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



 
                                                        S. Hrg. 112-189

                  MAXIMIZING AMERICA'S PROSPERITY: HOW
             FISCAL RULES CAN RESTRAIN FEDERAL OVERSPENDING

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 27, 2011

                               __________

          Printed for the use of the Joint Economic Committee





                  U.S. GOVERNMENT PRINTING OFFICE
70-855                    WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001




                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE                               HOUSE OF REPRESENTATIVES
Robert P. Casey, Jr., Pennsylvania,  Kevin Brady, Texas, Vice Chairman
    Chairman                         Michael C. Burgess, M.D., Texas
Jeff Bingaman, New Mexico            John Campbell, California
Amy Klobuchar, Minnesota             Sean P. Duffy, Wisconsin
Jim Webb, Virginia                   Justin Amash, Michigan
Mark R. Warner, Virginia             Mick Mulvaney, South Carolina
Bernard Sanders, Vermont             Maurice D. Hinchey, New York
Jim DeMint, South Carolina           Carolyn B. Maloney, New York
Daniel Coats, Indiana                Loretta Sanchez, California
Mike Lee, Utah                       Elijah E. Cummings, Maryland
Pat Toomey, Pennsylvania

                 William E. Hansen, Executive Director
              Robert P. O'Quinn, Republican Staff Director
                            C O N T E N T S

                              ----------                              

                     Opening Statements of Members

Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas     1
Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from 
  Pennsylvania...................................................     3

                               Witnesses

Hon. James C. Miller III, Senior Advisor, Husch Blackwell, LLP 
  and Former Director of the Office of Management and Budget, 
  Washington, DC.................................................     5
Dr. Daniel J. Mitchell, Senior Fellow, Cato Institute, 
  Washington, DC.................................................     6
Hon. Robert D. Reischauer, President, Urban Institute, 
  Washington, DC.................................................     8

                       Submissions for the Record

Study titled ``Spend Less, Owe Less, Grow the Economy'' submitted 
  by Vice Chairman Kevin Brady...................................    30
Study titled ``Maximizing America's Prosperity'' submitted by 
  Vice Chairman Kevin Brady......................................    48
Prepared statement of Representative Kevin Brady.................    63
Prepared statement of Senator Robert P. Casey, Jr................    64
Prepared statement of Dr. James C. Miller III....................    65
Prepared statement of Dr. Daniel J. Mitchell.....................    66
Prepared statement of Dr. Robert D. Reischauer...................    69


MAXIMIZING AMERICA'S PROSPERITY: HOW FISCAL RULES CAN RESTRAIN FEDERAL 
                              OVERSPENDING

                              ----------                              


                        WEDNESDAY, JULY 27, 2011

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:15 a.m. in Room 
216, the Hart Senate Office Building, the Honorable Kevin 
Brady, Vice Chairman, presiding.
    Senators present: Casey, Klobuchar, DeMint, and Lee.
    Representatives present: Brady, Burgess, Campbell, and 
Maloney.
    Staff present: Gail Cohen, Will Hansen, Colleen Healy, 
Jesse Hervitz, Matt Solomon, Connie Foster, Robert O'Quinn, and 
Michael Connolly.

 OPENING STATEMENT OF HON. KEVIN BRADY, VICE CHAIRMAN, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Vice Chairman Brady. Well good morning, everyone. Thank you 
for being here. Between debt limit discussions and broken 
subways, we are running a little late today. Thank you for your 
patience.
    I am pleased to join with Senator Casey and Senator DeMint 
and other members of the JEC in hosting this hearing today to 
talk about how we can fundamentally restrain future spending in 
Congress; what tools work at the state level; what are the 
right measurements.
    The United States is on the precipice of a financial crisis 
because Washington really spends too much relative to the size 
of our economy. Under this President, Federal spending has 
grown far beyond the ability of our tax system to generate 
revenues from American families and businesses sufficient to 
pay for Washington's overspending. The resulting large budget 
deficits are causing an unsustainable accumulation of Federal 
debt.
    Business investment in new buildings, equipment, and 
software drive job creation--not Federal spending. Today, both 
large corporations and entrepreneurs are not investing because 
of uncertainty. They fear higher taxes and new burdensome 
regulations. Consequently, job creation is anemic, the 
unemployment rate remains stubbornly high, and American 
families are suffering.
    As one major businessman recently--a Democrat, it turns 
out--recently commented about the Administration, he described 
it as the greatest wet blanket to business and progress and job 
creation in my lifetime. The business community in this country 
is frightened to death.
    Overspending cannot be cured by a so-called ``balanced 
approach.'' A recent study, ``Spend Less, Owe Less, Grow the 
Economy,'' published by the Joint Economic Committee Republican 
staff this past March found that successful fiscal 
consolidations by our global competitors were composed of at 
least 85 percent spending reductions with additional revenues 
largely from non-tax sources such as asset sales. Balanced 
approaches that included both spending reductions and tax 
increases failed in other countries.
    [The study titled ``Spend Less, Owe Less, Grow the 
Economy'' appears in the Submissions for the Record on page 
30.]
    Instinctively, Americans know that Federal spending must be 
reduced. Nevertheless, Washington has demonstrated that it 
cannot maintain a spending diet. Public choice economists have 
identified many biases in our political system against fiscal 
restraint and for higher Federal spending.
    When I became Vice Chairman, I asked the Joint Economic 
Committee Republican staff to examine what Constitutional and 
statutory tools our global competitors and our states use to 
control their government spending. The results were published 
in the study, ``Maximizing America's Prosperity,'' this June. 
This study found that our global competitors capped the 
spending of their national government relative to the size of 
their economy to put their financial house in order. We must do 
the same.
    [The study titled ``Maximizing America's Prosperity'' 
appears in the Submissions for the Record on page 48.]
    Washington should also consider using a number of tools 
that our states employ to control their spending, including the 
item-reduction veto and sunset laws. The item-reduction veto 
allows state governments to reduce specific items in 
appropriations bills without vetoing an entire bill. Sunset 
laws require the periodic review of all state agencies and 
programs. State agencies and programs expire if the legislature 
does not review them before their sunset date.
    Interestingly, the study found that the effectiveness of 
state tax and expenditure limitations has varied greatly based 
on their design. In particular, expenditure limits tied to 
measures of a state's actual GDP have been breached during 
recessions when mandated spending cuts proved to be politically 
unsustainable.
    Today's hearing will examine how these lessons can be 
applied to the Federal Government. Like our global competitors, 
Congress must establish spending caps. Yet, from our own states 
we have learned that the durability of spending caps through 
business cycles depends in large part on how they're designed, 
their metrics.
    In my opinion, caps should be placed on Federal non-
interest spending. Congress can control discretionary and 
entitlement spending through legislation. However, interest 
spending is a function of past fiscal decisions, the Federal 
Reserve's monetary policy, and financial market conditions 
largely beyond the control of Congress.
    Clearly, any spending caps should be related to the size of 
the economy over time. However, actual GDP poses a problem 
because it fluctuates with the business cycle. Therefore, 
spending caps based on actual GDP allow rapid spending growth 
during boom times only to force large, politically 
unsustainable spending cuts during recessions.
    A better choice is potential GDP. Potential GDP is a 
measure of what GDP would be at full employment without 
inflation. It is a well understood and a widely used economic 
concept. For example, Stanford University economist John Taylor 
uses potential GDP in the ``Taylor Rule'' to estimate what the 
Federal Reserve's target rate for Federal funds ought to be. 
The Congressional Budget Office already calculates potential 
GDP for its 10-year budget window.
    Potential GDP is the GDP family's smarter brother. Using 
potential GDP provides a more stable path for controllable 
spending through time, eliminating the spending blowouts on the 
upswing and preventing draconian spending cuts on the downswing 
that have not proven to be achievable.
    Given the differences between Republicans and Democrats on 
the size and scope of the Federal Government, it is unlikely 
that we will agree on the level of spending caps. However, I 
hope that we could agree on the metrics used to design them.
    I look forward to hearing the testimony of today's 
witnesses. And with that, I would like to yield to the Chairman 
of the Joint Economic Committee, Senator Casey.
    [The prepared statement of Representative Kevin Brady 
appears in the Submissions for the Record on page 63.]

  OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., CHAIRMAN, A 
                 U.S. SENATOR FROM PENNSYLVANIA

    Chairman Casey. Vice Chairman Brady, thanks very much. I 
don't know if Senator DeMint--did you want to jump ahead?
    Senator DeMint. [Nods in the negative.]
    Chairman Casey. I will be brief. I will submit a statement 
for the record, but I want to thank our Vice Chairman for 
calling this hearing. I know we will have a chance to examine 
some very difficult issues, and especially in light of where we 
are today with a resolution to this debt ceiling debate that we 
have been having.
    I think the key thing here is that I think there is broad 
agreement that we not only have to get a resolution of this, 
but we have got to do so by way of reducing spending.
    One of the reasons that I favor the approach taken by the 
Major Leader, Senator Reid, is that there is a substantial 
reduction in discretionary spending. And that would be the 
second time, if it were enacted, the second time this year 
where those numbers have been reduced. And I think that 
indicates the willingness that folks have here in the Congress 
to reduce spending.
    But there is more to do, and there is also an awareness I 
think that no matter what happens between now and the deadline, 
that we are going to have a lot of work to do after that--a lot 
of work to do in terms of cutting spending, a lot of work to do 
to putting us on a much firmer fiscal, or a much firmer 
foundation for fiscal responsibility.
    So we have got a lot of work to do. The key thing I think 
for the American people to see is that we are trying to do this 
in a bipartisan way. This is not just about getting the policy 
right; how we do it, and the manner and approach we take is 
going to be very important.
    So I want to thank the Vice Chairman for calling the 
hearing, and I will have to leave early after the testimony of 
Dr. Miller, Dr. Mitchell, and Dr. Reischauer. But I will be 
here for the testimony and then I have to go, but I know the 
hearing is in good hands with our Vice Chairman.
    Thank you.
    [The prepared statement of Senator Robert P. Casey, Jr. 
appears in the Submissions for the Record on page 64.]
    Vice Chairman Brady. Mr. Chairman, thank you very much for 
your participation and for working together on a series of 
hearings about our economy and jobs and the path forward, and 
the right size of government as we strengthen our economy.
    I would ask--normally we do not ask for opening statements, 
but I know Senator DeMint has a very busy schedule today, and 
certainly would offer that opportunity.
    Senator DeMint. No, thank you.
    Vice Chairman Brady. Thank you very much for being here. 
And Representative Campbell, as well. Thank you.
    I would like to take a moment to introduce our 
distinguished panel of three witnesses, two of whom happen to 
be Georgia Bulldogs: Dr. James C. Miller III is the Senior 
Advisor to the International Commercial Law Firm of Husch 
Blackwell, LLP, and a member of the Board of Directors of 
Americans for Prosperity. Dr. Miller is one of the country's 
leading public choice economists. His experience in government 
includes serving as Chairman of the Federal Trade Commission 
and Director of the Office of Management and Budget during the 
Reagan Administration; and Chairman of the Board of Directors 
of the U.S. Postal Service during the second Bush 
Administration. Dr. Miller's private-sector experience includes 
serving on the Board of Directors of several organizations, and 
as Chairman of the Capital Analysis Group of Howery LLP. He is 
a frequent contributor to many national media outlets. Dr. 
Miller holds a B.B.A., Economics, from the University of 
Georgia; and a PhD in Economics from the University of 
Virginia. We are pleased to have you here today as a witness, 
Dr. Miller.
    Dr. Daniel J. Mitchell, our second Bulldog, is a Senior 
Fellow and tax expert at the Cato Institute. Prior to his time 
at Cato, Dr. Mitchell was a Senior Fellow with the Heritage 
Foundation. He knows the Hill well, having worked as an 
economist for Senator Bob Packwood and the Senate Finance 
Committee. Dr. Mitchell also contributes to several national 
newspapers and is a frequent guest on radio and television 
shows. He holds Bachelor's and Master's Degrees in Economics 
from the University of Georgia, and a PhD in Economics from 
George Mason University. Thank you for joining us today, Dr. 
Mitchell.
    Dr. Robert D. Reischauer is President of the Urban 
Institute and is a nationally known expert on the Federal 
budget, Medicare, and Social Security. Dr. Reischauer served as 
the Director of the nonpartisan Congressional Budget Office 
from 1989 to 1995, and currently serves on the boards of 
several educational nonprofit organizations. He is one of the 
two Public Trustees of the Social Security and Medicare Trust 
Fund. Much like our other two witnesses, Dr. Reischauer is a 
frequent contributor to the public policy debate in newspapers, 
on the radio, and television. Dr. Reischauer holds an A.B. in 
Political Science from Harvard University; and a M.I. and PhD 
in Economics from Columbia University. Thank you, Dr. 
Reischauer for sharing your experience today.
    With that, I would invite Dr. Miller to begin the 
testimony. And again, welcome, all.

 STATEMENT OF HON. JAMES C. MILLER III, SENIOR ADVISOR, HUSCH 
     BLACKWELL, L.L.P AND FORMER DIRECTOR OF THE OFFICE OF 
             MANAGEMENT AND BUDGET, WASHINGTON, DC

    Dr. Miller. Thank you, Mr. Vice Chairman. I appreciate the 
opportunity of being with you today and to testify about this 
proposed Maximizing America's Prosperity Act. It addresses a 
very important question, perhaps a little bit abstract compared 
to all the nitty gritty of the negotiations going on today, but 
nevertheless I think a very important one. And that is: How do 
you maximize economic activity and thereby maximize income per 
capita, incomes per capita?
    This Act relates this to the proportion of government--the 
expenditures of government as a proportion of GDP. And why is 
that important? The reason is that there is--while the 
economists are debating over precise numbers--there is general 
consensus that there is a relationship between the size of 
government and our economy and the ability of our economy to 
produce goods and services.
    Obviously at root state of society, there is very little 
output, where people do not have property rights and so forth. 
But as you apply property rights, you enforce contracts, and 
this sort of thing, output rises. But if you get too large--
that is, you get the government too large--this output begins 
to fall. It can no longer maintain this rise.
    And so a challenge, it seems to me, for the Members of our 
Congress is to look and see--to understand this relationship 
better, and to consciously try to choose the size of 
government, relative size of government, that maximizes 
prosperity. And if not doing that, recognize what the tradeoffs 
are.
    This bill, like I said, does address the question of 
output. I have a little graph in my testimony that depicts the 
relationship that I just described. The MAP Act places a 
ceiling on spending, or actually noninterest spending as a 
proportion of potential GDP. And it provides for mechanisms to 
keep that spending under control.
    It provides, for example, sequestration of budget 
resources. I have experience with that because Gramm-Rudman-
Hollings was passed and implemented while I was Budget 
Director. It provides for an item-reduction veto for the 
President. It requires the President's budget submissions to 
comply with the restraints of the MAP Act.
    It establishes a commission to recommend the sunsetting of 
agencies--and goodness knows, while there are a lot of 
criticisms of agencies that are not justified, there is a lot 
of criticism that is justified. And some agencies simply should 
be sunsetted, and this commission would supply, or would come 
up with those kinds of answers. And there would be an expedited 
procedure for Congress to consider those recommendations.
    Let me just mention three additional points:
    First of all, there are things that you could do in 
addition to the MAP Act. It's not that you should exclude all 
these things. For example, the Cut, Cap, and Balance 
legislation passed by the House includes a requirement to put 
before the states a balanced budget amendment. I think that 
would be a good idea, in addition to the passage of the MAP 
Act.
    Second, the cost of government includes--I think we would 
all agree here--the cost of government includes not only 
spending but the cost of regulation. And I have urged for some 
years that Congress impose a regulatory budget and have the 
budget, or a regulatory budgeting process just like the fiscal 
budget process, and that you would want to add that cost in the 
cap, or you might want to change the numbers for that reason. 
Also, tax expenditures are basically an alternative way of 
accomplishing the same thing you can accomplish with direct 
outlays.
    And relatedly, there will be attempts to get around the 
strictures of the MAP Act by going for more regulation, or for 
tax expenditures. So you want to close off those loopholes and 
keep those opportunities from abusing the purposes of the MAP 
Act.
    Mr. Chairman, and Mr. Vice Chairman, that concludes my 
remarks. Thank you.
    [The prepared statement of Hon. James C. Miller III appears 
in the Submissions for the Record on page 65.]
    Vice Chairman Brady. Thank you, Dr. Miller.
    Dr. Mitchell.

   STATEMENT OF DR. DANIEL J. MITCHELL, SENIOR FELLOW, CATO 
                   INSTITUTE, WASHINGTON, DC

    Dr. Mitchell. Thank you to the Chairman, and Members of the 
Committee, for this opportunity to testify.
    In the past 10 years under Presidents of both Parties, the 
burden of Federal spending has jumped from 18.2 percent of GDP 
to close to 25 percent of GDP--but that is just the tip of the 
iceberg. Thanks to demographic changes and poorly designed 
entitlement programs, the burden of Federal spending as a share 
of GDP could double over the next several decades according to 
CBO's long-term forecast.
    The question is: What are we trying to fix when we are 
looking at budget process reforms? This is a critical question. 
Most people think that deficits and debt are the problems with 
fiscal policy. Excessive red ink surely is a problem, as places 
such as Greece and Portugal demonstrate, but deficits and debt 
should be viewed as symptoms. The real problem is that 
governments are too big and they are spending too much.
    The true fiscal tax is the amount of money that government 
diverts from the productive sector of the economy. And whether 
it finances that spending by borrowing, or whether it finances 
that spending by taxes, it still results in a transfer of 
resources from the private sector to the public sector. And so 
I think the important thing, when you are looking at budget 
process reforms, is trying to address that issue.
    But it is also important to have very realistic goals. No 
budget process reform is going to be perfect. The appropriate 
analogy is that fiscal rules are sort of like anti-crime 
mechanisms. If you put locks on your door, that does not mean 
you will not ever be burglarized. Even if you have bars on your 
window, an alarm system, and gun ownership, you are not 
guaranteed that you will never be victimized by crime. But the 
perfect should not be the enemy of the good, particularly when 
the alternative is to let the country slowly but surely sink 
into some sort of a European-style fiscal crisis.
    I touch on several things in my written testimony, 
including a balanced budget amendment, line-item veto, current-
services' budgeting, but in my brief time for oral testimony I 
want to focus on the idea of spending caps and what should they 
try to achieve.
    A spending cap is, of course, the notion that there should 
be some upper limit on how much government can spend in any 
given year. Those spending caps can be very narrow--say, just 
applying to discretionary spending; or they can be very broad.
    When you are talking about defining a spending cap, there 
are two ways of doing it. You can just say: government can only 
spend so much of GDP--however GDP is defined; or you can say: 
government can only spend this nominal amount every single 
year.
    In theory they could wind up being exactly the same thing. 
I like the idea of focusing on GDP, and I especially like the 
idea of looking at potential GDP, because, as was discussed in 
the opening statement by Vice Chairman Brady, when you focus on 
actual GDP and you have booms and busts in a business cycle, 
you wind up allowing politicians to spend too much money 
perhaps when the economy is booming. And we certainly see this 
in states.
    One of the reasons why states get in fiscal trouble is that 
when the economy is doing very well, their revenues are rising 
8, 9, 10 percent a year, and they wind up letting spending 
increase by that much. Then, when the economy goes into a 
downturn, all of a sudden, the revenue disappears and they wind 
up in very, very serious trouble, as we have seen with States 
such as California and Illinois.
    Whereas, if you focus on potential GDP, you not only solve 
that problem, you smooth out the spending patterns of the 
government, and you create something that is more stable.
    One of the problems with Gramm-Rudman was not a problem 
with the legislation itself, but a problem with the political 
durability of the legislation. As we moved into an economic 
downturn, the Gramm-Rudman spending caps--which were very 
indirect because they were actually deficit caps, which 
basically meant government could spend the amount of revenue 
coming in plus the deficit cap--those indirect spending caps 
under Gramm-Rudman simply could not be sustained when the 
potential sequester became too large, or Congress was being 
asked to do too much. And so potential GDP largely solves that 
problem.
    Another advantage of potential GDP, if you are using some 
forecast of future GDP, is that there is a risk that lawmakers 
might pressure CBO or OMB.
    And then, real quickly, I want to talk about what spending 
to cap. Obviously we know from looking at the CBO and OMB 
forecast that entitlements are the main long-term problems. So 
while discretionary caps are good, some cap that applies to all 
spending is better. But if you take out interest, you actually 
focus on just the spending that Congress truly can control 
through legislation.
    So I think the idea of focusing on primary spending--in 
other words, total expenditures minus debt interest--is a very 
reasonable way of doing it. It also has certain advantages in 
not complicating tax policy debates.
    But I see I am out of time, so I will stop there. Thank you 
very much.
    [The prepared statement of Daniel J. Mitchell appears in 
the Submissions for the Record on page 66.]
    Vice Chairman Brady. Thank you, Dr. Mitchell. Appreciate 
it. Dr. Reischauer.

   STATEMENT OF HON. ROBERT D. REISCHAUER, PRESIDENT, URBAN 
                   INSTITUTE, WASHINGTON, DC

    Dr. Reischauer. Vice Chairman Brady, Chairman Casey, 
Members of the Committee:
    I appreciate the opportunity to discuss the contribution 
that fiscal rules might play to restrain Federal spending. As 
my prepared statement makes clear, I think fiscal rules can 
play a rather limited role in getting the Nation's fiscal house 
in order.
    Let me elaborate on this by offering a few observations 
about some of the fiscal rules mentioned in the letter of 
invitation.
    What would happen if the existing Concurrent Budget 
Resolution were replaced with a Joint Resolution requiring the 
President's signature?
    Well first, the Congress would give up some of the 
budgetary independence that it gained when it went to the 
Congressional Budget Process in 1974.
    Second, it is likely that it would be even more difficult 
to formulate a budget resolution with three cooks in the 
kitchen representing two Branches of Government versus the 
current situation where we have the two Chambers of Congress 
representing one Branch of Government. And that has not proven 
very successful in the last few years.
    Third, a Joint Resolution would fog responsibility for 
failure as few would be able to judge which of the three 
participants was responsible for budgetary failure.
    Overall, I do not see why one would expect this reform to 
have an appreciable impact on spending or deficits, although it 
could make post-budget resolution decisions and processes less 
contentious and speedier.
    What about discretionary spending caps enforced through 
sequestration?
    This tool is clearly going to play a major role in whatever 
resolution we have to the debt ceiling crisis, and that seems 
appropriate considering that the discretionary spending caps of 
the 1990s appear to have been quite successful. But before you 
place too much emphasis on this mechanism, you should examine 
the record carefully.
    Between 1990 and 2000, total discretionary spending 
measured in inflation-adjusted dollars fell by almost 6 
percent, or an even more dramatic 27 percent drop as a 
percentage of GDP. But this successful record was largely a 
story about the defense budget and the rapid economic growth of 
the last half of the 1990s.
    The Berlin Wall came down in the Fall of 1989. The Soviet 
Empire collapsed, bringing the Cold War to an end. The 
combination of this new international environment and the 
spending caps resulted in a reduction in defense outlays of 
over 20 percent during that decade measured in real or constant 
dollars, a reduction as a fraction of GDP of 42 percent.
    The story was quite different if one looks at the 
nondefense side of the budget where the constant dollar 
spending actually increased by 17 percent over this period. And 
as a percent of GDP, it just decreased marginally, but that was 
due to the rapid growth in the economy in the last half of the 
1990s, some of which proved to be illusory.
    The take-away lesson from the 1990 experience with spending 
caps is that this tool can be effective if there exists a broad 
bipartisan consensus that certain areas of the budget should be 
scaled back in a significant way. But spending caps are 
relatively easy to agree to because no one knows which specific 
programs will be reduced disproportionately to achieve these 
caps.
    This creates a real risk that more will be promised than 
can be delivered, and the caps will prove to be unsustainable 
as they did after 1997.
    What about enhanced recision authority?
    The Budget Control and Impoundment Act gives the President 
the authority to propose recisions, but Congress has no 
obligation to take them up. And so the President's requests are 
frequently ignored. Enhanced recision authority would stop this 
benign neglect by requiring Congress to vote on the President's 
recision requests unamended, up or down, within a fixed time 
period.
    Enhanced recision would give the President a strengthened 
ability to weed out narrow, special interest allocations that 
do not have widespread Congressional support. It is doubtful, 
however, that large amounts of budget authority would be 
rescinded under this tool, and furthermore one has to make sure 
that whatever budget authority was rescinded did not get 
reallocated back into the pot but rather was offset by 
reductions in the budget resolution's allocation of authority.
    Balanced budget amendments to the Constitution could dampen 
the growth of spending, but this would come, in my opinion, at 
a very high price. The automatic stabilizing role that the 
Federal Government now plays for the economy would be seriously 
compromised. Economic downturns would be both deepened and 
prolonged, and vulnerable populations would suffer.
    Under a balanced budget amendment, the Federal Government 
will lose some of the budgetary flexibility it has now and its 
ability to respond quickly to unexpected events, be they 
natural or manmade catastrophes.
    Some proposed versions of a balanced budget amendment would 
make it difficult for Social Security or the government's 
pension plans to draw down reserves that they have built up 
over the years to pay benefits.
    Similar constraints would face the FDIC, the PBGC, and many 
of the government's insurance and loan guarantee programs, 
effectively eliminating the reasons for their existence.
    While the wording of the balanced budget amendments being 
considered by the Congress seems simple and clear, all of these 
proposals raise thorny questions involving definitions, 
implementation challenges, and enforcement.
    For example, answers would have to be found to such 
questions as: What is the budget? What constitutes the budget? 
Is Congress or the President responsible for achieving balance? 
And through what processes?
    What remedies would be imposed if balance were not 
achieved? And on whom? To assure the balanced budget amendment 
could achieve its objectives, Congress would probably have to 
cede some of its short-run authority over the budget to the 
President.
    Let me conclude by noting the fiscal rules can help frame 
and organize budget decisions. They can influence expectations, 
and they can provide a bit of political cover to those who must 
make difficult votes. But they cannot create or substitute for 
political will.
    History has shown us that if fiscal rules are found to be 
too stringent, they are going to be ignored, waived, 
circumvented, or repealed. Recent experience suggests that 
there exists a bottomless well of budget gimmicks that 
lawmakers can draw on to avoid the discipline implied by fiscal 
rules they have endorsed but cannot find the will to impose----
    Vice Chairman Brady. Doctor, at this point we have exceeded 
the time by about two-and-a-half minutes.
    Dr. Reischauer. Excuse me.
    Vice Chairman Brady. We will make sure your full--no, no. 
We will make sure your full statement is included in the 
record.
    [The prepared statement of Hon. Robert D. Reischauer 
appears in the Submissions for the Record on page 69.]
    Vice Chairman Brady. We will begin questioning. We 
appreciate being joined by Senator Lee and by Congressman 
Burgess, as well as Senator Klobuchar. Thank you.
    The size of a country's debt relative to its economy is a 
major indicator of its financial health. The amount of deficit 
related to its economy is the same. The size of government 
related to its economy and to its revenues are critical.
    Republican or Democrat, everyone agrees that a nearly 25 
percent--a government that is nearly 25 percent the size of the 
economy is unsustainable. So how we shrink the size of this 
government over time is critical. And those spending caps 
matter.
    In the MAP Act--and both Dr. Miller and Dr. Mitchell 
referenced this--we use different metrics. Rather than total 
spending that includes interest, which is not controllable--it 
is like a credit card; you cannot control necessarily the 
interest rate on your card, but you can control the monthly 
principal and continue to focus to shrink that over time.
    The same with GDP. Not only are there wide bands, it was 
revised several times over the years. You are always looking 
back at it, and it can be gamed. People try to get around it by 
making continual rollover estimations, or estimates of it. 
Potential GDP tracks actual GDP but in a much tighter band, so 
in the future you constrain spending during good economic times 
and the cuts are not quite so steep during the tough times.
    My question is: For lawmakers who are so accustomed to 
measuring all spending rather than controllable spending, and 
actual GDP versus the more stable potential GDP, as economists 
how do you translate this into a real-world example that 
lawmakers can better understand? Because it is a shift from the 
way we have thought about spending caps in the past.
    Dr. Miller. Dr. Mitchell.
    Dr. Miller. Well nothing comes to my mind as an easily 
grasped analogy or metaphor on this. I think I have no 
criticism of your choice of potential GDP. In fact, I think 
potential GDP, as Dr. Mitchell was mentioning, may have a 
stabilizing effect along the same lines that Dr. Reischauer was 
suggesting that the Federal spending does play with our 
national economy.
    If I might, Mr. Chairman, Mr. Vice Chairman, I would like 
to mention--I am not sure if it is--maybe it is a clarification 
of what Bob was saying. I think that these kinds of 
institutional restraints do work. They absolutely do work.
    If you look at the Gramm-Rudman-Hollings, it really worked. 
It brought the deficit way down. And it would have brought it 
all the way down to zero had Congress not panicked and changed 
the rules, or changed the targets when they did.
    Secondly, I did some work with one of my colleagues, Mark 
Crane, who, Mr. Chairman, Mr. Casey, is the William Simon 
Professor of Economics at Lafayette College, and we looked at 
state restraints. It may have been material that you covered in 
that report you were talking about. But states that had 
balanced budget requirements tended to control spending better.
    States that had a line-item veto for the governor tended to 
control things better. And all those institutional 
arrangements, they do work. But I think Bob's point is correct 
to the extent that he is saying that they may not work--they 
would not work if Congress undermines them.
    So you are making a big statement if you pass this kind of 
legislation because you are basically going--you need to commit 
that you are going to live under those constraints in the 
future.
    Vice Chairman Brady. Thank you, Dr. Miller.
    Dr. Mitchell.
    Dr. Mitchell. Your question is a challenge because I 
suspect that the average person, or for that matter the average 
lawmaker, when told that we are going to have some budget rule 
focused on potential GDP, they are going to say, wait, that 
sounds fishy. They are going to be suspicious. And for that 
matter, primary spending. Wait, wait. What's that?
    So there really is an educational mission here. This 
hearing obviously is part of it. As I am sure you know, Senator 
Corker has some legislation in the Senate, and so there is a 
lot of discussion about this, and everyone seems to be talking 
about discretionary caps.
    I just think it is a question of almost Member to Member 
education, staff to staff education, so they understand that 
this is not just some strange idea pulled out of nowhere that 
allows for some slipperiness. It is something that actually 
makes the legislation much more durable over time.
    And I gave my little example that putting locks on your 
doors does not mean you will never get victimized by crime. 
Maybe another way of thinking about it, when trying to put 
together budget process reform is: If I go on a diet and I want 
to lose 20 pounds and I only lose 10 pounds, it is still good 
that I went on a diet even if I did not achieve all of what I 
wanted. It is better not to have those extra 10 pounds.
    And so, yes, I fully expect that any budget process reform, 
no matter how well designed, is going to face challenges in 
enforcing and implementing it in the future just because it is 
the nature of the political system for people to try to get 
around it. But by all means, it is better than not doing 
something.
    Vice Chairman Brady. It is the biggest challenge when we 
set these guardrails, to put them in place in a way where, when 
things get a little tough, as Dr. Miller pointed out, both 
parties do not hold hands and jump the guardrails. That has 
been the challenge in the past. Appreciate the commitment.
    Senator Casey.
    Chairman Casey. Thanks very much, Mr. Vice Chairman.
    Dr. Reischauer, I wanted to ask you two basic questions, 
but then also if we have time refer back to part of your 
testimony.
    Am I right that you were at the Congressional Budget Office 
from 1977 to 1981, and then Director from 1989 to 1995?
    Dr. Reischauer. Yes.
    Chairman Casey. That is a long----
    Dr. Reischauer. I mean, not--I actually was the first 
employee of CBO. Alice Rivlin and I got in the cab. In 1975 I 
was sort of a kid at the Brookings Institution, and we came 
down to the Capitol. She was sworn in. There was a reception. 
The lights went out, and she said to me: Help set it up.
    [Laughter.]
    And I had to find a home, and I had to figure out how to 
get franking privileges, all of the complexities of starting 
something here. So it was really 1975 through the beginning of 
1981, and then 1989 to 1995.
    Chairman Casey. So present at the creation.
    Dr. Reischauer. But don't blame me.
    [Laughter.]
    Chairman Casey. They are in the news again. But in light of 
that experience, and you have been through a lot of these 
budget debates and what economic conditions were like in the 
1980s and the 1990s versus today. Anything you can tell us 
about how you compare the conditions then as to what they are 
now? And use that as a basis to analyze how we approach these 
budget issues. Or is that significant, or relevant?
    Dr. Reischauer. It is both significant and relevant.
    There is a huge difference between where we were in the 
1970s when we were worried about growth and budgets, and the 
1980 deficit problems. And that was, that we looked forward and 
we said: We've got to do something because the Baby Boom 
generation is going to retire in a couple of decades.
    Well, it is a couple of decades later and they are 
retiring. The demographic tsunami is on us. And we have not, in 
a sense, prepared ourselves for that.
    If you go back to the first years I was at CBO, there was 
one very huge difference when we were projecting the budget 
situation. And that was, we did not have an indexed-tax system. 
And so it was almost always true that no matter how deep the 
deficit was in the budget year, when you looked forward things 
corrected themselves. And they corrected themselves because the 
tax burden rose as people's effective tax rates rose as their 
incomes rose, and they got into higher and higher brackets.
    I am all for the indexation of the tax system, but we had 
in that, you know, an automatic fix for the deficit problems 
that we faced.
    I just want to add one thing, because it will probably be 
one of the few opportunities I have to show that there is some 
common agreement on this panel.
    That is, the use of potential GDP is really a good idea. 
And also if one were going to go down the route that Dr. 
Mitchell talked about, talking about spending, ex-interest is 
the right way to go about it.
    So I am on board with that. But I would add one caution. 
That is, that potential GDP is not a concept that everyone 
agrees how it should be calculated. When we are talking about 
actual GDP, when we are talking about outlays, when we are 
talking about revenues, there is no debate about what those 
involve. It is complicated to figure out what potential GDP is, 
and therefore it is difficult to explain to the average person 
I think.
    Thank you.
    Chairman Casey. Well, Doctor, if you guys can stay a couple 
of hours maybe we can get agreement on the debt ceiling, too. 
That would be great.
    [Laughter.]
    One final question. I know I am down to about 30 or so 
seconds. When you assess the last decade or so, how did we get 
to where we are now? What is your sense? We had not just 
surpluses in the late 1990s, but the projection was I guess 
trillions in surplus.
    Dr. Reischauer. Yes, it was sort of amusing. Eleven years 
ago we were having an argument on how the Federal Reserve would 
manage monetary policy when there was no Federal debt to buy 
and sell?
    And the answer to that question of course was: Well, they 
could begin buying and selling GMAC paper, Fannie and Freddie 
paper, et cetera.
    Well, half of it came true. They are.
    [Laughter.]
    But the other half, the elimination of Federal debt, seems 
to have fallen a bit short.
    Chairman Casey. I have a couple more but if I do not get 
them to you I will have to submit them in writing. Thank you.
    Vice Chairman Brady. Thank you, Mr. Chairman.
    Representative Campbell.
    Representative Campbell. Thank you, Mr. Vice Chairman.
    You know I think the reason we are talking about spending 
caps and so forth is, in the 12 years since I lost my mind and 
left the private sector and came into this line of work, it is 
politically really easy to spend money and give people money or 
services and not ask them to pay for all of it. And that is 
just a really easy political thing to do.
    So I think the natural thing that happens in any 
legislative body is to create deficits, because it is 
politically easy. There are some of my colleagues who never 
vote for a tax increase, but never vote for a spending cut 
either, because neither one is particularly popular.
    So, you know, there are a lot of things we have in life as 
individuals that we know are the right thing to do but we do 
not like to do. So what we generally do is create some external 
discipline that makes us do what we know we ought to do but 
will not do without that discipline--whether that is the 
trainer at the gym, or the money that comes out of your 401K, 
comes out of your paycheck so that you save for your 
retirement.
    That is what drives my interest in spending caps, or 
balanced budgets, or whatever.
    Dr. Reischauer, the first question is for you. I certainly 
get the impression from your testimony you are not a fan of 
balanced budget amendments.
    Is there a form of a spending limit or spending cap that 
you like, or that you think is better than the status quo that 
I just described?
    Dr. Reischauer. Well----
    Representative Campbell. Or let me phrase it more broadly. 
Is there an external discipline that you believe could help the 
situation to keep us from being driven toward these increasing 
and unsustainable deficits?
    Dr. Reischauer [continuing]. Well I think that the various 
measures that I talked about, excluding the balanced budget 
amendment, can make small contributions. But they are not going 
to solve the problem.
    The question here I think has much more to do with the 
structure of our political system and the fact that you are 
elected every two years, Senators every six years; you can 
communicate to the public all of the good things you do 
directly on television; there is very little in the way of 
Party discipline, and you want to continue to be elected. And 
that is not changed by a set of rules that, when faced with 
tough decisions that might mean that you face a primary 
opponent, or lose in a general election, it is very difficult 
to in a sense do the ``right'' thing for the long-run fiscal 
health of the Nation.
    If you do, no one will thank you 20 years from now. It will 
be sort of unclear the contribution that you did make. I do not 
think that is any different from many of us in our current jobs 
where we do not make decisions that could lead to us being 
asked to leave. You know, it is just that you bear a much 
greater responsibility for the future of this country than I 
do.
    Representative Campbell. Okay, I want to just, before my 
time runs out----
    Dr. Reischauer. Oh, sorry.
    Representative Campbell. Dr. Mitchell, what are your 
thoughts on the disciplines? And also, we are talking about a 
spending cap. I am curious about your view of a balanced budget 
amendment versus a spending cap, or any external discipline 
that we have not discussed.
    Dr. Mitchell. I am obviously a big fan of spending caps. I 
focused on that in my oral testimony just because I think there 
is actually some nontrivial chance that something like that 
could emerge from the political process this year.
    I am also a fan of a balanced budget amendment, 
specifically the kind of amendment that has super-majority 
requirements for tax increases, and limit spending as a share 
of GDP. And I view those two as complementary because the 
spending caps get you to a point in the process where you 
actually are finally balanced. And then some sort of 
Constitutional reform can keep you there.
    The challenge of course is how do you get a two-thirds vote 
in both Houses of Congress and ratification by three-fourths of 
the States? I hope that happens in my lifetime. I am not sure I 
would bet a lot of money on it, and therefore I was focusing 
more on spending caps just for purposes of my oral testimony.
    Representative Campbell. Okay, let me--Dr. Miller, the same 
question as Dr. Mitchell's.
    Dr. Miller. Well let me say, if your goal is to maximize 
prosperity I think it would be better--if you had to choose one 
or the other--would be to go with the MAP Act, with appropriate 
restraints on the abuse of regulation and tax expenditures as a 
way of getting around the constraints.
    But the balanced budget amendment would be very helpful 
inasmuch as, because of fiscal illusion the public generally, 
and their elected representatives, tend to underestimate the 
cost of government that is financed by debt. And if you had a 
balanced budget amendment, then you could not do that.
    Representative Campbell. Thank you. Thank you, Mr. 
Chairman.
    Vice Chairman Brady. Thank you. Former Chairwoman Maloney.
    Representative Maloney. First of all, thank you for calling 
this hearing. And it is good to see you again, Dr. Reischauer. 
Welcome back. It is very nice to see all of you. I regret I was 
in another hearing earlier.
    Chairman Bernanke testified last week before the Financial 
Services Committee that cutting too deeply too strongly would 
impede economic recovery and would increase unemployment in our 
country. That is then another challenge for us.
    So I would like to ask Dr. Reischauer to respond to his 
comments. We face many challenges, one of which is a fragile 
economy that we need to make sure continues to recover.
    Dr. Reischauer.
    Dr. Reischauer. I agree with that completely. We are not in 
a situation right now where it would be good for the economy if 
sharp fiscal contraction were enacted by Congress. At the same 
time, I think it is imperative that decisions be made now that 
are credible and specific that will begin tightening our fiscal 
stance by 2013.
    I think that it would be a huge tragedy if that did not 
occur. But as we have seen from the impact that the cutbacks by 
state and local governments are having on our overall 
employment and our overall economy, contraction at this point 
would be damaging and could even threaten another recession.
    Representative Maloney. Well that is very sobering. I have 
been told that right now our revenues are 15 percent of the GDP 
and 25 percent expenditures. So it is very out of line. And I 
would like your comments if that is a correct number. I read 
that in the paper. I do not know if it is correct or not, but 
having only 15 percent revenues with 25 percent expenditures, 
that is not sustainable.
    And your comments on what we could do to address that, and 
certainly putting it more in balance would help with economic 
growth, I would think, again Dr. Reischauer.
    Dr. Reischauer. Those are roughly the right numbers. And 
you are absolutely correct that that is an unsustainable 
situation. And as I suggested in the answer to my previous 
question, we should move forward with legislation that will 
guarantee that that gap narrows.
    I, as opposed to my colleagues here, would narrow the gap 
in different ways. I would rely partially on revenue increases 
associated with tax reform. But I think it is essential that we 
not focus solely on discretionary spending when we are 
ratcheting down the spending side of the budget. That has not 
been a major cause of the deficits that we are experiencing 
now, nor is it projected to be a cause of future deficits.
    What we have to do is reform the entitlement programs that 
are projected to grow rather substantially, but do that within 
a framework that preserves their fundamental objectives to help 
elderly, disabled, and low-income groups share in the American 
dream.
    Representative Maloney. And some of these proposals, one 
thing that I find very disturbing about this economic downturn 
is that the gap between the haves and the have-nots is growing, 
and in fact it is larger than it ever has been in the history 
of our country.
    Some of us are concerned that the cuts directed to the 
seniors and the needy will only broaden that gap and cause more 
turmoil in trying to get back to a balanced economy that works 
for everyone.
    On the balanced budget amendment, one of the things that 
helps our families grow is the ability to borrow money to buy a 
car so you can get to work, to invest in a company so that you 
can be an entrepreneur and grow it and make it prosper. And I 
would like to ask Dr. Reischauer and Dr. Miller, on the 
balanced budget amendment, if one should be ratified and passed 
in our country, what would the impact be on our ability not 
only to respond to catastrophes such as a 9/11 where we had to 
reorganize the whole spending of our country to respond to 
homeland security and more efforts to protect the Homeland, or 
our ability to invest in innovation and areas to grow our 
economy.
    What would the impact of a balanced budget amendment be on 
the ability of our country to do, like a family does, take out 
a loan to buy a car to get to work; to take out a loan to 
invest in new technologies; to create the new ideas that not 
only employ our people but move our country forward?
    Dr. Miller, if you could comment on it--and Dr. Mitchell, 
too, if you would like. I know my time is up, I believe. Thank 
you. Thank you, Mr. Chairman.
    Dr. Miller. Congresswoman, as I said in my statement, in an 
ideal world the Federal Government would borrow sometimes, run 
surpluses at times, et cetera. But the world is not ideal. It 
is not perfect. And so this rough-and-ready rule of a balanced 
budget would lead, in my judgment, to a much better situation 
than we have today.
    Secondly, the proposals for a balanced budget requirement 
that I have seen--and I will not comment on cap and balance, 
the legislation that recently passed the House--but most of 
them I have seen incorporate a supermajority option. That is, 
that you could violate this balanced budget requirement upon a 
supermajority passed by both Houses of Congress and signed by 
the President. And that would meet your concern for some kind 
of an emergency.
    Let me say also with respect to Dr. Reischauer's point 
about--and to the issue that you raise, Congresswoman, about 
the possible damage to the economy of immediately having a 
balanced budget, given the difference between spending as a 
portion of GDP and revenue as a portion of GDP.
    First of all, under the MAP Act those limits would not 
apply immediately.
    And secondly, as I believe passage of that Act and the 
affirmation and guarantee that outlays by the Federal 
Government would be a declining portion of GDP, would lead to 
economic growth to increase--given that our tax rates would not 
be going down much--you would have an increase in the total 
amount of revenue generated by the economy.
    And so that would itself narrow the deficit. So I think 
there is--I agree that we are in a very unusual situation, as I 
think you were pointing to, and we need to be careful how we 
get out of this box. But I think that it is doable to get out 
of the box without having substantial adverse effect on the 
economy.
    Vice Chairman Brady. All right. Thank you all very much.
    Senator Lee.
    Senator Lee. Thank you. And thank you, Chairman Brady, for 
calling this meeting and assembling this great panel of 
experts.
    As we approach the August 2nd debt limit deadline, I like 
most of my colleagues am very concerned about the double-
pronged threat that we face. I want to emphasize the double-
pronged nature of the threat because there is only one side of 
it I feel has gotten adequate attention.
    On the one hand we face a very real threat that has gotten 
a lot of attention, that if we do not raise the debt limit by 
August 2nd bad things will happen. Bad things do happen when 
you are traveling at 120 miles an hour and you immediately 
decelerate to 50 or 60 miles an hour. If you do it a little bit 
more gradually, things can be a little bit less painful and 
injurious.
    On the other hand, we also face a different risk, one that 
has gotten far too little attention. That is, that if we raise 
the debt limit reflexively, if we raise the debt limit the same 
way we have always raised it in the past, if we raise it 
especially to an unprecedented $2.4 trillion amount all in one 
fell swoop without putting in permanent binding structural 
spending reform mechanisms that will fundamentally change the 
way that we spend money in Washington and put us on a 
trajectory toward a balanced budget, we will face a credit 
downgrade.
    And that threat could well be as severe, if not more 
severe, than the threat associated with not raising it, at 
least in the short-term period.
    It is at that point that I think our most vulnerable 
populations in America face perhaps the greatest threat. If we 
look at what happened in Greece when Greece went into its 
economic tailspin after its debt-to-GDP ratio went well above 
100 percent, let's just say it is a very bad time to be a poor 
person, or an elderly person, or a person who for whatever 
reason is dependent on government assistance or government 
programs of one sort or another in Greece.
    Because when that happens, when your sovereign credit 
rating goes down that badly that quickly, it is the poor and 
the otherwise vulnerable that suffer the most.
    So, Dr. Reischauer, I have a question in response to your 
testimony, both your initial testimony and your answers to some 
of these questions. You referred to America's vulnerable 
populations and the fact that if we had a balanced budget 
amendment in place that might limit or impair our ability to 
provide them the services that they need to support them.
    But is it not also true, Doctor, that if we do raise the 
debt limit again, and if we do not put in place a permanent 
structural binding spending reform mechanism, that could also 
bring about revenue shortfalls that are equally if not more 
harsh, draconian, and abrupt?
    Dr. Reischauer. My responses to that are, the reference in 
my answers to the previous questions and in my prepared 
statement. It was about the cyclical nature of the economy. If 
you had a balanced budget amendment you would have a hard time 
paying unemployment benefits, SNAP benefits, various things 
that people depend on. That is sort of a short-term issue.
    On the long-term issue, I agree with you completely that if 
we let this fiscal situation continue to run out of control 
until there is a response from international markets and we are 
forced to make changes not on our own timetable, not maybe in 
our own priorities, but being dictated to by our creditors or 
international lending agencies, the fate of low-income 
vulnerable elderly populations will be severely tested, I 
think.
    One reason I have long been an advocate of putting our 
fiscal house in order is precisely that: I think it is in the 
long run best interests of those who are less fortunate to get 
this done, and get it done quickly.
    Whether one needs a balanced budget amendment or some 
extraordinary set of rules to do this, I am a bit skeptical 
because I have watched this process over a 30-year period and 
many times we have said, well, you know, this is the silver 
bullet, this is the process reform that will make it happen. 
And it has not happened.
    Senator Lee. But does the fact that it has not passed and 
we still have not solved the problem prove your point? Or does 
it prove the opposite point? I mean, one could argue, could one 
not, that because it has not passed, and because we have still 
not solved the problem, perhaps we ought to do that which we 
have failed to do in the past, which is to Constitutionally 
obligate ourselves to do it?
    Dr. Reischauer. That is an argument we could have, but I 
don't want to take the risk.
    Senator Lee. Understood. And I see my time has expired. 
Thank you.
    Vice Chairman Brady. Thank you, Senator. Congressman 
Burgess.
    Representative Burgess. Thank you, Chairman.
    Let me ask a question. I apologize that I wasn't here at 
the beginning, but as you know we are debating and redebating 
the issues related to the debt ceiling. I just have to say for 
the record, I am grateful this country has a statutory debt 
limit. I do not think we would be doing this hard work right 
now if we were not required to do it.
    So for those who argue against a debt limit, I would just 
say that if we did not have the debt limit, as Senator Lee 
points out, we could be Greece. So I am grateful we are having 
the discussions. They are not easy to have. They are sometimes 
painful internally and externally, but I am grateful we are 
doing it.
    We woke up this morning to the news that General Electric 
was moving some of its imaging jobs over to China. And there 
have been various theories put forward as to why that might be 
happening, but I think when we get beyond the discussion of the 
debt limit and what happens with our spending, the bigger 
problem that we have of course is the joblessness that has been 
pervasive for the last two-and-a-half years and shows no sign 
of abating.
    And, you know, I am from Texas and we are not doing as 
badly as other parts of the country, but I would like us to do 
a lot better. And I certainly want my country to do a lot 
better. When you look at the joblessness of the 20-year-olds, 
that is startling that we have a whole generation that may 
never know the value and reward of work.
    When you look at particularly the young people who are 
minorities, the joblessness rate is absolutely staggering. So 
now we are seeing jobs from a large, revered American company 
going over to China. And one of the reasons postulated is that 
it may be the Tax Code that is creating this impetus for this 
company to move those jobs.
    I was just wondering, Dr. Mitchell, do you have an opinion 
about that?
    Dr. Mitchell. There is no question that the U.S. corporate 
tax rate is among the highest in the world, sort of neck-and-
neck with Japan for the dubious honor of the highest corporate 
tax rate among industrialized nations.
    I remember that President Bush had a tax reform panel--I 
forget what the formal title of the tax reform panel was--but 
one of the testimonies to that panel, I think, was from the tax 
vice president at Intel who said that the biggest difference in 
the cost of locating a plant in the U.S. versus--I think 
Malaysia was their other choice, but I assume China would be 
similar--was not labor costs; it was taxation. That would be 
the number one advantage for them to build a plant overseas.
    Now obviously maybe it would be different in a labor-
intensive plant versus a high-tech plant, but I do think that 
our tax system is extraordinarily punitive to savings and 
investment in general, our corporate tax rate is very, very 
high, and is the statutory tax rate that acts as the marginal 
tax rate on new investment and new profits for companies. So I 
do think it is important to look at that statutory corporate 
tax rate. It is just punitive and self-destructive.
    Representative Burgess. So raising that rate, elevating 
that rate to add revenues to the Federal Treasury would be 
counterproductive?
    Dr. Mitchell. Well Kevin Hassett at the American Enterprise 
Institute--I think along with Alex Breaux, estimated that the 
revenue-maximizing corporate tax rate was closer to 25 percent 
over the long run. So not only would it be self-destructive to 
competitiveness and job creation in the U.S., but it very 
likely might have negative impact on the amount of revenue 
government collects.
    The greater danger is most likely not so much a higher 
corporate tax rate--I have not heard too many people talk about 
that; the greater danger is in increased double taxation of 
saving and investment through increased double taxation of 
dividends and capital gain. And those of course have an impact 
on the decisions of people to defer consumption and to save and 
invest. I think that is probably a greater danger. Although it 
is indirect, it could be just as injurious to our 
competitiveness.
    Representative Burgess. Representative Maloney talked about 
the fact that the tax rate, effectively 15 percent of GDP, and 
that needs to be corrected. Wouldn't normally that correct over 
time?
    Dr. Mitchell. If you look at the CBO 10-year forecast, they 
assume a baseline of current law, which means the Bush tax cuts 
would expire, and revenues would climb to over 19 percent of 
GDP by the end of the decade. If you assume that the 2001 and 
2003 tax cuts are extended or made permanent, you would still 
have revenues climbing up to about 18 percent of GDP, which is 
the long-run average.
    So if you look at our long-run fiscal imbalance, it is not 
because revenues, at least in the medium- and long-term will be 
below their historical levels; it is because spending has risen 
above its long-run levels. Historically we had 20 percent 
spending, 18 percent revenue. Well revenues are going to climb 
back up to 18 percent, and that is without any rosy scenarios. 
CBO's estimates do not show any great growth. It is the 
spending that has skyrocketed.
    Representative Burgess. Let me just quickly ask Dr. 
Reischauer a question, if I can, in my remaining time.
    Dr. Reischauer, we hear a lot of talk, and you spoke about 
the social safety net to some degree. Representative Maloney 
talked about the stress being put on Medicare. Now proposals 
have been put forward. There has been a lot of discussion about 
them.
    Can you tell us, is there a substantial difference between 
a voucher and a program of premium support?
    Dr. Reischauer. This has become a semantic issue of some 
importance to people. I was under the impression that premium 
support, and I have some responsibility for coining the term in 
an article Henry Aaron and I wrote back in 1995, associates the 
payment to the underlying cost of the service being delivered. 
Whereas in a voucher that not necessarily was the case.
    As Chairman Ryan's proposal suggests, that would be 
associated with price increases, general price increases, not 
medical price increases. So that is the distinction that some 
people make.
    Representative Burgess. And do you feel that it is a worthy 
distinction?
    Dr. Reischauer. Oh, I think it is a very important one. You 
know, especially when we are dealing with health care which has 
tended to rise in our measured inflation much faster than other 
goods and services.
    I for one think that we have a bit of confusion in this 
because, whereas as inflation is usually measured as the 
increase in the price of a good or service adjusted for 
qualitative change, more often when we talk about medical care 
there are huge improvements in quality or in the nature of the 
service. We can do things now that we could not do 10 years 
ago, and those are not factored in appropriately.
    But our expectations as a Nation are that everyone should 
benefit from whatever improvement and new technology comes on 
the market.
    Vice Chairman Brady. Thank you very much.
    Representative Burgess. I thank the Chairman for his 
indulgence.
    Vice Chairman Brady. No, no, that's called ``deficit 
questioning'' when you go beyond the five minutes.
    [Laughter.]
    Can I ask, what lessons have we learned from past fiscal 
rules Congress has put in place to restrain spending? There is 
a mixed record. What has worked? When has it not worked? And 
what would we do differently to create the guardrails to create 
discipline around future spending? What should we keep in mind 
as we do that?
    Dr. Mitchell. I would echo what Dr. Miller said, that I 
think Gramm-Rudman worked. It was grossly unsuccessful compared 
to the ideal, but compared to what might have happened without 
Gramm-Rudman, I think it was one of the few things I can look 
back on and think, okay, that made a difference in terms of how 
Congress behaved.
    We did of course have discretionary spending caps in the 
1990s. That to me was a little bit like having a 50-mile-an-
hour speed limit in a school zone. Yes, they were by and large 
adhered to, but I thought they were too high. But that is just 
a matter of judgment, of course. But for the most part, we just 
have not really done much budget process. We have had budget 
deals. We have had budget summits. We have had budget 
agreements. But those are just sort of just packages of 
legislation that tend to have a very short half-life anyhow.
    Budget process reform? There is really not much real-world 
evidence to look at--unless you are going to other countries, 
or looking at the states as Jim was mentioning.
    Vice Chairman Brady. Dr. Miller.
    Dr. Miller. I think what we have learned is that if you put 
these in place, or these restraints in place, and follow them, 
they work. If you violate them, they do not work.
    The legislation that established, among other things, the 
budget resolution that is supposed to be done by April and has 
a whole set of time limits, works when it is followed by 
Congress. But of course it has not been followed by Congress in 
decades.
    And the Gramm-Rudman-Hollings, as Dr. Mitchell was 
mentioning, did work and it brought the deficit down 
dramatically, but then it was violated by Congress. So you have 
got to stick with them.
    And these other--the other evidence from the states is that 
they work, so long as they are not violated. And keep in mind 
there are these avenues even under the MAP Act as written, 
there would be these avenues for getting around the restraints 
by increasing the amount of government regulation, or Federal 
regulation, but also the use or abuse of tax expenditures.
    Vice Chairman Brady. Thank you.
    Dr. Reischauer.
    Dr. Reischauer. There is more agreement on this panel than 
I expected. I believe that the Gramm-Rudman-Hollings procedures 
modestly held down the growth of spending, kept this as a 
front-burner issue so the Congress and the President were 
fighting it every year, but it was a terribly designed process.
    I think the discretionary spending caps allowed us to 
reduce defense spending very significantly, and that probably 
would not have occurred to the degree that it did had we not 
had those caps.
    I think the PAYGO procedures that we had during the 1990s 
were very important at stopping proposals that members had for 
expanded mandatory programs or tax cuts. I was running CBO 
during that era, and the number of times things came to us to 
look at, and when we gave our score to them they never 
appeared--they died--was quite impressive.
    The volume of ``good ideas'' that came rushing forth, 
attractive things, you know, was hugely reduced. So I think all 
of these things can make a small amount of difference, but the 
real question goes back to Dr. Miller's point.
    He said, if you adhere to these they will work. So what can 
you enact that will help you adhere to them when the going gets 
tough? When the American people do not want the cuts? They want 
the tax cuts. They want the spending increases. And this is 
very unpopular. And that is really a question I think for you 
to try and answer.
    Vice Chairman Brady. Thank you, Doctor.
    Dr. Miller. Could I give you just a quick set of metrics 
here?
    Vice Chairman Brady. Yes.
    Dr. Miller. In fiscal year 1987 the forecast for the 
deficit was something like $221 billion. That was the deficit. 
And this was on total spending of almost $1 trillion.
    The next year it came down to $108 billion, cut in half. So 
I mean that was Gramm-Rudman-Hollings. So it does work. But 
then of course the following year is when the Congress passed 
and the President had to sign--it's a long story--basically a 
redefining of those targets.
    Vice Chairman Brady. Thank you, Doctor.
    Representative Campbell.
    Representative Campbell. Thank you. I will just ask you all 
just one simple question, since it is something that is kind of 
boiling out there right now, the debt limit is. A balanced 
budget amendment that is so-called ``clean'' or ``straight up'' 
or however you want to do it, no supermajority for taxes, no 
spending limit attached, a supermajority to override clearly 
but otherwise just a straight balanced budget amendment, in 
each of your opinions is that a worthy thing to have? Does it 
help the situation, or not? I will start with you, Dr. Miller.
    Dr. Miller. Yes.
    Representative Campbell. Well that was quick. Dr. Mitchell.
    Dr. Mitchell. I will be a little more loquacious. It is a 
double-edged sword. One of the reasons I like Senator Lee's 
balanced budget amendment is because it, in reality, is more of 
a spending limit amendment. It is just called a balanced budget 
amendment because that is one of the features it has.
    I do worry because we have 49 out of 50 states with 
balanced budget requirements of some kind, and that obviously 
has not stopped some states from taxing and spending themselves 
into a fiscal ditch.
    Representative Campbell. That would include my home State 
of California.
    Dr. Mitchell. I was not going to point that out, but if you 
are willing to say so----
    [Laughter.]
    Representative Campbell. I point it out all the time.
    Dr. Mitchell. The Mostra Criteria in Europe, where these 
rules were 3 percent of GDP deficits and 60 percent of GDP 
debt, has not stopped the Europeans from taxing and spending 
themselves into fiscal crisis.
    So in my gloomier pessimistic moments, I worry that just a 
plain vanilla watered down balanced budget amendment would be 
seen as a Constitutional obligation to raise taxes, which I 
think would simply be like a dog chasing its tail. So I am 
leery about that.
    But I can certainly see that, well, if we did nothing else, 
we may have no choice but a plain balanced budget amendment. 
But it is not my preference.
    Representative Campbell. Okay, Dr. Reischauer.
    Dr. Reischauer. It will not surprise you that my answer to 
the question is: No. And one reason why I would say that--it is 
certainly better than the alternatives, but still not 
acceptable in my view--a balanced budget amendment to get 
through the Congress, to define all of the issues that I talked 
about, and to be ratified by the states, probably would take 
until around 2020, which I think is long after we have to 
settle this set of issues. And were we to--and pass through the 
Congress, a balanced budget amendment, the tendency of 
legislators I think would be to say, well, we have done that. 
Let's relax. And international markets are not going to let us 
relax.
    We have to face up to this issue in the next year or two.
    Representative Campbell. And I could not agree with you 
more on that point. However, I would love to think that this 
would be the last fiscal crisis the country will ever have; but 
I think that is not likely to be the case.
    So just for what it is worth, I mean, you are right. It 
would not have any impact. We are going to, in my view, we are 
dealing with a statutory debt limit. I talk about the real debt 
limit, which is the point out there at which markets no longer 
will buy our debt except at a severely higher interest rate.
    And unless we make progress on the real debt limit soon, 
the statutory debt limit is not going to matter very much over 
time. But you are right, we have to solve this problem much 
quicker than that. But it would at least maybe help future 
crises--future Congresses from getting to this point in decades 
ahead from now.
    I will yield back, Mr. Chairman.
    Vice Chairman Brady. Thank you, Congressman. Representative 
Maloney.
    Representative Maloney. I would like to ask all the 
panelists, I am really concerned, and we seem to be more 
challenged than I thought we would be at this point in passing 
something.
    What would happen if we did not raise the debt ceiling? 
What would happen if we defaulted? And would we not be self-
inflicting a wound, increasing our required payments to service 
our debt, and making our debt problem worse? And are these 
immediate problems that we face, is it worth this to get a 
budget deal done by August 2nd?
    I would just like to ask the same question to all of you. 
This is really the question of the day. This is what is before 
Congress and what is being debated. We have all read the press 
reports, and we are in serious challenges right now.
    So what would happen? Do you want to start, Dr. Miller, and 
go down?
    Dr. Miller. Thank you, Congresswoman.
    First, as I laid out in an op ed piece in The Hill 
recently, the debt ceiling is much more forgiving than I think 
people have talked about.
    Also, it is not a ``cliff'' as the kind of debt ceiling we 
had in the Reagan Administration where the ceiling is here 
(indicating) and then it falls automatically unless extended. 
It just continues. The current one just continues. In the case 
of the cliff, it is rather catastrophic because you cannot roll 
over any of the debt as it comes due.
    What you have to do would be to make the kinds of decisions 
any family would make if their credit card company called them 
up and says: You have hit the limit and you cannot have any 
more. That means that you have to make choices.
    So I mean the President will of course realize that the 
money coming in, the revenues coming in, are far more than what 
is required to pay the interest on the debt, far more than is 
required to pay Social Security, and pay Medicare, and most of 
the other entitlement programs, to pay our Armed Forces, and 
probably to pay most of the Federal employees.
    But you would have to make some hard decisions on the 
programs. And it would be relatively easy for awhile. You could 
also sell some assets. I'll just tell you a secret here: When I 
was Budget Director I wrote a memo to the President when we 
were facing one of these things and said: Well, Mr. President, 
if it comes down to the worst, you could sell the gold in Fort 
Knox. I got a note back from him that says: We're not selling 
the gold in Fort Knox.
    But there are a lot of ways that you can do something to 
ameliorate the problems. But it will not last very long. So it 
will be increasingly costly for the Congress and the President 
to have gridlock.
    Dr. Mitchell. The only thing I would add to what Professor 
Miller said is that spending is projected to be, $3.7 trillion 
or so; revenues $2.2 trillion. So obviously if we can no longer 
borrow, it would require overnight, a 35, to 40 percent 
reduction in government spending compared to what we have 
projected and promised for the year.
    As was just mentioned, there is obviously more than enough 
money to pay interest on the debt. So I do not think default is 
a real possibility.
    But there is no question that a 35 to 40 percent reduction 
overnight means real disruption. It means hospitals not getting 
their Medicare reimbursements. It means grants not going out to 
state and local government. It would mean all sorts of things 
like we have seen in the State of Illinois where vendors were 
going six months, nine months without payment.
    So as much as I want a much smaller government, that is 
probably not the best way to do it.
    Dr. Reischauer. I think my colleagues have made this sound 
a lot more ``doable'' than in fact it is. All of Dr. Mitchell's 
reactions would occur, but there are economic consequences.
    And if this lasts let's say more than a week or two, you 
are going to see economic activity begin to shrink. You are 
going to see spreading hardship among those who are getting a 
partial check when they expected a total--a large check, or 
applied for unemployment benefits and were denied them because 
there was no money.
    You know, besides that, once it occurred and was remedied, 
the tail would exist for a long time. Contractors in the 
Federal Government would say ``there's a risk I'm not going to 
get paid in a timely way, I'm going to charge a little more for 
this.''
    Lenders to the United States will say: You know this is not 
the safest bet in the world. I want a little higher interest 
rate. And we will be paying large amounts of money, tribute in 
a sense, for our failure to act in a responsible way when the 
time came.
    Representative Maloney. Thank you. My time has expired.
    Vice Chairman Brady. Thank you. Congressman Burgess, for 
the final question.
    Representative Burgess. Thank you. Dr. Reischauer, you were 
talking about the effect of the balanced budget amendment on 
some of the social safety nets, and you specifically referenced 
Social Security.
    Now I am sitting here addressing three high-powered 
economists, and I'm just a simple country doctor, but as I 
understand the Social Security Trust Fund and the way it was 
designed--now true enough, the Federal Government would have 
great difficulty in having to monetize the debt that we owe to 
the Trust Fund--but Social Security payments would continue 
because they are taken out of the Trust Fund, not out of the 
General Treasury. Is that correct?
    Dr. Reischauer. What I was talking about is some of the 
balanced budget amendments that say you cannot spend more in 
any single year than the revenues coming into the Federal 
Government. Then, to draw down the Trust Fund you are going to 
have to reduce other spending of the government. I mean, you 
could. I said it would make it more difficult, especially if 
you were sort of up at the limit, meaning you had passed 
appropriation bills and mandatory spending and all that that 
equaled, you thought, what the revenue stream would be during 
the year.
    Representative Burgess. But there are still dollars owed to 
the Trust Fund that would be available to pay the 
beneficiaries' Social Security?
    Dr. Reischauer. Yes, but every dollar you drew you would 
have to reduce some other spending. It is not that it is 
impossible; it is just that it is more difficult.
    Representative Burgess. There are certainly some that would 
argue that we should have never been spending the money 
collected for Social Security as general revenue in the first 
place; that that was a mistake to allow the commingling of 
assets. And were we a private law firm, we might all go to jail 
for having done that.
    But at the end of--if the Trust Fund at some point in the 
future becomes exhausted, what then happens to the benefits 
paid to people who are receiving Social Security at that point? 
Are the benefits not limited to the amount of money that is 
collected with the Social Security Tax?
    Dr. Reischauer. Yes, they are. And I believe under current 
law, rather than have a ratable reduction in benefits of 
something around 25 percent, as would occur, you would delay 
payments to individuals. I think that is the way the legal 
structure works.
    Representative Burgess. But there will be consequences.
    Dr. Reischauer. There certainly will.
    Representative Burgess. And, you know, I have not been here 
a long period of time, but long enough to have lived through 
the previous Administration's discussion of let's do something 
to improve the long-term solvency of Social Security. It has 
come up from time to time. It becomes a political football. But 
in truth, we are not being honest with people by simply saying 
the status quo will allow these benefits to be paid in 
perpetuity with no negative consequence to the benefits paid. 
Is that correct?
    Dr. Reischauer. That is correct, but I think the Trustees 
Reports, which I have some responsibility for, state that very 
clearly and have for many years.
    Representative Burgess. As you know----
    Dr. Reischauer. Few people read it.
    [Laughter.]
    It is not bedtime reading, to pick up the Trustees Report.
    Representative Burgess. But the truth--there's the old 
saying: A lie can get around the world twice before the truth 
gets a chance to put his pants on. And that is a problem.
    And yet, despite the political downside, I think this is 
something which we need to be honestly discussing. And 
unfortunately a lot of the rhetoric that surrounds the Ryan 
budget, and Medicare, and a lot of the rhetoric that surrounded 
when President Bush was talking about trying to save Social 
Security, it becomes a huge distraction and Congress has not 
done its work.
    And as a consequence, at some point in the future there is 
going to be a very, very serious price to be paid. And I will 
just never forget the day 20 years ago when, as a young 40-
year-old physician I am in an audience listening to Paul 
Tsongas the day after President Clinton gave his health care 
speech to a Joint Session of Congress, not a dry eye in the 
house as reported by Senator Tsongas, because President Clinton 
described five new entitlement programs and we cannot pay for 
the ones that we have now.
    And if we did not do something, in 20 years' time, if we 
did not do something to address the crisis coming in 
entitlements, in 20 years' time there likely could be an 
intergenerational conflict the likes of which this country has 
never seen. That was 20 years ago when I was 40. That seemed so 
far off and so theoretical, why worry about it? The problem is, 
it is 20 years later and that time now is at hand. And it is 
important that this Congress face those facts and deal with 
those hard problems because they are not going to be easier 10 
years from now.
    Thank you, Mr. Chairman, for your indulgence. I will yield 
back, unless, Doctor, you wanted to make a comment on that?
    Dr. Reischauer. Your call for action is one I agree with 
completely.
    Vice Chairman Brady. There is no substitute for political 
will in getting our financial house in order. Fiscal rules done 
right can matter, can help. And I so appreciate, we all do, the 
experience of this panel in dealing with real-world experiences 
in trying to get a handle on this.
    Dr. Miller, Dr. Mitchell, Dr. Reischauer, thank you for 
taking the time from your very busy schedules to share your 
insight with us today. We have got a lot of work to do, as you 
know, going forward. So do not be surprised if we are calling 
on your insights and advice and counsel as we move forward as 
well.
    So thank you, very much.
    Dr. Mitchell. Thank you.
    Dr. Miller. Thank you.
    Dr. Reischauer. Thank you, Mr. Chairman.
    Vice Chairman Brady. The meeting is adjourned.
    [Whereupon, at 11:43 a.m., Wednesday, July 27, 2011, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD
[GRAPHIC] [TIFF OMITTED] 70855.005

[GRAPHIC] [TIFF OMITTED] 70855.006

[GRAPHIC] [TIFF OMITTED] 70855.007

[GRAPHIC] [TIFF OMITTED] 70855.008

[GRAPHIC] [TIFF OMITTED] 70855.009

[GRAPHIC] [TIFF OMITTED] 70855.010

[GRAPHIC] [TIFF OMITTED] 70855.011

[GRAPHIC] [TIFF OMITTED] 70855.012

[GRAPHIC] [TIFF OMITTED] 70855.013

[GRAPHIC] [TIFF OMITTED] 70855.014

[GRAPHIC] [TIFF OMITTED] 70855.015

[GRAPHIC] [TIFF OMITTED] 70855.016

[GRAPHIC] [TIFF OMITTED] 70855.017

[GRAPHIC] [TIFF OMITTED] 70855.018

[GRAPHIC] [TIFF OMITTED] 70855.019

[GRAPHIC] [TIFF OMITTED] 70855.020

[GRAPHIC] [TIFF OMITTED] 70855.021

[GRAPHIC] [TIFF OMITTED] 70855.022

[GRAPHIC] [TIFF OMITTED] 70855.023

[GRAPHIC] [TIFF OMITTED] 70855.024

[GRAPHIC] [TIFF OMITTED] 70855.025

[GRAPHIC] [TIFF OMITTED] 70855.026

[GRAPHIC] [TIFF OMITTED] 70855.027

[GRAPHIC] [TIFF OMITTED] 70855.028

[GRAPHIC] [TIFF OMITTED] 70855.029

[GRAPHIC] [TIFF OMITTED] 70855.030

[GRAPHIC] [TIFF OMITTED] 70855.031

[GRAPHIC] [TIFF OMITTED] 70855.032

[GRAPHIC] [TIFF OMITTED] 70855.033

[GRAPHIC] [TIFF OMITTED] 70855.034

[GRAPHIC] [TIFF OMITTED] 70855.035

[GRAPHIC] [TIFF OMITTED] 70855.036

[GRAPHIC] [TIFF OMITTED] 70855.037

Prepared Statement of Representative Kevin Brady, Vice Chairman, Joint 
                           Economic Committee
    The United States is on the precipice of a financial crisis because 
Washington spends too much relative to the size of our economy. Under 
President Obama, federal spending has grown far beyond the ability of 
our tax system to generate revenues from American families and 
businesses sufficient to pay for Washington's overspending. The 
resulting large budget deficits are causing an unsustainable 
accumulation of federal debt.
    Business investment in new buildings, equipment, and software 
drives job creation, not federal spending. Today, both large 
corporations and entrepreneurs are not investing because of 
uncertainty. They fear higher taxes and new burdensome regulations. 
Consequently, job creation is anemic, the unemployment rate remains 
stubbornly high, and American families are suffering.
    As entrepreneur Steve Wynn, a self-identified Democrat, observed, 
``[T]his administration is the greatest wet blanket to business and 
progress and job creation in my lifetime. . . . Everybody complains 
about how much money is on the side in America. You bet. . . . [T]he 
business community in this country is frightened to death . . . ''
    Overspending cannot be cured by a so-called ``balanced approach.'' 
A study, Spend Less, Owe Less, Grow the Economy, published by JEC 
Republican staff on March 15, 2011, found that successful fiscal 
consolidations by our global competitors were composed of at least 85 
percent spending reductions with additional revenues largely from non-
tax sources such as asset sales. Balanced approaches that included both 
spending reductions and tax increases failed in other countries.
    Instinctively, Americans know that federal spending must be 
reduced. Nevertheless, Washington has demonstrated that it cannot 
maintain a spending diet. Public choice economists have identified many 
biases in our political system against fiscal restraint and for higher 
federal spending.
    When I became Vice Chairman, I asked the JEC Republican staff to 
examine what constitutional and statutory tools our global competitors 
and our states use to control their government spending. The results 
were published in the study, Maximizing America's Prosperity, on June 
21, 2011.
    This study found that our global competitors capped the spending of 
their national government relative to the size of their economy to put 
their fiscal house in order. Washington must do the same.
    Washington should also consider using a number of tools that our 
states employ to control their spending, including the item-reduction 
veto and sunset laws. The item-reduction veto allows state governors to 
reduce specific items in appropriations bills without vetoing an entire 
bill. Sunset laws require the periodic review of all state agencies and 
programs. State agencies and programs expire if the legislature does 
not renew them before their sunset date.
    Interestingly, the study found that effectiveness of state tax and 
expenditure limitations have varied greatly based on their design. In 
particular, expenditure limits tied to measures of a state's actual GDP 
have been breached during recessions when mandated spending cuts proved 
to be politically unsustainable.
    Today's hearing will examine how these lessons can be applied to 
the federal government. Like our global competitors, Congress must 
establish spending caps. Yet, from our states, we have learned that the 
durability of spending caps through business cycles depends in large 
part on their metrics.
    In my opinion, caps should be placed on federal non-interest 
spending. Congress can control discretionary and entitlement spending 
through legislation. However, interest spending is a function of past 
fiscal decisions, the Federal Reserve's monetary policy, and financial 
market conditions largely beyond the control of Congress.
    Clearly, any spending caps should be related to the size of the 
economy over time. However, actual GDP poses a problem because it 
fluctuates with the business cycle. Therefore, spending caps based on 
actual GDP allow rapid spending growth during booms only to force 
large, politically unsustainable spending cuts during recessions.
    A better choice is potential GDP. Potential GDP is a measure of 
what GDP would be at full employment without inflation. It is a well 
understood and a widely used economic concept. For example, Stanford 
University economist John Taylor uses potential GDP in the ``Taylor 
rule'' to estimate what the Federal Reserve's target rate for federal 
funds should be. The Congressional Budget Office already calculates 
potential GDP for its 10-year budget window.
    Potential GDP is the GDP family's smarter brother. Using potential 
GDP provides a more stable path for non-interest spending through time, 
eliminating the spending blowouts on the upswing and preventing 
draconian spending cuts or the downswing that have not proven to be 
politically sustainable.
    Given the differences between Republicans and Democrats on the size 
and scope of the federal government, it is unlikely that we will agree 
on the level of spending caps. However, I hope that we could agree on 
the metrics used to design spending caps.
    I look forward to hearing the testimony of today's witnesses.
                               __________
   Prepared Statement of Senator Bob Casey, Chairman, Joint Economic 
                               Committee
    Thank you Vice Chairman Brady for holding today's hearing on how 
fiscal rules can help the federal government control spending and get 
our finances in order. The absence of steady, responsible fiscal 
stewardship over the past decade has gotten us into a deep financial 
hole.
    Our federal debt has skyrocketed. Publically held federal debt 
increased from 33 percent of GDP in 2001 to 62 percent of GDP in 2010. 
The Congressional Budget Office projects that our publically held 
federal debt will reach 70 percent of GDP by the end of this year and 
exceed 100 percent of GDP in ten years. That's no way for the United 
States to operate.
    In the past weeks, as the leaders of both parties have worked to 
put together a deficit reduction package and extend the debt ceiling, 
the challenges of forging agreement on spending cuts and revenue 
increases have been clear for all to see.
    As we approach the August 2nd debt ceiling deadline, the first 
order of business must be to avoid default that can hurt the economy 
and job creation. The United States defaulting on its commitments would 
have catastrophic global consequences. It is not an option.
    Majority Leader Reid's proposal will allow us to raise the debt 
ceiling through 2012, providing certainty to world markets and 
businesses and consumers. It is a smart plan that balances the need to 
sustain the recovery in the immediate term with significant deficit 
reduction in the longer term.
    The Congressional Budget Office scored Senator Reid's proposal and 
concludes it will reduce the deficit by $2.2 trillion over the next ten 
years. CBO estimates that nearly $1.8 trillion of that deficit 
reduction comes from savings in discretionary spending. The deficit 
reduction achieved by the Reid plan is more than twice as great as the 
deficit reduction included in Speaker Boehner's proposal, according to 
CBO.
    Additionally, the Reid plan includes no changes to revenue and all 
of the spending cuts have been previously agreed to by Democrats and 
Republicans. It protects Medicare, Medicaid and Social Security. In my 
view, it is the most viable plan under consideration.
    By contrast, Speaker Boehner's short-term plan would require 
Congress to revisit and vote again on the debt ceiling issue next year. 
We've also learned that the Boehner plan could trigger a downgrade of 
the United States' AAA credit rating. Such a downgrade would lead to 
higher borrowing costs for businesses and consumers and slow the pace 
of economic growth. For example, consumers will face higher costs of 
financing on everything from refrigerators to houses--and Retirement 
Accounts could take a drastic hit if the financial markets slip.
    While there is a shared commitment in Washington to reducing our 
deficit and stabilizing the debt, we have not yet been able to reach a 
consensus on how best to do it. In the next few days, Washington must 
put partisan politics aside and come to agreement on a plan that will 
enable the United States to avoid default and make a significant down 
payment on reducing our deficit. How we forge this bipartisan agreement 
is also important, as it can provide a model for future cooperation and 
reassurance to so many who have grown understandably tired of partisan 
posturing.
    I believe strongly that the federal government should balance its 
books. But, Washington must be careful not to impede the economic 
recovery. How we reconcile the need to get our fiscal house in order 
while preserving the federal government's ability to step in during 
times of economic emergency is a central question for today's hearing 
and for this Congress.
    I look forward to the discussion this morning. I'm interested to 
learn more about how individual states' experiences and fiscal rules 
can apply at the federal level.
    We have terrific witnesses who have dedicated their careers to 
thinking about the federal budget and fiscal rules and I'm sure you all 
have great insights into how to get our federal government back onto a 
sustainable fiscal course.
                               __________
             Prepared Statement of James C. Miller III \1\
---------------------------------------------------------------------------
    \1\ The author served as Director of the U.S. Office of Management 
and Budget (1985-1988) and is currently a Senior Advisor to Husch 
Blackwell, LLP, Chairman of the Executive Committee of the 
International Tax and Investment Center, Senior Fellow at both the 
Hoover Institution (Stanford University), and Distinguished Fellow at 
the Center for Study of Public Choice (George Mason University).
---------------------------------------------------------------------------
    Mr. Chairman and Members of the Committee: thank you for inviting 
me here today, and thank you for addressing this important legislative 
proposal. The Maximizing America's Prosperity (MAP) Act sets forth an 
important goal, and goes about accomplishing it in an efficient manner. 
I welcome the opportunity to discuss this with you and with my 
distinguished fellow panelists, Bob Reischauer and Dan Mitchell.
    The goal of the MAP Act is prosperity, and the focus is on 
government spending. Why is that? The reason is that there is an 
acknowledged relationship between size of government and prosperity, 
and spending is the most common measure of size of government.
    Only the most naive conservative among us would argue that 
prosperity is enabled by having no government (spending) at all, and 
only the most naive liberal among us would argue that prosperity is 
enabled by having government account for all spending. Thus, as shown 
in the graph,\2\ prosperity is maximized somewhere in between these two 
extremes. Initially, as the public sector grows, total output does as 
well, as property rights are established, as contracts are enforced, as 
important infrastructure is put in place, and so forth. But past some 
point, the public sector adds less and less value, and in a sense 
crowds out the private sector, and total output and income per capita 
actually fall, even though government's share of the economy continues 
to rise.
---------------------------------------------------------------------------
    \2\ The rough approximation of the relationship shown on the next 
page is taken from the author's Monopoly Politics (Stanford: Hoover 
Institution Press, 1999), p. 9. Obviously, the economy is larger today 
than it was then. For further discussion of the nature of the curves 
depicted, see ibid., pp. 9-11. 
[GRAPHIC] [TIFF OMITTED] 70855.004


    As you know, at just what point between the two extremes prosperity 
is maximized is the subject of debate among economists. The prevailing 
opinion is that prosperity is maximized at a smaller size of government 
than we have today. That's a basic rationale for trying to control 
spending and to bring down the ratio of spending to GDP.
    We ought to ask as well why government spending tends to exceed 
levels that maximize prosperity. The answer is that inherent in the 
political budgeting process is a propensity to spend far beyond what is 
justified--and to be wasteful with spending as well. Like everyone 
else, elected officials respond to incentives, and when the incentive 
structure is biased toward ever-larger-government, that's what you get. 
Moreover, I conjecture, the larger government grows, the larger are the 
incentives to grow government even further.
    For this reason, it is imperative that any solution to the problem 
of overspending address the issue of incentives, either by changing the 
incentives directly or by limiting the excesses produced by the 
system--which, of course, is another way of changing incentives. The 
MAP Act does some of both. It places limits on non-interest spending as 
a proportion of potential GDP, and it provides for institutional 
changes that will make it easier to meet spending limits in an 
efficient manner. Specifically, it requires the President's budget 
submission to comply with the overall spending limits, it gives the 
President an item reduction veto, it provides for sequestration of 
budget resources in case spending is likely to exceed limits, and it 
establishes a commission to recommend sunsetting of agency functions 
and an expedited procedure for consideration of these recommendations 
by Congress.
    This is an excellent proposal. It incorporates spending limits that 
are in accord with what would be most beneficial to the economy as a 
whole and thus to prosperity in general. It adopts measures to assure 
meeting those targets with institutional reforms that would be 
effective and efficient in the sense of assuring that priorities are 
addressed.
    That said, let me make three additional points for your 
consideration.
    First, alternative and/or supplementary approaches to meeting 
spending limits do exist. For example, the recent House-passed ``cut, 
cap, and balance'' bill puts before the state legislatures for approval 
or disapproval a requirement that the federal budget be balanced. 
Although in a perfect world the federal government would incur deficits 
at times and surpluses at times, the world is not perfect, and a 
balanced budget requirement would lead to more prosperity. A major 
reason is that the failure of citizens and their elected 
representatives to fully ``capitalize'' the cost of borrowing reduces 
the perceived cost of government and leads to harmful increases in 
spending.
    Second, the cost of government includes not only spending but the 
cost of regulation as well. At some point you may wish to consider 
incorporating the cost of federal regulation in a revised cap. Probably 
the best way of doing this would be to establish a ``regulatory 
budget,'' with a legislative process that parallels the fiscal budget 
process.
    Third, the cost of government is disguised, to some extent, by 
``tax expenditures.'' As you know, these are dispensations in the tax 
code that accomplish government goals through the revenue side of the 
fiscal equation instead of the spending side. Without question, these 
``expenditures'' are just like direct spending, and you may want to 
include them in a revised cap.
    Fourth, without meaning to cast aspersions on anyone, let me 
emphasize that even under the current MAP Act's restraints on spending, 
strong incentives will lead to efforts to circumvent it's provisions. 
As implied by my last two points, you may well experience a rise in 
regulatory activity as a substitute for spending and also an increase 
in tax expenditures as another way of growing the size of government. 
Thus, you may wish to address these possible ``loopholes'' by including 
regulatory and tax-expenditure costs within the cap or to limit them by 
some other means.
    Mr. Chairman, that completes my statement. I shall be happy to 
address any questions you and your colleagues may have.
                               __________
   Prepared Statement of Dr. Daniel J. Mitchell, Senior Fellow, Cato 
                               Institute
                 process reforms to restrain leviathan
    In the past 10 years, the burden of federal spending has jumped 
from 18.2 percent of GDP to about 25 percent of GDP. But that's just 
the tip of the iceberg. Over the next several decades, the combination 
of demographic changes and poorly designed entitlement programs could 
cause the burden of federal spending to double as a share of economic 
output.
    This fiscal tsunami already has resulted in record deficits. Left 
unchecked, it suggests even more debt, along with rising tax burdens, 
in the future. And since the academic evidence is very clear that there 
is a negative relationship between the size of government and economic 
performance, this does not bode well for American prosperity and 
competitiveness.
    The only solution is to restrain the growth of spending, and 
today's hearing is very well designed, asking us to consider ``How 
fiscal rules can restrain federal overspending.''
                       what are we trying to fix?
    This is a critical question. Many people think deficits and debt 
are the problem. Excessive red ink surely is not a good thing, as 
places such as Greece and Portugal demonstrate, but deficits and debt 
generally should be seen as symptoms, while the real problem is that 
governments are too big and spending too much.
    The true fiscal tax is the amount of money that government diverts 
from the productive sector of the economy. In other words, government 
spending--at least beyond a certain level--undermines economic 
vitality, and that is true if the spending is financed by taxes and 
that is true if the spending is financed by borrowing.
    This doesn't mean that ``deficits don't matter.'' It just means 
that ``taxes also matter,'' and that the real issue is the overall 
burden of government spending.
                            realistic goals
    Perhaps the most important caveat in my presentation is that no 
process reform will be perfect. The appropriate analogy is that fiscal 
rules are like anti-crime mechanisms. Locks on your doors are a good 
idea, but they don't guarantee that you won't be victimized. Bars on 
your window, an alarm system, and gun ownership also would help deter 
crime, but even those steps are not a guarantee.
    But the perfect should not be the enemy of the good--particularly 
when the alternative is to let the nation slowly sink into Greek-style 
fiscal chaos.
    In addition, my testimony will focus only on policies that might 
make a difference in restraining spending. There are many proposed 
reforms, such as biennial budgeting, that would be akin (with a full-
time legislature) to rearranging the deck chairs on the Titanic.
                       balanced budget amendment
    The ultimate budget process reform would be some form of balanced 
budget amendment. But the devil is in the details. How would such an 
amendment be written? How would it be enforced? And, most important, is 
it realistic?
    These are not simple questions. A balanced budget amendment can be 
a watered-down requirement that says nothing more than deficits (in 
peacetime) require a supermajority vote. Or a balanced budget amendment 
can be a comprehensive package that requires supermajorities for both 
taxes and borrowing, and thus is really a spending limit amendment. 
Senator Lee's proposal is a good example of such a proposal.
    Enforcing a balanced budget is another challenge. Is it self-
enforcing, meaning that the supermajority requirements are all that's 
needed? Is it necessary to have something in place for the period of 
time between an amendment being approved by Congress and its 
ratification?
    Last but not least, there is a special challenge with reforms that 
require changes to the U.S. Constitution. Simply stated, it is 
extremely difficult--and deliberately difficult--to amend the 
Constitution. A proposal has to achieve \2/3\rds support in both the 
House and Senate, and then it must be ratified by \3/4\ths of the 
states.
                             line-item veto
    Over the years, there have been many proposals to give presidents 
some sort of line-item veto or enhanced-rescission authority. Interest 
in these proposals often is stimulated by stories of corrupt earmarks 
and specific wasteful spending items. And there is some evidence that 
governors have effectively used such authority to trim spending.
    But, just as is the case with a balanced budget amendment, the 
details are important since not all proposals are created equal. It 
also appears that such an initiative might require a constitutional 
amendment, which imposes a very high bar to its enactment.
                       current services budgeting
    There is a form of funny math in Washington. Lawmakers can increase 
spending, but then tell voters that they cut spending because outlays 
didn't rise even faster. Let's take the Ryan budget as an example. 
Legislators and journalists routinely talk about that proposal imposing 
trillions of dollars of cuts, yet CBO numbers show that spending would 
rise by an average of 2.6 percent each year if it was implemented.
    This is because Congress starts with an assumption that all 
spending should automatically increase for reasons such as inflation, 
built-in program expansions, and changes in beneficiary populations.
    All of that information is very useful in the budgeting process, 
but it is dishonest to tell the American people that spending is being 
cut when it is being increased--particularly when that process is used 
to frighten people into thinking that proposals to slow the growth of 
spending are actually plans filled with ``savage'' and ``draconian'' 
cuts.
    Some form of zero-based budgeting would address this problem. If 
spending is rising by, say, 3 percent next year, that's the information 
that should be presented. And by giving the American people accurate 
data, that will alleviate the current system's bias for bigger 
government.
                             spending caps
    I would like to spend most of my time on the issue of spending 
caps. This is the notion that there will be an upper limit on spending 
for some--or all--parts of the federal budget. The spending cap(s), 
whether broad or narrow, would be enforced by a process known as 
sequestration, which is an automatic spending cut if outlays rise above 
the cap.
    As with the BBA and line-item veto, it's very important to specify 
how a spending cap would operate. There are two important decision 
points--how is the upper limit defined and what spending will be 
covered by the cap.
                       defining a spending limit
    There are two ways of defining the upper limit of spending. The 
first option is to select a nominal spending target and the second is 
to require that spending not exceed a certain percentage of GDP. In 
theory, both options generate similar results, but lawmakers generally 
have gravitated to proposals that specify that spending should not 
exceed a certain share of economic output.
    But once that decision is made, there's another important choice: 
How to define GDP. The obvious answer is to use GDP, but which GDP? If 
you select estimates of future GDP, you create an opening for gimmickry 
since lawmakers might pressure CBO or OMB for an exaggerated estimate 
to facilitate more spending.
    Another option would be to use an average of the past couple of 
years of GDP. That would give a firm number, but it might create 
complications if the economy is coming out of boom or recovering from a 
downturn. This is why ``potential GDP'' might be the best option. 
Potential GDP is a technical concept based on what GDP would be at full 
employment without price inflation. It is a widely used number that CBO 
calculates for 10 fiscal years into the future.
    Why use ``potential GDP''? A spending cap based on traditional GDP 
allows spending to rise rapidly under booms only to force large 
spending cuts during recessions. That tends to be politically 
unsustainable, as we saw under Gramm-Rudman. Moreover, state spending 
caps tied to some measure of state GDP have largely failed because of 
this reason. Potential GDP eliminates this problem by smoothing out the 
fluctuations of the business cycle and thus curbing excessive spending 
growth during booms and not attempting to force politically difficult 
spending restraint during recessions.
                     defining what spending to cap
    The other key decision is what parts of the budget should be 
subject to cap. Some lawmakers focus only on so-called discretionary 
spending--i.e., annual appropriations. Considering the massive increase 
in spending in this category over the past 10 years, there certainly is 
a strong argument for discretionary caps.
    But America's real fiscal problem is entitlements. So-called 
mandatory spending already is the lion's share of the federal budget 
and entitlement programs will consumer ever-larger shares of our 
economic output as the baby boom generation retires and outlays 
skyrocket for Social Security, Medicare, and Medicaid. A cap that only 
applies to discretionary spending would be akin to visiting a doctor 
after an auto accident and getting treated for a sprained wrist while 
ignoring a ruptured spleen.
    So does that mean a spending cap should apply to all spending? That 
certainly would be a better option than a discretionary cap, but that 
means net interest--payments to service the publicly-held debt--would 
be included. Notwithstanding recent threats by the Treasury Secretary 
to deliberately and unnecessarily default on those obligations, 
interest on the debt is the one part of the budget that is truly 
uncontrollable.
    It is more reasonable, therefore, to target ``primary spending,'' 
which is everything other than net interest. One big advantage of this 
approach is that a cap on all spending creates a ``tax trap'' that may 
prevent the extension of current tax policy or future tax cuts. This is 
because a tax cut will be scored as a spending increase thanks to 
higher interest outlays. In other words, including interest in the 
spending cap hinders good tax policy. A non-interest cap on primary 
spending not only focuses lawmakers on the spending they can control, 
but it also avoids creating an inadvertent obstacle to good tax policy.
    Moreover, it's also worth noting that, with a total spending cap, 
Congress and the President may press the Federal Reserve to have an 
overly loose monetary policy that keeps interest rates artificially low 
in order to lower interest payments on the debt and allow for increased 
spending on discretionary and entitlement programs. A noninterest 
spending cap eliminates this perverse incentive for inflationary 
monetary policy.
                               conclusion
    Thank you for the opportunity to testify. I would be happy to 
answer any questions.
                               __________
Prepared Statement of Robert D. Reischauer, President, Urban Institute 
                                  \*\
---------------------------------------------------------------------------
    \*\ The views expressed in this statement should not be attributed 
to the Urban Institute, its sponsors, staff, or trustees.
---------------------------------------------------------------------------
    Chairman Casey, Vice-Chairman Brady, and members of the committee, 
I appreciate this opportunity to discuss with you the efficacy of 
fiscal rules that many believe can help to restrain federal spending.
    Over the past few years it has become abundantly clear that the 
nation is careening down an unsustainable fiscal path and that we will 
have to restrain the growth of spending significantly to put the 
federal budget on a more viable trajectory. Notwithstanding the growing 
realization that long-run spending restraint is imperative, elected 
policymakers find it difficult to curb both outlays and tax 
expenditures.
    There is no mystery behind why this is the case. While it is easy 
to give speeches embracing unspecified spending cuts, the termination 
of low-priority, wasteful or duplicative programs, the elimination of 
fraud, and the streamlining of the bureaucracy, it is another matter to 
vote to cut something that has an appropriation account number be it 
NIH research, veterans' health, or NASA. It is even harder to vote to 
change authorizations that guarantee Social Security recipients a 
certain sized benefit, reimburse states for Medicaid expenditures they 
have already made, or pay hospitals-only partially at that-for the 
costs they have incurred treating Medicare beneficiaries. Such votes 
engender opposition from affected constituents and interest groups who, 
no matter how broadly the sacrifice is shared, argue that some 
different distribution of the cuts would be more in the nation's 
interests, fairer, and better for the economy.
    Despite the rhetoric, there is no significant constituency for deep 
spending cuts that are specific. The pain from such cuts is immediate, 
significant and measurable and those affected are identifiable. The 
benefits of the fiscal restraint such cuts would generate are distant, 
uncertain in magnitude, and diffuse. When they materialize they will be 
difficult to identify and no one will reward those who made the tough 
decisions. If history is any guide, many of those lawmakers will have 
``moved on'' involuntarily to other careers.
    Given this situation it is reasonable to ask whether there are some 
fiscal rules that might create a more hospitable environment for those 
who must make unpopular but unavoidable decisions involving fiscal 
restraint. Among the measures that have been put forward to do this are 
proposals that would:

      Transform the concurrent budget resolution into a joint 
resolution,
      Impose statutory spending caps,
      Reinstitute strong PAYGO rules,
      Give the President expedited or enhanced rescission 
authority, and
      Amend the Constitution to require a balanced budget.

                        joint budget resolution
    The Congressional Budget Process was established to allow the 
legislative branch to set its own budget priorities, look at the budget 
comprehensively and with a multiyear perspective, set fiscal policy by 
considering the interdependence of the budget and the economy, provide 
structure and discipline to congressional budget decisions, and reduce 
Congress's dependence on the executive branch for fiscal information. 
The concurrent budget resolution establishes the framework for 
accomplishing these objectives. If the concurrent budget resolution 
were replaced with a joint resolution requiring the President's 
signature, Congress would be giving up its independence on these 
matters. In years when the House, Senate and White House are in hands 
of a single party, this might make little difference; at other times 
implications would be profound. For example, Congress would almost 
certainly have to rely on OMB scoring of its actions.
    For many years, formulating and passing a budget resolution in the 
timeframe called for by the Congressional Budget Act has been a 
challenge. More recently, the two chambers have not even been able to 
agree on a common resolution. Adding the President to the mix would 
undoubtedly slow down the process and would make it even more likely 
that a consensus budget resolution could not be fashioned. A joint 
resolution would also fog the responsibility for failure as few would 
be able to judge whether the House, Senate or White House was most 
intransigent.
                      discretionary spending caps
    Statutory caps can be imposed on discretionary spending and 
enforced through sequestration. They are not an effective way of 
controlling mandatory spending because such spending is affected by 
many factors over which lawmakers have little or no control such as the 
strength of the economy, weather, college attendance rates, new 
developments in medical technology, and interest rates.
    Many have argued that spending caps are a tool that has been proven 
to work and, therefore, a heavy emphasis on such caps should be part of 
any deficit reduction plan enacted to resolve the debt ceiling crisis. 
First imposed by the Budget Enforcement Act of 1990, discretionary 
spending caps, in one form or another, existed through the early years 
of the 21st century. However, after budget surpluses appeared in 1998, 
adherence to them waned and they were frequently waived or 
circumvented.
    Before placing too much emphasis on this mechanism for our future 
salvation, the record of the past should be examined carefully. On the 
surface, the discretionary spending caps of the 1990s look very 
successful. Between 1990 and 2000, total discretionary spending in 
constant 2005 dollars fell from $784 billion to $737 billion--or almost 
6 percent. As a fraction of GDP, the fall was even more dramatic, from 
8.7 percent to 6.3 percent of GDP, which is a drop of over one-quarter 
(27.5%). But this successful record was largely a story about the 
defense budget and rapid and sustained economic growth during the last 
half of the decade.
    The Berlin Wall came down in the fall of 1989 and the Soviet empire 
collapsed soon after. Our military budget, which had been justified by 
the Cold War, had to be rethought and there was widespread support for 
cashing in on the peace dividend. Because of the changed environment 
and spurred on by the spending caps, defense outlays in 2005 dollars 
declined from $463 billion to $362 billion--or by over one-fifth-
between 1990 and 2000. Relative to GDP, the fall was 42 percent (from 
5.2 percent of GDP to 3.0 percent).
    The story was different on the non-defense side of the 
discretionary budget. In constant 2005 dollars, non-defense 
discretionary spending increased by 17 percent over the 1990-2000 
period (from $321 billion to $375 billion). While non-defense 
discretionary spending as a percent of GDP declined slightly-from 3.5 
percent to 3.3 percent of GDP-this was largely a reflection of rapid 
GDP growth during the last half of the 1990s, a portion of which the 
collapse of the Dot-com bubble revealed to be illusory.
    The lesson to be taken away from the 1990-2000 experience with 
spending caps is that this tool can be effective if there exists a 
broad and bipartisan consensus that a certain budget function or a 
specific large program should be scaled back. While today there is 
widespread support for reducing spending on the military conflicts in 
Afghanistan and Iraq, more uncertainty surrounds the pace and the 
extent of the possible drawdown than was the situation when the Soviet 
Union collapsed in 1990. As was the case in the 1990s, there is little 
consensus concerning deep cuts in the non-security portion of the 
discretionary budget.
    Spending caps are relatively easy to agree to because no one knows 
how they will play out over time, that is, which specific programs will 
be reduced disproportionately. Therefore, there is a real risk that 
more will be promised than can be delivered and that the caps will 
prove to be unsustainable. Some will try, as they did at the end of the 
1990s, to evade the caps by attempting to designate certain spending as 
an emergency. Advocates of programs that will be cut deeply in regular 
appropriations will try to stymie the process knowing that their 
accounts would be better off under an across-the-board sequestration of 
a continuing resolution. In short, spending caps represent general 
promises that are easier to make than to fulfill.
                                 paygo
    Like discretionary spending caps, PAYGO rules were first introduced 
by the Budget Enforcement Act of 1990. In the original formulation, 
PAYGO required that the impact on the deficit of all direct spending 
legislation and all changes to the tax code enacted during a 
legislative session not increase the deficit. In the aggregate, 
increases in direct spending or decreases in revenue had to be offset 
by other spending decreases or revenue increases or a sequester would 
be imposed on a select set of mandatory programs to make up the 
difference.
    Unlike spending caps, which can be used to lower future deficits, 
PAYGO procedures can only ensure that new mandatory or revenue 
legislation does not make the deficit situation worse. In that role 
PAYGO was effective at restraining mandatory spending initiatives and 
new tax cuts during the decade of the 1990s. In the current situation, 
PAYGO, with a more balanced sequestration process that included 
selected tax expenditures and protected low-income mandatory programs, 
would be an essential component of any deficit reduction plan.
                     enhanced rescission authority
    The Budget Control and Impoundment Act gives the President the 
authority to propose rescissions of all or parts of items within 
appropriation bills and to delay obligating the relevant budget 
authority for up to 45 days while Congress considers the request. The 
Congress has no obligation to take up the President's requests and 
usually they are ignored.
    Enhanced rescission authority would require the Congress to vote up 
or down the President's rescission requests, without amendment, within 
a fixed number of continuous legislative days. Some proposals would 
limit the President to one package of rescissions per spending bill and 
require that the request be made within a fixed number of days 
following enactment of the spending bill.
    Spending bills are amalgamations of many items, some large and 
others quite small, some directed at national concerns and priorities, 
others quite narrow and parochial in nature. Enhanced rescission would 
give the President a strengthened ability to weed out narrow, special 
interest allocations that do not have widespread congressional support. 
It is doubtful, however, that large amounts of budget authority would 
be rescinded under this tool. Furthermore, to ensure that the rescinded 
amounts reduced overall spending rather than were redirected to other 
accounts through subsequent appropriation bills, mechanisms to reduce 
the budget resolution's budget authority allocations by the rescinded 
amounts would have to be adopted.
    Enhanced rescission would shift budget power marginally in the 
direction of the executive branch. It would improve transparency and 
accountability. Extending the reach of the process to mandatory 
spending legislation and to bills that provide targeted tax benefits 
would increase the deficit reduction potential of this tool.
             balanced budget amendment to the constitution
    A balanced budget amendment to the Constitution may well dampen the 
growth of spending but this would come at an extremely high price. The 
automatic stabilization role that the federal government now plays for 
the economy would be seriously undermined. When economic weakness 
caused federal revenues to fall and expenditures on unemployment 
insurance, SNAP benefits, Medicaid and Social Security to rise, other 
programs would have to be cut precipitously or the spending on these 
essential safety net programs would have to be curtailed significantly. 
Economic downturns would be both deepened and prolonged.
    Under a balanced budget amendment, the federal government would 
lose much of its flexibility and ability to respond quickly to 
unexpected events. It would become more difficult to respond to natural 
disasters such as hurricanes and Tsunamis be they at home or abroad and 
to mitigate the consequences of events like terrorist attacks.
    Balanced budget amendments that require revenues to equal or exceed 
spending on an annual basis would not allow Social Security or the 
government's military and civilian worker pension systems to draw down 
the reserves they have built up over the years to pay benefits unless 
the remainder of the budget was running an equal-sized surplus. A 
similar constraint would face the FDIC, the PBGC and the many 
government insurance and loan guarantee programs, effectively 
eliminating the reason for their existence.
    While the wording of the many proposals being considered by the 
Congress seems simple, clear and straight forward, all of these 
balanced budget amendments would raise many questions involving 
definitions, implementation and enforcement, which the courts would be 
reluctant to resolve. For example, answers would have to be found for 
such questions as, ``What is the budget? Is Congress or the President 
responsible for achieving balance and through what processes? What 
remedies would be imposed if balance were not achieved and on whom?''
    To have any chance of achieving a balanced budget amendment's 
objectives, Congress would probably have to cede much of its short-run 
authority over the budget to the President and OMB. Those who do 
business with the government and those who receive government benefits 
would have to expect some uncertainty with respect to when they would 
receive expected payments or benefit checks.
    In the short run, the volume of federal spending cannot be 
controlled with any precision. Millions of actors-individuals, states, 
federal contractors, hospitals and so on-make decisions that result in 
outlays. Unless the budget included a significant surplus for 
contingencies, the President would probably have to be given authority 
to vary taxes somewhat during the year.
                               conclusion
    Fiscal rules and procedural innovations can help to frame and 
organize budgetary decisions, influence expectations and provide a bit 
of political cover for those who must take difficult votes, but they 
can't force lawmakers to support policies they strongly oppose or ones 
they believe will end their political careers. In short, fiscal rules 
cannot create political will.
    Fiscal rules that are found to be too stringent will be ignored, 
waived, evaded, circumvented or repealed. Activities can also be moved 
``off-budget'' to escape the discipline of a fiscal rule. Recent 
experience suggests that there exists a bottomless well of budget 
gimmicks that lawmakers can draw from to avoid the discipline implied 
by the fiscal rules they have endorsed but cannot find the will to 
impose.
    In conclusion, it is worth noting that spending is not the only 
route lawmakers can take to achieve their objectives. Denied the 
ability to respond to the nation's needs through spending programs, 
Congress and the President will turn to the other tools they have 
available to achieve their objectives such as regulations imposed on 
businesses, unfunded mandates placed on individuals, states and 
localities, and tax expenditures. In most cases these approaches are 
less effective, less transparent and more difficult to control than is 
spending.
  

                                  
