical, post--World War II average of approximately 20 percent of 
GDP for federal spending and 44 percent for debt held by the public, 
this growth alone would be cause for concern. But the sad fact is that 
U.S. federal debt soon will explode to economically damaging levels and 
spending will be the primary driver of that explosion.
    Economic growth is materially slowed when debt approaches the size 
of the economy. But in a world like today's, where the global economy 
is increasingly interconnected and global capital markets in 
particular, it is possible that even this can miss the true potential 
magnitude of a debt and spending driven crisis. There is no better 
evidence than to watch the European budget and debt crises continue to 
unfold.
    By the end of the decade, debt held by the public will reach 100 
percent of GDP. After a generation it will reach nearly 200 percent\1\ 
and continue to skyrocket thereafter. The driver of this debt is 
federal spending; in 10 years federal spending will be at 22.1 percent 
of GDP, while revenues will reach 18.3 percent of GDP, essentially at 
their historical average of 18.1 percent.\2\ Then the situation 
deteriorates dramatically. By 2035, spending will reach 34 percent of 
GDP, driven primarily by the three major entitlement programs: Social 
Security, Medicare, and Medicaid. In 2012, they comprise approximately 
45 percent of total federal spending, or 10 percent of GDP, and by 2035 
they will reach approximately 16.5 percent of GDP. Left alone, they 
will devour all tax revenues by 2045, assuming the historical level of 
taxation.
---------------------------------------------------------------------------
    \1\ Congressional Budget Office, 2011 Long-Term Budget Outlook, 
Alternative Fiscal Scenario, June 2011 at http://www.cbo.gov/sites/
default/files/cbofiles/attachments/06-21-Long-Term--Budget--
Outlook.pdf.
    \2\ http://www.heritage.org/federalbudget/runaway-spending-tax-
revenue. There are different ways to calculate average historic levels 
of revenue, spending, and debt. Such averages vary due to the time 
periods covered. In the Heritage Foundation's Federal Budget in 
Pictures publication, these averages span 50 years (1959--2008), 
encompassing post--World War II and pre--Great Recession years. 
www.heritage.org/federalbudget
---------------------------------------------------------------------------
                     TAKING BACK OUR FISCAL FUTURE

    Many budget experts on the right and left have been rightly 
concerned about our grave situation and the lack of substantive 
legislative progress. One such project, Taking Back our Fiscal Future, 
stemmed from a joint project of the Brookings Institution and the 
Heritage Foundation. Experts from those and five other organizations 
across the ideological spectrum worked together for over a year to 
``define the dimensions and consequences of the looming federal budget 
problem, examine alternative solutions, and reach agreement on what 
should be done. Despite our diverse philosophies and political 
leanings, we have found solid common ground.'' \3\
---------------------------------------------------------------------------
    \3\ Joseph Antos, Robert Bixby, Stuart Butler, et al., ``Taking 
Back our Fiscal Future,'' Brookings Institution and Heritage 
Foundation, April 2008, http://www.brookings.edu/?/media/research/
files/papers/2008/4/fiscal%20future/04--fiscal--future.pdf (accessed 
May 30, 2012).
---------------------------------------------------------------------------
                           FIXING THE PROCESS

    Process reform legislation should include tools to address the 
major gaps that exist today, controlling the growth in spending--
including entitlement spending--over the both short term and the long 
term.
    My testimony will focus on the first two of the three bills under 
discussion today:
     Spending Control Act, H.R. 3576, which would put 
enforceable limits on federal spending over the 10-year budget window, 
which would be enforced through sequestration;
     Balancing our Obligations for the Long Term (BOLT) Act, 
H.R. 3580, which would focus on the long-term budget picture by putting 
budget controls on total federal spending over a 30-year period, 
increase disclosure of the true long-term budget picture to Members of 
Congress and the public; and
     Review Every Dollar (RED) Act, H.R. 3579, which would make 
it more feasible to control spending by creating reserve accounts for 
deficit reduction and placing new limits on administrative actions 
which can drive up spending on mandatory programs.
    The Spending Control Act starts by tightening the discretionary 
caps in the Budget Control Act (BCA), and importantly gives more 
discretion to Congress to set budget priorities between security and 
non-security spending. Both of these are important; the BCA's total of 
$2.1 trillion was only a first step toward slowing the growth in 
spending, and more should be done. Indeed, the size of cuts taken in 
isolation sounds impressive, yet over the 10-year period covered by the 
BCA, these cuts represent merely 4.7 percent of total spending and just 
over half of the new debt projected over the same period. As noted 
earlier, reforms to the budget process must be accompanied by policy 
changes. The new spending caps in the Act are taken from the House-
passed budget resolution, which included policy recommendations to 
committees, which effectively links process to the policy goals and 
strengthens the budget resolution. Congress should, however, have the 
discretion to set priorities across the entire budget, so removing the 
firewall between security and non-security spending is sound policy.
    One major gap in the budget process today is that direct (or 
mandatory) spending is not budgeted. Thus, the big three entitlement 
programs--which enjoy essentially open-ended appropriations--are 
allowed to grow on auto-pilot. Put another way, the biggest drivers of 
the federal budget are able to enjoy an automatic ``first call'' on tax 
revenues, squeezing other priorities--be they strong defense or 
education. This is remarkable in the sense that affording such a budget 
priority to any program--much less such a major one--effectively limits 
congressional debate on setting national priorities. This is especially 
problematic for solving our spending and debt crises as it places more 
budget emphasis on the smallest portion of the budget and diverts 
attention away from the biggest drivers. To address this imbalance, 
this legislation would cap spending on the major entitlements in two 
ways.
    First, it places caps on three categories of direct spending: 
Medicare, Medicaid and other health-related spending, and all other 
direct spending (exempting Social Security and net interest). Here too, 
the caps are set to the levels in the House-passed budget resolution--
further linking program modernization with the enforcement and process 
side of budgeting. It is unfortunate that Social Security is exempt 
from caps, as it is unsustainable over the decade and beyond.\4\ The 
program is already in permanent deficits, which means it is placing a 
strain on the rest of the federal budget by crowding out other spending 
or--more likely--higher borrowing. Exempting Social Security from 
spending restraint will mean more years of drawing on general revenues 
to cover its deficits and will not require the program reforms that are 
sorely needed to make it solvent and sustainable. Indeed, this seems at 
odds with the intent of the legislation.
---------------------------------------------------------------------------
    \4\ U.S. Social Security Administration, ``The 2012 Annual Report 
of the Board of Trustees of the Federal Old-Age and Survivors Insurance 
and Federal Disability Insurance Trust Funds,'' April 23, 2012, http://
www.socialsecurity.gov/OACT/TR/2012/index.html (accessed April 23, 
2012).
---------------------------------------------------------------------------
    Even with these diverse ideological perspectives, the 
recommendations in this report included taking entitlement spending off 
budgetary auto-pilot and budgeting for the long term. This paper was 
published over four years ago. One striking passage in the report notes 
the ``huge problem the candidates are not talking about'' namely, ``how 
to narrow significantly the enormous gap between projected federal 
spending and revenues.'' Fast forward four years to the 2012 election 
and an even worse fiscal picture. The same flaws in the budget process 
still exist today, but the urgency for solving the fiscal picture is 
even more imperative. Fixing the process is equally important.
    Second, this legislation would also cap total spending, including 
both discretionary and direct spending, and also requires enforcement 
should the caps be exceeded. Putting the brakes on total spending is 
essential, as noted earlier, and any limits must be enforceable. 
Federal spending must be evaluated by the sum of its breadth; 
comparisons of one part of the budget or another are simply inadequate 
unless the budget in its entirety is measured and limited. The devil is 
always in the details of just how to enforce such caps. Across-the-
board cuts, which are the Act's mechanism for enforcement, are the most 
simple to implement, especially quickly. Moreover, there is the 
semblance of shared sacrifice across all programs. However, they are 
quite a crude tool for de facto policy-setting. This is especially true 
for complex programs like Medicare where such a mechanism can have all 
manner of unintended consequences, or in the Department of Defense 
where it can jeopardize efficient and cost-effective management of 
long-term contracts. Paraphrasing Churchill, other cuts have been tried 
and across-the-board cuts are the worst form * * * except for all the 
others.
    Areas for Improvement: As noted above, Social Security is exempt 
from the individual direct spending caps. To set policies which both 
meet the needs of our citizens and are affordable and sustainable, all 
programs across the entire federal budget should be on a level playing 
field, open for debate and trade-offs. This should include even the 
most popular or seemingly sacrosanct ones like Social Security. It too 
should be subject to some form of spending restraint--whether part of 
an individual spending cap or subject to some limit so that all federal 
programs are brought under some form of budget discipline and 
assessment. Leaving one out--no matter how integral it is in our 
society--paves the way for additional exemptions. As for Social 
Security itself, eliminating it from a cap simply delays the day of 
reckoning when the trust fund is finally exhausted and solutions will 
happen one way or another.
    The policy results of budget enforcement should be as important as 
the fiscal ones. So, one improvement for sequestration could be to link 
the particular policy proposals included in the budget resolution into 
sequestration rather than relying on sequestration. For example, the 
phase-in period for moving Medicare to a premium support model could be 
expedited, or income adjusting for affluent seniors could be enhanced. 
In such a way, the policy changes to modernize these programs would be 
an integral part of enforcement. Similar enforcement could be done for 
Social Security such as phasing in a retirement age, or further income 
adjusting for affluent retirees.
    Another concern in the legislation is the sheer number of caps it 
contains: discretionary spending, three individual program caps for 
entitlements, and a cap on total spending. In addition to this, there 
is a cap on deficits. This adds potentially unnecessary complexity and 
makes it much harder for budget and program managers to anticipate and 
prepare for sequestration, and conceivably could lead to more than one 
set of sequestration cuts in a given year. These should be addressed in 
future versions of the bill. Additionally, since deficits are the 
result of spending and revenue levels, the deficit cap would be an 
impractical one that--as the bill is written--would be difficult and 
problematic to enforce. Since deficits are specified on budget 
resolutions, this seems an unnecessary addition to this bill.
    The Balancing Our Obligations for the Long Term (BOLT) Act has many 
of the same strengths of the Spending Control Act, and some of the same 
concerns. Its strengths lie in the steps it takes to ensure that the 
entire budget--and federal spending in particular--is affordable over 
the longer term beyond the rather arbitrary 10-year budget window. 
There are several reasons this is of crucial importance.
    First, lawmakers and the public must know whether existing policies 
are affordable over both the near term and long term. In past years, 
the 10-year budget window would show relatively modest increases in 
spending and stable debt levels. However, over the longer term, 
spending--especially on entitlements--explodes and the debt along with 
it. This was the case, for example, in the last years of the George W. 
Bush Administration where spending growth tapered off and revenues grew 
with a stronger economy which lowered deficits and the debt ratio. But 
it was well known that this was a false sense of security as shown by 
the annual reports of the Medicare and Social Security Trustees and 
long-term budget projections by the CBO and GAO. Lawmakers still did 
nothing to tackle this huge problem. The lack of long-term budget 
measures in the budget process allowed Congress and the Administration 
to ignore the problem. Exclusive reliance in the budget process on 
shorter-term projections even seemed to incentivize huge increases in 
federal spending, as in the examples of the Medicare Drug Benefit or 
universal health care subsidies in the Affordable Care Act, the Farm 
Bill, or the budget busting SAFETEA-LU Transportation reauthorization.
    Second, it is possible for individual programs to appear 
affordable, but when examined in concert with all other spending a 
different, troublesome picture can emerge. When the appalling condition 
of Social Security and Medicare is added to the growing expanse of the 
federal government, the true picture of federal finances is markedly 
worse. Alternatively, especially important today, the longer-term 
horizon shows the efficacy of spending reductions. Those that do not 
tackle entitlement programs will do very little to bring the budget in 
line to where it can be either affordable or sustainable. So the 
objective of this legislation is sound and these kinds of changes are 
sorely needed.
    Lastly, it is possible to game legislation such that it appears to 
be affordable within the 10-year budget window. The two biggest 
examples of new programs--the Medicare drug benefit and the Affordable 
Care Act--both employed this gimmick. They were affordable according to 
the criteria established for the legislation within the 10-year window. 
But since each of them back-loaded their new spending, they failed the 
test of sustainable and affordable policy changes over longer-term 
measures. For example, excess costs for the Medicare Drug Benefit were 
estimated to approach $8 trillion over the 75-year time horizon, net 
present value, more than twice the debt held by the public at the time 
the bill was passed.
    The BOLT Act addresses these flaw by first requiring reporting over 
a long-term budget window--an additional 30 years after the end of the 
10-year budget window. Both the legislative branch, through CBO and 
GAO, and the executive branch through OMB and the President's own 
budget submission must present an analysis of the long-term budget 
picture and the sustainability of policy. To be sure, these kinds of 
projections will not be accurate and are based on numerous assumptions 
such as the growth in discretionary spending, needs of defense, 
interest rates, the size and growth of the economy, etc. However, such 
projections are made regularly by the departments named above which 
present a reasonable picture of future spending and finances for 
lawmakers and the public to gauge whether the budget and major policies 
are sustainable. This first step, disclosure of long-term 
sustainability in the budget process itself is important so it can be 
used to guide policy in the budget resolution.
    The legislation imposes spending caps over a 30-year period, 
beginning after the 10-year budget window closes. Here, caps include 
the same direct spending categories as the Spending Control Act, in 
addition to a total spending cap. As noted earlier, budgeting only for 
discretionary spending covers less than half of the budget and leaves 
the biggest drivers of the budget out of annual budget debates. As 
entitlement spending will automatically grow ever larger, these 
programs must be brought under a formal review process, and thus 
extending spending caps to them will be an important part of 
constraining spending to affordable levels. These caps are set using 
the same levels of spending as the House-passed FY-2013 budget 
resolution, again linking policy objectives to fiscal targets.
    Spending is kept under control by long-term reconciliation, a 
regular review of sustainability every five years. Tens of millions of 
Americans rely on entitlements for retirement security, so new changes 
to these programs should be periodic, allowing seniors to plan and 
react to changes. If reconciliation and regular review fail to keep 
spending in check, there will be sequestration. These steps are welcome 
improvements over today's glaring lack of long-term budgeting. The 
downgrading of the nation's credit ratings last summer serves as 
further warning that the debt is reaching unsustainable levels and must 
be addressed. As the long-term budget gap is exclusively driven by 
spending, this legislation is properly focused on spending.
    As noted above, it is important to measure the costs of new 
legislation over the short term, but this alone is an incomplete 
measure as it allows gaming of the rules towards greater spending. 
Measuring major legislation over the long term is an important step in 
ensuring sustainable policy. Such formal measures would have markedly 
changed the debate for the Medicare Drug Benefit and the Affordable 
Care Act.
    Improvements: While there are fewer caps than the Spending Control 
Act, setting targets for Medicare, Medicaid and other health, and all 
other excluding Social Security may set an unnecessary level of detail 
for budget caps--especially over the long term. It is difficult enough 
to forecast spending over the long run, and requiring enforcement 
mechanisms at such detailed levels may prove troublesome. It is 
valuable to assess sustainability of individual programs. So one 
enhancement might be to provide additional flexibility to Congress to 
move resources from one category to another.
    The old saw that economists spend their careers explaining why 
their predictions are wrong has some relevance here. Long-term 
estimates are bound to be wrong. So giving some breathing room for the 
caps and sequestration in particular through a small, acceptable margin 
of error would still incentivize reforms and budget control if done 
carefully. Ensuring that entitlement programs are not whipsawed by 
frequent policy changes in response to the annual sustainability report 
are also important. There should be a balance between the tension 
needed for urgent steps to rein in spending and predictability for 
those who rely heavily on such programs.
    The Spending Control Act's shortcoming of excluding Social Security 
also is present in the BOLT Act.

                          GENERAL OBSERVATIONS

    If it was only rules and procedures that were needed, our severe 
budget challenges would likely be resolved today. Indeed, existing laws 
have been ignored, whether intentionally as with the Senate, from 
gridlock, or just plain lack of will to address these serious problems. 
Since the last timely concurrent budget resolution was passed 
(excluding FY 2013), there has only been a concurrent budget resolution 
in four of out eight years. Reconciliation, the process originally 
designed to help Congress change current law to conform revenue, 
spending, and debt limit levels to the policies laid out in the budget 
resolution, has only been used to minor effect for deficit reduction in 
recent years.\5\
---------------------------------------------------------------------------
    \5\ See Alison Acosta Fraser and Brian M Riedl, ``The Deficit 
Reduction Act: One Small Step for the House,'' Heritage Foundation 
WebMemo No. 911, November 9, 2005, http://www.heritage.org/research/
reports/2005/11/the-deficit-reduction-act-one-small-step-for-the-house.
---------------------------------------------------------------------------
    The nature of the political process today has tremendous inertia to 
ignore our severe spending and debt problems until forced to by outside 
events. But this approach to governing is the worst way to set policy, 
as crisis-driven decisions are often desperate choices which will fail. 
The flawed concept of the Supercommittee and the equally flawed BCA 
sequester are good examples. Moreover, crisis-driven decisions rarely 
allow for public discourse, weighing the pros and cons of such changes 
and building support so they are accepted. Congress and the President 
must act with purpose and intent to solve the spending and debt 
challenges, yet the system is sorely inadequate to ensure that all 
spending over the short term and long term is both affordable and 
sustainable. The objectives of these bills are sound and sorely needed: 
to provide more transparency, strong spending controls across the 
entire federal budget over the short term and the long term, and to 
require steps for reining in spending to meet those limits. They are 
important steps to fixing the budget process. In the end, Congress 
itself will decide if it will act. Better if it does so in an 
intentional, prudent way rather as these bills would provide, rather 
than in a crisis.

    Chairman Ryan. Dr. Holtz-Eakin.

                STATEMENT OF DOUGLAS HOLTZ-EAKIN

    Mr. Holtz-Eakin. Chairman Ryan, Ranking Member Van Hollen 
and members of the committee.
    Chairman Ryan. Pull your mic a little closer.
    Mr. Holtz-Eakin. Thank you again for the privilege to 
appear today, and I look forward to your questions. Let me 
briefly make a couple points at the outset. First, to echo what 
has already been said, the Federal budget process is 
fundamentally broken. At best, when it works, the President 
submits a budget and the House and Senate pass budget 
resolutions and conference it to a single agreement, but there 
is in fact no reason why is has to match what the President 
submitted, there is no reason why the amount of spending in 
mandatory programs has to have any relation to the 
discretionary programs, and there is no reason why taxes have 
to match spending in any fundamental way.
    So when it works well, it doesn't produce a fiscal policy, 
it produces a fiscal outcome, and it is usually bad. At the 
moment, it is not working well at all. As the chairman noted, 
the Senate is not passing budgets at all. The President's 
budget submissions can't even get votes in either House of 
Congress. And we have a demonstrable dangerous fiscal state. As 
this committee is well aware, we already have gross Federal 
debt that exceeds the size of the U.S. economy. We have all the 
characteristics of countries that get into sovereign debt 
crises, high levels of debt, heavy reliance of short-term 
borrowing, a failure to understand fully the obligations that 
the taxpayer faces and then they pop up and we have to pay for 
them. All of this suggests the need for dramatic action in the 
United States.
    The history of countries that have gotten in this situation 
has actually provided a road map for the right thing to do. In 
circumstances of bad growth and large debt, the best set of 
policies are to keep taxes low and reform them to be as pro-
growth as possible and to control spending. And the key in 
controlling spending turns out to be government employment, not 
a real big problem in the United States, and transfer programs. 
And in the United States, those transfer programs are the large 
mandatory spending programs, they are the entitlements, 
Medicare, Medicaid, Social Security and the new Affordable Care 
Act. So the policy playbook is actually apparent, the question 
is can you design a budget process which will be a complement 
and support that policy process. And as everyone here has 
noted, process is no substitute for getting policies right.
    The key features of the pieces of legislation under control 
today, under consideration today, are that they actually put 
mandatory spending on a budget, and that is a necessary 
complement to getting policies control spending programs which 
are at the heart of addressing the Nation's problems, so 
putting mandatory spending on a budget is an enormously 
important step, and having a long-term outlook with mechanisms 
to force action to keep the policies on track is the second key 
feature.
    There are lots of other details, but there is no substitute 
for doing that. These are examples of fiscal rules, imposing a 
set of fiscal rules on a Congress is an important step for the 
United States. It has been tried elsewhere around the globe, as 
I noted in my written testimony, the Dutch adopted its spending 
caps, the Swedes adopted spending caps and targets for surplus 
averaged over the business cycle. These kinds of fiscal rules 
have been shown to improve budgetary and economic performance 
around the globe. I applaud the attempt to consider these here 
and get the United States on a better track, both from a policy 
and process point of view, thank you.
    Chairman Ryan. Thank you.
    [The prepared statement of Mr. Holtz-Eakin follows:]

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

    Chairman Ryan, Ranking Member Van Hollen and members of the 
Committee, I am pleased to have the opportunity to appear today. In 
this testimony, I wish to make a few basic points:
---------------------------------------------------------------------------
    *The opinions expressed herein are mine alone and do not represent 
the position of the American Action Forum. I thank Gordon Gray for his 
assistance.
---------------------------------------------------------------------------
     The U.S. faces a dramatic threat from the current and 
projected levels of federal debt, driven by ever-increasing mandatory 
spending;
     The outlay reductions in the president's budget proposal 
or the Budget Control Act are dwarfed by the scale and imminence of the 
problem;
     The current Congressional budget process is broken, and 
does not facilitate addressing the threats to the Nation;
     The legislation contemplated in this hearing have relative 
strengths and weaknesses, but are clearly designed to introduce greater 
discipline in the budgeting process;
     In particular, to the extent they involve the adoption of 
a ``fiscal rule'' these proposals would be a valuable step toward 
budgetary practice that would address the debt threat and preclude its 
recurrence; and
     Budget process reforms are commendable, and to the extent 
they can precipitate action, they should be pursued, but are no 
substitute for necessary underlying policy changes.
    Let me discuss each in turn.

                      THE THREAT FROM FEDERAL DEBT

    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, 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. 2011. The Long-Term Budget 
Outlook. Pub. No. 4277. http://www.cbo.gov/ftpdocs/122xx/doc12212/06-
21-Long-Term--Budget--Outlook.pdf
---------------------------------------------------------------------------
    This depiction of the federal budgetary future and its diagnosis 
and prescription has all remained unchanged for at least a decade. 
Despite this, lasting action (in the right direction) has yet to 
achieve the force of law.
    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 2013,\2\ the deficit will average over $630 billion over 
the next ten years. Ten years from now, in 2022, the deficit will be 
3.0 percent of GDP, roughly $700 billion. As a result of the spending 
binge, in 2022 debt held by the public will nearly have doubled from 
its 2008 level to roughly 80 percent of GDP and will continue its 
upward trajectory.
---------------------------------------------------------------------------
    \2\ Congressional Budget Office. 2012. An Analysis of the 
President's 2013 Budget. http://www.cbo.gov/sites/default/files/
cbofiles/attachments/03-16-APB1.pdf
---------------------------------------------------------------------------
    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, Italy, Portugal, Spain, 
Ireland, and even Britain are under the scrutiny of skeptical financial 
markets. And there are signs that the U.S. is next--as witnessed by the 
decision of S&P to downgrade the federal credit rating. The federal 
government ran a fiscal 2011 deficit of $1.3 trillion--nearly 9 percent 
of GDP, as spending remained above 24 percent of GDP and receipts 
remained below 16 percent of GDP.
    How did this happen? First, the U.S. frittered away its time for 
easier action. 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 approaching 70 percent and rising 
rapidly.
    Third, active steps continue to make the problem worse. The 
Affordable Care Act ``reform'' added 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 2022 public debt will have nearly doubled from 
its 2008 level to nearly 80 percent of GDP and will continue its upward 
trajectory. Already, gross federal debt exceeds 100 percent of GDP. 
Using this measure, research shows that a debt-to-GDP ratio of 90 
percent or more is associated with the risk of a sovereign debt crisis.
    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. Rather than reducing this threat, 
according to news reports the United States is facilitating increased 
indebtedness to China by providing the People's Bank direct access to 
Treasury markets.\3\
---------------------------------------------------------------------------
    \3\ Flitter, Emily. Reuters. http://www.reuters.com/article/2012/
05/21/us-usa-treasuries-china-idUSBRE84K11720120521
---------------------------------------------------------------------------
    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 and escalating.
    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. The combination of sluggish 
income growth and a very large tax burden from the debt, assures that 
the next generation will inherit a standard of living inferior to that 
bequeathed to this one.

                          THE NEED FOR ACTION

    The federal budget problem demands fundamental reforms to major 
mandatory spending programs--Medicare, Medicaid, Social Security, the 
Affordable Care Act--and would benefit from the improved growth derived 
from fundamental tax reform. Despite this, successive budget proposals 
by the president are devoid of reform proposals and characterized at 
best by the type of piecemeal spending cuts and tax increases that 
invite stagnation.
    Recently, the passage of the Budget Control Act of 2011, its caps 
on discretionary spending, and the formation of the Joint Select 
Committee on Deficit Reduction represented a commitment to move the 
nation's finances in a better direction.
    However, the failure of the Committee to report recommendations to 
address our fiscal challenges has left the United States in a perilous 
position. It faces the expiration of tax polices most recently extended 
in 2010 and a sequester that is widely judged to be bad policy. The 
combined effect of these policies, in an unprecedented statement from 
CBO, threatens recession.\4\
---------------------------------------------------------------------------
    \4\ Congressional Budget Office. 2012. Economic Effects of Reducing 
the Fiscal Restraint That Is Scheduled to Occur in 2013. http://
www.cbo.gov/sites/default/files/cbofiles/attachments/FiscalRestraint--
0.pdf
---------------------------------------------------------------------------
    However, the structural budget challenges the nation faces are so 
pressing and significant that they outweigh in terms of their 
implications for economic output even a near-term recession. Clearly 
something must be done to avoid a downturn, but any such undertaking 
must be paired with reforms to address our fiscal imbalance.

                       THE BROKEN BUDGET PROCESS

    The Congressional budget process is broken and does not engender 
regular evaluation of the fiscal health of the federal government. 
Indeed, the prima facie evidence of its failure is that fact that the 
president has regularly submitted budgets that clearly display a path 
to a sovereign debt crisis, the U.S. Senate has not adopted a budget 
resolution in three years, and the Congress as a whole regularly 
operates without a binding budget resolution--all with no consequence.
    The budget process is intended to facilitate a regular and 
disciplined evaluation of the inflow of taxpayer resources and outflow 
of federal spending. It should enhance the role of the Congress as a 
good steward of the federal credit rating. It does neither because the 
current process is insufficiently binding. As a result, it easily 
degenerates to the mere adoption of current-year discretionary spending 
levels, with no review of the real problem: the long-term commitments 
in mandatory spending.

                LEGISLATIVE PROPOSALS FOR PROCESS REFORM

    To the extent that process reforms introduce added discipline to 
governance, and contribute to good budgetary outcomes, they should be 
commended. I believe there are elements of each of the three bills 
considered today that meet that test.

        BALANCING OUR OBLIGATIONS FOR THE LONG TERM ACT OF 2011

    As noted above, the U.S. long-term budget challenge is daunting--
now more so because what was once a truly long-term challenge now 
confronts in the medium term. Indeed, if credit markets observe a 
continued failure to put in place a credible plan to address this 
challenge, there would likely be near-term implications.
    The BOLT Act should be viewed favorably for its focus beyond the 
standard budget window. Any meaningful reform to major entitlements may 
have only modest impact within the 10 year budget window, but are the 
only sort of reforms that will address our looming, spending-driven 
debt crisis. Some efforts on this issue have been made in the past, 
such as the long-term budget point of order, the codification of which 
is a particularly laudable aspect of this legislation. Strengthening of 
the ``Medicare trigger'' enacted in 2003, but repeatedly ignored by the 
current administration is also a worthy pursuit.
    I must also note with caution the reliance inherent in this 
legislation on long-term budget projections. Any budget process that is 
contingent upon a long-term estimate of federal finances and a 
subsequent long-term estimate on how legislation (the compulsory 
``fast-track'' legislation) might alter those finances is fraught with 
uncertainty. It is simply beyond the scientific capabilities of the 
budget community to project these impacts with great certainty. The 
need for Congress to consider the long-term outlook is undeniable. 
Assuring that federal finances are sustainable and that the debt 
trajectory is downward are far more important than hitting precise 
projected numerical targets.

                      SPENDING CONTROL ACT OF 2011

    Any serious approach to budget discipline must include mandatory 
spending, which comprises over half of federal spending. The Budget 
Control Act, and other efforts, principally stemming from this body 
have put the brakes on discretionary spending growth. I would commend 
any policymaker for rooting out additional savings in discretionary 
programs, in domestic and defense appropriations, but much of the low-
hanging fruit has been culled, and undue effort to squeeze less 
consequential savings from discretionary programs at the expense of a 
much needed debate on entitlement reforms would likely be unproductive. 
While praise-worthy for staunching the recent discretionary spending 
binge, the Budget Control Act, in its post Super Committee-failure 
guise, suffers from this flaw.
    The Spending Control Act addresses this flaw by introducing 
measures to restrain direct spending, overall spending, and deficits. I 
believe the inclusion of mandatory spending into any budget process 
reform regime is critical. While ultimately, we must reform the 
underlying elements of mandatory programs, the desire to establish a 
global budget for mandatory spending, which is essentially what such a 
cap would do, is well intentioned, and would advance the goal of 
imposing needed reforms to these programs.

                    REVIEW EVERY DOLLAR ACT OF 2011

    Much like the previous two proposals, this legislation addresses 
the critical driver of our budget woes--direct spending. A periodic 
reassessment, as called for in the Review Every Dollar Act, of all 
federal programs should serve as a catalyst for the necessary debate on 
how to address our mandatory programs. That is the crucial first step 
to reining in the largest and fastest growing federal programs.
    The RED Act also seeks to address other specific flaws in current 
budget practice that are worthwhile efforts. Making explicit the tens 
of billions in federal transfers to the Highway Trust Fund is critical 
to effectively prioritizing federal spending initiatives. In a time of 
tight budgets, prioritization must determine funding allocations, and 
if we are to do so with any fidelity, then the masking of the state of 
the Trust Fund's finances is a practice that must come to an end. 
Additional measures in the RED are also commendable for their 
approaches to other such anomalies that impede proper budgetary 
practice.

                       THE VALUE OF FISCAL RULES

    One way to think of the reforms under consideration today is in the 
context of a federal ``fiscal rule.'' At present, the federal 
government does not have a fiscal ``policy.'' Instead, it has fiscal 
``outcomes''. The House and Senate do not reliably agree on a budget 
resolution. Annual appropriations reflect the contemporaneous politics 
of conference committee compromise, and White House negotiation. Often, 
the annual appropriations process is in whole or part replaced with a 
continuing resolution. Annual discretionary spending is not coordinated 
in any way with the outlays from mandatory spending programs operating 
on autopilot. And nothing annually constrains overall spending to have 
any relationship to the fees and tax receipts flowing into the U.S. 
Treasury. The fiscal outcome is whatever it turns out to be--usually 
bad--and certainly not a policy choice.
    I believe that it would be tremendously valuable for the federal 
government to adopt a fiscal rule. Such a rule could take the form of 
an overall cap on federal spending (perhaps as a share of gross 
domestic product (GDP)), a limit on the ratio of federal debt in the 
hands of the public relative to GDP, a balanced budget requirement, or 
many others. Committing to a fiscal rule would force the current, 
disjointed appropriations, mandatory spending, and tax decisions to fit 
coherently within the adopted fiscal rule. Accordingly, it would force 
lawmakers to make tough tradeoffs, especially across categories of 
spending.
    Most importantly, it would give Congress a way to say ``no.'' 
Spending proposals would not simply have to be good ideas. They would 
have to be good enough to merit cutting other spending programs or 
using taxes to dragoon resources from the private sector. Congress 
would more easily be able to say, ``not good enough, sorry.''
    As documented by the Pew-Peterson Commission on Budget Reform\5\ 
other countries have benefitted from adopting fiscal rules. The Dutch 
government established separate caps on expenditures for health care, 
social security and the labor market. There are also sub-caps within 
the core sectors.
---------------------------------------------------------------------------
    \5\ http://budgetreform.org/
---------------------------------------------------------------------------
    Sweden reacted to a recession and fiscal crisis by adopting an 
expenditure ceiling and a target for the overall government surplus 
(averaged over the business cycle). Later (in 2000) a balanced budget 
requirement was introduced for local governments. Finally, in 2003 the 
public supported a constitutional amendment to limit annual federal 
government spending to avoid perennial deficits.
    A lesson is that, no matter which rule is adopted, it will rise or 
fall based on political will to institute it and the public's support 
for its consequences.

                        NECESSARY POLITICAL WILL

    All three of the measures being discussed today share the necessary 
goal of controlling the largest drivers of our spending problem. To the 
extent that the three bills before the Committee impel reforms to our 
entitlement programs, then I support their passage. However, process 
reform, no matter how well intentioned or considered is no substitute 
for the actual reforms needed to address the looming debt crisis fueled 
by federal spending. No statutory spending cap or scheduled sequester 
can replace the needed debate on what a realistic or fair retirement 
age should be, or what the proper federal role in seniors' health care 
delivery is. So while I commend the authors of the legislation we are 
discussing, I would also caution this Committee's membership, as many 
know, the clock is ticking on the need for that broader discussion.
    Thank you. I look forward to your questions.

    Chairman Ryan. Dr. Aaron.

                  STATEMENT OF HENRY J. AARON

    Mr. Aaron. Thank you very much, and I am very glad to be 
here. I would like to begin with some areas of agreement.
    Chairman Ryan. Pull your mic a little closer.
    Mr. Aaron. Sure. I would like to begin with some areas of 
agreement. There is not a hair's worth of difference among us 
on the issue of the importance of dealing with the long-term 
budget challenge that we face. There is not much difference 
among us on the question of whether budget procedures could, in 
fact, be improved. This hearing, however, isn't about those 
issues; it is about whether these particular bills are the 
right way to go about dealing with those problems.
    The second area of agreement, I think among us, both Ms. 
Fraser and Mr. Holtz-Eakin emphasized in their testimony the 
problematic nature of any rule that is linked to very long-term 
projections because they are wrong and exact, and if they force 
actions, they are subject to random and capricious errors, and 
they actually place in the hands of technocrats decisions that 
properly belong in the hands of Congress.
    A third area, one that Ms. Fraser emphasized, is that these 
bills contain way too many caps and are unbalanced because they 
omit from their ambit consideration of revenues as part of the 
fiscal picture.
    Mr. Holtz-Eakin just mentioned an aspect of his testimony 
that I wanted to also emphasize, which is his reference to 
budget caps in European countries. I would like to go on 
record, maybe bragging a bit, I suggested precisely such a 
budget cap for U.S. health care spending in total 20 years ago 
in a Brookings volume, I still think it is a good idea but that 
is not what these bills do. What these bills do is single out 
those aspects of health care spending that benefit the aged, 
the disabled and the poor. In that respect, they differ 
fundamentally from the very European proposals to which Mr. 
Holtz-Eakin called attention.
    I would like to echo and repeat a point that Mr. Van Hollen 
made in his opening remarks. I think it is important that none 
of us, I believe, is opposed to procedural reforms in the 
budget process. The current system is flawed it suffers from 
many of the shortcomings from which Mr. Holtz-Eakin previously 
referred. But there is also a very clear record of consistent 
and complete failure of budgetary procedural rules to take the 
place of substantive negotiations on the very policies that 
comprise the budget and are projected to cause problems in the 
future. They have never succeeded in the past in the United 
States, there is no reason to think they will do so in the 
future. They are no substitute for the specific substantive 
negotiations.
    When and as those negotiations yield an agreement on how to 
deal with long-term budget challenges, changes in procedural 
rules can help cement and sustain those agreements. But to 
date, there is no evidence whatsoever that they can bring those 
agreements about.
    I would like in my concluding couple of minutes to focus on 
what I think is perhaps the fundamental problem with the 
procedural rules that are contained in this bill. They call for 
spending cuts that, in my view, are simultaneously mistimed, 
wrongly calibrated, and perversely targeted. They are mistimed 
because they would be triggered just when additional spending 
is needed to counter weakness in private demand. They are 
wrongly calibrated because they would be largest during the 
deepest recessions when those expenditures are most needed, and 
they would be perversely targeted because they would fall most 
heavily on the jobless and the sick precisely at the time when 
assistance for those groups is most sorely needed.
    I want to conclude by reiterating once again that I am not, 
in any way, urging opposition to procedural reforms in budget 
process. I think they are an important step for this committee 
to take a leadership role in bringing about, but they are no 
substitute and they cannot proceed substantive agreement on the 
budgetary measures necessary to improve the long-term fiscal 
picture of this country. Thank you.
    Chairman Ryan. Thank you.
    [The prepared statement of Mr. Aaron follows:]

          Prepared Statement of Henry J. Aaron, Senior Fellow,
             Economic Studies, the Brookings Institution\1\

    Mr. Chairman and Mr. Ranking Member: Thank you very much for 
inviting me to testify today.
---------------------------------------------------------------------------
    \1\ Bruce and Virginia MacLaury Senior Fellow, the Brookings 
Institution. The views expressed here are my own and do not necessarily 
reflect those of the trustees, officers, or other staff of the 
Brookings Institution.
---------------------------------------------------------------------------
    These bills deal in complex ways with the rules that will govern 
how Congress handles budgetary matters in the near and distant future. 
In my testimony, I shall focus primarily on HR 3576 and 3580. I shall 
emphasize the following points.
     These bills would establish stringent spending limits. 
Those limits would force spending to be cut far below levels set in 
laws that Congress has duly enacted and the President has signed. These 
cuts would span the federal budget, cutting spending in myriad programs 
without debate or vote by members of Congress on the specific cuts 
involved.
     The limits on the size of government in HR 3576 and HR 
3580 are lower than actual expenditures during the administrations of 
the last five presidents, Republican and Democratic. A variety of 
forces will tend to increase government spending in the future.
     The bills would set limits on deficits without regard to 
economic conditions. If adopted, they would likely deepen and lengthen 
recessions. They would increase unemployment and lower earnings and 
profits at times when the economy was already in distress.
     Although ostensibly aimed a limiting the scope of 
government, these bills would do nothing to curb tax provisions that 
are the functional equivalent of expenditures and that, like direct 
spending, alter the private allocation of resources.
     Although ostensibly aimed at limiting deficits, these 
bills would do nothing to inhibit deficit-increasing cuts in tax rates 
or the creation of new deductions, credits, or exclusions.
     These bills would end the established and benign 
principle, present in budget deals and negotiations for more than two 
decades and most recently embraced by the Bowles-Simpson commission, 
that programs protecting low income Americans should be exempt from 
sequestration.
     The bills would limit the size of government and fiscal 
policy not just for the next several years, but into a future no one 
can foresee. To do so, they must depend on projections of economic and 
political circumstances that are subject to vast uncertainty and 
enormous discretion by those preparing projections. They thereby cede 
to unelected technicians, who must use opaque assumptions and 
procedures, power over policies that under the Constitution are the 
responsibilities of members of Congress.
    Government spending, revenues, and the deficit change because of 
new legislation and evolving economic circumstances. Congress enacts 
legislation. It does not control the economy.
    Spending and revenues change automatically with economic activity. 
Most taxes increase when the economy expands and shrink when the 
economy contracts. Many expenditures vary with economic activity, as 
well.
     Spending under Old-Age, Survivors, and Disability 
Insurance, Medicare, and Unemployment Insurance increases when the 
economy slows. So does spending under income- or means-tested programs, 
such as Medicaid, Temporary Assistance to Needy Families, Supplemental 
Nutrition Assistance.
     Personal and corporation income taxes, payroll taxes, and 
many excise taxes rise and fall with economic activity.
    These automatic variations in taxes and spending help keep the 
economy on an even keel. When the economy is booming, rising revenues 
and falling spending tend to prevent the economy from overheating. When 
the economy is declining, falling revenues and rising government 
spending directly support private demand or offset its fall. Without 
automatic stabilizers, the economy would more easily 'overheat' during 
economic booms. Without automatic stabilizers, the drop in income and 
increase in unemployment during recession would be more severe than is 
with them.
    The faster such offsetting effects occur, the better. These 
stabilizing effects would be delayed if anti-recession legislation were 
enacted only after official statistics signaled economic shifts and 
only after Congress reacted to such news and resolved the inevitable 
political squabbling about just what to do. The fiscal relief measures 
enacted in 2008 under President George W. Bush and 2009 under President 
Barack Obama, for example, would have done even more good than they did 
if political disagreements had not delayed them.
    The bills that the Budget Committee is considering today would 
weaken or reverse portion of the benign fiscal effect of automatic 
stabilizers traceable to expenditures. They would not prevent tax 
collections from falling during recession. But both the spending and 
deficit caps would prevent spending from increasing. In fact, they 
would force spending cuts. Those cuts would be mis-timed, wrongly 
calibrated, and perversely targeted.
     The spending cuts would be mis-timed because the caps 
would cut spending just when it should be increased--during economic 
slowdowns. That is when spending targeted on the unemployed and the 
needy automatically increases. That spending has two beneficial 
effects. It helps to maintain demand. And it relieves hardships 
associated with unemployment and falling income. Together with 
recession-induced drops in revenues, rising spending generates budget 
deficits and boosts the ratio of spending to GDP. To cut spending when 
the economy is weak would be no less wrong-headed than it would be to 
raise tax rates to offset the automatic drop in revenues. To do either 
because of an arbitrary formula would be folly.
     The cuts would be wrongly calibrated because they would be 
largest during the deepest recessions when spending is most needed. It 
is during deep recessions when spending unemployment compensation, 
pensions, and health and food benefits increases most. It is during 
deep recessions when such assistance is needed most.
     The cuts would be perversely targeted because they would 
fall most heavily on the jobless and the sick. Meanwhile, of course, 
the automatic stabilizer that would be left in place--tax flexibility--
would go disproportionately to those who had the highest incomes and 
therefore faced the highest tax rates--those with high wealth or 
income. Please understand, the automatic reduction in tax collections 
that occurs when economic activity slows is a good thing. It also 
attenuates economic losses. But so, too, do automatic increases in 
government spending. To enact rules that reverse either of these 
automatic responses to declining economic activity would be senseless. 
Yet, that is just what these bills would do.
    Please understand as well that this indictment of spending and 
deficit triggers in these bills does not depend on the wisdom or lack 
thereof of the particular stimulus legislation enacted at the end of 
President George W. Bush's administration or the separate law enacted 
early in President Obama's administration. I believe that this 
legislation was beneficial, as does the report issued this week by the 
Congressional Budget Office. I also think that the stimulus packages 
were generally well, although not ideally, designed and were too small. 
Some members of this Committee probably agree with those judgments. 
Some probably do not. But whatever one may think about the 2008 and 
2009 stimulus packages should have nothing to do with one's view of the 
legislation on which you are holding hearings today. I speculate that 
few members of this Committee personally believe that it would have 
been a good idea to cut unemployment insurance, Medicaid, defense 
procurement, agricultural supports, and highway construction just when 
timed to take effect when the financial collapse of 2008 occurred and 
massive unemployment ensued. I also speculate that fewer still would 
have voted for such cuts. Yet, such cuts would have been forced had 
legislation such as proposed in these bills been enacted by those who a 
decade or two ago sat where you sit now.
    To make matters even worse, the sequestration rule in this bill 
reserves the largest cuts for those programs that increase when 
economic activity falls or that were considered sufficiently important 
for Congress to expand faster than inflation. Outlays that are not 
expanding faster than the consumer price index would be exempt from 
sequesters.
    Programs that rise when unemployment goes up or incomes fall will 
surely rise faster than consumer prices. They will be cut. Spending on 
programs that Congress has deemed important enough to expand will 
increase faster than the consumer price index. They will be cut.
    What is left? Programs that don't directly help the unemployed or 
those with falling incomes. Programs that Congress does not think worth 
increasing. They will not be cut. It is hard to imagine a provision 
more perversely designed to slow economic recovery, to harm those most 
in need of help, and to shift resources from activities from high to 
low priority uses.
    Disagreement about the proper role and size of the federal 
government is as old as our republic and was never deeper than it is 
today. These bills attempt to settle that disagreement through 
budgetary procedures. They create major, even insuperable, hurdles to 
raising spending. Simultaneously, they lower current barriers to 
cutting taxes.
    Trying to settle the long-standing and deeply felt disagreements 
about the proper role and size of government in this way is a bit like 
trying to settle the outcome of a football game by telling one team 
that it has to go twenty yards for a first down and the other team that 
it has to go only ten. Such rules would be laughably unfair and one-
sided. The same may be said of the cut-go rules.
    This harsh comment in no way contradicts the importance, once the 
recovery is well established and well under way, of bringing the 
deficit under control. It also does not deny that elected officials may 
be tempted spend the taxpayer's money irresponsibly if they are not 
forced to take account of the full costs of that spending. But there is 
a parallel and equally serious danger that elected officials, unless 
forced to take account of the deficit-increasing effects of their 
actions, use tax cuts to pander to their constituents. You ignore 
either risk at the nation's peril.
    It is fair and sensible to require sponsors of new spending to show 
how they will pay for what they want to spend. It is equally fair and 
sensible to require sponsors of tax cuts to show how they intend to 
offset the revenues they will surrender. It is neither fair nor 
sensible to require one, but not the other.
    Nor would it be fair nor sensible for current members of Congress 
to presume that they are sufficiently informed or far-sighted to know 
what the size or scope of government should be decades hence. The 
fiscal records of the last five presidents have varied widely. In every 
year Ronald Reagan and George Herbert Walker Bush were in office, as 
well as three of the presidential years of Bill Clinton and of George 
W. Bush, budget outcomes would have failed the spending tests set in HR 
3576. In every budget year of the presidencies of Ronald Reagan and 
George Herbert Walker Bush, in four of the budget years of Bill 
Clinton, and in six of the budget years of George W. Bush, the deficit 
tests set in that bill would have triggered sequesters.
     Budgets for each president are assumed to begin with the 
fiscal year after the year in which they are inaugurated and to run 
through the fiscal year in which their successor is inaugurated.
    Hard, objective forces drove government spending and deficits 
during those presidencies. Similar forces will drive spending in the 
future. Future presidents and Congresses may find it necessary to 
deploy American military power abroad. They will encounter added 
pension costs for the tens of millions of baby-boomers yet to retire. 
If we are lucky, they will have to cope with added medical spending for 
a growing menu of beneficial diagnostic and therapeutic interventions. 
Unless we are both luckier and wiser than we have an reason to expect, 
they will have to grapple with recessions, financial panics, and 
natural disasters. No Congress can repeal such events. No Congress can 
foresee when they will happen or how severe they will be. It would 
therefore be profoundly unwise to legislate caps that hamstring what 
can then be done.
    For at least two decades, deficit reduction efforts have been 
guided by the principle that the burden of closing the deficit should 
be shouldered by those with adequate incomes--the middle class and the 
well-to-do--not by the poor, people with disabilities, or the elderly, 
and certainly not primarily by these vulnerable groups. This view has 
been shared by Republicans and Democrats alike. Erskine Bowles and Alan 
Simpson endorsed this principle in the introduction to their draft plan 
for deficit reduction. While the overall plan did not secure the 
requisite super majority laid out in its charter, there has been no 
indication that committee members rejected this underlying principle.
    Yet these bills would do just that. They would subject to sequester 
programs that serve the poor, such as Medicaid and Supplementary 
Nutrition Assistance. They would, in fact, target these programs for 
the largest cuts. They would permit long-term pension commitments to be 
rewritten without explicit debate, based on projections of spending or 
deficits stretching decades into the future that historically have been 
laughably inaccurate and are, inevitably, subject to manipulation 
through the artful selection of assumptions.
    It is just over a decade since budget analysts, a Federal Reserve 
chairman, and at least a few economists worried--I am not making this 
up!--that then-anticipated budget surpluses would sop up all 
outstanding government debt and make impossible the management of 
monetary policy. Those worries now seem risible, but serious people 
believed them, just as many people now believe that projected deficits 
will materialize. We now see that projections thirteen years ago were 
unduly rosy. We should understand that it is just as easy for current 
projections, which depend on assumptions about events we cannot 
possibly anticipate, may be unduly bleak.
    The Congressional Budget Office now issues long-term budget 
projections under alternative assumptions. Informed observers 
understand that these projections are highly sensitive to underlying 
but seldom examined assumptions. For example, if health care spending 
slowed to the rate of growth of income, most of currently projected 
long-term budget deficits would largely vanish. Let me be clear * * * I 
think such a slowdown in growth of health care spending is unlikely and 
we shouldn't count on it. But how fast health care spending rises 
depends sensitively on the fruits of future medical research. We can 
guess, but we cannot know, what will be, but has not yet been, 
discovered. Projections are also sensitive to assumed interest rates, 
labor force participation, and productivity growth. CBO is crystal 
clear that its long-term budget projections are not forecasts, but 
extrapolations of certain trends about variables that no one can 
forecast accurately. CBO's projections shape public debate, as they 
should. But they do not, and should not, trigger specific legislative 
action. HR 3580 would convert these guesses about the future course of 
spending and revenues into action forcing events and goad Congress and 
the President to act now on projections of spending and deficits as 
much as forty years in the future.
    During the 1980s, the nation faced large and troubling deficits. 
Members of Congress repeatedly enacted rigid targets for deficit 
reduction. None worked. Then, presidents of both parties and Congress 
under both Republican and Democratic leadership dealt with the 
substantive cause of deficits. They identified spending that 
Congressional majorities agreed could be cut and taxes that could be 
increased.
    After those agreements had been struck, but only then, the pay-go 
procedural rules helped members stick by the deal. But those rules 
applied to both taxes and spending. They did not presume to know how 
much government should spend or tax decades into the future. They did 
not foster budget policy that would deepen recessions. They protected 
vulnerable populations and did not force them to shoulder the burden of 
deficit reduction. And, until they were repealed, they worked.

    Chairman Ryan. Ms. Fraser, let me start with you, I have 
got this piece from Brookings and Heritage, Taking Back Our 
Fiscal Future I will include in the record without objection.
    [The article follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Ryan. Joe Antos, Bob Bixby, Stuart Butler, Paul 
Cullinan, Allison Fraser, Bill Galston, Ron Haskins, Julia 
Isaacs, Maya MacGuineas, Will Marshall, Pietro Nivola, Rudy 
Penner, Bob Reischauer, Alice Rivlin, Bell Sawhill, Gene 
Steuerle, a pretty good list, people from both sides of the 
aisle with specific recommendations on how to improve the 
budget process, which are encapsulated in these bills we are 
talking about here.
    I want to look at a certain section which I think had you a 
lot to do with, specifically, there are three recommendations I 
want your take on. First you recommend, and I will read it from 
the document here, ``Congress and President should enact 
explicit long-term budgets for Social Security, Medicare and 
Medicaid that are sustainable, set limits on automatic spending 
growth and have required review every 5 years.'' Can you tell 
us about the rationale for this recommendation and whether this 
rationale was shared by the bipartisan group of experts that 
signed this document?
    Second, is this issue, ``the rules for the 5-year window 
trigger for action forcing device that requires explicit 
decisions when projected spending exceeds budgeted amounts.'' 
That is basically what Mr. Mulvaney's bill does. Can you 
discuss how these triggers might work in your judgment?
    Ms. Fraser. Yes, thank you very much.
    Chairman Ryan. And then third, third, you can go back if 
you want to, but I just want to in the interest of time pack my 
question pretty quickly here. You recommend, ``The long-run 
cost of these three programs should be visible in the budget at 
all times and considered when decisions are made. The benefits 
should not be increased either at the 5-year review or in 
between without insuring that they are fully financed, that is 
the other idea that is in Mr. Mulvaney's bill. Can you talk a 
bit about a rationale for this recommendation and whether this 
idea was supported by the bipartisan group of experts?
    Ms. Fraser. Yes, thank you very much. We published this in 
2008 after nearly a year of working together, going over what 
our big concerns are over fiscal policy. And let me just read 
the two bullets where we came to agreement: ``We have 
unsustainable deficits in the Federal budget which threaten the 
health and vigor of the American economy. The first step 
towards establishing budget responsibility is to reform the 
budget decision process so that the major drivers of the 
escalating deficits, Social Security, Medicare and Medicaid, 
are no longer on budgetary autopilot.'' We thought this was 
very important, both from the short-term perspective and the 
traditional 10-year budget window, but also, and more 
importantly, over the longer term.
    So that is where we came up with the three basic 
recommendations that we went through. And we spent a lot of 
time doing this, because as you can tell by the individuals 
associated with this, there are a lot of diverse, very diverse 
ideological opinions and core beliefs. But it was a bipartisan 
view that we have to change course and that the biggest threat 
really is the fact that entitlement spending, especially on the 
Big Three is on budgetary autopilot.
    So with that, we thought it was fundamentally important 
that we change the dynamics, that Congress change the dynamics 
that trade-offs are made in the budgetary process by bringing 
these three entitlement programs on. We do believe that all 
three of them are very important in our society and our 
culture, but we believe that they have to be transformed and 
modernized so that they are both sustainable and affordable.
    Since they are, in essence, especially Social Security and 
Medicare, longer term, people rely on--millions of people rely 
on them exclusively in retirement, that there should not be a 
number of sort of whipsawing changes that occur in the same way 
that could occur in discretionary spending. Hence, we thought a 
regular review of say every 5 years that was the suggestion 
would allow for more sustainable or planning kinds of policies 
that people could rely on, policy changes.
    So we didn't want to see changes that would happen every 
year as in discretionary spending. That is why we recommended 
sort of 5-year, 7-year kind of period.
    Again, this is was a bipartisan view. I would say that one 
of the differences is though we all believed that spending is 
the problem, we also believe that we should have a full and 
very formal overhaul of our Tax Code. And we should have a 
debate about how big we want government to be, and we should 
have a debate about how high revenue should be, and there are 
provisions in there to do that. And I would be happy to talk 
about my views on how big government should be, and we could 
have a robust discussion about that, but that was outside of 
your three questions.
    So what we thought is by setting a course that everybody 
could agree with about how big government should be, that 
should involve both the Congress and to the President that we 
should set sort of the track that we should be on, and then 
have some sort of way to keep us on track, hence the regular 
review. If Congress and the President did not come together to 
ensure that fiscal policy, especially over these biggest 
drivers was in adherence with those benchmarks, then there 
would be some sort of forcing action through a trigger to make 
sure that that happened.
    Now one of the things that we actually recommended as 
opposed the across-the-board sequestration was having actual 
policy triggers and there are a number of ways to do that. For 
example, you could increase premiums in Medicare, we could 
increase income adjusting in Social Security, lots of policy 
ways to include in the triggers themselves.
    And then lastly, again, I forget your third question.
    Chairman Ryan. Third question, let me get it, it is in the 
document here, ``the long-run cost of the programs should be 
visible at all times without insuring they are fully 
financed.'' Basically, how do you think the trigger ought to be 
worked, that is basically what you just got into?
    Ms. Fraser. But if I could add----
    Chairman Ryan. So it was the policy trigger, I think that 
the sequester was what Mr. Van Hollen said, what do you think 
is the best trigger? I think you more or less answered that. 
You are saying the backup ought to be a policy, a predesigned 
policy trigger is what you are basically saying is what the 
trigger ought to be versus, say, a sequester? That was the 
question.
    Ms. Fraser. That was my recommendation to consider a 
policy. Because a sequester--you all are dealing with what the 
sequester is or is not going to be at the end of the year. And 
our thoughts were, well, let's have something that we can all 
agree on in advance that could be ratcheted up.
    Chairman Ryan. Is the thinking that that is a trigger that 
is more likely to stick or that that is a trigger that is more 
focused on these programs, and therefore, it will more likely 
require actual policy prescriptions from Congress before that 
occurs. So, for instance, we passed our reconciliation package 
to prevent the sequester in the first year, nothing is 
happening in the Senate, we have the lame duck issue we are 
going to be dealing with. People can speculate as to whether 
the sequester will or will not occur if it will be replaced or 
not. Is the thinking that a policy trigger is better because it 
is more specific, less across the board, and more directed 
towards the very programs of the drivers of our debt, is that 
the basic rationale?
    Ms. Fraser. Yes. And if I could just elaborate on a point 
of making sure that there is more transparency in what our long 
term path is. We thought that was especially important, so 
there is a debt limit that is set, but there is never any sort 
of measure or metric as to how high we want the future, our 
excess obligations stemming from some of these programs to be 
and we thought that was especially important.
    Chairman Ryan. That is what where we thought was most 
intriguing about this. What Mr. Mulvaney, and I will let him 
speak for himself and his bill, a bill that all of us here on 
the committee on this side are behind, is it is all about 
confident and trajectory. Are we getting our trajectory of debt 
under control, and are we confident that we are going to meet 
that trajectory. And therefore, to the point that some say, 
well, arbitrary caps on spending in and of themselves don't 
really give you confidence that you are going to meet this 
trajectory of the debt because that means a future Congress at 
some other time will actually do the right thing, then to meet 
this benchmark. But if we actually are forcing ourselves to 
deal with the drivers of the debt, changing the laws themselves 
that are the cause for this run up in debt, and then putting 
enforcement mechanisms to make sure that those change in laws 
actually do continue and persist, then we have confidence that 
this trajectory of debt is under control.
    And by measuring the outcomes in the outyears of this debt, 
we can better send signals to the credit markets, we can better 
keep the integrity of our currency, we can better give seniors, 
or soon-to-be seniors or would-be seniors in their 40s and 50s 
more confidence that the Federal Government will be able to 
make its commitment that it is making to people which today has 
no means of making.
    So what we believe this does is this gives us the 
confidence that we will get the debt under control, and it 
gives us the tools to make sure that the changes we need to 
make are made and continue so that government can keep its 
promises to people, and we can avoid a debt crisis from our 
debt getting out of control, and as a result of that, we can 
have better, fast economic growth, because we are removing so 
much uncertainty from the marketplace.
    Now we limit ourselves to 10, maybe on the second round I 
will ask Dr. Holtz-Eakin I had a question I wanted to as you, 
but I want to be sensitive to members' time. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman. Let me, again, 
thank all the witnesses for their testimony. Let me begin with 
the point that Mr. Aaron made which is that there is agreement 
that we have got to deal with our budget challenges, especially 
our growing long-term budget challenges, and much of the 
testimony was focused on that area of common agreement. As Mr. 
Aaron also pointed out, the purpose of this hearing is to look 
at three specific bills. And when you are looking at bills, I 
hope everybody would agree that details matter because very 
shortly, this committee will be asked to vote up or down on 
those and then the full House will as well.
    I would just point out, Mr. Chairman, this Brookings 
Heritage document, Taking Back Our Fiscal Future, makes a 
number of points in it. I would also just comment on the fact 
that it says ``Myth: Cutting taxes will increase revenues,'' 
that is on page 5. It also discusses other alternative to a 
trigger that in addition to cutting spending would include 
revenue increases. I dare say that you would be hard pressed to 
get the individuals--all of the individuals who put their names 
on this to endorse these three bills. In fact, I am sure many 
of them would not endorse the bills that are before us because 
as I said, bills require details, details are important. Let's 
just talk about some of those details.
    Under this bill, under the bill, the first spending cap 
bill that was put in that would go into effect immediately, I 
want to make the point that it would require immediate 
sequester in 2013, even if we passed the House Republican 
budget for 2013, the one that has already passed the House that 
goes into effect. You pass the first sequester bill that is on 
the agenda, it would require a $70 billion outlay cut. So I 
would like all our witnesses just to very briefly say whether 
they think that is a good idea going into the beginning of next 
year.
    Chairman Ryan. If the gentleman would yield. These bills 
are in December on a different baseline.
    Mr. Van Hollen. Right.
    Chairman Ryan. So new versions of these bills will be 
changed to reflect the latest numbers from the CBO to conform. 
It will be a technical thing.
    Mr. Van Hollen. In fact, you are making my point, Mr. 
Chairman, which is those numbers change every year. They change 
every year, we have seen them change just in the last year, and 
yet, you are putting in the bill for 10 years a list of 
assumptions and making cuts based off assumptions. As you have 
just pointed out, those assumptions change within 9 months, 
they change more in a year, they change even more in 2 years, 
and yet you are codifying policies for 10 years. So you are 
going have that problem every single year.
    Now I would like to ask the witnesses to walk through this 
following scenario, because we have done the math and we are 
happy to share these with others. If you put these bills into 
effect, the House passes it next week, let's just say the 
Senate goes off its rocker and passes it and the President 
signs it and then you were to have an economic downturn next 
year, let's say, of the magnitude we just had. We had double 
dip recession, this would require cuts in fiscal year 2013 by 
over $700 billion. And the way this is designed, I hope all my 
colleagues will take a closer look at it, it limits the cuts to 
some of the mandatory programs, but you still have to hit the 
overall spending limit cut and the cut of the deficit as a 
percent of GDP.
    So you have an economic downturn, two things we all know 
happen, number 1, more people become eligible for some of the 
programs that are safety net programs, a lot of those are cut 
under the bill, but even with those cuts, some people will get 
somewhat higher benefits.
    Second, you have a big drop in revenue and yet the bill 
requires that you hit the deficit through GDP target. And what 
gets wiped out is discretionary spending. You think the cuts to 
defense in the sequester that we are talking about happening in 
January are big? They would be huge under this bill if you have 
another economic downturn next year.
    So I just want to ask, our witnesses are distinguished 
economists, I want to ask each of you whether you think that is 
a good public policy.
    Ms. Fraser. Well, in my view, one of the most damaging 
things to the economy is maintaining our current course. And I 
think one the things that can be addressed in this bill is, as 
you say, when we do have a downturn, but I am not projecting 
that we do have a downturn next year. So I think that what we 
need is policies such as are contained in this bill to 
immediately begin to rein in spending because I believe it is 
the most damaging thing to our future.
    Mr. Van Hollen. Let me just ask you, did you project in 
2008 and 2009 an economic downturn?
    Ms. Fraser. No, sir.
    Mr. Van Hollen. Okay. We can't project things that are 
somewhat beyond our control. What we are seeing in Europe is an 
austerity-only approach taken by some countries that has led to 
double dip recessions.
    Mr. Holtz-Eakin, do you think that is a good policy result?
    Mr. Holtz-Eakin. A wise man once told me, you should budget 
for your problem. No budget will be perfect, but you should 
have a process that solves your biggest problem. Our biggest 
problem is mandatory spending, even if we don't project 
downturns, we have enormous fiscal problems. That wise man was 
Henry Aaron.
    Mr. Van Hollen. Go ahead.
    Mr. Holtz-Eakin. And that is why I believe these bills are 
the right thing to do. If, in fact, we revisit something that 
looks like 2008 and 2009, I find it unimaginable that a 
Congress would sit and pretend that its hands were cuffed and 
not respond to the general needs of the American people.
    Mr. Van Hollen. As it turns out we have seen changes 
between the 2011 Republican budget and the 2013 Republican 
budget that would require 70 billion. So I don't think that 
changes in the economy are things that we don't expect. We all 
know that the economy will change in certain ways, and 
pretending we can freeze in place these particular levels 
obviously have negative consequences.
    Let me ask you, Mr. Holtz-Eakin, a question because you 
have been on the record about this, with respect to something 
that is been talked about very much, another budget issue, 
which is the Speaker's proposal to once again threaten that the 
United States would not pay its obligations when we hit the 
debt ceiling. Do you think that is productive?
    Mr. Holtz-Eakin. I can't speak for the Speaker, but you did 
read his remarks very carefully and I did not see that. There 
was a commitment to meet the obligations of the Federal 
Government and not to, in any way, default on its borrowing. 
And there was a principle that increasing the Federal debt 
limit should be accompanied by comparable dollar amounts of 
spending cuts or reforms. And I believe the central word in 
that is ``reforms,'' because that goes straight to the 
mandatory spending programs are at the heart of our problems. 
And once again, that takes the form of a fiscal rule that 
forces the Congress to address the policies which are 
generating bad outcomes, and I endorse that.
    Mr. Van Hollen. Do you think it is productive to threaten 
that we not raise our debt limit?
    Mr. Holtz-Eakin. I do not believe he said that. And I don't 
think its productive to announce you are going to default on 
your borrowing and no one has.
    Mr. Van Hollen. Well, I think the record will speak for 
itself. If that is the case and the Speaker has proposed to 
vote to increase the debt limit that would be news, we will 
have to find out if that is the case.
    Would you agree that the--all the discussion surrounding 
the August Budget Control Act that that had some--created 
uncertainty in the economy and creates some negative effects in 
the economy.
    Mr. Holtz-Eakin. Yes, I do believe there was a real 
negative impact because for the first time, the American people 
were close to as aware of how dysfunctional the budget process 
is as this committee is. And that is one of the reasons why I 
hope similar reforms are made.
    Mr. Van Hollen. All right. I would just ask to put in the 
record some documents from Bloomberg that noted the negative 
economic consequences to the economy as a result of that sort 
of standoff last year.
    [The information follows:]

                     [From Bloomberg, May 28, 2012]

                Debt-Ceiling Deja Vu Could Sink Economy

                 By Betsey Stevenson and Justin Wolfers

    Europe is crumbling. China is slowing. The Federal Reserve is 
dithering. Yet the biggest threat to the emerging U.S. economic 
recovery may be Congress.
    John Boehner, the leader of the House Republicans, has promised yet 
another fight with the White House over the debt ceiling--the limit 
Congress has placed on the amount the federal government can borrow.
    If this sounds familiar, it's because we suffered through an 
identical performance last summer. Our analysis of that episode leads 
to a troubling conclusion: It almost derailed the recovery, and this 
time could be a lot worse.
    Sometime around the end of this year, the federal government will 
bump up against its $16.4 trillion borrowing limit, as a direct result 
of spending and tax laws enacted by Congress. To raise the limit, 
legislators must pass a separate law. In principle, the extra level of 
approval can serve as a useful mechanism, forcing Congress to debate 
its priorities. But refusing to raise the limit wouldn't free the 
government of its existing spending obligations. Rather, it would leave 
the government with no choice but to default on its debts.
    In other words, congressional Republicans are taking the 
government's creditworthiness hostage when they threaten not to 
increase the debt ceiling. Politically advantageous as this may be, it 
is terrible economics. To understand why, let us consider the economic 
effects of last year's debt-ceiling debate. If we know our history, 
perhaps we will not be doomed to repeat it.

                            CONFIDENCE DROP

    High-frequency data on consumer confidence from the research 
company Gallup, based on surveys of 500 Americans daily, provide a good 
picture of the debt-ceiling debate's impact (see chart). Confidence 
began falling right around May 11, when Boehner first announced he 
would not support increasing the debt limit. It went into freefall as 
the political stalemate worsened through July. Over the entire episode, 
confidence declined more than it did following the collapse of Lehman 
Brothers Holdings Inc. in 2008. After July 31, when the deal to break 
the impasse was announced, consumer confidence stabilized and began a 
long, slow climb that brought it back to its starting point almost a 
year later. (Disclosure: We have a consulting relationship with 
Gallup.)
    Businesses were also hurt by uncertainty, which rose to record 
levels as measured by the number of newspaper articles mentioning the 
subject. This proved far more damaging than the regulatory uncertainty 
on which Republican criticisms of Barack Obama's administration have 
focused (more on that subject in a Bloomberg View editorial today). 
Employers held back on hiring, sapping momentum from a recovery that 
remains far too fragile.
    Growth in nonfarm payrolls decelerated to an average 88,000 a month 
during the three months of the debt-ceiling impasse, compared with an 
average of 176,000 in the first five months of 2011 (see chart). 
Payroll growth subsequently recovered and has averaged 187,000 jobs a 
month since. Despite the rebound in job growth, employment is likely 
still below where it would otherwise have been.
    There are also more visible permanent scars. The sense that the 
U.S. political system could no longer credibly commit to paying its 
debts led the credit-rating company Standard & Poor's to remove the 
U.S. government from its list of risk-free borrowers with gold-standard 
AAA ratings. Just as a poor credit score raises the interest rate you 
pay in the long run, so a worse credit rating will probably raise the 
interest rate on our national debt.

                           ECONOMIC SABOTAGE

    All told, the data tell us that a debt-ceiling standoff is an act 
of economic sabotage. The only way to avoid this conclusion is to argue 
that consumers and employers were reacting to some other economic 
factors. But the debt ceiling was the dominant economic story at the 
time. No other news fits the data as well. Although the European debt 
crisis was a rising concern throughout 2011, the real trouble in Europe 
arose in the period when consumer confidence and employment were 
recovering.
    The next debt-ceiling battle could be worse, because the stakes are 
even higher. In addition to the threat of default, the U.S. is facing 
the so-called fiscal cliff: a raft of spending cuts and tax increases 
that will happen at the end of this year unless Congress acts to 
postpone them. Another stalemate would almost certainly plunge the 
economy into a deep recession. Our best alternative--in fact, our only 
hope--is for Congress to set aside partisan politics and work together 
with a common goal of helping our country out of the Great Recession.

    (Betsey Stevenson and Justin Wolfers, both professors at the 
University of Pennsylvania's Wharton School, are Bloomberg View 
columnists. The opinions expressed are their own.)

    Mr. Van Hollen. Mr. Aaron, could you just comment on, 
again, the issue of compounding the negative effects of an 
economic downturn by locking in some of these bills?
    Chairman Ryan. And Henry, try to do it in 39 seconds if you 
can. You will get other time later.
    Mr. Aaron. I don't remember making the statement that Doug 
Holtz-Eakin attributed to me, but I think it makes sense. And 
it underscores the importance of answering a question that 
posed which he did not do. The question that you posed to him 
was what should be done in the face of a serious financial 
panic and downturn in Europe that threatens to have an effect 
on the U.S. economy. In that situation, a policy in the United 
States of cutting spending as would be required under this bill 
because of the likelihood that the ratio of debt to GDP would 
exceed the ceilings, because the ratio of spending to GDP would 
exceed the ceilings, would, in my view, be utter folly. It 
would be worse than folly, it would be extremely damaging to 
the economy. The implication I think is that members of both 
parties would understand that, and this law would be overridden 
and wouldn't have any effect.
    Mr. Van Hollen. Thank you.
    Chairman Ryan. Dr. Price.
    Mr. Price. Thank you, Mr. Chairman. And I want to thank the 
witnesses as well for your work in the past and for your 
testimony today, and I think there is some significant 
agreement, as Dr. Aaron mentioned, and hopefully, we can get to 
that from a policy standpoint. I do want to, however, correct 
the record on the ranking member's, one of the comments he made 
in his opening statement, and our friends on the other side 
continue to do this talking about our opposition to closing 
corporate loopholes for deficit reduction. And the fact of the 
matter is our budget actually does close significant corporate 
loopholes. What we----
    Mr. Van Hollen. Mr. Price, if I may, that is not--that is 
not for the purpose of deficit reduction. That is a 
misstatement.
    Mr. Price. I will reclaim my time.
    Mr. Van Hollen. And you are under clarifying my statement, 
you are making a misstatement.
    Mr. Price. It is an interesting process, you just embarked 
upon.
    Mr. Van Hollen. We don't have the chairman here.
    Mr. Simpson. I am in charge.
    Mr. Ryan. Well, we will have Mr. Simpson be in charge.
    Mr. Price. I think the response to that is curious and 
points out the fallacy of the statement. We strongly support 
closing corporate loopholes in the Tax Code, strongly. The fact 
of the matter is, what the ranking member does has always added 
that final clause to it, phrase to it for deficit reduction 
which is something we would gladly do. What we are not in favor 
is of is increasing revenue, is increasing taxes on either 
business or hard-working taxpayers across this land to chase 
ever increasing spending, that is what we are opposed to. And 
my friend from Maryland----
    Mr. Van Hollen. Would the gentleman yield?
    Mr. Price. No, no, no. You had your 10 minutes.
    Mr. Van Hollen. But it is a totally accurate statement, you 
just confirmed it.
    Mr. Price. With my remaining 3 minutes after correcting the 
record from my friend from Maryland.
    Mr. Holtz-Eakin, I want to address an issue that we dealt 
with on this committee in the past, but I know that you have an 
interest in, and that is the issue of fair value accounting. In 
an article less than a year ago you stated, ``Budget law 
requires the CBO, Congressional Budget Office, to assume that 
loans made directly by the government earned huge profits with 
virtually no risk that such assessments could be wrong.''
    I think this is one of the areas where the budget process 
is remarkably flawed and gets us to the wrong answer. So I 
wonder if you might elaborate on why the current system is 
structured in this manner and what perverse spending policies 
does this structure bring about.
    Mr. Holtz-Eakin. I actually wrote a letter to Chairman Ryan 
on this topic which has sort of my full views on it. The short 
version is that what you want the process to do is reflect the 
timing and scale of obligations that the taxpayers will have to 
finance. And in its origins, the Federal Credit Reform Act did 
something quite desirable, which took loans, loan guarantees 
and put them on a level budgetary playing field in terms of the 
timing. At the moment the obligations was incurred, these 
economically equivalent transactions were recorded in the 
budget.
    What it didn't do was get the scale right, because it did 
not reflect fully the risks to which the taxpayers exposed, it 
took a narrow view of risk, the credit risk of the borrower, 
not the larger market risks for changes and interest rates and 
economic conditions. It is entirely desirable to do that. If it 
is done that way, they will be fully on a level playing field 
and you wouldn't have any budgetary gain moving from one to the 
other. We saw, for example, in the passage of the Affordable 
Care Act the use of taking equivalent student loans from the 
private sector into the public sector at an apparent profit as 
a way to pay for it, and that is an economic mirage that you 
shouldn't permit.
    Mr. Price. And the folks at risk in this process are the 
taxpayers.
    Mr. Holtz-Eakin. Taxpayers, absolutely
    Mr. Price. Our friends are talking about the student loan 
issue that you just raised. I wonder if you would elaborate a 
little bit in just a few remaining seconds about how that issue 
has been pushed, or the risk has been pushed to the taxpayer in 
that program.
    Mr. Holtz-Eakin. Well, the all new student loans are out of 
a direct loan program where the portfolio was held by the 
Department of Education.
    Mr. Price. All by the government?
    Mr. Holtz-Eakin. All by the government. And we have 
mispriced the risk systematically and we don't fully understand 
the exposure of the taxpayer to future liabilities out of that 
portfolio. I am deeply concerned about the quality of that 
portfolio and the taxpayer risk embedded in it.
    Mr. Price. As we are as well. Thank you, very much. Thank 
you, Mr. Chairman, I yield back.
    Chairman Ryan. Thank you, Ms. Bass.
    Ms. Bass. Thank you. I would like to yield a minute to the 
ranking member.
    Mr. Van Hollen. I thank you, Ms. Bass, I don't need a 
minute, I just want to put in the record the so-called taxpayer 
pledge from Grover Norquist, point two that people signed in 
the supposed any net reduction eliminating deductions and 
credits unless matched dollar for dollar by reducing--by 
further reducing tax rates. You don't--the Republican position, 
anyone who signs this is taking a pledge not to close one tax 
loophole for the purpose of deficit reduction, just go ask 
Grover Norquist that is what he said and that is what it says 
on this sheet.
    [The information follows:]

    
    
    Chairman Ryan. Since we are throwing time around----
    Ms. Bass. Hey, wait a minute. I did not yield----
    Chairman Ryan. Not to rob her time, I just want to ask 
unanimous consent to include the Speaker's speech in the record 
which corroborates what Dr. Holtz-Eakin was saying. And I will 
without objections include in the record.
    [The Speaker's speech follows:]

                [From the Washington Post, May 16, 2012]

                     Boehner's Debt Ceiling Speech

                             By Ezra Klein

    On Tuesday, Speaker John Boehner took the stage at the Peter G. 
Peterson's 2012 Fiscal Summit and outlined his intentions to again 
threaten the Obama administration with default in order to extract 
concessions on spending. I wrote a bit about why Boehner is adopting 
this strategy in Wednesday's Wonkbook. But here's his full speech:

    It's truly an honor to be with you in the historic Mellon 
Auditorium. It was here in the spring of 1949 that the United States 
and our closest allies gathered to sign the North Atlantic Treaty, 
giving birth to NATO.
    On that occasion, President Truman declared that people `with 
courage and vision can still determine their own destiny. They can 
choose freedom or slavery.'
    In our time, all of these great nations face a grave threat to 
freedom, one from within, and that is debt. It is shackling our 
economies and smothering the opportunities that have blessed us with so 
much.
    Once again the world looks to the United States for what it always 
has: an example. It is the example of a free people whose hard work and 
sacrifice make up the sum total of thriving towns and a vibrant 
economy. It's a humble government that lives within its means and 
unleashes the potential of first-rate ideas and world-class products. 
It's a nation never content with the status quo and always on the make.
    I got a glimpse of this example growing up working at my dad's 
tavern just outside Cincinnati, and then lived a piece of it running my 
own small business.
    Instead of this shining example, what does the world now see?
    A president on whose watch the United States lost its gold-plated 
triple-A rating for the first time in our history;
    A Senate, controlled by the president's party, that has not passed 
a budget in more than three years;
    And, earlier this month, another unemployment report showing that 
the world's greatest economy remains unable to generate enough jobs to 
spur strong and lasting growth. If you should know one thing about me, 
it's that I'm an optimist. Yes, times are tough, but our future doesn't 
need to be dark. We don't have to accept a new normal where the 
workplace looks more like a battlefield and families have to endure 
flat incomes, weak job prospects, and higher prices in their daily 
lives.
    We have every reason to believe we can come out of this freer and 
more prosperous than ever. And we will, if we confront our challenges 
now while we still have the ability to do so.
    For the solution to what ails our economy is not government--it's 
the American people.
    The failure of `stimulus'--a word people in Washington won't even 
use anymore--has sparked a rebellion against overspending, 
overtaxation, and overregulation.
    Nationwide, we're seeing a groundswell of support for bold ideas 
that reject small politics, cast off big government, and return us to 
common sense and first principles--the kind of ideas that will restore 
prosperity and substantially improve the trajectory of our economy.
    In March, as part of our Plan for America's Job Creators, the House 
passed an honest budget with real spending cuts, pro-growth tax reform, 
and serious entitlement reform. It's a far-reaching effort to control 
government's worst habits and capitalize on the American people's best. 
This budget gets our fiscal house in order AND promotes long-term 
growth. Far from settling for stability, it offers a true path to 
prosperity.
    Various bipartisan commissions and coalitions have devised 
ambitious plans as well. The math and the mix are different, but the 
goals are mainly the same.
    And of course, there are summits like these that bring together 
people who just get it. Of course, while I'm happy to be here and I'm 
sure we all enjoy each other's company, we can also agree that we've 
talked this problem to death.
    It's about time we roll up our sleeves and get to work.
    For all the focus on Election Day, another date looms large for 
every household and every business, and that's January 1, 2013.
    On that day, without action by Congress, a sudden and massive tax 
increase will be imposed on every American--by an average of $3,000 per 
household. Rates go up, the child tax credit is cut in half, the AMT 
patches end, the estate tax returns to 2001 levels, and so on.
    Now, it gets a little more complicated than that. What will expire 
on January 1 is cause for concern--as is what will take effect. That 
includes:
    Indiscriminate spending cuts of $1.2 trillion--half of which would 
devastate our men and women in uniform and send a signal of weakness;
    Several tax increases from the health care law that is making it 
harder to hire new workers; As well as a slate of energy and banking 
rules and regulations that will also increase the strain on the private 
sector. But * * * it gets even more complicated than that. Sometime 
after the election, the federal government will near the statutory debt 
limit. This end-of-the-year pileup, commonly called the `fiscal cliff,' 
is a chance for us to bid farewell--permanently--to the era of so-
called `timely, temporary, and targeted' short-term government 
intervention.
    For years, Washington has force-fed our economy with a constant 
diet of meddling, micromanagement, and manipulation. None of it has 
been a substitute for long-term economic investment, private 
initiative, and freedom Previous Congresses have encountered lesser 
precipices with lower stakes, and made a beeline for the closest lame-
duck escape hatch.
    Let me put your mind at ease. This Congress will not follow that 
path, not if I have anything to do with it.
    Having run a business, I know that failing to plan is planning to 
fail. The real pain comes from doing nothing * * * `austerity' is what 
will become necessary if we do nothing now. We'll wake up one day 
without a choice in the matter. There's also no salvation to be found 
in doing anything just to get by, just to get through this year. 
`Nothing' is not an option, and `anything' is not a plan. To get on the 
path to prosperity, we have to avoid the fiscal cliff, but we need to 
start today. To show my intentions are sincere, I'll start with the 
stickiest issue, and that of course is the debt limit. On several 
occasions in the past, the debt limit has been the catalyst for budget 
agreements. Last year, however, the president requested a quote-unquote 
`clean' debt limit increase--business as usual.
    So last year around this time, I accepted an invitation to address 
the Economic Club of New York. I went up there and said that in my 
view, the debt limit exists in statute precisely so that government is 
forced to address its fiscal issues.
    Yes, allowing America to default would be irresponsible. But it 
would be more irresponsible to raise the debt ceiling without taking 
dramatic steps to reduce spending and reform the budget process.
    We shouldn't dread the debt limit. We should welcome it. It's an 
action-forcing event in a town that has become infamous for inaction.
    That night in New York City, I put forth the principle that we 
should not raise the debt ceiling without real spending cuts and 
reforms that exceed the amount of the debt limit increase.
    From all the way up in Midtown Manhattan, I could hear a great 
wailing and gnashing of teeth. Over the next couple of months, I was 
asked again and again if I would yield on my `position,' what it would 
take, if I would budge * * *
    Each and every time, I said `no' * * * because it isn't a 
`position'--it's a principle. Not just that--it's the right thing to 
do. When the time comes, I will again insist on my simple principle of 
cuts and reforms greater than the debt limit increase. This is the only 
avenue I see right now to force the elected leadership of this country 
to solve our structural fiscal imbalance.
    If that means we have to do a series of stop-gap measures, so be 
it--but that's not the ideal. Let's start solving the problem. We can 
make the bold cuts and reforms necessary to meet this principle, and we 
must. Just so we're clear, I'm talking about REAL cuts and reforms--not 
these tricks and gimmicks that have given Washington a pass on 
grappling with its spending problem.
    Last year, in our negotiations with the White House, the president 
and his team put a number of gimmicks on the table. Plenty of thought 
and creativity went into them--things like counting money that was 
never going to be spent as savings. Maybe in another time, with another 
Speaker, gimmicks like these would be acceptable.
    But, as a matter of simple arithmetic, they won't work.
    They won't work, and as I told the president, we're not doing 
things that way anymore.
    What also doesn't count as `cuts and reforms' are tax increases. 
Tax hikes destroy jobs--especially an increase on the magnitude set for 
January 1st. Small businesses need to plan. We shouldn't wait until New 
Year's Eve to give American job creators the confidence that they 
aren't going to get hit with a tax hike on New Year's Day.
    Any sudden tax hike would hurt our economy, so this fall--before 
the election--the House of Representatives will vote to stop the 
largest tax increase in American history.
    This will give Congress time to work on broad-based tax reform that 
lowers rates for individuals and businesses while closing deductions, 
credits, and special carveouts.
    Eyebrows go up all over town whenever I talk about this, but when I 
say `broad-based' tax reform, I mean it. We need to do it all * * * 
deal with the whole code, personal and corporate it's fairer and more 
productive for everyone.
    That's why our bill to stop the New Year's Day tax increase will 
also establish an expedited process by which Congress would enact real 
tax reform in 2013. This process would look something like how we 
handle Trade Promotion Authority, where you put in place a timeline for 
both houses to act.
    The Ways Means Committee will work out the details, but the bottom 
line is: if we do this right, we will never again have to deal with the 
uncertainty of expiring tax rates.
    We'll have replaced the broken status quo with a tax code that 
maintains progressivity, taxes income once, and creates a fairer, 
simpler code.
    And if we do THAT right, we will see increased revenue from more 
economic growth.
    Last fall, when I addressed the Economic Club of Washington, I said 
that making relatively small changes now can lead to huge dividends 
down the road in terms of debt reduction. As we approach the issue of 
the debt limit again, we need to continue to bear this in mind.
    As you know, we could eliminate all of the unfunded liabilities in 
Social Security, Medicare and Medicaid tomorrow, and the effect within 
the Congressional Budget Office 10-year window could be minimal.
    That's because changes to these programs take time and are phased-
in slowly.
    For example, when Congress last increased the retirement age for 
Social Security, the increase--a mere two years--was scheduled to fully 
take effect 40 years after the law was enacted. Another example: take 
the House Budget Resolution and its assumptions for Medicare reform. 
Those would not even begin until after 2022.
    Smart and modest changes today mean huge dividends down the line. 
Now, I can already hear the grumbles * * * partisans getting all worked 
up or people saying, eh, let's wait until after the election. We can't 
wait. Employers large and small are already bracing for the coming tax 
hikes and regulations, which freeze their plans.
    The markets aren't going to wait forever; eventually they're going 
to start reacting. We now know that we ignore these warnings at our own 
peril.
    That's why the House will do its part to ease the uncertainty 
surrounding the fiscal cliff. And I hope the president will step up, 
bring his party's Senate leaders along, and work with us.
    Because if there's one action-forcing event that trumps all the 
rest--even the debt limit--it's presidential leadership. Ladies and 
gentlemen, I believe President Obama cares about this country and knows 
what the right thing to do is. But knowing what's right and doing 
what's right are different things.
    The difference between knowing what's right and doing what's right 
is courage, and the president, I'm sorry to say, lost his.
    He was willing to talk about the tough choices needed to preserve 
and strengthen our entitlement programs, but he wasn't ready to take 
action.
    As it turned out, he wouldn't agree to even the most basic 
entitlement reform unless it was accompanied by tax increases on small 
business job creators.
    We were on the verge of an agreement that would have reduced the 
deficit by trillions, by strengthening entitlement programs and 
reforming the tax code with permanently lower rates for all, laying the 
foundation for lasting growth.
    But when the president saw his former colleagues in the Senate 
getting ready to press for tax hikes, he lost his nerve. The political 
temptation was too great. He moved the goalposts, changed his stance, 
and demanded tax hikes. We ended up enacting a package with cuts and 
reforms larger than the hike. But it could have been so much more. The 
letdown was considerable. And, in turn, our nation's credit rating was 
downgraded for the first time.
    Well it should also be the last time that happens, which is why I 
came here today. If the president continues to put politics before 
principle--or party before country, as he often accuses others of 
doing--our economy will suffer and we may well miss our last chance to 
solve this crisis on our own terms.
    But if we have leaders who will lead * * * if we have leaders with 
the courage to make tough choices and the vision to pursue a future 
paved with growth, then we can heal our economy and again be the 
example for all to follow. I'm ready, and I've been ready. I'm not 
angling for higher office. This is the last position in government I 
will hold. I haven't come this far to walk away.
    Well, NOW is the time to do the right thing.
    Let's do it for the right reasons--we don't need to be dragged 
kicking and screaming. That's not the American way. Let's summon the 
courage and vision to choose freedom, to choose prosperity, and to 
determine our destiny.
    Then we'll not only have succeeded in solving this crisis--we'll be 
worthy of that success. Thank you all.

    Chairman Ryan. Ms. Bass.
    Ms. Bass. I get 2 extra seconds. Thank you for coming 
today. I actually wasn't going to ask these questions but I did 
want to follow up on the student loan issue because you 
mentioned the fact when the student loans were pulled away from 
the private sector back to the public sector, that that creates 
problems. Do you think it is better? Should it go back to the 
private sector?
    Mr. Holtz-Eakin. I personally believe that it would be 
highly desirable to get more private capital involved in the 
financing of student loans, that is an observation number one. 
The second observation is really the origination process and 
the monitoring of borrowers under the current program troubles 
me. We have recreated some of the worst aspects of the subprime 
disaster by having those who originate student loans have no 
stake in their future liability. And so that loan portfolio has 
terrible incentives embedded in it, and my reading of the 
evidence, and I have done some papers on this, is that private 
lenders do it a better job of keeping those who get arrears 
getting them back current and keeping them out of default, that 
is important part of----
    Ms. Bass. Let me interrupt you, because I would agree on 
one hand because I think the private sector kind of acted a 
little bit like a loan shark, but let me just say that isn't it 
the case that if a student defaulted when it was in the private 
sector, that it was Federally guaranteed so that the government 
would wind up paying if the student defaulted?
    Mr. Holtz-Eakin. Absolutely. The whole goal was to 
subsidize lending to those who were going to institutions of 
higher education.
    Ms. Bass. So it is not just a question that the liability 
is taken away from the taxpayers if we guarantee it. But let me 
change subjects since my time is limited. You were saying there 
was no liability. I am not going to yield because I am running 
out of time.
    So another question that I would like to ask when there is 
an economic downturn, I think about--and especially coming from 
State government, I think about programs such as unemployment 
compensation, supplemental nutrition assistance program, how 
the they automatically expand to protect the vulnerable. So how 
would statutory limitations in the Spending Control Act, how 
would that affect the ability, especially of a State government 
to meet the folks' needs because of unemployment? Coming from 
California, I have actually asked each of you if you could 
briefly, because I am steadily watching this clock.
    Mr. Holtz-Eakin. My view is that the virtue of these kinds 
of budget processes, these caps, is they force the Congress to 
look at the policies regularly. In fact, the best evidence of 
that is the SGR, where much to the chagrin of the Congress, 
every year they have to actually look at the Medicare program. 
Looking at the Medicare program every year is a good idea, and 
thus the policies can be adjusted for economic conditions and 
any other policy objectives. The caps putting it on autopilot 
is exactly the problem.
    Ms. Bass. So essentially, we would have a cap that would 
just be flexible, and it really wouldn't be a cap, a cap 
spending but if we needed to increase it, you could do that 
under the Spending Control Act?
    Mr. Holtz-Eakin. You could always change the policies to 
target those in need and still hit the cap or if Congress saw--
--
    Ms. Bass. What if the policies didn't change? So let's just 
say unemployment is capped in the State of California, which is 
where I come from, and had to deal with this crisis between 
2008 and 2010. If unemployment is capped, and we couldn't issue 
anymore, what happens to those folks? What happens to the women 
and the children who run out of--they have no more supplemental 
nutrition assistance, what would they do?
    Ms. Fraser. Well, I think that these are overall caps. And 
You have discretionary spending caps. You have various 
categories of caps. I think one of the things that concerns me 
is that there are almost too many caps. When you are talking 
solely about SNAP and talking about unemployment, there is not 
individual caps for these, as I understand it, under any of 
these bills.
    Ms. Bass. Okay.
    Ms. Fraser. It gives Congress the flexibility to move 
resources from one program to another.
    Ms. Bass. Thank you.
    In my last few seconds, could Mr. Aaron or Dr. Aaron speak?
    Mr. Aaron. The effect is catastrophic, and the scenario 
that Mr. Holtz-Eakin and Ms. Fraser have described is 
unrealistic. What would happen would be that need would rise 
abruptly. Whether action might be taken would depend on where 
in the legislative cycle Congress happened to be. Congress 
would debate these issues. They would hold hearings. There 
would possibly be filibusters in the Senate. There would be 
delay.
    Ms. Bass. Okay.
    Mr. Aaron. The result would be that the needs of people who 
are extremely vulnerable would not be met for extended periods 
of time, and perhaps indefinitely, depending on what action 
might eventually be taken.
    Ms. Bass. Okay.
    Mr. Aaron. We have to have a realistic understanding of how 
things would actually play out in moments of crisis.
    Ms. Bass. Thank you.
    I am sorry I was cutting both of you off. I was just real 
cognizant of that big clock. So sorry about that.
    Chairman Ryan. We let it go over because we took some of 
your time.
    Ms. Bass. I appreciate that.
    Chairman Ryan. Mr. McClintock.
    Mr. McClintock. Thank you, Mr. Chairman.
    First, I would like to remind the ranking member that the 
top 1 percent of income earners earn 17 percent of the income 
and pay 37 percent of the income taxes. So if the gentleman 
were really serious about the rich paying their fair share, he 
would be arguing for a 50 percent cut. Nobody is suggesting 
that, but we do think that as we eliminate loopholes, we should 
not be raising the overall amount that is being paid.
    To my colleague from California, who has just left, I would 
remind her that at the peak of California's revenues in early 
2008, when the State was taking in more money than it had ever 
taken in in its history, it was already running on nearly a $10 
billion deficit. That is the problem; a simple inability to say 
no to reckless, irresponsible spending at both the State and 
Federal level. We run deficits in good times as well bad.
    What I would like to do is pose two observations now to the 
panelists for comment. My observation is that the single 
biggest problem we have is very simply that we are allowed to 
spend more than we take in, so we do. It is much easier to 
borrow money from the future generation and spend it now than 
it is to go through the difficult process of saying no to 
spending or imposing higher and higher taxes. It seems to me 
the most important single reform that we could adopt to bring 
our spending back into line is a simple balanced budget 
amendment. That is the first observation.
    The second observation, the second biggest problem that we 
have, is that mandatory spending is not subject to budget 
appropriations, and I--what happens is we end up arguing over 
discretionary--whether discretionary spending should be 1.048 
trillion or 1.027 trillion, and completely ignore the $2.7 
trillion in mandatory spending that is growing like Topsy, and 
is sinking our country. So I certainly applaud the Heritage 
proposal on that.
    Final point: It seems to me that except for those two 
problems, those two flaws, we have got a pretty good process. I 
mean, we set overall budget parameters, the authorizing 
committees review these programs regularly to determine whether 
or not they are worthy of expenditure, and then the 
Appropriations Committee decides if we can afford them in the 
budget. The problem is that process is not being followed. It 
is being ignored.
    The Senate has not passed a budget in years. Authorizations 
have routinely expired, and we keep shoveling money at them, 
and the appropriators are acting independently of the 
authorizers. That seems to me to be the problem.
    Those are the observations I have drawn for the 3 years 
that I have been here, and I would appreciate your comments on 
them.
    Ms. Fraser. Yeah. Thank you very much.
    I think that you are absolutely right. One of the biggest 
problems that we have is that we are spending too much. There 
are a lot of pros and cons of the balanced budget amendment 
that I don't know if we have time to discuss today, but like 
the bills under consideration today, a balanced budget 
amendment would force the Congress to begin to address both our 
resources as well as the amount that we are spending.
    And you know, like any process, it needs to be accompanied 
by strong policy changes. So what we are looking at are 
mechanisms that are going to drive policy changes so that we 
have affordable spending and levels of taxation to cover that, 
whether that is balancing, or whether, as Chairman Ryan 
indicated, what we are doing is to drive down the debt to 
sustainable levels, especially when we consider our global 
capital markets and so forth.
    I absolutely agree that one of the fundamental problems 
here is that as Congress sets the budget, it is fighting over a 
smaller and smaller share in discretionary spending as 
entitlement programs continue to grow. I think that bringing 
them in some form so they continue to deliver predictable, 
reliable benefits, bringing them on budget in some way is very 
important.
    Mr. McClintock. Since my time is short, may I go to Mr. 
Holtz-Eakin for his thoughts on those observations?
    Mr. Holtz-Eakin. Well, I have testified on the balanced 
budget amendment. I applaud the notion of putting mandatory 
spending on a budget, because, in fact, these kinds of fiscal 
rules give the Congress a way to say no. I think that is one of 
the most succinct advantages of this.
    It is important that these things be in law, because the 
problems we have, there is no shortage of information. The CBO 
puts out----
    Mr. McClintock. Let me just cut right to the chase. With 
those two exceptions, the balanced budget amendment and the 
mandatory spending being brought within the budget process, is 
there really anything wrong with our process except that it is 
not being used?
    Mr. Holtz-Eakin. I believe the other additional 
improvements in this are to force the President to agree with 
the Congress and have the Congress agree between the House and 
Senate on a budget. We do not do that at the moment, and that 
is a huge flaw.
    Chairman Ryan. Thank you.
    Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    I am glad to hear that at least there is a starting point 
at some agreement here across the aisle, and that, as Mr. Aaron 
put it, at least we agree that something has to be done, and 
that is encouraging. I think that is an advance over where we 
were probably 2 years ago when one side was saying, let's do 
something about the deficit, and the other side was saying, 
let's not worry about the deficit. So at least we have made 
that progress.
    But I think at the end of the day, that is probably not 
nearly enough. We can't just agree that we are going to have to 
do something and then not actually do something.
    So I do want to talk a little bit about the BOLT Act, and I 
want to go to Mr. Aaron for a second, who was critical of it at 
a couple of different places.
    Mr. Aaron, I encourage you to consider the fact that the 
act does not completely exclude considerations for revenues or 
new taxes. It doesn't set caps, and we will talk about caps for 
a second. I understand you don't agree with those necessarily, 
but would you agree with me, sir, that there is nothing in the 
BOLT Act itself that automatically excludes the consideration 
of additional revenues, closing of loopholes, or new taxes?
    Mr. Aaron. There is nothing that any law could do to 
prohibit Congress from considering new taxes. Obviously, that 
is always within their prerogatives. The question is whether 
the procedural imperatives in the bill symmetrically and 
equally deal with the revenue and expenditure sides of the 
budget, and it doesn't.
    Mr. Mulvaney. And I can see that perspective. I thought you 
were taking the point that it was sort of like the most 
conservative version of the balanced budget amendment, which 
would have a supermajority necessarily raising taxes.
    Mr. Aaron. No.
    Mr. Mulvaney. Okay. So I see that you disagree with the 
philosophy of it embraced in, for example, the caps. Let's talk 
about that.
    And one of the sets of caps in the bill sets total spending 
at 20 percent of GDP, which I take it is something you would 
object to. Let me ask you a philosophical question as I sit 
here and try and build bipartisan support for this bill. Would 
you take it if it was 25 percent?
    Mr. Aaron. No.
    Mr. Mulvaney. How about 30?
    Mr. Aaron. I don't believe that any current Member of 
Congress is sufficiently wise to set a limit on what the size 
of the Federal Government should be regardless of 
circumstances. I think that is a prerogative of Members of 
Congress to decide that they should face the substantive issues 
involved and not rely on formulas.
    Mr. Mulvaney. That is fine. Let's exclude war, because I 
think that is something we would all agree on would be an 
emergency situation, or we might have to blow it through a cap. 
And I will just ask you a very simple question. Excluding war, 
is there any size of the Federal Government that would 
objectionable to you in terms of percentage----
    Mr. Aaron. Oh, sure. Lots of sizes of the Federal 
Government that would be objectionable to me.
    Mr. Mulvaney. Give me a number.
    Mr. Aaron. No, I won't give you a number. If you want to 
give me substantive policies, I will deal and respond to them, 
but I think dealing with numbers is an avoidance mechanism.
    Mr. Mulvaney. Well, dealing with numbers----
    Mr. Aaron. Let's deal with the specific policies involved. 
Is Social Security larger than it should be? Is Medicare larger 
than it should be? Is national defense larger than it should 
be? Let's talk about policy, and then we can have an informed 
debate. If we are talking about numbers, we are talking about 
what I regard as a kind of mindless abstraction.
    Mr. Mulvaney. Well, unfortunately on the Budget Committee 
oftentimes what we have to do deal with is numbers.
    Talk about the long-term projections. I understand the 
objection generally, understanding a little bit about how 
numbers work and about basic economics, that it is difficult to 
anticipate 5 or 10 or 20 years out. It was difficult to predict 
at the end of 2007 that we would have a recession just a couple 
of months later. But we do it at a certain level every day, 
don't we? I mean, we do 75 years, for example, with Social 
Security. It is not accurate, it is not perfect, but would you 
agree with me that it is better than doing nothing at all and 
just flying blind on a day-to-day basis?
    Mr. Aaron. I believe it is very important and valuable to 
do long-term projections. Exactly how far out one should look 
into the future, I think, varies depending on the program and 
the circumstances.
    With respect to Social Security, it seems to me 75-year 
projections are valuable. With respect to Medicare, I don't 
think they make a whole lot of sense because we have no idea 
what is going to be forthcoming in the way of medical 
technology down the road. But still, multiyear, 25, 30-year 
projections, it seems to me, are extremely valuable.
    What is not valuable is tying or requiring current actions 
to be taken to change the system in response to those 
projections, because we do know for a fact that historically 
they have been wrong by vast amounts. So as long as Congress is 
aware of those numbers, is doing those projections, is 
incorporating them into its debate about what current policy 
should be, I think you have gone exactly the right distance. If 
you introduce requirements that legislative actions be taken 
now in response to those projections of the distant future, I 
think you have gone a step too far.
    Mr. Mulvaney. Thank you.
    Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Huelskamp.
    Mr. Huelskamp. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask a few questions here in between committee 
meetings in another room here.
    First I want to start with--follow up with Mr. Aaron and 
your response to some questions from my colleague here. And you 
talked about numbers avoidance and mindless--what was that word 
you used, mindless----
    Mr. Aaron. I don't remember exactly what it was. It is in 
the record.
    Mr. Huelskamp. I am just trying to follow it. I am just 
trying to follow the numbers. I do have a numbers question for 
you.
    Mr. Aaron. Yes.
    Mr. Huelskamp. And given the current projections on 
growth--and I know you indicate that they are usually 
horrifically wrong. They are usually horrifically wrong in the 
same direction.
    Mr. Aaron. That is not true. It can be wrong in either 
direction. We----
    Mr. Huelskamp. It certainly could, but if you look at the 
projections of our entitlements, they have been horrifically 
underguessing the cost since the beginning, particularly on 
Medicare.
    Mr. Aaron. On Medicare there was a long period in which 
there were severe underestimates. In the case of Social 
Security, the estimated cost has been more or less on target 
for about the last 15 or 20 years. It has varied very little. 
It has gone up and down.
    Mr. Huelskamp. Sure. Sure.
    Mr. Aaron. It has moved in both directions, but we are back 
at about where the projections were 20 years ago.
    Mr. Huelskamp. Yeah, and I appreciate that. But the issue 
of numbers is pretty important. In your estimation how much 
longer can our Federal Government continue to run $3- to $4 
billion deficits every day? How long can that continue to 
occur, in your opinion?
    Mr. Aaron. I think it is, under current economic 
circumstances, on balance beneficial, a serious effort to 
reduce----
    Mr. Huelskamp. You think it can go on forever then? And the 
question was how long do you think it can go? You think it can 
go on forever then?
    Mr. Aaron. I was in process of trying to answer your 
question.
    The question of whether a deficit is helpful or harmful 
depends on the economic circumstances. Once the economy--the 
economic recovery is well established and well under way, I 
believe it is of urgent importance for Congress to take 
aggressive measures to reduce Federal budget deficits. An 
indefinite expansion of the national debt can do enormous harm 
to this country, could precipitate serious economic crisis, and 
I believe in the end Members of this body and the Senate will 
jointly prevent that from happening. Currently----
    Mr. Huelskamp. Okay.
    Mr. Aaron. Currently, in the midst of a recession, an 
attempt to balance the budget, it seems to me, would do 
considerable harm.
    Mr. Huelskamp. Okay. And I agree. I agree. And under the 
President's budget proposal, it didn't balance for 75 years. 
How much harm does that do if the President never proposed to 
ever balance the budget in the 75-year window?
    Mr. Aaron. I think that if one looks at the projection of 
the Congressional Budget Office, under current law, under 
current law, you will discover that the budget deficit comes 
down sharply and reaches a very sustainable level. Current law, 
as opposed to current policy, would entail significant tax 
increases and spending cuts. Current law would not permit 
Social Security to spend more than they have collected.
    Mr. Huelskamp. May I interrupt? The President's budget 
never balances. It never gets to a surplus in 75 years; never, 
ever.
    Mr. Aaron. But the debt-to-GDP ratio comes down.
    Mr. Huelskamp. The question as I ask and as you answered 
was, can you run deficits without economic harm? And you said, 
when you have an economic recovery, you should not run 
deficits. I agree with that statement. That was the statement 
that you gave, Mr. Aaron. I am just trying to figure out----
    Mr. Aaron. But I still think we should take aggressive 
measures to reduce the deficit.
    Mr. Huelskamp. Okay. I am just trying to get answers.
    Mr. Aaron. I am trying to answer.
    Mr. Huelskamp. Okay. Well, let me ask it again, if I might. 
Do you think we should ever run a surplus----
    Mr. Aaron. Oh, yes.
    Mr. Huelskamp [continuing]. In the next 75 years? How about 
in the next 75 years? Any time do you see an----
    Mr. Aaron. I don't have a specific date, but there are many 
circumstances under which a budget surplus would be highly 
desirable.
    Mr. Huelskamp. Okay. I agree with that. And again, the 
President's budget proposes to never run a surplus in 75 years, 
in 75 years, and the tremendous damage that could do to our 
economy if we don't look at entitlement spending--a year ago, 
by the way, was the anniversary of a vote in the House on the 
President's demand that we have a clean debt limit increase; 
clean, with no cuts, no proposals, and no idea what we are 
going to do for the next--I don't know what his budget was, 
still 75 years of null on balance as well--but an anniversary, 
and the House wisely said no including--it was a bipartisan no, 
that we should do something.
    Do you think that we should do a clean debt limit increase 
in December again, assuming that is when we hit the debt 
ceiling again?
    Mr. Aaron. I believe the debt ceiling should be completely 
separate from consideration of spending and revenue decisions. 
The debt ceiling is breached because of decisions that Congress 
has made in the past. If it wishes to change those policies, it 
should do so, but the idea that we are going to not raise the 
debt ceiling in the face of decisions that a majority of 
Congress has voted on and the President has signed seems to me 
to be to link policies that should not be linked.
    Mr. Huelskamp. I appreciate that opinion.
    Thank you, Mr. Chairman.
    Chairman Ryan. We have another Member Mr. Campbell, who is 
an author of one of these bills coming, so I will just start 
round two, if that is okay with the panel, if you have the 
time, in order to buy some time for him to come.
    Let me start. I have got a question for--I wanted to ask 
Dr. Holtz-Eakin a question about some CBO baseline issues, but 
before I get into that, I am kind of puzzled at the premise of 
the arguments used against these reforms, which were derived 
from this bipartisan working group document. And it kind of 
goes like this: We have a spending-driven debt crisis coming in 
this country. We all know that. It will threaten our economy 
and put us into an economic meltdown, or a recession, or a 
slowdown, whatever you want to say. And so in order to prepare 
for that eventuality, we don't want any spending caps so that 
we can spend more money to fight the fire at that time, which, 
you know, I know a lot of people believe in the demand side 
argument that is there.
    What we are trying to do here is prevent that from 
happening. What we are trying to do here is address the drivers 
of this spending-driven debt crisis so that we don't have a 
debt crisis, so that we don't have a recession stemming from a 
debt crisis. That is the whole purpose of this.
    And so if you want to look at where we are headed, it is 
Europe, because we are on the same path. That is what austerity 
is. Austerity is once the crisis has hit, once your yield curve 
starts going nuts, the bond markets have turned on you, massive 
surgery right away, indiscriminate across the board, pull the 
rug out from current seniors, raise taxes, slow down the 
economy, youth unemployment rate 21 percent, on, and on, and 
on. And that is because governments have overspent. Governments 
had made promises that they can't keep, and now they are broken 
promises to lots of people.
    But we are trying to preempt that from happening, prevent 
that from happening, by getting at the source of this problem: 
a spending-driven debt crisis. And what we have learned around 
here is that this process not only is not broken, it is not 
even working, it is not even being used. There is no budget 
process. There is no budget. Haven't had one for 3 years. And 
that means we are sticking with the status quo, which means we 
will have a debt crisis, which then, yeah, I suppose if you 
believe in the Keynesian, you know, demand-side stimulus 
argument, you want to be ready with the buckets of spending to 
throw at the fire.
    But what we want to do is put together a budget process 
that actually works to actually deliver on the fiscal targets 
to actually get Congress to put these reforms in place to 
prevent that crisis from ever occurring in the first place. 
That is what this is all about.
    And so when we see a working group of people with 
impressive credentials from both sides of the aisle coming to a 
consensus on some natural ideas on how to attack this problem, 
knowing that it is not a substitute for actually passing the 
laws that fix the problem, but are good backups, good 
enforcement mechanisms, good measurement sticks to make sure 
that Congress gets on task to actually fix the problem, we see 
that as productive. We see that as a constructive step in the 
right direction.
    And as I mentioned at the beginning, no one party is going 
to fix this thing on its own. There will have to be, you know, 
bipartisan agreements at the end of the day here to fix this 
mess. And what we see in front of us is a narrowing window of 
opportunity to do that in before we have a European-like crisis 
on our doorstep. That is the whole point here.
    It is the baseline issue I wanted to get to you, Doug. When 
you were Director of CBO, when you are running the baseline, 
there are times that administrative decisions increase CBO's 
estimate of spending even though the underlying statute did not 
change. The administration will take actions that they believe 
they have the authority under the law to do. How does CBO score 
that action?
    We had a VA issue, or I think they had an actuarial misfire 
which resulted in a change administratively that resulted in 
$13 billion in more direct spending. This year we have got 
Medicare Advantage cuts that are coming, which I think, likely 
for political reasons, a new demonstration project was formed, 
which has something like $8.35 billion in spending to delay 
those cuts, which will clearly accrue to adverse benefits for 
people currently on Medicare Advantage before the end of the 
year. How does CBO deal with this?
    Mr. Holtz-Eakin. Very straightforwardly. So a concrete 
example, Medicare Modernization Act passed, the prescription 
drug bill. CBO had a score under my tenure on that bill as it 
was passed. When HHS implemented the bill, they actually 
implemented a tighter formulary than we had anticipated that 
would come out of the bill. As a result, access to high-cost 
drugs was more limited than we expected, and the bill actually 
turned out to be cheaper, and we had to mark down in the 
baseline the expected Medicare outlays to reflect that. And it 
goes on all the time, in every program. What stands out are 
ones of large magnitude like the VA. Those are relatively 
unusual.
    Chairman Ryan. Time is up. Let's go to you, and then we 
will see if Mr. Campbell gets here.
    Mr. Van Hollen. Mr. Chairman, let me again thank the 
witnesses. Thank you, Mr. Chairman.
    Just to go back to the overall point that the chairman 
raised where there is consensus is that we need to reduce our 
deficits, especially as they are projected to rise over the 
long term. That is where there is consensus.
    Yes, there is a spending component. We recognize that. 
There is also a revenue component. Apparently our Republican 
colleagues do not recognize that component, at least not as 
part of the solution, despite the fact that every bipartisan 
group that has looked at that challenge recently has concluded 
that the way to tackle this problem is through a combination of 
policies that lead to spending reductions and policies that 
will increase the revenue component. And putting process bills 
forward in the absence of an agreement on the underlying policy 
issues is putting the cart before the horse, and I think that 
is what the testimony has been about.
    Mr. Holtz-Eakin, I mean, I would assume--I have some 
statements you made when you were the Director of the 
Congressional Budget Office, and I think from your testimony 
today you would agree with your earlier statements.
    Let me just read: ``The statutory''--this was 2004. Quote: 
``The statutory budget disciplines that expired in 2002, the 
limits on discretionary spending, and the pay-as-you-go 
requirement for new legislation affecting entitlements and 
revenue prove to be an effective enhancement of the budget 
process.''
    Do you agree with that?
    Mr. Holtz-Eakin. Yes.
    Mr. Van Hollen. Okay. Do you know that this bill, the first 
one, Mr. Campbell's bill, eliminates the statutory pay-as-you-
go requirement? Are you aware of that?
    Mr. Holtz-Eakin. I am aware of that, but it is a completely 
different approach. I mean, there are many ways to support the 
budget----
    Mr. Van Hollen. I am just saying that, as I understand, you 
agree that it was an effective enhancement to the budget 
process in the past. I am not saying there aren't others, but 
you would agree then that this legislation eliminates one 
effective budget-control enhancement. Would you agree with 
that?
    Mr. Holtz-Eakin. But I would stipulate it adds others. So, 
I mean, that is----
    Mr. Van Hollen. I know, but they are taking one tool out of 
the toolbox, right?
    Mr. Holtz-Eakin. And again, you have to budget for the 
circumstances in which you find yourself. PAYGO rules and 
discretionary caps--I mean, the PAYGO rules in particular stop 
you from making it worse, but there is nothing there that 
forces the Congress to make it better.
    Mr. Van Hollen. Mr. Holtz-Eakin, I agree with you. Stopping 
us from making it worse is a good thing. I mean, it doesn't 
solve the problem, but it is a good thing.
    I assume you also continue to agree that these kind of 
process reforms are most effective when there is an agreement 
on the underlying policies.
    Mr. Holtz-Eakin. I think everyone has said from the outset 
this is not a substitute for better policy.
    Mr. Van Hollen. Mr. Aaron, if you could just elaborate on--
well, let me just make this point, because, Mr. Chairman, you 
referred to this document a couple of times. Again, I think--I 
mean, I have looked at this document. I think it is a long way 
from this particular document to the three particular bills, 
especially the two bills that we are talking on, and I would 
just say----
    Chairman Ryan. They are not meant to be a complete--all of 
the points of the document. Some of the other bills we passed 
before----
    Mr. Van Hollen. Right.
    Chairman Ryan [continuing]. Out of here in that document, 
these are three of the ideas being recommended in the document.
    Mr. Van Hollen. Well, I would--just to be clear, I mean, it 
would be useful, I think, to ask every individual who is on 
this bipartisan group whether they agree with the three 
specific bills, because I daresay you would find a lot of 
Members whose names are on here who do not agree with the 
details, as Mr. Aaron has pointed out, of these bills. But----
    Mr. Aaron. May I say something at this point?
    Mr. Van Hollen. Sure.
    Mr. Aaron. As it happens, yesterday afternoon, as I was 
completing my testimony for this, Isabel Sawhill, who was a 
colleague at Brookings, and who is a signer of that particular 
document, walked by, and we had a brief conversation. I think 
you will find she is not sympathetic with this particular 
approach.
    In addition, I would like to mention and make available, 
should you wish it, a document that I was a party to that 
responded to the Taking Back Our Fiscal Future document that 
the chairman has mentioned. It, too, was signed by a lengthy 
roster of very distinguished economists, including one Nobel 
Prize winner, a former director of--a former CEA chairman, and 
a number of others in many ways, I think, as distinguished as 
the list that signed Taking Back Our Fiscal Future. This 
document indicated why we thought the approach taken in this 
document was flawed, and I would like to make it available to 
the committee, if you wish.
    Chairman Ryan. I would love to see what your board meetings 
at Brookings Institution are like.
    Mr. Aaron. Well, I think----
    Chairman Ryan. That is a big think tank you have got there.
    Mr. Aaron. It is worth noting that the Brookings 
Institution is, I think, the only think tank around where you 
can have senior members of staff debate each other, holding 
different positions, as, for example, Alice Rivlin and I do on 
the issue of the----
    Chairman Ryan. We enjoyed--I am digressing here.
    Mr. Campbell, I guess, is not going to show up. But we had 
a nice hearing at Ways and Means where Dr. Rivlin and Dr. Aaron 
debated each other on the issue of premium support. So you have 
got all sides of representation over there at Brookings.
    We will just close it out with Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman. I appreciate the 
second opportunity to ask just a couple of questions and move 
away from the bills, because one of the other things we get a 
chance to do on this committee is talk generally about ideas 
and policies, in addition to the specifics of bills. And you 
have heard a couple of things mentioned here during the course 
of today's discussion that I want to touch on very briefly 
before we go, which is the situation in Europe, and then also 
the debt ceiling.
    Ms. Fraser, I know it is very difficult to sort of sum up 
the causes behind the current situation in Greece, and Ireland, 
and Portugal, and Spain, but is it fair to say that 
overborrowing by those sovereigns, by those governments, is a 
major contributor to what is happening and the difficulties 
they are experiencing in those countries today?
    Ms. Fraser. Yeah. In my view, it is a part of 
overborrowing. They are spending too much. They are borrowing 
to do it. I think they also have large government. But they 
also don't have growing economies. And that is one of the 
biggest problems that they face right now is how do you rein in 
spending to stabilize your debt when you have a recessionary 
kind of economy that is not robust.
    And I think that is one of the advantages that we have in 
this Nation when it comes to solving our own problems is that 
we do have the underpinnings of a robust economy even though we 
are not growing at our capacity today.
    Mr. Mulvaney. And I think several of you mentioned the fact 
that if we don't do something differently--I will paraphrase. I 
don't want to misquote anybody. Unless we do something 
differently, we may well be facing a similar type of future as 
to what they are facing in Europe today.
    Dr. Holtz-Eakin, what would it look like in this country 
when we start to go through what Europe is going through today? 
Tell me what that would look like for the folks in this 
country.
    Mr. Holtz-Eakin. What it would look like is something that 
would make 2008, 2009 pale in comparison. You would have credit 
markets freeze up, inability of private borrowers to get even 
ordinary financing for their inventories and things like that. 
Main Street America would crumble. And in those moments 
international lenders would demand of the U.S. changes to the 
Federal budget that would be unpalatable to every American, but 
about which we would have no choice. There would be sharply 
higher taxes and slashes in spending that have nothing to do 
with thoughtful policy.
    Mr. Mulvaney. Thank you for mentioning that, because that 
is the point I am getting at that I don't think folks grasp 
back home, which is that we are going to get to the point where 
people don't want to lend us money under the same terms they 
have been lending us money. We can print it, but that is 
another debate for another day. But we could get to the point 
where folks don't want to lend us money at half a percent, or 1 
percent, or 25 basis points. They are going to ask for much 
larger spreads, which is exactly what is happening in Greece.
    So it comes to one of the overall discussion, Dr. Aaron, of 
when you are faced with that, when you are faced with interest 
rates of 6 or 8 or 10 percent, which are numbers that we have 
incurred as a government during my lifetime for our debt, how 
do you borrow your way out of that difficulty?
    Mr. Aaron. You don't.
    Mr. Mulvaney. But one of your criticisms of my BOLT Act was 
it didn't give you the flexibility that you needed to borrow 
money and to grow the size of the government when you go into a 
recession.
    Mr. Aaron. The United States currently is so far from the 
situation that I think Doug has correctly described could occur 
if debt piled up for an extended period of time that we are in 
a completely different world. The world we are in right now is 
one in which the United States remains the most secure and 
reliable borrower in the world, in which we are operating well 
below our economic capacity, and in which, in my view, the 
first and overwhelmingly the most important task facing our 
Nation is to get U.S. workers back on the job, to increase 
employment, to reduce unemployment, to avoid the human tragedy 
that is resulting for millions of people coming out of school 
and not being able to find work. And for that reason the first 
and most important problem is to increase the demand for the 
services of American workers. That should include tax policy 
that encourages private spending. It should include government 
expenditure that supports demand and provides essential 
services.
    We are going to return to full employment, and when we do, 
we have got to reverse that engine and begin to get our Federal 
budget under control.
    Mr. Mulvaney. Thank you.
    Mr. Aaron. I think it is a key to understand which problem 
comes first and the vital need to solve it.
    Mr. Mulvaney. I appreciate that.
    Finally, Mr. Chairman, I do want to touch very briefly on 
the debt ceiling issue that the ranking member raised. And I 
always enjoy dealing with folks who do pay attention to 
language and do pay attention to details is one of the things 
that I appreciate about the ranking member. And I couldn't help 
but notice the details of the language that you are using now 
in the discussions about the debt ceiling, which is no longer 
that this side is threatening to default on our debts, default 
on our obligations. The language is now ``meeting our 
obligations.'' I think this is sort of taking the veil off of 
the accusations last year that we are going to default on our 
debt. We heard it. We heard that if we didn't raise the debt 
ceiling, we would default on the debt. And I think we have put 
the lie to that. We are never going to default on our debt, 
because we have plenty of money to pay the debt--to pay our 
interest obligations. Similarly, we are always going to pay our 
Social Security obligations. We are going to continue to do 
those things.
    I think it is interesting to hear the language from the 
opposition now who has changed from ``defaulting on our debt'' 
to ``meeting our obligations.'' I am interested to hear that 
language as we go through the discussions between now and the 
end of the year.
    Mr. Van Hollen. Mr. Chairman, if I might, since the 
gentleman referred to a comment I had made. I would like to put 
in a record a transcript of a YouTube posting by Mr. Holtz-
Eakin on what would happen in the event that we had a--we hit 
the debt limit, including not making full payments of Social 
Security and zeroing out, I might add, defense spending and all 
other discretionary spending, among other things.
    [The information follows:]
    
    
    Chairman Ryan. I am sure that the hits will spike now.
    Mr. Holtz-Eakin. Thank you for the advertisement.
    Mr. Van Hollen. Absolutely. I actually hope a lot of people 
will turn to it. It was a well-done tape.
    Chairman Ryan. Thank you for your indulgence. We will 
conclude it here. The hearing is adjourned.
    [Whereupon, at 11:38 a.m., the committee was adjourned.]

                                  
